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BNNY > SEC Filings for BNNY > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for ANNIE'S, INC.

Form 10-Q for ANNIE'S, INC.


31-Oct-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended March 31, 2012 ("fiscal 2012") included in our Annual Report on Form 10-K filed with the SEC on June 8, 2012. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,( the "Exchange Act"). These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those in our Form 10-K discussed in the section titled "Risk Factors." The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

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. We offer over 125 products and are 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 product lines and discontinued our cereal product line in the fourth quarter of fiscal 2012, which resulted in low or negative growth in that category. However, excluding our cereal product line, the dressings, condiments and other category grew modestly. 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, samples, consumer events, sales data, consumer research and search engine and digital advertising.


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Trends and Other Factors Affecting Our Business

Net sales growth continues to be driven by increased penetration of mainstream grocery and mass merchandiser channels, product innovation, increased brand awareness and greater consumer demand for natural and organic food products. In the twelve months ended September 30, 2012, we have experienced acceleration in consumer trends for many of our products. We also have benefited from improved placement in the mainstream grocery channel, which we believe has resulted in increased sales of our products. Our net sales growth has been primarily driven by volume; however, we have demonstrated the ability to execute price increases as needed to maintain margins, driven by our strong brand loyalty and perceived value relative to the competition.

We purchase finished products from independent contract manufacturers. We have long standing, strategic relationships with many of our contract manufacturers and suppliers of organic ingredients. We enter either directly or through contract manufacturers into forward pricing contracts with certain ingredient suppliers. This practice provides us with significant visibility into our cost structure over the next six to twelve months. In fiscal 2012, our contracted ingredients represented approximately 48% of our material costs and 25% of our cost of sales. Over the past 18 months, we have experienced increased costs for many of our inputs and expect these higher costs to continue throughout the remainder of our fiscal year ending March 31, 2013 ("fiscal 2013"). We strive to maintain or improve gross margins despite increasing commodity costs through a combination of cost management and price increases. We actively manage our input and production costs through commodity management practices, vendor negotiation, productivity improvements and cost reductions in our supply chain. We invest significant time and effort to achieve permanent cost reductions in our supply chain. To drive these initiatives, we have begun to selectively invest capital in equipment located at our contract manufacturers to drive down costs, improve throughput and improve product quality.

Selling, general and administrative expenses have increased as a result of the investment we have made in building our organization and adding headcount to support our growth and operating as a public company. Many of our selling, general and administrative expenses are variable with volume including freight and warehouse expenses and commissions paid to our sales brokers. In addition, we continue to make investments in marketing to drive trial of our products and promote awareness of our brand and in research and development to support our robust innovation pipeline. Starting in fiscal 2012, we incurred incremental expense related to getting ready to operate as a public company. We expect to incur approximately $2 million in incremental expense annually related to being 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:



                                                  Three Months Ended September 30,             % of Net Sales              Six Months Ended September 30,             % of Net Sales
                                                    2012                    2011             2012          2011              2012                   2011            2012          2011
                                                                                                (in thousands, except for percentages)
Net sales                                      $        46,686         $        38,872        100.0 %       100.0 %     $       80,979         $       67,482        100.0 %       100.0 %
Cost of sales                                           28,786                  24,737         61.7 %        63.6 %             49,272                 41,759         60.8 %        61.9 %

Gross profit                                            17,900                  14,135         38.3 %        36.4 %             31,707                 25,723         39.2 %        38.1 %
Operating expenses:
Selling, general and administrative expenses            11,539                   8,056         24.7 %        20.7 %             21,750                 16,359         26.9 %        24.2 %

Total operating expenses                                11,539                   8,056         24.7 %        20.7 %             21,750                 16,359         26.9 %        24.2 %

Income from operations                                   6,361                   6,079         13.6 %        15.6 %              9,957                  9,364         12.3 %        13.9 %
Interest expense                                           (40 )                   (23 )       (0.1 )%       (0.1 )%               (80 )                  (41 )       (0.1 )%       (0.1 )%
Other income (expense), net                                 36                      13          0.1 %         0.0 %                 85                   (471 )        0.1 %        (0.7 )%

