Bridgford Foods Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended November 2, 2018 (52 weeks), compared with the 53-week year ended November 3, 2017. This is an annual filing; it does not provide a separate stand-alone fourth-quarter financial summary. Unless noted, dollar amounts below are in millions.
Business context
Bridgford manufactures, markets and distributes frozen and snack food products in the United States. Snack foods represented 73% of sales and frozen foods 27% in FY2018. The company reported two operating segments: Frozen Food Products and Snack Food Products.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $174.257 | $167.223 |
| Gross margin | $56.506 (32.4%) | $61.586 (36.8%) |
| Income before taxes | $12.813 | $12.828 |
| Income tax provision | $6.296 | $3.999 |
| Net income | $6.517 | $8.829 |
| Basic earnings per share | $0.72 | $0.97 |
| Cash from operating activities | $8.265 | $16.769 |
| Capital expenditures | $18.147 | $11.574 |
Sales rose 4.2%, but gross profit fell about 8.2% and net income fell about 26.2%. Gross margin contracted as costs of products sold rose 11.5%, outpacing sales growth. The results include a $5.977 gain on the sale of Chicago land; total gain on sale of property, plant and equipment was $6.236, compared with $0.058 in FY2017. The effective tax rate was 49.1%, including a $3.059 charge from remeasurement of deferred taxes following U.S. tax reform.
At year-end, cash was $8.179, current assets $53.216, current liabilities $18.367, total assets $101.494 and total liabilities $35.814. Shareholders’ equity was $65.680. There were no borrowings on the $7.5 million Wells Fargo revolving line during FY2018; the prior capital-lease obligation was fully settled by year-end. Operating cash flow declined by approximately 51%, while investing activities used $12.112, including capital spending partly offset by property-sale proceeds. The cash conversion cycle improved to 64 days from 73.
Material changes and segment results
- Snack Food Products: Sales increased 7.5% to $126.991, driven by higher beef and pork product volumes. Segment gross margin declined to 31.7% from 36.1%, reflecting lower selling prices, higher overhead and meat commodity costs.
- Frozen Food Products: Sales declined 3.7% to $47.266, as lower volume and prices outweighed promotional effects. Retail demand was weak for rolls, monkey bread and certain other bread products; combined volume for those products fell 24%. Segment gross margin declined to 34.4% from 38.5%.
- Consolidated unit volume increased, but selling price per pound fell 3.4%. Management cited higher meat commodity costs, hourly wages, healthcare and operating supplies, as well as costs associated with the new Chicago facility.
- Property, plant and equipment increased to $32.638 from $18.571, reflecting investment in facilities and equipment. Construction in process was $8.424 at year-end.
Outlook, risks and unusual items
- Management said financial resources were sufficient for FY2019 operating needs and capital expenditures; no quantified earnings or revenue guidance was provided. A new Chicago processing facility was under construction, with approximately $14.6 million of expected obligations for smokehouses and chillers as of November 30, 2018.
- After year-end, the company borrowed $7.5 million under a seven-year equipment loan at a fixed 4.13% rate, secured by purchased equipment. The agreement permits up to $15 million in equipment financing and includes financial covenants.
- The company had breached the revolving credit facility’s capital-expenditure limit at year-end; the lender waived that breach by letter dated January 3, 2019. The company reported compliance with the other covenants.
- Key risks include volatile pork, beef and flour costs, limited ability to adjust selling prices quickly, food-safety and regulatory exposure, competition, and reliance on major customers. Walmart accounted for approximately 36.4%–36.5% of FY2018 sales; Dollar General accounted for 9.6%. Walmart represented 31.3% and Dollar General 23.5% of year-end receivables, respectively.
- More than 80% of shares were beneficially owned by the Bridgford family, giving the family substantial influence and allowing the company to use NASDAQ controlled-company exemptions. Approximately 41% of employees were covered by collective bargaining agreements, with contract expirations from May 2019 through March 2022.
- The company reported no material pending legal proceedings. It participates in multiemployer pension plans and notes that a withdrawal liability could be material. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an internal-control opinion.
Most important facts for investors to verify
- Whether sales-volume growth can translate into improved margins given commodity costs, wage and healthcare expense, and pricing pressure.
- The Chicago facility’s remaining construction costs, completion timing, expected capacity or cost benefits, and the effect of the new equipment loan on liquidity and covenant headroom.
- Customer concentration and receivable exposure, including the filing’s slightly differing Walmart sales percentages (36.4% and 36.5%).
- The sustainability of reported earnings excluding the property-sale gain, and the effects of tax reform and deferred-tax accounting on future tax expense.
- Defined-benefit and multiemployer pension funding obligations, and the effect of assumptions and market returns on future contributions.