(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, 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, puffed corn and rice snacks, nut clusters and other specialty products. Our products are marketed under many recognized brands, including
Ac’cent
,
B&G
,
B&M
,
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
,
Molly McButter
,
Mrs. Dash
,
New York Flatbreads
,
New York Style
,
Old London
,
Original Tings
,
Ortega
,
Pirate’s Booty
,
Polaner
,
Red Devil
,
Regina
,
Sa-són
,
Sclafani
,
Smart Puffs
,
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 30, 2017 (fiscal 2017) and our fiscal year ended December 31, 2016 (fiscal 2016) each contain 52 weeks. Each quarter of fiscal 2017 and 2016 contains 13 weeks.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements for the thirteen and twenty-six week periods ended July 1, 2017 (second quarter and first two quarters of 2017) and July 2, 2016 (second quarter and first two quarters of 2016) have been prepared by our company in accordance with accounting principles generally accepted in the United States of America 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 generally accepted accounting principles 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 July 1, 2017, and the results of our operations, comprehensive income and cash flows for the second quarter and first two quarters of 2017 and 2016. Our results of operations for the second quarter and first two quarters of 2017 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 2016 filed with the SEC on March 1, 2017. Certain prior year amounts have been reclassified to conform to the current year presentation.
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” below 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 and twenty-six weeks ended July 1, 2017 (second quarter and first two quarters of 2017) included elsewhere in this report and the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2016 (fiscal 2016) included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 1, 2017 (which we refer to as our 2016 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 December 2, 2016, we acquired Victoria Fine Foods, LLC, and a related entity, from Huron Capital Partners and certain other sellers. On November 21, 2016, we completed the acquisition of the spices & seasonings business of ACH Food Companies, Inc. We refer to these acquisitions in this report as the “
Victoria
acquisition” and the “spices & seasonings acquisition,” respectively. Each of these recent acquisitions has 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 respective dates of acquisition. These acquisitions and the application of the acquisition method of accounting affect 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.
We attempt to manage cost inflation risks by locking in prices through short‑term supply contracts and advance commodities purchase agreements and by implementing cost saving measures. We also attempt to offset rising input costs by raising sales prices to our customers. However, increases in the prices we charge our customers may lag behind rising input costs. Competitive pressures also may limit our ability to quickly raise prices in response to rising costs.
We have seen and expect to continue to see moderate net cost increases for raw materials in the marketplace during 2017 and are currently locked into our supply and prices for a majority of our most significant commodities (excluding, among others, maple syrup) through the remainder of fiscal 2017 at a cost increase of less than 1% of cost of goods sold. During fiscal 2016, we had a minimal cost decrease for a majority of our most significant commodities (excluding, among others, maple syrup). 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.
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 two quarters of 2017 and 2016, our net sales to customers in foreign countries represented approximately 7.1% and 8.4%, 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 accounting principles generally accepted in the United States 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 amortizable trademark intangibles; and the accounting for share-based compensation expense. Actual results could differ significantly from these estimates and assumptions.
In our 2016 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 2016 Annual Report on Form 10-K.
Results of Operations
The following table sets forth the percentages of net sales represented by selected items for the second quarter and first two quarters of each of 2017 and 2016 reflected in our consolidated statements of operations. The comparisons of financial results are not necessarily indicative of future results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
July 1,
|
|
July 2,
|
|
July 1,
|
|
July 2,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of goods sold
|
|
69.8
|
%
|
|
64.2
|
%
|
|
69.7
|
%
|
|
65.8
|
%
|
|
Gross profit
|
|
30.2
|
%
|
|
35.8
|
%
|
|
30.3
|
%
|
|
34.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
13.5
|
%
|
|
11.0
|
%
|
|
13.1
|
%
|
|
11.2
|
%
|
|
Amortization expense
|
|
1.2
|
%
|
|
1.1
|
%
|
|
1.2
|
%
|
|
1.0
|
%
|
|
Impairment of intangible assets
|
|
—
|
%
|
|
1.8
|
%
|
|
—
|
%
|
|
0.8
|
%
|
|
Operating income
|
|
15.5
|
%
|
|
21.9
|
%
|
|
16.0
|
%
|
|
21.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
6.0
|
%
|
|
6.0
|
%
|
|
5.3
|
%
|
|
5.7
|
%
|
|
Loss on extinguishment of debt
|
|
0.2
|
%
|
|
—
|
%
|
|
0.2
|
%
|
|
0.4
|
%
|
|
Other income
|
|
(0.2)
|
%
|
|
(0.1)
|
%
|
|
(0.4)
|
%
|
|
(0.3)
|
%
|
|
Income before income tax expense
|
|
9.5
|
%
|
|
16.0
|
%
|
|
10.9
|
%
|
|
15.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
3.5
|
%
|
|
6.1
|
%
|
|
3.9
|
%
|
|
5.8
|
%
|
|
Net income
|
|
6.0
|
%
|
|
9.9
|
%
|
|
7.0
|
%
|
|
9.6
|
%
|
|
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.
