Bridgford Foods Corporation — Form 10-Q
Reporting period: Third quarter and first 36 weeks of fiscal 2016, ended July 8, 2016. Comparisons are with the periods ended July 10, 2015; balance-sheet comparisons are with October 30, 2015. Dollar amounts are in thousands except per-share data.
Financial performance
| Metric | 12 weeks ended July 8, 2016 | 36 weeks ended July 8, 2016 |
|---|---|---|
| Net sales | $29,892; up 12.8% | $97,193; up 10.6% |
| Gross margin | $12,173; 40.7% of sales, versus 40.1% | $38,183; 39.3% of sales, versus 34.7% |
| SG&A | $9,862; up 14.4% | $30,300; up 17.2% |
| Income before taxes | $2,311 | $7,883 |
| Income tax provision | $489 | $2,697 |
| Net income | $1,822, versus $1,855 | $5,186, versus $4,524 |
| Basic and diluted EPS | $0.20, unchanged | $0.57, versus $0.50 |
Third-quarter sales growth did not translate into higher net income, as SG&A and tax expense rose. For the 36-week period, earnings improved despite higher SG&A; the effective tax rate was 34.2%, versus 3.0% in the prior-year period. Management attributed the difference from the approximately 37.7% statutory rate primarily to the domestic production activities deduction.
Segments and drivers
- Snack Food Products: Third-quarter sales increased 24.7% to $20,722; 36-week sales rose 21.5% to $65,382. Growth was driven principally by higher volume, especially beef products. Segment income before taxes was $2,182 for the quarter and $6,144 year to date.
- Frozen Food Products: Third-quarter sales fell 7.1% to $9,170; 36-week sales declined 6.7% to $31,811, mainly because of lower volume. Segment income before taxes was $129 for the quarter and $1,739 year to date.
- Management cited lower meat ingredient costs as a support to gross margin, partly offset by higher wages, bonuses, pension and workers’ compensation costs. For the 36-week period, SG&A also increased due to advertising and licensing payments and outside consulting.
Cash, liquidity and capital
- Cash and cash equivalents were $12,286 at July 8, up from $5,842 at October 30, 2015. Current assets were $49,174 and current liabilities $15,915.
- Operating cash flow was $9,052 for the first 36 weeks, versus $10,497 a year earlier. The decrease reflected inventory growth of $1,598, partly offset by higher net income and increases in certain liabilities. Management linked inventory growth to production for large warehouse-customer orders. The cash conversion cycle was 62 days, increased by extended terms with significant customers.
- Capital expenditures were $2,486, versus $549 in the prior-year period; investing cash use was $2,471. Financing cash use was $137, including $97 of capital-lease payments and $40 of share repurchases.
- The company reported no borrowings on its $4,000 Wells Fargo credit line during fiscal 2016 and said it remained in compliance with covenants. The line expires March 1, 2018. Management stated that resources were sufficient for operating needs and capital expenditures for the remainder of fiscal 2016.
- Management reported no interest-bearing debt, excluding capital leases. Remaining transportation-equipment capital-lease obligations were $558. Total liabilities were $43,337 at July 8.
Outlook, risks and notable items
- No specific sales or earnings guidance was provided. Management’s stated outlook was that resources were adequate for the remainder of fiscal 2016; interim results may not indicate full-year performance, in part because of seasonality.
- Customer concentration is significant: Wal-Mart represented 38.3% of 36-week sales and 45.6% of accounts receivable, versus 31.9% and 45.5%, respectively, in the prior-year period.
- The company does not hedge commodity exposure. Flour and meat prices, labor and employee-benefit costs, customer demand, competition, weather, regulation and execution of operating initiatives are among the cited risks.
- Management said ordinary-course claims and legal actions were not expected to materially affect financial position or results. No significant unfulfilled flour contracts remained at quarter-end. The company reported no material changes to previously disclosed risk factors.
- Third-quarter net income included a $134 non-taxable gain on life-insurance policies; the comparable period included $29. Year-to-date gains were $50 and $165, respectively. Such gains depend on underlying investment performance and may vary.
- Pension assumptions are a source of estimation risk: the cited pension discount rate was 3.61% at June 30, 2016, versus 4.29% at October 31, 2015. Management also noted uncertainty in estimates for self-insurance, healthcare and pension liabilities.
Important facts for investors to verify
- Whether Snack Food Products’ volume-led growth can continue and offset persistent Frozen Food Products declines.
- Whether higher SG&A, pension and labor costs constrain margins, and how commodity-cost changes affect profitability.
- How customer concentration and extended payment terms affect receivables, working capital and operating cash flow.
- The use and returns from elevated capital spending, as well as the company’s compliance with credit-line covenants and remaining lease obligations.
- The assumptions behind pension and other benefit liabilities, and the sustainability of earnings excluding variable life-insurance gains.