B&G Foods, Inc. — Q1 2012 Form 10-Q
Business context and period. B&G Foods manufactures and distributes branded shelf-stable foods and household products in the U.S., Canada and Puerto Rico. This unaudited report covers the 13 weeks ended March 31, 2012, compared with the 13 weeks ended April 2, 2011.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $157.3 million | $131.4 million |
| Gross profit / margin | $56.8 million / 36.1% | $44.9 million / 34.1% |
| Operating income / margin | $38.2 million / 24.3% | $29.1 million / 22.1% |
| Net income | $16.8 million | $13.3 million |
| Diluted EPS | $0.35 | $0.27 |
| EBITDA (non-GAAP) | $42.6 million | $33.0 million |
| Operating cash flow | $21.0 million | $11.7 million |
| Capital expenditures | $1.8 million | $1.5 million |
| Cash dividends paid | $11.0 million | $8.1 million |
Net interest expense rose to $12.0 million from $8.2 million, principally reflecting acquisition-related debt and financing-cost amortization. The effective tax rate was 35.9%, versus 36.3%.
Balance sheet and liquidity
At March 31, 2012, cash was $20.0 million, total assets were $1.129 billion, and stockholders’ equity was $237.6 million. Debt was $717.9 million net of unamortized discount, including $11.6 million current; debt less cash was approximately $697.9 million. The debt comprised $148.1 million of Tranche A term loans, $224.4 million of Tranche B term loans, and $350.0 million of 7.625% senior notes.
No revolving loans were outstanding; available revolver capacity, net of letters of credit, was $199.5 million. The company reported compliance with its debt covenants. A hypothetical 1 percentage-point rate change would affect annual interest expense by approximately $2.1 million. Operating cash flow exceeded dividends paid in the quarter, but the stated annual dividend expectation of approximately $50.2 million makes continued cash generation and borrowing capacity important to monitor.
Changes versus prior period
- Reported sales grew 19.7%, with $25.6 million of the increase attributable to the November 2011 Culver Specialty Brands acquisition. Base-business sales increased only $0.3 million: $2.5 million of pricing gains were largely offset by a $2.2 million volume decline.
- Gross margin improved 2.0 percentage points, attributed to pricing and a higher-margin mix, particularly from the acquired brands, partly offset by commodity costs. SG&A rose 17.6% in dollars but declined 0.2 percentage points as a share of sales.
- Operating income increased 31.2%; net income increased 26.1%. The acquisition also increased amortization expense and borrowing costs.
- For additional context, management’s pro forma Q1 2011 figures assuming the acquisition occurred at the start of that quarter were sales of $156.0 million and net income of $17.0 million. These are illustrative, not actual results or a projection.
- Operating cash flow increased by $9.3 million; the prior-year comparison included a $12.4 million interest-rate-swap termination payment in January 2011. Q1 2012 financing cash use also included $10.7 million of tax-withholding payments on share awards and $2.4 million of scheduled debt payments.
Outlook, risks and notable items
- Management expected significant market raw-material cost increases in 2012, but said it had locked in prices and supply for substantially all major commodities other than maple syrup at cost increases below 2% of projected 2012 cost of goods sold. It expected pricing and cost savings to offset inflation, while acknowledging that failure to do so could harm results.
- Fiscal 2012 capital expenditures were expected to total approximately $11–12 million. Management believed cash on hand, operating cash flow and revolver capacity would fund foreseeable operations, debt service, capital spending, potential acquisitions and anticipated dividends.
- The company described itself as highly leveraged. Key risks include commodity, packaging, fuel and distribution costs; interest rates; competition and retailer consolidation; customer inventory reductions; consumer preferences and food safety; Canadian-dollar movements; and acquisition integration and financing. Wal-Mart represented 20.8% of quarterly sales.
- The Portland, Maine collective bargaining agreement was extended through May 1, 2015. The related multi-employer pension plan was reported in critical status for 2012; a 5% contribution surcharge applied from June 1 through year-end 2012, with a 10% surcharge for succeeding critical-status years until a rehabilitation-plan agreement is implemented.
- Management said pending ordinary-course legal matters were not expected to materially affect financial position, results or liquidity. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much future sales and profit growth comes from acquired brands versus underlying volume, pricing and mix.
- Whether commodity-cost increases, particularly maple syrup, can be offset without weakening volume or margins.
- Debt reduction, covenant headroom, variable-rate exposure and the ability to sustain the dividend alongside planned capital spending and debt service.
- The actual cost and duration of the multi-employer pension surcharge, and any effects of the labor agreement.
- Customer concentration, especially Wal-Mart, and the sensitivity of cash flow to working-capital movements and employee share-award tax withholding.