(1)
Nature of Operations
B&G Foods, Inc. is a holding company whose principal assets are the shares of capital stock of its subsidiaries. Unless the context requires otherwise, references in this report to “B&G Foods,” “our company,” “we,” “us” and “our” refer to B&G Foods, Inc. and its subsidiaries. Our financial statements are presented on a consolidated basis.
We operate in a single industry segment and manufacture, sell and distribute a diverse portfolio of high-quality shelf-stable and frozen foods across the United States, Canada and Puerto Rico. Our products include frozen and canned vegetables, oatmeal and other hot cereals, fruit spreads, canned meats and beans, bagel chips, spices, seasonings, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, pizza crusts, Mexican-style sauces, dry soups, taco shells and kits, salsas, pickles, peppers, tomato-based products, cookies and crackers, nut clusters and other specialty products. Our products are marketed under many recognized brands, including
Ac’cent
,
B&G
,
B&M
,
Back to Nature
,
Baker’s Joy
,
Bear Creek Country Kitchens
,
Brer Rabbit
,
Canoleo
,
Cary’s
,
Cream of Rice
,
Cream of Wheat
,
Devonsheer
,
Don Pepino
,
Durkee
,
Emeril’s
,
Grandma’s Molasses
,
Green Giant
,
JJ Flats
,
Joan of Arc
,
Las Palmas
,
Le Sueur
,
MacDonald’s
,
Mama Mary’s
,
Maple Grove Farms of Vermont
,
McCann’s
,
Molly McButter
,
Mrs. Dash
,
New York Flatbreads
,
New York Style
,
Old London
,
Ortega
,
Polaner
,
Red Devil
,
Regina
,
Sa-són
,
Sclafani
,
SnackWell’s
,
Spice Islands
,
Spring Tree
,
Sugar Twin
,
Tone’s
,
Trappey’s
,
TrueNorth
,
Underwood
,
Vermont Maid
,
Victoria
,
Weber
and
Wright’s
. We also sell and distribute
Static Guard
, a household product brand. We compete in the retail grocery, foodservice, specialty, private label, club and mass merchandiser channels of distribution. We sell and distribute our products directly and via a network of independent brokers and distributors to supermarket chains, foodservice outlets, mass merchants, warehouse clubs, non-food outlets and specialty distributors.
(2)
Summary of Significant Accounting Policies
Fiscal Year
Typically, our fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to December 31 in the case of our fiscal year and fourth fiscal quarter, and on the Saturday closest to the end of the corresponding calendar quarter in the case of our fiscal quarters. As a result, a 53
rd
week is added to our fiscal year every five or six years. In a 53-week fiscal year our fourth fiscal quarter contains 14 weeks. Our fiscal year ending December 28, 2019 (fiscal 2019) and our fiscal year ended December 29, 2018 (fiscal 2018) each contain 52 weeks. Each quarter of fiscal 2019 and 2018 contains 13 weeks.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements for the thirteen week periods ended March 30, 2019 (first quarter of 2019) and March 31, 2018 (first quarter of 2018) have been prepared by our company in accordance with generally accepted accounting principles in the United States (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and include the accounts of B&G Foods, Inc. and its subsidiaries. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, our management believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. All intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated interim financial statements contain all adjustments that are, in the opinion of management, necessary to present fairly our consolidated financial position as of March 30, 2019, and the results of our operations, comprehensive income and cash flows for the first quarter of 2019 and 2018. Our results of operations for the first quarter of 2019 are not necessarily indicative of the results to be expected for the full year. We have evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited consolidated interim financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for fiscal 2018 filed with the SEC on February 26, 2019.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
s
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Forward-Looking Statements” before Part I of this report and elsewhere in this report. The following discussion should be read in conjunction with the unaudited consolidated interim financial statements and related notes for the thirteen weeks ended March 30, 2019 (first quarter of 2019) included elsewhere in this report and the audited consolidated financial statements and related notes for the fiscal year ended December 29, 2018 (fiscal 2018) included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 26, 2019 (which we refer to as our 2018 Annual Report on Form 10-K).
General
We manufacture, sell and distribute a diverse portfolio of branded, high quality, shelf-stable and frozen foods and household products, many of which have leading regional or national market shares. In general, we position our branded products to appeal to the consumer desiring a high quality and reasonably priced product. We complement our branded product retail sales with institutional and foodservice sales and private label sales.
Our company has been built upon a successful track record of acquisition-driven growth. Our goal is to continue to increase sales, profitability and cash flows through strategic acquisitions, new product development and organic growth. We intend to implement our growth strategy through the following initiatives: expanding our brand portfolio with disciplined acquisitions of complementary branded businesses, continuing to develop new products and delivering them to market quickly, leveraging our multiple channel sales and distribution system and continuing to focus on higher growth customers and distribution channels.
Since 1996, we have successfully acquired and integrated more than 45 brands into our company. Most recently, on July 16, 2018, we acquired the
McCann’s
brand of premium Irish oatmeal from TreeHouse Foods, Inc. On October 2, 2017, we completed the acquisition of
Back to Nature Foods Company, LLC and related entities from Brynwood Partners VI L.P., Mondelēz International and certain other sellers
. We refer to these acquisitions in this report as the “
McCann’s
acquisition” and the “
Back to Nature
acquisition,” respectively. These acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the assets acquired, liabilities assumed and results of operations of the acquired businesses are included in our consolidated financial statements from the date of acquisition. This acquisition and the application of the acquisition method of accounting affect comparability between periods.
On October 17, 2018, we completed the sale of Pirate Brands, which includes the
Pirate’s Booty
,
Smart Puffs
and
Original Tings
brands to The Hershey Company. We refer to this divestiture in this report as the “Pirate Brands sale.” This divestiture affects comparability between periods.
We are subject to a number of challenges that may adversely affect our businesses. These challenges, which are discussed below and under the heading “Forward‑Looking Statements,” include:
Fluctuations in Commodity Prices and Production and Distribution Costs.
We purchase raw materials, including agricultural products, meat, poultry, ingredients and packaging materials from growers, commodity processors, other food companies and packaging suppliers located in U.S. and foreign locations. Raw materials and other input costs, such as fuel and transportation, are subject to fluctuations in price attributable to a number of factors. Fluctuations in commodity prices can lead to retail price volatility and intensive price competition, and can influence consumer and trade buying patterns. The cost of raw materials, fuel, labor, distribution and other costs related to our operations can increase from time to time significantly and unexpectedly. For example, we have experienced industry-wide and anticipated significant increases in freight expenses and we expect freight expenses to continue to remain elevated for the foreseeable future.
