B&G Foods, Inc. — Q1 2017 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2017; filed May 9, 2017. Financial statements are unaudited. B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico.
Financial results and liquidity
Amounts below are in millions except per-share data. Comparisons are with the thirteen weeks ended April 2, 2016.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $417.9 | $353.0 | +18.4% |
| Gross profit / margin | $126.8 / 30.3% | $115.9 / 32.8% | Profit +9.4%; margin −2.5 points |
| Operating income / margin | $68.7 / 16.4% | $72.9 / 20.6% | −5.7%; margin −4.2 points |
| Net income | $32.8 | $33.2 | −1.3% |
| Basic and diluted EPS | $0.49 | $0.56 | −12.5% |
| Adjusted EBITDA (non-GAAP) | $92.0 | $89.6 | +2.7% |
| Cash from operating activities | $2.5 | $123.8 | −$121.4 |
| Capital expenditures | $10.3 | $5.1 | +$5.2 |
Operating cash flow less capital expenditures was approximately negative $7.8 million. Management attributed the sharp cash-flow decline primarily to unfavorable working-capital movements, including receivables growth, vendor-payment timing, inventory and spending timing. Cash ended the quarter at $31.8 million, versus $28.8 million at year-end 2016. The current ratio was approximately 3.5, although current assets included $359.8 million of inventory.
At April 1, total debt was $1.795 billion before unamortized financing costs and discount, or $1.770 billion net; cash was $31.8 million and reported net debt was $1.738 billion. Stockholders’ equity was $791.0 million. The company had $277.0 million of available revolving capacity, net of letters of credit, and reported compliance with debt covenants. Quarterly dividends were $0.465 per share; $30.9 million was paid during the quarter.
Material changes and drivers
- Reported sales growth principally reflected acquisitions completed in late 2016: the spices and seasonings business contributed $63.2 million and Victoria contributed $10.7 million. Excluding acquisitions and the discontinued Rickland Orchards brand, base-business sales fell 2.4% to $344.0 million, primarily from a 2.8% unit-volume decline; pricing and currency each contributed modestly.
- Management attributed more than half of the base-business decline to anticipated distribution losses for some core Green Giant products, partly offset by new products. Bear Creek sales were also lower, which management linked in part to an unusually warm winter. Pirate Brands sales increased, supported by the club channel.
- Gross margin declined as the acquired businesses had lower gross margins, approximately $6.6 million of trade spending and slotting was moved into Q1 from Q4 of the prior year, and acquired-inventory fair-value step-up expense was $1.6 million. SG&A increased 35.3%, with increases including acquisition-related and distribution costs, warehousing and consumer marketing. Amortization also rose following acquisitions.
- Net income included a $0.8 million discrete tax benefit from the adoption of share-based-payment accounting guidance. The quarter also included a $1.6 million loss on sale of the Le Sueur research center and related assets, and a $0.1 million debt-extinguishment loss.
Debt, outlook and risks
- On March 30, B&G refinanced its secured credit facility, reducing the spread on $640.1 million of Tranche B loans by 0.75 percentage points. On April 3, after quarter-end, it issued $500 million of 5.25% senior notes due 2025 and used net proceeds to repay all outstanding revolver and Tranche A borrowings and related amounts; remaining proceeds were designated for general corporate purposes. The filing reports a subsequent loss on extinguishment of debt from the Tranche A repayment.
- Management said cash, operating cash flow and revolver availability should be sufficient for foreseeable operating needs, debt service, capital expenditures, potential acquisitions and anticipated dividends. It expected approximately $60 million of fiscal 2017 capital expenditures, including about $17 million to relocate Green Giant production equipment. At the current annual dividend rate of $1.86 per share, it estimated fiscal 2017 dividends of approximately $123.6 million. These are expectations, not a stated sales or earnings forecast.
- Management expected moderate raw-material cost increases in 2017; most significant commodities other than maple syrup were contracted through year-end at a cost increase of less than 1% of cost of goods sold. Risks include commodity and distribution-cost inflation, pricing pressure, retailer consolidation and inventory reductions, changing consumer preferences, food-safety and labeling issues, acquisition integration, substantial leverage, interest rates, and Canadian-dollar and Mexican-peso movements. A 1% interest-rate change was estimated to affect annual interest expense by approximately $10.9 million at quarter-end debt levels.
- The top ten customers represented 56.1% of quarterly sales; Walmart alone represented 23.3%. Management did not expect pending legal matters or known environmental obligations to have a material adverse effect. Approximately 63% of employees were covered by collective bargaining agreements; after quarter-end, employees at the Portland facility ratified a five-year extension.
- Disclosure controls were assessed as effective. Management planned an ERP transition for the acquired spices and seasonings business in Q3 2017 and further implementation across the company over approximately two years.
Important facts for investors to verify
- Whether acquired sales and integration benefits offset the 2.4% decline in base-business sales and lower gross and operating margins.
- Whether working capital normalizes and operating cash flow recovers, given Q1 operating cash flow of only $2.5 million versus $30.9 million of dividends paid.
- The post-April 3 debt balance, interest costs, maturity profile and covenant headroom after the $500 million notes issuance and repayment of revolver and Tranche A debt.
- Execution and costs of the planned Green Giant equipment relocation, ERP transition and remaining fiscal 2017 capital program.
- Exposure to Walmart and other large customers, commodity and currency movements, and the sustainability of the dividend alongside substantial debt obligations.