NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts, time periods, ratios and percentages)
NOTE
1 -
The Company and Summary of Significant Accounting Policies:
Bridgford
Foods Corporation was organized in 1952. We originally began operations in 1932 as a retail meat market in San Diego, California
and evolved into a meat wholesaler for hotels and restaurants, a distributor of frozen food products, a processor and packer of
meat, and a manufacturer and distributor of frozen food products for sale on a retail and wholesale basis. We and our subsidiaries
are primarily engaged in the manufacturing, marketing and distribution of an extensive line of frozen, refrigerated, and
snack food products throughout the United States.
The
consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All
inter-company transactions have been eliminated.
Use
of estimates and assumptions
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported revenues and expenses during the respective reporting periods.
Actual results could differ from those estimates. Amounts estimated related to liabilities for pension benefits, self-insured
workers’ compensation and employee healthcare benefits are subject to inherent uncertainties and these estimated liabilities
may ultimately settle at amounts which may vary from current estimates. Other areas with underlying estimates include realization
of deferred tax assets, cash surrender or contract value of life insurance policies, promotional allowances and the allowance
for doubtful accounts and inventory reserves. Management believes its current estimates are reasonable and based on the best information
available at the time.
We
test long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable. If an impairment is indicated, we measure the fair value of assets to determine if and when adjustments are recorded.
Subsequent
events
Management
has evaluated events subsequent to November 2, 2018 through the date the accompanying consolidated financial statements were filed
with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure
in such financial statements. On December 26, 2018, we entered into a master collateral loan and security agreement with Wells
Fargo Bank, N.A for up to $15,000 in equipment financing. Pursuant to the loan agreement, we borrowed $7,500 to purchase specific
equipment for our new Chicago processing facility at a fixed rate of 4.13% per annum. The loan term is seven years and
is secured by the purchased equipment. The funds were received on December 28, 2018. The master collateral loan and security
agreement with Wells Fargo Bank, N.A. contains various affirmative and negative covenants that limit the use of funds and
define other provisions of the loan. The main financial covenants are listed below:
|
●
|
Total
Liabilities divided by Tangible Net Worth not greater than 2.5 to 1.0 at each
fiscal quarter,
|
|
●
|
Quick
Ratio not less than 1.0 to 1.0 at each fiscal quarter end,
|
|
●
|
Net
income after taxes not less than one dollar on a quarterly basis, determined as
of each fiscal quarter end.
|
Based
on management’s review, no other material events were identified that require adjustment to the financial statements or
additional disclosure.
Concentrations
of credit risk
Our
credit risk is diversified across a broad range of customers and geographic regions. Losses due to credit risk have recently been
immaterial. The carrying amount of cash equivalents, accounts and other receivables, accounts payable and accrued liabilities
approximate fair market value due to the short maturity of these instruments. We maintain cash balances at financial institutions,
which may at times exceed the amounts insured by the Federal Deposit Insurance Corporation. Management does not believe there
is significant credit risk associated with these financial institutions. The provision for doubtful accounts receivable is based
on historical trends and current collectability risk.
We
have significant accounts receivable with a few large, well known customers which, although historically secure, could be subject
to material risk should these customers’ operations suddenly deteriorate. Sales to Wal-Mart® comprised 36.5%
of revenues in fiscal year 2018 and 31.3% of total accounts receivable was due from Wal-Mart® as of November 2, 2018.
Sales to Wal-Mart® comprised 37.7% of revenues in fiscal year 2017 and 36.5% of total accounts receivable was
due from Wal-Mart as of ® November 3, 2017. Sales to Dollar General® comprised 9.6% of revenues in fiscal year
2018 and 23.5% of total accounts receivable was due from Dollar General® as of November 2, 2018.
Business
segments
Our
company and subsidiaries operate in two business segments - the processing and distribution of frozen foods products, and the
processing and distribution of snack food products. See Note 7 for further information.
Fiscal
year
We
maintain our accounting records on a 52-53-week fiscal basis ending on the Friday closest to October 31. As part of the regular
accounting cycle, fiscal year 2018 included 52 weeks and fiscal year 2017 included 53 weeks.
Revenues
Revenues
are recognized upon passage of title to the customer, typically upon product pick-up, shipment or delivery to customers. Products
are delivered to customers primarily through our own long-haul fleet or through a Company owned direct store delivery system.
These delivery costs, $3,883 and $3,556 for fiscal years 2018 and 2017, respectively, are included in selling, general and administrative
expenses in the accompanying consolidated financial statements.
We
record promotional and returns allowances based on recent and historical trends. Revenue is recognized as the net amount estimated
to be received after deducting estimated amounts for discounts, trade allowances and product returns. Promotional allowances,
including customer incentive and trade promotion activities, are recorded as a reduction to sales based on amounts estimated being
due to customers, based primarily on historical utilization and redemption rates. Promotional allowances deducted from sales for
fiscal years 2018 and 2017 were $8,840 and $9,123, respectively.
