Bridgford Foods Corporation — FY2017 Form 10-K
Business context and reporting period
Bridgford manufactures and distributes frozen and snack food products in the United States. Fiscal 2017 ended November 3, 2017 and comprised 53 weeks, compared with 52 weeks in fiscal 2016; this affects year-over-year comparability. Unless noted otherwise, financial amounts below are in thousands of dollars.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $167,223 | $140,063 |
| Gross profit | $61,586 | $55,213 |
| Gross margin | 36.8% | 39.4% |
| Income before taxes | $12,828 | $10,836 |
| Net income | $8,829 | $7,770 |
| Basic EPS | $0.97 | $0.86 |
| Cash from operations | $16,769 | $4,527 |
| Capital expenditures | $11,574 | $3,265 |
Sales rose 19.4% year over year, primarily on a 23.1% increase in unit volume; selling price per pound fell 4.7%. Snack Food Products sales increased 26.4% to $118,142, while Frozen Food Products sales increased 5.3% to $49,081. Snack foods generated 71% of sales. Snack segment gross margin declined to 36.1% from 40.5%, mainly due to lower selling prices; frozen segment gross margin improved to 38.5% from 37.2%.
At year-end, cash and cash equivalents were $12,109, up from $6,985; current assets were $55,823 and current liabilities were $16,244. The company had no borrowings on its $7,500 Wells Fargo credit line during FY2017. It reported $424 of capital lease obligations and said it had otherwise remained free of interest-bearing debt. Operating cash flow improved substantially, with working capital changes contributing to the year-over-year increase. The cash conversion cycle was 73 days, down from 89 days.
Total assets were $97,545, total liabilities $41,507, and shareholders’ equity $56,038. The defined-benefit pension plan was underfunded by $14,271 at year-end, compared with $26,416 a year earlier. Other comprehensive income included an $8,300 after-tax improvement, mainly reflecting pension-plan changes.
Material changes and unusual items
- Snack Food Products volume, particularly beef products, pepperoni, jerky, and shelf-stable meats, drove most of the sales growth; sales mix shifted toward more discounted channels.
- Gross margin contracted by 2.6 percentage points. Higher overhead, including workers’ compensation, union retroactive pay, utilities, property taxes, and hourly wages, also weighed on costs. Lower meat commodity costs partly offset these increases.
- SG&A increased 9.9% to $48,758. Wage and bonus expense increased by $3,631; product advertising rose by $847.
- Capital expenditures were $11,574, including the $5,600 cash purchase of a Chicago-area facility and approximately $1,900 in building improvements. The facility began receiving product shipments in July 2017.
- The company exceeded the credit line’s capital expenditure covenant, which required expenditures below $5,000; the lender waived the violation by letter dated December 22, 2017. The line was due to expire March 1, 2018.
- A 2017 tax law enacted after year-end reduced the federal corporate tax rate from 34% to 21%. The company said it would revalue deferred tax assets in the first quarter of fiscal 2018; the filing does not quantify the resulting financial-statement impact.
- No dividends were paid in either year, and no shares were repurchased in FY2017.
Outlook, commentary, and key risks
Management stated that cash resources and capital resources were sufficient for operating needs and capital expenditures in fiscal 2018. It did not provide numerical revenue or earnings guidance. Management noted that raw material and fuel price volatility can affect profitability and that selling prices may not adjust as quickly as commodity costs.
- Customer concentration is significant: Walmart accounted for 37.7% of FY2017 revenue and 36.9% of year-end accounts receivable.
- The Bridgford family beneficially owned more than 80% of outstanding stock, creating substantial control and limiting certain NASDAQ governance requirements.
- Commodity pork, beef, and flour costs, food safety and regulatory compliance, competition, labor costs, and employee benefit obligations are material business risks. The company does not hedge commodity exposure.
- The company participates in multiemployer pension plans; withdrawal liabilities could be material. Its defined-benefit plan assumptions and obligations are also subject to uncertainty.
- No material legal proceedings were pending as of the filing date. Management reported effective disclosure controls and internal control over financial reporting; the external auditor expressed an unqualified opinion on the financial statements and did not audit internal-control effectiveness.
Important facts for investors to verify
- Whether the volume-led sales growth and lower selling prices translated into sustainable segment margins after the 2017 mix shift.
- The effect of the federal tax-rate reduction and deferred-tax remeasurement in fiscal 2018.
- The status and terms of the credit facility after its March 1, 2018 expiration, and any subsequent borrowing or covenant developments.
- Actual returns, contributions, and funding requirements for the defined-benefit and multiemployer pension plans.
- Walmart sales and receivable concentration, and related-party arrangements, including approximately $1,033 of accrued profit-sharing payable over three years to a director providing consulting services.