Bridgford Foods Corporation — Q3 FY2013 Form 10-Q
Reporting period: The quarter comprised 12 weeks ended July 12, 2013; year-to-date (“YTD”) results cover 36 weeks. Comparatives are the 12 and 36 weeks ended July 6, 2012. Financial amounts below are in thousands of dollars, except per-share data.
Business context and key financial results
Bridgford manufactures and distributes frozen foods and refrigerated and snack foods. Its two reportable segments are Frozen Food Products and Refrigerated and Snack Food Products.
| Metric | 12 weeks ended July 12, 2013 | 12 weeks ended July 6, 2012 | 36 weeks ended July 12, 2013 | 36 weeks ended July 6, 2012 |
|---|---|---|---|---|
| Net sales | $29,294 | $27,862 | $88,649 | $84,890 |
| Gross margin | $9,485 (32.4%) | $10,201 (36.6%) | $31,295 (35.3%) | $28,505 (33.6%) |
| SG&A expenses | $9,480 | $9,340 | $29,274 | $26,882 |
| Income before taxes | $5 | $861 | $2,021 | $1,623 |
| Net income (loss) | $(19) | $861 | $1,814 | $1,623 |
| Basic and diluted earnings (loss) per share | $0.00 | $0.09 | $0.20 | $0.18 |
Q3 net loss included a $289 non-taxable gain on life insurance policies. YTD net income included a $617 non-taxable life-insurance gain; the filing notes these gains and losses depend on underlying equity performance and can vary considerably.
Cash flow, balance sheet, debt and liquidity
- YTD operating cash flow was $657, down from $2,135 in the prior-year period. The filing attributes pressure primarily to working-capital changes, including inventory growth.
- YTD investing cash outflow was $3,264, including $3,291 of capital expenditures, versus $422 of investing outflow and $430 of capital expenditures in the prior-year period. Financing cash outflow was $655, including $458 in dividends, $138 in capital-lease payments and $59 in share repurchases.
- Cash declined to $6,482 at July 12, 2013 from $9,744 at November 2, 2012. Current assets were $38,869 and current liabilities $14,164; inventories were $19,681, up from $17,355 at fiscal year-end.
- Total liabilities were $41,344 and shareholders’ equity $21,441. The Company reported no bank borrowings; it had $1,628 remaining under a transportation-equipment capital lease. A $2,000 bank credit line was available through March 1, 2015.
- Management stated that it believed cash and capital resources were sufficient for fiscal 2013 operating needs and capital expenditures. It expects operating cash flow in the first fiscal quarter from seasonal liquidation of holiday-related inventory and receivables.
Material changes versus prior periods
- Q3 sales rose 5.1%, but gross margin fell to 32.4% from 36.6%, and net results moved from $861 income to a $19 loss. Higher cost of products sold, unfavorable segment mix and high-volume, lower-margin specialty sales were cited.
- YTD sales rose 4.4% and gross margin improved to 35.3% from 33.6%; net income increased to $1,814 from $1,623. YTD SG&A rose 8.9%, faster than sales, with higher wages and bonuses, advertising, workers’ compensation, depreciation and other costs among the cited increases.
- Refrigerated and Snack Food sales increased 14.6% YTD, supported by higher prices/mix and volume; its gross margin increased to 34.4% from 29.8%, primarily reflecting lower meat commodity costs. Frozen Food sales declined 8.5% YTD, mainly due to lower volume; its gross margin declined to 36.8% from 38.4%, reflecting higher flour costs and unfavorable mix.
- Cash conversion cycle lengthened to 59 days from 44 days, mainly because of higher inventory. YTD capital expenditures rose to $3,291 from $430.
Outlook, risks and contingencies
- No numerical earnings or sales guidance was provided. Management cited lower operating profit and higher meat and flour commodity costs as negative near-term factors, while describing its fiscal 2013 resources as adequate.
- The Company maintained a full valuation allowance against deferred tax assets. It reported a projected fiscal 2013 federal tax net operating loss of $290 and said only one of its three stated criteria for releasing the allowance had been met.
- Wal-Mart represented 20.6% of YTD consolidated revenue and 33.4% of accounts receivable, compared with 14.5% and 27.8%, respectively, in the prior-year period. The Company reported no other customer above the stated concentration thresholds.
- Commodity, labor, employee-benefit, customer-demand, inventory-obsolescence and economic risks could affect results. The Company does not use commodity futures or hedging; most flour purchases are made at market prices.
- The $2,000 credit facility had no borrowings, but the Company disclosed violations of capital-expenditure and net-income covenants; these were subsequently waived by letter dated August 21, 2013. The facility also contains tangible-net-worth and quick-ratio covenants.
- Management said ordinary-course claims and legal actions were not expected to have a material adverse effect. No significant flour contracts remained unfulfilled at July 12, 2013. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Q3 margin decline and frozen-segment volume weakness persist, and how specialty-product mix affects profitability.
- Inventory levels, cash conversion cycle and operating cash generation, particularly after the elevated capital spending.
- The status and terms of the waived credit-facility covenant violations, and continuing compliance with facility covenants.
- Wal-Mart concentration and the potential effect of customer, commodity and employee-benefit cost changes.
- The durability of earnings excluding variable life-insurance gains, and the conditions required to change the full deferred-tax valuation allowance.