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, acquisition‑related expenses and other general corporate expenses.
Amortization Expense.
Amortization expense includes the amortization expense associated with customer relationships, amortizable trademarks and other intangibles.
Impairment of Intangible Assets.
Impairment of intangible assets represents a reduction of the carrying value of amortizable intangible assets to fair value when the carrying value of the assets is no longer recoverable.
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.
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 accounting principles generally accepted in the United States (GAAP) in our consolidated balance sheets and related consolidated statements of operations, comprehensive income 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 impact of acquisitions until the net sales from such acquisitions are included in both comparable periods and (2) net sales of discontinued brands. The portion of current period net sales attributable to recent acquisitions for which there is no corresponding period 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 first anniversary of the acquisition date. For discontinued 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 brands.
A reconciliation of base business net sales to reported net sales for the second quarter and first two quarters of 2017 and 2016 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
July 1,
|
|
July 2,
|
|
July 1,
|
|
July 2,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Reported net sales
|
|
$
|
368,134
|
|
$
|
306,376
|
|
$
|
786,008
|
|
$
|
659,354
|
|
Net sales from acquisitions
(1)
|
|
|
(77,062)
|
|
|
—
|
|
|
(150,918)
|
|
|
—
|
|
Net sales of
Rickland Orchards
(2)
|
|
|
—
|
|
|
(158)
|
|
|
—
|
|
|
(528)
|
|
Base business net sales
|
|
$
|
291,072
|
|
$
|
306,218
|
|
$
|
635,090
|
|
$
|
658,826
|
|
|
(1)
|
|
Reflects net sales for the spices & seasonings business and
Victoria
for the second quarter and first two quarters of 2017 for which there is no comparable period of net sales in 2016. The spices & seasonings business was acquired on November 21, 2016, and
Victoria
was acquired on December 2, 2016.
|
|
(2)
|
|
Rickland Orchards
was discontinued during the second quarter of 2016.
|
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-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, intangible asset impairment charges and related asset write offs, and gains and losses on sale of assets), and distribution restructuring expenses. Management believes that it is useful to eliminate net interest expense, income taxes, depreciation and amortization, loss on extinguishment of debt, acquisition-related expenses, gains and losses, non-cash intangible asset impairment charges and related asset write offs and distribution restructuring expenses 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, internal management reports used 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 (loss) 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 costs and expenses for depreciation and amortization, interest and related expenses, loss on extinguishment of debt, acquisition-related expenses, gains and losses, income taxes, intangible asset impairment charges and related asset write offs, and distribution restructuring expenses. 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 second quarter and first two quarters of each of 2017 and 2016 along with the components of EBITDA and adjusted EBITDA follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
July 1,
|
|
July 2,
|
|
July 1,
|
|
July 2,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,061
|
|
$
|
30,251
|
|
$
|
54,825
|
|
$
|
63,447
|
|
Income tax expense
|
|
|
12,871
|
|
|
18,756
|
|
|
31,166
|
|
|
38,387
|
|
Interest expense, net
|
|
|
21,998
|
|
|
18,426
|
|
|
41,645
|
|
|
37,561
|
|
Depreciation and amortization
|
|
|
12,329
|
|
|
9,154
|
|
|
24,547
|
|
|
18,158
|
|
Loss on extinguishment of debt
|
|
|
1,045
|
|
|
—
|
|
|
1,163
|
|
|
2,836
|
|
EBITDA
|
|
|
70,304
|
|
|
76,587
|
|
|
153,346
|
|
|
160,389
|
|
Acquisition-related expenses
|
|
|
7,851
|
|
|
1,699
|
|
|
13,693
|
|
|
3,931
|
|
Amortization of acquisition-related inventory step-up
|
|
|
—
|
|
|
—
|
|
|
1,550
|
|
|
3,074
|
|
Impairment of intangible assets
|
|
|
—
|
|
|
5,405
|
|
|
—
|
|
|
5,405