Advertising
expenses
Advertising
and other promotional expenses are recorded as selling, general and administrative expenses. Advertising expenses for fiscal years
2018 and 2017 were $2,713 and $2,403, respectively.
Cash
and cash equivalents
We
consider all investments with original maturities of three months or less to be cash equivalents. Cash equivalents include money
market funds and treasury bills. Cash equivalents totaled $8,179 as of November 2, 2018 and $12,109 as of November 3, 2017. All
material cash and cash equivalents as of November 2, 2018 were held at Wells Fargo Bank N.A.
Fair
value measurements
We
classify levels of inputs to measure the fair value of financial assets as follows:
●
|
Level
1 inputs: Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible
at the measurement date.
|
|
|
●
|
Level
2 inputs: Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly.
|
|
|
●
|
Level
3 inputs: Level 3 inputs are unobservable and should be used to measure fair value to the extent that observable inputs are
not available.
|
The
hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available,
when determining fair value.
The
Company does not have any assets or liabilities measured at fair value on a recurring or non-recurring basis for the fiscal years
ended November 2, 2018 and November 3, 2017.
Inventories
Inventories
are valued at the lower of cost (which approximates actual cost on a first-in, first-out basis) or net realizable value.
Inventories include the cost of raw materials, labor and manufacturing overhead. We regularly review inventory quantities on hand
and write down any excess or obsolete inventories to net realizable value. An inventory reserve is created when potentially slow-moving
or obsolete inventories are identified in order to reflect the appropriate inventory value. Changes in economic conditions, production
requirements, and lower than expected customer demand could result in additional obsolete or slow-moving inventory that cannot
be sold or must be sold at reduced prices and could result in additional reserve provisions.
Property,
plant and equipment
Property,
plant and equipment are carried at cost less accumulated depreciation. Major renewals and improvements are charged to the asset
accounts while the cost of maintenance and repairs is charged to expense as incurred. When assets are sold or otherwise disposed
of, the cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is credited
or charged to income. Depreciation is computed on a straight-line basis over 10 to 20 years for buildings and improvements, 5
to 10 years for machinery and equipment, and 3 to 5 years for transportation equipment. We are building a processing plant from
the ground up and as such have attributed longer useful lives to these types of assets employed at the new facility in Chicago.
Capital
leases
Leased
property and equipment that meet capital lease criteria are capitalized at the lower of the present value of the minimum payments
required under the lease or the fair value of the asset at inception of the lease and are included within property, plant and
equipment on the consolidated balance sheet. If any, obligations under capital leases are accounted for as current and noncurrent
liabilities on the consolidated balance sheet. Amortization is calculated on a straight-line method based upon the shorter of
the estimated useful life of the asset or the lease term.
Life
insurance policies
We
record the cash surrender value or contract value for life insurance policies as an adjustment of premiums paid in determining
the expense or income to be recognized under the contract for the period. The cash surrender value is included in other non-current
assets in the accompanying consolidated balance sheets.
Income
taxes
Deferred
taxes are provided for items whose financial and tax bases differ. A valuation allowance is provided against deferred tax assets
when it is expected that it is more likely than not that the related asset will not be fully realized. The determination as to
whether or not a deferred tax asset can be fully realized is subject to a significant degree of judgment, based at least partially
upon a projection of future taxable income, which takes into consideration past and future trends in profitability, customer demand,
supply costs, and multiple other factors, none of which are predictable.
We
provide tax accruals for federal, state and local exposures relating to audit results, tax planning initiatives and compliance
responsibilities. The development of these accruals requires judgments about tax issues, potential outcomes and timing. (See Note
4 to the Consolidated Financial Statements). Although the outcome of these tax audits is uncertain, in management’s opinion
adequate provisions for income taxes have been made for potential liabilities emanating from these reviews. If actual outcomes
differ materially from these estimates, they could have a material impact on our results of operations.
Stock-based
compensation
We
measure and recognize compensation expense for all share-based payments to employees, including grants of employee stock options,
in the financial statements based on the fair value at the date of the grant. We have not issued, awarded, granted or entered
into any stock-based payment agreements since April 29, 1999.
Comprehensive
income
or loss
Comprehensive
income or loss consists of net income and additional minimum pension liability adjustments.
Recently
issued accounting pronouncements and regulations
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09 “Revenue from Contracts with
Customers” to supersede previous revenue recognition guidance under current U.S. GAAP. The guidance presents a single five-step
model for comprehensive revenue recognition that requires an entity to recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. Two options are available for implementation of the standard which are either the retrospective approach
or cumulative effect adjustment approach. The guidance becomes effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company anticipates using
the modified retrospective transition method beginning with the first quarter of fiscal 2019. The Company is completing its
evaluation of the full impact of adoption of this guidance and does not presently expect adoption to have a material
impact on its consolidated financial statements aside from more detailed and improved disclosure requirements.
