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| BNNY > SEC Filings for BNNY > Form 10-K on 8-Jun-2012 | All Recent SEC Filings |
8-Jun-2012
Annual Report
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in "Risk Factors." The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K, as well as the information presented under "Selected Financial Data."
Overview
Annie's, Inc. is a rapidly growing natural and organic food company with a widely recognized brand, offering consumers great-tasting products in large packaged foods categories. We sell premium products made from high-quality ingredients at affordable prices. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.
Our loyal and growing consumer following has enabled us to migrate from our natural and organic roots to a brand sold across the mainstream grocery, mass merchandiser and natural retailer channels. As of March 31, 2012, we were offering over 125 products and were present in over 25,000 retail locations in the United States and Canada.
Our net sales are derived primarily from the sale of meals, snacks, dressings, condiments and other products under the Annie's Homegrown and Annie's Naturals brand names. We have experienced strong growth, driven by our meals and snacks categories, resulting from our focus on supporting our best-selling items and the introduction of new products in these categories. We have reduced our offerings in our dressings and condiments lines, which has resulted in no growth in that category. Sales are reported net of estimated sales and promotion incentives, slotting, customer discounts and spoils.
Gross profit is net of cost of sales, which consists of the costs of ingredients in the manufacture of products, contract manufacturing fees, packaging costs and in-bound freight charges. Ingredients account for the largest portion of the cost of sales followed by contract manufacturing fees and packaging.
Our selling, general and administrative expenses consist primarily of marketing and advertising expenses, freight and warehousing, wages, related payroll and employee benefit expenses, including stock-based compensation, commissions to outside sales representatives, legal and professional fees, travel expenses, other facility related costs, such as rent and depreciation, and consulting expenses. The primary components of our marketing and advertising expenses include trade advertising, in-store promotions, consumer promotions, display fixtures, sales data, consumer research and search engine and digital advertising.
Business Segments
We have determined that we operate as one segment: the marketing and distribution of natural and organic food products. Our chief executive officer is considered to be our chief operating decision maker. He reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Trends and Other Factors Affecting Our Business
Net Sales
The following trends in our business have driven top-line growth over the past three years:
• our increased penetration of the mainstream grocery and mass merchandiser channels;
• our continued innovation, including adding new flavors and sizes to existing lines and introducing new product lines, including organic fruit snacks and organic snack mix in fiscal 2009, organic granola bars and pretzels in fiscal 2011 and organic rising crust frozen pizza in fiscal 2012; and
Over the past three years, we have significantly increased both the number of retail locations where our products can be found and the number of our products found in individual stores. From time to time, we review our product lines to remove items not meeting our sales or profitability expectations and to make room for new products. We expect that increasing penetration of the mainstream grocery and mass merchandiser channels, combined with greater brand awareness, new product introductions and line extensions and favorable consumer trends, will continue to fuel our sales growth in all channels.
In addition, we have historically sold our products both direct to retailers and through distributors. Over the past three years, the percentage of sales made direct to retailers has increased, primarily driven by increased volume with mass merchandisers such as Target and Costco.
We offer a variety of sales and promotion incentives to our customers and to consumers, such as price discounts, consumer coupons, volume rebates, cooperative marketing programs, slotting fees and in-store displays. Our net sales are periodically influenced by the introduction and discontinuance of sales and promotion incentives. We anticipate that promotional activities will continue to impact our net sales and that changes in such activities will continue to impact period-over-period results.
Gross Profit
Over the past three years, despite increasing volatility in commodity prices, we have successfully increased our gross margin each year through a combination of commodity management practices, productivity improvements, cost reductions in our supply chain and price increases.
We purchase finished products from our contract manufacturers. With an industry-wide commodity cost escalation starting in fiscal 2008, we became more directly involved in the sourcing of the ingredients for our products. This allowed us to consolidate ingredient sourcing across contract manufacturers in order to negotiate more favorable pricing on ingredients and, in some cases, to lock in ingredient pricing for typically six to twelve months through forward price contracts. We have increased the percentage of our cost of sales represented by these contracted ingredients from an estimated 5% in fiscal 2008 to approximately 25% in fiscal 2012. These efforts mitigated the impact of volatile and increasing commodity costs on our business. We plan to continue to expand our portfolio of contracted ingredients and utilize forward price contracts to allow us sufficient time to respond to changes in our ingredient costs over time.
