Bridgford Foods Corporation — Q2 2016 Form 10-Q
Reporting period: Twelve weeks ended April 15, 2016; year-to-date figures cover the 24 weeks ended April 15, 2016. Comparatives are the corresponding periods ended April 17, 2015. Amounts are in thousands of dollars, except per-share data and percentages.
Business context
Bridgford makes and distributes frozen foods and snack foods, including dough products, meat snacks, jerky and sausage products. It reports two segments: Frozen Food Products and Snack Food Products. Results are interim and may be affected by seasonality.
Financial results and liquidity
| Metric | 12 weeks ended Apr. 15, 2016 | Prior 12 weeks | 24 weeks ended Apr. 15, 2016 | Prior 24 weeks |
|---|---|---|---|---|
| Net sales | $31,145 | $26,696 | $67,301 | $61,407 |
| Gross profit | $12,231 | $10,277 | $26,010 | $19,894 |
| Gross margin | 39.3% | 38.5% | 38.6% | 32.4% |
| Income before taxes | $2,471 | $2,202 | $5,572 | $2,669 |
| Income tax provision | $979 | $0 | $2,208 | $0 |
| Net income | $1,492 | $2,202 | $3,364 | $2,669 |
| Diluted EPS | $0.16 | $0.24 | $0.37 | $0.29 |
- Sales and segments: Q2 sales rose 16.7%; Snack Food sales grew 32.1% to $19,990, while Frozen Food sales fell 3.5% to $11,155. Year to date, Snack Food sales increased 20.1% to $44,660 and Frozen Food sales declined 6.5% to $22,641.
- Profit and margins: Q2 net income declined despite higher sales and pretax income, primarily reflecting the $979 tax provision versus none in the prior-year quarter. Year-to-date net income increased to $3,364. Management attributed improved year-to-date gross margin chiefly to lower meat ingredient costs and a higher-margin snack product mix. Frozen Food’s year-to-date gross margin declined to 37.8% from 38.4%.
- Cash flow: Operating cash flow was $5,540 for 24 weeks, versus $7,893 a year earlier. Cash ended the period at $10,266, up from $5,842 at October 30, 2015. Inventory liquidation contributed $1,400, while estimated income tax payments were $1,559. Capital expenditures were $1,015, versus $293 in the prior period.
- Liquidity and obligations: Current assets were $44,965 and current liabilities $13,788. The company reported no borrowings on its $4,000 Wells Fargo credit line during fiscal 2016 and said it was covenant-compliant. It generally operates without interest-bearing debt, excluding capital leases; the remaining transportation-equipment capital lease obligation was $652.
- Other balance-sheet items: Total assets were $79,002 and shareholders’ equity was $38,969 at April 15, 2016. No dividends were paid during the 24-week period.
Material changes and management commentary
- Consolidated sales growth was driven by higher selling prices and volume, particularly for snack foods. Management linked snack-food price and mix increases mainly to a shift toward higher-value beef products; pork-based product volume was lower.
- Frozen Food sales and volume weakened, with higher promotional activity also weighing on segment sales. Management said most frozen product categories declined year to date, with monkey bread an exception.
- Year-to-date SG&A increased 18.7% to $20,438. Management cited higher wages and bonuses, pension costs, advertising/licensing payments and outside consulting costs.
- Management said its financial position and capital resources were sufficient for operating needs and capital expenditures for the remainder of fiscal 2016. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Customer concentration: Wal-Mart represented 39.1% of year-to-date sales and 45.7% of accounts receivable, compared with 28.4% and 32.3%, respectively, in the prior-year period. Management noted that deterioration in a major customer’s operations could create material risk.
- Commodities: Meat and flour costs affect margins; the company does not use commodity futures or hedging. Lower meat costs benefited results, but management cautioned that future commodity prices can affect cash balances and costs.
- Employee benefits: Pension costs rose following changes to expected plan-asset returns and mortality assumptions. Pension and self-insured benefit estimates are subject to uncertainty; the pension discount rate was 3.83% at April 30, 2016, versus 4.29% at October 31, 2015.
- Variable items: Q2 net income included a $238 non-taxable gain on life insurance policies; the comparable quarter included a $70 gain. Year-to-date results included an $84 loss versus a $136 gain a year earlier. Management said policy value changes depend on underlying equity performance.
- The company disclosed ordinary-course legal claims that management did not expect to materially adversely affect financial position or results. It reported no significant unfulfilled flour purchase contracts and no material changes to month-to-month facility leases. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether snack-food sales growth and product mix can continue, and whether frozen-food volume declines stabilize.
- How margins respond if meat and flour costs rise, given the company’s lack of commodity hedging.
- Whether the increased customer concentration and extended customer terms affect receivables, collections and the 65-day cash conversion cycle.
- Whether pension costs, tax provisions and life-insurance value fluctuations materially affect subsequent-period earnings and cash flow.
- Capital spending, remaining capital-lease obligations, credit-line covenant compliance and management’s stated capacity to fund the rest of fiscal 2016.