B&G Foods, Inc. — Q3 2016 Form 10-Q
Reporting period: 13 and 39 weeks ended October 1, 2016; comparable periods ended October 3, 2015. Unaudited. B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico.
Financial performance
Dollar amounts are in millions except per-share data.
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $318.2 | $213.3 | $977.6 | $624.1 |
| Gross profit / margin | $115.4 / 36.3% | $71.6 / 33.6% | $341.1 / 34.9% | $201.0 / 32.2% |
| Operating income / margin | $69.7 / 21.9% | $41.6 / 19.5% | $209.6 / 21.4% | $123.6 / 19.8% |
| Net income | $32.4 | $19.8 | $95.9 | $58.1 |
| Diluted EPS | $0.50 | $0.34 | $1.54 | $1.03 |
| Net interest expense | $18.0 | $11.3 | $55.5 | $33.9 |
- Reported sales rose 49.2% in Q3 and 56.7% year to date, primarily reflecting the Green Giant acquisition, completed November 2015. Green Giant contributed $113.8 million of Q3 sales and $351.2 million year to date; Mama Mary’s contributed $19.4 million year to date.
- Excluding acquisition-related sales and discontinued Rickland Orchards, base-business sales fell 3.7% in Q3 and 2.3% year to date. Year-to-date base sales declines included TrueNorth (40.4%) and Ortega (4.3%).
- Gross margin improved 2.7 percentage points for both comparison periods, primarily due to Green Giant, lower base-business commodity, packaging and distribution costs, and product mix. Excluding Green Giant, gross margin increased 0.5 points in Q3 and 0.1 points year to date.
- SG&A was $42.5 million in Q3 and $116.0 million year to date; as a share of sales it increased to 13.4% and 11.9%, respectively. Higher marketing, selling and acquisition-related expenses contributed.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $192.8 million, versus $86.7 million. Investing cash outflow was $24.8 million, including $24.8 million of capital expenditures; financing cash inflow was $67.9 million.
- Cash was $240.6 million at October 1, 2016, compared with $5.2 million at fiscal year-end. The increase reflects, among other items, $331.9 million net proceeds from March and August common-stock offerings.
- Debt carrying value, net of financing costs and discount, was $1,548.5 million; net debt after cash was $1,307.9 million. No revolving loans were outstanding; available revolving capacity, net of letters of credit, was $498.0 million. The company reported compliance with debt covenants.
- In the first quarter, B&G repaid $150.0 million of term loans using March offering proceeds. It paid $72.9 million of dividends in the first three quarters; management expected approximately $100.8 million of dividends for fiscal 2016. Quarterly dividends declared were $0.42 per share versus $0.35 a year earlier.
- Management said cash, operating cash flow and available revolver capacity should be sufficient for foreseeable operating needs, debt service, capital expenditures, potential acquisitions and anticipated dividends. Fiscal 2016 capital expenditures were expected to total approximately $35.0 million.
Outlook, risks and unusual items
- B&G agreed to acquire ACH Food Companies’ spices and seasonings business for approximately $365 million in cash, subject to inventory adjustment and customary conditions; closing was expected in Q4 2016. The planned funding included cash on hand, August offering proceeds and additional revolver borrowings.
- Management reported expected moderate raw-material cost decreases in 2016; major commodities other than maple syrup were largely priced through year-end at a cost decrease of less than 1% of cost of goods sold. Pricing competition, input-cost volatility and currency movements could pressure results.
- Rickland Orchards was discontinued for insufficient demand. B&G recorded $5.4 million of intangible-asset impairment and approximately $0.8 million of inventory write-off costs. The company expected a one-time fiscal 2016 cash-tax benefit of approximately $17.3 million related to the discontinuation.
- A Spartanburg facility closure and transfer of Mama Mary’s operations prompted a $0.8 million Q3 severance and employee-cost charge; a further non-cash equipment write-off of approximately $0.3 million was expected in Q4.
- Other risks include substantial leverage, customer and retailer concentration, food safety and recalls, changing consumer preferences, commodity and foreign-exchange exposure, and acquisition integration. Walmart represented 24.3% of year-to-date sales. Management did not expect currently pending legal matters or environmental compliance costs to have a material adverse effect. A union agreement covering the Portland, Maine facility was due to expire in April 2017; labor interruption remained a stated possibility.
- Year-to-date interest-rate sensitivity: a hypothetical 1 percentage-point rate change would affect annual interest expense by approximately $8.7 million. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Assess underlying demand and pricing trends separately from acquired sales, particularly the continued base-business declines and TrueNorth and syrup performance.
- Confirm ACH acquisition closing, final purchase price adjustment, financing mix, integration costs and expected contribution.
- Review debt leverage, floating-rate exposure, covenant headroom and the effect of additional acquisition borrowing.
- Reconcile operating cash flow growth with working-capital movements, including receivables, inventory and payables, and evaluate dividend funding needs.
- Track expected tax benefits, the Rickland discontinuation and Spartanburg restructuring costs, and any further asset impairments or charges.
- Monitor Walmart and top-customer concentration, commodity and currency exposure, and the Portland labor negotiations.