• Q1 operating income drops to US$5.3m, from $12.7m
  • Adjusted EBITDA decreased by 3.2% to $17.7m 
  • Net sales increased 15.2% to $122.9m
Boulder Brands earnings fall

Boulder Brands earnings fall

Gluten free manufacturer Boulder Brands lowered the top end of its full year guidance as it blamed a drop in first quarter earnings on higher egg white prices, product mix and one-off costs.

First quarter operating income fell to $5.3m, from $17.7m last year. The company said higher egg white prices and a mix shift to its lower margin natural segment caused earnings to fall in the period.

The group also registered a number of one-time costs associated with restructuring initiatives and acquisition costs associated with Evol. Excluding these items, adjusted EBITDA fell by 3.2%.

During the period, net sales surged 15.2% reflecting "strong" growth of the natural segment.

The firm lowered the top end of its full-year adjusted earnings guidance range to $89-91m, from $89-94m previously. Boulder reaffirmed its sales outlook, with full-year sales expected to total $540-$550m.

Show the press release

Boulder Brands, Inc. (NasdaqGM: "BDBD") today announced its financial results for the first quarter ended March 31, 2014.  For the first quarter of 2014 compared to the equivalent period of 2013:

  • Net sales increased 15.2% to $122.9 million, operating income decreased 58% to $5.3 million, non-GAAP operating income decreased 20.9% to $10.2 million and adjusted EBITDA decreased 3.2% to $17.7 million. 
  • Organic net sales increased 17.6% and organic consumption growth increased 15.5%.
  • Diluted earnings per share were $0.01 in the first quarter of 2014 compared to $0.06 per share in the first quarter of 2013.
  • Excluding certain items, non-GAAP diluted earnings per share were $0.05 in the first quarter of 2014, compared to $0.07 in the first quarter of 2013. 

The Company also reaffirmed its guidance, but narrowed the range on profit metrics due to the impact and uncertainty of egg white prices. For 2014, the Company continues to expect net sales to be in the range of $540 million to $550 million. However the Company updated its adjusted EBITDA outlook to be in the range of $89 to $91 million, from $89 million to $94 million previously, and its earnings per share outlook to be in the range of $0.39 to $0.41, at the lower end of its previously stated $0.39 to $0.44 range, primarily reflecting updated estimates for higher egg white prices for the remainder of 2014.

Commenting on the results, Chairman and Chief Executive Officer Stephen Hughes stated, "While we continued to see strong sales momentum, our bottom line results were muted due to higher than expected egg white prices, which are an important ingredient in our gluten free bread business, as well as the mix shift to our Natural segment, which has lower gross margins. Regarding the higher egg white price environment, we expect to somewhat offset the impact as we are in the process of improving our formulation, which requires less egg white.  In addition, we have a number of margin improvement projects in process.  As a result, we expect to see gross margins return to more normal levels in the back half."  

Commenting further, Mr. Hughes said, "The Natural segment, which includes Udi's, Glutino, and EVOL, represented 60% of our total net sales and reported a strong organic net sales increase of 39.5%. The segment continued to benefit from distribution gains across the brands. We had top to top meetings with 10 of our top 20 accounts during the quarter and expect significant distribution gains across our natural portfolio in the second half.  In addition, our Balance segment continued to execute on its core strategies during the quarter.  While organic net sales for the Balance segment declined 4.7%, brand profit continued to increase.  Despite the difficult environment for spreads, we continue to lead the category in innovation with the transition to non-GMO, once again giving Smart Balance a significant point of differentiation in the category. Non-GMO Smart Balance is hitting the shelves now and will be fully converted by the end of the second quarter."

"Overall, despite some short-term gross margin pressure, we are pleased with the first quarter.  I believe the stage is set for us to build on both revenue and margin.  As we move from the first half of the year to the second half, we expect to  begin to see the fruits of our efforts in terms of our margin improvement program and major distribution gains on our major sales initiatives - Project Gluten Freedom, Frozen Forward with Udi's and EVOL, and expansion into the Club channel," concluded Mr. Hughes. 

