Bridgford Foods Corporation — Q1 FY2014 Form 10-Q
Reporting period: Twelve weeks ended January 24, 2014; comparative period ended January 25, 2013. Dollar amounts below are in thousands unless stated otherwise. Bridgford manufactures and distributes frozen foods and refrigerated and snack foods.
Financial results and position
| Metric | Q1 FY2014 | Prior-year period |
|---|---|---|
| Net sales | $32,466 | $30,771 |
| Gross margin | $10,268; 31.6% | $12,033; 39.1% |
| SG&A | $10,021 | $10,139 |
| Income before taxes | $247 | $1,894 |
| Income tax provision | $13 | $172 |
| Net income | $234 | $1,722 |
| Diluted earnings per share | $0.03 | $0.19 |
| Operating cash flow | $3,727 | $(2,301) |
Cash and cash equivalents were $11,463 at January 24, 2014, versus $8,325 at November 1, 2013. Current assets were $38,982 and current liabilities $14,722. Total liabilities were $29,747; shareholders’ equity was $33,643. The company reported no bank borrowings, but had $1,506 of capital lease obligations outstanding. A $2,000 Wells Fargo credit line expires March 1, 2015; there were no borrowings and the company reported compliance with its covenants.
Investing cash outflow was $490, primarily reflecting $496 of capital expenditures. Financing cash outflow was $99, including $46 of share repurchases and $53 of capital lease payments; no dividend was paid, compared with $458 paid in the prior-year quarter. Cash increased by $3,138 to $11,463.
Material changes and operating drivers
- Sales rose 5.5% ($1,695), driven by a 21.2% increase in unit volume; lower selling price per pound, returns, and promotional activity partly offset the volume gain. Management attributed much of the volume growth to a large holiday promotion in Refrigerated and Snack Foods that did not recur in the prior-year period.
- Gross margin fell to 31.6% from 39.1%. Cost of products sold increased 18.5%, substantially faster than sales. Refrigerated and Snack Foods margin declined to 28.3% from 39.1%, reflecting higher meat commodity costs and high-volume, low-margin sales. Frozen Foods margin declined to 36.7% from 39.2%, with higher freight, wages, utilities, and sample/coupon costs outweighing lower flour costs.
- Net income decreased to $234 from $1,722. Lower gross margin was the main factor; SG&A declined slightly. The current quarter included a $149 non-taxable gain on life insurance policies, while the prior-year quarter included a $265 non-taxable loss.
- Operating cash flow improved by $6,028 year over year, mainly from collecting receivables and liquidating inventory after holiday sales. The cash conversion cycle was 50 days, versus 60 days. The company contributed $338 to its defined benefit pension plan during the period.
- External sales were $12,905 in Frozen Foods, up 3.2%, and $19,561 in Refrigerated and Snack Foods, up 7.1%. Refrigerated and Snack Foods reported a pretax loss of $618, compared with pretax income of $1,031 a year earlier; Frozen Foods pretax income was $865, versus $858.
Outlook, risks, and other notable items
Management said its financial position and capital resources were sufficient for FY2014 operating needs and capital expenditures and expected positive operating cash flow in the first fiscal quarter from seasonal receivables and inventory liquidation. No specific full-year earnings or sales guidance was provided. Management cautioned that commodity price trends could affect cash balances.
- The company maintained a full valuation allowance against deferred tax assets, concluding realization did not meet the more-likely-than-not threshold. It reported federal and state net operating loss carryforwards of approximately $1,394 and $3,302, respectively, expiring from 2019 through 2033.
- Meat, labor, employee-benefit, and other commodity costs; competition and pricing; customer demand; and economic conditions were identified as risks. The company does not use commodity futures or hedging. It reported no significant unfulfilled flour purchase contracts at period-end.
- Wal-Mart accounted for 27.2% of consolidated revenue and 19.2% of receivables in the quarter, compared with 14.3% and 14.0%, respectively, in the prior-year quarter. Management noted that deterioration in large customers’ operations could pose risk.
- Ordinary-course legal matters were not expected by management to materially adversely affect financial position or results. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
- The company repurchased 4,588 shares for an aggregate $46 during the quarter. It had 172,800 shares remaining authorized for repurchase under the program at January 24, 2014.
Important facts for investors to verify
- Whether sales growth from the holiday promotion can be sustained, and the associated effect on product mix and margins.
- Whether meat commodity costs and other production and distribution expenses continue to pressure gross margins.
- The concentration and durability of Wal-Mart sales, along with collection risk from major customers.
- The basis for maintaining the full deferred-tax-asset valuation allowance and the company’s path to meeting its reversal criteria.
- Seasonal working-capital movements, pension funding needs, and capital lease obligations; the filing provides no formal earnings guidance.