B&G Foods, Inc. annual report, FY2017

B&G Foods, Inc. — FY2016 Form 10-K

Business context and reporting period. Filed March 1, 2017, this annual report covers the 52-week fiscal year ended December 31, 2016. B&G Foods manufactures, markets and distributes branded shelf-stable and frozen foods and household products in the U.S., Canada and Puerto Rico. Fiscal 2015 also had 52 weeks. Results are heavily affected by acquisitions: 2016 included the Green Giant business for a full year and the spices and seasonings and Victoria businesses from their November and December acquisitions, respectively.

Financial results

Metric	FY2016	FY2015
Net sales	$1,391.3 million	$966.4 million
Gross profit / margin	$448.0 million / 32.2%	$289.6 million / 30.0%
Operating income / margin	$254.0 million / 18.3%	$172.4 million / 17.8%
Net income	$109.4 million	$69.1 million
Diluted EPS	$1.73	$1.22
Operating cash flow	$289.7 million	$128.5 million
Capital expenditures	$42.4 million	$18.6 million
Cash and cash equivalents at year-end	$28.8 million	$5.2 million

• Sales rose 44.0%, but base-business sales—excluding recent acquisitions and discontinued Rickland Orchards—fell 2.1% to $942.3 million. The base-business decline reflected lower volume, lower net pricing and a modest adverse currency effect.
• Green Giant contributed $506.7 million in FY2016 sales. Acquisition-related expenses were $17.5 million; adjusted EBITDA, a non-GAAP measure, was $322.0 million versus $217.8 million. The filing cautions that EBITDA and adjusted EBITDA are not substitutes for GAAP results or cash flow.
• Interest expense, net, increased to $74.5 million from $51.1 million, primarily due to acquisition-related borrowings. The effective tax rate was 38.2%, compared with 43.0% in FY2015.
• At year-end, total debt was $1,749.8 million at principal value ($1,725.8 million net of unamortized financing costs and discounts); cash was $28.8 million. Debt to EBITDA was 6.0x, and EBITDA to cash interest was 4.2x.
• Available revolving-credit borrowing capacity was $322.0 million, net of letters of credit. The company reported compliance with debt covenants. Current assets were $549.8 million and current liabilities $205.7 million.
• FY2016 cash from operations benefited from higher net income and working-capital movements. Investing cash outflow was $481.2 million, including $438.8 million for acquisitions. Financing cash inflow was $216.0 million, including $331.9 million of net equity proceeds, debt activity and $100.8 million of dividends paid.

Material changes and unusual items

• The company acquired the ACH Food spices and seasonings business for approximately $366.9 million and Victoria Fine Foods for approximately $71.9 million. Purchase-price allocations for both were preliminary at year-end.
• Acquisition-driven revenue growth masked weakness in established brands: syrup sales declined amid price deflation and competition; TrueNorth sales fell 33.9%, following price increases in response to high almond costs; and Ortega sales decreased 2.6%.
• Gross margin improved by 2.2 percentage points, primarily due to Green Giant’s contribution, lower base-business commodity, packaging and distribution costs, and product mix. Higher consumer marketing, selling and warehousing costs contributed to SG&A rising to 12.5% of sales from 11.0%.
• B&G discontinued Rickland Orchards due to insufficient demand, recording $5.4 million of intangible impairment and approximately $0.8 million of inventory write-off charges. It also closed its Spartanburg facility and moved Mama Mary’s operations, recording about $0.8 million of severance costs and a $0.3 million equipment write-off.
• FY2016 included a $2.8 million loss on debt extinguishment related to term-loan prepayments. The prior-year comparison includes the Green Giant and Mama Mary’s acquisitions and is therefore not fully like-for-like.
• Fiscal fourth-quarter sales were $413.7 million versus $342.3 million; gross profit was $106.9 million versus $88.6 million; net income was $13.6 million versus $11.0 million; and diluted EPS was $0.20 versus $0.19.

Outlook, risks and contingencies

• Management expected moderate market raw-material cost increases in 2017. The company said it had locked in prices and supply for most major commodities, excluding items such as maple syrup, through FY2017 at a cost increase of less than 1% of cost of goods sold. Cost inflation may not be fully offset by savings or pricing actions.
• Management estimated FY2017 capital expenditures of approximately $60 million, including about $17 million to relocate Green Giant production equipment from General Mills’ Belvidere facility. The transition co-packing agreement expires November 2, 2017; delays could disrupt product supply.
• Management expected cash, operating cash flow and revolving-credit availability to fund operations, debt service, capital spending, potential acquisitions and anticipated dividends. At the then-current $1.86 annual dividend rate, expected aggregate 2017 dividends were approximately $123.6 million; dividends remain discretionary and subject to debt covenants and cash generation.
• Key risks include substantial leverage and variable-rate exposure (a hypothetical 1 percentage-point rate change would affect annual interest expense by approximately $10.5 million), customer concentration (Wal-Mart represented 24.1% of sales), retailer bargaining power, commodity and currency volatility, co-packer and supply disruption, acquisition integration, food safety and regulatory matters, and water scarcity at the Irapuato, Mexico facility.
• About 60% of employees were covered by collective bargaining agreements. The Portland agreement covering approximately 80 employees was due to expire April 29, 2017; negotiations were underway. Management did not expect a material impact, but could not assure an agreement without disruption.
• The company reported no material expected effect from currently pending litigation and no material environmental compliance expenditures in the last three years. An IRS audit of the 2014 tax year was underway; management did not expect a material adverse outcome. A multiemployer pension plan remained in critical status; the spices-and-seasonings acquisition also brought a recognized $17.5 million pension-related liability.
• KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded the recently acquired spices-and-seasonings and Victoria businesses from the internal-control assessment; together they represented 16.1% of total assets and 2.3% of FY2016 sales.

Important facts for investors to verify

• How much of sales and earnings growth is sustainable from existing brands versus acquired businesses, and whether base-business trends stabilize.
• Progress on integrating the two late-2016 acquisitions, final purchase-price allocations, and the transition of spices-and-seasonings distribution from ACH.
• Execution and cost of the Green Giant production relocation before the transition agreement expires, including continuity of supply.
• Debt covenant headroom, refinancing needs and sensitivity to interest rates, alongside the company’s ability to fund dividends and planned capital expenditures.
• Whether commodity, maple-syrup currency and retailer pricing pressures affect margins and 2017 cash generation as management anticipated.
• Resolution of the IRS examination and Portland labor negotiations, and the acquired pension obligations and multiemployer plan’s funding status.