B&G Foods, Inc. — Q2 2016 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 2, 2016, compared with the periods ended July 4, 2015. Unaudited consolidated results; amounts below are in U.S. dollars.
Business context
B&G Foods manufactures, markets and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico. Results include Green Giant and Le Sueur, acquired in November 2015, and Mama Mary’s, acquired in July 2015. These acquisitions substantially affect year-over-year comparisons.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $306.4 million | $193.6 million | $659.4 million | $410.8 million |
| Gross profit | $109.7 million | $62.0 million | $225.6 million | $129.4 million |
| Gross margin | 35.8% | 32.0% | 34.2% | 31.5% |
| Operating income | $67.1 million | $40.1 million | $139.9 million | $82.0 million |
| Operating margin | 21.9% | 20.7% | 21.2% | 20.0% |
| Net income | $30.3 million | $18.7 million | $63.4 million | $38.3 million |
| Diluted EPS | $0.48 | $0.33 | $1.04 | $0.69 |
| Net interest expense | $18.4 million | $11.1 million | $37.6 million | $22.6 million |
Reported sales rose 58.2% in Q2 and 60.5% in the first half, primarily from the acquired brands. Excluding acquisitions and discontinued Rickland Orchards, base-business sales declined 1.3% in Q2 and 1.6% in the first half. First-half base-business declines reflected lower unit volume, foreign exchange and pricing.
Management attributed improved gross margin mainly to Green Giant, lower input and distribution costs, improved product mix and acquisition synergies. Excluding Green Giant, gross margin declined 0.7 percentage points in Q2 and 0.1 points in the first half. SG&A rose to $33.9 million in Q2 and $73.5 million in the first half; as a share of sales it increased to 11.0% and 11.2%, respectively.
Cash flow, debt and liquidity
- First-half operating cash flow was $200.7 million, versus $57.6 million a year earlier. Management cited higher net income and a favorable working-capital impact; cash flow included $50.7 million from lower inventories and $41.8 million from lower prepaid and other current assets.
- Capital expenditures were $13.2 million; management expects approximately $35.0 million for fiscal 2016. Dividends paid in the first half were $46.6 million.
- Cash was $107.6 million at July 2, up from $5.2 million at January 2. Long-term debt, net of financing costs and discount, was $1.547 billion; management reported debt net of cash of $1.440 billion.
- A March 2016 share offering generated $152.0 million net, used to repay $150.0 million of term loans. No revolving loans were outstanding; available revolver capacity, net of letters of credit, was $498.0 million.
- The company reported compliance with its debt covenants. The credit agreement’s maximum consolidated leverage ratio was 6.75 to 1.00 through Q4 2016, declining to 6.50 to 1.00 thereafter; the minimum interest coverage ratio was 1.75 to 1.00. Actual covenant ratios are not stated in the filing text provided.
- Variable-rate debt was $873.8 million. A hypothetical 1 percentage-point rate change would affect annual interest expense by approximately $8.7 million.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management said it expected moderate raw-material cost decreases and had locked in most significant commodities, excluding items such as maple syrup, through the rest of fiscal 2016 at a cost decrease of less than 1% of cost of goods sold.
- At the current annual dividend rate of $1.68 per share, management estimated fiscal 2016 aggregate dividends of approximately $99.2 million, but noted the board may change dividend policy. Management believes cash, operating cash flow and revolver availability will fund foreseeable needs, including debt service, capital spending, acquisitions and dividends.
- Rickland Orchards was discontinued for insufficient demand. The company recorded a $5.4 million non-cash intangible impairment and approximately $0.8 million inventory write-off; it expected a one-time fiscal 2016 cash-tax benefit of approximately $17.3 million.
- On July 6, 2016, the company announced plans to close its Spartanburg facilities and move Mama Mary’s operations to Yadkinville. It expected approximately $0.8 million of severance and other employee charges and a $0.3 million non-cash equipment write-off in Q3 and Q4.
- Key risks include substantial leverage, commodity and distribution costs, pricing pressure, competition and changing consumer preferences, acquisition integration and impairment risk, customer concentration, and Canadian-dollar and Mexican-peso movements. Wal-Mart represented 25.8% of first-half sales; the top ten customers represented 56.9%.
- A putative class action concerning Ortega taco-shell labeling remained pending on limited claims stayed pending further FDA guidance. Management did not expect currently pending claims to materially affect financial position, results or liquidity. The company reported disclosure controls as effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of reported growth and margin improvement is sustainable apart from Green Giant and Mama Mary’s, given declining base-business sales.
- Whether the sharp first-half operating-cash-flow increase reflects durable performance or temporary working-capital movements.
- Debt leverage, interest-rate exposure, covenant headroom and the company’s capacity to sustain dividends while servicing debt and funding acquisitions.
- Final Green Giant purchase-price allocation and integration results, plus the financial impact of the Rickland Orchards discontinuation and Spartanburg restructuring.
- Customer concentration and exposure to input-cost, foreign-exchange, food-safety, labeling and labor-related risks.