B&G Foods, Inc. — Q1 2019 Form 10-Q
Business context and period. The filing, dated May 7, 2019, covers the 13 weeks ended March 30, 2019, compared with the 13 weeks ended March 31, 2018. B&G Foods manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico. Results reflect the October 2018 sale of Pirate Brands and the July 2018 acquisition of McCann’s.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $412.7 million | $431.7 million |
| Gross profit / margin | $88.1 million / 21.3% | $103.4 million / 23.9% |
| Operating income / margin | $45.3 million / 11.0% | $56.2 million / 13.0% |
| Net income | $16.8 million | $20.5 million |
| Diluted EPS | $0.26 | $0.31 |
| Operating cash flow | $50.3 million | $73.7 million |
| Capital expenditures | $8.6 million | $5.0 million |
- Net sales fell 4.4%. Excluding acquisitions, divested or discontinued brands, and non-branded IQF rice, base-business sales were nearly flat at $409.5 million versus $409.3 million. Net pricing added $7.3 million, offset by a $7.1 million decline in base-business volume.
- Gross margin contracted 2.6 percentage points. Management cited inventory-reduction costs, input-cost inflation—including freight and warehousing—and product mix. SG&A declined 10.0% to $38.3 million, but operating income still fell 19.4%.
- Net interest expense declined to $23.1 million from $28.3 million, mainly reflecting lower debt after repayments funded in part by the Pirate Brands sale.
- At March 30, cash was $11.3 million and current assets were $572.1 million, against current liabilities of $266.5 million. Long-term debt was $1.637 billion; net debt, after cash, was $1.626 billion. The company had $647.8 million of available revolver capacity, net of letters of credit, and reported compliance with debt covenants.
- Operating cash flow declined by $23.4 million year over year, attributed mainly to less favorable working-capital comparisons and the timing of transition-services receipts. Cash dividends paid were $31.2 million; the company repurchased $10.0 million of shares.
Changes, outlook and risks
- Green Giant aggregate sales increased $6.9 million (5.4%); Green Giant frozen rose 6.3%. Back to Nature sales decreased 16.9%, Mrs. Dash 9.1%, and Cream of Wheat 5.5% on a base-business basis.
- Management expected fiscal 2019 capital expenditures of approximately $45–$50 million, including about $9.1 million for ERP implementation. It stated that cash, operating cash flow and available revolver capacity should be sufficient for foreseeable operating needs, debt service, capital spending and anticipated dividends. No full-year earnings or sales guidance is provided in the filing text.
- The current annual dividend rate was $1.90 per share; management estimated fiscal 2019 aggregate dividends of approximately $124.1 million. The board may change the dividend policy.
- Management reported expected annualized savings of $2.4 million from a Q1 workforce reduction. The company recorded $1.6 million of related charges in Q1 and expected approximately $0.8 million more during the remainder of 2019. A separate $6.0 million special bonus pool related to the Pirate Brands sale was paid in Q1.
- Adjusted EBITDA was $75.8 million versus $89.4 million, and adjusted diluted EPS was $0.44 versus $0.55. These are non-GAAP measures; adjustments included $12.7 million of inventory-reduction-plan impact in Q1 2019. They should be assessed alongside GAAP results and cash flow.
- Principal risks include substantial leverage, rising commodity and distribution costs, price increases that may not offset inflation, competition and changing consumer preferences, customer concentration (Walmart represented 23.5% of Q1 sales), foreign-exchange exposure, food safety, and acquisition and ERP execution risks. Management said two labor agreements covering about 110 employees were due to expire within the next 12 months. It did not expect pending legal matters or environmental compliance to have a material adverse effect.
- The company adopted lease accounting in Q1, recognizing $37.5 million of operating lease right-of-use assets and $40.4 million of lease liabilities at quarter-end; management said adoption did not materially affect the financial statements. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Most important facts for investors to verify
- Whether base-business volume stabilizes and pricing offsets higher input, freight and distribution costs.
- Whether reported GAAP margins and cash generation improve, considering the size and recurring nature of inventory-plan and other adjusted-earnings exclusions.
- Debt-service capacity, covenant headroom and refinancing needs, particularly the $700 million notes due 2021 and the continuing dividend and repurchase commitments.
- Delivery of projected cost savings, capital spending and ERP implementation without disrupting operations or controls.
- Customer concentration, labor negotiations and the potential effect of commodity, currency and food-safety risks.