We experienced moderate net cost increases for raw materials during fiscal 2018 and anticipate higher raw materials cost increases for fiscal 2019. We are currently locked into our supply and prices for a majority of our most significant commodities (excluding, among others, maple syrup) through fiscal 2019. In addition, we expect higher distribution costs industry-wide for fiscal 2019. To the extent we are unable to avoid or offset any present or future cost increases by locking in our costs, implementing cost saving measures or increasing prices to our customers, our operating results could be materially adversely affected. In addition, if input costs begin to decline, customers may look for price reductions in situations where we have locked into purchases at higher costs.
We attempt to manage cost inflation risk by locking in prices through short term supply contracts and advance commodities purchase agreements and by implementing cost savings measures. We also attempt to offset rising input costs by raising sales prices to our customers. For example, in response to inflationary pressure, we announced list price increases for the majority of our products during the first quarter of 2018 and the first quarter of 2019. We saw some benefit from the 2018 list price increases during fiscal 2018 and the first quarter of 2019, and we expect additional benefit from the 2018 and 2019 list price increases during the remainder of fiscal 2019. However, increases in the prices we charge our customers often lag behind rising input costs and competitive pressures may limit our ability to quickly raise prices, or to raise prices at all, in response to rising costs. Moreover, customer and consumer acceptance of price increases cannot be assured.
Consolidation in the Retail Trade and Consequent Inventory Reductions.
As the retail grocery trade continues to consolidate and our retail customers grow larger and become more sophisticated, our retail customers may demand lower pricing and increased promotional programs. These customers are also reducing their inventories and increasing their emphasis on private label products.
Changing Consumer Preferences.
Consumers in the market categories in which we compete frequently change their taste preferences, dietary habits and product packaging preferences.
Consumer Concern Regarding Food Safety, Quality and Health.
The food industry is subject to consumer concerns regarding the safety and quality of certain food products. If consumers in our principal markets lose confidence in the safety and quality of our food products, even as a result of a product liability claim or a product recall by a food industry competitor, our business could be adversely affected.
Fluctuations in Currency Exchange Rates.
Our foreign sales are primarily to customers in Canada. Our sales to Canada are generally denominated in Canadian dollars and our sales for export to other countries are generally denominated in U.S. dollars. During the first quarter of 2019 and 2018, our net sales to customers in foreign countries represented approximately 7.7% and 6.7%, respectively, of our total net sales. We also purchase a significant majority of our maple syrup requirements from suppliers located in Québec, Canada. Any weakening of the U.S. dollar against the Canadian dollar could significantly increase our costs relating to the production of our maple syrup products to the extent we have not purchased Canadian dollars in advance of any such weakening of the U.S. dollar or otherwise entered into a currency hedging arrangement in advance of any such weakening of the U.S. dollar. These increased costs would not be fully offset by the positive impact the change in the relative strength of the Canadian dollar versus the U.S. dollar would have on our net sales in Canada. Our purchases of raw materials from other foreign suppliers are generally denominated in U.S. dollars. We also operate a manufacturing facility in Irapuato, Mexico for the manufacture of
Green Giant
frozen products and are as a result exposed to fluctuations in the Mexican peso. Our results of operations could be adversely impacted by changes in foreign currency exchange rates. Costs and expenses in Mexico are recognized in local foreign currency, and therefore we are exposed to potential gains or losses from the translation of those amounts into U.S. dollars for consolidation into our financial statements.
To confront these challenges, we continue to take steps to build the value of our brands, to improve our existing portfolio of products with new product and marketing initiatives, to reduce costs through improved productivity, to address consumer concerns about food safety, quality and health and to favorably manage currency fluctuations.
Critical Accounting Policies; Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States (GAAP) requires our management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates and assumptions made by management involve trade and consumer promotion expenses; allowances for excess, obsolete and unsaleable inventories; pension benefits; acquisition accounting fair value allocations; the recoverability of goodwill, other intangible assets, property, plant and equipment, and deferred tax assets; the determination of the useful life of customer relationship and finite-lived trademark intangibles; and the accounting for share-based compensation expense. Actual results could differ significantly from these estimates and assumptions.
In our 2018 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. There have been no material changes to these policies from those disclosed in our 2018 Annual Report on Form 10-K.
U.S. Tax Act
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which we refer to as the “U.S. Tax Act.” The changes in the U.S. Tax Act are broad and complex and we continue to examine the impact the U.S. Tax Act may have on our business and financial results. The U.S. Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.
Under FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes, we are required to revalue any deferred tax assets or liabilities in the period of enactment of change in tax rates. The U.S. Tax Act lowers the federal corporate income tax rate from 35% to 21%. In the fourth quarter of 2017 we revalued our prior year U.S. deferred tax assets and liabilities at the lower U.S. corporate income tax rate, which resulted in a discrete tax benefit of approximately $133.3 million. This tax benefit was partially offset by an increase in our blended state rate of approximately $5.8 million and a repatriation expense of $0.9 million.
The reduction in the corporate income tax rate from 35% to 21% was effective for our fiscal 2019 and 2018. Our consolidated effective tax rate for the first quarter of 2019 and fiscal 2018 was 25.3% and 22.4%, respectively.
We also expect to realize a cash tax benefit for future bonus depreciation on certain business additions, which, together with the reduced income tax rate, we expect to reduce our cash income tax payments.
The U.S. Tax Act also limits the deduction for net interest expense incurred by a corporate taxpayer to 30% of the taxpayer’s adjusted taxable income. Although we currently expect that our interest expense may exceed 30% of our adjusted taxable income, at this time we do not believe this limitation will have a material adverse impact on our business or financial results because any interest that is non-deductible may be carried forward indefinitely.
The U.S. Treasury's proposed 2018 regulations also seek to clarify the application of the U.S. Tax Act provisions for the limitation of interest expense, including treatment of depreciation and other deductions in arriving at adjusted taxable income and application of the rules to controlled foreign affiliates. These regulations remain open for comment and are not effective until published in the federal register. As a result, we will monitor their impact to our filing positions and will record the impacts as discrete income tax expense adjustments in the period that the guidance is finalized.
The SEC issued guidance on December 23, 2017 providing a one-year measurement period from a registrant’s reporting period that includes the U.S. Tax Act’s enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740. As of March 30, 2019, we have recorded all known and estimable impacts of the U.S. Tax Act that are effective for fiscal 2019.
The ultimate impact of the U.S. Tax Act on our reported results in fiscal 2019 and beyond may differ from the estimates provided in this report, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the U.S. Tax Act different from that currently contemplated.
