B&G Foods, Inc. — Q2 2014 Form 10-Q
Reporting period: Second quarter and first six months ended June 28, 2014; filed July 24, 2014. The unaudited results cover 13-week and 26-week periods. Fiscal 2014 has 53 weeks, with an extra week in Q4.
Business context and financial performance
B&G Foods manufactures and distributes shelf-stable foods and household products across retail, food-service and other channels. Results reflect recent acquisitions, including Specialty Brands (completed April 23, 2014), Rickland Orchards and Pirate Brands; this affects comparability with 2013.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $202.9m | $160.9m | $401.0m | $332.1m |
| Gross profit / margin | $63.0m / 31.1% | $55.7m / 34.6% | $127.7m / 31.8% | $114.5m / 34.5% |
| Operating income / margin | $42.6m / 21.0% | $36.2m / 22.5% | $81.4m / 20.3% | $76.5m / 23.0% |
| Net income (loss) | $16.1m | ($1.4m) | $33.9m | $18.2m |
| Diluted EPS | $0.30 | ($0.03) | $0.63 | $0.34 |
| Adjusted EBITDA | $46.1m | $42.4m | $92.5m | $88.0m |
| Operating cash flow | — | — | $36.1m | $41.7m |
Q2 sales rose 26.1%, primarily from acquired brands. Base-business sales increased 1.1% in Q2 on 2.8% higher unit volume, partly offset by 1.7% lower net pricing. First-half base-business sales declined 1.8%, reflecting lower pricing and slightly lower volume. Management attributed margin compression to higher distribution costs, promotional price reductions and a shift toward lower-margin products. First-half SG&A rose to $47.9m from $33.8m, including higher marketing, acquisition costs, selling and warehousing expenses.
Cash flow, debt and liquidity
- First-half operating cash flow was $36.1m, down from $41.7m, with acquisition/integration spending and working-capital needs—particularly inventory—identified as factors. Capital expenditures were $9.5m.
- Investing cash outflow was $163.8m, including $154.3m for Specialty Brands. Financing cash inflow was $127.5m. Cash ended at $4.0m.
- Debt totaled $1,045.3m before cash ($1,041.3m net debt); stockholders’ equity was $375.6m. Total debt was up from $870.9m at year-end 2013.
- A new June 2014 credit agreement provides a $500m revolving facility and $300m term loan. At quarter-end, $46m was drawn on the revolver and $453.5m of capacity remained available. The term and revolving rates were each approximately 2.15%; the facility matures in 2019. The company reported compliance with covenants.
- First-half dividends paid were $35.9m versus $36.1m of operating cash flow. The declared dividend was $0.34 per share for Q2; the stated intended annual rate was $1.36 per share, with expected fiscal-2014 payments of approximately $72.4m.
Material changes, outlook and risks
- Rickland Orchards: Lower-than-expected sales led the company to reduce the fair value of its earn-out liability to zero, recording an $8.2m non-cash gain. An interim impairment review found no impairment at June 28, 2014, but further deterioration beyond revised projections could trigger a material non-cash impairment charge.
- Debt refinancing: The new credit agreement refinanced the prior facility. Q2 included a $5.7m debt-extinguishment loss; the comparable 2013 quarter included a $28.5m loss related to earlier debt transactions. The prior-year loss materially affects the net-income comparison.
- Management outlook: No earnings or sales guidance is provided in the supplied filing text. The company expected approximately $20m of fiscal-2014 capital expenditures, with $9.5m already spent. It expected marketplace raw-material cost decreases in 2014 and had locked in most significant commodities, excluding items such as maple syrup, at a cost decrease of less than 1% of cost of goods sold.
- Management said available cash, operating cash flow and revolver capacity should fund operations, debt service, capital expenditures, potential acquisitions and anticipated dividends for the foreseeable future. This depends on operating results and financing access; dividends may be changed by the board.
- Key risks include substantial leverage; commodity, packaging, fuel and distribution costs; competitive pricing and promotional pressure; changing consumer preferences; acquisition integration; Canadian-dollar exposure, especially for maple syrup; and food safety, labeling and supplier risks. The company also disclosed six coordinated putative class actions alleging Pirate Brands products were improperly labeled “natural”; a motion to dismiss was pending, and management did not expect a material adverse effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether acquired-brand sales and integration translate into sustained organic growth and improved margins, given first-half base-business sales declined.
- Rickland Orchards’ performance versus revised forecasts and the potential for impairment of its acquired intangible assets.
- Debt, covenant headroom, refinancing costs and the sustainability of dividends relative to operating cash generation and investment needs.
- Whether promotional activity, distribution costs and product mix continue to pressure gross margins.
- Final Specialty Brands purchase-price allocation and any subsequent changes to acquisition-related estimates or contingencies.