Bridgford Foods Corporation — Q3 FY2015 Form 10-Q
Reporting period: Third quarter and first 36 weeks of fiscal 2015, ended July 10, 2015; comparative periods ended July 11, 2014. Financial amounts below are in thousands of dollars, except per-share data. The company operates Frozen Food Products and Snack Food Products businesses. It discontinued its Refrigerated Deli Products Division at the end of fiscal 2014, affecting period comparisons.
Financial performance and position
| Metric | 12 weeks ended July 10, 2015 | 12 weeks ended July 11, 2014 | 36 weeks ended July 10, 2015 | 36 weeks ended July 11, 2014 |
|---|---|---|---|---|
| Net sales | $26,489 | $27,915 | $87,896 | $91,624 |
| Gross margin | $10,620 (40.1%) | $7,429 (26.6%) | $30,514 (34.7%) | $26,632 (29.1%) |
| Income (loss) before tax | $1,997 | $(2,383) | $4,666 | $(3,429) |
| Net income (loss) | $1,855 | $(2,383) | $4,524 | $(3,429) |
| Basic and diluted EPS | $0.20 | $(0.26) | $0.50 | $(0.38) |
| Operating cash flow | Not presented for the 12-week period | $10,497 | $(4,172) |
- Balance sheet at July 10, 2015: Cash $9,856; current assets $36,117; total assets $60,277; current liabilities $13,368; total liabilities $30,707; shareholders’ equity $29,712. At October 31, 2014, cash was $192 and total liabilities were $32,926.
- Debt and liquidity: No borrowing on the $4,000 Wells Fargo revolving credit line during the 36-week period; it expires March 1, 2016. The company reported compliance with its covenants. Capital lease obligations were $772, including $656 associated with returned tractors. Management said resources were sufficient for operating needs and capital expenditures for the remainder of fiscal 2015.
- Cash flow: Cash increased by $9,664 to $9,856. Operating cash flow benefited from net income and a $4,969 inventory reduction, which management attributed to shipments fulfilling large warehouse-customer orders. Investing cash outflow was $502, including $549 in capital expenditures; financing cash outflow was $331, including $204 of share repurchases.
Material changes and management commentary
- Quarterly sales fell 5.1%; 36-week sales fell 4.1%. Management attributed the decline versus the prior periods primarily to the discontinued deli division, partly offset by higher sales from continuing operations. For the 36 weeks, continuing-operation sales increased 3.5%, while discontinued-division sales had been $7,329 in the comparable prior-year period.
- For the quarter, lower meat ingredient costs and reduced overhead helped lift consolidated gross margin to 40.1%. For the 36 weeks, gross margin rose to 34.7%; management cited operating-cost reductions and favorable product mix, partly offset by higher year-to-date meat commodity costs.
- Quarterly SG&A declined 12.1% to $8,623; 36-week SG&A declined 14.0% to $25,848. The closure of the deli division contributed to the comparative reduction. Continuing-operation SG&A was slightly higher for the quarter and lower for the 36-week period.
- Snack Food Products generated 36-week sales of $53,814 and pretax income of $1,578; Frozen Food Products generated sales of $34,082 and pretax income of $3,088. Snack Food sales growth in continuing operations was offset by the discontinued division and lower unit volume.
Outlook, risks and unusual items
- No specific earnings or sales guidance was provided. Management cited positive trends in Snack Food operating profit and lower meat costs, but stated the full deferred-tax valuation allowance would remain because the company still expected a federal net operating loss for fiscal 2015.
- A workers’ compensation estimate revision reduced cost of sales by $233 and SG&A by $137, reduced the liability by $370, and increased 36-week net income by $370, or $0.04 per share.
- The company received a $798 demand for payment relating to its withdrawal from the Western Conference of Teamsters Pension Plan. It expected to pay the amount by October 2015; the final amount could differ, and the company could seek review or dispute the determination through arbitration.
- The company returned five leased over-the-road tractors and recorded a $75 disposal gain in the quarter ended April 17, 2015. It does not hedge commodity exposure; flour purchases may be made under short-term fixed-price contracts, and no significant contracts remained unfulfilled at quarter-end.
- Customer concentration is significant: Wal-Mart accounted for 31.9% of 36-week sales and 45.5% of receivables at July 10, 2015. Management also identified commodity, labor and benefit costs, competition, customer demand, and operating execution among forward-looking risks. No material changes to previously disclosed risk factors were reported.
- The company reported a full valuation allowance against net deferred tax assets and federal and state NOL carryforwards of approximately $6,160 and $4,006, respectively. These carryforwards expire at various dates from 2018 through 2033.
Important facts for investors to verify
- Whether the sharp margin improvement persists as commodity costs and product mix change, and how much of reported earnings reflects the $370 workers’ compensation estimate benefit.
- Whether continuing-operation sales and volumes can offset the discontinued deli business, particularly given lower unit volumes and reliance on a significant promotional program.
- Cash-flow sustainability after the inventory liquidation, and the eventual payment and final determination of the $798 pension withdrawal liability.
- Exposure to Wal-Mart concentration, commodity-price volatility without hedging, and the terms and covenant requirements of the revolving credit line.
- The filing’s quarter-period income statement reports net income of $1,855; the MD&A separately refers to $1,997 as “net income” in one passage, while the statement identifies that amount as income before taxes.