B&G Foods, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended October 3, 2020. Fiscal Q3 comprised 14 weeks versus 13 weeks in the prior-year quarter; year-to-date comparisons cover 40 weeks versus 39. Financial amounts below are in millions except per-share data.
Business context and results
B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico. The company attributed stronger sales to pandemic-related pantry stocking and increased at-home consumption, as well as an extra reporting week and acquisitions. The extra week contributed an estimated $35.0 million to Q3 sales.
| Metric | Q3 2020 | Q3 2019 | First 40 weeks 2020 | First 39 weeks 2019 |
|---|---|---|---|---|
| Net sales | $495.8 | $406.3 | $1,457.7 | $1,190.2 |
| Gross profit / margin | $136.0 / 27.4% | $108.8 / 26.8% | $375.0 / 25.7% | $288.7 / 24.3% |
| Operating income / margin | $87.9 / 17.7% | $65.9 / 16.2% | $233.1 / 16.0% | $158.6 / 13.3% |
| Net income | $46.8 | $31.1 | $119.8 | $66.1 |
| Diluted EPS | $0.72 | $0.48 | $1.86 | $1.01 |
| Adjusted EBITDA (non-GAAP) | $104.6 | $86.2 | $287.9 | $233.0 |
Material changes and financial position
- Q3 sales rose 22.0%; base-business sales increased 21.9%, principally from higher unit volume. Year-to-date sales rose 22.5%; base-business sales increased 19.5%, reflecting higher volume and 2.0% net pricing.
- Green Giant products saw notable growth. Year-to-date shelf-stable sales, including Le Sueur, increased 64.8%, and frozen sales increased 17.3%. Back to Nature sales declined 10.5% on a year-to-date base-business basis.
- Gross margin improved year over year in both comparisons. SG&A declined as a share of sales to 8.8% from 9.4% in Q3 and to 8.7% from 9.8% year to date. Operating income grew 33.3% in Q3 and 47.0% year to date.
- Net interest expense increased 9.4% in Q3 and 9.8% year to date, reflecting, among other items, the extra week, higher average debt in the year-to-date comparison and $1.1 million accelerated amortization of debt financing costs after a term-loan prepayment.
- Cash from operations was $232.3 million for the first 40 weeks, versus $1.3 million in the prior-year period. The comparison benefited from higher earnings and working-capital changes, and from the prior-year $73.9 million adverse tax impact related to the Pirate Brands divestiture. Investing cash outflow was $19.4 million; financing cash outflow was $167.4 million. Cash increased $45.7 million to $57.0 million.
- At October 3, 2020, long-term debt was $1,804.6 million, net of unamortized costs and discounts; net debt after cash was approximately $1,747.6 million. The company prepaid $75.0 million of term loans in August. Its revolving facility was undrawn, with $698.1 million available after letters of credit. It reported compliance with debt covenants.
- Current assets were $752.6 million and current liabilities $294.3 million. The quarterly dividend remained $0.475 per share; the filing states a current annual rate of $1.90 per share.
Outlook, risks and unusual items
- On October 26, 2020, after quarter-end, B&G agreed to acquire the Crisco oils and shortening brand, plus a Cincinnati facility and warehouse, for approximately $550 million in cash, subject to an inventory adjustment. Closing was expected in Q4 2020, subject to regulatory approval and customary conditions. The company expected to use cash and revolving borrowings.
- Management said raw-material costs had increased moderately and anticipated higher increases for the rest of fiscal 2020; freight costs were expected to remain elevated. Most significant commodity supplies, except certain items including maple syrup, were contracted through year-end. Price increases may lag cost inflation or be constrained by competition.
- COVID-19 had increased demand and positively affected sales, adjusted EBITDA, operating cash flow and net leverage to date. The duration of elevated demand is uncertain; potential risks include demand normalization, further pandemic waves, supply-chain or facility disruption, raw-material availability and macroeconomic effects on consumer behavior. The company estimated $9.2 million of COVID-related costs to date and temporarily enhanced employee compensation through at least December 31, 2020.
- Other risks include substantial leverage, commodity and currency fluctuations, customer concentration, competition, consumer preference changes, acquisition integration, and food safety and labeling exposure. Walmart represented 26.1% of year-to-date sales and 30.6% of receivables at quarter-end; the top ten customers accounted for 61.7% of sales.
- Management expected $40–45 million of fiscal 2020 capital expenditures. It stated that cash, operating cash flow and available revolver capacity should fund foreseeable operating needs, debt service, capital spending, acquisitions and anticipated dividends. The board may change the dividend policy.
- Pending legal claims were not expected to have a material adverse effect. Two union agreements were scheduled to expire in the next 12 months; management did not expect negotiations to materially affect results, but could not assure agreement without interruptions. The multi-employer pension plan remained in critical and declining status.
Important facts for investors to verify
- Separate underlying demand from the extra fiscal week, pandemic pantry-loading effects, and acquired-business contributions when assessing sales growth.
- Monitor whether elevated consumer demand persists and whether input, freight and temporary COVID-related costs pressure margins.
- Review funding, leverage and covenant headroom after the proposed Crisco acquisition, including actual closing terms and use of revolver capacity.
- Assess cash conversion and working-capital movements; the prior-year operating cash-flow comparison was affected by a substantial divestiture-related tax payment.
- Track dividend coverage, customer concentration and upcoming labor negotiations.