Bridgford Foods Corporation — Q3 2014 Form 10-Q
Reporting period: Twelve and thirty-six weeks ended July 11, 2014; comparative periods ended July 12, 2013. Dollar amounts below are in thousands unless stated otherwise. Results are unaudited, and the company cautions that interim results may be affected by seasonality.
Financial performance
| Metric | 12 weeks 2014 | 12 weeks 2013 | 36 weeks 2014 | 36 weeks 2013 |
|---|---|---|---|---|
| Net sales | $27,915 | $29,294 | $91,624 | $88,649 |
| Gross margin | $7,429 (26.6%) | $9,485 (32.4%) | $26,632 (29.1%) | $31,295 (35.3%) |
| SG&A | $9,812 | $9,480 | $30,061 | $29,274 |
| Net income (loss) | $(2,383) | $(19) | $(3,429) | $1,814 |
| Basic and diluted EPS | $(0.26) | $0.00 | $(0.38) | $0.20 |
- Quarterly change: Sales fell 4.7%, principally because a large seasonal customer program in the prior-year quarter did not recur. Pound volume fell 4.9%; pricing contributed a modest increase.
- Year-to-date change: Sales rose 3.4%, mainly on an 8.6% increase in volume, partly offset by lower selling prices, higher returns and promotional activity.
- Margin pressure: Cost of products sold rose 3.4% in the quarter and 13.3% year to date, materially faster than sales year to date. Management cited higher meat commodity costs and high-volume, low-margin sales. Year-to-date significant meat commodity costs increased about $3,025; flour costs declined about $102. The refrigerated and snack segment’s gross margin fell to 24.4% year to date from 34.4%; frozen food margin was 36.5% versus 36.8%.
- Segment results, 36 weeks: Frozen Food Products recorded $35,128 sales and $1,481 pretax income. Refrigerated and Snack Food Products recorded $56,496 sales and a $4,910 pretax loss.
Cash flow, liquidity and balance sheet
- Operating cash flow was negative $4,172 for the 36 weeks, versus positive $657 a year earlier. Investing cash use was $2,896, including $2,986 of capital expenditures; financing cash use was $282. Cash declined from $8,325 at November 1, 2013 to $975 at July 11, 2014.
- At July 11, 2014, current assets were $32,228 and current liabilities $14,007, versus $40,406 and $15,646 at November 1, 2013. Total assets were $58,199 and total liabilities $28,313. Inventory increased to $20,051 from $18,919.
- The company reported $1,417 of remaining capital lease obligations. It had no bank borrowings at July 11, but borrowed $500 under its $2,000 Wells Fargo credit line on August 12 for short-term ingredient and payable needs. The line expires March 1, 2015.
- The company was in violation of the credit line’s minimum net income and Quick Ratio covenants; both violations were subsequently waived by letter dated August 11. The filing does not provide the actual Quick Ratio or covenant calculation.
- Management stated that capital resources were sufficient for operating needs and capital expenditures for the remainder of fiscal 2014. This assessment followed substantial cash use and the subsequent credit-line borrowing.
Material developments, outlook and risks
- Deli business exit: On August 11, after quarter-end, the company decided to exit its California-focused direct-store-delivery deli business because of declining demand, higher operating costs and significant recent losses. It expected to reduce headcount by about 40 by fiscal year-end. For the 36 weeks, the business represented approximately 6% of sales, 8% of gross margin, 12% of SG&A and 43% of pretax loss. The filing does not quantify expected exit or severance costs.
- Cash use drivers: Management cited increased inventory for large customer orders amid higher meat costs, a $1,107 workers’ compensation loss-fund payment following adverse claims, and lower accrued and non-current liabilities. The company funded $714 of its defined benefit pension plan year to date.
- Taxes: No federal or state income tax benefit was recorded despite the loss. A full valuation allowance remained against deferred tax assets because management concluded realization did not meet the more-likely-than-not standard. Federal and state net operating loss carryforwards were approximately $1,394 and $3,302, respectively, expiring from 2019 through 2033.
- Other risks and items: The company does not hedge commodity exposure; meat and flour prices can affect margins. Large retail customers represent significant revenue and receivables. Ordinary-course legal matters were not expected by management to materially affect financial position or results. Life-insurance gains included in net results were $195 for the quarter and $410 year to date; future gains may vary with underlying investments. No specific sales or earnings guidance was provided.
Important facts for investors to verify
- Customer concentration disclosure is inconsistent: the financial-statement note says Wal-Mart accounted for 27.0% of year-to-date revenue, while MD&A says 20.3%; both report 22.8% of receivables. Confirm the correct revenue percentage.
- Assess the deli exit’s timing, costs, employee reductions and expected effect on segment results and cash flow; quantified exit charges are not provided.
- Monitor cash balances, operating cash generation, inventory and commodity costs, and the company’s use of the credit line.
- Confirm ongoing compliance with the waived credit-line covenants and the terms of any future waiver or borrowing.
- Evaluate whether deteriorating margins and the full deferred-tax valuation allowance persist; the filing gives no quantified forward earnings outlook.