Bridgford Foods Corporation — Q2 FY2018 Form 10-Q
Reporting period: Twelve weeks ended April 20, 2018; year-to-date figures cover the twenty-four weeks ended April 20, 2018. Comparatives are the corresponding periods ended April 14, 2017. Dollar amounts below are in millions unless stated otherwise. The company operates Frozen Food Products and Snack Food Products segments.
Financial performance
| Metric | 12 weeks ended Apr. 20, 2018 | 12 weeks ended Apr. 14, 2017 | 24 weeks ended Apr. 20, 2018 | 24 weeks ended Apr. 14, 2017 |
|---|---|---|---|---|
| Net sales | $37.900 | $34.097 | $79.092 | $74.178 |
| Gross margin | $12.060; 31.8% | $12.957; 38.0% | $26.019; 32.9% | $27.872; 37.6% |
| SG&A | $11.613 | $10.952 | $23.484 | $22.421 |
| Income before taxes | $6.442 | $2.029 | $8.537 | $5.479 |
| Income tax provision | $1.808 | $0.714 | $5.530 | $1.690 |
| Net income | $4.634 | $1.315 | $3.007 | $3.789 |
| Basic EPS | $0.52 | $0.15 | $0.35 | $0.42 |
- Quarterly sales increased 11.2%; year-to-date sales increased 6.6%. Quarterly volume growth was partly offset by lower average selling prices.
- Quarterly gross margin fell to 31.8% from 38.0%; year-to-date gross margin declined to 32.9% from 37.6%. Management cited higher meat commodity costs, wages and health costs, along with product mix and lower overhead absorption in Frozen Foods.
- Quarterly net income included a nonrecurring $5.977 gain before tax from selling Chicago land. Year-to-date results also included a $3.200 deferred-tax expense from remeasuring deferred taxes under the Tax Cuts and Jobs Act and $1.640 tax expense associated with the land sale. Excluding these items, reported earnings comparisons are not directly comparable; the filing does not present an adjusted earnings measure.
- Segment trends: year-to-date Frozen Food sales decreased 4.1% to $21.601, while Snack Food sales increased 11.3% to $57.491. Snack Food growth reflected higher beef and pork product volumes; Frozen Food weakness reflected lower demand for certain breads and reduced food-service volumes.
Cash flow, liquidity and capital
- For the 24 weeks, operating cash flow was $0.607, down from $14.180 a year earlier. Investing activities provided $1.191, including $6.002 in property-sale proceeds and $4.811 of capital expenditures; financing activities used $0.070 for capital-lease payments. Cash increased $1.728 to $13.837.
- April 20, 2018 current assets were $55.230 and current liabilities $15.600; total assets were $97.093 and total liabilities $38.048. Working capital was $39.630. The balance sheet lists $0.353 remaining on a capital lease obligation; the company stated it had no interest-bearing debt other than capital leases.
- The company had a $7.500 Wells Fargo credit line, expiring March 1, 2020, with no fiscal 2018 borrowings and compliance with its covenants. It reported sufficient financial resources for operating needs and capital expenditures for the remainder of FY2018.
- Capital expenditures were $4.811 year to date. The company made initial payments of $2.200 toward smokehouses and chillers expected to cost approximately $5.700 in total.
Material developments, outlook and risks
- On March 7, 2018, the company sold a Chicago land parcel and recorded a $5.977 pretax gain. This was a material, nonrecurring contributor to quarterly pretax income.
- The Tax Act reduced the federal corporate rate; the company used a blended 23.07% statutory federal rate for FY2018 and 21% thereafter. It said its final accounting remained in process and estimates could change. The filing reports a 64.8% effective tax rate for the 24-week period; its quarterly tax discussion reports a 28.1% rate. The filing text is inconsistent in describing the period associated with the 64.8% rate.
- Management identified commodity, labor, employee-benefit, customer-demand, competitive, regulatory, weather, and execution risks. Meat commodity costs rose; the company does not hedge commodity exposure and most flour purchases are at market prices. Wal-Mart represented 36.3% of year-to-date sales and 34.1% of receivables, creating customer-concentration exposure.
- Other noted exposures include estimates for self-insured workers’ compensation, healthcare and pension obligations, possible multiemployer pension withdrawal liability, and ordinary-course legal claims. Management did not expect the legal matters to materially adversely affect results or financial position.
- No specific sales or earnings guidance was provided. Management noted interim results may be affected by seasonality and are not necessarily indicative of full-year results. It reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported quarterly profit and year-to-date earnings reflects the land-sale gain and Tax Act-related tax charges, and what are normalized earnings?
- Whether volume growth, particularly in Snack Foods, can offset commodity inflation and sustain margins; and whether Frozen Food demand stabilizes.
- The drivers of the sharp year-over-year decline in operating cash flow, including working-capital movements and noncurrent-liability payments.
- The final tax accounting and effective tax-rate reconciliation, including the filing’s differing descriptions of quarterly versus year-to-date rates.
- Capital spending and project costs for the smokehouses and chillers, alongside pension, healthcare and workers’ compensation obligations.