Results of Operations
The following table sets forth the percentages of net sales represented by selected items for the first quarter of 2019 and 2018 reflected in our consolidated statements of operations. The comparisons of financial results are not necessarily indicative of future results:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
March 30,
|
|
March 31,
|
|
|
|
2019
|
|
2018
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of goods sold
|
|
78.7
|
%
|
|
76.1
|
%
|
|
Gross profit
|
|
21.3
|
%
|
|
23.9
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
9.3
|
%
|
|
9.9
|
%
|
|
Amortization expense
|
|
1.0
|
%
|
|
1.0
|
%
|
|
Operating income
|
|
11.0
|
%
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
Other income and expenses:
|
|
|
|
|
|
|
|
Interest expense, net
|
|
5.7
|
%
|
|
6.6
|
%
|
|
Loss on extinguishment of debt
|
|
—
|
%
|
|
0.6
|
%
|
|
Other income
|
|
(0.1)
|
%
|
|
(0.5)
|
%
|
|
Income before income tax expense
|
|
5.4
|
%
|
|
6.3
|
%
|
|
Income tax expense
|
|
1.3
|
%
|
|
1.5
|
%
|
|
Net income
|
|
4.1
|
%
|
|
4.8
|
%
|
As used in this section, the terms listed below have the following meanings:
Net Sales.
Our net sales represents gross sales of products shipped to customers plus amounts charged to customers for shipping and handling, less cash discounts, coupon redemptions, slotting fees and trade promotional spending, including marketing development funds.
Gross Profit.
Our gross profit is equal to our net sales less cost of goods sold. The primary components of our cost of goods sold are cost of internally manufactured products, purchases of finished goods from co‑packers, a portion of our warehousing expenses plus freight costs to our distribution centers and to our customers.
Selling, General and Administrative Expenses.
Our selling, general and administrative expenses include costs related to selling our products, as well as all other general and administrative expenses. Some of these costs include administrative, marketing and internal sales force employee compensation and benefits costs, consumer advertising programs, brokerage costs, a portion of our warehousing expenses, information technology and communication costs, office rent, utilities, supplies, professional services, severance, acquisition/divestiture-related expenses and other general corporate expenses.
Amortization Expense.
Amortization expense includes the amortization expense associated with customer relationships, finite-lived trademarks and other intangibles.
Net Interest Expense.
Net interest expense includes interest relating to our outstanding indebtedness, amortization of bond discount and amortization of deferred debt financing costs (net of interest income).
Loss on Extinguishment of Debt.
Loss on extinguishment of debt includes costs relating to the retirement of indebtedness, including repurchase premium, if any, and write‑off of deferred debt financing costs and unamortized discount, if any.
Other Income.
Other income includes income resulting from the remeasurement of monetary assets denominated in a foreign currency into U.S. dollars for financial reporting purposes and the impact of the newly adopted presentation of net periodic pension cost and net periodic post-retirement benefit cost below operating profit, in accordance with the FASB ASU issued in March 2017. See Note 2, “Summary of Significant Accounting Policies —
Newly Adopted Accounting Standards
,” for further details.
Non-GAAP Financial Measures
Certain disclosures in this report include non-GAAP financial measures. A non-GAAP financial measure is defined as a numerical measure of our financial performance that excludes or includes amounts so as to be different from the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated balance sheets and related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows.
Base Business Net Sales.
Base business net sales is a non-GAAP financial measure used by management to measure operating performance. We define base business net sales as our net sales excluding (1) the net sales of acquisitions until at least one full quarter of net sales from such acquisitions are included in both comparable periods, (2) net sales of discontinued or divested brands and (3) net sales of our IQF bulk rice products, see footnote 2 to the table below. The portion of current period net sales attributable to recent acquisitions for which there is not at least one full quarter of net sales in the comparable period of the prior year is excluded. For each acquisition, the excluded period starts at the beginning of the most recent fiscal period being compared and ends on the last day of the quarter in which the first anniversary of the date of acquisition occurs, and the period from the date of acquisition to the end of the quarter in which the acquisition occurred. For discontinued or divested brands, the entire amount of net sales is excluded from each fiscal period being compared. Management has included this financial measure because it provides useful and comparable trend information regarding the results of our business without the effect of the timing of acquisitions and the effect of discontinued or divested brands.
A reconciliation of base business net sales to reported net sales for the first quarter of 2019 and 2018 follows (in thousands):
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
March 30,
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Net sales
|
$
|
412,734
|
|
$
|
431,729
|
|
Net sales from acquisitions
(1)
|
|
(3,269)
|
|
|
—
|
|
Net sales of non-branded IQF bulk rice products
(2)
|
|
—
|
|
|
(578)
|
|
Net sales from divested and discontinued brands
(3)
|
|
—
|
|
|
(21,828)
|
|
Base business net sales
|
$
|
409,465
|
|
$
|
409,323
|
|
|
(1)
|
|
Reflects net sales for
McCann’s
for the first quarter of 2019.
McCann’s
was acquired on July 16, 2018.
|
|
|
(2)
|
|
Reflects net sales of our non-branded individually quick frozen (IQF) bulk rice products, which is a product line we acquired as part of the
Green Giant
acquisition, and which we are excluding from net sales for the purposes of calculating base business net sales because we do not consider the non-branded IQF bulk rice products to be part of our core business or material. We discontinued the sale of non-branded IQF bulk rice products during the fourth quarter of 2018.
|
|
|
(3)
|
|
Reflects net sales of Pirate Brands and French’s
®
seasoning mixes. We completed the divestiture of Pirate Brands on October 17, 2018. We discontinued the sale of French’s products during the third quarter of 2018 following the expiration of a licensing agreement.
|
EBITDA and Adjusted EBITDA.
EBITDA and adjusted EBITDA are non-GAAP financial measures used by management to measure operating performance. We define EBITDA as net income before net interest expense, income taxes, depreciation and amortization and loss on extinguishment of debt. We define adjusted EBITDA as EBITDA adjusted for cash and non-cash acquisition/divestiture-related expenses, gains and losses (which may include third party fees and expenses, integration, restructuring and consolidation expenses, amortization of acquired inventory fair value step-up, and gains and losses on the sale of assets); non-recurring expenses, gains and losses, including severance and other expenses relating to a workforce reduction; and the non-cash accounting impact of our inventory reduction plan. Management believes that it is useful to eliminate these items because it allows management to focus on what it deems to be a more reliable indicator of ongoing operating performance and our ability to generate cash flow from operations. We use EBITDA and adjusted EBITDA in our business operations to, among other things, evaluate our operating performance, develop budgets and measure our performance against those budgets, determine employee bonuses and evaluate our cash flows in terms of cash needs. We also present EBITDA and adjusted EBITDA because we believe they are useful indicators of our historical debt capacity and ability to service debt and because covenants in our credit agreement and our senior notes indentures contain ratios based on these measures. As a result, reports used by internal management during monthly operating reviews feature the EBITDA and adjusted EBITDA metrics. However, management uses these metrics in conjunction with traditional GAAP operating performance and liquidity measures as part of its overall assessment of company performance and liquidity, and therefore does not place undue reliance on these measures as its only measures of operating performance and liquidity.
