B&G Foods, Inc. — Q1 2018 Form 10-Q
Period: Thirteen weeks ended March 31, 2018; comparatives are the thirteen weeks ended April 1, 2017. The company manufactures and distributes branded shelf-stable and frozen foods. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $431.7 | $412.3 | +4.7% |
| Gross profit / margin | $103.4 / 23.9% | $121.2 / 29.4% | Margin down 5.5 percentage points |
| Operating income / margin | $56.2 / 13.0% | $68.2 / 16.5% | Income down 17.7% |
| Net income | $20.5 | $32.8 | Down 37.3% |
| Diluted EPS | $0.31 | $0.49 | Down $0.18 |
| Adjusted EBITDA (non-GAAP) | $89.4 | $92.0 | Down 2.9% |
| Operating cash flow | $73.7 | $2.5 | Up $71.3 |
| Capital expenditures | $5.0 | $10.3 | Down $5.3 |
Gross margin was pressured by $16.1 million of non-recurring and acquisition-related costs, including the non-cash inventory reduction plan impact. Excluding those items, management reported gross margin of 27.7%; it attributed the remaining year-over-year margin decline primarily to higher freight costs, partly offset by procurement savings, lower warehousing expense and improved net pricing. GAAP net income included a $2.8 million loss on extinguishment of debt. Adjusted net income was $36.4 million, or $0.55 per diluted share, versus $38.5 million, or $0.58, in Q1 2017; these are non-GAAP measures.
Liquidity, debt and capital allocation
- At March 31, cash was $118.1 million, total current assets were $767.8 million and current liabilities were $203.2 million.
- Long-term debt was $2.097 billion net of financing costs and discount, with $2.125 billion of face principal. Net debt, using face principal less cash, was approximately $2.007 billion.
- The company prepaid $125 million of its variable-rate term loans during the quarter. It reported $525.1 million of term loans outstanding at quarter-end, no revolver borrowings and $697.8 million of available revolver capacity, net of letters of credit. A further $25 million optional term-loan prepayment occurred in Q2 2018.
- Debt comprises $700 million of 4.625% senior notes due 2021, $900 million of 5.25% senior notes due 2025 and term loans due 2022. The term-loan rate was approximately 3.88% at quarter-end. The company reported compliance with debt covenants.
- Cash declined $88.4 million to $118.1 million, mainly reflecting $125 million of debt repayment and $30.9 million of dividends. The large improvement in operating cash flow primarily reflected working-capital movements, including inventory reduction; it should not be read as a comparable improvement in earnings.
- The declared quarterly dividend was $0.465 per share. Management estimated approximately $123.8 million of dividends for fiscal 2018 at the then-current annual rate of $1.86 per share. A share-repurchase program of up to $50 million was authorized through March 15, 2019; no shares were repurchased in Q1.
Changes, outlook and risks
- Reported sales growth included $20.0 million from Back to Nature, acquired in October 2017. Base-business net sales rose only 0.3% to $411.1 million, reflecting a 0.3% increase in net pricing and essentially flat unit volume. Green Giant frozen sales rose 12.8%; Pirate Brands declined 17.9%.
- Management said industry-wide freight expense increases began in Q1 and are expected to continue at least through the remainder of 2018. It reported moderate expected raw-material cost increases and said most significant commodities (with exceptions including maple syrup) were locked in through fiscal year-end at a cost increase of less than 1% of cost of goods sold.
- Price increases announced for most products in Q1 were expected to benefit net pricing beginning in Q2, with most benefit in the second half of 2018. The company cautioned that cost increases may precede pricing benefits and that customer acceptance and competitive conditions are uncertain.
- Management estimated a fiscal 2018 effective tax rate of approximately 25% following the U.S. Tax Act. It expected lower cash taxes from the reduced tax rate and bonus depreciation, but noted uncertainty around final tax accounting and the interest-deduction limitation.
- Fiscal 2018 capital expenditures were projected at approximately $50–$55 million, including about $12.4 million for a new ERP system. Management said cash, operating cash flow and available revolver capacity should fund operations, debt service, capital spending, potential acquisitions and anticipated dividends for the foreseeable future.
- Key risks include substantial leverage and interest-rate exposure, commodity and freight inflation, ability to realize price increases and savings, customer concentration and inventory reductions, changing consumer preferences, acquisition integration, foreign exchange exposure, food safety and labeling matters, and ERP and cybersecurity execution. Walmart represented 24.6% of Q1 sales. Management did not expect pending legal matters to have a material adverse effect; no material environmental compliance spending was reported.
- The company adopted new revenue-recognition and pension-cost presentation standards in Q1. Revenue timing was unchanged; an immaterial amount of customer payments was reclassified as a sales deduction. Management reported disclosure controls were effective and no material change in internal financial-reporting controls, while ERP implementation continues.
Important facts for investors to verify
- Whether Q2 and second-half pricing gains offset the stated freight and other input-cost pressures, and whether gross margins recover.
- Whether base-business sales and volumes improve, given that reported growth relied on the Back to Nature acquisition and underlying growth was modest.
- The repeatability of Q1 operating cash flow, which benefited from inventory reduction and other working-capital timing.
- Debt reduction, interest expense, covenant headroom and the company’s capacity to sustain dividends while funding capital expenditures and any acquisitions.
- Progress, costs and control implications of the ERP rollout and completion of the Back to Nature purchase-price allocation.