|
|
Loss on disposal of inventory
|
|
|
—
|
|
|
791
|
|
|
—
|
|
|
791
|
|
Loss on sale of assets
|
|
|
—
|
|
|
—
|
|
|
1,608
|
|
|
—
|
|
Distribution restructuring expenses
|
|
|
—
|
|
|
474
|
|
|
—
|
|
|
948
|
|
Adjusted EBITDA
|
|
|
78,155
|
|
|
84,956
|
|
|
170,197
|
|
|
174,538
|
|
Income tax expense
|
|
|
(12,871)
|
|
|
(18,756)
|
|
|
(31,166)
|
|
|
(38,387)
|
|
Interest expense, net
|
|
|
(21,998)
|
|
|
(18,426)
|
|
|
(41,645)
|
|
|
(37,561)
|
|
Acquisition-related expenses
|
|
|
(7,851)
|
|
|
(1,699)
|
|
|
(13,693)
|
|
|
(3,931)
|
|
Distribution restructuring expenses
|
|
|
—
|
|
|
(474)
|
|
|
—
|
|
|
(948)
|
|
Write-off of property, plant and equipment
|
|
|
105
|
|
|
—
|
|
|
105
|
|
|
—
|
|
Deferred income taxes
|
|
|
9,712
|
|
|
25,813
|
|
|
19,992
|
|
|
35,667
|
|
Amortization of deferred financing costs and bond discount
|
|
|
1,464
|
|
|
1,314
|
|
|
2,795
|
|
|
2,782
|
|
Amortization of acquisition-related inventory step-up
|
|
|
—
|
|
|
—
|
|
|
(1,550)
|
|
|
(3,074)
|
|
Share-based compensation expense
|
|
|
2,059
|
|
|
2,018
|
|
|
3,202
|
|
|
3,116
|
|
Excess tax benefits from share-based compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(343)
|
|
Changes in assets and liabilities, net of effects of business combinations
|
|
|
(31,444)
|
|
|
2,078
|
|
|
(88,413)
|
|
|
68,814
|
|
Net cash provided by operating activities
|
|
$
|
17,331
|
|
$
|
76,824
|
|
$
|
19,824
|
|
$
|
200,673
|
|
Second quarter of 2017 compared to the second quarter of 2016
Net Sales.
Net sales increased $61.7 million, or 20.2%, to $368.1 million for the second quarter of 2017 from $306.4 million for the second quarter of 2016. Net sales of the spices & seasonings business, acquired on November 21, 2016, and net sales of
Victoria
, acquired on December 2, 2016, contributed $67.4 million and $9.7 million, respectively, to the overall net sales increase.
Base business net sales for the second quarter of 2017 decreased $15.1 million, or 4.9%, to $291.1 million from $306.2 million for the second quarter of 2016. The $15.1 million decrease was attributable to decreases in unit volume of $11.8 million, or 3.8%, and net pricing of $3.3 million, or 1.1%.
Approximately 65% of our base business net sales decline for the second quarter of 2017 was attributable to Pirate Brands, our maple syrup products,
Green Giant
and
Mama Mary’s
. Net sales of Pirate Brands decreased $3.4 million, primarily due to a shift in timing of certain promotional spending from the second quarter of last year to the third quarter of this year. Net sales of our maple syrup products decreased $3.0 million primarily due to our decision during the first quarter of 2017 to discontinue certain private label sales. Net sales of
Green Giant
frozen products increased by $9.4 million, driven by the brand’s new innovation products. The increase was more than offset by decreases in net sales of
Green Giant
shelf-stable products of $7.6 million, primarily attributable to forecasted
distribution losses with certain customers, increases in coupon and slotting expenses of $2.9 million and a decrease in net sales of non-branded bulk IQF products of $0.9 million. Net sales of
Mama Mary’s
, which faced a category decline of approximately 10.0% during the second quarter of 2017, decreased $1.5 million, or 16.9%.
See Note 14, “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 by brand for the second quarter of 2017 and the second quarter of 2016 for each of our brands that exceed approximately 2% of our fiscal 2017 or fiscal 2016 net sales and for all other brands in the aggregate.
The following chart sets forth the most significant base business net sales decreases by brand for the second quarter of 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Business
|
|
|
|
|
Net Sales Increase (Decrease)
|
|
|
|
|
Dollars
|
|
Percentage
|
|
|
|
|
(in millions)
|
|
|
|
|
Brand:
|
|
|
|
|
|
|
|
Pirate Brands
|
|
$
|
(3.4)
|
|
(16.5)
|
%
|
|
Maple Grove Farms of Vermont
|
|
|
(2.3)
|
|
(12.1)
|
%
|
|
Green Giant
|
|
|
(2.0)
|
|
(1.9)
|
%
|
|
Mama Mary's
|
|
|
(1.5)
|
|
(16.9)
|
%
|
|
Mrs. Dash
|
|
|
(1.0)
|
|
(6.6)
|
%
|
|
Bear Creek Country Kitchens
|
|
|
(0.9)
|
|
(17.4)
|
%
|
|
TrueNorth
|
|
|
(0.8)
|
|
(25.7)
|
%
|
|
|
|
|
|
|
|
|
|
All other brands
|
|
|
(3.2)
|
|
(2.5)
|
%
|
|
Base business net sales decrease
|
|
$
|
(15.1)
|
|
(4.9)
|
%
|
|
Gross Profit.
