B&G Foods, Inc. — Q2 2012 Form 10-Q
Business and period. B&G Foods manufactures and distributes branded shelf-stable foods and household products. This unaudited filing covers the 13 weeks ended June 30, 2012 and the 26 weeks ended June 30, 2012, compared with periods ended July 2, 2011. The company completed its $326.0 million Culver Specialty Brands acquisition in November 2011; consequently, reported 2012 results include those brands while reported 2011 results do not.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $148.6 million | $129.5 million | $306.0 million | $260.9 million |
| Gross profit / margin | $51.8 million / 34.8% | $42.2 million / 32.6% | $108.6 million / 35.5% | $87.0 million / 33.4% |
| Operating income / margin | $35.1 million / 23.6% | $26.3 million / 20.3% | $73.3 million / 23.9% | $55.4 million / 21.2% |
| Net income | $16.0 million | $12.6 million | $32.8 million | $25.9 million |
| Diluted EPS | $0.33 | $0.26 | $0.68 | $0.53 |
| Net interest expense | $11.9 million | $8.3 million | $23.9 million | $16.5 million |
| Operating cash flow | Not stated separately | Not stated separately | $41.8 million | $26.2 million |
Material changes and financial position
- Q2 sales rose 14.8%; the acquired brands contributed $19.5 million. In the base business, $4.3 million of price increases was more than offset by a $4.6 million unit-volume decline. For the first half, acquired brands contributed $45.1 million and base-business sales were flat as $6.8 million of price gains offset a $6.8 million volume decline.
- Gross margin improved by 2.2 percentage points in Q2 and 2.1 points in the first half. Management attributed the improvement mainly to pricing and a higher-margin product mix, partly offset by commodity costs.
- First-half operating cash flow increased by $15.6 million year over year, reflecting higher net income and working-capital comparisons, including the prior-year payment to terminate an interest-rate swap. Investing cash outflow was $5.5 million, including $5.3 million of capital expenditures. Financing cash outflow was $31.6 million, including $24.0 million of dividends and $4.9 million of scheduled debt payments.
- At June 30, cash was $21.4 million, versus $16.7 million at year-end 2011. Current assets were $166.8 million and current liabilities $79.2 million. Inventory increased to $100.9 million from $85.2 million at year-end.
- Debt carrying value was $715.6 million, net of unamortized discount; cash less carrying-value debt was approximately $694.2 million. The company had no revolving-credit borrowings and reported $199.5 million of available revolver capacity, net of letters of credit. It was in compliance with debt covenants at quarter-end.
- The board’s intended quarterly dividend increased to $0.27 per share in Q1 2012. First-half dividends paid were $24.0 million; management estimated fiscal 2012 dividends of approximately $50.2 million at the then-current rate. Dividends are discretionary and subject to debt-agreement restrictions.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected cash, operating cash flow and revolver capacity to be sufficient for foreseeable operating needs, debt service, capital expenditures, potential acquisitions and anticipated dividends.
- Fiscal 2012 capital expenditures were expected to total approximately $11–12 million, of which $5.3 million had been spent in the first half. Management said most major commodities other than maple syrup were priced and supplied through 2012 at cost increases of less than 2% of projected 2012 cost of goods sold, and expected pricing actions and cost savings to offset inflation.
- Key risks include substantial leverage and interest-rate exposure; commodity, packaging, fuel and transportation inflation; competitive limits on price increases; customer consolidation and inventory reductions; changing consumer preferences; food safety and product-liability risks; acquisition integration; customer concentration; and Canadian-dollar movements. Wal-Mart accounted for 19.9% of first-half sales.
- The multi-employer pension plan serving the Portland facility was reported in critical status (Red Zone) for the 2012 plan year. A 5% contribution surcharge applied from June 1 through year-end 2012; a 10% surcharge was specified for succeeding critical-status years until a rehabilitation-plan agreement.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. It reported no material environmental compliance expenditures in the first half. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Separate the acquired brands’ contribution from underlying volume and pricing trends; reported year-over-year growth is not directly comparable without acquisition adjustments.
- Assess whether base-business volume declines, commodity inflation and the ability to pass through price increases affect future margins.
- Review debt-service costs, variable-rate exposure, covenant headroom and refinancing needs. A hypothetical 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $2.0 million.
- Evaluate dividend sustainability against operating cash flow, seasonal working-capital requirements, capital spending and contractual restrictions.
- Monitor the Red Zone pension plan surcharges and any resulting cost or labor developments.