BGS

Business Context and Reporting Period

Company: B&G Foods, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended October 3, 2009 (Fiscal Q3 and YTD 2009)
Business Overview: B&G Foods manufactures, sells, and distributes a diverse portfolio of shelf-stable food products (e.g., hot cereals, fruit spreads, canned meats, spices, maple syrup) across the U.S., Canada, and Puerto Rico. The company operates in one industry segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6.3% in Q3 and 3.8% YTD compared to 2008. Growth was driven by price increases and volume gains in brands like Ortega, Cream of Wheat, and Ac'cent, partially offset by a decline in pure maple syrup sales due to the 2008 crop shortage.
• Margin Expansion: Gross margin improved to 29.2% in Q3 (from 26.4% in 2008) and 30.6% YTD (from 28.2% in 2008). This was primarily due to price increases and lower wheat/maple syrup costs, offset by higher bean and packaging costs.
• Operating Expenses: General and administrative expenses rose significantly (42.0% in Q3, 46.1% YTD) due to increased accruals for performance-based compensation. Sales, marketing, and distribution expenses decreased slightly as a percentage of sales.
• Interest Expense: Net interest expense increased 17.4% in Q3 and 8.0% YTD, reflecting unrealized losses on an interest rate swap and reclassifications from accumulated other comprehensive income.
• Debt Repurchase: The company repurchased $6.3 million of senior subordinated notes in Q3, incurring a $0.7 million loss on extinguishment of debt.

Guidance, Outlook, and Risks

• Debt Redemption: The company issued a notice to partially redeem $90.0 million of its 12% senior subordinated notes on November 2, 2009. This will result in an estimated pre-tax charge of $9.5 million in Q4 2009 (comprising a $5.4 million cash call premium and $4.1 million non-cash write-off of deferred financing costs).
• Capital Raise: In September 2009, the company completed a public offering of 11.5 million shares of Class A common stock, raising $86.6 million in net proceeds to fund the debt redemption.
• Dividend Policy: The dividend rate was reduced to $0.68 per share per annum (from $0.848). The new shares issued will increase aggregate dividend payments in 2010, but this is expected to be offset by reduced interest payments from the debt redemption.
• Key Risks:
  • Commodity Prices: Fluctuations in raw material costs (beans, packaging) and currency exchange rates (Canadian dollar for maple syrup).
  • Liquidity: The company is highly leveraged. While cash on hand and operating cash flow are currently sufficient, future dividends depend on maintaining strong cash flows.
  • Interest Rate Swap: An interest rate swap with Lehman Brothers (now bankrupt) is no longer an effective hedge. The fair value is recorded as an unrealized loss of $13.0 million, with changes in fair value impacting current earnings.

Investor Verification Checklist

• Debt Redemption Impact: Verify the timing and accounting treatment of the $9.5 million pre-tax charge associated with the November 2009 partial redemption of senior subordinated notes.
• Interest Rate Swap Exposure: Confirm the ongoing impact of the Lehman Brothers bankruptcy on the $13.0 million unrealized loss and future reclassifications to interest expense.
• Commodity Cost Trends: Monitor the trajectory of bean and packaging costs versus the company's ability to pass these costs through via price increases.
• Dividend Sustainability: Assess whether the reduction in interest expense from the debt redemption will fully offset the increased dividend obligations from the new share issuance.
• Customer Concentration: Note that the top ten customers accounted for 50.1% of YTD 2009 sales, with Wal-Mart representing 15.9%.