Business Context and Reporting Period
Company: B&G Foods, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: July 4, 2009 (Second Quarter of Fiscal 2009)
Business Overview: B&G Foods manufactures, sells, and distributes a diverse portfolio of high-quality shelf-stable foods (e.g., hot cereals, fruit spreads, canned meats, spices, maple syrup) across the United States, Canada, and Puerto Rico. The company operates in a single industry segment.
Key Financial Metrics
| Metric | 13 Weeks Ended July 4, 2009 | 26 Weeks Ended July 4, 2009 |
|---|---|---|
| Net Sales | $122.9 million | $241.5 million |
| Gross Profit | $36.9 million (30.0% margin) | $75.6 million (31.3% margin) |
| Operating Income | $21.8 million (17.8% margin) | $45.7 million (18.9% margin) |
| Net Income | $6.0 million | $11.9 million |
| Earnings Per Share (Basic/Diluted) | $0.17 | $0.33 |
| Cash from Operating Activities | N/A | $17.3 million |
| Cash and Cash Equivalents | $29.6 million (Ending Balance) | $29.6 million (Ending Balance) |
| Total Long-Term Debt | $535.8 million | $535.8 million |
| EBITDA | $25.5 million | $52.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.1% in the second quarter and 2.6% for the first two quarters compared to the prior year. Growth was driven by price increases ($8.5M in Q2, $15.1M YTD) which offset volume declines.
- Maple Syrup Impact: Sales of Maple Grove Farms pure maple syrup products decreased due to a global shortfall caused by a poor 2008 crop in Canada. However, the 2009 crop yield is expected to normalize supply and reduce costs.
- Margin Expansion: Gross profit margin improved to 30.0% in Q2 (from 28.2% in 2008) and 31.3% YTD (from 29.1% in 2008), primarily due to successful price increases offsetting higher costs for beans and packaging.
- Expense Management: Sales, marketing, and distribution expenses decreased as a percentage of sales (8.9% in Q2 vs. 9.6% in 2008). General and administrative expenses increased due to higher accruals for performance-based compensation.
- Interest Expense: Net interest expense decreased in Q2 ($12.1M vs. $12.9M) due to a $1.5M unrealized gain on an interest rate swap, partially offset by reclassifications from accumulated other comprehensive income.
Guidance, Outlook, Risks, and Unusual Items
- Dividend Policy: The company maintains a policy of distributing a substantial portion of cash available. The current intended dividend rate is $0.68 per share per annum (reduced from $0.848). Dividends are not guaranteed and depend on cash flow and debt covenants.
- Debt Repurchase Plan: The Board authorized a $25.0 million stock and debt repurchase program (extended to May 2010). The company repurchased $2.3 million of Class A common stock in the first two quarters of 2009.
- Lehman Brothers Exposure: Lehman Commercial Paper Inc. (Lehman CPI) is the administrative agent for the credit facility and a lender on the revolving credit facility. Due to Lehman's bankruptcy, the company does not believe Lehman CPI would honor its $3.1 million commitment. Effective available borrowing capacity is estimated at $21.4 million.
- Interest Rate Swap: An interest rate swap with Lehman Special Financing Inc. (counterparty to the swap) is no longer considered an effective hedge due to Lehman's bankruptcy. Changes in fair value are now recorded in current earnings. The fair value of the swap liability was $12.4 million as of July 4, 2009.
- Proposed Credit Facility Amendment: In July 2009, the company proposed an amendment to its senior credit facility to replace Lehman CPI as administrative agent with Credit Suisse and to extend the maturity of the revolving credit facility to match the term loan (2013). No assurance is given that this will be consummated.
- Risks: Key risks include substantial leverage, fluctuations in commodity prices (wheat, beans, packaging, maple syrup), currency exchange rates (USD vs. CAD), and the ability to pass cost increases to consumers.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with financial maintenance covenants (leverage ratios, interest coverage) given the high debt load ($535.8M) and dividend policy.
- Maple Syrup Supply: Monitor the 2009 maple syrup crop yield and pricing to confirm the expected reduction in costs and normalization of supply.
- Credit Facility Status: Confirm the status of the proposed amendment to replace Lehman CPI as administrative agent and the extension of the revolving credit facility maturity.
- Interest Rate Swap Liability: Track the reclassification of the interest rate swap fair value changes from accumulated other comprehensive income to net interest expense.
- Dividend Sustainability: Assess whether operating cash flows ($17.3M YTD) are sufficient to cover dividend payments ($12.3M YTD), capital expenditures, and debt service without requiring additional borrowing.