Income before provision for income taxes                 6,357                   6,069         13.6 %        15.6 %              9,962                  8,852         12.3 %        13.1 %
Provision for income taxes                               2,572                   2,453          5.5 %         6.3 %              4,046                  3,424          5.0 %         5.1 %

Net income                                     $         3,785         $         3,616          8.1 %         9.3 %     $        5,916         $        5,428          7.3 %         8.0 %


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Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011

Net Sales



                                        Three Months Ended September 30,              Change                 % of Net Sales
                                           2012                  2011              $           %           2012         2011
                                                               (in thousands, except for percentages)
Meals                                 $        21,869       $        16,724     $ 5,145        30.8 %        46.9 %       43.0 %
Snacks                                         19,146                16,338       2,808        17.2 %        41.0 %       42.0 %
Dressings, condiments and other                 5,671                 5,810        (139 )      (2.4 )%       12.1 %       15.0 %

Net sales                             $        46,686       $        38,872     $ 7,814        20.1 %       100.0 %      100.0 %

Net sales increased $7.8 million, or 20.1%, to $46.7 million during the three months ended September 30, 2012 compared to $38.9 million during the three months ended September 30, 2011. This increase reflects an increase in net sales of meals and snacks of $5.1 million and $2.8 million, respectively, offset by a slight decrease in dressings, condiments and other of $0.1 million. The increase in meals was predominantly driven by strong growth in the macaroni and cheese product line with a benefit from organic and made with organic frozen pizza products. Organic frozen pizza first shipped in January 2012 and made with organic frozen pizza first shipped this quarter. The increase in snacks was primarily due to growth in our snack mix, fruit snacks, grahams and crackers product lines. The slight decrease in dressings, condiments and other was attributable to the discontinuation of our cereal product line. Excluding our cereal product line, the dressings, condiments and other category grew modestly. Distribution gains and our mainline placement initiatives also contributed to net sales growth, primarily in the mainstream grocery channel. The net sales increase was primarily driven by volume with slightly higher average selling prices adding modest growth.

Gross Profit



                          Three Months Ended September 30,                Change
                            2012                    2011               $          %
                                   (in thousands, except for percentages)
      Cost of sales    $        28,786         $        24,737      $ 4,049       16.4 %

      Gross profit     $        17,900         $        14,135      $ 3,765       26.6 %

      Gross margin %              38.3 %                  36.4 %

Gross profit increased $3.8 million, or 26.6%, to $17.9 million for the three months ended September 30, 2012 from $14.1 million for the three months ended September 30, 2011. Gross margin increased 1.9 percentage points to 38.3% from 36.4% during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase in gross profit was primarily driven by the increase in net sales. The increase in gross margin resulted from price increases and the cumulative impact of various cost reduction initiatives, which were partially offset by higher commodity costs.

Operating Expenses

Three Months Ended September 30, Change
2012 2011 $ %
(in thousands, except for percentages)

Operating expenses:
Selling, general and administrative
expenses $ 11,539 $ 8,056 $ 3,483 43.2 %

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $3.5 million, or 43.2%, to $11.5 million during the three months ended September 30, 2012 from $8.0 million during the three months ended September 30, 2011. This increase was due primarily to an increase in payroll expense resulting from increased headcount to support our


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growth and operations as a public company. Additionally, public company related expenses impacted selling, general and administrative expenses during the three months ended September 30, 2012 compared with the three months ended September 30, 2011. Further, during the three months ended September 30, 2012, we incurred $0.7 million including legal, accounting and printing costs and various other fees associated with the registration and sale of common stock in the secondary public offering by certain stockholders including Solera. We did not receive any proceeds from the sale of shares by the selling stockholders. As a percentage of net sales, selling, general and administrative expenses increased 4.0 percentage points to 24.7% during the three months ended September 30, 2012 from 20.7% during the three months ended September 30, 2011.

