Bridgford Foods Corporation — Q3 FY2020 Form 10-Q
Reporting period: Twelve weeks ended July 10, 2020; year-to-date figures cover the thirty-six weeks ended July 10, 2020. Comparative periods ended July 12, 2019. The unaudited statements report amounts in thousands, except per-share data.
Business context
Bridgford operates Frozen Food Products, including biscuits, dough products and shelf-stable sandwiches, and Snack Food Products, including jerky and other meat snacks. COVID-19 disrupted operations and shifted demand from foodservice toward retail: Snack Food Products benefited from increased demand, while retail growth did not offset foodservice weakness in Frozen Food Products.
Financial performance
| Metric | 12 weeks ended July 10, 2020 | 12 weeks ended July 12, 2019 | 36 weeks ended July 10, 2020 | 36 weeks ended July 12, 2019 |
|---|---|---|---|---|
| Net sales | $41.660m | $42.837m | $131.301m | $129.321m |
| Gross margin | $12.032m; 28.9% | $13.415m; 31.3% | $39.996m; 30.5% | $43.470m; 33.6% |
| SG&A | $10.183m | $11.819m | $36.381m | $36.514m |
| Income before taxes | $1.854m | $1.605m | $3.637m | $6.965m |
| Net income | $3.133m | $1.105m | $5.419m | $5.201m |
| Basic EPS | $0.35 | $0.12 | $0.60 | $0.57 |
- Quarterly sales fell 2.7%; year-to-date sales rose 1.5%. In the quarter, Frozen Food sales declined 27.8% to $8.141m, while Snack Food sales rose 6.2% to $33.519m. Year to date, Frozen Food sales declined 18.0% and Snack Food sales increased 8.7%.
- Gross margin contracted in both comparison periods. Management attributed pressure to channel and product-mix changes, lower Frozen Food volume and higher meat commodity costs; year-to-date meat commodity costs in Snack Food were approximately $3.327m higher year over year.
- Year-to-date operating cash flow was $7.921m, versus $5.042m in the prior-year period. Investing cash use was $14.320m, mainly reflecting $15.257m of capital expenditures; financing provided $16.496m.
- At July 10, cash and cash equivalents were $12.675m, with $0.900m restricted cash. Current assets were $67.445m and current liabilities $21.959m, implying working capital of $45.486m. Equipment notes totaled $30.283m, including $4.385m current; the $7.5m revolving line was repaid in May. The company reported compliance with loan covenants.
Changes, outlook and risks
- COVID-19 caused temporary production idling, reduced productivity, higher production costs, worker absences and closures at some facilities. Management expected operational challenges and volume effects to weigh on earnings for at least the remainder of FY2020, but expected the company to remain profitable on a consolidated basis.
- Management expected Frozen Food volumes to decline for the rest of FY2020; Snack Food had experienced short-term volume growth. Commodity volatility and potential pork and beef shortages could constrain production. Customer requests for payment terms extended by 10–35 days, and Walmart represented 38.7% of year-to-date sales and 33.9% of receivables, indicating concentration risk.
- The CARES Act NOL carryback generated a material tax benefit: the company recorded a $1.782m year-to-date income tax benefit, versus a $1.764m provision in the comparable period. Management expected NOL carrybacks to provide a material cash benefit and estimated about $1.258m of FY2020 employer Social Security tax deferrals. The tax benefit materially affects comparability of reported earnings.
- Management stated liquidity should be sufficient through FY2020 and to complete the Chicago plant expansion, supported by operating cash, expected tax refunds and payroll tax deferrals. The filing also reports $15.257m of year-to-date capital additions, primarily projects in process.
- A subsidiary agreed to sell a Chicago property for $60m, subject to approvals and closing conditions. A July 2020 amendment extended inspection and zoning deadlines; the revised outside closing date was May 6, 2021. The escrow account held $1.350m in earnest money as of July 31, 2020. Proceeds are contingent and should not be treated as completed or assured.
- Quarterly net income included a $0.916m non-taxable life-insurance gain, versus $0.285m a year earlier; these gains depend on underlying investments and may fluctuate. Management disclosed no other material changes to previously reported risk factors beyond COVID-19-related uncertainties. Legal matters in the ordinary course were not expected by management to materially affect results.
Most important facts to verify
- The cash flow statement reports operating cash flow of $7.921m, but the MD&A COVID-19 liquidity discussion states $8.821m and elsewhere correctly cites $7.921m. Confirm the correct figure.
- The tax note describes the third-quarter effective tax rate as -49.0%, while the quarterly results table and MD&A calculate it as -69.0% ($1.279m benefit on $1.854m pretax income). Confirm the correct quarterly rate; -49.0% appears to be the year-to-date rate.
- Assess whether retail demand can offset continuing foodservice weakness, especially in Frozen Food, and whether Snack Food volume growth can absorb higher commodity and operating costs.
- Verify expected CARES Act tax refunds and payroll-tax deferrals, remaining Chicago expansion funding needs, and the timing and conditions for the proposed $60m property sale.