In
July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory”. The guidance is part of the “Simplification
Initiative” to identify and re-evaluate areas where the generally accepted accounting principles may be complex and cumbersome
to apply. The guidance requires that inventory be stated at the lower of cost and net realizable value as opposed to the
lower of cost or market. Net realizable value is the estimated selling price for the inventory less completion, disposal and transportation
costs. The guidance is effective for fiscal years beginning after December 15, 2016. Adoption of this guidance in the first
quarter of fiscal 2018 did not have a material impact on the Company’s results of operations or financial position.
In
January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”
that requires most equity investments to be measured at fair value and subsequent changes in fair value to be recognized in net
income. The guidance covers presentation and disclosure requirements of financial liabilities and the classification and measurement
of financial instruments. The guidance is effective for annual reporting periods and interim periods within those annual reporting
periods beginning after December 15, 2017. The Company is currently evaluating this statement and its impact on its results of
operations or financial position.
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which will require a lessee to recognize assets and liabilities
with lease terms of more than 12 months. Both capital and operating leases will need to be recognized on the balance sheet. The
guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within fiscal
years beginning after December 15, 2019. The Company is currently evaluating this statement and its impact on its results
of operations or financial position.
In
March 2016, the FASB issued ASU 2016-09 “Compensation-Stock Compensation” guidance which simplifies various aspects
of the accounting for employee share-based payment transactions, including the accounting for income tax consequences, forfeitures,
and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. Adoption
of this guidance in the first quarter of fiscal 2018 did not have a material impact on results of Company operations or
financial position.
In
October 2016, the FASB issued ASU 2016-16, “Income Taxes – Classification of Certain Cash Receipts and Cash Payments”.
The guidance involves eight specific cash flow issues and aims to unify accounting for these transactions. The guidance becomes
effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently
evaluating this guidance and its impact on its results of operations or financial position.
In
March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits”. The guidance separates service
cost from other pension cost components changing the presentation of net periodic benefit cost related to company sponsored defined
benefit or other postretirement benefits. The guidance becomes effective for annual and interim reporting periods beginning after
December 15, 2017 with early adoption permitted. The Company is currently evaluating this guidance and its impact on its results
of operations or financial position.
In
February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income”. The guidance allows reclassification from accumulated
other comprehensive income to retained earnings for stranded tax effects resulting from the application of the U.S. Tax Cuts and
Jobs Act. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018 with early adoption
permitted. The Company elected to early adopt this guidance during the quarter ended January 26, 2018. Adoption of this guidance
had a material impact on retained earnings and other comprehensive income (see the Consolidated
Statements of Shareholders’ Equity contained in this Report).
NOTE
2 -
Composition of Certain Financial Statement Captions:
|
|
2018
|
|
|
2017
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Meat, ingredients and supplies
|
|
$
|
6,455
|
|
|
$
|
5,409
|
|
Work in process
|
|
|
1,415
|
|
|
|
1,501
|
|
Finished goods
|
|
|
15,543
|
|
|
|
16,106
|
|
|
|
$
|
23,413
|
|
|
$
|
23,016
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
3,908
|
|
|
$
|
3,853
|
|
Buildings and improvements
|
|
|
21,665
|
|
|
|
19,944
|
|
Machinery and equipment
|
|
|
57,593
|
|
|
|
50,352
|
|
Capital leased trucks
|
|
|
404
|
|
|
|
1,060
|
|
Transportation equipment
|
|
|
6,981
|
|
|
|
6,436
|
|
Construction
in process
|
|
|
8,424
|
|
|
|
648
|
|
|
|
|
98,975
|
|
|
|
82,293
|
|
Accumulated depreciation
and amortization
|
|
|
(66,337
|
)
|
|
|
(63,722
|
)
|
|
|
$
|
32,638
|
|
|
$
|
18,571
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
|
Cash surrender value benefits
|
|
$
|
11,624
|
|
|
$
|
13,105
|
|
Other
|
|
|
6
|
|
|
|
6
|
|
|
|
$
|
11,630
|
|
|
$
|
13,111
|
|
Accrued payroll, advertising and other
expenses:
|
|
|
|
|
|
|
|
|
Payroll, vacation, payroll taxes and
employee benefits
|
|
$
|
3,326
|
|
|
$
|
3,252
|
|
Accrued advertising and broker commissions
|
|
|
489
|
|
|
|
576
|
|
Property taxes
|
|
|
517
|
|
|
|
450
|
|
Other
|
|
|
245
|
|
|
|
277
|
|
|
|
$
|
4,577
|
|
|
$
|
4,555
|
|
|
|
|
|
|
|
|
|
|
Current portion of non-current liabilities
(Notes 3 and 6):
|
|
|
|
|
|
|
|
|
Defined benefit retirement plan
|
|
$
|
1,150
|
|
|
$
|
1,150
|
|
Executive retirement plans
|
|
|
10
|
|
|
|
10
|
|
Incentive compensation
|
|
|
4,796
|
|
|
|
4,502
|
|
Capital lease obligation
|
|
|
-
|
|
|
|
424
|
|
Customer deposits
|
|
|
10
|
|
|
|
9
|
|
Postretirement
healthcare benefits
|
|
|
14
|
|
|
|
13
|
|
|
|
$
|
5,980
|
|
|
$
|
6,108
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities (Note 3):
|
|
|
|
|
|
|
|
|
Defined benefit retirement plan
|
|
$
|
6,903
|
|
|
$
|
13,122
|
|
Executive retirement plans
|
|
|
5,553
|
|
|
|
5,598
|
|
Incentive compensation
|
|
|
4,487
|
|
|
|
6,028
|
|
Postretirement
healthcare benefits
|
|
|
504
|
|
|
|
515
|
|
|
|
$
|
17,447
|
|
|
$
|
25,263
|
|
NOTE
3 -
Retirement and Other Benefit Plans:
Noncontributory-Trusteed
Defined Benefit Retirement Plans for Sales, Administrative, Supervisory and Certain Other Employees
We
have noncontributory-trusteed defined benefit retirement plans for sales, administrative, supervisory and certain other employees.
