B&G Foods, Inc. — FY2015 Form 10-K Summary
Business context and reporting period. B&G Foods manufactures and distributes branded shelf-stable and frozen foods and household products. This Form 10-K, filed March 2, 2016, covers the fiscal year ended January 2, 2016 (52 weeks); the prior fiscal year had 53 weeks. Fiscal 2015 included Green Giant and Le Sueur from November 2, 2015, Mama Mary’s from July 10, 2015, and additional months of Specialty Brands. Fourth-quarter figures below are unaudited.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $966.4 million | $848.0 million |
| Gross profit / margin | $289.6 million / 30.0% | $247.8 million / 29.2% |
| Operating income / margin | $172.4 million / 17.8% | $116.1 million / 13.7% |
| Net income | $69.1 million | $41.0 million |
| Diluted EPS | $1.22 | $0.76 |
| Operating cash flow | $128.5 million | $99.1 million |
| Capital expenditures | $18.6 million | $19.0 million |
| Cash and cash equivalents at year-end | $5.2 million | $1.5 million |
| Total debt, net of discount | $1,759.6 million | $1,025.9 million |
| Adjusted EBITDA (non-GAAP) | $217.8 million | $194.1 million |
Reported sales rose 14.0%, primarily from acquisitions. Comparable base-business net sales, excluding acquisition effects, the extra prior-year week, the Rickland Orchards shortfall, and recall refunds, were essentially unchanged at $815.9 million versus $815.7 million. Net pricing increased 1.5%, offset by a 1.5% decline in volume. Operating cash flow improved by $29.4 million. Investing cash outflow was $892.4 million, including $873.8 million for acquisitions. Financing cash inflow was $767.4 million, including term-loan proceeds and a common-stock offering.
Fourth-quarter 2015 sales were $342.3 million versus $238.0 million in Q4 2014; net income was $11.0 million versus $11.5 million. The filing attributes the annual sales increase substantially to acquisitions and notes that Q4 2014 included an extra reporting week.
At year-end, the company had $458.0 million of available revolver capacity, net of letters of credit. Debt comprised $700 million of 4.625% senior notes due 2021 and secured revolving and term borrowings, including $750 million of tranche B loans due 2022. Senior debt/EBITDA was 8.8x; adjusted senior debt/adjusted EBITDA was 8.1x. The company reported compliance with credit-agreement and note covenants. A hypothetical 1 percentage-point interest-rate change would affect annual interest expense by approximately $10.6 million.
Material changes and unusual items
- The Green Giant and Le Sueur acquisition cost $765 million plus a $57.8 million inventory adjustment; cash paid at closing was reported as $822.8 million. Green Giant contributed $106.2 million of FY2015 sales. Its preliminary purchase-price allocation remained subject to finalization.
- Debt increased substantially to fund Green Giant. A May 2015 stock offering generated $126.2 million net proceeds and helped fund Mama Mary’s and other corporate needs.
- Gross margin improved 0.8 percentage point, reflecting pricing and comparison with prior-year recall and Rickland Orchards inventory charges; the improvement was partly offset by $6.1 million of Green Giant acquired-inventory fair-value amortization.
- Income tax expense rose to $52.1 million; the effective tax rate increased to 43.0% from 35.8%, including a $7.2 million deferred tax expense related to state-apportionment changes following acquisitions.
- The 2014 Ortega and Las Palmas recall generated $1.9 million of net costs in FY2015; management did not expect material future recall expenses. The 2014 Rickland Orchards impairment was $34.2 million; there was no intangible-asset impairment in FY2015.
- The board increased the quarterly dividend from $0.35 to $0.42 per share on February 22, 2016, after fiscal year-end. The company expected approximately $93.4 million of aggregate 2016 dividends at the then-current annualized rate of $1.68 per share.
Outlook, risks, and contingencies
- Management expected 2016 raw-material cost increases, but said most significant commodities other than maple syrup were contracted through fiscal 2016 at a cost increase of less than 1% of cost of goods sold. Price increases, cost savings, and supply contracts are intended to mitigate inflation; pricing may lag costs or be constrained by competition.
- Expected fiscal 2016 capital expenditures were approximately $26 million for existing operations, plus a one-time $10–15 million over fiscal 2016–2017 to relocate Green Giant production equipment. Management believed cash, operating cash flow, and revolver availability would support operations, debt service, capex, potential acquisitions, and anticipated dividends.
- Green Giant’s frozen-product production and distribution transition creates execution risk. A General Mills co-packing agreement for certain products expires November 2, 2017; delays in relocating production could disrupt supply. Distribution transition services were scheduled to expire November 2, 2016.
- Key risks include high leverage and debt-covenant restrictions; acquisition integration and execution; customer concentration (Wal-Mart represented 20.4% of sales); competitive pricing and mature-category declines; commodity, currency, water-supply, and weather exposure; reliance on co-packers and single-site production; food safety, recalls, and product-labeling litigation; labor negotiations; pension obligations; and impairment of substantial goodwill and intangible assets.
- A putative class action alleging misleading Ortega taco-shell labeling remained pending in part; the court dismissed labeling claims in February 2016, while remaining claims were stayed. Management did not expect a material adverse effect. Management also reported no material environmental expenditures and no material expected impact from pending ordinary-course claims.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying performance: comparable base-business sales were flat, with lower volume offset by higher pricing.
- Assess the sustainability of earnings and cash generation after acquisition-related adjustments, acquired-inventory amortization, integration costs, and the unusually high tax expense.
- Review leverage, variable-rate exposure, debt maturities, covenant headroom, and the company’s capacity to fund dividends alongside debt service and planned investment.
- Track Green Giant integration, production relocation, distribution transition, and the final purchase-price allocation; Green Giant was excluded from the year-end internal-control assessment, representing 33% of assets and 11% of annual sales.
- Reconcile the reported cash flow and acquisition outlays with working-capital needs, including seasonal produce and maple-syrup purchases. The filing reports no off-balance-sheet arrangements.
- Consider that adjusted EBITDA is a non-GAAP measure and excludes specified items; it is not a substitute for GAAP earnings or cash flow. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.