B&G Foods, Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended April 2, 2016; comparative period ended April 4, 2015. Financial statements are unaudited. B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $353.0 million | $217.1 million | +62.6% |
| Gross profit / margin | $115.9 million / 32.8% | $67.4 million / 31.0% | Margin +1.8 pts |
| Operating income / margin | $72.9 million / 20.6% | $41.9 million / 19.3% | Income +74.0% |
| Net income / margin | $33.2 million / 9.4% | $19.6 million / 9.0% | Income +69.6% |
| Diluted earnings per share | $0.56 | $0.36 | +55.6% |
| Cash provided by operations | $123.8 million | $38.7 million | +$85.2 million |
| Capital expenditures | $5.1 million | $3.2 million | +$1.9 million |
Adjusted EBITDA, a non-GAAP measure, was $89.6 million versus $49.9 million. Management reported that Green Giant’s lower-than-anticipated trade spending and input costs, as well as synergies, helped lift gross margin. Base-business gross margin, excluding Green Giant, increased 0.4 percentage points.
Reported sales growth largely reflected acquisitions: Green Giant contributed $130.2 million and Mama Mary’s $10.5 million in Q1 2016 sales. Excluding acquired sales without a comparable prior-year period, base-business sales fell 2.2% to $212.3 million, principally due to lower volume. Management cited a 2.2% unit-volume decline and a small adverse currency impact, partly offset by pricing.
Balance sheet, debt and liquidity
- At April 2, 2016, cash and cash equivalents were $65.2 million; current assets were $462.0 million and current liabilities were $111.6 million.
- Long-term debt, net of financing costs and discount, was $1.546 billion; cash-adjusted net debt was approximately $1.481 billion. Stockholders’ equity was $618.9 million.
- Following a March stock offering that generated $152.0 million net, the company repaid $150.0 million of term loans. No revolving-credit borrowings were outstanding; available revolver capacity, net of letters of credit, was $498.0 million.
- Debt included $700 million of 4.625% senior notes due 2021, $233.6 million of Tranche A term loans due 2019 and $640.1 million of Tranche B term loans due 2022. The company reported compliance with its debt covenants.
- Operating cash flow benefited from higher net income and working-capital changes, including a $53.8 million cash-flow benefit from inventories. Dividends paid were $20.3 million. The declared quarterly dividend was $0.42 per share; management estimated fiscal 2016 dividends of approximately $99.2 million at the then-current annual rate of $1.68 per share.
Outlook, risks and unusual items
- Management said cash, operating cash flow and available revolver capacity should be sufficient for the foreseeable future to fund operations, debt service, capital expenditures, possible acquisitions and anticipated dividends. No specific earnings or sales guidance was provided.
- Fiscal 2016 planned capital expenditures were approximately $26 million, plus a further $10–15 million during fiscal 2016 and 2017 to relocate equipment associated with Green Giant.
- The filing gives conflicting commodity-cost outlook language: one passage describes locked-in costs for most significant commodities through the rest of fiscal 2016 at a decrease of less than 1% of cost of goods sold, while another describes a cost increase of less than 1%. Management also notes maple syrup is excluded from these locked-in arrangements. The precise outlook is unclear in the filing text.
- Q1 included a $2.8 million debt-extinguishment loss related to the term-loan prepayment and $2.2 million of acquisition-related expenses. Adjusted EBITDA also adds back $3.1 million of acquisition-related inventory step-up amortization and $0.5 million of distribution restructuring expenses. Q1 2015 included $1.5 million of Ortega and Las Palmas recall costs; no material recall cost was recorded in Q1 2016.
- Key risks include substantial leverage, commodity and distribution costs, retail customer consolidation and inventory reductions, changing consumer preferences, food safety and labeling, foreign exchange exposure, and acquisition integration and synergy execution. Wal-Mart represented 25.2% of Q1 2016 sales; the top ten customers represented 56.8%.
- A putative class action concerning Ortega taco-shell labeling remained pending. The court dismissed the labeling claims; remaining claims were stayed pending FDA guidance, and the plaintiff appealed. Management did not expect a material adverse effect. The contributing multi-employer pension plan remained in critical status; company contributions are expected to rise by at least 5% annually under its rehabilitation plan.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the correct weighted-average basic share count: the statements’ extracted text appears to show an inconsistent value, while the EPS note specifies 59,000,682 basic and 59,103,349 diluted shares.
- Clarify the conflicting statement about whether locked-in commodity costs are expected to decrease or increase by less than 1% of cost of goods sold.
- Assess underlying demand and volume trends separately from acquisition-driven growth, including performance of major brands and customer concentration.
- Track leverage, variable-rate exposure and covenant headroom; a hypothetical 1 percentage-point rate change was estimated to affect annual interest expense by approximately $8.5 million.
- Monitor Green Giant integration, anticipated equipment-relocation spending, acquisition synergies, dividend funding and the Ortega litigation and pension-plan status.