BRIDGFORD FOODS CORP annual report, FY2012

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Bridgford Foods Corporation — FY2012 Form 10-K

Reporting period: Fiscal year ended November 2, 2012 (53 weeks), compared with the 52-week year ended October 28, 2011. The filing is an annual report, not a standalone fourth-quarter report. Amounts below are in millions unless stated otherwise.

Business context

Bridgford manufactures, processes, markets, and distributes frozen foods and refrigerated and snack food products across the United States and Canada. FY2012 sales were approximately 44% frozen products and 56% refrigerated and snack products. The company discontinued third-party redistributor arrangements in the final quarter, shifting toward customer-managed warehouse distribution.

Financial results and liquidity

  • Revenue: $127.4 million, up $9.1 million (7.7%). Higher selling prices and favorable mix drove growth; volume declined 0.8%. The extra fiscal week is also relevant to comparisons.
  • Profitability: Gross profit was $44.3 million and gross margin was 34.8%, versus 31.7%. Operating income was not separately reported; income before tax was $4.0 million, versus a $1.1 million loss. Net income was $3.7 million, or $0.40 per share, versus a $0.4 million loss, or $0.05 per share.
  • Segments: Frozen sales rose 1.4% to $55.4 million; segment income before tax was $4.0 million versus $4.3 million. Refrigerated and snack sales rose 13.1% to $72.9 million including intersegment sales; segment income before tax was $0.1 million versus a $5.2 million loss. Refrigerated and snack gross margin increased to 31.9% from 25.5%, while frozen gross margin declined to 38.5% from 39.0%.
  • Cash flow: Cash from operations was $1.8 million, compared with cash used of $2.3 million. Capital expenditures were $1.0 million; cash increased $0.4 million to $9.7 million. The company contributed $2.4 million to its defined benefit pension plan.
  • Liquidity: Current assets were $40.2 million and current liabilities $14.9 million, implying working capital of about $25.3 million. The reported cash conversion cycle was 56 days, versus 57 days.
  • Debt and obligations: No bank borrowings were outstanding, and the company reported no interest-bearing debt other than capital leases. Capital lease obligations totaled approximately $1.8 million. Total liabilities were $41.4 million; defined benefit pension obligations were materially underfunded, with a reported plan funded status deficit of $21.2 million.
  • Other balance-sheet changes: Total assets increased to $61.6 million from $57.0 million, while shareholders’ equity fell to $20.1 million from $24.8 million, primarily reflecting an $8.0 million increase in accumulated other comprehensive loss, largely related to employee benefit plans.

Material changes and unusual items

  • Consolidated sales growth was principally price-driven. Refrigerated and snack sales benefited from significant shipments of a one-time specialty item in the third quarter; the filing says this also contributed to higher advertising expense.
  • FY2012 cost of products sold increased 2.9%, less than sales growth. Refrigerated and snack costs included higher beef commodity input costs and $0.7 million of additional direct production labor; frozen performance was affected by unfavorable product mix and promotional spending.
  • The effective tax rate was 9.1%. The company maintained a full valuation allowance against deferred tax assets, citing uncertainty about future realization; it reported federal and state net operating loss carryforwards of approximately $1.7 million and $3.5 million.
  • OSHA penalties relating to prior-year enforcement actions were resolved favorably in FY2012, producing a net gain of $41,000; $229,000 remained accrued for unpaid penalties. The prior-year comparison included approximately $415,000 of estimated OSHA penalties.
  • FY2011 included a $1.675 million cost-of-sales charge for a customer-specific product return that was donated after the company concluded it had no ready market.
  • The company repurchased 39,469 shares for approximately $322,000 in FY2012. A one-time $0.05-per-share dividend was approved after year-end and paid December 24, 2012.

Outlook, risks, and contingencies

  • Management stated that cash, capital resources, and its financial position were sufficient for operating needs and capital expenditures in FY2013. The filing provides no earnings or revenue guidance.
  • The $2.0 million Wells Fargo credit facility had no outstanding borrowings and was scheduled to expire March 1, 2013. The company had violated tangible-net-worth and other covenants; the filing says these were subsequently waived and that the company was then in compliance. The filing text gives waiver dates of January 11 and January 18, 2013 in different sections.
  • Key risks include volatility in pork, beef, flour, and fuel costs; limited ability to adjust selling prices quickly; food-safety and regulatory exposure; intense competition; and dependence on major customers. Wal-Mart represented 16.3% of FY2012 revenue and 19.7% of year-end receivables.
  • Approximately 70% of employees were covered by collective bargaining agreements. The company also highlighted pension assumptions and funding needs, concentration of family ownership (approximately 81%), and reliance on key personnel.
  • No material legal proceedings were pending at the filing date. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an attestation on internal-control effectiveness.

Important facts for investors to verify

  • How much FY2012 revenue and margin growth depended on price increases and the one-time specialty-item shipment, and whether these factors were repeatable.
  • The credit-facility covenant waivers, including the precise waiver date, terms, and status of the facility after its stated March 1, 2013 expiration.
  • The pension plan’s funding trajectory, sensitivity to discount-rate and asset-return assumptions, and expected FY2013 contribution of $2.386 million.
  • The sustainability of cash generation given working-capital needs, commodity volatility, customer concentration, and the company’s full deferred-tax-asset valuation allowance.
  • The effect of the distributor transition on refrigerated and snack distribution costs, customer coverage, sales, and margins.