In the third quarter of fiscal year 2006, we froze future benefit accruals under these plans for employees classified
within the administrative, sales or supervisory job classifications or within any non-bargaining class. The benefits under these
plans are primarily based on years of service and compensation levels. The funding policy of the plans requires contributions
which are at least equal to the minimum required contributions needed to avoid a funding deficiency. The measurement date for
the plans is our fiscal year end.
Net
pension cost consisted of the following:
|
|
November
2, 2018
|
|
|
November
3, 2017
|
|
|
|
(52
Weeks)
|
|
|
(53
Weeks)
|
|
Service cost
|
|
$
|
126
|
|
|
$
|
131
|
|
Interest cost
|
|
|
2,248
|
|
|
|
2,196
|
|
Expected return on plan assets
|
|
|
(3,408
|
)
|
|
|
(2,901
|
)
|
Amortization
of unrecognized loss
|
|
|
1,575
|
|
|
|
2,412
|
|
Net pension cost
|
|
$
|
541
|
|
|
$
|
1,838
|
|
Net
pension costs and benefit obligations are determined using assumptions as of the beginning of each fiscal year.
Weighted
average assumptions for each fiscal year are as follows:
|
|
2018
|
|
|
2017
|
|
Discount
rate
|
|
|
4
.30
|
%
|
|
|
3.65
|
%
|
Rate
of increase in salary levels
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected
return on plan assets
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
The
benefit obligation, plan assets, and funded status of these plans as of the fiscal years ended are as follows:
|
|
November
2, 2018
|
|
|
November
3, 2017
|
|
|
|
(52
Weeks)
|
|
|
(53
Weeks)
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets - beginning of year
|
|
$
|
48,208
|
|
|
$
|
41,871
|
|
Employer contributions
|
|
|
3,150
|
|
|
|
1,150
|
|
Actual return on
plan assets
|
|
|
(242
|
)
|
|
|
6,853
|
|
Benefits
paid
|
|
|
(1,682
|
)
|
|
|
(1,666
|
)
|
Fair
value of plan assets - end of year
|
|
$
|
49,434
|
|
|
$
|
48,208
|
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
Benefit obligations
- beginning of year
|
|
$
|
62,480
|
|
|
$
|
68,287
|
|
Service cost
|
|
|
126
|
|
|
|
131
|
|
Interest cost
|
|
|
2,248
|
|
|
|
2,196
|
|
Actuarial gain
|
|
|
(5,686
|
)
|
|
|
(6,468
|
)
|
Benefits
paid
|
|
|
(1,681
|
)
|
|
|
(1,666
|
)
|
Benefit
obligations - end of year
|
|
|
57,487
|
|
|
|
62,480
|
|
Funded status of the plans
|
|
|
(8,053
|
)
|
|
|
(14,272
|
)
|
Unrecognized prior service costs
|
|
|
-
|
|
|
|
-
|
|
Unrecognized
net actuarial loss
|
|
|
16,821
|
|
|
|
20,431
|
|
Net amount recognized
|
|
$
|
8,768
|
|
|
$
|
6,159
|
|
We
perform an internal rate of return analysis when making the discount rate selection. The discount rates were based on Citigroup
Pension Liability Index as of September 30, 2018 and October 31, 2017, respectively.
Plan
assets are primarily invested in marketable equity securities, corporate and government debt securities and are administered by
an investment management company. The plans’ long-term return on assets is based on the weighted-average of the plans’
investment allocation as of the measurement date and the published historical returns for those types of asset categories, taking
into consideration inflation rate forecasts. We contributed $2,000 more than our expected employer contribution to the plans
in fiscal 2018 as part of a tax planning strategy. Our expected employer contribution to the plans in fiscal year 2019
is $1,150.
For
fiscal year 2018, our actuary updated mortality tables from the RP-2014 Mortality Total Dataset, adjusted to 2006 with Scale MP-2016,
Scaling to RP-2014 Mortality Total Dataset, adjusted to 2006, with MP-2017 Scaling. The expected rate of return on plan assets
remained the same at 7.00% effective for fiscal years 2018 and 2017, respectively.
