Bridgford Foods Corporation — Q1 FY2018 Form 10-Q
Reporting period: The 12 weeks ended January 26, 2018; comparisons are with the 12 weeks ended January 20, 2017. Dollar amounts below are in thousands unless stated otherwise.
Business context and results
Bridgford manufactures and distributes frozen food products and snack foods, including biscuits, dough products, jerky and other meat snacks. Its reportable segments are Frozen Food Products and Snack Food Products.
| Metric | Q1 FY2018 | Prior comparable period |
|---|---|---|
| Net sales | $41,192 | $40,081 |
| Gross profit / gross margin | $13,959 / 33.9% | $14,915 / 37.2% |
| SG&A | $11,864 | $11,465 |
| Income before taxes | $2,095 | $3,450 |
| Income tax provision / effective rate | $3,722 / 177.68% | $976 / 28.3% |
| Net income (loss) / diluted EPS | $(1,627) / $(0.18) | $2,474 / $0.27 |
| Operating cash flow | $(1,240) | $6,585 |
| Capital expenditures | $3,620 | $1,044 |
Financial position and liquidity
- Cash was $7,221 at January 26, 2018, down from $12,109 at November 3, 2017. Total current assets were $50,295 and current liabilities were $15,407, giving reported-period working capital of $34,888.
- Total assets were $92,087; total liabilities were $37,676; shareholders’ equity was $54,411. The filing states the Company had no borrowings under its $7,500 Wells Fargo credit line and was in compliance with its covenants. It describes itself as generally free of interest-bearing debt, excluding capital leases; the remaining capital lease obligation was $389.
- Cash used in investing activities was $3,613, primarily reflecting capital spending. The Company made initial payments of $2,200 for smokehouses and chillers expected to cost approximately $5,700 in total. Financing cash use was $35 for capital lease payments.
Material changes and management commentary
- Consolidated sales increased 2.8%, primarily from a 2.5% rise in unit volume. Frozen Food sales fell 9.6% to $10,591, mainly because of lower volume; Snack Food sales rose 7.9% to $30,601, led by higher beef-product and pork-product volumes.
- Gross margin fell to 33.9% from 37.2%. Management attributed higher costs principally to rising meat commodity costs, higher workers’ compensation costs and hourly wages. Meat commodity costs increased approximately $1,054 year over year; total cost of products sold rose 8.2%.
- The Company recorded a $3,200 deferred tax expense associated with remeasuring deferred tax balances under the Tax Cuts and Jobs Act. Management said its accounting for the Act was incomplete and the estimate could change. The Act also established a blended federal rate of 23.07% for FY2018 and 21% thereafter. The tax charge was the principal reason the quarter ended in a net loss despite pretax income.
- Operating cash flow declined from $6,585 provided to $1,240 used. Management cited, among other factors, a $2,994 decrease in non-current liabilities, $1,198 of estimated income tax payments and the net loss; collections of receivables partially offset these uses. The cash conversion cycle was 67 days, similar to the prior year.
- Management said its financial position and capital resources were sufficient for operating needs and planned capital expenditures for the remainder of FY2018. No specific earnings or revenue guidance was provided.
Outlook, risks and unusual items
- On March 7, 2018, after quarter-end, the Company sold Chicago land for approximately $6,000. Its cost basis was described as insignificant; management expected to recognize a pretax gain in the second 12 weeks of FY2018.
- Customer concentration is significant: Walmart represented 36.0% of quarterly sales and 32.7% of receivables; Dollar General represented 8.7% of sales and 22.4% of receivables. The filing identifies customer deterioration as a potential credit risk.
- Management cited risks including competition and pricing, customer demand, commodity and labor costs, employee-benefit costs, regulations, weather and execution of operating initiatives. The Company does not hedge commodity exposure. Management reported no material change to previously disclosed risk factors and no material litigation expected to adversely affect results.
- The Company participates in multiemployer pension plans and notes that withdrawal could trigger additional liabilities. Estimates for pension, healthcare, workers’ compensation, inventory and deferred tax assets are subject to uncertainty. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth in Snack Foods can offset continued Frozen Food volume weakness, and whether consolidated gross margin stabilizes as commodity and labor costs change.
- The final tax accounting under the Tax Act, including any revisions to the provisional deferred-tax remeasurement and its effects on reported earnings.
- Whether operating cash flow recovers after the period’s cash use and elevated capital spending, and the timing and total cost of the smokehouse and chiller project.
- The realized gain and cash proceeds from the Chicago land sale, and the expected timing of recognition.
- Exposure to major customers, multiemployer pension obligations, and uninsured cash balances noted in the filing.