Bridgford Foods Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended October 28, 2011 (52 weeks), compared with the 52 weeks ended October 29, 2010. This is an annual report, not a standalone fourth-quarter report; amounts below are in U.S. dollars unless noted.
Business context and results
Bridgford manufactures, markets and distributes frozen foods and refrigerated and snack foods. The segments represented 46% and 54% of sales, respectively. The company reported consolidated net sales of $118.263 million.
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $118.263 million | $117.655 million |
| Gross margin | $37.527 million (31.7%) | $47.092 million (40.0%) |
| SG&A | $38.639 million | $41.569 million |
| Operating result before taxes | Loss of $1.112 million | Income of $5.523 million |
| Net result | Loss of $443,000; loss per share $0.05 | Income of $4.319 million; earnings per share $0.46 |
| Cash from operating activities | Used $2.320 million | Provided $4.714 million |
Material changes and drivers
- Sales increased 0.5% as higher selling prices (4.2% impact) were largely offset by lower unit volume (3.5% impact). Frozen-segment sales rose 1.2%; refrigerated and snack sales declined 0.1%.
- Gross margin fell sharply amid higher meat and flour commodity costs, lower production volumes, unfavorable product mix and a shift toward lower-margin direct shipments to customer warehouses.
- Refrigerated and snack segment gross margin declined to 25.5% from 38.9%; the segment recorded a $5.244 million pretax loss versus $93,000 of pretax income. Frozen segment gross margin fell to 39.0% from 41.3%, and pretax income was $4.256 million versus $5.564 million.
- Cost of products sold included a $1.675 million fourth-quarter loss on a customer-specific product returned by the customer and donated after the company concluded it had no ready market.
- SG&A decreased 7.0%, partly reflecting lower headcount, wages and healthcare costs, and reduced direct selling expenses as warehouse business expanded. The company also accrued approximately $415,000 in estimated OSHA penalties; it is contesting many citations.
- Net loss and working-capital changes contributed to negative operating cash flow. Accounts receivable increased $2.219 million; the company also funded $1.175 million to its defined-benefit pension plan.
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $9.324 million at year-end, down $6.362 million from $15.686 million. Current assets were $37.290 million and current liabilities were $13.275 million.
- The company reported no interest-bearing debt and no borrowings under its $2.0 million Wells Fargo credit line. It disclosed violations of tangible-net-worth and minimum-net-income covenants, subsequently waived by the lender on January 17, 2012; the company stated it was then in compliance with the agreement. The facility expires March 1, 2013.
- Capital expenditures were $1.852 million. The company repurchased 129,900 shares for $1.312 million and paid $932,000 in dividends. Management said operating cash flows were expected to fund growth, capital expenditures and repurchases.
- Total liabilities rose to $32.128 million from $24.323 million, largely including increased benefit-plan obligations. The defined-benefit pension plan’s funded status worsened to a $15.441 million deficit from $8.052 million. Other comprehensive loss was $8.675 million, primarily reflecting pension-related actuarial losses; shareholders’ equity declined to $24.838 million from $36.200 million.
- The company maintained a full valuation allowance against deferred tax assets. It reported a $669,000 income-tax benefit for FY2011, primarily reflecting minimum federal and state taxes and the accounting treatment of the valuation allowance.
Outlook, risks and other disclosures
- Management said its financial position and capital resources were sufficient for operating needs and capital expenditures in fiscal 2012. The filing provides no specific sales, earnings or margin guidance.
- Key risks include commodity-price volatility, competition and pricing pressure, food-safety and regulatory exposure, and customer concentration. Dollar General represented 9.0% of FY2011 revenue and 20.2% of year-end receivables.
- Approximately 81% of the company’s outstanding stock was beneficially owned by the Bridgford family, which the filing says can exert substantial influence over corporate matters. The company uses Nasdaq’s controlled-company exemption from certain governance requirements.
- The company reported no material legal proceedings pending at year-end or filing date. It identified no off-balance-sheet arrangements and described warehouse and office rentals as month-to-month; transportation equipment is also rented month-to-month, with new leases anticipated in FY2012.
- Management concluded disclosure controls and internal control over financial reporting were effective. The independent auditor issued an unqualified opinion on the financial statements and did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether price increases can offset commodity inflation and continued volume declines without further margin erosion.
- The outlook for the refrigerated and snack segment after its significant FY2011 loss, including any remaining costs or customer-return exposure related to the failed product launch.
- Cash conversion and working-capital trends, particularly receivables, and the company’s ability to fund pension contributions, capital spending and shareholder distributions.
- The status and terms of the credit-line covenant waiver, and compliance with the facility’s financial covenants going forward.
- Updates to pension funding assumptions and obligations, OSHA proceedings and penalties, and the recoverability of deferred tax assets subject to the full valuation allowance.