B&G Foods, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended June 27, 2020, and year-to-date results for the 26 weeks ended that date; comparisons are with the corresponding 2019 periods. B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico. The interim financial statements are unaudited.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $512.5 million | $371.2 million | $961.9 million | $783.9 million |
| Gross profit / margin | $134.1 million / 26.2% | $91.9 million / 24.7% | $239.0 million / 24.8% | $179.9 million / 23.0% |
| Operating income / margin | $85.0 million / 16.6% | $47.4 million / 12.8% | $145.2 million / 15.1% | $92.7 million / 11.8% |
| Net income / diluted EPS | $44.9 million / $0.70 | $18.3 million / $0.28 | $73.0 million / $1.14 | $35.0 million / $0.53 |
| Adjusted EBITDA, non-GAAP | $102.6 million | $71.0 million | $183.3 million | $146.8 million |
Q2 sales rose 38.1%; first-half sales rose 22.7%. Management attributed the increase primarily to pandemic-related demand and greater at-home consumption. First-half base-business sales, which exclude sales from acquisitions not yet comparable across periods, increased 18.3%, driven by unit volume and net pricing. The company said pricing gains reflected 2019 list-price increases, trade-spend optimization and a temporarily lower trade-spend environment.
For the first half, net cash provided by operating activities was $246.4 million, versus $16.8 million in 2019. The comparison benefited from higher earnings, favorable working-capital changes—including a $110.0 million inventory-related cash benefit—and the prior-year cash-tax burden from the Pirate Brands sale. Capital expenditures were $10.0 million; investing cash outflow was $12.9 million. Financing cash outflow was $63.2 million, including $60.9 million of dividends paid.
Financial position and liquidity
- At June 27, 2020, cash and cash equivalents were $181.2 million, compared with $11.3 million at fiscal year-end 2019. Current assets were $717.8 million and current liabilities were $229.9 million.
- Long-term debt, including current maturities and net of unamortized costs, was approximately $1.879 billion; net debt after cash was approximately $1.693 billion. The $700 million revolving facility was undrawn, with $698.4 million available after letters of credit.
- The debt structure included $900 million of 5.25% senior notes due 2025, $550 million of 5.25% notes due 2027 and tranche B term loans due 2026. The company reported compliance with debt covenants at quarter-end. Its credit agreement permits a maximum consolidated leverage ratio of 7.00:1.00 and requires minimum interest coverage of 1.75:1.00.
- The quarterly dividend declared was $0.475 per share; management estimated fiscal 2020 dividends of approximately $121.9 million at the then-current annualized rate of $1.90 per share.
Material changes, outlook and risks
- Pandemic effects: Increased retail, mass-merchant, club, wholesale and e-commerce demand more than offset lower foodservice sales. Management said operations and customer service had not been materially disrupted to date, but could not estimate the pandemic’s full-year impact. It cited uncertainty about demand normalization, subsequent infection waves, supply-chain continuity and consumer behavior. COVID-related costs were estimated at $4.5–$4.9 million through the filing date.
- Costs and margins: Management reported moderate raw-material cost increases in the first half and anticipated higher increases during the remainder of fiscal 2020. Freight costs had risen and were expected to remain elevated. Most significant commodity supply and pricing was locked in through year-end, with exceptions including maple syrup; pricing actions and cost savings may not fully offset input-cost increases.
- Acquisitions: B&G Foods acquired Farmwise on February 19, 2020. Clabber Girl, acquired in May 2019, also increased year-over-year sales. The acquisitions affect comparability; management said neither was material enough to require pro forma financial information.
- Tax and unusual items: The first half included a $2.3 million tax benefit from the CARES Act’s change to the business-interest deduction limit. COVID-related demand also led to $2.3 million of additional Q2 share-based compensation expense because performance goals were more likely to be achieved. Prior-year results included charges related to the 2018 inventory-reduction plan and a substantial tax cash outflow connected to the Pirate Brands divestiture.
- Outlook: No specific full-year revenue or earnings guidance is provided in the filing. Management expected fiscal 2020 capital expenditures of approximately $40–$45 million and stated that cash, operating cash flow and available revolver capacity should fund operations, debt service, capital expenditures, possible acquisitions and anticipated dividends for the foreseeable future.
- Other risks: Significant leverage and interest-rate exposure, commodity and foreign-exchange movements, customer concentration, food-safety and product-liability matters, and labor negotiations remain relevant. Walmart represented 25.9% of first-half sales. One collective bargaining agreement had expired at the Ankeny facility, with negotiations resumed; management did not then expect negotiations to materially affect results. The company said pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether pandemic-driven pantry loading persists or reverses, and how retail growth compares with continuing weakness in foodservice.
- How much of the reported sales and profit growth is sustainable without pandemic demand, acquisitions and temporary trade-spend conditions.
- Whether cash generation remains strong after the large inventory-related working-capital benefit, and how inventory levels and operating cash flow evolve.
- Debt, interest expense, covenant headroom and the capacity to sustain dividends while funding capital expenditures and potential acquisitions.
- Whether elevated freight and anticipated raw-material cost increases are offset by pricing and cost-saving actions, including exposure to maple syrup and foreign currencies.