B&G Foods, Inc. — Fiscal 2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks); filed February 28, 2018. This is an annual filing, not a standalone fourth-quarter report. B&G Foods manufactures and distributes branded shelf-stable and frozen foods and household products. Growth strategy emphasizes acquisitions, product development and organic growth.
Financial results and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales | $1,668.1 million | $1,391.3 million |
| Gross profit / margin | $462.2 million / 27.7% | $448.0 million / 32.2% |
| Operating income / margin | $239.4 million / 14.4% | $254.0 million / 18.3% |
| Net income | $217.5 million | $109.4 million |
| Diluted EPS | $3.26 | $1.73 |
| Operating cash flow | $37.8 million | $289.7 million |
| Capital expenditures | $59.8 million | $42.4 million |
| Cash and cash equivalents at year-end | $206.5 million | $28.8 million |
- Sales rose 20.0%, principally from acquisitions. Base-business sales declined 1.1% to $1,344.3 million.
- Fiscal 2017 adjusted EBITDA, a non-GAAP measure, was $333.2 million versus $322.0 million; reported EBITDA was $290.2 million versus $291.6 million.
- Cash flow from operations fell sharply, largely due to working-capital movements, including a $139.5 million inventory cash use. Capital spending exceeded operating cash flow by approximately $22.0 million.
- Cash dividends paid were $123.6 million, substantially exceeding operating cash flow. Declared dividends were $1.86 per share for the year; management estimated approximately $123.7 million of aggregate 2018 dividends at the then-current rate, subject to restrictions and board discretion.
- At year-end, principal debt was $2,250.1 million: $650.1 million of variable-rate secured term loans and $1.6 billion of fixed-rate senior notes. Net debt was approximately $2,011.1 million. The company reported $697.8 million of available revolving capacity and compliance with debt covenants. A $50 million optional term-loan repayment followed in the first quarter of 2018.
- Current assets were $886.6 million and current liabilities $201.5 million; inventories were $501.8 million.
Material changes and unusual items
- Acquisitions drove much of sales growth: spices and seasonings contributed $260.7 million in fiscal 2017, Victoria $42.8 million, and Back to Nature approximately three months of sales after its October 2017 acquisition for $162.8 million.
- Base-business performance was mixed: Green Giant frozen sales increased $33.6 million, while Green Giant shelf-stable sales decreased $30.6 million, primarily due to weak consumption and distribution losses with a key customer. Maple syrup sales and Ortega sales also declined.
- Gross margin declined 4.5 percentage points. Management attributed 2.5 points to product mix and the remaining decline primarily to higher warehousing and distribution costs and lower net pricing. Operating income declined 5.7% despite higher sales.
- Net income included a discrete $133.3 million deferred-tax benefit from the 2017 U.S. Tax Cuts and Jobs Act, partly offset by state-tax and repatriation charges. Without the Act’s impact, management estimated fiscal 2017 tax expense of about $57.1 million and an effective tax rate of 38.6%. Adjusted net income, excluding specified items, was $140.5 million versus $131.1 million.
- Fourth-quarter net income was $129.9 million versus $13.6 million in the prior-year quarter, largely reflecting the tax benefit; quarterly sales were $473.7 million versus $413.7 million.
- Adoption of the new revenue standard in fiscal 2018 reclassified certain customer payments. Retrospective adjustments reduce fiscal 2017 sales and gross profit by $21.7 million and SG&A by the same amount, with no impact on operating income or net income.
Outlook, risks and contingencies
- Management expected moderate raw-material cost increases in 2018, with most significant commodities other than maple syrup contracted through fiscal 2018 at a cost increase of less than 1% of cost of goods sold. It forecast fiscal 2018 capital expenditures of approximately $50–$55 million and an effective tax rate of approximately 25%. No specific sales or EPS guidance is provided in the filing text.
- Management said cash, operating cash flow and revolving availability should be sufficient for foreseeable needs, including debt service, capital spending, potential acquisitions and anticipated dividends. This outlook should be considered alongside the sharp 2017 operating-cash-flow decline and the dividend outflow.
- Key risks include substantial leverage and debt covenants; customer concentration (Wal-Mart was 24.1% of sales); competitive pricing and mature-category declines; commodity, packaging and labor cost volatility; acquisition integration; reliance on co-packers and single-site production for many products; food safety and product recalls; foreign exchange and water-supply exposure; and pension funding, cybersecurity and ERP implementation risks.
- The company reported no material expected impact from pending litigation or existing environmental compliance obligations. Its multiemployer pension plan remained in critical status. The Back to Nature purchase-price allocation was preliminary and expected to be completed in fiscal 2018.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The Back to Nature business was excluded from the internal-control assessment and audit; it represented 5.4% of consolidated assets and 1.2% of fiscal 2017 sales.
Investor verification priorities
- Assess whether underlying sales can stabilize: separate acquisition-driven growth from base-business trends, especially Green Giant shelf-stable and other declining brands.
- Trace the causes and reversibility of the inventory build and working-capital cash outflow; evaluate cash generation after capital expenditures, interest and dividends.
- Review leverage, interest coverage, covenant headroom, debt maturities and refinancing flexibility, including the first-quarter 2018 term-loan prepayment.
- Distinguish recurring earnings from the one-time tax benefit and other adjustments; verify the fiscal 2018 tax-rate estimate and final accounting for the Tax Act.
- Monitor gross-margin recovery, distribution costs, commodity exposure—especially maple syrup—and the completion and integration of the Back to Nature acquisition.