B&G Foods, Inc. — Q3 2018 Form 10-Q
Reporting period: 13 weeks ended September 29, 2018; year-to-date figures cover 39 weeks. Filed November 2, 2018. B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico.
Financial results
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $422.6m | $406.1m | $1,242.7m | $1,180.0m |
| Gross profit / margin | $115.0m / 27.2% | $120.9m / 29.8% | $299.6m / 24.1% | $346.7m / 29.4% |
| Operating income / margin | $70.4m / 16.7% | $75.7m / 18.6% | $165.9m / 13.3% | $200.6m / 17.0% |
| Net income | $32.0m | $32.7m | $60.5m | $87.6m |
| Diluted EPS | $0.48 | $0.49 | $0.91 | $1.31 |
| Net interest expense | $27.9m | $23.4m | $83.8m | $65.0m |
Cash flow: For the first 39 weeks, operating cash flow was $139.1m, versus $7.5m a year earlier; capital expenditures were $25.9m and investing cash outflow was $56.7m, including $30.8m for the McCann’s acquisition. Financing cash outflow was $263.5m, including $93.2m of dividends, $150.0m of term-loan repayments and $18.5m of share repurchases. Cash ended at $26.2m, down from $206.5m at fiscal 2017 year-end.
Balance sheet and debt: At September 29, cash was $26.2m, current assets $965.3m (including $238.7m of assets held for sale), current liabilities $601.4m and equity $832.6m. Long-term debt, including current portion, was $2,075.3m net of financing costs and discount; management reported debt net of cash of $1,696.9m. The company had $697.8m of revolver capacity available at quarter-end, net of letters of credit, and reported compliance with debt covenants.
Dividends: Quarterly dividend declared was $0.475 per share. The company expected fiscal 2019 dividends of approximately $125.3m at its then-current rate of $1.90 per share annually.
Changes and operating drivers
- Q3 sales grew 4.1%, but base-business sales declined 0.3%; year-to-date sales grew 5.3%, while base-business sales increased 0.6%. Acquisitions contributed $19.4m to Q3 sales and $57.0m year to date.
- Green Giant frozen sales rose 14.0% in Q3 and 15.3% year to date, supported by newer vegetable products. Green Giant shelf-stable sales fell 12.2% in Q3 and 16.9% year to date. The company cited declines in spices and seasonings and several other brands as additional pressures.
- Gross margin contracted, which management attributed primarily to input-cost inflation—including freight, warehousing and procurement—and product mix. Q3 pricing contributed about $5.2m to gross profit; year-to-date net pricing increased $10.6m.
- Management said freight costs had risen significantly and were expected to remain elevated. Most major commodities (with exceptions including maple syrup) were locked in for the rest of 2018 at cost increases of less than 1% of cost of goods sold. Price increases announced early in 2018 were beginning to benefit results, with further benefit expected in Q4.
Outlook, transactions and risks
- Pirate Brands sale: The $420.0m cash sale to Hershey closed October 17, 2018, after quarter-end. B&G expected an approximately $272.5m gain and agreed to provide transition services for up to 14 months.
- Debt actions after quarter-end: The company used sale proceeds to repay $352.2m of term loans and, on October 19, repaid the remaining $147.9m using cash and additional revolver borrowings. No tranche B term loans remained; available revolver capacity was reported as $527.8m as of the filing date. B&G expected a $9.8m Q4 loss on extinguishment of debt.
- Acquisitions: McCann’s premium Irish oatmeal was acquired in July 2018 for approximately $30.8m; Back to Nature was acquired in October 2017 for approximately $162.8m. Both affect period comparability.
- Management expectations: Fiscal 2018 capital expenditures were estimated at approximately $45.0m, including $12.4m for a new ERP system. Management estimated a fiscal 2018 effective tax rate of approximately 25%; Q3 and year-to-date effective rates were 27.0% and 25.9%, respectively. Management believed cash, operating cash flow and borrowing capacity would meet foreseeable operating, debt-service, capital-spending and dividend needs.
- Risks and contingencies: Key exposures include substantial leverage and interest rates, commodity and freight inflation, ability to implement price increases, competition and changing consumer preferences, customer concentration (Walmart represented 24.0% of year-to-date sales), currency movements, acquisition integration, food safety and labeling, cybersecurity and ERP implementation. The filing reports ordinary-course legal claims but does not expect currently pending matters to materially affect results, financial position or liquidity. No material risk-factor changes from the 2017 Form 10-K were reported.
Non-GAAP context: Adjusted EBITDA was $91.9m in Q3 versus $94.1m and $255.7m year to date versus $264.3m. Adjusted net income was $37.5m versus $36.8m in Q3 and $98.8m versus $102.8m year to date. These measures exclude specified items and are not GAAP substitutes. Year-to-date adjusted results included a $37.3m EBITDA add-back for the inventory reduction plan; reported gross profit was also affected by non-recurring expenses.
Most important facts for investors to verify
- Whether pricing and cost actions offset persistently elevated freight and input costs, and whether gross margins stabilize.
- The final sale proceeds, inventory adjustments and realized gain on the Pirate Brands sale, along with the effect of divestiture on future sales and earnings.
- Post-sale debt, revolver borrowings, interest expense and covenant headroom after the term-loan repayments.
- Whether cash generation can support the dividend, planned capital expenditures and future acquisitions; operating cash flow benefited substantially from working-capital comparisons, particularly inventory.
- Performance of Green Giant frozen products relative to declines in shelf-stable products and other brands, and the integration and returns of recent acquisitions.