B&G Foods, Inc. — Q3 2014 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 27, 2014, compared with the periods ended September 28, 2013. Fiscal 2014 contains 53 weeks, with an extra week in Q4. The company manufactures and distributes shelf-stable foods and household products through a single operating segment. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $209.0 million | $181.4 million | $610.0 million | $513.4 million |
| Gross profit / margin | $63.1 million / 30.2% | $61.3 million / 33.8% | $190.8 million / 31.3% | $175.8 million / 34.2% |
| Operating income / margin | $4.3 million / 2.1% | $37.6 million / 20.8% | $85.8 million / 14.1% | $114.1 million / 22.2% |
| Net income (loss) | $(4.4) million | $15.4 million | $29.5 million | $33.6 million |
| Diluted EPS | $(0.08) | $0.29 | $0.55 | $0.63 |
| Operating cash flow | — | $60.7 million | $68.9 million |
Q3 sales rose 15.2%; first-three-quarter sales rose 18.8%. Growth largely reflected acquisitions. Q3 base-business sales increased 0.6%, while year-to-date base-business sales declined 1.0%. The company reported adjusted EBITDA, a non-GAAP measure, of $49.5 million for Q3 and $142.0 million year to date; it cautions that this measure is not a substitute for GAAP results or cash flow.
Material changes and unusual items
- Q3 operating income fell 88.5% year over year, and the company recorded a net loss, principally reflecting a $34.2 million non-cash impairment charge for Rickland Orchards intangible assets. A further approximately $3.0 million inventory write-off reduced gross profit.
- Rickland Orchards club-channel sales continued to underperform. The company reduced sales projections and impaired its trademarks by $26.9 million and customer relationship intangibles by $7.3 million. Remaining carrying values were $5.3 million and $1.1 million, respectively. Further material impairment charges are possible if performance deteriorates beyond revised projections.
- For the first three quarters, results included an $8.2 million non-cash gain from reducing Rickland Orchards contingent consideration to zero, and a $5.7 million loss on extinguishment of debt related to refinancing. The contingent consideration was eliminated after lower-than-expected sales made earn-out targets unlikely.
- Acquisitions contributed materially to reported sales: Specialty Brands contributed $22.1 million in Q3 and $33.5 million year to date; Rickland Orchards contributed $4.5 million and $20.3 million. The April 2014 Specialty Brands acquisition cost $154.3 million in cash. Acquisition timing makes reported period comparisons less directly comparable.
Balance sheet, debt and liquidity
- At September 27, 2014, cash was $6.0 million, current assets were $232.1 million, and current liabilities were $116.2 million. Inventories were $132.9 million, up from $101.3 million at fiscal year-end.
- Total debt was $1.045 billion, or approximately $1.039 billion net of cash, compared with $870.9 million of debt at December 28, 2013. Stockholders’ equity was $353.2 million.
- The company had $700 million of 4.625% senior notes due 2021, $300 million of term loans due 2019, and $46 million drawn on its revolving facility. Revolver availability, net of letters of credit, was $453.5 million. Term-loan and revolver rates were approximately 2.16% at quarter-end.
- The company reported compliance with its credit agreement and note covenants. A hypothetical 1 percentage-point rate change would affect annual interest expense by approximately $3.5 million.
- Year-to-date operating cash flow declined $8.2 million, with management citing acquisition-related spending and integration inefficiencies and higher working-capital needs, particularly inventory. Investing cash outflow was $168.2 million, including acquisitions and $13.9 million of capital expenditures. Financing cash inflow was $109.4 million.
Outlook, commentary and risks
- Management stated that cash, operating cash flow and available revolver capacity should be sufficient for the foreseeable future to fund operations, debt service, capital expenditures, potential acquisitions and anticipated dividends. This is management’s assessment, not a guarantee.
- Management expected approximately $22 million of fiscal 2014 capital expenditures, including $13.9 million spent through Q3. At the intended annual dividend rate of $1.36 per share, fiscal 2014 dividends were expected to total approximately $72.4 million; $54.1 million had been paid in the first three quarters. The board may change dividend policy.
- Management reported commodity pricing and supply locked for most major commodities, excluding items such as maple syrup, through Q2 2015 at a cost decrease of less than 1% of cost of goods sold. Pricing actions may lag input-cost changes, and customers may seek price reductions if costs decline.
- Key risks include substantial leverage, commodity and distribution-cost fluctuations, competition and promotional pricing, changing consumer preferences, customer inventory reductions, acquisition integration, Canadian-dollar exposure, food safety and labeling claims, and access to credit markets.
- Six coordinated putative class actions involving Pirate Brands allege improper “natural” labeling; a motion to dismiss was pending. A separate September 2014 labeling action against B&G Foods was voluntarily dismissed without prejudice; another October 2014 action had been filed and the company had not yet been served. Management stated it intended to defend the cases and did not expect the matters to have a material adverse effect based on information available.
- About 34% of employees were covered by collective bargaining agreements; the Portland, Maine agreement was due to expire in April 2015. Management expected negotiations to begin in late 2014 or early 2015 and did not then expect a material adverse effect, but could not rule out labor disruption.
- Disclosure controls were assessed as effective, and management reported no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether Rickland Orchards sales stabilize and whether further impairment charges are required.
- Underlying sales and margin trends excluding acquisitions, promotional effects, the inventory write-off and other unusual items.
- Cash conversion and working-capital requirements, especially inventory, alongside the company’s dividend and capital-spending commitments.
- Debt covenant headroom, refinancing and interest-rate exposure, and the company’s ability to manage its substantial leverage.
- Developments in product-labeling litigation and the Portland collective bargaining negotiations.