Bridgford Foods Corporation — Q2 FY2013 Form 10-Q
Reporting period: Twelve and twenty-four weeks ended April 19, 2013, compared with periods ended April 13, 2012. Balance-sheet comparisons are with November 2, 2012. Unless noted, financial amounts are in thousands of dollars. The company operates Frozen Food Products and Refrigerated and Snack Food Products businesses.
Financial performance
| Metric | 12 weeks ended Apr. 19, 2013 | 12 weeks ended Apr. 13, 2012 | 24 weeks ended Apr. 19, 2013 | 24 weeks ended Apr. 13, 2012 |
|---|---|---|---|---|
| Net sales | $28,584 | $27,313 | $59,355 | $57,028 |
| Gross margin | $9,777; 34.2% | $9,741; 35.7% | $21,810; 36.7% | $18,304; 32.1% |
| SG&A | $9,655 | $8,701 | $19,794 | $17,542 |
| Income before taxes | $122 | $1,040 | $2,016 | $762 |
| Income tax | $11 | $0 | $183 | $0 |
| Net income | $111 | $1,040 | $1,833 | $762 |
| Basic and diluted EPS | $0.01 | $0.11 | $0.20 | $0.08 |
Quarterly change: Sales rose 4.7%, but net income fell sharply. Gross margin declined from 35.7% to 34.2%; management attributed the decline to higher production material and labor costs and workers’ compensation costs. SG&A increased 11.0%, including higher advertising and workers’ compensation costs and lower life-insurance cash-value gains.
Six-month change: Sales increased 4.1% and net income more than doubled. Gross margin improved to 36.7%, primarily reflecting lower meat commodity costs and favorable mix in Refrigerated and Snack Food Products. SG&A rose 12.8%, including higher wages and bonuses, advertising, depreciation and workers’ compensation costs, and lower life-insurance gains.
In the quarter, Frozen Food Products sales declined 7.9%, mainly due to lower volume and increased promotions; Refrigerated and Snack Food Products sales grew 15.4%. For the 24-week period, Frozen sales fell 8.2%, while Refrigerated and Snack Food sales increased 14.5%. Management cited lower Frozen customer demand and higher flour costs, alongside increased Refrigerated volume and favorable meat costs.
Cash flow, balance sheet and liquidity
- For the 24 weeks, operating cash flow was negative $1,411, versus positive $344 a year earlier. The company attributed the outflow mainly to higher finished-goods and ingredient inventories; inventory increased $4,413 in the cash-flow reconciliation.
- Investing cash outflow was $1,318, including $1,331 of capital expenditures, versus $283 outflow in the prior-year period. Financing outflow was $583, including $458 of dividends, $102 of capital-lease payments and $23 of share repurchases.
- Cash declined from $9,744 at November 2, 2012 to $6,432 at April 19, 2013. Current assets were $40,350 and current liabilities $14,173; total liabilities were $40,959 and shareholders’ equity $21,496.
- Management said the company had remained free of bank debt for 25 years. It reported no borrowings under its $2,000 revolving credit line in fiscal 2012 or 2013 and compliance with the facility’s covenants. The line expires March 1, 2015. A transportation-equipment capital lease had $1,663 outstanding at period-end.
- The company paid a one-time dividend of $0.05 per share during the first 12 weeks of fiscal 2013. It repurchased 1,972 shares during the reported 12-week quarter.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management said capital resources were sufficient for fiscal 2013 operating needs and capital expenditures, and expects positive operating cash flows in the first fiscal quarter as seasonal inventory and receivables are liquidated.
- Management maintained a full valuation allowance against deferred tax assets, concluding realization did not meet the more-likely-than-not standard. It cited a projected fiscal 2013 federal tax NOL of $472 and negative economic trends, including drought-related potential food and commodity price increases. The filing gives an expected FY2013 effective tax rate of 9.1%.
- Commodity costs are a key exposure: flour costs increased in the Frozen segment, while meat commodity costs declined in the Refrigerated segment during the six-month period. The company does not hedge commodity exposure with futures; it may use short-term flour contracts, with no significant unfulfilled contracts at period-end.
- Customer concentration warrants attention: for the 24 weeks, Walmart represented 16.3% of revenue and 15.6% of receivables; Dollar General represented 11.3% of revenue and 20.2% of receivables.
- Other sensitivities include inventory obsolescence, customer demand, labor and benefit costs, workers’ compensation claims, pension assumptions, and changes in life-insurance policy values. Management said ordinary-course legal matters were not expected to materially adversely affect financial position or results.
- The filing says no material changes had occurred in the risk factors from the FY2012 Form 10-K. Management reported disclosure controls effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether inventory growth and the 64-day cash conversion cycle (up from 44 days) convert into cash as management anticipates.
- Whether the Frozen segment’s volume and margin pressures persist, and whether Refrigerated segment growth and favorable commodity costs continue.
- How commodity inflation, particularly drought-related food and beef cost pressure, affects pricing, margins and the deferred-tax-asset assessment.
- Customer concentration and collection exposure, particularly Dollar General’s share of receivables.
- Capital spending, pension funding, capital-lease obligations and the company’s ongoing capacity to fund dividends and repurchases while operating cash flow is negative.