Gross profit increased $1.3 million, or 1.2%, to $111.0 million for the second quarter of 2017 from $109.7 million for the second quarter of 2016. Gross profit expressed as a percentage of net sales decreased to 30.2% in the second quarter of 2017 from 35.8% in the second quarter of 2016, a decrease of 5.6 percentage points. Excluding spices & seasonings and
Victoria
, approximately 3.2 percentage points of the decrease in gross profit percentage was due to an increase in warehousing and distribution costs, 1.1 percentage points of the decrease was due to a decrease in pricing and 0.9 percentage points of the decrease was due to an increase in coupon and slotting expenses. The remaining 0.4 percentage points of the decrease was due to an increase in all other costs, including the impact of product mix.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased $15.7 million, or 46.3%, to $49.6 million for the second quarter of 2017 from $33.9 million for the second quarter of 2016. The increase was composed of increases in marketing expenses of $8.0 million, acquisition-related expenses of $6.2 million and warehousing expenses of $3.7 million, partially offset by a decrease in distribution restructuring expenses of $0.5 million and all other expenses of $1.7 million. Expressed as a percentage of net sales, selling, general and administrative expenses increased 2.5 percentage points to 13.5% for the second quarter of 2017 from 11.0% for the second quarter of 2016.
Amortization Expense.
Amortization expense increased $0.9 million to $4.3 million for the second quarter of 2017 from $3.4 million for the second quarter of 2016 due to the spices & seasonings and
Victoria
acquisitions completed in fiscal 2016.
Impairment of Intangible Assets.
Impairment of intangible assets of $5.4 million for the second quarter of 2016 includes a $4.5 million loss for the impairment of amortizable trademarks and a $0.9 million loss for the impairment of customer relationship intangibles, both relating to
Rickland Orchards,
as we discontinued the
Rickland
Orchards brand during the second quarter of 2016 because there was not sufficient demand to warrant continued production.
Operating Income.
As a result of the foregoing, operating income decreased $9.9 million, or 14.8%, to $57.2 million for the second quarter of 2017 from $67.1 million for the second quarter of 2016. Operating income expressed as a percentage of net sales decreased to 15.5% in the second quarter of 2017 from 21.9% in the second quarter of 2016.
Net Interest Expense.
Net interest expense increased $3.6 million, or 19.4%, to $22.0 million for the second quarter of 2017 from $18.4 million in the second quarter of 2016. The increase was primarily attributable to additional borrowings made in the fourth quarter of 2016 to fund the spices & seasonings acquisition and the
Victoria
acquisition and in the second quarter of 2017 in connection with our credit agreement refinancing and senior notes offering. See “—Liquidity and Capital Resources—Debt” below.
Loss on Extinguishment of Debt.
Loss on extinguishment of debt for the second quarter of 2017 includes the write-off of deferred debt financing costs and unamortized discount of $0.9 million and $0.2 million, respectively, relating to the repayment of all outstanding borrowings under the tranche A term loans. We did not incur a loss on extinguishment of debt for the second quarter of 2016. See “—
Debt
” below.
Other Income.
Other income for the second quarter of 2017 and 2016 includes remeasurement of monetary assets denominated in a foreign currency into U.S. dollars of $0.8 million and $0.4 million, respectively.
Income Tax Expense.
Income tax expense decreased $5.9 million to $12.9 million for the second quarter of 2017 from $18.8 million for the second quarter of 2016. Our effective tax rate was 36.8% for the second quarter of 2017 and 38.3% for the second quarter of 2016.
First two quarters of 2017 compared to the first two quarters of 2016
Net Sales.
Net sales increased $126.6 million, or 19.2%, to $786.0 million for the first two quarters of 2017 from $659.4 million for the first two quarters of 2016. Net sales of the spices & seasonings business, acquired on November 21, 2016, and net sales of
Victoria
, acquired on December 2, 2016, contributed $130.6 million and $20.4 million, respectively, to the overall net sales increase.
Base business net sales for the first two quarters of 2017 decreased $23.7 million, or 3.6%, to $635.1 million from $658.8 million for the first two quarters of 2016. The $23.7 million decrease was attributable to decreases in unit volume of $21.5 million, or 3.3%, and net pricing of $2.2 million, or 0.3%.
