B&G Foods, Inc. — Q2 2011 Form 10-Q
Reporting period: Second quarter (13 weeks) and first half (26 weeks) ended July 2, 2011; comparable periods ended July 3, 2010. Financial amounts below are in millions of dollars unless noted. B&G Foods manufactures and distributes branded shelf-stable foods in the U.S., Canada, and Puerto Rico.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $129.5 | $121.1 | $260.9 | $246.3 |
| Gross profit / margin | $42.2 / 32.6% | $39.4 / 32.5% | $87.0 / 33.4% | $81.4 / 33.1% |
| Operating income / margin | $26.3 / 20.3% | $24.3 / 20.1% | $55.4 / 21.2% | $50.7 / 20.6% |
| Net income | $12.6 | $8.5 | $25.9 | $8.8 |
| Diluted EPS | $0.26 | $0.18 | $0.53 | $0.18 |
| Net interest expense | $8.3 | $10.9 | $16.5 | $21.5 |
- First-half operating cash flow was $26.2 versus $43.5; capital expenditures were $4.0 versus $4.6. Cash increased $2.8 to $101.5.
- At July 2, cash was $101.5, current assets $229.2, current liabilities $59.3, and working capital $169.8. Long-term debt was $477.9; net debt was $376.4. Stockholders’ equity was $237.6.
- Debt comprised a $130.0 term loan and $350.0 face amount of 7.625% senior notes due 2018. The $25.0 revolving facility was undrawn, with $24.5 available after letters of credit. The term loan matures in February 2013; the revolver also matures in February 2013.
- The company declared dividends of $0.21 per share in Q2 and $0.38 for the first half. The intended annual rate was raised to $0.84 per share beginning with the May 2011 payment.
Changes versus prior periods
- Q2 sales rose 6.9%; first-half sales rose 5.9%. Volume growth was partly offset by lower net pricing and higher coupon/slotting costs. First-half sales included $7.1 from the Don Pepino and Sclafani brands acquired in late 2010.
- Management attributed improved gross margin mainly to a favorable mix of higher-margin products; first-half margin also benefited from slightly lower input costs. Operating income increased 8.3% in Q2 and 9.3% in the first half.
- Net interest expense declined 23.5% in Q2 and 23.2% in the first half, primarily after the company terminated its interest-rate swap in January 2011. The term loan became floating-rate debt; its rate was 2.26% at July 2, 2011.
- First-half 2010 included a $15.2 loss on extinguishment of debt. No such charge occurred in 2011, materially affecting the year-over-year net income comparison.
- First-half operating cash flow fell by $17.3, largely due to the $12.4 swap termination payment and higher inventory, mainly from the timing of maple syrup purchases. Inventory rose to $89.9 from $74.6 at fiscal year-end.
Outlook, risks, and unusual items
- No specific sales, earnings, or EPS guidance was provided. Management expected fiscal 2011 input and other operating costs to increase by approximately 1.5% of projected sales versus 2010, excluding costs from additional sales volume; substantially all major commodities and packaging were priced or supplied under arrangements through 2011.
- Management expected up to $11.0 of fiscal 2011 capital expenditures, of which $4.0 had been spent in the first half, and expected full-year dividends of $38.3 at the then-current intended rate. It stated available cash, operating cash flow, and revolver capacity should fund foreseeable needs, including debt service, capex, and anticipated dividends.
- The company expected the swap termination to reduce term-loan interest expense by about $6.2 in each of 2011 and 2012 and $1.1 in 2013, or $13.5 through maturity; higher LIBOR would reduce the benefit. A 100-basis-point rate increase was estimated to raise annual interest expense by $1.3 and reduce cash flow by about $0.8.
- Key risks include substantial leverage, commodity, packaging, fuel and labor inflation, limited ability to pass costs through, competition and retailer consolidation, changing consumer preferences, food safety and product-liability exposure, customer concentration, Canadian-dollar movements, and acquisition/integration risks. Wal-Mart represented 16.5% of first-half sales; the top ten customers represented 50.7%.
- A $1.1 non-cash tax benefit from state tax-law changes reduced the Q2 blended tax rate. The company authorized up to $25.0 of stock and/or senior-note repurchases through March 31, 2012, but made no repurchases in the first half. It reported compliance with debt covenants, no material change in previously disclosed risk factors, and no off-balance-sheet arrangements. Management said pending ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether volume growth and acquired-brand contributions continue, and whether pricing can offset input-cost inflation without harming demand or margins.
- Cash conversion and working-capital trends, particularly inventory build and seasonal purchasing needs.
- Floating-rate exposure, the expected interest savings from swap termination, and refinancing needs as the term loan approaches its 2013 maturity.
- Dividend affordability against operating cash flow, capital spending, debt covenants, and the company’s acquisition plans.
- Customer concentration, commodity and currency exposures, and continued compliance with credit-facility and senior-note covenants.