2014 First Quarter Results

Total Company net sales in the first quarter of 2014 increased 15.2% to $122.9 million, compared to net sales of $106.7 million in the first quarter of 2013.  This performance reflected strong growth from our Natural segment.  Organic net sales, which include EVOL sales and exclude discontinued items and the licensing of Smart Balance Milk from our reported net sales in the first quarter of 2013, increased 17.6% in the first quarter of 2014 compared to the first quarter of 2013.

The chart below reconciles net sales to organic net sales for the first quarters of 2014 and 2013, by segment:

Reconciliation of Net Sales to Organic Net Sales - First Quarter
$ in Millions 2014 2013
Natural Segment    
     Reported Net Sales $73.4 $49.8
     EVOL Pre-Ownership   -   2.8
Organic Natural Segment Net Sales* $73.4 $52.6
     
Balance Segment    
     Reported Net Sales 49.5 56.9
     Less: Milk - 4.8
               Discontinued items   -   0.2
Organic Balance Segment Net Sales  49.5 51.9
Total Company Reported Net Sales $122.9 $106.7
Total Company Organic Net Sales* $122.9 $104.5
*Excludes discontinued items (Bestlife Spreads and Smart Balance Butter Blends) & licensing of Smart
Balance Milk, and includes EVOL in both periods

Net sales for the Company's Natural segment increased 47.4% to $73.4 million in the first quarter of 2014 compared to $49.8 million in the first quarter of 2013.  Organic net sales for the Natural Segment, which include EVOL in the prior year comparison, increased 39.5%.  The Company's gluten-free brands - Udi's and Glutino - reported net sales growth of 37.4% and 14.1%, respectively, which was driven by distribution gains for Udi's and continued strength in the gluten-free category. EVOL reported a strong organic net sales gain of 152.6%, also led by distribution gains.

Net sales for the Company's Balance segment declined 13.0% to $49.5 million in the first quarter of 2014 compared to $56.9 million in the first quarter of 2013.  Net sales in this segment were negatively impacted by the licensing of Smart Balance® Milk, which began in July 2013, and to a much lesser extent the winding down of Bestlife® Spreads and Smart Balance® Butter Blends.  Excluding the impact of these items, organic sales for the Balance segment declined 4.7% in the first quarter of 2014 compared to the same period in 2013. In addition, net sales in the first quarter of 2014 were negatively impacted by the Easter shift (Easter fell in the first quarter of 2013 but in the second quarter of 2014) as well as start-up costs associated with the launch of non-GMO Smart Balance spreads.  Earth Balance reported a net sales gain of 19.4% in the first quarter of 2014 compared to the first quarter of 2013. 

The chart below highlights net sales, gross profit, gross margin, and brand profit (calculated as gross profit less marketing, selling and royalty expense (income)) for the first quarters of 2014 and 2013, by the Company's Natural and Balance segments. 

Segment Results - First Quarter
$ in Millions 2014 Margin 2013 Margin
Net Sales:        
   Natural $73.4   $49.8  
   Balance 49.5   56.9  
  $122.9   $106.7  
Gross Profit*        
   Natural $24.1 32.8% $18.8 37.7%
   Balance 23.2 46.8% 26.8 47.1%
  $47.2 38.5% $45.6 42.7%
Brand Profit*        
   Natural $14.7 20.1% $13.0 26.0%
   Balance 18.2 36.8% 17.8 31.3%
  $32.9 26.8% $30.8 28.9%
 *2014 excludes a purchase accounting adjustment to reflect the estimated fair value of
finished goods inventory of acquired company, EVOL, of $0.9 million.

Gross profit in the first quarter of 2014 increased 3.7% to $47.2 million, or 38.5% of net sales compared to $45.6 million, or 42.7% of net sales in the first quarter of 2013.  Gross profit in 2014 excludes the impact of the purchase accounting adjustment to reflect the estimated fair value of finished goods inventory for the EVOL acquisition.  Overall gross margin was impacted by the Natural segment, and to a much lesser extent, a slightly lower gross margin in the Balance segment.  In the quarter, the Natural segment gross margin was primarily affected by an increase in egg white prices. The Company is in the process of improving its bread formula, which will enhance its structure and require less egg white, somewhat offsetting the gross margin impact from higher egg white prices. 