Over 60% of our base business net sales decline for the first two quarters of 2017 was attributable to
Green Giant
, our maple syrup products,
Bear Creek Country Kitchens
and
Mama Mary’s
. Net sales of
Green Giant
frozen products increased by $7.8 million, driven by the brand’s new innovation products. The increase was more than offset by decreases in unit volume of
Green Giant
shelf-stable products of $8.7 million, primarily attributable to forecasted distribution losses with certain customers, an increase in coupon and slotting expenses of $4.5 million and a decrease in net sales of non-branded bulk IQF products of $1.3 million. Net sales of our maple syrup products decreased $3.9 million, primarily due to our decision during the first quarter of 2017 to discontinue certain private label sales. Net sales of
Bear Creek Country Kitchens
, which faced aggressive competition and a category decline of approximately 5.0% during the first two quarters of 2017, decreased $2.3 million, or 12.1%. Net sales of
Mama Mary’s
decreased $2.2 million, or 11.4%, generally in line with a category decline of approximately 9.0%.
See Note 14, “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 by brand for the first two quarters of 2017 and the first two quarters of 2016 for each of our brands that exceed approximately 2% of our fiscal 2017 or fiscal 2016 net sales and for all other brands in the aggregate.
The following chart sets forth the most significant base business net sales decreases by brand for the first two quarters of 2017:
|
|
|
|
|
|
|
|
|
|
Base Business
|
|
|
|
|
Net Sales Increase (Decrease)
|
|
|
|
|
Dollars
|
|
Percentage
|
|
|
|
|
(in millions)
|
|
|
|
|
Brand:
|
|
|
|
|
|
|
|
Green Giant
|
|
$
|
(6.7)
|
|
(2.8)
|
%
|
|
Bear Creek Country Kitchens
|
|
|
(2.3)
|
|
(12.1)
|
%
|
|
Mama Mary's
|
|
|
(2.2)
|
|
(11.4)
|
%
|
|
Maple Grove Farms of Vermont
|
|
|
(2.2)
|
|
(5.9)
|
%
|
|
Pirate Brands
|
|
|
(1.6)
|
|
(3.5)
|
%
|
|
TrueNorth
|
|
|
(1.5)
|
|
(23.5)
|
%
|
|
SpringTree
|
|
|
(1.3)
|
|
(13.6)
|
%
|
|
B&M
|
|
|
(1.1)
|
|
(10.1)
|
%
|
|
Bloch & Guggenheimer
|
|
|
(1.1)
|
|
(7.5)
|
%
|
|
Mrs. Dash
|
|
|
(0.8)
|
|
(2.6)
|
%
|
|
|
|
|
|
|
|
|
|
All other brands
|
|
|
(2.9)
|
|
(1.3)
|
%
|
|
Base business net sales decrease
|
|
$
|
(23.7)
|
|
(3.6)
|
%
|
|
Gross Profit.
Gross profit increased $12.2 million, or 5.4%, to $237.8 million for the first two quarters of 2017 from $225.6 million for the first two quarters of 2016. Gross profit expressed as a percentage of net sales decreased to 30.3% in the first two quarters of 2017 from 34.2% in the first two quarters of 2016, a decrease of 3.9 percentage points. Excluding spices & seasonings and
Victoria
, approximately 2.7 percentage points of the decrease in gross profit percentage was due to an increase in warehousing and distribution costs, 0.6 percentage points of the decrease was due to an increase in coupon and slotting expenses and 0.3 percentage points of the decrease was due to a decrease in pricing. The remaining 0.3 percentage points of the decrease was due to an increase of all other costs, including the impact of product mix.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased $29.7 million, or 40.4%, to $103.2 million for the first two quarters of 2017 from $73.5 million for the first two quarters of 2016. The increase was composed of increases in marketing expenses of $11.3 million, acquisition-related expenses of $9.8 million, warehousing expenses of $7.9 million, selling expenses of $2.0 million (which includes a $1.6 million increase in brokerage expenses) and a loss on sale of assets of $1.6 million, partially offset by a decrease in distribution restructuring expenses of $0.9 million and all other expenses of $2.0 million. Expressed as a percentage of net sales, selling, general and administrative expenses increased 1.9 percentage points to 13.1% for the first two quarters of 2017 from 11.2% for the first two quarters of 2016.
Amortization Expense.
Amortization expense increased $1.9 million to $8.7 million for the first two quarters of 2017 from $6.8 million for the first two quarters of 2016 due to the spices & seasonings and
Victoria
acquisitions completed in fiscal 2016.
Impairment of Intangible Assets.
Impairment of intangible assets of $5.4 million for the first two quarters of 2016 includes a $4.5 million loss for the impairment of amortizable trademarks and a $0.9 million loss for the impairment of customer relationship intangibles, both relating to
Rickland Orchards,
as we discontinued the
Rickland
Orchards brand during the second quarter of 2016 because there was not sufficient demand to warrant continued production.
Operating Income.