Over the past three years, we have invested significant time and energy to improve gross margins and achieve permanent cost reductions and productivity improvements in our supply chain. These efficiency projects have focused on selecting more cost-effective contract manufacturers, negotiating lower tolling fees, consolidating in-bound freight, leveraging warehouse expense and reducing ingredient and packaging costs through increased volume buys, contract consolidation and price negotiation. To further drive these initiatives, we plan to selectively invest capital for the purchase of equipment to be used by certain of our contract manufacturers to drive down costs, improve throughput and improve product quality. In fiscal 2012, we invested approximately $1.2 million in manufacturing equipment, which is located at the facilities of our contract manufacturers and remains our property. We expect to invest approximately $2.0 to $2.5 million annually over the next few years to support these initiatives, which will drive capital expenditures significantly above historical levels.
Our gross margins have also benefited from the impact of price increases taken over the past three years. We typically effect new pricing to our customers annually or semi-annually. We consider many factors when evaluating pricing action, including cost of sales increases, competitive pricing strategy and the price-value equation to our consumers. We have demonstrated our ability to execute price increases to cover increasing ingredient costs, driven by our strong brand loyalty and our perceived value relative to competitive products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales has decreased slightly over the past three years driven by lower freight and warehousing costs, offset by increasing general and administrative expenses. Selling and marketing expenses have remained relatively flat as a percentage of net sales but are expected to increase in the future as we invest to support new product releases and drive greater brand awareness, attract new customers and increase household penetration.
Over the past three years, we have significantly reduced our freight and warehousing costs as a percentage of net sales, which are reflected in our selling, general and administrative expenses. This has been primarily due to an increase in the proportion of orders that are picked up by customers from our warehouse at their expense. The freight charges for such pickups reduce net sales with a corresponding reduction in our freight expense recorded in selling, general and administrative expenses. We have also reduced our warehouse costs due to labor savings driven by productivity improvements in our third-party warehouse.
To support our growth, we continue to increase headcount, particularly in the sales, marketing and finance departments. We also continue to invest in product development to support innovation and fuel sales growth and in information technology. Despite these additional investments described above, our selling, general and administrative expenses have remained relatively flat. We expect our selling, general and administrative expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public company, which could impact our future operating profitability. We expect to incur incremental annual costs of approximately $2.0 million related to operating as a public company.
Results of Operations
The following table sets forth items included in our consolidated statements of operations in dollars and as a percentage of net sales for the periods presented:
Fiscal Year ended March 31, % of Net Sales
2012 2011 2010 2012 2011 2010
(in thousands, except for percentages)
Net sales $ 141,304 $ 117,616 $ 96,015 100.0 % 100.0 % 100.0 %
Cost of sales 85,877 71,804 63,083 60.8 % 61.0 % 65.7 %
Gross profit 55,427 45,812 32,932 39.2 % 39.0 % 34.3 %
Operating expenses:
Selling, general and administrative
expenses 36,195 30,674 25,323 25.6 % 26.1 % 26.4 %
Advisory agreement termination fee 1,300 - - 0.9 % 0.0 % 0.0 %
Total operating expenses 37,495 30,674 25,323 26.5 % 26.1 % 26.4 %
Income from operations 17,932 15,138 7,609 12.7 % 12.9 % 7.9 %
Interest expense (161 ) (885 ) (1,207 ) (0.1 )% (0.8 )% (1.3 )%
Other income (expense), net (1,594 ) 155 21 (1.1 )% 0.1 % 0.0 %
Income before provision for (benefit
from) income taxes 16,177 14,408 6,423 11.4 % 12.3 % 6.7 %
Provision for (benefit from) income
taxes 6,588 (5,747 ) 400 4.7 % (4.9 )% 0.4 %
Net income $ 9,589 $ 20,155 $ 6,023 6.8 % 17.1 % 6.3 %
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The following table sets forth net sales by product category in dollars and as a percentage of net sales:
Fiscal Year ended March 31, % of Net Sales
2012 2011 2010 2012 2011 2010
(in thousands, except for percentages)
Product Categories:
Meals $ 60,624 $ 49,168 $ 43,838 43 % 42 % 46 %
Snacks 56,789 44,687 27,252 40 % 38 % 28 %
Dressings, condiments and other 23,891 23,761 24,925 17 % 20 % 26 %
Total $ 141,304 $ 117,616 $ 96,015 100 % 100 % 100 %
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Fiscal Year Ended March 31, 2012 Compared to Fiscal Year Ended March 31, 2011
Net Sales
Fiscal Year Ended
March 31, Change
2012 2011 $ %
(in thousands, except for percentages)
Meals $ 60,624 $ 49,168 $ 11,456 23.3 %
Snacks 56,789 44,687 12,102 27.1 %
Dressings, condiments and other 23,891 23,761 130 0.5 %
Net sales $ 141,304 $ 117,616 $ 23,688 20.1 %
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Net sales increased $23.7 million, or 20.1%, to $141.3 million in fiscal 2012 compared to $117.6 million in fiscal 2011. This increase primarily reflects a $12.1 million and an $11.5 million increase in net sales of snacks and meals, respectively. The increase in meals was driven by strong growth in the macaroni and cheese product line partially offset by lower sales of pasta meals due to reduced offerings. The dressings, condiments and other held relatively flat across each category. Distribution gains also contributed to net sales growth, primarily in the mainstream grocery and mass merchandiser channels. The net sales increase was primarily driven by volume combined with slightly higher average selling prices to offset rising commodity costs.