Brand Profit for the Company's Natural segment increased 13.6% to $14.7 million in the first quarter of 2014 from $13.0 million in last year's first quarter, excluding the purchase accounting adjustment in 2014.  The increase is primarily related to strong sales growth from the Company's gluten-free brands, Udi's and Glutino, as well as EVOL, offset by the lower gross margin in the Natural Segment.

Brand Profit for the Company's Balance segment increased 2.2% to $18.2 million in the first quarter of 2014 from $17.8 million in the previous year's quarter primarily due to the licensing of milk and lower marketing expense compared to the prior year's quarter. 

The table below provides a reconciliation of GAAP operating income to non-GAAP operating income and non-GAAP adjusted EBITDA.

Reconciliation of Operating Income to Non-GAAP Operating Income and Adjusted EBITDA - First Quarter
$ in Millions   2014   2013  
Operating income   $5.3   $12.7  
    Restructuring, acquisition and integration costs   3.9   0.2  
    Relocation and other charges   0.1   -  
    Purchase accounting adjustment   0.9   -  
Non-GAAP operating income   10.2   12.9  
Add back non-cash and other items affecting operating income:          
    Depreciation and amortization 5.5   4.4  
    Stock-based compensation expense   2.4   1.8  
Subtotal   18.1   19.1  
Less other expense, net   0.5   0.8  
Less net loss attributable to non-controlling interest   (0.1)   -  
Adjusted EBITDA   $ 17.7   $18.3  
           

Operating income decreased to $5.3 million in the first quarter of 2014 compared $12.7 million in the first quarter of 2013.  Excluding certain items, non-GAAP operating income decreased to $10.2 million in the first quarter of 2014 compared to non-GAAP operating income of $12.9 million in the first quarter of 2013.  The charges impacting operating income in the first quarter of 2014 include charges associated with the restructuring of certain executive management positions, asset write-offs related to restructuring efforts associated with Udi's facilities consolidation, a purchase accounting adjustment to EVOL, acquisition costs associated with EVOL as well as other integration-related costs, and relocation expenses.  The first quarter of 2013 was unfavorably impacted by restructuring, acquisition, and integration costs of $0.2 million.  
First quarter 2014 operating income was impacted by higher depreciation and amortization of approximately $1.1 million when compared to last year's first quarter. 

Other expense of $0.5 million in the first quarter of 2014 includes foreign currency losses and other taxes.

Adjusted EBITDA decreased by 3.2% to $17.7 million in the first quarter of 2014 compared to $18.3 million in the prior year's first quarter.

The table below provides a reconciliation of GAAP Net Income (Loss) and GAAP Diluted EPS to non-GAAP Net Income and non-GAAP Diluted EPS.

Reconciliation of Certain Items Affecting Net  Income (Loss) and Earnings Per Share (EPS), Net of Tax - First Quarter
  Net Income (Loss) ($Mil) Diluted EPS
($ Per Share)
  2014 2013 2014 2013
Reported GAAP $0.5 $4.0 $0.01 $0.06
Add back certain items:        
       Restructuring, acquisition and integration costs 2.9 0.1 0.05 -
       Purchase accounting adjustment 0.6 - - -
       Relocation and other changes 0.1 - - -
       Forfeiture of certain stock options - 0.2 - 0.01
       Tax rate adjustment (0.8) - (0.01) -
  _______ _______ _______ _______
Total certain items 2.8 0.3 0.04 0.01
         
Non-GAAP excluding certain items* $3.3 $4.3 $0.05 $0.07
*Diluted share count for Q1-14 = 63.6 million & Q1-13 = 62.2 million

Excluding the items noted above, and adjusted for a normalized tax rate of 40.6% in 2014 and 41.0% in 2013, non-GAAP net income in the first quarter of 2014 was $3.3 million, or $0.05 per share, compared with non-GAAP net income of $4.3 million, or $0.07 per share, in the first quarter of 2013. 

The table below provides a reconciliation of brand profit by segment to GAAP income before income taxes.