As a result of the foregoing, operating income decreased $14.1 million, or 10.1%, to $125.8 million for the first two quarters of 2017 from $139.9 million for the first two quarters of 2016. Operating income expressed as a percentage of net sales decreased to 16.0% in the first two quarters of 2017 from 21.2% in the first two quarters of 2016.
Net Interest Expense.
Net interest expense increased $4.0 million, or 10.9%, to $41.6 million for the first two quarters of 2017 from $37.6 million in the first two quarters of 2016. The increase was primarily attributable to additional borrowings made in the fourth quarter of 2016 to fund the spices & seasonings acquisition and the
Victoria
acquisition and in the second quarter of 2017 in connection with our credit agreement refinancing and senior notes offering. See “—Liquidity and Capital Resources—Debt” below.
Loss on Extinguishment of Debt.
Loss on extinguishment of debt for the first two quarters of 2017 includes the write-off of deferred debt financing costs and unamortized discount of $0.9 million and $0.2 million, respectively, relating to the repayment of all outstanding borrowings under the tranche A term loans. During the first quarter of 2017, we incurred a loss on extinguishment of debt relating to the refinancing of our tranche B term loans of less than $0.1 million. Loss on extinguishment of debt for the first two quarters of 2016 includes the write-off of deferred debt financing costs and unamortized discount of $2.2 million and $0.6 million, respectively, relating to the repayment of $40.1 million aggregate principal amount of our tranche A term loans and $109.9 million aggregate principal amount of our tranche B term loans. See “—
Debt
” below.
Other Income.
Other income for the first two quarters of 2017 and 2016 includes remeasurement of monetary assets denominated in a foreign currency into U.S. dollars of $3.0 million and $2.3 million, respectively.
Income Tax Expense.
Income tax expense decreased $7.2 million to $31.2 million for the first two quarters of 2017 from $38.4 million for the first two quarters of 2016. Our effective tax rate was 36.2% for the first two quarters of 2017 and 37.7% for the first two quarters of 2016.
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 $180.9 million to $19.8 million for the first two quarters of 2017 from $200.7 million for the first two quarters of 2016. The decrease in net cash provided by operating activities primarily reflects unfavorable working capital (comprised of changes in inventories, prepaid expenses and accrued expenses) comparisons to the first two quarters of 2016. This decrease is mainly due to an increase in inventory and the timing of payments received from post-acquisition transition services agreements.
Net cash used in investing activities for the first two quarters of 2017 increased $11.6 million to $24.8 million from $13.2 million for the first two quarters of 2016. The increase was attributable to an increase in capital spending, partially offset by the proceeds from the sale of assets. Capital expenditures in the first two quarters of 2017 and 2016 included expenditures for building improvements, purchases of manufacturing and computer equipment and capitalized interest. During the first two quarters of 2017, we sold to a third-party co-packer our Le Sueur, Minnesota research center, including the seed technology assets, property, plant and equipment, which we acquired as part of the
Green Giant
acquisition, resulting in a $1.6 million loss on sale of assets.
Net cash provided by financing activities for the first two quarters of 2017 increased $113.6 million to $28.0 million from net cash used in financing activities of $85.6 million for the first two quarters of 2016. Net cash provided by financing activities for the first two quarters of 2017 consisted of $500.0 million of proceeds from the issuance of our 5.25% senior notes and $55.0 million of revolving credit facility borrowings, partially offset by $233.6 million repayment of our tranche A term loan, $221.0 million of repayments of revolving credit facility borrowings, $61.8 million of dividend payments, $8.6 million of debt financing costs and $2.0 million of payments of tax withholding on behalf of employees for net share settlement of share based compensation. Net cash used in financing activities for the first two quarters of 2016 consisted of $150.0 million of term loan repayment, $50.0 million of repayments of revolving credit facility borrowings, $46.6 million of dividend payments and $1.4 million of payments of tax withholding on
behalf of employees for net share settlement of share based compensation, partially offset by $152.0 million of proceeds from the issuance of common stock, $10.0 million of revolving credit facility borrowings, and $0.3 million excess tax benefits of from share-based compensation.
Based on a number of factors, including amortization for tax purposes of our trademarks, goodwill and other intangible assets acquired in prior acquisitions, we realized a significant reduction in cash taxes in fiscal 2016 as compared to our tax expense for financial reporting purposes. During the second quarter of 2016, we discontinued the
Rickland Orchards
brand, which resulted in a one-time cash taxes benefit of $17.3 million for fiscal 2016.
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 2017 through 2031. 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 two quarters of 2017 and 2016, we had cash flows provided by operating activities of $19.8 million and $200.7 million, respectively, and distributed as dividends of $61.8 million and $46.6 million, respectively. Based upon our current dividend rate of $1.86 per share per annum, we expect our aggregate dividend payments in fiscal 2017 to be approximately $123.6 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 spices & seasonings acquisition, completed in November 2016, with cash on hand, including the net proceeds of our August 2016 public offering of common stock, and additional revolving loans under our senior secured credit facility. We financed the
Victoria
acquisition, completed in December 2016, with cash on hand and additional revolving loans under our senior secured 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.
