Bridgford Foods Corporation — Q3 FY2018 Form 10-Q
Reporting period: Twelve and thirty-six weeks ended July 13, 2018; comparisons are to the periods ended July 7, 2017. Amounts below are in millions of dollars unless otherwise noted. The company makes frozen food and snack food products.
Financial performance
| Metric | 12 weeks 2018 | 12 weeks 2017 | 36 weeks 2018 | 36 weeks 2017 |
|---|---|---|---|---|
| Net sales | $38.47 | $36.61 | $117.56 | $110.79 |
| Gross margin | $12.43; 32.3% | $14.02; 38.3% | $38.45; 32.7% | $41.89; 37.8% |
| Income before taxes | $1.70 | $3.10 | $10.24 | $8.58 |
| Income tax provision | $0.26 | $1.04 | $5.79 | $2.73 |
| Net income | $1.45 | $2.06 | $4.46 | $5.85 |
| Basic EPS | $0.16 | $0.22 | $0.49 | $0.64 |
- Revenue and mix: Third-quarter sales rose 5.1%, as 11.5% higher unit volume more than offset a 7.3% decline in selling price per pound. For the 36 weeks, sales increased 6.1%, driven by 8.4% higher volume despite a 3.4% price decline.
- Segments: Q3 Frozen Food sales fell 6.1% to $9.57 million; Snack Food sales rose 9.4% to $28.89 million. Year-to-date, Frozen Food sales declined 4.8% to $31.18 million, while Snack Food sales grew 10.7% to $86.39 million. Management cited weak retail demand and discontinued low-margin food-service business in Frozen Food; Snack Food growth was led by beef and pork product volumes.
- Margins and costs: Cost of products sold rose faster than sales: 15.2% in Q3 and 14.8% year to date. Management attributed pressure mainly to rising meat commodity costs, higher volume, and—in the year-to-date period—higher workers’ compensation and healthcare costs. Reported commodity cost increases were $0.36 million for Q3 and $2.58 million year to date.
- Cash flow: Year-to-date operating cash flow was $5.00 million, down from $13.44 million. Investing used $3.70 million, including $9.70 million of capital expenditures and $6.00 million of property-sale proceeds; financing used $0.08 million for capital lease payments. Cash increased $1.22 million to $13.33 million.
Financial position, liquidity, and material changes
- At July 13, 2018, cash was $13.33 million, current assets $55.92 million, current liabilities $18.58 million, total assets $100.34 million, and total liabilities $39.85 million. Shareholders’ equity was $60.49 million.
- Management stated it had remained free of interest-bearing debt, excluding capital leases, for 28 of the prior 29 years. The company had not drawn on its $7.50 million Wells Fargo credit line during the reported 36 weeks. The line expires March 1, 2020.
- The company breached the credit-line capital-expenditure covenant as of July 13; Wells Fargo waived that breach by letter dated August 23, 2018. The company reported compliance with the other covenants.
- Capital expenditures included initial payments of $4.80 million toward smokehouses and chillers expected to cost approximately $5.70 million. PP&E increased to $25.68 million from $18.57 million at November 3, 2017.
- Year-to-date net income included a nonrecurring $5.98 million pretax gain on a Chicago land sale, and $1.09 million of gains on life insurance policies. Excluding the land sale, pretax income was lower than the prior-year comparable period.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management said financial position and capital resources were sufficient for operating needs and capital expenditures for the remainder of FY2018; interim results may not indicate full-year performance.
- The Tax Cuts and Jobs Act prompted a $3.20 million deferred-tax expense from remeasurement of deferred tax assets; the company described its tax accounting as provisional and still under evaluation. The filing reports a 23.07% blended federal statutory rate for FY2018 and 21% thereafter.
- The filing contains inconsistent Q3 2018 effective tax-rate disclosures: the income statement and MD&A quarterly table imply approximately 15.0% ($0.26 million tax on $1.70 million pretax income), while Note 5 states 56.5%, which matches the reported 36-week rate. Verify the correct quarterly figure.
- Customer concentration is significant: Walmart represented 36.6% of 36-week sales and 34.4% of receivables; Dollar General represented 23.9% of receivables. The company does not hedge commodity exposure and noted rising meat costs. Other cited sensitivities include healthcare, workers’ compensation, pension estimates, consumer demand, competition, and regulation.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results. A tractor capital lease had converted to month-to-month rental, with final terms under negotiation. No material changes to previously disclosed risk factors were reported.
- Disclosure controls were assessed as effective; no material changes to internal control over financial reporting were reported. The company early adopted ASU 2018-02, reclassifying $2.53 million from accumulated other comprehensive loss to retained earnings.
Important facts for investors to verify
- Confirm the correct Q3 effective tax rate and treatment of the $3.20 million deferred-tax adjustment and land-sale taxes.
- Assess whether Snack Food volume growth can offset lower realized prices and commodity, labor, and healthcare cost pressure; track gross margin recovery.
- Monitor Frozen Food demand and the impact of discontinued food-service products and weaker retail volumes.
- Review capital spending and project completion, covenant compliance following the waiver, and remaining availability under the credit line.
- Evaluate exposure to Walmart and other major customers, as well as unhedged commodity costs and the variability of life-insurance gains.