B&G Foods, Inc. — Q3 2015 Form 10-Q
Reporting period: Thirteen weeks ended October 3, 2015; year-to-date figures cover 39 weeks. Comparative periods ended September 27, 2014. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Net sales | $213.3 | $209.0 | $624.1 | $610.0 |
| Gross profit / margin | $71.6 / 33.6% | $63.1 / 30.2% | $201.0 / 32.2% | $190.8 / 31.3% |
| Operating income | $41.6 | $4.3 | $123.6 | $85.8 |
| Net income (loss) | $19.8 | $(4.4) | $58.1 | $29.5 |
| Diluted EPS | $0.34 | $(0.08) | $1.03 | $0.55 |
| Adjusted EBITDA | $53.1 | $49.5 | $150.4 | $142.0 |
- Cash flow: Year-to-date operating cash flow was $86.7, versus $60.7 a year earlier. Capital expenditures were $12.7; investing cash use was $63.7, including $51.0 for Mama Mary’s. Financing provided $21.6. Cash ended at $45.9, up from $1.5 at fiscal 2014 year-end.
- Debt and liquidity: Debt was $978.9, net of discount, including $700.0 of 4.625% senior notes and $279.4 of Tranche A term loans; cash-net debt was $933.0. Revolver borrowings were zero, with $498.0 available after letters of credit. The company reported compliance with debt covenants.
- Balance sheet: Current assets were $258.2 and current liabilities $105.9. Total assets were $1,763.1; stockholders’ equity was $466.7.
- Dividends: Quarterly dividend declared was $0.35 per share. The company estimated fiscal 2015 aggregate dividend payments of approximately $76.5.
Material changes versus the prior period
- Reported sales increased 2.1% in Q3 and 2.3% year to date, but acquisitions materially contributed. Comparable base-business sales declined 0.4% in Q3 and rose 0.1% year to date. Pricing gains were offset by lower unit volume.
- Q3 gross margin improved 3.4 percentage points, primarily from pricing and lower delivery costs. Management also noted that comparison benefited from a roughly $3.0 inventory write-off in Q3 2014.
- Reported operating income and net income rose sharply in comparison with 2014, which included a $34.2 non-cash Rickland Orchards impairment in Q3 and year to date. Year-to-date 2014 also included an $8.2 gain on contingent consideration and a $5.7 debt-extinguishment loss.
- SG&A increased 29.0% in Q3, mainly from acquisition-related, warehousing, selling and compensation costs; year-to-date SG&A was nearly flat.
- The company acquired Mama Mary’s for $51.0 cash in July 2015. It also completed a $126.2 net-proceeds common-stock offering in May, used in part for debt repayment and the acquisition.
Outlook, management commentary, and risks
- Pending acquisition: B&G agreed to acquire Green Giant and Le Sueur from General Mills for approximately $765 million cash plus an inventory adjustment. Closing was expected in Q4 2015, subject to customary conditions. The company expected to fund $750 million with a new Tranche B term loan and the balance and related costs with revolver borrowings.
- Liquidity outlook: Management believed cash on hand, operating cash flow and available revolver capacity would fund operations, debt service, capital expenditures, potential acquisitions and anticipated dividends for the foreseeable future. Fiscal 2015 capital expenditures were expected to be approximately $20 million.
- Costs and demand: Management said most significant commodity supplies, other than maple syrup, were priced or contracted through Q2 2016 and expected costs to be relatively flat versus fiscal 2014. Risks include commodity, packaging and distribution inflation; pricing and promotional pressure; shifting consumer preferences; and retail consolidation and inventory reductions.
- Leverage and market exposure: Substantial leverage and the planned Green Giant financing increase debt and interest exposure. A 1 percentage-point interest-rate change was estimated to affect annual interest expense by approximately $2.8 million. Canadian-dollar movements may affect maple syrup costs and Canadian sales.
- Contingencies: A putative class action alleges misleading labeling of certain Ortega taco shells; the company intended to defend the suit and did not expect a material adverse effect. The 2014 Ortega/Las Palmas recall cost $1.9 in the first three quarters of 2015, with a $0.3 receivables reserve at quarter-end. The multi-employer pension plan remained in critical status; a labor agreement implementing a rehabilitation plan was expected to increase contributions by at least 5% annually.
- Top ten customers accounted for 51.9% of year-to-date sales; Walmart alone represented 19.3%. Management stated interim results are not necessarily indicative of full-year results. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether the Green Giant and Le Sueur acquisition closed on the expected terms and timing, and the final purchase price and financing mix.
- Post-acquisition debt, interest expense, covenant headroom and the company’s ability to maintain dividends while funding integration and working capital.
- Whether base-business unit volumes stabilize, particularly for Rickland Orchards and other declining brands, and whether pricing gains persist.
- Final Mama Mary’s purchase-price allocation and the financial contribution and integration costs of recent acquisitions.
- Developments in the Ortega labeling litigation, recall-related costs, pension contributions and upcoming labor negotiations.