B&G Foods, Inc. — Q3 2019 Form 10-Q
Business context and period. B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico. This unaudited report covers the 13 weeks ended September 28, 2019, and the first 39 weeks of fiscal 2019; comparisons are with the corresponding 2018 periods. Results are affected by the October 2018 sale of Pirate Brands and the 2018 McCann’s and 2019 Clabber Girl acquisitions.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | First 39 weeks 2019 | First 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $406.3 million | $422.6 million | $1,190.2 million | $1,242.7 million |
| Gross profit / margin | $108.8 million / 26.8% | $115.0 million / 27.2% | $288.7 million / 24.3% | $299.6 million / 24.1% |
| Operating income / margin | $65.9 million / 16.2% | $70.4 million / 16.7% | $158.6 million / 13.3% | $165.9 million / 13.3% |
| Net income | $31.1 million | $32.0 million | $66.1 million | $60.5 million |
| Diluted EPS | $0.48 | $0.48 | $1.01 | $0.91 |
| Operating cash flow | Not separately presented | Not separately presented | $1.3 million | $139.1 million |
| Adjusted EBITDA (non-GAAP) | $86.2 million | $91.9 million | $233.0 million | $255.7 million |
- Q3 sales declined 3.9% year over year; base-business sales fell 2.5%, with a $14.8 million volume decline partly offset by $5.0 million of improved pricing. Q3 net income fell 2.8%, while diluted EPS was unchanged.
- For the first 39 weeks, reported sales declined 4.2%. Base-business sales fell 1.0%, as a $27.5 million volume decline and a small foreign-exchange headwind more than offset $16.2 million in improved pricing. Net income increased 9.3%, but adjusted EBITDA declined 8.9%.
- Q3 gross margin contracted 0.4 percentage points; YTD gross margin improved 0.2 points. YTD reported gross profit includes $19.5 million of acquisition/divestiture-related and non-recurring costs, including inventory-reduction-plan costs.
- Operating cash flow was unusually weak at $1.3 million. Management attributed the decline primarily to about $71.8 million of adverse cash-tax impact related to the Pirate Brands sale, including a $43.2 million tax payment and an estimated $28.6 million tax benefit otherwise expected, as well as working-capital and timing effects. Excluding that tax impact, management estimated YTD operating cash flow would have been approximately $73.1 million.
- Inventory rose to $526.1 million from $401.4 million at fiscal 2018 year-end; the cash-flow statement shows a $112.2 million inventory use of cash. Capital expenditures were $28.5 million YTD.
- At September 28, cash was $267.0 million, long-term debt net of financing costs was $2,133.5 million, and net debt was $1,866.5 million. The revolving facility was undrawn, with $698.4 million available after letters of credit. The company reported compliance with debt covenants.
- Quarterly dividends declared were $0.475 per share ($1.425 YTD); dividends paid YTD were $93.2 million. The company expected approximately $121.7 million of fiscal 2020 dividends at its then-current rate and share count.
Material changes, outlook and risks
- Clabber Girl was acquired on May 15, 2019 for approximately $84.6 million; its sales contributed $20.1 million in Q3. Purchase-price allocation remained preliminary.
- On September 26, B&G issued $550 million of 5.25% senior notes due 2027. After quarter-end, on October 10, it issued $450 million of term loans due 2026 and redeemed all $700 million of 4.625% notes due 2021, also repaying part of revolving borrowings and funding fees and other purposes. Management expected a roughly $1.2 million debt-extinguishment loss in Q4.
- Management expected fiscal 2019 capital expenditures of $45–$50 million, including ERP, productivity, IT/cybersecurity and infrastructure projects. It stated that cash, operating cash flow and available revolver capacity should fund operations, debt service, capital spending, potential acquisitions and anticipated dividends for the foreseeable future. No specific revenue or earnings guidance is provided in the filing text.
- Management reported higher raw-material costs in 2019, elevated freight costs and tariff effects, and expected cost pressures to continue into 2020. It cited pricing actions and cost-saving measures as offsets, while cautioning that price increases may lag inflation or be constrained by competition and customer acceptance.
- Key risks include substantial leverage, commodity and transportation costs, competition and changing consumer preferences, acquisition integration, foreign exchange, food safety and labeling matters, and customer concentration. Walmart represented 26.2% of YTD sales. Four collective bargaining agreements were due to expire within 12 months; management did not expect negotiations to have a material adverse impact, but could not rule out production interruptions. Management did not expect pending legal matters to have a material adverse effect.
- The multi-employer pension plan remained in critical status; required contributions may rise at least 5% annually under the rehabilitation arrangement. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales volumes stabilize, particularly in Green Giant frozen, spices and seasonings, and Back to Nature, and whether pricing offsets input-cost inflation.
- Whether operating cash flow recovers as inventory and tax-related working-capital effects normalize, given dividends paid exceeded reported YTD operating cash flow.
- Post-refinancing debt, interest expense, covenant headroom and the company’s capacity to fund dividends and acquisitions while managing leverage.
- Final Clabber Girl purchase-price allocation and its contribution to sales, margins and cash generation.
- Execution of the ERP rollout, cost initiatives and labor negotiations, alongside commodity, freight, tariff and food-safety risks.