B&G Foods, Inc. — Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended April 4, 2015; filed April 28, 2015. Comparisons are with the thirteen weeks ended March 29, 2014. The company manufactures and distributes branded shelf-stable foods and household products. Results are unaudited.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $217.1 million | $198.1 million | +9.6% |
| Gross profit / margin | $67.4 million / 31.0% | $64.7 million / 32.6% | Margin down 1.6 percentage points |
| Operating income / margin | $41.9 million / 19.3% | $38.8 million / 19.6% | Income up 7.9% |
| Net income | $19.6 million | $17.8 million | Up 10.1% |
| Diluted EPS | $0.36 | $0.33 | Up $0.03 |
| Operating cash flow | $38.7 million | $31.0 million | Up $7.7 million |
| Capital expenditures | $3.2 million | $2.2 million | Up $1.0 million |
Adjusted EBITDA, a non-GAAP measure, was $49.9 million versus $46.5 million. The company reported cash dividends declared of $0.34 per share in each quarter.
Balance sheet, debt and liquidity
- At April 4, 2015, cash was $23.7 million, total assets $1.656 billion and stockholders’ equity $339.3 million.
- Total debt, net of discount, was $1.032 billion, including $700 million of 4.625% senior notes due 2021, $288.8 million of term loans and $44 million drawn on the revolving facility. Debt net of cash was approximately $1.009 billion.
- Available revolving-credit capacity was $454.7 million, net of letters of credit. The company said cash, operating cash flow and available borrowing capacity should be sufficient for foreseeable operating, debt-service, capital spending, acquisition and dividend needs.
- The company was in compliance with credit-agreement and senior-note covenants. Its credit agreement sets a minimum interest coverage ratio of 1.75:1 and maximum leverage ratio thresholds that tighten over time.
Changes and management commentary
- Specialty Brands, acquired in April 2014, contributed $22.0 million of Q1 2015 sales; this acquisition makes reported year-over-year growth less comparable. Base-business sales declined 1.5%; excluding Rickland Orchards’ decline, base-business sales increased 2.4%.
- Rickland Orchards sales fell $7.6 million, or 87.6%, continuing the weakness that led to intangible-asset impairments in 2014. Ortega sales rose $5.0 million, partly reflecting customer restocking after the recall.
- Gross margin was affected by recall-related customer refunds (about 0.7 percentage points), product mix, distribution costs and Canadian currency movements. Pricing increases partly offset these pressures.
- Operating cash flow improved with higher earnings and lower net working-capital costs. Cash increased by $22.2 million during the quarter; cash flows included a $9.8 million reduction in income-tax receivable and an $11.8 million reduction in accounts payable.
Outlook, risks and unusual items
- No specific full-year earnings or sales guidance is provided. Management expected most significant commodity costs, excluding items such as maple syrup, to remain relatively flat versus 2014 because supply and pricing were locked in for much of 2015. It expected fiscal 2015 capital expenditures of about $20 million.
- At the then-current dividend rate of $1.36 per share annually, management estimated fiscal 2015 dividends of about $78.8 million, assuming successful completion of the planned equity offering. On April 28, the company announced its intention to offer 4.2 million common shares; proceeds were intended for general corporate purposes, potentially including debt repayment and acquisitions.
- The Ortega and Las Palmas allergen recall cost $1.5 million in Q1: $0.8 million in customer refunds, $0.5 million in cost of goods sold and $0.2 million in administrative costs. At quarter-end, accounts receivable included a $0.5 million recall reserve and prepaid expenses included a $5.0 million receivable for expected insurance recoveries.
- The BCTGM multi-employer pension plan remained in critical status. A new Portland, Maine labor agreement was ratified after quarter-end and implements a rehabilitation plan; company contributions are expected to increase at least 5% annually above current contributions.
- Key disclosed risks include substantial leverage, commodity and distribution-cost inflation, retail/customer concentration, competition and changing consumer preferences, product safety and recalls, Canadian-dollar exposure, acquisition integration, and pension-plan market risk. Walmart represented 20.1% of Q1 sales; the top ten customers represented 52.6%.
- Management did not expect pending ordinary-course legal matters or existing environmental compliance costs to materially adversely affect results, financial position or liquidity. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether the announced 4.2 million-share offering was completed, its final terms and resulting dilution, and how proceeds were used.
- Whether the expected $5.0 million recall insurance recovery was collected and whether additional recall costs or liabilities arose.
- Whether Rickland Orchards sales stabilized and whether base-business growth continued after excluding that brand.
- Whether gross-margin pressure from product mix, distribution, currency and input costs persisted, and whether pricing offset it.
- Debt levels, covenant headroom, dividend affordability and the actual impact of the pension rehabilitation plan.