EBITDA and adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to operating income, net income or any other GAAP measure as an indicator of operating performance. EBITDA and adjusted EBITDA are not complete net cash flow measures because EBITDA and adjusted EBITDA are measures of liquidity that do not include reductions for cash payments for an entity’s obligation to service its debt, fund its working capital, capital expenditures and acquisitions and pay its income taxes and dividends. Rather, EBITDA and adjusted EBITDA are two potential indicators of an entity’s ability to fund these cash requirements. EBITDA and adjusted EBITDA are not complete measures of an entity’s profitability because they do not include certain costs and expenses and gains and losses described above. Because not all companies use identical calculations, this presentation of EBITDA and adjusted EBITDA may not be comparable to other similarly titled measures of other companies. However, EBITDA and adjusted EBITDA can still be useful in evaluating our performance against our peer companies because management believes these measures provide users with valuable insight into key components of GAAP amounts.
A reconciliation of EBITDA and adjusted EBITDA to net income and to net cash provided by operating activities for the first quarter of 2019 and 2018 along with the components of EBITDA and adjusted EBITDA follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
March 30,
|
|
March 31,
|
|
|
|
2019
|
|
2018
|
|
Net income
|
|
$
|
16,791
|
|
$
|
20,547
|
|
Income tax expense
|
|
|
5,684
|
|
|
6,602
|
|
Interest expense, net
|
|
|
23,074
|
|
|
28,306
|
|
Depreciation and amortization
|
|
|
13,863
|
|
|
13,064
|
|
Loss on extinguishment of debt
(1)
|
|
|
—
|
|
|
2,778
|
|
EBITDA
|
|
|
59,412
|
|
|
71,297
|
|
Acquisition/divestiture-related and non-recurring expenses
(2)
|
|
|
3,696
|
|
|
3,269
|
|
Inventory reduction plan impact
(3)
|
|
|
12,722
|
|
|
14,850
|
|
Adjusted EBITDA
|
|
|
75,830
|
|
|
89,416
|
|
Income tax expense
|
|
|
(5,684)
|
|
|
(6,602)
|
|
Interest expense, net
|
|
|
(23,074)
|
|
|
(28,306)
|
|
Acquisition/divestiture-related and non-recurring expenses
(2)
|
|
|
(3,696)
|
|
|
(3,269)
|
|
Inventory reduction plan impact
(3)
|
|
|
(12,722)
|
|
|
(14,850)
|
|
Write-off of property, plant and equipment
|
|
|
1
|
|
|
21
|
|
Deferred income taxes
|
|
|
3,575
|
|
|
4,821
|
|
Amortization of deferred financing costs and bond discount
|
|
|
873
|
|
|
1,545
|
|
Share-based compensation expense
|
|
|
580
|
|
|
838
|
|
Changes in assets and liabilities, net of effects of business combinations
|
|
|
14,661
|
|
|
30,130
|
|
Net cash provided by operating activities
|
|
$
|
50,344
|
|
$
|
73,744
|
|
|
(1)
|
|
Loss on extinguishment of debt for the first quarter of 2018 included the write-off of deferred debt financing costs and unamortized discount of $2.4 million and $0.4 million, respectively, relating to the prepayment of outstanding borrowings under our tranche B term loans.
|
|
|
(2)
|
|
Acquisition/divestiture-related and non-recurring expenses for the first quarter of 2019 of $3.7 million primarily include divestiture expenses for the Pirate Brands sale and severance and other expenses relating to a workforce reduction. Acquisition/divestiture-related and non-recurring expenses for the first quarter of 2018 of $3.3 million primarily included acquisition and integration expenses for the
Green Giant
, spices & seasonings,
Victoria
and
Back to Nature
acquisitions.
|
|
|
(3)
|
|
For the first quarter of 2019, inventory reduction plan impact of $12.7 million includes the underutilization of our manufacturing facilities as we reduced inventory during the implementation of an inventory reduction plan. For the first quarter of 2018, the inventory reduction plan impact of $14.9 million included fixed manufacturing, warehouse and other corporate overhead costs associated with inventory purchased and converted into finished goods in fiscal 2017 and sold in the first quarter of 2018 as part of our inventory reduction plan.
|
Adjusted Net Income
and
Adjusted Diluted Earnings Per Share.
Adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures used by management to measure operating performance. We define adjusted net income and adjusted diluted earnings per share as net income and diluted earnings per share adjusted for certain items that affect comparability. These non-GAAP financial measures reflect adjustments to net income and diluted earnings per share to eliminate the items identified in the reconciliation below. This information is provided in order to allow investors to make meaningful comparisons of our operating performance between periods and to view our business from the same perspective as our management. Because we cannot predict the timing and amount of these items, management does not consider these items when evaluating our company’s performance or when making decisions regarding allocation of resources.
A reconciliation of adjusted net income and adjusted diluted earnings per share to net income for the first quarter of 2019 and 2018 along with the components of adjusted net income and adjusted diluted earnings per share follows (in thousands):
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
March 30,
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Net income
|
$
|
16,791
|
|
$
|
20,547
|
|
Loss on extinguishment of debt, net of tax
(1)
|
|
—
|
|
|
2,102
|
|
Acquisition/divestiture-related and non-recurring expenses, net of tax
(2)
|
|
2,761
|
|
|
2,474
|
|
Inventory reduction plan impact, net of tax
(3)
|
|
9,505
|
|
|
11,238
|
|
Adjusted net income
|
$
|
29,057
|
|
$
|
36,361
|
|
Adjusted diluted earnings per share
|
$
|
0.44
|
|
$
|
0.55
|
|
|
(1)
|
|
Loss on extinguishment of debt for the first quarter of 2018 included the write-off of deferred debt financing costs and unamortized discount of $1.8 million, net of tax, and $0.3 million, net of tax, respectively, relating to the prepayment of outstanding borrowings under our tranche B term loans.
|
|
|
(2)
|
|
Acquisition/divestiture-related and non-recurring expenses for the first quarter of 2019 primarily include divestiture expenses for the Pirate Brands sale and severance and other expenses relating to a workforce reduction. Acquisition/divestiture-related and non-recurring expenses for the first quarter of 2018 primarily included acquisition and integration expenses for the
Green Giant
, spices & seasonings,
Victoria
and
Back to Nature
acquisitions.
|
|
|
(3)
|
|
For the first quarter of 2019, inventory reduction plan impact of $12.7 million (or $9.5 million net of taxes) includes the underutilization of our manufacturing facilities as we reduced inventory during the implementation of an inventory reduction plan. For the first quarter of 2018, the inventory reduction plan impact of $14.9 million (or $11.2 million net of taxes) included fixed manufacturing, warehouse and other corporate overhead costs associated with inventory purchased and converted into finished goods in fiscal 2017 and sold in the first quarter of 2018 as part of our inventory reduction plan.
|
First quarter of 2019 compared to the first quarter of 2018
Net Sales.