Gross Profit
Fiscal Year Ended
March 31, Change
2012 2011 $ %
(in thousands, except for percentages)
Cost of sales $ 85,877 $ 71,804 $ 14,073 19.6 %
Gross profit $ 55,427 $ 45,812 $ 9,615 21.0 %
Gross margin % 39.2 % 39.0 %
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Gross profit increased $9.6 million, or 21.0%, to $55.4 million in fiscal 2012 from $45.8 million in fiscal 2011. Gross margin increased 0.2 percentage points to 39.2% in fiscal 2012, from 39.0% in fiscal 2011. The increase in net sales was the primary driver of the increase in gross profit. Cost reduction initiatives also contributed to the higher gross profit, although to a lesser extent than higher net sales. Higher commodity and other cost of sales were offset by price increases and cost reduction initiatives, primarily the negotiation of lower tolling fees from a key contract manufacturer.
Operating Expenses
Fiscal Year Ended
March 31, Change
2012 2011 $ %
(in thousands, except for percentages)
Operating expenses:
Selling, general and administrative expenses $ 36,195 $ 30,674 $ 5,521 18.0 %
Advisory agreement termination fee 1,300 - 1,300 nm
Total operating expenses $ 37,495 $ 30,674 $ 6,821 22.2 %
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.5 million, or 18.0%, to $36.2 million in fiscal 2012, from $30.7 million in fiscal 2011. This increase was due primarily to a $1.6 million increase in wages and salary expense, due to increasing headcount to support our growth, a $1.1 million increase in professional services due to increased spending on legal, accounting and auditing services in connection with our preparation to become a public company. As a percentage of net sales, selling, general and administrative expenses decreased 0.5 percentage points to 25.6% in fiscal 2012, from 26.1% in fiscal 2011.
Advisory Agreement Termination Fee
We paid a one-time fee of $1.3 million to Solera upon consummation of our IPO in connection with the termination of its advisory services agreement with us.
Income from Operations
Fiscal Year Ended
March 31, Change
2012 2011 $ %
(in thousands, except for percentages)
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As a result of the factors above, income from operations increased $2.8 million, or 18.5%, to $17.9 million in fiscal 2012, from $15.1 million in fiscal 2011. Income from operations as a percentage of net sales decreased 0.2 percentage points to 12.7% in fiscal 2012, from 12.9% in fiscal 2011.
Other Income (Expense), Net
Fiscal Year Ended
March 31, Change
2012 2011 $ %
(in thousands, except for percentages)
Interest expense $ (161 ) $ (885 ) $ 724 nm
Other income (expense), net (1,594 ) 155 (1,749 ) nm
Total other income (expense), net $ (1,755 ) $ (730 ) $ (1,025 ) nm
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Interest Expense
Interest expense decreased $0.7 million to $0.2 million in fiscal 2012 from $0.9 million in fiscal 2011. The decrease in interest expense was primarily due to lower interest expense resulting from repayment of the term loan in August 2010 and decreased average borrowings on our credit facility during fiscal 2012 offset by higher interest rates in fiscal 2012.
Other Income (Expense), Net
Other income (expense), net increased $1.8 million to $1.6 million in expense in fiscal 2012 from $0.2 million in income in fiscal 2011. Other income (expense), net primarily reflects a non-recurring, non-cash charge of $1.7 million related to the increase in the fair value of our convertible preferred stock warrant liability offset by royalty income.
