B&G Foods, Inc. annual report, FY2015

B&G Foods, Inc. — FY2014 Form 10-K

Reporting period: Fiscal year ended January 3, 2015, filed March 4, 2015. Fiscal 2014 included 53 weeks versus 52 weeks in fiscal 2013. This is an annual filing; fourth-quarter figures below are unaudited quarterly data included in the 10-K. B&G Foods manufactures and distributes branded shelf-stable food and household products. The company acquired Specialty Brands in April 2014.

Financial performance and position

Metric	FY2014	FY2013
Net sales	$848.0 million	$725.0 million
Gross profit / gross margin	$247.8 million / 29.2%	$242.9 million / 33.5%
Operating income / margin	$116.1 million / 13.7%	$154.0 million / 21.2%
Net income	$41.0 million	$52.3 million
Diluted EPS	$0.76	$0.98
Operating cash flow	$99.1 million	$114.9 million
Capital expenditures	$19.0 million	$14.6 million

• Fourth-quarter net sales were $238.0 million versus $211.5 million; gross profit was $57.0 million versus $67.1 million; net income was $11.5 million versus $18.8 million.
• Fiscal 2014 sales rose 17.0%, reflecting acquisitions and the extra week: acquisitions contributed $133.6 million to the increase and the extra week an estimated $15.0 million. Comparable base-business sales declined 1.5%; excluding the recall and Rickland Orchards shortfall, they increased 1.4%.
• Gross margin fell 4.3 percentage points. Management attributed the decline to the product recall and Rickland inventory write-off, higher distribution costs, lower net pricing, lower-margin sales mix, and the weaker Canadian dollar.
• Cash and equivalents were $1.5 million at year-end; current assets were $196.5 million and current liabilities $92.7 million. Total debt was $1,025.9 million, up from $870.9 million; net debt was $1,024.4 million. Stockholders’ equity was $338.0 million.
• Reported EBITDA, a non-GAAP measure, was $143.5 million versus $178.1 million; adjusted EBITDA was $194.1 million versus $184.0 million. Debt/EBITDA was 7.1x and debt/adjusted EBITDA 5.3x. The company cautions that EBITDA measures are not substitutes for GAAP results or cash flow.
• Cash dividends paid were $72.4 million, compared with operating cash flow of $99.1 million. The annual declared dividend was $1.36 per share; management estimated approximately $73.1 million of aggregate 2015 dividends at the then-current rate, subject to board discretion and debt restrictions.

Material changes and unusual items

• Fiscal 2014 included $34.2 million of non-cash intangible impairment charges for Rickland Orchards and a $4.5 million related inventory disposal loss. Management cited deteriorating club-channel sales; further impairment is possible if performance weakens beyond forecasts.
• The November 2014 voluntary Ortega and Las Palmas recall followed discovery that a third-party spice ingredient contained undeclared peanuts and almonds. The estimated fiscal-year cost was $12.8 million net of expected insurance recoveries, plus an estimated $4.8 million in lost sales during temporary production and distribution suspensions. The filing recorded a $5.0 million insurance receivable; recall-related reserves remained at year-end.
• An $8.2 million non-cash gain reversed the Rickland Orchards contingent earn-out liability to zero after revised forecasts indicated revenue targets were unlikely to be achieved.
• Fiscal 2014 included a $5.7 million loss on extinguishment of debt related to refinancing. Net interest expense increased to $46.6 million from $41.8 million.

Liquidity, debt, outlook, and risks

• In June 2014, the company refinanced its secured credit facilities with a $500 million revolver and $300 million of term loans. At year-end, $34.0 million was drawn on the revolver and $292.5 million on the term loan; stated available revolver capacity, net of letters of credit, was $464.7 million. Both facilities carried an approximately 2.16% rate at year-end. The $700 million 4.625% senior notes mature in 2021; the revolver and term loans mature in 2019.
• The company reported compliance with debt covenants at year-end. Covenants restrict dividends and additional debt, and include leverage and interest-coverage tests. Management believed cash, operating cash flow, and revolver availability would fund foreseeable operations, debt service, capital spending, acquisitions, and anticipated dividends.
• Management expected 2015 capital expenditures of approximately $18 million and defined-benefit pension contributions of $3.5 million. Major commodities other than maple syrup were largely contracted through fiscal 2015 at an expected cost increase of less than 1% of cost of goods sold. The filing provides no specific revenue or earnings guidance.
• Key risks include high leverage and dividend constraints; retailer concentration and bargaining power (Wal-Mart represented 19.1% of sales); competition and mature or declining categories; commodity, packaging, labor, and distribution-cost volatility; dependence on co-packers and single-site production; food safety and recall exposure; Canadian-dollar sensitivity, particularly for maple syrup; acquisition integration and further Rickland impairment; pension funding and labor negotiations at the Portland facility; and refinancing or covenant risk.
• The Portland collective bargaining agreement covering approximately 95 employees was due to expire April 25, 2015; negotiations were underway. Management did not expect a material adverse outcome but could not rule out disruption.
• The financial statements received an unqualified audit opinion from KPMG, and management and the auditor reported effective internal control over financial reporting as of January 3, 2015.

Important facts for investors to verify

• Whether underlying sales and margins improve after adjusting for acquisitions, the extra fiscal week, recall effects, and Rickland Orchards’ weakness.
• Actual recall costs, insurance recoveries, remaining claims or reserves, and any subsequent impact on Ortega and Las Palmas sales.
• Rickland Orchards’ subsequent sales trajectory and whether additional impairment or inventory charges are required.
• Cash generation, working-capital needs, leverage and covenant headroom, refinancing capacity, and the sustainability of dividends relative to cash available.
• Actual 2015 input-cost movements, including maple syrup and foreign exchange, and the company’s ability to offset inflation without further margin pressure.