Bridgford Foods Corporation — Q2 2019 Form 10-Q
Reporting period: Twelve and twenty-four weeks ended April 19, 2019; comparisons are to the periods ended April 20, 2018. Amounts below are in thousands of dollars except per-share data, percentages, and where noted. Bridgford makes and distributes frozen food products and snack foods.
Financial performance
| Metric | 12 weeks 2019 | 12 weeks 2018 | 24 weeks 2019 | 24 weeks 2018 |
|---|---|---|---|---|
| Net sales | $41,443 | $37,900 | $86,484 | $79,092 |
| Gross margin | $14,401 (34.7%) | $12,060 (31.8%) | $30,055 (34.8%) | $26,019 (32.9%) |
| SG&A | $11,608 | $11,613 | $24,695 | $23,484 |
| Income before taxes | $2,793 | $6,442 | $5,360 | $8,537 |
| Net income | $2,220 | $4,634 | $4,096 | $3,007 |
| Basic EPS | $0.24 | $0.52 | $0.45 | $0.35 |
- Q2 sales rose 9.3%; management attributed the increase to higher selling prices and pound volume, with higher snack-food sales and shelf-stable sandwich volume contributing. YTD sales also rose 9.3%.
- Gross margin expanded in both comparisons. Management cited lower meat commodity costs as partly offsetting higher production labor costs and sales volume.
- Q2 net income declined despite sales growth, in part because the prior-year quarter included a $5,977 pretax property-sale gain. Q2 2019 included a $439 non-taxable life-insurance gain. YTD 2019 included a $428 life-insurance gain; prior-year YTD included the $5,977 property gain and a $366 life-insurance gain.
- YTD income taxes were $1,264 versus $5,530. The prior-year amount included a $3,200 deferred-tax remeasurement expense related to the Tax Cuts and Jobs Act; effective tax rates were 23.6% and 64.8%, respectively.
Cash flow, liquidity, and debt
- At April 19, cash was $2,798, down from $8,179 at November 2, 2018. Current assets were $50,156 and current liabilities $19,228 (current ratio approximately 2.6).
- The cash flow statement reports YTD operating cash flow of $(531), versus $607 in the prior-year period. Investing cash flow was $(14,118), principally reflecting $14,118 of property and equipment additions, compared with $1,191 of investing inflow in 2018. Financing cash flow was $9,268, including $9,500 of bank borrowings.
- The filing’s MD&A separately says operating cash flow was positive $1,469 and $862 higher than the prior-year period, conflicting with the cash flow statement. The filing text does not reconcile this discrepancy.
- At quarter-end, the company had $7,268 of equipment notes payable and a $2,000 line-of-credit balance. It borrowed $7,500 in December 2018 for Chicago-facility equipment at 4.13%, with a seven-year term, and borrowed a further $7,500 after quarter-end. The line-of-credit draw was repaid April 25, 2019.
- The $7,500 line of credit expires March 1, 2020. The company was in violation of its capital-expenditure covenant, which was waived by the lender in a May 24, 2019 letter. It reported compliance with equipment-loan covenants at quarter-end. Management said available resources were sufficient for operating needs and capital expenditures for the remainder of fiscal 2019.
Outlook, risks, and other matters
- No quantitative earnings or sales guidance was provided. Management noted that interim results may not indicate full-year performance and that seasonal working-capital patterns affect cash flows.
- Capital investment rose to $14,118 from $4,811 in the prior-year period, primarily due to projects in process associated with the new Chicago processing facility.
- Customer concentration is notable: Wal-Mart represented 36.1% of YTD sales and 36.9% of receivables; Dollar General represented 21.0% of receivables. Management monitors customer credit risk.
- Risks discussed include competition and pricing, commodity and labor costs, consumer demand, execution of operating initiatives, regulation, weather, and pension and employee-benefit estimates. The company does not hedge commodity exposure; no significant flour purchase contracts remained unfulfilled at quarter-end.
- Ordinary-course legal claims were not expected by management to materially affect financial position or results. The filing reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Reconcile the MD&A’s $1,469 operating-cash-flow statement with the cash flow statement’s $(531) figure.
- Review the Chicago facility’s remaining capital spending, expected completion and operating contribution, and the effect of the additional equipment borrowing.
- Monitor the capital-expenditure covenant waiver, line-of-credit availability and terms, and compliance with all loan covenants.
- Assess whether sales growth and gross-margin improvement can persist amid customer concentration, promotional allowances, commodity-price changes, and higher labor costs.
- Consider the effect of unusual property-sale and life-insurance gains, and the prior-year tax remeasurement, when comparing earnings.