Debt
Senior Secured Credit Agreement.
On March 30, 2017, we refinanced our senior secured credit facility. The refinancing reduced by 0.75% the spread over LIBOR or the applicable base rate on $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 the net proceeds of our registered public offering of $500.0 million aggregate principal amount of 5.25% senior notes due 2025. At July 1, 2017, $640.1 million of tranche B term loans and $10.0 million of revolving loans were outstanding under our credit agreement. The credit agreement is secured by substantially all of our and our domestic subsidiaries’ assets except our and our domestic subsidiaries’ real property. At July 1, 2017, the available borrowing capacity under our revolving credit facility, net of outstanding letters of credit of $2.0 million, was $488.0 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. The revolving credit facility matures on June 5, 2019.
The entire $640.1 million principal amount of tranche B term loans outstanding are due and payable at maturity on November 2, 2022.
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 0.50% to 1.00%, and LIBOR plus an applicable margin ranging from 1.50% to 2.00%, in each case depending on our consolidated leverage ratio. At July 1, 2017, the revolving credit facility interest rate was approximately 3.21%.
Interest under the tranche B term loan facility 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 of 1.25%, and LIBOR plus an applicable margin of 2.25%. At July 1, 2017, the tranche B term loan interest rate was approximately 3.48%.
For further information regarding our senior secured 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. 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. 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. See Note 6, “Long-Term Debt,” to our unaudited consolidated interim financial statements 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. We used the net proceeds of the 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 intend to use the remaining net proceeds for general corporate purposes, which 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, “Debt,” to our unaudited consolidated interim financial statements. We may also, from time to time, seek to retire the 5.25% senior notes through cash repurchases of the 5.25% senior notes or exchanges of the 5.25% 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. See Note 6 “Debt,” to our unaudited consolidated interim financial statements for a more detailed description of the 5.25% senior notes.
Future Capital Needs
On July 1, 2017, our total long-term debt of $1,821.5 million, net of our cash and cash equivalents of $51.7 million, was $1,769.8 million. Stockholders’ equity as of that date was $787.7 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 $60.0 million in the aggregate during fiscal 2017, $26.9 million of which were made during the first two quarters. Our projected capital expenditures for fiscal 2017 include anticipated capital expenditures of approximately $9.8 million to move equipment used in the production of certain
Green Giant
products from General Mills’ Belvidere, Illinois manufacturing facility to an existing B&G Foods manufacturing facility and one or more co-packers, approximately $11.0 million for the purchase of equipment for innovation products for
Green Giant
and approximately $11.2 million in connection with the implementation of a new enterprise resource planning (ERP) system.
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
We are currently locked into pricing and supply for substantially all of our major commodities, other than maple syrup, through the remainder of fiscal 2017 at a cost increase of less than 1% of cost of goods sold and will continue to manage inflation risk by entering into short term supply contracts and advance commodities purchase agreements from time to time, and, if necessary, by raising prices. During fiscal 2016, we had a minimal cost decrease for a majority of our most significant commodities (excluding, among others, maple syrup). 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 and 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.
Contingencies
See Note 10, “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 July 1, 2017, 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 two quarters of 2017, except for the refinancing of our tranche B term loans and the issuance of our 5.25% senior notes, 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 2016 Annual Report on Form 10-K.
Forward-Looking Statements
This report includes forward-looking statements, including without limitation the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The words “believes,” “anticipates,” “plans,” “expects,” “intends,” “estimates,” “projects” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by any forward-looking statements. We believe important factors that could cause actual results to differ materially from our expectations include the following:
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·
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our substantial leverage;
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·
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the effects of rising costs for our raw materials, packaging and ingredients;
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·
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crude oil prices and their impact on distribution, packaging and energy costs;
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·
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our ability to successfully implement sales price increases and cost saving measures to offset any cost increases;
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·
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intense competition, changes in consumer preferences, demand for our products and local economic and market conditions;
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·
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our continued ability to promote brand equity successfully, to anticipate and respond to new consumer trends, to develop new products and markets, to broaden brand portfolios in order to compete effectively with lower priced products and in markets that are consolidating at the retail and manufacturing levels and to improve productivity;
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·
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the risks associated with the expansion of our business;
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·
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our possible inability to identify new acquisitions or to integrate recent or future acquisitions or our failure to realize anticipated revenue enhancements, cost savings or other synergies;
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·
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our ability to access the credit markets and our borrowing costs and credit ratings, which may be influenced by credit markets generally and the credit ratings of our competitors;
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·
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unanticipated expenses, including, without limitation, litigation or legal settlement expenses;
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·
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the effects of currency movements of the Canadian dollar and the Mexican peso as compared to the U.S. dollar;
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·
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future impairments of our goodwill and intangible assets;
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·
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our sustainability initiatives and changes to environmental laws and regulations;
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·
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other factors that affect the food industry generally, including:
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·
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recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations and the possibility that consumers could lose confidence in the safety and quality of certain food products;
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·
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competitors’ pricing practices and promotional spending levels;
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·
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fluctuations in the level of our customers’ inventories and credit and other business risks related to our customers operating in a challenging economic and competitive environment; and
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·
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the risks associated with third-party suppliers and co-packers, including the risk that any failure by one or more of our third-party suppliers or co-packers to comply with food safety or other laws and regulations may disrupt our supply of raw materials or certain finished goods products or injure our reputation; and
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·
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other factors discussed elsewhere in this report and in our other public filings with the SEC, including under Item 1A, “Risk Factors,” in our 2016 Annual Report on Form 10-K.