We generated net sales of $412.7 million for the first quarter of 2019, compared to $431.7 million for the first quarter of 2018. The decrease was primarily attributable to the Pirate Brands divestiture, offset in part by the
McCann’s
acquisition. Net sales of Pirate Brands, which was sold on October 17, 2018 and therefore not part of our first quarter of 2019 results, were $21.0 million during the first quarter of 2018. Net sales of
McCann’s
, which was acquired on July 16, 2018 and therefore not part of our first quarter of 2018 results, contributed $3.3 million to our net sales for the first quarter of 2019.
Base business net sales for the first quarter of 2019 increased $0.2 million to $409.5 million from $409.3 million for the first quarter of 2018. The increase was attributable to an increase in net pricing of $7.3 million, or 1.8% of base business net sales, offset by a decrease in unit volume for the base business of $7.1 million.
Net sales of all
Green Giant
products in the aggregate (including
Le Sueur
) increased $6.9 million, or 5.4%, in the first quarter of 2019, as compared to the first quarter of 2018, as net sales in both frozen and shelf stable products increased. Net sales of
Green Giant
frozen increased $6.0 million, or 6.3%, for the quarter. Net sales of
Green Giant
shelf stable (including
Le Sueur
) increased $0.9 million, or 2.8%, for the first quarter of 2019.
See Note 17, “Net Sales by Brand,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report, for detailed information regarding total net sales for each of our brands whose net sales for the first quarter of 2019 or fiscal 2018 represent 3% or more of our total net sales for those periods, and for “all other brands” in the aggregate. The following chart sets forth the most significant base business net sales increases and decreases by brand for those brands for the first quarter of 2019:
|
|
|
|
|
|
|
|
|
|
|
Base Business
|
|
|
|
Net Sales Increase (Decrease)
|
|
|
|
Dollars
(in millions)
|
|
Percentage
|
|
Brand:
|
|
|
|
|
|
|
|
Green Giant
- frozen
|
|
$
|
6.0
|
|
6.3
|
%
|
|
Spices & Seasonings
(1)
|
|
|
1.3
|
|
2.1
|
%
|
|
Maple Grove Farms of Vermont
|
|
|
0.9
|
|
5.5
|
%
|
|
Green Giant
- shelf stable
(2)
|
|
|
0.9
|
|
2.8
|
%
|
|
Back to Nature
|
|
|
(3.3)
|
|
(16.9)
|
%
|
|
Mrs. Dash
|
|
|
(1.5)
|
|
(9.1)
|
%
|
|
Cream of Wheat
|
|
|
(1.0)
|
|
(5.5)
|
%
|
|
Ortega
|
|
|
(0.6)
|
|
(1.6)
|
%
|
|
All other brands
|
|
|
(2.5)
|
|
(2.3)
|
%
|
|
Base business net sales increase
|
|
$
|
0.2
|
|
< 0.1
|
%
|
|
|
(1)
|
|
Includes net sales for multiple brands acquired as part of the spices & seasonings acquisition that we completed on November 21, 2016. Does not include net sales for
Mrs. Dash
and our other legacy spices & seasonings brands or net sales for French’s
®
seasoning mixes, which we discontinued during the third quarter of 2018 following the expiration of a licensing agreement.
|
|
|
(2)
|
|
Includes net sales of the
Le Sueur
brand.
|
Gross Profit.
Gross profit was $88.1 million for the first quarter of 2019, or 21.3% of net sales. Excluding the negative impact of $13.1 million of acquisition/divestiture-related and non-recurring expenses during the first quarter of 2019, which includes expenses related to our inventory reduction plan, our gross profit would have been $101.2 million, or 24.5% of net sales for the first quarter of 2019. Gross profit was $103.4 million for the first quarter of 2018, or 23.9% of net sales. Excluding the negative impact of $16.1 million of acquisition-related and non-recurring charges during the first quarter of 2018, which includes expenses relating to our inventory reduction plan, our gross profit would have been $119.5 million, or 27.7% of net sales, for the first quarter of 2018. For the first quarter of 2019, gross profit benefited from an increase in net pricing of $7.3 million and was negatively impacted by our inventory reduction plan, input cost inflation (inclusive of freight, warehousing and procurement), and product mix.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses decreased $4.3 million, or 10.0%, to $38.3 million for the first quarter of 2019 from $42.6 million for the first quarter of 2018. The decrease was composed of decreases in consumer marketing expenses of $3.3 million, selling expenses of $1.6 million, warehousing expenses of $0.3 million and general and administrative expenses of $0.3 million, partially offset by an increase in acquisition/divestiture-related and non-recurring expenses of $1.2 million. Expressed as a percentage of net sales, selling, general and administrative expenses improved by 0.6 percentage points to 9.3% for the first quarter of 2019, compared to 9.9% for the first quarter of 2018.
Amortization Expense.
Amortization expense decreased $0.1 million to $4.5 million for the first quarter of 2019 from $4.6 million for the first quarter of 2018 due to the
McCann’s
acquisition completed in fiscal 2018, partially offset by the Pirate Brands sale completed in fiscal 2018.
Operating Income.
As a result of the foregoing, operating income decreased $10.9 million, or 19.4%, to $45.3 million for the first quarter of 2019 from $56.2 million for the first quarter of 2018. Operating income expressed as a percentage of net sales decreased to 11.0% in the first quarter of 2019 from 13.0% in the first quarter of 2018.
Net Interest Expense.
Net interest expense decreased $5.2 million, or 18.5%, to $23.1 million for the first quarter of 2019 from $28.3 million in the first quarter of 2018. The decrease was primarily attributable to a reduction in long-term debt outstanding during the first quarter of 2019 as compared to the first quarter of 2018, primarily as a result of the use of the net proceeds from the sale of Pirate Brands to prepay long-term debt during the fourth quarter of 2018 and other prepayments of long-term debt made earlier during the first and second quarters of 2018. At the end of the first quarter of 2019, we had long-term debt outstanding of $1.637 billion, compared to $2.097 billion at the end of the first quarter of 2018, a decrease of $460.1 million, or 21.9%. See “—Liquidity and Capital Resources —
Debt
” below.
