B&G Foods, Inc. — Q3 2017 Form 10-Q
Business context and period. B&G Foods manufactures and distributes branded shelf-stable and frozen foods and household products. This unaudited filing covers the 13 weeks ended September 30, 2017 and the first 39 weeks of fiscal 2017; comparisons are with the corresponding periods ended October 1, 2016. Results include the spices and seasonings business and Victoria, acquired in late 2016, from their respective acquisition dates.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 39 weeks 2017 | First 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $408.4 million | $318.2 million | $1,194.4 million | $977.6 million |
| Gross profit / margin | $123.3 million / 30.2% | $115.4 million / 36.3% | $361.1 million / 30.2% | $341.1 million / 34.9% |
| Operating income / margin | $76.0 million / 18.7% | $69.7 million / 21.9% | $201.8 million / 16.9% | $209.6 million / 21.4% |
| Net income | $32.7 million | $32.4 million | $87.6 million | $95.9 million |
| Diluted EPS | $0.49 | $0.50 | $1.31 | $1.54 |
| Net interest expense | $23.4 million | $18.0 million | $65.0 million | $55.5 million |
- Sales mix and comparability: Reported sales increased 28.3% in Q3 and 22.2% year to date, substantially reflecting acquisitions. Excluding acquisition-period sales and discontinued brands, base business sales rose 3.2% in Q3 to $328.3 million, but fell 1.4% year to date to $963.4 million. Q3 base growth was driven by unit volume; year-to-date base sales declined on lower volume and pricing.
- Cash flow: Operating cash flow was $7.5 million for the first 39 weeks, down from $192.8 million a year earlier. Management attributed the decline mainly to working-capital movements, including higher inventory and timing of receipts under transition-services agreements. Capital expenditures were $42.7 million; cash dividends paid were $92.7 million.
- Liquidity and debt: At September 30, cash was $22.6 million and current assets and current liabilities were $724.5 million and $223.7 million, respectively. Long-term debt, net of financing costs and discount, was $1,852.9 million; debt less cash was $1,830.3 million. Revolver borrowings were $40.0 million, with $458.0 million of available capacity net of letters of credit. The company reported compliance with its credit agreement covenants.
- Dividends: Dividends declared were $0.465 per share in Q3 and $1.395 per share for the first 39 weeks. Management expected approximately $123.6 million of fiscal 2017 dividends at the then-current annual rate of $1.86 per share; the board may change the policy.
Material changes and management commentary
- Gross margin fell 6.1 percentage points in Q3 and 4.7 points year to date. Management cited higher warehousing and distribution costs, coupon and slotting expense, lower pricing, and other costs including product mix. Higher reported sales did not translate into comparable margin expansion.
- Q3 operating income increased 9.0%, but year-to-date operating income fell 3.7%; year-to-date net income declined 8.7%. Higher interest expense reflected acquisition-related borrowings and 2017 financing activity.
- In April, the company issued $500 million of 5.25% senior notes due 2025 and used proceeds primarily to repay its revolving borrowings and Tranche A term loans. At quarter-end, debt included $700 million of 4.625% notes due 2021, $500 million of 5.25% notes due 2025, $640.1 million of Tranche B term loans, and $40 million of revolver loans.
- On October 2, 2017, after quarter-end, B&G completed the approximately $162.5 million Back to Nature acquisition, funded with additional revolver loans. Initial purchase accounting was incomplete at filing, and the company described the acquisition as not material to consolidated results or financial position.
- Management expected fiscal 2017 capital expenditures of approximately $60 million, including Green Giant equipment moves and innovation equipment, and implementation of a new ERP system. Management said cash, operating cash flow, and available revolver capacity should fund foreseeable operations, debt service, capital spending, acquisitions, and dividends; this outlook is subject to risks and working-capital needs.
Risks, contingencies, and unusual items
- Key risks include substantial leverage and debt service, commodity and packaging inflation, competitive pricing and promotional pressure, changing consumer preferences, acquisition integration and execution, customer inventory changes, and foreign exchange exposure—particularly Canadian-dollar costs for maple syrup and Mexican-peso costs.
- The company had locked in supply and pricing for most major commodities, excluding items such as maple syrup, through fiscal year-end at a cost increase of less than 1% of cost of goods sold. Cost increases may outpace price actions; falling input costs may also lead customers to seek price reductions.
- Top ten customers generated 53.8% of year-to-date sales; Walmart alone accounted for 24.7%. A disruption involving major customers, suppliers, or co-packers could affect results.
- Approximately 60.8% of employees were covered by collective bargaining agreements. The company reported no material expected adverse effect from pending ordinary-course legal claims, and no material environmental compliance expenditures during the period.
- Unusual items included $1.6 million loss on sale of the Le Sueur research center and assets, $1.2 million loss on extinguishment of debt, and $20.1 million of acquisition-related expenses year to date. Adjusted EBITDA, a non-GAAP measure, was $264.3 million versus $259.6 million; operating cash flow was only $7.5 million, underscoring that adjusted EBITDA is not cash flow.
- Management reported effective disclosure controls. The spices and seasonings business transitioned to a new ERP system during Q3, with implementation across the remaining business expected over approximately two years; related control processes continue to be reviewed.
Important facts for investors to verify
- How much sales growth is organic and sustainable, given acquisition contributions and the year-to-date decline in base business sales?
- Whether gross-margin pressure and elevated working-capital needs persist, and how inventory converts to cash in subsequent quarters.
- Post-acquisition debt, interest expense, covenant headroom, and revolver availability after funding Back to Nature.
- Whether operating cash generation can support capital expenditures, debt service, and the dividend, particularly given first-39-week operating cash flow below dividends paid.
- Back to Nature’s final purchase-price allocation and integration results, along with progress and control implications of the ERP rollout.