Bridgford Foods Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014, comprising 52 weeks; comparison is the 52 weeks ended November 1, 2013. Unless otherwise noted, financial amounts are in thousands of dollars. The filing reports annual results, not standalone fourth-quarter financial statements.
Business context
Bridgford manufactures, markets and distributes frozen foods and refrigerated and snack foods. In FY 2014, frozen products represented 38% of sales and refrigerated and snack products 62%. The company reported that 96% of its products were manufactured, processed or packaged by Bridgford.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $133,401 | $129,003 |
| Gross margin | $38,657; 29.0% of sales | $45,437; 35.2% of sales |
| SG&A | $43,089 | $42,352 |
| Income (loss) before taxes | $(4,432) | $3,085 |
| Net income (loss) | $(4,344) | $2,916 |
| Basic earnings (loss) per share | $(0.48) | $0.32 |
| Cash from (used in) operating activities | $(4,021) | $3,760 |
| Capital expenditures | $3,877 | $4,378 |
| Cash and cash equivalents at year-end | $192 | $8,325 |
At year-end, current assets were $32,265 and current liabilities $14,405. Total assets were $58,176, total liabilities $32,926, and shareholders’ equity $25,250. No line-of-credit borrowings were outstanding at year-end. The company had a $6,500 accounts-receivable-based credit facility bearing interest at the bank’s prime rate; its stated expiry was March 1, 2015. Capital lease obligations totaled $1,345.
Material changes and unusual items
- Sales increased $4,398, or 3.4%, primarily from higher unit volume. Increased returns and promotional activity and a slight decrease in selling price per pound partly offset volume gains.
- Cost of products sold rose 13.4%, substantially faster than sales, driven by higher volume and record-high meat commodity costs. Management reported that significant meat commodity costs increased approximately $5,504 in the refrigerated and snack segment.
- Frozen segment sales fell 1.4%; its gross margin edged up to 37.3% from 37.0%. Refrigerated and snack segment sales rose 6.6%, but its gross margin fell to 23.8% from 34.1%; segment income before taxes moved to a $7,667 loss from $708 income. Large, low-margin seasonal programs, returns and promotional spending contributed to the segment’s results.
- During the fourth quarter, the company closed its refrigerated snack food products division after continued losses, terminated approximately 44 employees, withdrew from the Western Conference of Teamsters Pension Plan, and ceased Canadian route distribution. It recorded an estimated $798 pension withdrawal liability.
- Cash declined by $8,133 during the year. Operating cash use reflected, among other factors, increased inventory; the company also temporarily borrowed on its credit line during the fourth quarter to meet working-capital needs, including payments to meat suppliers.
- The company recorded a full valuation allowance against deferred tax assets, including a $1,598 valuation-allowance amount noted in its tax reconciliation. It reported a federal tax net operating loss of $6,160 and a tax benefit of $88.
Outlook, risks and contingencies
No quantified revenue, earnings or margin guidance is provided. Management said its financial position and capital resources were sufficient for FY 2015 operating needs and capital expenditures, while identifying commodity-cost volatility and uncertainty about future earnings. Its discussion of expected cash generation also notes seasonal working-capital patterns, including inventory builds ahead of holiday sales.
Major risks include volatile pork, beef and flour costs, which the company does not hedge; limited ability to quickly pass cost increases through to customers; dependence on large customers; food-safety and regulatory exposure; and labor and benefit-plan costs. Wal-Mart represented 28.8% of FY 2014 revenue and 31.8% of year-end accounts receivable. Bridgford family members beneficially owned more than 80% of the stock, giving them substantial voting influence.
The company disclosed violations of the credit facility’s capital-expenditure, tangible-net-worth and net-income covenants at October 31, 2014; the lender waived them in letters dated December 17 and December 24, 2014, respectively. It reported no material pending legal proceedings and no material off-balance-sheet arrangements. Management assessed disclosure controls and internal control over financial reporting as effective; the external auditor did not audit internal-control effectiveness.
Important facts for investors to verify
- Whether the refrigerated snack division closure and Canadian route exit reduce losses and improve cash generation, and what ongoing costs or liabilities remain.
- Subsequent credit-facility terms, renewal or replacement after the March 1, 2015 expiry, and the company’s ability to meet covenant requirements.
- Whether commodity costs can be passed through in pricing, particularly given the sharp FY 2014 gross-margin decline.
- Customer concentration, including continued exposure to Wal-Mart for revenue and receivables.
- The estimated $798 Teamsters withdrawal liability, other pension obligations, and the recoverability of deferred tax assets subject to the full valuation allowance.