Bridgford Foods Corporation — Q2 FY2020 Form 10-Q
Reporting period: Twelve and twenty-four weeks ended April 17, 2020, compared with the corresponding periods ended April 19, 2019. Financial amounts below are in thousands of dollars unless noted. The company operates Frozen Food Products and Snack Food Products segments.
Financial results and changes
| Metric | 12 weeks ended Apr. 17, 2020 | 12 weeks ended Apr. 19, 2019 | 24 weeks ended Apr. 17, 2020 | 24 weeks ended Apr. 19, 2019 |
|---|---|---|---|---|
| Net sales | $42,999 | $41,443 | $89,641 | $86,484 |
| Gross margin | $12,910; 30.0% | $14,401; 34.7% | $27,964; 31.2% | $30,055; 34.8% |
| SG&A | $13,580 | $11,608 | $26,198 | $24,695 |
| Income (loss) before taxes | $(666) | $2,793 | $1,783 | $5,360 |
| Income tax benefit (provision) | $1,093 benefit | $573 provision | $503 benefit | $1,264 provision |
| Net income | $427 | $2,220 | $2,286 | $4,096 |
| Basic EPS | $0.05 | $0.24 | $0.25 | $0.45 |
- Quarterly sales increased 3.8%, but gross margin fell as cost of products sold rose 11.3% and SG&A rose 17.0%. Year-to-date sales increased 3.7%, while cost of products sold increased 9.3%.
- Snack Food Products sales rose 13.9% in the quarter and 10.0% year to date, driven mainly by higher volume. Frozen Food Products sales fell 22.5% in the quarter and 13.3% year to date, reflecting lower volume and foodservice weakness.
- COVID-related channel shifts raised retail demand but did not offset Frozen segment foodservice losses. Meat commodity costs, higher production overhead per case in Frozen, and higher depreciation and freight contributed to margin pressure.
- The quarter’s pretax loss became net income after a $1,093 tax benefit, including a discrete $1,100 benefit associated with CARES Act NOL carrybacks. Net income also includes non-taxable life-insurance losses of $823 for the quarter and $420 year to date; the comparable 2019 periods included gains of $439 and $428.
Cash flow, balance sheet and financing
- For the 24 weeks, operating cash flow was $(733), versus $(531) in 2019; investing cash flow was $(10,968), mainly reflecting $10,985 of capital additions. Financing provided $21,926, including bank borrowing proceeds of $22,950. Cash increased $10,225 to $13,703.
- At April 17, 2020, current assets were $67,334 and current liabilities $24,656, or net working capital of $42,678. Total assets were $144,217; total liabilities $75,447; shareholders’ equity $68,770.
- Equipment notes payable totaled $31,200, including $4,350 current and $26,850 long-term. The company also had a $4,500 revolving credit balance at period-end; it repaid that balance on May 13, 2020 using proceeds from the fifth equipment borrowing. The fifth borrowing was $7,200, at 3.68% fixed for seven years; total equipment financing borrowed under the Wells Fargo agreements was $33,450. The company reported covenant compliance at April 17.
- Management reported sufficient liquidity expected for the rest of FY2020 and to complete the Chicago plant expansion, considering cash, operations, anticipated tax refunds and tax deferrals. The company used $733 in operating cash during the period and identified additional borrowing options under evaluation.
Outlook, risks and notable items
- Management expected consolidated profitability in the second half of FY2020, but anticipated lower overall earnings from operating challenges and volume impacts. Frozen segment volume was expected to decline; Snack Food Products had experienced significant short-term volume increases.
- COVID-19 caused temporary production idling, lower productivity, higher production costs, worker absenteeism and facility closures. Management warned impacts could persist through at least the remainder of FY2020. Supply-chain conditions were largely intact at filing, but meat-processing closures increased the risk of raw-material shortages; commodity volatility was expected to continue.
- The CARES Act NOL carryback provision was expected to provide a material cash benefit, though future-period amounts were not yet clear. The company estimated FY2020 employer Social Security tax deferrals of approximately $1,258; the potential payroll tax credit was not quantified.
- On March 16, 2020, the company agreed to sell its Chicago property and processing building for $60 million, subject to zoning, due diligence, closing conditions and adjustments. A May amendment extended inspection and zoning/closing timelines. Proceeds and timing are therefore uncertain.
- Customer concentration is material: Walmart accounted for 37.7% of year-to-date sales and 35.5% of receivables; Dollar General accounted for 12.7% of sales and 24.4% of receivables. Some customers requested payment extensions of 10–35 days.
- Management cited possible future impairment charges, higher doubtful-account reserves, inventory valuation adjustments, ingredient availability and cost pressures. Ordinary-course legal matters were not expected to materially affect results. The company did not hedge commodity exposure.
Most important facts for investors to verify
- Whether COVID-related channel shifts, plant disruptions and foodservice weakness persist, particularly in Frozen Food Products.
- Whether Snack Food Products volume and margins remain sustainable amid commodity, freight and promotional pressures.
- Actual cash proceeds and closing conditions for the proposed $60 million Chicago property sale, and the financing and completion costs of the plant expansion.
- The amount and timing of CARES Act tax refunds and payroll-tax deferrals, and their effect on liquidity.
- Receivables collection, customer concentration, raw-material availability and covenant compliance as conditions evolve.