Bridgford Foods Corporation — Q1 FY2017 Form 10-Q
Business context and reporting period. The unaudited quarter covers the 12 weeks ended January 20, 2017; comparison is the 12 weeks ended January 22, 2016. Bridgford operates Frozen Food Products and Snack Food Products segments, selling products including dough and biscuits, jerky, meat snacks, sausage and pepperoni. Dollar amounts below are in thousands unless stated otherwise. Interim results may not indicate full-year performance, in part because of seasonality.
Key financial results
| Metric | Q1 FY2017 | Comparable period | Change |
|---|---|---|---|
| Net sales | $40,081 | $36,156 | +$3,925; +10.9% |
| Gross margin | $14,915; 37.2% | $13,779; 38.1% | Margin down 0.9 percentage points |
| SG&A | $11,465 | $10,678 | +$787; +7.4% |
| Income before taxes | $3,450 | $3,101 | +$349 |
| Income tax provision | $976; 28.3% effective rate | $1,229; 39.6% effective rate | Provision down $253 |
| Net income / diluted EPS | $2,474 / $0.27 | $1,872 / $0.21 | Net income +32.2% |
| Operating cash flow | $6,585 | $7,438 | Down $853 |
| Capital expenditures | $1,044 | $578 | Up $466 |
| Cash and cash equivalents | $12,497 at Jan. 20, 2017 | $6,985 at Oct. 28, 2016 | Up $5,512 |
Balance sheet, liquidity and cash flow
- Total assets were $89,363 and total liabilities $47,980 at January 20, 2017. Current assets were $50,058 versus current liabilities of $12,982.
- Inventory declined to $19,168 from $24,081 at October 28, 2016, primarily reflecting seasonal inventory liquidation. The cash conversion cycle was 69 days and increased because of extended payment terms for certain significant customers.
- Operating cash flow was lower year over year, mainly due to slower receivables collections and a reduction in the promotional-allowance provision. The company contributed $300 to its defined benefit pension plan during the quarter.
- The company reported no borrowings on its Wells Fargo credit line, which was expanded in Q1 to $7,500 and expires March 1, 2018. It was in compliance with covenants. Management said it had no interest-bearing debt apart from capital leases; remaining transportation-equipment capital lease obligation was $520.
- Cash increased by $5,512 during the quarter. Investing activities used $1,040, largely for capital expenditures; financing activities used $33 for capital lease payments.
Material changes and management commentary
- Snack Food Products sales rose 15.0% to $28,366; Frozen Food Products sales rose 2.0% to $11,715. Consolidated sales growth was primarily volume-driven: pound volume contributed $4,951, while lower selling prices reduced sales by $1,340. Snack-food volume growth was particularly strong in beef products.
- Consolidated cost of products sold increased 12.5%, faster than sales, and gross-margin percentage fell to 37.2% from 38.1%. Management cited higher volume, freight and storage costs, and changes in product mix and pricing; lower meat and flour commodity costs partly offset these pressures.
- SG&A growth included higher wages and bonuses, pension costs, outside storage and advertising. A $279 gain on life-insurance cash surrender value compared with a $322 loss in the prior-year quarter contributed to the year-over-year earnings improvement. Management cautioned that these gains and losses depend on underlying equity performance and may vary.
- The effective tax rate was 28.3%, compared with 39.6% in the prior-year-period MD&A comparison. The filing attributes the current-year rate partly to domestic production activities deductions, non-taxable life-insurance gains and state taxes.
- Management stated that cash and capital resources should be sufficient for operating needs and capital expenditures for the remainder of FY2017. No numerical earnings or sales guidance was provided.
Outlook, risks and unusual items
- Key disclosed exposures include commodity, labor, freight, pension and employee-benefit costs; customer demand and pricing; competition; and customer credit or payment risk. Wal-Mart represented 37.0% of sales and 31.7% of receivables; Dollar General represented 8.9% of sales and 24.0% of receivables.
- Most flour is purchased at market prices, and the company does not use commodity futures or hedging. The filing says no significant flour contracts remained unfulfilled at quarter-end.
- The company participates in multiemployer pension plans; withdrawal could trigger additional liability. Estimates for self-insured benefits and pension obligations are subject to uncertainty. The pension discount rate cited by management rose to 4.16% from 3.40% at October 28, 2016.
- Management said ordinary-course claims and legal matters were not expected to materially adversely affect financial position or results. No material changes to previously disclosed risk factors were reported.
- After quarter-end, Chicago City Council approved a zoning change for the company’s Chicago production-plant property. The company entered a non-binding purchase agreement for another Chicago-area facility and had deposited $250 in escrow while evaluating whether the facility meets its needs.
Important facts for investors to verify
- Whether the strong snack-food volume growth and overall sales growth are sustainable, and how pricing and product mix will affect margins.
- Whether higher freight, storage, labor and pension costs persist, and how commodity-price changes affect gross margin.
- Receivables collection trends and the impact of extended customer payment terms, particularly given customer concentration.
- The planned Chicago-area facility purchase, including whether the non-binding agreement proceeds and the final cost and intended use.
- Funding needs for capital expenditures and pension obligations, credit-line availability and covenant compliance, and the company’s seasonal cash-flow pattern.