The
actual and target allocation for plan assets are as follows:
Asset
Class
|
|
2018
|
|
|
Target
Asset
Allocation
|
|
|
2017
|
|
|
Target
Asset
Allocation
|
|
Large Cap Equities
|
|
|
21.4
|
%
|
|
|
22.0
|
%
|
|
|
29.7
|
%
|
|
|
30.0
|
%
|
Mid Cap Equities
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Small Cap Equities
|
|
|
13.0
|
%
|
|
|
12.0
|
%
|
|
|
13.2
|
%
|
|
|
12.0
|
%
|
International (equities only)
|
|
|
24.7
|
%
|
|
|
26.0
|
%
|
|
|
22.9
|
%
|
|
|
23.0
|
%
|
Fixed Income
|
|
|
39.0
|
%
|
|
|
39.0
|
%
|
|
|
32.2
|
%
|
|
|
33.0
|
%
|
Other (Government/Corporate, Bonds)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Cash
|
|
|
1.9
|
%
|
|
|
1.0
|
%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The
fair value of our pension plan assets as of November 2, 2018 and the level under which fair values were determined, using the
hierarchy described in Note 1, is as follows:
|
|
2018
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total plan assets
|
|
$
|
49,434
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
49,434
|
|
Expected
payments for the pension benefits are as follows:
Fiscal
Years
|
|
Pension
Benefits
|
|
2019
|
|
$
|
2,304
|
|
2020
|
|
$
|
2,234
|
|
2021
|
|
$
|
2,602
|
|
2022
|
|
$
|
2
,772
|
|
2023
|
|
$
|
3,203
|
|
2024-2028
|
|
$
|
16,576
|
|
Executive
Retirement Plans
Non-Qualified
Deferred Compensation
Effective
January 1, 1991, we adopted a deferred compensation savings plan for certain key employees. Under this arrangement, selected employees
contribute a portion of their annual compensation to the plan. We contribute an amount to each participant’s account by
computing an investment return equal to Moody’s Average Seasoned Bond Rate plus 2%. Employees receive vested amounts upon
death, termination or attainment of retirement age. No benefit expense was recorded under this plan for fiscal years 2018
and 2017.
Supplemental
Executive Retirement Plan
In
fiscal year 1991, we adopted a non-qualified supplemental retirement plan for certain key employees. Benefits provided under the
plan are equal to 60% of the employee’s final average earnings, less amounts provided by our defined benefit pension plan
and amounts available through Social Security.
Benefits
payable related to these plans and included in the accompanying consolidated financial statements were $5,563 and $5,608
as of November 2, 2018 and November 3, 2017, respectively. In connection with these arrangements we are the beneficiary of life
insurance policies on the lives of certain key employees and retirees. The aggregate cash surrender value of these policies, included
in non-current assets, was $11,624 and $13,105 as of November 2, 2018 and November 3, 2017, respectively.
Expected
payments for executive postretirement benefits are as follows:
Fiscal
Years
|
|
Executive
Postretirement
Benefits
|
|
2019
|
|
$
|
177
|
|
2020
|
|
$
|
524
|
|
2021
|
|
$
|
524
|
|
2022
|
|
$
|
524
|
|
2023
|
|
$
|
524
|
|
2024-2028
|
|
$
|
2,619
|
|
Incentive
Compensation Plan for Certain Key Executives
We
provide an incentive compensation plan for certain key executives, which is based upon our pretax income. The payment of these
amounts is generally deferred over three or five-year periods. The total amount payable related to this arrangement was $9,283
and $10,530 as of November 2, 2018 and November 3, 2017, respectively. Future payments are approximately $4,796, $3,140, $1,183,
$113 and $51 for fiscal years 2019 through 2023, respectively.
Postretirement
Healthcare Benefits for Selected Executive Employees
We
provide postretirement health care benefits for selected executive employees. Net periodic postretirement healthcare (benefit)
cost is determined using assumptions as of the beginning of each fiscal year, except for the total actual benefit payments and
the discount rate used to develop the net periodic postretirement benefit expense, which is determined at the end of the fiscal
year.