Income from Operations



                                               Three Months Ended September 30,                  Change
                                                2012                      2011                $           %
                                                         (in thousands, except for percentages)
Income from operations                     $         6,361           $         6,079        $ 282         4.6 %

Income from operations as a percentage
of net sales                                          13.6 %                    15.6 %

As a result of the factors above, income from operations increased $0.3 million, or 4.6%, to $6.4 million during the three months ended September 30, 2012, from $6.1 million during the three months ended September 30, 2011. Income from operations as a percentage of net sales decreased 2.0 percentage points to 13.6% in the three months ended September 30, 2012, from 15.6% in the three months ended September 30, 2011.

Interest Expense

Three Months Ended September 30, Change
2012 2011 $ %
(in thousands, except for percentages)

Interest expense $ (40 ) $ (23 ) $ (17 ) nm

Interest expense during the three months ended September 30, 2012 primarily related to non-cash imputed interest expense related to financing of product formulas intangible asset acquired in fiscal 2012. Interest expense during the three months ended September 30, 2011 consisted of expense related to borrowings on our revolving line of credit.

Other Income (Expense), Net

Three Months Ended September 30, Change
2012 2011 $ %
(in thousands, except for percentages)

Other income (expense), net $ 36 $ 13 $ 23 nm

Other income (expense), net during the three months ended September 30, 2012 consisted of royalty income. Other income (expense), net during the three months ended September 30, 2011 primarily reflects royalty income partially offset by non-cash charge of $20,000 related to the increase in the fair value of our convertible preferred stock warrant liability.


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Provision for income taxes

                                   Three Months Ended September 30,               Change
                                    2012                      2011              $        %
                                          (in thousands, except for percentages)
  Provision for income taxes   $         2,572           $         2,453      $ 119       nm

  Effective tax rate                      40.5 %                    40.4 %

Our effective tax rate was 40.5% for the three months ended September 30, 2012, compared to 40.4% in the same period last year. The effective tax rate is based on a projection of our annual fiscal year results. Our effective tax rate for the three months ended September 30, 2012 was higher than the effective tax rate for the three months ended September 30, 2011 largely due to a tax benefit recorded during the three months ended September 30, 2011 related to an increase in the tax rate applied for deferred tax assets due to an increase in the federal and state tax rates.

In addition, during the three months ended September 30, 2012, we recognized $2.3 million of tax deductions associated with stock option exercises. As of September 30, 2012, $2.1 million of these tax deductions are considered "excess" stock compensation related deductions, resulting in a reduction in taxes payable of $3.8 million, recording a tax refund receivable of $1.4 million, with a corresponding increase in additional paid in capital of $5.3 million. We will recognize the remaining $0.2 million of stock compensation related deductions as a reduction in taxes payable in future periods as we generate state taxable income.

Net income

Three Months Ended September 30, Change 2012 2011 $ %

(in thousands, except for percentages)

Net income $ 3,785 $ 3,616 $ 169 4.7 %

As a result of the factors above, net income increased $0.2 million, or 4.7%, to $3.8 million for the three months ended September 30, 2012 from $3.6 million for the three months ended September 30, 2011.

Six Months Ended September 30, 2012 Compared to Six Months Ended September 30, 2011

Net Sales



                                         Six Months Ended September 30,                Change                 % of Net Sales
                                           2012                  2011              $            %           2012         2011
                                                               (in thousands, except for percentages)
Meals                                 $        36,536       $        27,176     $  9,360        34.4 %        45.1 %       40.3 %
Snacks                                         32,609                28,236        4,373        15.5 %        40.3 %       41.8 %
Dressings, condiments and other                11,834                12,070         (236 )      (2.0 )%       14.6 %       17.9 %

Net sales                             $        80,979       $        67,482     $ 13,497        20.0 %       100.0 %      100.0 %

Net sales increased $13.5 million, or 20.0%, to $81.0 million during the six months ended September 30, 2012 compared to $67.5 million during the six months ended September 30, 2011. This increase reflects an increase in net sales of meals and snacks of $9.3 million and $4.4 million, respectively, offset by a slight decrease in dressings, condiments and other of $0.2 million. The increase in meals was predominantly driven by strong growth in the macaroni and cheese product line with a benefit from organic and made with organic frozen pizza products. Organic frozen pizza first shipped in January 2012 and made with organic pizza first shipped this quarter. The increase in snacks was primarily due to growth in our fruit snacks, grahams, crackers and snack mix product lines. The slight decrease in dressings, condiments and other was attributable to the discontinuation of our cereal product line. Excluding our cereal product line, the dressings, condiments and other category grew modestly. Distribution gains


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and our mainline placement initiatives also contributed to net sales growth, primarily in the mainstream grocery channel. The net sales increase was primarily driven by volume with slightly higher average selling prices adding modest growth.

