Bridgford Foods Corporation — Q2 FY2014 Form 10-Q
Reporting period: Twelve and twenty-four weeks ended April 18, 2014; comparisons are to the corresponding periods ended April 19, 2013. The interim results are unaudited. Dollar amounts are in thousands unless noted.
Business context and results
The company manufactures and distributes frozen foods and refrigerated and snack foods. Its two reportable segments are Frozen Food Products and Refrigerated and Snack Food Products. Management cautions that seasonality and other factors mean interim results may not indicate full-year performance.
| Metric | 12 weeks ended Apr. 18, 2014 | 12 weeks ended Apr. 19, 2013 | 24 weeks ended Apr. 18, 2014 | 24 weeks ended Apr. 19, 2013 |
|---|---|---|---|---|
| Net sales | $31,243 | $28,584 | $63,709 | $59,355 |
| Gross margin | $8,935; 28.6% | $9,777; 34.2% | $19,203; 30.1% | $21,810; 36.7% |
| Income (loss) before taxes | $(1,280) | $122 | $(1,046) | $2,016 |
| Net income (loss) | $(1,280) | $111 | $(1,046) | $1,833 |
| Basic and diluted EPS | $(0.14) | $0.01 | $(0.11) | $0.20 |
Financial position, cash flow and liquidity
- At April 18, 2014, cash was $5,496, down from $8,325 at November 1, 2013. Total assets were $60,972, total liabilities $28,689 and shareholders’ equity $32,283.
- For the 24 weeks, operating cash flow was $(511), investing cash flow $(2,086) and financing cash flow $(232); cash declined by $2,829 to $5,496. Capital expenditures were $2,163.
- The company reported no bank debt and no borrowings on its $2,000 Wells Fargo credit line during FY2014 to date or FY2013. The line expires March 1, 2015. Capital lease obligations were $1,453, including $106 of payments during the period.
- The company says it expects positive operating cash flow in the first fiscal quarter from seasonal liquidation of holiday-related inventory and receivables, and believes its resources are sufficient for FY2014 operating needs and capital expenditures. The filing provides no numerical earnings or revenue guidance.
Material changes and management commentary
- Q2 sales rose 9.3%; 24-week sales rose 7.3%. The 24-week increase was volume-driven, particularly by seasonal programs with a customer in Refrigerated and Snack Food Products. These programs involved lower-priced, low-margin products and increased returns and promotional activity.
- Q2 cost of products sold rose 18.6%; 24-week cost rose 18.5%. Consolidated gross margin fell to 28.6% in Q2 and 30.1% year to date. Management cited higher meat commodity costs and high-volume, low-margin sales. Meat commodity costs increased approximately $374 in Q2 and $895 year to date versus the comparable periods.
- Frozen Food Products’ gross margin improved to 38.2% for Q2 and 37.4% year to date, aided by favorable mix and lower flour costs. Refrigerated and Snack Food Products’ margin declined to 22.5% and 25.4%, respectively, mainly from higher meat costs and low-margin program volume.
- SG&A rose 5.8% in Q2 and 2.3% year to date. Management cited higher healthcare claims; year-to-date expense also reflected licensing, advertising and depreciation costs. The company made a $1,107 workers’ compensation loss-fund payment and contributed $714 to its defined-benefit pension plan during the 24 weeks.
- A full valuation allowance remained against deferred tax assets; the company recorded no federal or state income-tax benefit for the 2014 periods. Management cited a projected FY2014 federal tax NOL of $476 and negative operating trends, including lower operating profit and higher meat costs.
Risks, contingencies and unusual items
- The company violated the credit-line minimum-net-income covenant; the bank subsequently waived the violation by letter dated May 15, 2014. No line borrowings were outstanding.
- Customer concentration is notable: Wal-Mart accounted for 15.7% of 24-week revenue and 29.2% of receivables, versus 16.3% and 15.6%, respectively, in the prior-year period. Management says it monitors large customers closely.
- The company does not hedge commodity exposure; most flour is purchased at market prices, and meat and other commodity prices, labor, healthcare and employee-benefit costs are identified risks. Management reported no significant open flour contracts at April 18, 2014.
- Net loss included non-taxable gains on life insurance policies of $66 for Q2 and $215 for the 24-week period; these gains depend on underlying equity performance and may vary. The filing also cites estimation uncertainty in self-insured claims, healthcare, pension obligations, inventory reserves and deferred-tax assets.
- Management does not expect ordinary-course legal claims to materially adversely affect financial position or results. No material changes to previously disclosed risk factors were reported. Disclosure controls were judged effective, with no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether seasonal customer programs recur, and their effects on sales mix, returns, promotions and segment margins.
- Trends in meat commodity costs and whether Refrigerated and Snack Food Products can recover costs or improve margins.
- Cash conversion and working-capital needs, including the timing of seasonal receivable collections and inventory liquidation.
- Ongoing compliance with the credit-line covenants after the net-income covenant waiver, and liquidity through the credit line’s March 2015 expiration.
- Customer exposure, workers’ compensation and healthcare claims, pension funding requirements, and the basis for retaining a full deferred-tax valuation allowance.