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Developments in any of these areas could cause our results to differ materially from results that have been or may be projected by or on our behalf.
All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
We caution that the foregoing list of important factors is not exclusive. There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed elsewhere in this section of this report. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. We urge investors not to unduly rely on forward-looking statements contained in this report.
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 “Inflation” 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 July 1, 2017, we had $1,200.0 million of fixed rate debt and $650.1 million of variable rate debt.
Based upon our principal amount of long-term debt outstanding at July 1, 2017, a hypothetical 1.0% increase or decrease in interest rates would have affected our annual interest expense by approximately $6.5 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 July 1, 2017 and December 31, 2016 are as follows (in thousands):
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July 1, 2017
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December 31, 2016
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Carrying Value
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Fair Value
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Carrying Value
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Fair Value
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Revolving credit loans
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10,000
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10,000
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(1)
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176,000
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176,000
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(1)
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Tranche A term loans due 2019
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—
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—
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233,378
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(2)
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232,795
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(1)
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Tranche B term loans due 2022
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637,614
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(3)
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640,802
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(1)
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637,391
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(3)
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645,358
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(1)
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4.625% senior notes due 2021
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700,000
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711,375
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(4)
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700,000
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714,000
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(4)
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5.25% senior notes due 2025
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500,000
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510,000
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(4)
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—
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—
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(1)
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Fair values are estimated based on Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.
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(2)
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The carrying values of the tranche A term loans are net of discount. On April 3, 2017, we repaid all of the outstanding borrowings and amounts due under our tranche A term loans. At December 31, 2016, the face amounts of the tranche A term loans were $233.6 million.
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(3)
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The carrying values of the tranche B term loans are net of discount. At July 1, 2017 and December 31, 2016, the face amounts of the tranche B term loans were $640.1 million.
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(4)
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Fair values are estimated based on quoted market prices.
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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 two quarters of 2017, our net sales to customers in foreign countries represented approximately 7.1% of our total net sales. During the first two quarters of 2016, our net sales to customers in foreign countries represented approximately 8.4% 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 9, “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 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, except as described below, there has been no change during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In anticipation of the upcoming expiration of the transition services agreement relating to our newly acquired spices & seasonings business, we transitioned the spices & seasonings business to a new enterprise resource planning (ERP) system during the third quarter of 2017. We plan to continue implementing the ERP system throughout other parts of our businesses over the course of approximately the next two years. In connection with these implementations 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.
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.
PART II
OTHER INFORMATIO
N
Item 1.
Legal Proceeding
s
The information set forth under the heading “
Legal Proceedings
” in Note 10 to our unaudited consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factor
s
We do not believe there have been any material changes in our risk factors as previously disclosed in our 2016 Annual Report on Form 10-K.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceed
s
Not applicable.
Item 3.
Defaults Upon Senior Securitie
s
Not applicable.
Item 4.
Mine Safety Disclosure
s
Not applicable.
Item 5.
Other Informatio
n
Not applicable.
Item 6.
Exhibit
s
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EXHIBIT
NO.
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DESCRIPTION
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31.1
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Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer.
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31.2
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Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer.
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer and Chief Financial Officer.
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101.1
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The following unaudited financial information from B&G Foods’ Quarterly Report on Form 10-Q for the quarter ended July 1, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial Statements, and (vi) document and entity information.
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SIGNATUR
E
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Dated: August 7, 2017
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B&G FOODS, INC.
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By:
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/s/ Amy J. Chiovari
|
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Amy J. Chiovari
Corporate Controller and Interim Chief Financial Officer (Principal Financial and Accounting Officer and Authorized Officer)
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