B&G Foods, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 28, 2019 (52 weeks); filed February 26, 2020. The filing also reports fourth-quarter results. B&G Foods manufactures and sells branded shelf-stable and frozen foods and household products, primarily in the U.S., with sales in Canada and Puerto Rico.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,660.4 million | $1,700.8 million |
| Gross profit / margin | $383.1 million / 23.1% | $349.5 million / 20.5% |
| Operating income / margin | $203.8 million / 12.3% | $340.2 million / 20.0% |
| Net income | $76.4 million | $172.4 million |
| Diluted EPS | $1.17 | $2.60 |
| Operating cash flow | $46.5 million | $209.5 million |
| Capital expenditures | $42.4 million | $41.6 million |
| Adjusted EBITDA (non-GAAP) | $302.5 million | $314.2 million |
| Cash and cash equivalents at year-end | $11.3 million | $11.6 million |
| Total debt, including discount/premium | $1,900.7 million | $1,653.4 million |
Reported gross margin improved year over year, but the comparison reflects lower unusual costs in 2019: excluding disclosed acquisition-related and non-recurring costs, gross margin was 24.4% in 2019 versus 25.0% in 2018. Adjusted net income was $106.6 million in 2019 versus $122.3 million in 2018. These are company-defined non-GAAP measures and are not substitutes for GAAP results.
Material changes versus prior period
- Sales fell 2.4%. Base-business sales declined 1.4%, as $20.3 million of higher net pricing was outweighed by a $42.4 million reduction in unit volume and a small negative currency effect.
- Comparability was affected by the 2018 Pirate Brands divestiture, which had contributed $74.9 million of 2018 sales, and by acquisitions. Clabber Girl contributed $53.6 million of 2019 sales; McCann’s added $5.8 million of incremental comparable-period sales.
- Green Giant shelf-stable sales rose 11.8%; Green Giant frozen sales declined 2.5%. Back to Nature sales declined 12.6% and spices and seasonings declined 2.1% on the company’s brand comparison.
- Net income and operating income were lower than in 2018, when B&G recorded a $176.4 million pre-tax gain on the Pirate Brands sale. Excluding that one-time gain, 2018 comparisons still reflect significant inventory-reduction costs.
- Operating cash flow fell $163.0 million, principally due to $44.7 million of cash taxes paid on the prior-year divestiture gain, the associated loss of an expected tax benefit, and unfavorable working-capital comparisons. Management estimated 2019 operating cash flow would have been about $120.4 million absent the divestiture’s approximately $73.9 million negative tax impact.
Debt, liquidity, and capital allocation
- Year-end long-term debt was $1,874.2 million net of financing costs and discounts/premiums; principal debt was $1.9 billion. Cash less reported total debt was approximately $1.89 billion of net debt.
- Senior debt/EBITDA was 7.2x; senior debt/adjusted EBITDA was 6.3x. EBITDA/cash interest coverage was 2.8x; adjusted EBITDA/cash interest was 3.2x. These are non-GAAP ratios.
- The $700 million 4.625% notes due 2021 were redeemed in October 2019, funded with $550 million of new 5.25% notes due 2027 and a new $450 million variable-rate term loan due 2026, alongside other financing sources. The company also had $900 million of 5.25% notes due 2025.
- The $700 million revolving facility was undrawn at year-end, with $698.4 million available after letters of credit. The company reported compliance with debt covenants. Current assets were $661.8 million and current liabilities were $216.9 million; cash was low relative to debt and current assets included $472.2 million of inventory.
- Cash dividends paid were $123.7 million, compared with $46.5 million of operating cash flow. At the then-current annual rate of $1.90 per share, management expected approximately $121.7 million of dividends in 2020; dividends remain discretionary and subject to debt and other restrictions.
Outlook, risks, and unusual items
- Management expected higher raw-material cost increases and elevated freight rates in 2020. Most significant commodities, except some items such as maple syrup, were locked into supply and prices through fiscal 2020. Pricing, trade-spend optimization, cost savings, and distribution realignment are intended to offset costs, but management warned these actions may not fully do so.
- Management projected fiscal 2020 capital expenditures of $40–$45 million and 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 2020 sales or earnings guidance was provided in the supplied filing text.
- Key risks include substantial leverage and interest burden, dividend and covenant constraints, customer concentration (Walmart was 25.6% of sales), retailer bargaining power, competition and mature-category declines, commodity/freight inflation, reliance on co-packers and single-site production, food safety and recalls, weather and water scarcity, currency exposure, pension underfunding, and ERP/cybersecurity disruptions.
- The multi-employer pension plan was in critical and declining status. The company’s own defined-benefit plans were underfunded by $36.1 million at year-end; the lower discount rate contributed to a higher obligation. Expected 2020 pension contributions were $4.9 million.
- Other notable items: $22.0 million of 2019 non-recurring cost-of-goods-sold items, including $16.4 million of trailing inventory-reduction effects; $16.7 million of acquisition/divestiture-related and other non-recurring SG&A expenses; and $1.2 million of debt-extinguishment loss. The company acquired Clabber Girl in May 2019 and Farmwise in February 2020. Annual goodwill and indefinite-lived intangible impairment tests recorded no impairment, though valuation depends on forecasts and discount-rate assumptions.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The assessment excluded Clabber Girl, representing 2.9% of assets and 3.2% of 2019 sales; the company reported its disclosure controls were effective.
Important facts for investors to verify
- Whether core volumes recover after the 1.4% decline in base-business sales, and whether pricing can offset 2020 input and freight inflation without further volume loss.
- Whether operating cash flow improves from the unusually weak $46.5 million result, including inventory and other working-capital movements, and whether dividends remain supported by cash generation.
- Debt maturities, variable-rate exposure, covenant headroom, refinancing costs, and the sustainability of leverage at 7.2x senior debt/EBITDA.
- Clabber Girl and Farmwise integration, acquisition returns, and final purchase-price accounting for Clabber Girl.
- Underlying performance of weaker brands and the assumptions supporting the large goodwill and indefinite-lived trademark balances.
- Labor negotiations, the critical-and-declining multi-employer pension plan, and progress and controls associated with ERP implementation.