Bridgford Foods Corporation — Q1 FY2013 Form 10-Q
Business context and period: The filing covers the 12 weeks ended January 25, 2013, compared with the 12 weeks ended January 20, 2012. Bridgford operates Frozen Food Products and Refrigerated and Snack Food Products segments. Dollar amounts below are in thousands unless stated otherwise.
Financial performance
| Metric | Q1 FY2013 | Prior-year period |
|---|---|---|
| Net sales | $30,771 | $29,715 |
| Gross margin | $12,033; 39.1% | $8,563; 28.8% |
| SG&A | $10,139 | $8,841 |
| Income (loss) before taxes | $1,894 | $(278) |
| Income tax provision | $172 | $0 |
| Net income (loss) | $1,722; $0.19 per share | $(278); $(0.03) per share |
| Operating cash flow | $(2,301) | $713 |
| Capital expenditures | $692 | $263 |
- Sales increased 3.6%. Unit volume rose 5.0%, while selling price per pound fell 3.1%, primarily due to unfavorable product mix.
- Frozen segment sales declined 8.4% to $12,500; segment income before taxes was $858. Refrigerated and Snack segment sales rose 13.8% to $18,271; segment income before taxes was $1,031.
- Gross margin improved substantially, mainly from lower commodity costs, particularly meat costs in the refrigerated/snack segment. Consolidated SG&A rose 14.7%, reflecting higher wages and bonuses, advertising, workers’ compensation, healthcare, pension costs, doubtful-account allowance and customer fines.
- Cash and cash equivalents were $6,244 at January 25, 2013, down from $9,744 at November 2, 2012. Current assets were $40,063 and current liabilities $14,185.
- The company reported no bank borrowings and stated it had been free of bank debt for 25 years. A $2,000 Wells Fargo credit line was available and unused; the company reported compliance with its covenants. Remaining capital lease obligation was $1,714.
Material changes and cash flow
Net income improved from a prior-year loss, and gross margin increased from 28.8% to 39.1%. The Refrigerated and Snack segment drove sales growth, while Frozen Food sales fell. Operating cash flow swung to a $2,301 outflow, primarily because inventory increased by $3,353; the company said it built finished-goods and ingredient inventory for anticipated warehouse orders and to take advantage of lower meat costs. The cash conversion cycle lengthened to 60 days from 40 days.
Investing cash outflow was $683, including $692 of property and equipment additions. Financing cash outflow was $516, including a one-time dividend of $458 ($0.05 per share), capital-lease payments and share repurchases.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management said its financial position and capital resources were sufficient for fiscal 2013 operating needs and capital expenditures. It cited expected operating cash-flow seasonality, but this quarter’s cash flow was negative due to inventory investment.
- Management noted that severe drought could raise food, beef and other commodity prices. The company does not use commodity futures or hedging to limit commodity exposure; flour may be purchased under short-term contracts.
- Wal-Mart represented 14.3% of sales and 14.0% of receivables; Dollar General represented 11.5% of sales and 21.3% of receivables. The company identified large-customer deterioration as a potential credit risk.
- A full valuation allowance remained against deferred tax assets because management concluded realization did not meet the more-likely-than-not standard. Federal and state NOL carryforwards were approximately $1,681 and $3,506, respectively.
- Net income included a non-taxable $265 gain on life insurance policies; such gains depend on underlying equity performance. Management said ordinary-course claims and legal actions were not expected to materially affect financial position or results.
- The company reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting, and no material unfulfilled flour purchase contracts.
Important facts for investors to verify
- Whether the inventory build converts to sales and operating cash flow, and whether inventory reserves remain adequate.
- Whether lower commodity costs persist or reverse, and the potential effect of drought-related commodity inflation on margins.
- Whether Refrigerated and Snack segment growth and Frozen segment performance continue, including the effect of product mix and pricing.
- Customer concentration and receivable exposure, especially Dollar General’s 21.3% share of accounts receivable.
- The sustainability of earnings excluding the $265 life-insurance gain, and developments affecting the deferred-tax valuation allowance.
- Capital-lease obligations, credit-line covenant compliance, and the effect of future capital spending, dividends or repurchases on cash balances.