Loss on Extinguishment of Debt.
There was no loss on extinguishment of debt for the first quarter of 2019, compared to a loss on extinguishment of debt for the first quarter of 2018 of $2.8 million, which included the write-off of deferred debt financing costs and unamortized discount of $2.4 million and $0.4 million, respectively, relating to the repayment of $125.0 million aggregate principal amount of our tranche B term loans.
Other Income.
Other income for the first quarter of 2019 and 2018 includes remeasurement of monetary assets denominated in a foreign currency into U.S. dollars of less than $0.1 million and $1.5 million, respectively. Other income for the first quarter of 2019 and 2018 also includes the impact of the newly adopted presentation of net periodic pension cost and net periodic post-retirement benefit costs below operating profit, in the amount of $0.3 million and $0.6 million, respectively.
Income Tax Expense.
Income tax expense decreased $0.9 million to $5.7 million for the first quarter of 2019 from $6.6 million for the first quarter of 2018. Our effective tax rate was 25.3% for the first quarter of 2019 and 24.3% for the first quarter of 2018. See “U.S. Tax Act” above.
Liquidity and Capital Resources
Our primary liquidity requirements include debt service, capital expenditures and working capital needs. See also, “Dividend Policy” and “Commitments and Contractual Obligations” below. We fund our liquidity requirements, as well as our dividend payments and financing for acquisitions, primarily through cash generated from operations and external sources of financing, including our revolving credit facility.
Cash Flows
Net cash provided by operating activities decreased $23.4 million to $50.3 million for the first quarter of 2019 from $73.7 million for the first quarter of 2018. The decrease in net cash provided by operating activities primarily reflects unfavorable working capital (comprised of changes in inventories, prepaid expenses and other current assets, trade accounts payable, accrued expenses and other liabilities) comparisons to the first quarter of 2018, mainly related to inventory, with a decrease in inventory of $27.3 million for the first quarter of 2019 as compared to a decrease in inventory of $46.1 million during the first quarter of 2018. The inventory reduction in the first quarter of 2018 was primarily attributable to our inventory reduction plan. The decrease in net cash provided by operating activities was also due to the timing of payments received in 2018 from post-acquisition transition services agreements.
Net cash used in investing activities for the first quarter of 2019 increased $3.6 million to $8.6 million from $5.0 million for the first quarter of 2018. The increase was attributable to an increase in capital spending. Capital expenditures in the first quarter of 2019 and 2018 included expenditures for building improvements, purchases of manufacturing and computer equipment.
Net cash used in financing activities for the first quarter of 2019 decreased $115.7 million to $42.1 million as compared to net cash used in financing activities of $157.8 million for the first quarter of 2018. Net cash used in financing activities for the first quarter of 2018 included the repayment of $125.0 million of tranche B term loans.
We believe that we will realize a benefit to our cash taxes payable from amortization of our trademarks, goodwill and other intangible assets for the taxable years 2019 through 2034. If there is a change in U.S. federal tax policy that reduces any of these available deductions or results in an increase in our corporate tax rate, our cash taxes payable may increase further, which could significantly reduce our future liquidity and impact our ability to make interest and dividend payments.
Dividend Policy
Our dividend policy reflects a basic judgment that our stockholders are better served when we distribute a substantial portion of our cash available to pay dividends to them instead of retaining it in our business. Under this policy, a substantial portion of the cash generated by our company in excess of operating needs, interest and principal payments on indebtedness, capital expenditures sufficient to maintain our properties and other assets is distributed as regular quarterly cash dividends to the holders of our common stock and not retained by us. We have paid dividends every quarter since our initial public offering in October 2004.
For the first quarter of 2019 and 2018, we had net cash provided by operating activities of $50.3 million and $73.7 million, respectively, and distributed as dividends $31.2 million and $30.9 million, respectively. Based upon our current dividend rate of $1.90 per share per annum and our current number of outstanding shares, we expect our aggregate dividend payments in fiscal 2019 to be approximately $124.1 million.
Our dividend policy is based upon our current assessment of our business and the environment in which we operate, and that assessment could change based on competitive or other developments (which could, for example, increase our need for capital expenditures or working capital), new acquisition opportunities or other factors. Our board of directors is free to depart from or change our dividend policy at any time and could do so, for example, if it was to determine that we have insufficient cash to take advantage of growth opportunities.
Acquisitions
Our liquidity and capital resources have been significantly impacted by acquisitions and may be impacted in the foreseeable future by additional acquisitions. As discussed elsewhere in this report, as part of our growth strategy we plan to expand our brand portfolio with disciplined acquisitions of complementary brands. We have historically financed acquisitions by incurring additional indebtedness, issuing equity and/or using cash flows from operating activities. Our interest expense has over time increased as a result of additional indebtedness we have incurred in connection with acquisitions and will increase with any additional indebtedness we may incur to finance future acquisitions. Although we may subsequently issue equity and use the proceeds to repay all or a portion of the additional indebtedness incurred to finance an acquisition and reduce our interest expense, the additional shares of common stock would increase the amount of cash flows from operating activities necessary to fund dividend payments.
We financed the
McCann’s
acquisition, completed in July 2018, with cash on hand and additional revolving loans under our existing credit facility. The impact of future acquisitions, whether financed with additional indebtedness or otherwise, may have a material impact on our liquidity and capital resources.
Divestitures
We used the net proceeds from the Pirate Brands sale, completed in October 2018, along with additional borrowings under our revolving credit facility, to prepay the entire $500.1 million principal amount of tranche B term loans outstanding under our credit facility. See “Debt” below.
Debt
Senior Secured Credit Agreement.
In fiscal 2017, we refinanced our senior secured credit facility twice by amending and restating our senior secured credit agreement, first on March 30, 2017, and again on November 20, 2017.
The first refinancing, on March 30, 2017, reduced by 0.75% the spread over LIBOR or the applicable base rate on the then-outstanding $640.1 million of tranche B term loans.
On April 3, 2017, we repaid all of the outstanding borrowings and amounts due under our revolving credit facility and tranche A term loans using a portion of the net proceeds of our registered public offering of $500.0 million aggregate principal amount of 5.25% senior notes due 2025.
On November 20, 2017, we again refinanced our senior secured credit facility. This second refinancing increased the principal amount of the tranche B term loans by $10.0 million to $650.1 million, reduced by 25 basis points the spread over LIBOR or the applicable base rate on the tranche B term loans and any revolving loans, increased the aggregate commitments under our revolving credit facility from $500.0 million to $700.0 million, and extended the maturity date applicable to our revolving credit facility from June 2019 to November 2022.
