B&G Foods, Inc. — 2012 Third-Quarter Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2012; filed October 25, 2012. Unaudited consolidated results. B&G manufactures and distributes branded shelf-stable foods and household products.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 39 weeks 2012 | First 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $154.2m | $133.0m | $460.1m | $393.9m |
| Gross profit / margin | $55.3m / 35.9% | $41.5m / 31.2% | $163.9m / 35.6% | $128.5m / 32.6% |
| Operating income / margin | $38.3m / 24.9% | $27.1m / 20.4% | $111.6m / 24.3% | $82.5m / 20.9% |
| Net income | $16.9m | $12.1m | $49.7m | $38.0m |
| Diluted EPS | $0.35 | $0.25 | $1.02 | $0.78 |
| Net interest expense | $12.0m | $8.3m | $35.8m | $24.9m |
For the first 39 weeks, operating cash flow was $53.5m versus $39.3m in 2011; capital expenditures were $7.7m. Dividends paid were $37.1m, and cash declined $1.4m to $15.4m. Inventory increased $22.0m from year-end 2011.
At September 29, cash was $15.4m, current assets $171.7m and current liabilities $76.9m. Debt was $713.4m before cash, or $698.0m net of cash, per management’s discussion. The company had no revolver loans outstanding and $199.5m of available capacity. Stockholders’ equity was $246.7m.
Changes versus prior period
- Q3 sales grew 15.9%; the Culver Specialty Brands acquisition contributed $20.2m. Base-business sales increased just $0.9m, as $3.5m of pricing gains were partly offset by a $2.6m volume decline.
- For the first 39 weeks, sales grew 16.8%, including $65.3m from Culver. Base-business sales rose $0.9m, with $10.3m of pricing gains offset by a $9.4m unit-volume decline.
- Management attributed improved gross margins mainly to pricing and a higher-margin product mix, particularly from Culver, partly offset by commodity cost increases. Higher acquisition-related borrowing and financing-cost amortization raised interest expense.
- Reported year-over-year comparisons include Culver only from its November 30, 2011 acquisition date. The filing also presents 2011 pro forma figures assuming acquisition from the start of 2011; those figures are not forecasts.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management expected fiscal 2012 capital expenditures of approximately $11m–$12m and said cash, operating cash flow and revolver capacity should fund foreseeable operations, debt service, investment, acquisitions and anticipated dividends.
- Management reported that most major commodities other than maple syrup were contracted through 2012 at cost increases of less than 2% of projected 2012 cost of goods sold. It expected pricing and cost-saving actions to offset inflation, but acknowledged those actions may not suffice.
- The board raised the quarterly dividend to $0.29 per share beginning with the dividend declared October 16, 2012, payable January 30, 2013. Dividends are discretionary and subject to debt covenants and cash needs.
- On October 9, 2012, after quarter-end, B&G raised approximately $120.3m net from issuing 4,173,540 shares. Proceeds may fund the planned $62.5m New York Style and Old London acquisition, future acquisitions or debt repayment. The acquisition, including a North Carolina facility, was expected to close in Q4 2012, subject to customary conditions.
- The company was in compliance with debt covenants at quarter-end. Key exposures include substantial leverage, variable interest rates, commodity and transportation inflation, competition, customer concentration, changing preferences, food safety, Canadian-dollar movements and acquisition integration. A 1% interest-rate increase was estimated to increase annual interest expense by about $2.0m.
- The multi-employer pension plan covering workers at the Portland facility entered critical (Red Zone) status for 2012; a 5% surcharge applied from June 1 through year-end, with a 10% surcharge applicable from January 1, 2013 while the plan remains critical and no rehabilitation-plan agreement is in place.
- Management said ordinary-course legal matters and known environmental obligations were not expected to materially affect results or liquidity. Disclosure controls were assessed as effective; no material change in internal control was reported.
Investor verification priorities
- Assess how much reported growth and margin expansion reflect the Culver acquisition versus underlying volume, pricing and product mix; monitor continued base-business volume declines.
- Verify whether commodity, freight and labor costs remain offset by pricing and savings, especially for maple syrup and future contract periods.
- Review debt reduction, interest expense, covenant headroom and use of the equity-offering proceeds, including the financing and completion of the planned acquisition.
- Evaluate whether operating cash flow can sustain dividends, capital spending and acquisitions, given working-capital needs and the board’s ability to reduce or suspend dividends.
- Track the multi-employer pension surcharge and developments in plan status, as well as customer concentration (Wal-Mart represented 19.8% of year-to-date sales).