Bridgford Foods Corporation — Q3 FY2023 Form 10-Q
Reporting period: Twelve weeks ended July 7, 2023; year-to-date (“YTD”) means the 36 weeks ended July 7, 2023. Comparative periods ended July 8, 2022. Financial amounts below are in millions of dollars unless stated otherwise; the filing reports most amounts in thousands.
Business context
Bridgford manufactures and distributes food through two segments: Frozen Food Products and Snack Food Products. Snack Food Products sells through direct-store-delivery and customer warehouses; Frozen Food Products primarily serves distributors in retail and foodservice channels.
Financial performance and position
| Metric | Q3 FY2023 | Q3 FY2022 | YTD FY2023 | YTD FY2022 |
|---|---|---|---|---|
| Net sales | $54.2 | $59.5 | $171.3 | $183.6 |
| Gross margin | $15.3; 28.2% | $17.0; 28.6% | $47.8; 27.9% | $50.1; 27.3% |
| Operating income | $0.6 | $59.4 | $2.2 | $62.6 |
| Net income | $0.7 | $41.3 | $1.8 | $42.4 |
| Basic EPS | $0.08 | $4.55 | $0.19 | $4.67 |
- Sales declined 9.0% in Q3 and 6.7% YTD. Management attributed the weakness chiefly to lower unit volumes, particularly in Snack Food Products, amid inflation-related pressure on consumer spending. Higher selling prices partly offset volume declines.
- Q3 gross margin eased 0.4 percentage points year over year; YTD gross margin improved 0.6 points. Lower meat commodity costs helped Snack Food Products, while Frozen Food Products faced higher production and overhead costs.
- Prior-year operating income and earnings included a $57.6 million gain on property sales. This unusual gain explains most of the substantial year-over-year decline in reported operating income and net income; the comparable periods are not like-for-like.
- YTD SG&A rose 0.6% to $45.4 million. Higher outside storage, insurance, and pension expense were partly offset by lower wages, advertising, fuel, and healthcare costs.
- YTD operating cash flow was $0.1 million, versus cash used of $5.0 million a year earlier. Capital expenditures were $2.4 million; investing cash outflow was $2.2 million, compared with $56.9 million of investing inflow in the prior period, largely reflecting the prior-year property sale. Cash fell to $12.8 million from $16.3 million at October 28, 2022.
- At July 7, 2023, working capital was $68.2 million; current assets were $89.7 million and current liabilities $21.5 million. Total debt was $4.2 million, all equipment notes; $1.0 million was current and $3.1 million long-term. No revolving-credit balance was outstanding. Lease obligations are additional liabilities.
- Inventory was $43.7 million, up from $40.5 million at fiscal year-end. The cash conversion cycle increased to 84 days from 80 days, primarily due to more days in inventory.
Outlook, risks, and notable matters
- Management expected inflationary pressures, including labor, freight, and materials costs, to continue through the rest of FY2023. It stated that operating cash generation should provide sufficient liquidity for at least the next 12 months and that resources were sufficient for operating needs and capital expenditures for the remainder of FY2023. No numerical earnings or sales guidance was provided.
- The company was negotiating to reduce its Wells Fargo revolving-credit commitment from $15 million to $7.5 million, with an expected August 31, 2024 expiration. The filing describes this as planned, not completed. Management said it was covenant-compliant as of July 7, 2023. Commodity-cost volatility, consumer price sensitivity, and the risk that price increases reduce demand could pressure results and liquidity.
- Walmart and Dollar General represented 27.8% and 17.9% of Q3 sales, respectively. Together they represented 27.4% and 25.8% of accounts receivable at July 7, 2023, creating customer-concentration exposure. Management said Walmart’s receivables share increased after accelerated payments ended in July 2022.
- The company reported a material weakness in internal control over financial reporting related to a lease-term change that was not timely reported to accounting. Disclosure controls were deemed ineffective as of July 7, 2023. Remediation steps were underway, with completion expected before fiscal year-end, subject to operating-effectiveness testing.
- Management did not expect ordinary-course legal matters to have a material adverse effect. It maintained a $0.24 million inventory net-realizable-value reserve for certain meat products. Commodity purchases are not hedged with futures. The filing stated COVID-19 disruptions had minimal financial-statement impact in the periods reported.
Key facts investors should verify
- Whether the proposed $7.5 million credit-line amendment was executed before the August 31, 2023 expiration, and the resulting availability and covenant terms.
- Whether management completed and tested remediation of the lease-related material weakness by fiscal year-end.
- Whether sales volumes, particularly Snack Food Products direct-store-delivery volumes, stabilized and whether inflation, input costs, and customer promotions affected subsequent margins.
- Customer concentration and receivables collection trends, alongside inventory levels and the cash conversion cycle.
- The filing contains inconsistent tax-rate disclosure: the MD&A reports a 27.4% Q3 effective tax rate, while a note describes the third-quarter rate as 31.7%. Verify the correct quarterly rate; the YTD rate is reported as 31.7%.