B&G Foods, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. B&G Foods manufactures and distributes shelf-stable foods and household products in the U.S., Canada and Puerto Rico. This unaudited filing covers the 13 and 39 weeks ended September 28, 2013, compared with the periods ended September 29, 2012. Results include acquisitions from their respective closing dates.
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $181.4 | $154.2 | $513.4 | $460.1 |
| Gross profit / margin | $61.3 / 33.8% | $55.3 / 35.9% | $175.8 / 34.2% | $163.9 / 35.6% |
| Operating income / margin | $37.6 / 20.8% | $38.3 / 24.9% | $114.1 / 22.2% | $111.6 / 24.3% |
| Net income | $15.4 | $16.9 | $33.6 | $49.7 |
| Diluted EPS | $0.29 | $0.35 | $0.63 | $1.02 |
| Net interest expense | $11.1 | $12.0 | $30.9 | $35.8 |
| Loss on extinguishment of debt | $2.8 | — | $31.3 | — |
| Operating cash flow | Not separately presented | Not separately presented | $68.9 | $53.5 |
| Capital expenditures | Not separately presented | Not separately presented | $8.4 | $7.7 |
At September 28, 2013, cash was $12.3 million, total debt was $864.6 million and stockholders’ equity was $348.2 million. Debt less cash was $852.3 million. Current assets were $192.8 million and current liabilities $118.6 million. The revolving facility had $269.5 million of available capacity at quarter-end; after the subsequent Rickland Orchards acquisition, reported availability was $229.5 million.
Material changes and drivers
- Q3 sales rose 17.6%; 39-week sales rose 11.6%. Acquisitions drove reported growth: Pirate Brands contributed $16.5 million of Q3 and 39-week sales; New York Style/Old London contributed $11.4 million in Q3 and $33.6 million year to date; TrueNorth contributed $5.4 million and $8.5 million, respectively.
- Excluding these acquired brands, base-business sales declined 3.9% in Q3 and 1.2% year to date, reflecting lower net pricing and unit volume.
- Gross margin fell 2.1 percentage points in Q3 and 1.4 points year to date, primarily from net price decreases and sales mix shifting toward lower-margin products. SG&A increased, including marketing, acquisition costs and warehousing expenses.
- Q3 operating income declined 1.9% despite higher sales; year-to-date operating income increased 2.2%. Net income and EPS fell in both comparisons, with year-to-date results particularly affected by the $31.3 million debt-extinguishment loss and a larger weighted-average share count.
- Operating cash flow increased year to date by $15.4 million. Investing cash outflow rose to $218.3 million, principally due to acquisitions; financing provided $142.5 million, reflecting debt refinancing. Cash declined $6.9 million from year-end 2012.
Debt, outlook, risks and unusual items
- In June, B&G issued $700 million of 4.625% senior notes due 2021 and used proceeds to retire its 7.625% notes and repay tranche B and revolving borrowings, with remaining proceeds funding Pirate Brands. The refinancing lowered reported net interest expense, but generated $31.3 million of year-to-date extinguishment losses.
- A July credit agreement amendment increased revolving commitments from $200 million to $300 million and raised permitted leverage limits. The company reported compliance with debt covenants at September 28. The tranche A term loan rate was approximately 3.18%; a 1% rate change was estimated to alter annual interest expense by about $1.7 million.
- Management expected sufficient cash, operating cash flow and borrowing capacity for foreseeable operations, debt service, capital spending, potential acquisitions and dividends. Fiscal 2013 capital expenditures were forecast at $14–15 million. Management expected approximately $62.8 million of fiscal 2013 dividends; the quarterly rate was raised to $0.32 and subsequently to $0.33 per share.
- Management expected minimal raw-material cost decreases for the rest of 2013 and reported approximately $1 million of cost decreases locked in for most major commodities, excluding items such as maple syrup. Cost inflation, pricing limitations, commodity and currency movements, retail consolidation, consumer preferences, food safety and acquisition integration remain risks.
- On October 7, 2013, after quarter-end, the company acquired Rickland Orchards for approximately $57.5 million, including approximately $37.4 million cash and $20.1 million in shares, plus potential earn-outs. Purchase accounting was incomplete at filing issuance.
- Pirate Brands faced six related putative class actions alleging improper “natural” labeling. The cases were consolidated in New York; a motion to dismiss was pending and discovery had not begun. Management did not expect a material adverse effect. A union agreement covering Roseland, New Jersey employees was due to expire March 31, 2014; negotiations could entail labor disruption. A multi-employer pension plan remained in critical status, with a 10% contribution surcharge applicable.
- Management said disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter. The filing reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- Whether organic sales and volume stabilize, and whether pricing and product mix recover after reported growth driven substantially by acquisitions.
- Whether the acquisitions, including Pirate Brands and Rickland Orchards, deliver expected growth and cash generation, and the final Rickland purchase-price allocation and earn-out exposure.
- Debt reduction, covenant headroom, refinancing benefits and the sustainability of dividends relative to operating cash flow and acquisition spending.
- Developments in the Pirate Brands labeling litigation, labor negotiations and pension-plan surcharge obligations.