Gross Profit



                           Six Months Ended September 30,                Change
                             2012                   2011              $          %
                                   (in thousands, except for percentages)
       Cost of sales    $       49,272         $       41,759      $ 7,513       18.0 %

       Gross profit     $       31,707         $       25,723      $ 5,984       23.3 %

       Gross margin %             39.2 %                 38.1 %

Gross profit increased $6.0 million, or 23.3%, to $31.7 million for the six months ended September 30, 2012 from $25.7 million for the six months ended September 30, 2011. Gross margin increased 1.1 percentage points to 39.2% from 38.1% during the six months ended September 30, 2012 compared to the six months ended September 30, 2011. The increase in gross profit was primarily driven by the increase in net sales. The increase in gross margin resulted from price increases and the cumulative benefit of various cost reduction initiatives, which were partially offset by higher commodity costs.

Operating Expenses

Six Months Ended September 30, Change
2012 2011 $ %
(in thousands, except for percentages)

Operating expenses:
Selling, general and administrative expenses $ 21,750 $ 16,359 $ 5,391 33.0 %

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $5.4 million, or 33.0%, to $21.8 million during the six months ended September 30, 2012 from $16.4 million during the six months ended September 30, 2011. This increase was due primarily to an increase in payroll expense resulting from increased headcount to support our growth and operations as a public company. Additionally, public company related expenses impacted selling, general and administrative expenses during the six months ended September 30, 2012 compared with the six months ended September 30, 2011. Further, during the six months ended September 30, 2012, we incurred $0.7 million including legal, accounting and printing costs and various other fees associated with the registration and sale of common stock in the secondary public offering by certain stockholders including Solera. We did not receive any proceeds from the sale of shares by the selling stockholders. As a percentage of net sales, selling, general and administrative expenses increased 2.7 percentage points to 26.9% during the six months ended September 30, 2012 from 24.2% during the six months ended September 30, 2011.


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Income from Operations



                                                Six Months Ended September 30,                Change
                                                 2012                   2011               $           %
                                                        (in thousands, except for percentages)
Income from operations                       $       9,957          $       9,364        $ 593         6.3 %

Income from operations as a percentage
of net sales                                          12.3 %                 13.9 %

As a result of the factors above, income from operations increased $0.6 million, or 6.3%, to $10.0 million during the six months ended September 30, 2012, from $9.4 million during the six months ended September 30, 2011. Income from operations as a percentage of net sales decreased 1.6 percentage points to 12.3% in the six months ended September 30, 2012, from 13.9% in the six months ended September 30, 2011.

Interest Expense

Six Months Ended September 30, Change
2012 2011 $ %
(in thousands, except for percentages)

Interest expense $ (80 ) $ (41 ) $ (39 ) nm

Interest expense during the six months ended September 30, 2012 primarily related to non-cash imputed interest expense related to financing of product formulas intangible asset acquired in fiscal 2012. Interest expense during the six months ended September 30, 2011 consisted of expense related to borrowings on our revolving line of credit.

Other Income (Expense), Net

Six Months Ended September 30, Change
2012 2011 $ %
(in thousands, except for percentages)

Other income (expense), net $ 85 $ (471 ) $ 556 nm

Other income (expense), net during the six months ended September 30, 2012 primarily reflects royalty income partially offset by non-cash charge of $13,000 related to the increase in the fair value of the convertible preferred stock warrant on April 2, 2012, prior to its conversion into a common stock warrant. Other income (expense), net during the six months ended September 30, 2011 primarily reflects a non-recurring, non-cash out of period charge of $0.5 . . .

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