B&G Foods, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. B&G Foods manufactures and distributes branded, shelf-stable and frozen foods and household products. The unaudited quarter ended July 1, 2017 comprised 13 weeks; the first half comprised 26 weeks. Comparisons are with the corresponding 2016 periods. Results include the spices and seasonings and Victoria businesses acquired in November and December 2016, respectively, so reported growth is not directly comparable with underlying performance.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $368.1 million | $306.4 million | $786.0 million | $659.4 million |
| Gross profit / margin | $111.0 million / 30.2% | $109.7 million / 35.8% | $237.8 million / 30.3% | $225.6 million / 34.2% |
| Operating income / margin | $57.2 million / 15.5% | $67.1 million / 21.9% | $125.8 million / 16.0% | $139.9 million / 21.2% |
| Net income | $22.1 million | $30.3 million | $54.8 million | $63.4 million |
| Diluted EPS | $0.33 | $0.48 | $0.82 | $1.04 |
| Operating cash flow | Not separately shown for the quarter | $19.8 million | $200.7 million |
- Q2 sales increased 20.2%, but base-business sales fell 4.9% to $291.1 million. Acquired businesses contributed $77.1 million of Q2 sales for which there was no comparable 2016 period. First-half base-business sales declined 3.6%.
- Q2 gross margin fell 5.6 percentage points year over year; first-half margin fell 3.9 points. Management cited higher warehousing and distribution costs, lower pricing, and increased coupon and slotting expenses.
- Q2 SG&A rose 46.3% to $49.6 million, including higher marketing, acquisition-related and warehousing costs. Operating income declined 14.8% in Q2 and 10.1% for the first half; net income fell 27.1% and 13.6%, respectively.
- First-half adjusted EBITDA, a non-GAAP measure, was $170.2 million versus $174.5 million. The filing cautions it is not a substitute for GAAP results or cash flow.
- First-half operating cash flow fell to $19.8 million, principally due to unfavorable working-capital comparisons, including a $60.6 million inventory cash use and payment timing related to transition-services agreements. Capital expenditures were $26.9 million; operating cash flow less capital expenditures was therefore approximately negative $7.0 million.
Balance sheet, debt and liquidity
- At July 1, 2017, cash was $51.7 million; current assets were $631.3 million and current liabilities $169.6 million. Inventory was $420.4 million, up from $356.6 million at year-end 2016.
- Long-term debt, net of financing costs and discount, was $1.821 billion; management reported debt less cash of $1.770 billion. Debt included $700 million of 4.625% senior notes due 2021, $500 million of 5.25% notes due 2025, and $640.1 million of tranche B term loans due 2022. The revolver had $10 million drawn and $488 million available, net of letters of credit.
- In March and April 2017, the company refinanced its credit facility, reduced the tranche B loan spread by 0.75 percentage point, issued $500 million of 5.25% notes, and used proceeds to repay the tranche A loans and revolving borrowings. Q2 net interest expense rose 19.4% year over year to $22.0 million.
- The company said it was in compliance with debt covenants at quarter-end. Covenants include a maximum consolidated leverage ratio of 6.50 to 1.00 and minimum interest coverage of 1.75 to 1.00; the filing does not state the actual leverage or coverage ratios.
Material changes, outlook and risks
- Revenue growth was acquisition-led, while underlying sales declined on lower unit volume and pricing. Management attributed weakness to brands and categories including Green Giant shelf-stable products, maple syrup, Bear Creek Country Kitchens and Mama Mary’s; Green Giant frozen innovation products provided an offset.
- Management expected moderate raw-material cost increases in 2017. It had locked in prices for most significant commodities, excluding items such as maple syrup, through the rest of the fiscal year at a cost increase of less than 1% of cost of goods sold. The company cited risks from commodity, fuel, labor and distribution costs, competitive limits on pricing, retailer consolidation and changing consumer preferences.
- Management expected approximately $60 million of fiscal 2017 capital expenditures, including Green Giant equipment moves and innovation, and implementation of a new ERP system. It believed cash, operating cash flow and available revolver capacity would be sufficient for foreseeable operating needs, debt service, capital expenditures, potential acquisitions and dividends; this is an expectation, not a guarantee.
- The current annual dividend rate was $1.86 per share, with anticipated fiscal 2017 aggregate dividends of approximately $123.6 million. First-half dividends paid were $61.8 million, compared with $19.8 million of operating cash flow. The board may change the dividend policy.
- Key risks include substantial leverage, input-cost inflation, acquisition integration and synergy execution, customer inventory and pricing pressure, product safety and labeling, supplier and co-packer reliance, currency exposure (notably Canadian-dollar maple syrup costs), interest rates, and potential goodwill or intangible impairments. A 1 percentage-point interest-rate change was estimated to affect annual interest expense by about $6.5 million.
- Ordinary-course legal claims were not expected to materially affect the company, and no material environmental compliance expenditures were reported. Approximately 60.7% of employees were covered by collective bargaining agreements; none was scheduled to expire within a year.
- Disclosure controls were assessed as effective. Management was transitioning the acquired spices and seasonings business to a new ERP system and planned broader implementation over approximately two years, while continuing to review and enhance financial-reporting controls.
Important facts for investors to verify
- Whether base-business sales declines and margin pressure persist, and whether acquired-business growth translates into improved profitability.
- Whether inventory levels convert to cash and operating cash flow recovers after the unusually weak first half.
- Debt-service capacity and covenant headroom, particularly alongside substantial dividends and planned capital spending.
- Execution and cost of the ERP transition, Green Giant investments, and integration of acquired businesses.
- Exposure to commodity, currency and interest-rate changes, and any subsequent changes to guidance, dividend policy or risk disclosures.