Net
periodic postretirement healthcare (benefit) consisted of the following:
|
|
November
2. 2018
|
|
|
November
3. 2017
|
|
|
|
(52
Weeks)
|
|
|
(53
Weeks)
|
|
Service
cost
|
|
$
|
13
|
|
|
$
|
13
|
|
Interest
cost
|
|
|
18
|
|
|
|
17
|
|
Amortization
of prior service cost
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Amortization
of actuarial gain
|
|
|
(41
|
)
|
|
|
(58
|
)
|
Net
periodic postretirement healthcare (benefit)
|
|
$
|
(142
|
)
|
|
$
|
(160
|
)
|
Weighted
average assumptions for the fiscal years ended November 2, 2018 and November 3, 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Discount
rate
|
|
|
4.30
|
%
|
|
|
3.51
|
%
|
Medical
trend rate next year
|
|
|
8.00
|
%
|
|
|
8
.50
|
%
|
Ultimate
trend rate
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year
ultimate trend rate is achieved
|
|
|
2022
|
|
|
|
2022
|
|
The
table below shows the estimated effect of a 1% increase in healthcare cost trend rate on the following:
|
|
2018
|
|
|
2017
|
|
Interest
cost plus service cost
|
|
$
|
4
|
|
|
$
|
4
|
|
Accumulated
postretirement healthcare obligation
|
|
$
|
54
|
|
|
$
|
64
|
|
The
table below shows the estimated effect of a 1% decrease in healthcare cost trend rate on the following:
|
|
2018
|
|
|
2017
|
|
Interest
cost plus service cost
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
Accumulated
postretirement healthcare obligation
|
|
$
|
(45
|
)
|
|
$
|
(53
|
)
|
The
healthcare obligation and funded status of this plan as of the fiscal years ended are as follows:
|
|
2018
|
|
|
2017
|
|
Change
in accumulated postretirement healthcare obligation:
|
|
|
|
|
|
|
|
|
Healthcare
obligation - beginning of year
|
|
$
|
528
|
|
|
$
|
511
|
|
Service
cost
|
|
|
13
|
|
|
|
13
|
|
Interest
cost
|
|
|
18
|
|
|
|
17
|
|
Actuarial
gain
|
|
|
(40
|
)
|
|
|
(11
|
)
|
Benefits
paid
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Healthcare
obligation – end of year
|
|
$
|
517
|
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
Funded
status of the plans
|
|
|
517
|
|
|
|
528
|
|
Unrecognized
prior service costs
|
|
|
(44
|
)
|
|
|
(176
|
)
|
Unrecognized
net actuarial gain
|
|
|
(109
|
)
|
|
|
(110
|
)
|
Unrecognized
amounts recorded in other comprehensive income
|
|
|
153
|
|
|
|
286
|
|
Postretirement
healthcare liability
|
|
$
|
517
|
|
|
$
|
528
|
|
Expected
payments for the postretirement benefits are as follows:
Fiscal
Years
|
|
Postretirement
Healthcare
Benefits
|
|
2019
|
|
$
|
57
|
|
2020
|
|
$
|
84
|
|
2021
|
|
$
|
66
|
|
2022
|
|
$
|
46
|
|
2023-2027
|
|
$
|
111
|
|
401(K)
Plan for Sales, Administrative, Supervisory and Certain Other Employees
During
the fiscal year ended November 3, 2006, we implemented a qualified 401(K) retirement plan (the “401K Plan”)
for our sales, administrative, supervisory and certain other employees. During fiscal years 2018 and 2017, we made total employer
contributions to the 401K Plan in the amounts of $660 and $599, respectively.
NOTE
4 -
Income Taxes:
The
provision for income taxes includes the following:
|
|
November
2, 2018
|
|
|
November
3, 2017
|
|
|
|
(52
Weeks)
|
|
|
(53
Weeks)
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
979
|
|
|
$
|
4,039
|
|
State
|
|
|
377
|
|
|
|
450
|
|
|
|
|
1,356
|
|
|
|
4,489
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,715
|
|
|
|
(321
|
)
|
State
|
|
|
225
|
|
|
|
(169
|
)
|
|
|
|
4,940
|
|
|
|
(490
|
)
|
|
|
$
|
6,296
|
|
|
$
|
3,999
|
|
The
total tax provision differs from the expected amount computed by applying the statutory federal income tax rate to income before
income taxes as follows:
|
|
November
2, 2018
|
|
|
November
3, 2017
|
|
|
|
(52
Weeks)
|
|
|
(53
Weeks)
|
|
Provision for federal
income taxes at the applicable statutory rate
|
|
$
|
2,956
|
|
|
$
|
4,373
|
|
Increase in provision resulting from state
income taxes, net of federal income tax benefit
|
|
|
463
|
|
|
|
108
|
|
Change in federal rate – Tax Act
|
|
|
3,059
|
|
|
|
-
|
|
Non-taxable life insurance gain
|
|
|
(99
|
)
|
|
|
(459
|
)
|
Domestic Production Activities Deduction
|
|
|
(106
|
)
|
|
|
(375
|
)
|
Change in valuation allowance
|
|
|
-
|
|
|
|
77
|
|
Other, net
|
|
|
23
|
|
|
|
275
|
|
|
|
$
|
6,296
|
|
|
$
|
3,999
|
|
Deferred
income taxes result from differences in the bases of assets and liabilities for tax and accounting purposes.
