B&G Foods, Inc. — Q2 2013 Form 10-Q
Business context and period: The filing covers the 13 and 26 weeks ended June 29, 2013, compared with the periods ended June 30, 2012. B&G manufactures and distributes branded shelf-stable foods and household products. Recent acquisitions affect period comparability.
Key financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $160.9m | $148.6m | $332.1m | $306.0m |
| Gross profit / margin | $55.7m / 34.6% | $51.8m / 34.8% | $114.5m / 34.5% | $108.6m / 35.5% |
| Operating income / margin | $36.2m / 22.5% | $35.1m / 23.6% | $76.5m / 23.0% | $73.3m / 23.9% |
| Net income (loss) | $(1.4)m | $16.0m | $18.2m | $32.8m |
| Diluted EPS | $(0.03) | $0.33 | $0.34 | $0.68 |
| Net interest expense | $10.0m | $11.9m | $19.8m | $23.9m |
Q2 and first-half 2013 included a $28.5m debt-extinguishment loss. Excluding that item, reported net results would be materially different; the filing’s EBITDA and adjusted EBITDA were $42.4m and $88.0m for Q2 and the first half, respectively. These are non-GAAP measures.
Cash flow and liquidity: First-half operating cash flow was $41.7m, versus $41.8m a year earlier; capital expenditures were $4.6m and investing cash outflow was $19.1m, including the TrueNorth acquisition. Cash at June 29 was $202.4m. Gross debt was $864.6m and net debt, after cash, was $662.2m. Stockholders’ equity was $348.5m. The company reported $199.5m of available revolver capacity at quarter-end, before subsequent events. First-half dividends paid were $30.6m.
Material changes and developments
- Sales rose 8.3% in Q2 and 8.5% in the first half. Acquired New York Style and Old London brands contributed $10.9m in Q2 and $22.2m in the first half; TrueNorth contributed $3.2m in each period. Base-business sales fell 1.2% in Q2 but rose 0.2% in the first half.
- Gross margin declined 0.2 percentage points in Q2 and 1.0 point in the first half. Management cited acquired-brand mix and pricing; first-half results also reflected a shift toward lower-margin products. SG&A rose 18.4% in Q2, including higher marketing and selling costs.
- On June 4, B&G issued $700m of 4.625% senior notes due 2021, using proceeds to refinance higher-cost notes and term debt and to fund the Pirate Brands purchase. Interest expense declined, but the refinancing generated the $28.5m charge.
- After quarter-end, B&G redeemed the remaining $30.2m of 7.625% notes on July 4 and completed the $195m Pirate Brands acquisition on July 8. The acquisition was funded with remaining note proceeds and about $40m of revolver borrowings. Initial purchase accounting was incomplete.
Outlook, risks and contingencies
- No full-year earnings or revenue guidance was provided. Management expected minimal raw-material cost decreases in 2013 and said it had locked in supply and pricing for most major commodities, excluding items such as maple syrup, at an estimated cost decrease of about $1m. Planned 2013 capital expenditures were $13m–$14m.
- The board raised the quarterly dividend to $0.32 per share, beginning with the dividend declared July 25 and payable October 30; management expected approximately $62.8m of total 2013 dividends. The board may change the policy, and debt covenants restrict certain distributions.
- On July 3, the credit agreement was amended to increase revolver commitments from $200m to $300m and temporarily raise the maximum permitted consolidated leverage ratio. After the amendment and Pirate Brands closing, reported available revolver capacity was $254.5m. The company said it was compliant with covenants at June 29 and expected liquidity to cover foreseeable needs.
- Key risks include substantial leverage, commodity and transportation cost changes, competition and retailer inventory or pricing pressure, acquisition integration, food safety and labeling, customer concentration, and Canadian-dollar exposure. Wal-Mart accounted for 20.9% of first-half sales. Management also disclosed putative class actions alleging Pirate Brands products were improperly labeled “natural”; it did not expect a material adverse effect based on information then available.
- About 34.6% of employees were covered by collective bargaining agreements. A pension plan to which B&G contributes remained in critical status; the company expected less than $0.1m in 2013 surcharges.
Important facts for investors to verify
- Post-acquisition debt, cash, leverage and covenant headroom, including the effect of Pirate Brands and revolver borrowing.
- Whether acquired-brand growth can offset weak or declining base-business sales, and whether gross-margin pressure persists.
- The expected contribution, integration costs and completed purchase-price allocation for Pirate Brands.
- The recurring earnings and cash-flow impact of the refinancing, dividend commitment, and planned capital expenditures.
- Developments in the Pirate Brands labeling litigation, commodity costs and labor negotiations.