We made optional prepayments of our tranche B term loans of $125.0 million principal amount in the first quarter of 2018 and $25.0 million principal amount in the second quarter of 2018. On October 18, 2018, we made a mandatory prepayment of $352.2 million principal amount of tranche B term loans with the net proceeds of the Pirate Brands sale. On October 19, 2018, we made an optional prepayment of the remaining $147.9 million principal amount of tranche B term loans outstanding under our credit agreement from cash on hand and the proceeds of additional revolving loans under our credit agreement. As a result of the optional and mandatory prepayments of the tranche B term loans, we recognized a loss on extinguishment of debt of $13.1 million in fiscal 2018, including $2.8 million in the first quarter of 2018.
As of the date of this report, the available borrowing capacity under our revolving credit facility, net of outstanding letters of credit of $2.2 million, was $647.8 million. Proceeds of the revolving credit facility may be used for general corporate purposes, including acquisitions of targets in the same or a similar line of business as our company, subject to specified criteria. At March 30, 2019, there was $50.0 million outstanding under our revolving credit facility. The revolving credit facility matures on November 21, 2022.
Our credit agreement is secured by substantially all of our and our domestic subsidiaries’ assets except our and our domestic subsidiaries’ real property.
Interest under the revolving credit facility, including any outstanding letters of credit is determined based on alternative rates that we may choose in accordance with the credit agreement, including a base rate per annum plus an applicable margin ranging from 0.25% to 0.75%, and LIBOR plus an applicable margin ranging from 1.25% to 1.75%, in each case depending on our consolidated leverage ratio.
Interest under the tranche B term loan facility was determined based on alternative rates that we could choose in accordance with the credit agreement, including a base rate per annum plus an applicable margin of 1.00%, and LIBOR plus an applicable margin of 2.00%. As of March 30, 2019, there were no tranche B term loans outstanding under our credit facility.
For further information regarding our credit agreement, including a description of optional and mandatory prepayment terms, and financial and restrictive covenants, see Note 6, “Long-Term Debt,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report.
4.625% Senior Notes due 2021.
On June 4, 2013, we issued $700.0 million aggregate principal amount of 4.625% senior notes due 2021 at a price to the public of 100% of their face value. We used the net proceeds from the issuance of the 4.625% senior notes to purchase or redeem all $248.5 million principal amount of our then existing 7.625% senior notes due 2018, to repay $222.2 million principal amount of our then existing tranche B term loans and approximately $40.0 million principal amount of revolving loans under our then existing credit agreement, and to pay related premiums, fees and expenses. We used the remaining net proceeds for our acquisition of Pirate Brands, completed in July 2013.
Interest on the 4.625% senior notes is payable on June 1 and December 1 of each year. The 4.625% senior notes will mature on June 1, 2021, unless earlier retired or redeemed as permitted or required by the terms of the indenture governing the 4.625% senior notes as described in Note 6, “Long-Term Debt,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report. We may also, from time to time, seek to retire the 4.625% senior notes through cash repurchases of the 4.625% senior notes or exchanges of the 4.625% senior notes for equity securities or both, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
We may also, from time to time, seek to retire the 4.625% senior notes through cash repurchases of the 4.625% senior notes and/or exchanges of the 4.625% senior notes for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
See Note 6, “Long-Term Debt,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report for a more detailed description of the 4.625% senior notes.
5.25% Senior Notes due 2025.
On April 3, 2017, we issued $500.0 million aggregate principal amount of 5.25% senior notes due 2025 at a price to the public of 100% of their face value. On November 20, 2017, we issued an additional $400.0 million aggregate principal amount of 5.25% senior notes due 2025 at a price to the public 101% of their face value plus accrued interest from October 1, 2017, which equates to a yield to worst of 5.03%. The notes issued in November were issued as additional notes under the same indenture as our 5.25% senior notes due 2025 that were issued in April, and, as such, form a single series and trade interchangeably with the previously issued 5.25% senior notes.
We used the net proceeds of the April 2017 offering to repay all of the outstanding borrowings and amounts due under our revolving credit facility and tranche A term loans, and to pay related fees and expenses. We used the net proceeds of the November 2017 offering to repay all of the then outstanding borrowings and amounts due under our revolving credit facility and to pay related fees and expenses. We have used a portion of, and intend to use the remaining portion of, the net proceeds of the April 2017 and November 2017 offerings for general corporate purposes, which have included and could include, among other things, repayment of other long term debt or possible acquisitions.
Interest on the 5.25% senior notes is payable on April 1 and October 1 of each year, commencing October 1, 2017. The 5.25% senior notes will mature on April 1, 2025, unless earlier retired or redeemed as permitted or required by the terms of the indenture governing the 5.25% senior notes as described in Note 6, “Long-Term Debt,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report.
We may also, from time to time, seek to retire the 5.25% senior notes through cash repurchases of the 5.25% senior notes and/or exchanges of the 5.25% senior notes for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
See Note 6, “Long-Term Debt,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report for a more detailed description of the 5.25% senior notes.
Stock Repurchase Program
On March 13, 2018, our board of directors authorized a stock repurchase program for the repurchase of up to $50.0 million of our company’s common stock through March 15, 2019.
Under that authorization, we repurchased and retired 1,397,148 shares of common stock at an average price per share (excluding fees and commissions) of $26.41, or $36.9 million in the aggregate, including 407,022 shares of common stock at an average price per share (excluding fees and commissions) of $24.55, or $10.0 million in the aggregate, during the first quarter of 2019. We did not repurchase any shares of common stock during the first quarter of 2018.
On March 12, 2019, our board of directors authorized an extension of our stock repurchase program from March 15, 2019 to March 15, 2020. In extending the repurchase program, our board of directors also reset the repurchase authority to up to $50.0 million. Therefore, as of March 30, 2019, we had $50.0 million available for future repurchases of common stock under the stock repurchase program.
Under the authorization, we may purchase shares of common stock from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the SEC.
The timing and amount of future stock repurchases, if any, under the program will be at the discretion of management, and will depend on available cash, market conditions and other considerations. Therefore, we cannot assure you as to the number or aggregate dollar amount of additional shares, if any, that will be repurchased under the repurchase program. We may discontinue the program at any time. Any shares repurchased pursuant to the repurchase program will be retired.
Future Capital Needs
On March 30, 2019, our total long-term debt of $1,636.8 million, net of our cash and cash equivalents of $11.3 million, was $1,625.5 million. Stockholders’ equity as of that date was $877.1 million.
Our ability to generate sufficient cash to fund our operations depends generally on our results of operations and the availability of financing. Our management believes that our cash and cash equivalents on hand, cash flow from operating activities and available borrowing capacity under our revolving credit facility will be sufficient for the foreseeable future to fund operations, meet debt service requirements, fund capital expenditures, make future acquisitions, if any, and pay our anticipated quarterly dividends on our common stock.