|
|
2018
|
|
|
2017
|
|
Receivables allowance
|
|
$
|
9
|
|
|
$
|
12
|
|
Returns allowance
|
|
|
112
|
|
|
|
264
|
|
Inventory packaging reserve
|
|
|
35
|
|
|
|
129
|
|
Inventory overhead capitalization
|
|
|
305
|
|
|
|
480
|
|
Employee benefits
|
|
|
385
|
|
|
|
544
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
State taxes
|
|
|
(230
|
)
|
|
|
(420
|
)
|
Incentive compensation
|
|
|
2,174
|
|
|
|
3,399
|
|
Pension and health care benefits
|
|
|
3,494
|
|
|
|
7,736
|
|
Depreciation
|
|
|
(2,274
|
)
|
|
|
(2,105
|
)
|
Net operating
loss carry-forward and credits
|
|
|
77
|
|
|
|
77
|
|
Valuation allowance
established against state NOL
|
|
|
(77
|
)
|
|
|
(77
|
)
|
Non-current
tax assets, net
|
|
$
|
4,010
|
|
|
$
|
10,040
|
|
Management
is required to evaluate whether a valuation allowance should be established against its deferred tax assets based on the consideration
of all available evidence using a “more likely than not” standard. Realization of deferred tax assets is dependent
upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies, and reversals of existing
taxable temporary differences.
Management
reevaluated the need for a valuation allowance at the end of 2018 and determined that some of its California net operating
loss (“NOL”) may not be utilized. Therefore, a valuation allowance of $77 has been retained for such portion of
the California NOL. Management has concluded that it is more likely than not that the other deferred tax assets as of November
2, 2018 will be realized.
On
December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes
significant changes to the U.S. tax code that affected our fiscal year ended November 2, 2018, and future periods, including,
but not limited to, (1) reducing the corporate federal income tax rate from 35% to 21%, (2) bonus depreciation that will allow
for full expensing of qualified property in the year placed in service, and (3) the repeal of the domestic production activity
deduction beginning with our fiscal year 2019. Section 15 of the Internal Revenue Code (the “Code”) stipulates that
our fiscal year ended November 2, 2018 will have a blended corporate tax rate of 23.07%, which is based on the applicable tax
rates before and after the Tax Act and the number of days in the year.
Under
U.S. GAAP, specifically ASC Topic 740,
Income Taxes,
the tax effects of changes in tax laws must be recognized in the period
in which the law is enacted, or December 22, 2017, for the Tax Act. ASC Topic 740 also requires deferred tax assets and liabilities
to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the
date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rates.
The
Tax Act reduced the corporate tax rate from 35% to 21%, effective January 1, 2018. This results in a blended corporate tax rate
of 23.07% in fiscal year 2018 and 21% thereafter. We analyzed our deferred tax balances to estimate which of those balances are
expected to reverse in fiscal 2018 or thereafter, and we re-measured the deferred taxes at 23.07% or 21% accordingly. The change
in deferred taxes is recorded as an adjustment to our income tax provision, which resulted in a charge totaling $3,059 in fiscal
2018.
The
Company adopted ASU 2018-02, “Income Statement-Reporting Other Comprehensive Income (OCI) (Topic 220)” in year ended November 2,
2018. As a result of the remeasurement of deferred tax assets related to the Tax Act, we reclassified $2,529 from Other Comprehensive
Income to Retained Earnings.
As
of November 2, 2018, the Company had net operating loss carryforwards of approximately $874 for state purposes. These loss carryforwards
will expire at various dates from 2018 through 2033.
As
of November 2, 2018, we have provided a liability of $155 to unrecognized tax benefits related to various federal and state income
tax matters. None of this liability will reduce our effective income tax rate if the asset is recognized in future reporting periods.
We have not identified any new unrecognized tax benefits.
As of November
3, 2017, we have provided a liability of $135 to unrecognized tax benefits related to various federal and state income tax matters.
None of this liability will reduce our effective income tax rate if the asset is recognized in future reporting periods. We have
not identified any new unrecognized tax benefits.
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
|
November
2, 2018
|
|
|
November
3, 2017
|
|
|
|
(52
Weeks)
|
|
|
(53
Weeks)
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
135
|
|
|
$
|
130
|
|
Additions
based on tax positions related to the current year
|
|
|
10
|
|
|
|
14
|
|
Additions
for tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
Reductions
for tax positions of prior years
|
|
|
10
|
|
|
|
(9
|
)
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
155
|
|
|
$
|
135
|
|
We
recognize any future accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of November
2, 2018, we had approximately $22 in accrued interest and penalties which is included as a component of the $155 unrecognized
tax benefit noted above.
Our
federal income tax returns are open to audit under the statute of limitations for the fiscal years 2015 through
2017.
We
are subject to income tax in California and various other state taxing jurisdictions. Our state income tax returns are open to
audit under the statute of limitations for the fiscal years ended 2014 through 2017.
We do not
anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
NOTE
5 -
Line of Credit and Borrowing Agreement:
We
maintain a line of credit with Wells Fargo Bank, N.A. that expires on March 1, 2020. The line of credit was expanded from $5,000
to $7,500 during the first quarter of fiscal 2017. Under the terms of this line of credit, we may borrow up to $7,500 at an
interest rate equal to the bank’s prime rate or Libor plus 1.5%. The borrowing agreement contains various covenants, the
more significant of which require us to maintain a minimum tangible net worth, a minimum quick ratio, a minimum net income after
tax and total capital expenditures less than $7,500. The Company was in violation of the capital expenditure covenant which was
subsequently waived by letter dated January 3, 2019. The Company was in compliance with all other covenants as of November
2, 2018. There have been no borrowings under this line of credit during fiscal year 2018.
