B&G Foods, Inc. — Q3 2011 Form 10-Q
Business and period: B&G Foods manufactures and distributes branded shelf-stable foods in the U.S., Canada and Puerto Rico. The filing covers the 13 and 39 weeks ended October 1, 2011; comparatives are the periods ended October 2, 2010. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Net sales | $133.0 | $125.1 | $393.9 | $371.5 |
| Gross profit / margin | $41.5 / 31.2% | $39.2 / 31.3% | $128.5 / 32.6% | $120.6 / 32.5% |
| Operating income / margin | $27.1 / 20.4% | $25.1 / 20.1% | $82.5 / 20.9% | $75.8 / 20.4% |
| Net interest expense | $8.3 | $10.3 | $24.9 | $31.9 |
| Net income | $12.1 | $9.3 | $38.0 | $18.1 |
| Diluted EPS | $0.25 | $0.19 | $0.78 | $0.37 |
- Q3 sales rose 6.3%, primarily from higher unit volume, including $3.4 million from the Don Pepino and Sclafani brands acquired in late 2010. YTD sales rose 6.0%; volume added $24.0 million, partly offset by $1.4 million of lower pricing.
- Q3 gross margin edged down 0.1 percentage point as commodity and distribution costs outweighed favorable mix. YTD gross margin improved 0.1 point on favorable product mix, partly offset by higher costs and lower prices.
- YTD operating cash flow was $39.3 million, down from $61.1 million. Capital expenditures were $6.9 million; dividends paid were $28.2 million and share repurchases were $3.7 million. Cash declined $0.6 million to $98.1 million.
Balance sheet and liquidity
- At October 1, 2011, total assets were $882.9 million, cash $98.1 million, inventory $94.3 million, current liabilities $58.3 million and long-term debt $478.0 million. Net debt, after cash, was $379.9 million. Stockholders’ equity was $237.2 million.
- Debt comprised a $130.0 million secured term loan due February 2013 and $350.0 million face amount of 7.625% senior notes due 2018. The $25.0 million revolver was undrawn; available capacity net of letters of credit was $24.5 million. The company reported compliance with debt covenants.
- Inventory increased $19.7 million from the start of the fiscal year, primarily reflecting finished goods and the timing of maple syrup purchases. Management attributed much of the operating cash flow decline to inventory growth and the $12.4 million payment to terminate the interest-rate swap.
Changes, outlook and risks
- Net income comparisons benefited from lower interest expense after termination of the swap, which left the $130.0 million term loan floating-rate; its stated rate was 2.33% at October 1. A 100-basis-point rate increase would raise annual interest expense by about $1.3 million and reduce cash flow by about $0.8 million.
- YTD 2010 included a $15.2 million debt-extinguishment loss; no such charge occurred in 2011. The 2011 effective tax rate was 34.1% YTD versus 37.0%, including a $1.1 million non-cash deferred tax benefit from state tax-law changes.
- Management expected aggregate 2011 input and operating costs to rise about 1.5% of projected net sales versus 2010, despite locking in most major commodity and packaging needs through 2011 and, except maple syrup, the first nine months of 2012. It expected capital expenditures of up to $11.0 million for 2011 and stated that available cash, operating cash flow and revolver capacity should fund foreseeable needs, including anticipated dividends. No specific earnings guidance was provided.
- The annual dividend rate increased to $0.84 per share beginning May 2011 and was set to rise to $0.92 beginning January 2012. Management estimated 2011 dividends of $38.2 million and 2012 dividends of $44.4 million. Dividends are discretionary and subject to debt restrictions; the company cautioned that weaker cash flow could require a reduction or suspension.
- Principal risks include leverage and refinancing the term loan in 2013; floating-rate exposure; commodity, packaging, energy and distribution cost inflation and limits on passing costs through; retail consolidation and pricing pressure; changing consumer preferences and food safety; and Canadian-dollar exposure for maple syrup. Wal-Mart represented 17.1% of YTD sales; the top ten customers represented 50.8%.
- Approximately 45.6% of employees were covered by collective bargaining agreements; the Portland, Maine agreement was due to expire April 28, 2012. Management said pending ordinary-course legal matters and known environmental obligations were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether sales growth and favorable YTD mix can continue as input and distribution costs rise and pricing remains competitive.
- Whether inventory levels normalize and operating cash flow adequately supports capital spending, debt service and the planned dividend.
- The effect of floating rates on interest expense and the company’s plans for the $130.0 million term-loan maturity in 2013.
- Dividend capacity under cash-flow conditions and contractual restrictions, including the planned increase to $0.92 per share annually.
- Customer concentration, supplier and food-safety exposure, and the outcome of Portland labor negotiations.