B&G Foods, Inc. — Q2 2018 Form 10-Q
Reporting period: 13 and 26 weeks ended June 30, 2018, compared with the corresponding periods ended July 1, 2017. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Business context and reporting period
B&G Foods manufactures, sells and distributes branded shelf-stable and frozen foods and household products in the U.S., Canada and Puerto Rico. It operates as one industry segment and pursues growth through acquisitions, product development and organic growth. The 2018 results include Back to Nature, acquired in October 2017; its sales were $17.6 million in Q2 and $37.7 million in the first half.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $388.4m | $361.7m | $820.1m | $774.0m |
| Gross profit / margin | $81.2m / 20.9% | $104.6m / 28.9% | $184.5m / 22.5% | $225.8m / 29.2% |
| Operating income / margin | $39.3m / 10.1% | $56.7m / 15.7% | $95.5m / 11.6% | $124.9m / 16.1% |
| Net income | $8.0m | $22.1m | $28.5m | $54.8m |
| Diluted EPS | $0.12 | $0.33 | $0.43 | $0.82 |
| Net interest expense | $27.6m | $22.0m | $55.9m | $41.6m |
| Operating cash flow | Not stated separately | Not stated separately | $104.8m | $19.8m |
Management-reported non-GAAP adjusted EBITDA was $74.4 million in Q2 versus $78.2 million, and $163.9 million in the first half versus $170.2 million. Adjusted net income was $25.1 million ($0.38 per diluted share) in Q2 and $61.5 million ($0.92 per diluted share) in the first half. These measures exclude specified items and are not GAAP measures.
At June 30, cash was $62.8 million, total assets $3.36 billion and stockholders’ equity $827.0 million. Long-term debt was $2.074 billion net of financing costs and discount; principal debt was approximately $2.100 billion. The company had no revolver borrowings at quarter-end and $697.8 million of available capacity, net of letters of credit. It reported covenant compliance. The current annual dividend rate was $1.88 per share; management estimated 2018 aggregate dividends of about $124.5 million.
Material changes versus the prior comparable period
- Q2 sales grew 7.4%, but base-business sales increased a more modest 3.1% to $370.2 million. Management attributed the base increase to $6.7 million of volume and $4.3 million of net pricing. First-half base-business sales rose 1.6%, with $6.7 million from volume and $5.5 million from pricing.
- Profitability weakened substantially: Q2 gross margin fell 8.0 percentage points and operating margin fell 5.6 points year over year. First-half gross and operating margins declined 6.7 and 4.5 points, respectively. Net income and diluted EPS also fell in both periods.
- Reported gross profit included a $20.1 million Q2 and $36.2 million first-half impact from non-recurring and acquisition-related costs, including the non-cash accounting impact of the inventory reduction plan. Excluding these items, management stated gross margin was 26.1% in Q2 and 26.9% in the first half.
- Higher freight costs pressured gross margin. Management cited procurement savings, lower warehousing expense and improved net pricing as partial offsets. SG&A declined year over year, partly because acquisition-related and non-recurring expenses and consumer marketing costs were lower.
- Net interest expense increased 25.5% in Q2 and 34.3% in the first half, primarily reflecting debt raised in 2017 for acquisitions and senior-note offerings. First-half operating cash flow improved mainly on favorable working-capital comparisons, particularly inventory reduction; cash nevertheless fell by $143.7 million, principally after debt repayments, dividends and share repurchases.
Outlook, management commentary, risks and unusual items
- Management expected most of the benefit from Q1 list-price increases in the second half of 2018. Freight expense was expected to continue rising through at least year-end, with the rate of increase moderating in the second half. For most significant commodities, excluding items such as maple syrup, the company said it was locked into supply and prices through year-end at a cost increase of less than 1% of cost of goods sold.
- Management estimated a fiscal 2018 effective tax rate of approximately 25%, reflecting the U.S. Tax Act, and anticipated lower cash taxes from the reduced tax rate and bonus depreciation. It cautioned that the Act’s ultimate effect could differ from current estimates.
- Management expected approximately $50 million of fiscal 2018 capital expenditures, including about $12.4 million for a new ERP system. It said cash, operating cash flow and revolver availability should fund operations, debt service, capex, potential acquisitions and anticipated dividends for the foreseeable future.
- On July 16, 2018, after quarter-end, the company acquired the McCann’s premium Irish oatmeal brand for approximately $32 million, funded with cash and revolving loans. At the date of the report, $35 million of revolving loans were outstanding and available capacity was $662.8 million.
- Key risks include substantial leverage and interest-rate exposure, commodity and freight inflation, ability to implement price increases, competition and shifting consumer preferences, retailer concentration, foreign exchange movements, acquisition integration, food safety and labeling matters, and execution of the ERP and cybersecurity initiatives. Walmart represented 24.8% of Q2 sales; the top ten customers represented 56.0% of first-half sales.
- The company reported ordinary-course legal matters and did not expect currently pending matters to materially affect its financial position, results or liquidity. The multi-employer pension plan remained in critical status; contributions were expected to increase at least 5% annually under the rehabilitation plan. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether price increases and product mix can offset persistent freight, commodity and other input-cost pressures, and whether gross margins recover.
- How much of reported cash-flow improvement is repeatable after the inventory reduction and other working-capital timing effects.
- Debt levels, interest expense, covenant headroom and liquidity after funding the McCann’s acquisition, alongside the company’s dividend and repurchase commitments.
- Whether growth in Green Giant frozen and other stronger brands can counter declines in Green Giant shelf-stable and other weaker brands; assess the contribution and integration of Back to Nature and McCann’s.
- The reconciliation and ongoing size of non-GAAP adjustments, particularly the inventory reduction plan impact, when assessing underlying earnings and cash generation.