Provision for (Benefit from) Income Taxes
Fiscal Year Ended
March 31, Change
2012 2011 $ %
(in thousands, except for percentages)
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Effective tax rate 40.7 % (39.9 )%
Our provision for income taxes was $6.6 million in fiscal 2012 compared to a benefit of $5.7 million in fiscal 2011. The benefit in fiscal 2011 was the result of a reversal of our valuation allowance on net deferred tax assets of $11.3 million net of a provision for income taxes related to earnings for the period.
As of March 31, 2010, we recorded a valuation allowance for the full amount of the net deferred tax assets as we had assessed our cumulative loss position and determined that the future benefits were not more likely than not to be realized as of these dates. Due to our profitability during fiscal 2011 and projected operating results, we determined during fiscal 2011 that it was more likely than not that the deferred tax assets would be realized, and we therefore released substantially all of the valuation allowance. This resulted in our recording a tax benefit during fiscal 2011.
Our effective tax rate for fiscal 2012 was 40.7% and differs from the federal statutory rate primarily due to state income taxes and the impact of a significant permanent tax difference resulting from a $1.7 million non-cash charge in fiscal 2012 due to an increase in the fair value of our convertible preferred stock warrant liability. The effective tax rate for fiscal 2012 is not comparable to the rate for fiscal 2011 primarily due to the valuation allowance reversal recorded in fiscal 2011.
Net Income
Fiscal Year Ended
March 31, Change
2012 2011 $ %
(in thousands, except for percentages)
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As a result of the factors above, net income decreased $10.6 million, or 52.4%, to $9.6 million in fiscal 2012 from $20.2 million in fiscal 2011.
Fiscal Year Ended March 31, 2011 Compared to Fiscal Year Ended March 31, 2010
Net Sales
Fiscal Year Ended
March 31, Change
2011 2010 $ %
(in thousands, except for percentages)
Meals $ 49,168 $ 43,838 $ 5,330 12.2 %
Snacks 44,687 27,252 17,435 64.0 %
Dressings, condiments and other 23,761 24,925 (1,164 ) (4.7 )%
Net sales $ 117,616 $ 96,015 $ 21,601 22.5 %
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Net sales increased $21.6 million, or 22.5%, to $117.6 million in fiscal 2011 compared to $96.0 million in fiscal 2010. This increase reflects a $17.4 million increase in snacks and a $5.3 million increase in meals, offset by a $1.1 million decrease in dressings, condiments and other. Growth in the snack category was driven by strong growth across all of our snack lines. In addition, the introduction of our granola bars and pretzel lines generated an estimated increase in net sales of $1.1 million. Growth in meals was primarily driven by strong performance in our macaroni and cheese product line. The decrease in dressings, condiments and other was attributable to reduced offerings in this category. We experienced net sales growth in all distribution channels. The net sales increase was predominantly driven by volume, with a small amount of the increase due to product mix which drove higher average unit prices.
Gross Profit
Fiscal Year Ended
March 31, Change
2011 2010 $ %
(in thousands, except for percentages)
Cost of sales $ 71,804 $ 63,083 $ 8,721 13.8 %
Gross profit $ 45,812 $ 32,932 $ 12,880 39.1 %
Gross margin % 39.0 % 34.3 %
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Gross profit increased $12.9 million, or 39.0%, to $45.8 million in fiscal 2011 from $32.9 million in fiscal 2010. Gross margin increased 4.7 percentage points to 39.0% in fiscal 2011 from 34.3% in fiscal 2010. The increase in net sales was the primary driver of the increase in gross profit. Lower commodity costs, cost reduction initiatives and product mix also contributed to the higher gross profit but to a lesser extent than the higher net sales. Average selling prices were only marginally higher in fiscal 2011 than in fiscal 2010. The increase in gross margin was driven by the combination of lower commodity costs, cost reduction initiatives and product mix. Cost reduction initiatives included reductions in ingredient, tolling, freight and packaging costs.
Operating Expenses
Fiscal Year Ended
March 31, Change
2011 2010 $ %
(in thousands, except for percentages)
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.4 million, or 21.1%, to $30.7 million in fiscal 2011 from $25.3 million in fiscal 2010. This increase was due primarily to an increase in payroll expense, due to increased headcount to support our growth and an increase in marketing and advertising expenses and research and development expenses to support product innovation. As a percentage of net sales, selling, general and administrative expenses decreased 0.3 percentage points to 26.1% in fiscal 2011, from 26.4% in fiscal 2010.
Income from Operations
Fiscal Year Ended
March 31, Change
2011 2010 $ %
(in thousands, except for percentages)
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