Bridgford Foods Corporation — Q1 FY2016 Form 10-Q
Reporting period: Twelve weeks ended January 22, 2016; comparisons are with the twelve weeks ended January 23, 2015. Amounts are in thousands of dollars except per-share data. Results are unaudited, and the company cautions that interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 FY2016 | Prior-year period | Change |
|---|---|---|---|
| Net sales | $36,156 | $34,712 | +4.2% |
| Gross margin | $13,779; 38.1% | $9,617; 27.7% | Margin +10.4 percentage points |
| SG&A | $10,678 | $9,150 | +16.7% |
| Income before taxes | $3,101 | $467 | +$2,634 |
| Income tax provision | $1,229; 39.6% effective rate | $0 | — |
| Net income / diluted EPS | $1,872 / $0.21 | $467 / $0.05 | — |
| Operating cash flow | $7,438 | $4,891 | +$2,547 |
| Capital expenditures | $578 | $92 | +$486 |
Segments: Frozen Food Products sales fell 9.2% to $11,486, mainly due to a 7.1% decline in unit volume; segment pretax income was $731 versus $1,162. Snack Food Products sales rose 11.8% to $24,670, with segment pretax income of $2,370 versus a prior-year loss of $695. Improved Snack Food profitability primarily reflected lower meat commodity costs, higher-value beef mix, and higher-margin warehouse-channel sales.
Liquidity, capital resources and balance sheet
- Cash and cash equivalents were $12,642, up from $5,842 at October 30, 2015. Current assets were $42,665 and current liabilities $13,471.
- Operating cash flow benefited from inventory reductions of $3,650 and accounts-receivable collections of $1,379, alongside net income. Management said seasonal liquidation of holiday-related inventory and receivables typically supports first-quarter cash flow.
- The company reported no borrowings on its $4,000 Wells Fargo credit line during the quarter and said it was in compliance with covenants. Management stated it had remained free of interest-bearing debt, excluding capital leases, for 27 of the previous 28 years.
- Remaining capital lease obligations were $689. Total liabilities were $39,275; the filing does not identify all non-current liabilities as debt.
- Financing cash outflow was $61, including $25 of share repurchases and $36 of capital-lease payments. The company repurchased 2,532 shares at an average $9.17 per share.
Changes, outlook and risks
- Consolidated sales growth reflected a 5.2% increase in selling price per pound, partly offset by a 2.3% decline in volume. Cost of products sold fell 10.8%, principally due to lower meat ingredient costs. Management also cited higher pension and wage costs.
- SG&A rose 16.7%, including increases in wages and bonuses, life-insurance cash-surrender-value loss, pension costs, and product advertising/licensing expenses.
- Q1 net income included a non-taxable $322 loss on life insurance policies, compared with a non-taxable $66 gain in the prior-year period. Management noted future policy results may vary with underlying equity performance.
- No formal earnings or sales guidance was provided. Management said financial resources were sufficient for operating needs and capital expenditures for the remainder of fiscal 2016.
- Key exposures include commodity, labor and employee-benefit costs; customer concentration; competition and pricing; product demand and promotional activity; and pension-plan assumptions and investment returns. Wal-Mart represented 41.2% of sales and 39.8% of accounts receivable, up from 35.8% and 35.4%, respectively, in the comparable period.
- The company does not hedge commodity exposure. No significant flour contracts remained unfulfilled at quarter-end. Management did not expect ordinary-course claims and legal actions to materially adversely affect financial position or results.
- The company reported no material changes to the risk factors in its FY2015 Form 10-K. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp gross-margin improvement, particularly in Snack Food Products, is sustainable as commodity costs and product mix change.
- Whether frozen-food volume weakness continues and whether Snack Food price increases affect future volumes or customer demand.
- Wal-Mart concentration and the related implications for sales, receivables, and customer bargaining power.
- The drivers and potential variability of pension costs, self-insured benefit liabilities, and life-insurance policy values.
- Capital spending plans, credit-line covenant headroom, and the composition and cash requirements of non-current liabilities.