Bridgford Foods Corporation — Q3 FY2019 Form 10-Q
Reporting period: Twelve and thirty-six weeks ended July 12, 2019, compared with the periods ended July 13, 2018. Financial amounts below are in thousands of dollars, except per-share data. The company operates Frozen Food Products and Snack Food Products segments. Management cautions that interim results may not indicate full-year performance.
Financial performance
| Metric | 12 weeks 2019 | 12 weeks 2018 | 36 weeks 2019 | 36 weeks 2018 |
|---|---|---|---|---|
| Net sales | $42,837 | $38,468 | $129,321 | $117,560 |
| Gross margin | $13,415 (31.3%) | $12,434 (32.3%) | $43,470 (33.6%) | $38,453 (32.7%) |
| SG&A | $11,819 | $10,730 | $36,514 | $34,214 |
| Income before taxes | $1,605 | $1,704 | $6,965 | $10,241 |
| Net income | $1,105 | $1,448 | $5,201 | $4,455 |
| Basic EPS | $0.12 | $0.16 | $0.57 | $0.49 |
- Sales and segments: Q3 sales rose 11.4%; management attributed the increase mainly to higher unit volume, with higher pricing also contributing. Frozen Foods sales increased 17.7% to $11,273; Snack Foods increased 9.2% to $31,564. For the 36-week period, sales rose 10.0%, with Frozen Foods up 11.3% and Snack Foods up 9.5%.
- Margins and earnings: Q3 gross margin declined 1.0 percentage point as cost of products sold grew faster than sales. Year-to-date gross margin improved 0.9 point. Q3 net income decreased 23.7%; year-to-date net income increased 16.7%, while pretax income fell from the prior period, which included a $6,002 property-sale gain. The prior-year period also included a $3,200 tax expense from remeasuring deferred taxes following U.S. tax law changes.
- Cash flow and investment: Year-to-date operating cash flow was $5,042, versus $5,000. Investing cash outflow was $19,782, including $19,791 of property and equipment additions, versus $3,702 of investing outflow in 2018. Financing provided $14,378, primarily equipment-loan proceeds. Cash ended at $7,817, down $362 from the fiscal-year opening balance.
Balance sheet, debt and liquidity
At July 12, 2019, cash was $7,817, current assets $54,236 and current liabilities $20,888. Total assets were $120,234 and shareholders’ equity was $70,881. Equipment notes totaled $14,378, comprising $1,918 current and $12,460 long-term; the notes finance equipment for the new Chicago processing facility, carry fixed rates of 3.98% and 4.13%, and have seven-year terms. The company reported compliance with the equipment-loan covenants. It also had a $7,500 Wells Fargo credit line expiring March 1, 2020; a $2,000 draw in April was repaid ten days later.
Management commentary, outlook and risks
- Management stated that financial position and capital resources were sufficient for operating needs and capital expenditures through the remainder of FY2019. The company planned further capital-lease arrangements for over-the-road tractors later in FY2019; no quantified earnings or sales guidance was provided.
- The company was in violation of the credit-line capital-expenditure covenant; Wells Fargo subsequently waived the violation by letter dated August 19, 2019. The filing states the company was otherwise in compliance with the equipment-loan covenants at quarter-end.
- Management cited higher production volume and new products as sales drivers. Cost pressures included higher hourly wages, healthcare claims and promotional activity; lower meat commodity costs partly offset these pressures. Life-insurance policy gains depend on underlying equity performance and may vary.
- Customer concentration is notable: Wal-Mart represented 35.9% of year-to-date sales and 33.3% of receivables; Dollar General represented 10.7% of sales and 25.1% of receivables. The company does not hedge commodity exposure and identifies commodity, labor, competition, customer demand, construction schedules and regulatory matters among its risks.
- The company reported ordinary-course legal claims that management did not expect to materially adversely affect results or financial position. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile the tax-rate disclosures: the statements imply a Q3 rate of about 31.2% ($500 tax on $1,605 pretax income), consistent with the MD&A table, while the income-tax note separately states 23.6% for the third quarter of FY2019.
- Track Chicago facility spending, completion and production ramp-up, including whether planned capital-lease arrangements proceed and their effect on cash and debt.
- Assess covenant headroom and the implications of the waived credit-line capital-expenditure violation, alongside the credit line’s March 2020 expiration.
- Monitor sales and receivable concentration, promotional allowances, commodity and labor costs, and the sustainability of segment volume and margin trends.
- Interpret year-over-year earnings comparisons in light of the prior-year property-sale gain and tax-law-related deferred-tax expense; interim results are seasonal and not necessarily indicative of the full year.