On
December 26, 2018, we entered into a master collateral loan and security agreement with Wells Fargo Bank, N.A for up to $15,000
in equipment financing. Pursuant to the loan agreement, we borrowed $7,500 to purchase specific equipment for our new Chicago
processing facility at a fixed rate of 4.13% per annum. The loan term is seven years and is secured by the equipment
purchased. The funds were received on December 28, 2018. Our agreement with Wells Fargo Bank, N.A. contains various affirmative
and negative covenants that limit the use of funds and define other provisions of the loan. The main financial covenants are listed
below:
|
●
|
Total
Liabilities divided by Tangible Net Work not greater than 2.5 to 1.0 at each fiscal quarter,
|
|
●
|
Quick
Ratio not less than 1.0 to 1.0 at each fiscal quarter end,
|
|
●
|
Net
income after taxes not less than one dollar on a quarterly basis, determined as
of each fiscal quarter end.
|
NOTE
6 -
Contingencies and Commitments:
We
lease warehouse and/or office facilities throughout the United States under month-to-month rental agreements.
We
invested in OTR (over-the-road) tractors during fiscal year 2012 financed by a capital lease obligation in the amount of $1,848.
The total capital lease obligation was settled as of November 2, 2018 with no remaining lease liability. We bought several of
the tractors and converted to month-to-month arrangements on other tractors as needed. We plan to invest in new capital lease
arrangements in fiscal year 2019.
NOTE
7 -
Segment Information:
We
have two reportable operating segments, Frozen Food Products (the processing and distribution of frozen products) and Snack Food
Products (the processing and distribution of meat and other convenience foods).
We
evaluate each segment’s performance based on revenues and operating income. Selling, general and administrative expenses
include corporate accounting, information systems, human resource and marketing management at the corporate level. These activities
are allocated to each operating segment based on revenues and/or actual usage.
The
following segment information is for the fiscal years ended November 2, 2018 (52 weeks) and November 3, 2017 (53 weeks):
Segment
Information
|
2018
|
|
Frozen
Food
Products
|
|
|
Snack
Food
Products
|
|
|
Other
|
|
|
Totals
|
|
Net
Sales
|
|
$
|
47,266
|
|
|
$
|
126,991
|
|
|
$
|
-
|
|
|
$
|
174,257
|
|
Cost
of products sold
|
|
|
30,992
|
|
|
|
86,759
|
|
|
|
-
|
|
|
|
117,751
|
|
Gross
margin
|
|
|
16,274
|
|
|
|
40,232
|
|
|
|
-
|
|
|
|
56,506
|
|
SG&A
|
|
|
14,226
|
|
|
|
35,703
|
|
|
|
-
|
|
|
|
49,929
|
|
Gain
on sale of property, plant and equipment
|
|
|
(242
|
)
|
|
|
(17
|
)
|
|
|
(5,977
|
)
|
|
|
(6,236
|
)
|
Income
before taxes
|
|
$
|
2,290
|
|
|
$
|
4,546
|
|
|
$
|
5,977
|
|
|
$
|
12,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,902
|
|
|
$
|
64,429
|
|
|
$
|
25,163
|
|
|
$
|
101,494
|
|
Additions
to PP&E
|
|
$
|
981
|
|
|
$
|
17,166
|
|
|
$
|
-
|
|
|
$
|
18,147
|
|
Segment
Information
|
2017
|
|
Frozen
Food
Products
|
|
|
Snack
Food
Products
|
|
|
Other
|
|
|
Totals
|
|
Net
Sales
|
|
$
|
49,081
|
|
|
$
|
118,142
|
|
|
$
|
-
|
|
|
$
|
167,223
|
|
Cost
of products sold
|
|
|
30,177
|
|
|
|
75,460
|
|
|
|
-
|
|
|
|
105,637
|
|
Gross
margin
|
|
|
18,904
|
|
|
|
42,682
|
|
|
|
-
|
|
|
|
61,586
|
|
SG&A
|
|
|
14,734
|
|
|
|
34,082
|
|
|
|
-
|
|
|
|
48,816
|
|
Gain
on sale of property, plant and equipment
|
|
|
(28
|
)
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
(58
|
)
|
Income
before taxes
|
|
$
|
4,198
|
|
|
$
|
8,630
|
|
|
$
|
-
|
|
|
$
|
12,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,826
|
|
|
$
|
49,511
|
|
|
$
|
36,208
|
|
|
$
|
97,545
|
|
Additions
to PP&E
|
|
$
|
356
|
|
|
$
|
11,218
|
|
|
$
|
-
|
|
|
$
|
11,574
|
|
NOTE
8-
Unaudited Interim Financial Information:
Not
applicable for a smaller reporting company.