Bridgford Foods Corporation — Q3 FY2017 Form 10-Q
Reporting period: 12 and 36 weeks ended July 7, 2017; comparisons are to the periods ended July 8, 2016. Unaudited results are subject to seasonality and are not necessarily indicative of full-year performance. The company processes and distributes frozen foods and snack foods.
Financial performance
| Metric | 12 weeks | 36 weeks |
|---|---|---|
| Net sales | $36.609m; up 22.5% | $110.787m; up 14.0% |
| Gross margin | $14.019m; 38.3% of sales, down from 40.7% | $41.891m; 37.8% of sales, down from 39.3% |
| SG&A | $10.917m; up 10.7% | $33.310m; up 9.9% |
| Income before taxes | $3.102m | $8.581m |
| Net income / diluted EPS | $2.059m / $0.22 | $5.848m / $0.64 |
| Operating cash flow | Not separately presented | $13.438m, versus $9.052m |
Q3 sales growth was driven by volume, up 26.0%, while selling price per pound fell 4.2%. For the first 36 weeks, volume rose 17.9% and selling price per pound fell 4.2%. Snack Food Products drove most growth: 36-week sales rose 19.4% to $78.056m; Frozen Food Products sales increased 2.9% to $32.731m. Higher volume and lower pricing, along with increased labor, freight, and other costs, pressured gross margin. Year-to-date net income included a $0.727m non-taxable gain on life insurance policies; the comparable prior period included a $0.050m loss. The 36-week effective tax rate was 31.8%, versus 34.2%.
Liquidity, capital spending and debt
Cash was $10.659m at July 7, 2017, versus $6.985m at October 28, 2016. Current assets were $50.529m and current liabilities $14.575m. Operating cash flow was partly offset by $9.673m of net investing outflows, including $9.725m of property and equipment additions; financing outflows were $0.091m. The company reported no borrowings on its $7.5m Wells Fargo credit line during fiscal 2017 and said it had generally operated without interest-bearing debt, excluding capital leases. Remaining capital lease obligations were $0.462m.
Capital spending included the $5.6m cash purchase of a Chicago-area facility and approximately $1.8m in improvements through Q3; management expected total improvements of approximately $2.0m. The facility began receiving product shipments July 27, 2017. The company breached the credit agreement’s capital-expenditure covenant, which was waived by a July 31, 2017 letter; it reported compliance with the other covenants at quarter-end. The line expires March 1, 2018. Management said resources were sufficient for operating needs and capital expenditures for the remainder of fiscal 2017.
Outlook, risks and notable items
- No specific sales, earnings, or margin guidance was provided. Management cited commodity, labor and employee-benefit costs, competition and pricing, customer demand, execution of initiatives, regulations, weather, and construction schedules among forward-looking risks.
- Customer concentration is significant: Wal-Mart represented 38.7% of year-to-date sales and 48.1% of accounts receivable, compared with 38.3% and 45.6%, respectively, in the prior-year period. The company does not require customer collateral.
- Management identified estimates for pension, self-insured healthcare and workers’ compensation liabilities as particularly uncertain. The company participates in multiemployer pension plans and could face withdrawal liability if it exits a plan.
- Most flour is purchased at market prices; the company does not hedge commodity exposure. Management said no significant commodity contracts remained unfulfilled at quarter-end. Higher meat commodity costs contributed to Q3 cost pressure, although meat commodity costs were lower for the year-to-date comparison.
- Ordinary-course legal matters were not expected by management to materially affect financial position or results. No material risk-factor changes were reported from the prior Form 10-K. Disclosure controls were deemed effective; no material changes in internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether strong volume growth continues and whether pricing pressure and lower gross margins persist, particularly in Snack Food Products.
- Progress, total cost, and operating contribution of the Chicago facility, as well as the company’s capital-spending plans.
- Status of the waived capital-expenditure covenant and the credit facility’s March 2018 expiration and renewal terms.
- Exposure to Wal-Mart and the effect of extended customer payment terms on receivables and cash conversion; the reported cash conversion cycle was 71 days.
- Trends in pension, healthcare, workers’ compensation, and commodity costs, and the volatility of life-insurance gains included in earnings.