We expect to make capital expenditures of approximately $45.0 million to $50.0 million in the aggregate during fiscal 2019, $8.8 million of which were made during the first quarter. Our projected capital expenditures for fiscal 2019 include, among other things, approximately $9.1 million in connection with the implementation of a new enterprise resource planning (ERP) system, $5.4 million for new productivity projects, $4.4 million for IT infrastructure enhancements, including cyber security, and $3.8 million to fund infrastructure optimization projects.
Seasonality
Sales of a number of our products tend to be seasonal and may be influenced by holidays, changes in seasons or certain other annual events. In general, our sales are higher during the first and fourth quarters.
We purchase most of the produce used to make our frozen and shelf-stable vegetables, shelf-stable pickles, relishes, peppers, tomatoes and other related specialty items during the months of June through October, and we generally purchase the majority of our maple syrup requirements during the months of April through August. Consequently, our liquidity needs are greatest during these periods.
Inflation
See “—General—
Fluctuations in Commodity Prices and Production and Distribution Costs
” above.
Contingencies
See Note 12, “Commitments and Contingencies,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report.
Recent Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies —
Newly Adopted Accounting Standards
”
and
“—Recently Issued Accounting Standards
,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report.
Off-balance Sheet Arrangements
As of March 30, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Commitments and Contractual Obligations
Our contractual obligations and commitments principally include obligations associated with our outstanding indebtedness, future minimum operating lease obligations and future pension obligations. During the first quarter of 2019, except for the prepayment of a portion of our tranche B term loans, see “—Debt” above, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in the Commitments and Contractual Obligations table in our 2018 Annual Report on Form 10-K.
Item 3.
Quantitative and Qualitative Disclosures About Market Ris
k
Our principal market risks are exposure to changes in commodity prices, interest rates on borrowings and foreign currency exchange rates and market fluctuation risks related to our defined benefit pension plans.
Commodity Prices and Inflation.
The information under the heading “General—
Fluctuations in Commodity Prices and Production and Distribution Costs
” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.
Interest Rate Risk.
In the normal course of operations, we are exposed to market risks relating to our long-term debt arising from adverse changes in interest rates. Market risk is defined for these purposes as the potential change in the fair value of a financial asset or liability resulting from an adverse movement in interest rates.
Changes in interest rates impact our fixed and variable rate debt differently. For fixed rate debt, a change in interest rates will only impact the fair value of the debt, whereas for variable rate debt, a change in the interest rates will impact interest expense and cash flows. At March 30, 2019, we had $1,600.0 million of fixed rate debt and $50.0 million of variable rate debt.
Based upon our principal amount of long-term debt outstanding at March 30, 2019, a hypothetical 1.0% increase or decrease in interest rates would have affected our annual interest expense by approximately $0.5 million.
The carrying values and fair values of our revolving credit loans, term loans, 4.625% senior notes and 5.25% senior notes as of March 30, 2019 and December 29, 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2019
|
|
|
December 29, 2018
|
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
Revolving credit loans
|
|
$
|
50,000
|
|
$
|
50,000
|
(1)
|
$
|
50,000
|
|
$
|
50,000
|
(1)
|
|
4.625% senior notes due 2021
|
|
|
700,000
|
|
|
699,125
|
(2)
|
|
700,000
|
|
|
684,250
|
(2)
|
|
5.25% senior notes due 2025
|
|
$
|
903,236
|
(3)
|
$
|
867,107
|
(2)
|
$
|
903,371
|
(3)
|
$
|
837,877
|
(2)
|
|
|
(1)
|
|
Fair values are estimated based on Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.
|
|
|
(2)
|
|
Fair values are estimated based on quoted market prices.
|
|
|
(3)
|
|
The carrying values of the 5.25% senior notes due 2025 include a premium. At March 30, 2019 and December 29, 2018 the face amount of the 5.25% senior notes due 2025 was $900.0 million.
|
Cash and cash equivalents, trade accounts receivable, income tax receivable/payable, trade accounts payable, accrued expenses and dividends payable are reflected on our consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.
For more information, see Note 6, “Long-Term Debt,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report.
Foreign Currency Risk
. Our foreign sales are primarily to customers in Canada. Our sales to Canada are generally denominated in Canadian dollars and our sales for export to other countries are generally denominated in U.S. dollars. During the first quarter of 2019, our net sales to customers in foreign countries represented approximately 7.7% of our total net sales. During the first quarter of 2018, our net sales to customers in foreign countries represented approximately 6.7% of our total net sales. We also purchase certain raw materials from foreign suppliers. For example, we purchase a significant majority of our maple syrup requirements from suppliers in Québec, Canada. These purchases are made in Canadian dollars. A weakening of the U.S. dollar in relation to the Canadian dollar would significantly increase our future costs relating to the production of our maple syrup products to the extent we have not purchased Canadian dollars or otherwise entered into a currency hedging arrangement in advance of any such weakening of the U.S. dollar. Our purchases of raw materials from other foreign suppliers are generally denominated in U.S. dollars, but certain purchases of raw materials in Mexico are denominated in Mexican pesos.
As a result, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an adverse impact on operating results.
Market Fluctuation Risks Relating to our Defined Benefit Pension Plans
. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies; Use of Estimates” and Note 10, “Pension Benefits,” to our unaudited consolidated interim financial statements in Part I, Item 1 of this report for a discussion of the exposure of our defined benefit pension plan assets to risks related to market fluctuations.
Item 4.
Controls and Procedure
s
Evaluation of Disclosure Controls and Procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, our management, including our chief executive officer and our chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures that we use that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
. As required by Rule 13a-15(d) under the Exchange Act, our management, including our chief executive officer and our chief financial officer, also conducted an evaluation of our internal control over financial reporting to determine whether any change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our chief executive officer and our chief financial officer concluded that there has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We transitioned the spices & seasonings business that we acquired in late 2016 to a new enterprise resource planning (ERP) system during the third quarter of 2017. Since then, we have been planning for the transition of the remainder of our business to that new ERP system. Implementation and transition efforts continued during the first quarter of 2019. We currently expect the implementation and transition to the new ERP system to be completed during the second or third quarter of 2019. In connection with the implementation and transition, and resulting business process changes, we continue to review and enhance the design and documentation of our internal control over financial reporting processes to maintain effective controls over our financial reporting following the completion of the implementation and transition. To date, the implementation and transition have not materially affected, and upon completion we do not expect the implementation and transition to have any material effect on, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls.
Our company’s management, including the chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