Reconciliation of Brand Profit by Segment to GAAP Income, before Taxes
$ in Millions        
Brand Profit:   2014   2013
   Natural*   $14.7   $13.0
   Balance   18.2   17.8
Total reportable segments*   32.9   30.8
   Less:        
Purchase accounting adjustment   0.9   -
General and administrative, excluding royalty expense (income), net   22.7   17.8
Restructuring, acquisition and integration-related costs   3.9   0.2
Interest expense   4.3   4.8
Other expense   0.5   0.8
   GAAP Income before income taxes   $0.6   $7.1
 *2014 excludes a purchase accounting adjustment to reflect the estimated fair value of finished goods inventory of
acquired company EVOL, of $0.9 million.

2014 Outlook

For 2014, the Company continues to expect net sales to be in the range of $540 million to $550 million; however, it has updated its adjusted EBITDA outlook to be in the range of $89 to $91 million, from $89 to $94 million previously. Additionally, the Company updated its earnings per share outlook to be in the range of $0.39 to $0.41, at the lower end of its previously stated $0.39 to $0.44 range, primarily reflecting updated estimates for higher egg white prices, and based on diluted shares outstanding of 63.6 million.

The Company provided the following additional information regarding its outlook for 2014:

  • For the second quarter, the Company expects gross margin to be approximately 37% and net income to be similar to Q1.
  • In the second half of the year, the Company expects to see a sequential improvement in gross margin due to operational improvements.  Accordingly, the Company expects full year gross margin to be approximately 40% to 41%. Despite higher egg white prices, gross margin is expected to benefit from trade efficiencies, cost of goods reductions by improving its formula, and efficiency gains with its co-packers. Additionally, we expect margin improvement in the UK and at Level as they lap start-up costs associated with product launches.
  • For the year, stock-based compensation is expected to be $10 million.

Forward-looking Statements 
Statements made in this press release that are not historical facts, including statements about the Company's plans, strategies, beliefs, and expectations, including the Company's outlook for the second quarter of 2014, the second half of 2014 and for all of 2014, are forward-looking and subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These statements may include use of the words "expect," "estimate," "anticipate," "plan," "intend," "project," "may," "believe" and similar expressions.  Forward-looking statements speak only as of the date they are made, and, except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statement, whether to reflect actual results of operations, changes in financial condition, changes in general economic or business conditions, changes in estimates, expectations or assumptions, or circumstances or events arising after the issuance of this press release.  Actual results may differ materially from such forward-looking statements for a number of reasons, including risks related to the Company's ability to implement its growth strategy, the Company's ability to drive product innovation, the loss of a significant customer, erosion of the reputation of the Company's brands, adverse developments with respect to the sale of buttery spreads, maintaining and upgrading the Company's manufacturing facilities, the loss of a manufacturer, the departure of one or more members of the Company's management, the Company's rapid growth and need to build an infrastructure and workforce, termination of the Company's relationships with its primary sales agents, changes in consumer preferences, potential unavailability of necessary capital, price increases, the Company's ability to protect its intellectual property, the Company's obligations under its principal license agreement, any sustained economic downturn in the U.S. and abroad, fluctuations in various food and supply costs, the Company's ability to manage its supply chain effectively, regulation of the Company's advertising, adverse publicity or consumer concern regarding safety and quality of food products, the absence of long-term contracts with the Company's customers, economic and political conditions in the U.S. and abroad, foreign currency fluctuations, the execution and integration of acquisitions, the realization of the expected growth benefits from acquisitions, selling gluten-free products, the Company's internal control over financial reporting, labor disputes and adverse employee  relations, conducting business outside of the U.S., potential liabilities of litigation, the potential unavailability of insurance, increases in costs of medical and employee benefits, the failure of the Company's information technology systems to operate effectively, an impairment in the carrying value of the Company's goodwill, volatility of the market price of the Company's common stock, the numerous laws and regulations the Company is subject to, liabilities resulting from claims against the Company's products, risks that customers will not accept the Company's products for their stores, changes in retail distribution arrangements, competition, and the Company's debt, as well as other risks and uncertainties set forth in the Company's filings with the SEC.

Original source: Boulder Brands