B&G Foods, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2018 (52 weeks); filed February 26, 2019. This is an annual filing, not a standalone fourth-quarter report. B&G Foods manufactures, sells and distributes branded shelf-stable and frozen foods and household products in the U.S., Canada and Puerto Rico.
Key financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1,700.8 million | $1,646.4 million |
| Gross profit / margin | $349.5 million / 20.5% | $440.6 million / 26.8% |
| Operating income | $340.2 million | $237.9 million |
| Net income | $172.4 million | $217.5 million |
| Diluted EPS | $2.60 | $3.26 |
| Operating cash flow | $209.5 million | $37.8 million |
| Capital expenditures | $41.6 million | $59.8 million |
| Cash and cash equivalents at year-end | $11.6 million | $206.5 million |
| Long-term debt, net | $1,635.9 million | $2,217.6 million |
- Sales rose 3.3%, reflecting $42.2 million of higher unit volume and $12.2 million of higher net pricing. Base-business sales, excluding acquisitions, divested brands and non-branded bulk rice, grew 0.9% to $1,564.2 million.
- Gross margin fell 6.3 percentage points. FY2018 included $66.3 million of inventory-reduction-plan costs and $10.0 million of warehouse, delivery and other distribution-transition costs. Management said gross profit would have been $425.8 million, or 25.0% of sales, excluding these items and acquisition/divestiture-related expenses.
- Operating income included a $176.4 million pretax gain on the Pirate Brands sale. Net income declined 20.7%, in part because FY2017 benefited from a $133.3 million deferred-tax remeasurement benefit under the Tax Cuts and Jobs Act. FY2018 effective tax rate was 22.4%.
- Adjusted EBITDA, a non-GAAP measure, was $314.2 million versus $333.2 million; adjusted net income was $122.3 million versus $140.5 million, and adjusted diluted EPS was $1.85 versus $2.12. These measures exclude specified items and should be considered alongside GAAP results.
- Operating cash flow improved sharply, primarily from lower inventory and favorable working-capital and tax-balance movements. Investing cash flow included $420.0 million of Pirate Brands sale proceeds. Financing cash outflow included debt repayment, dividends and share repurchases.
Business changes and material comparisons
- B&G acquired the McCann’s premium Irish oatmeal brand for approximately $30.8 million in July 2018 and sold Pirate Brands to Hershey for $420.0 million cash in October. Sale proceeds were used, with additional revolver borrowings, to repay all $500.1 million of tranche B term loans.
- Green Giant frozen sales increased 12.9% to $372.7 million, supported by newer vegetable-based products. Green Giant shelf-stable sales declined 8.2% on a base-business basis. Spices and seasonings sales declined 1.0%; several other brands also recorded declines.
- Walmart represented 23.1% of FY2018 sales; the ten largest customers represented 54.4%. The company operates one reportable segment.
- Fourth-quarter sales were $458.1 million versus $466.4 million a year earlier; gross profit was $49.9 million versus $93.9 million. Fourth-quarter net income of $111.9 million included the Pirate Brands sale gain.
Liquidity, debt and shareholder distributions
- At year-end, face-value debt was $1.65 billion: $700 million of 4.625% notes due 2021, $900 million of 5.25% notes due 2025, and $50 million drawn on a $700 million revolving facility. Revolver availability, net of letters of credit, was $647.8 million; the facility matures in November 2022.
- Net debt was approximately $1.624 billion. Senior debt/adjusted EBITDA was 5.3x; adjusted EBITDA/cash interest was 3.0x. Interest expense was $108.3 million. The company reported compliance with debt covenants at year-end.
- Current assets were $586.1 million and current liabilities $258.5 million. Management said cash, operating cash flow and revolver availability should fund operations, debt service, capital expenditures, potential acquisitions and anticipated dividends for the foreseeable future.
- Dividends paid were $124.5 million in FY2018. The stated current rate was $1.90 per share annually, with approximately $124.7 million of aggregate 2019 dividends anticipated at that rate. Dividends remain discretionary and subject to debt covenants and other restrictions.
Outlook, risks and unusual items
- No specific FY2019 sales or earnings guidance is provided. Management anticipated higher raw-material costs and higher industry-wide distribution costs in 2019. Most major commodities were contracted or price-locked through 2019, with exceptions including maple syrup; pricing increases and cost savings had not fully offset prior cost inflation.
- Expected FY2019 capital expenditures were $45–$50 million, including approximately $9.1 million for ERP implementation, $5.4 million for productivity projects, $4.4 million for IT and cybersecurity infrastructure, and $3.8 million for infrastructure optimization.
- A February 2019 workforce reduction was expected to generate approximately $4.0 million in annualized pretax savings, with about $1.9 million of mostly cash severance and related charges.
- The ERP rollout was expected to be completed in the second or third quarter of 2019. The company identified implementation disruption and possible effects on operations and financial controls as risks; management reported no material control impact to date.
- Other principal risks include substantial leverage and debt-service needs; input, freight and labor inflation; competition, private-label pressure and changing consumer preferences; reliance on major customers, co-packers and single-site production; crop, weather and water-supply exposure; foreign exchange and trade risks; food-safety, labeling and recall exposure; pension funding; and cybersecurity or other IT disruptions.
- Goodwill and indefinite-lived trademarks totaled approximately $1.94 billion; annual impairment testing found no impairment in FY2018. The company reported no material expected adverse effect from currently pending ordinary-course litigation or existing environmental obligations. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Separate recurring operating performance from the $176.4 million Pirate Brands gain and the $66.3 million inventory-plan charge; review the company’s non-GAAP reconciliations.
- Assess whether 2019 pricing, cost savings and contracted commodity costs can offset expected raw-material and freight inflation, particularly for maple syrup.
- Review leverage, cash interest, debt maturities and covenant headroom, alongside the dividend’s cash requirements and restrictions.
- Track inventory normalization, cash conversion and working-capital movements to determine whether FY2018 operating cash flow is sustainable.
- Monitor Green Giant frozen growth versus shelf-stable declines, customer concentration, and the execution and control implications of the ERP transition.