B&G Foods, Inc. — Q1 2014 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2014; filed April 24, 2014. Financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
B&G Foods manufactures, sells and distributes shelf-stable food and household products across the United States, Canada and Puerto Rico. Q1 results include Pirate Brands, TrueNorth and Rickland Orchards, acquired during 2013; this affects comparison with Q1 2013. The company reports one operating segment.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $198.1 million | $171.2 million | +15.7% |
| Gross profit / margin | $64.7 million / 32.6% | $58.8 million / 34.4% | Margin down 1.8 points |
| Operating income / margin | $38.8 million / 19.6% | $40.2 million / 23.5% | Income down 3.5% |
| Net income | $17.8 million | $19.6 million | Down 9.5% |
| Diluted EPS | $0.33 | $0.37 | Down $0.04 |
| Net cash from operations | $31.0 million | $23.1 million | Up $7.9 million |
Sales rose $26.9 million, including $34.7 million from the three 2013 acquisitions. Base-business sales declined $7.9 million, or 4.6%, reflecting lower unit volume ($5.2 million) and net price ($2.7 million). Gross margin pressure reflected lower net pricing and higher distribution costs. SG&A rose $6.1 million, mainly from consumer marketing, selling costs, acquisition-related costs and warehousing. Net interest expense increased $1.4 million to $11.1 million, primarily due to higher average debt associated with acquisitions. The effective tax rate was 35.8%, versus 35.6%.
Adjusted EBITDA, a non-GAAP measure, was $46.5 million versus $45.7 million. Management defines it to exclude specified items; it is not a substitute for GAAP results or cash flow.
Cash, debt and dividends
- Quarter-end cash was $17.0 million, up from $4.1 million at fiscal year-end. Operating cash flow was $31.0 million; capital expenditures were $2.2 million; dividends paid were $17.6 million.
- Quarter-end debt was $874.7 million, net of discount, comprising $700.0 million of 4.625% senior notes due 2021, $127.5 million of term loans and $47.5 million of revolver borrowings. Debt net of cash was $857.7 million.
- Available revolver capacity at March 29 was $252.0 million, net of letters of credit. The company reported compliance with debt covenants. The filing does not provide a clear actual consolidated leverage ratio.
- On April 23, after quarter-end, B&G completed the Specialty Brands/Bear Creek Country Kitchens acquisition for approximately $155 million, funded with $155 million of April revolver borrowings and cash on hand. Initial purchase accounting was incomplete.
- Declared dividends were $0.34 per share for Q1, versus $0.29 a year earlier. At the intended annual rate of $1.36 per share, management estimated fiscal 2014 dividend payments of approximately $72.4 million.
Outlook, risks and unusual items
- Management expected cash, operating cash flow and revolver availability to be sufficient for the foreseeable future to fund operations, debt service, capital spending, acquisitions and anticipated dividends. It expected approximately $20 million of fiscal 2014 capital expenditures. These are management expectations, not guarantees.
- The company said it was locked into supply and pricing for most significant commodities through 2014 at an expected cost decrease of less than 1% of cost of goods sold; maple syrup was among the exceptions. Input-cost changes, pricing competition and the ability to pass costs through remain risks.
- Other stated risks include substantial leverage, acquisition integration and financing, retailer consolidation and inventory reductions, changing consumer preferences, food safety and labeling issues, customer concentration, and Canadian-dollar exposure—particularly for maple syrup purchases.
- Pirate Brands faced six coordinated putative class actions alleging “natural” labeling was improper because of genetically modified and processed ingredients. A motion to dismiss was pending; management did not expect a material adverse effect. The company also reported ordinary-course claims and said pending matters were not expected to materially affect its financial position, results or liquidity.
- A multi-employer pension plan remained in critical status; the company expected fiscal 2014 surcharges below $0.1 million, assuming consistent hours worked. Management planned approximately $1.8 million of contributions to its company-sponsored defined-benefit plans during the remainder of fiscal 2014.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether base-business sales declines and weaker gross and operating margins persist, and how much reported growth reflects acquired brands.
- The post-acquisition debt, available revolver capacity, covenant headroom and cash-flow coverage of debt service and dividends.
- Integration and performance of the recent acquisitions, including the Specialty Brands purchase-price allocation and Rickland Orchards contingent consideration.
- Whether the intended dividend remains supportable given acquisition spending, capital needs and leverage.
- Developments in Pirate Brands’ labeling litigation, retailer/customer concentration and commodity, distribution and currency costs.