Hill Country Snack Foods Co.

The Chief Executive Officer of Hill Country Snack Foods had never enjoyed analyst
conference calls, but in late January of 2012, Howard Keener was yet again asked about
the company’s cash balances, capital structure, and performance measures. One analyst
complained that Hill Country’s growing cash position, absence of debt finance, and
large equity balance made it difficult for a company in a mature industry to earn a high
rate of return on equity, and recommended a more aggressive capital structure. “Maybe
I don’t fully understand capital structure theory and practice,” replied Keener, “but I
have observed that companies don’t get into trouble because they have too much cash;
they get into trouble because they have too much debt.” Hill Country had seen its sales
and profits grow at a steady rate during Keener’s tenure as CEO, and at the end of 2011
the company had zero debt and cash balances equal to 18% of total assets and 13% of
market capitalization. Having just celebrated his 62nd birthday, Keener was
approaching retirement, creating speculation by investors and analysts that the
company might change to a more aggressive capital structure in the near future.

Company Background
Hill Country Snack Foods, located in Austin, Texas, manufactured, marketed, and
distributed a variety of snacks, including churros, tortilla chips, salsa, pretzels, popcorn,
crackers, pita chips, and frozen treats. Although many of its products had a
Southwestern flair, it also offered more traditional snack foods, which were purchased
by end consumers thousands of times every day in supermarkets, wholesale clubs,
convenience stores, and other distribution outlets. The company’s growth and success
was driven by its efficient operations; quality products; strong position in a region that
was experiencing both population and economic growth; and its ability to expand its
presence beyond the aisle into sporting events, movie theaters, and other leisure venues
where consumers were more likely to purchase snack foods. Many of Hill Country’s
products were also sold through school systems, which required the company to reduce
the fat and sugar content of its products. This was just one example of the company’s
continual work to solicit, collect, analyze, and internally distribute customer feedback
so the company could quickly react to customer requirements or preferences, and
reinvent and expand its products as required to succeed in the rapidly changing
marketplace.
Hill Country’s Corporate Culture
Hill Country was a well-managed company, where all decisions were made according
to one criterion: will this action build shareholder value? This singular management
focus came directly from Howard Keener, the company’s CEO for over fifteen years,
who strongly believed that management’s job was to maximize shareholder value. This
philosophy was applied at every level of the organization and in all operating decisions.
Many managers talk about shareholder value, but Keener was proud of the fact that, at
Hill Country, shareholder value was a way of life, not just a talking point. Keener and
other management insiders also held a significant proportion of the company’s common
stock, approximately one-sixth of the 33.9 million shares outstanding, so this focus on
building shareholder value was also personally beneficial to the members of the
management team.
Another important component of company culture was a strong commitment to
efficiency and controlling costs. The snack foods industry was very competitive, with
Hill Country facing off against industry giant PepsiCo and smaller companies like
Snyder’s-Lance every day. Efficient operations and tight cost controls were necessary
conditions for success; the company could not rely on price increases in this high rivalry
industry. Operating and capital budgets were lean and aggressive, and Keener himself
was actively involved in both the budget approval process and in ensuring the business
was managed to the numbers in the budget. Unfavorable cost variances resulted in
management action to bring costs back into line with plans, even when the cost
increases were due to external factors. Management didn’t always have a solution to
unfavorable variances, but they did all they could to keep costs under control.
The final component of Hill Country’s culture and managerial philosophy was caution
and risk aversion. The company invested in new capacity and new products when
attractive opportunities were identified, but it did not make high-risk bets in its product
markets. Growth was low-risk and incremental, driven by extensions of existing
products and the acquisition of smaller specialty companies. This strategy produced
sales growth rates that were steady, if unspectacular, but also increased the likelihood
that customers would respond favorably to the company’s new products. Management
avoided great leaps in its product markets, instead believing a series of small but
successful product launches, combined with the company’s operating and cost
efficiencies, would quickly contribute positive operating profits.
Hill Country’s culture of risk-avoidance was also manifested in its financing decisions.
The CEO had strong preferences for equity finance and against debt finance, and the
company was managed consistent with these beliefs. Debt was avoided, investments
were funded internally, and the balance sheet was strong. The company also held large
cash balances to increase both safety and flexibility. Some members of the analyst and
investment communities questioned these policies, but CEO Keener believed they were
appropriate for the company.

Financial Performance
The combination of good products, efficient and low-cost operations, and all-equity
funding had produced consistently strong financial results, as presented in Exhibit 1.
Sales had increased at a steady rate, and except for the difficult economic years of 2007
and 2008, net income had followed a similar growth pattern. The company had
experienced a decrease in earnings in 2007, and struggled to increase profitability in
2008, but growing sales and continued attention to costs drove large increases in net
income since the recession ended in 2009. Return on asset and return on equity numbers
had similarly increased in the past few years, with return on assets reaching 10%, and
return on equity exceeding 12% in 2011. Hill Country’s cautious growth strategy also
allowed the company to pay continuous and growing dividends; carefully considered
and controlled growth meant the company’s cash flow was sufficient to fund both
capital investments and dividend payments to shareholders. The dividend payout ratio
had been just below 30% of net income in each of the past five years, and management
planned to maintain this distribution ratio.
The company’s cash position and conservative capital structure, however, had a
negative impact on its financial performance measures. Return on assets was reduced
by Hill Country’s large cash balances in two ways. The interest rate earned on invested
cash was barely over 0%, contributing almost nothing to net income, and more cash
meant more total assets. Return on equity was similarly reduced by the avoidance of
debt and complete reliance on equity capital. Hill Country’s common stock was widely
held by investors and covered by analysts, reflecting the stock market’s favorable
opinion of the company’s products, prospects, and management. Many members of the
investment community were also frustrated by the company’s excess liquidity and lack
of debt finance. Even modest reductions to cash, increases to debt, and reductions to
owners’ equity would significantly increase return on equity. There was no clear
consensus about this issue, however, as others worried about the wisdom of demanding
changes from a successful company.

Capital Structure
Cash holdings of U.S. non-financial corporations had increased to record levels by the
end of 2011;1 thus Hill Country’s large and growing cash balances were not unusual.
The company’s capital structure with zero debt finance, in contrast, was fairly unique,
particularly within its industry. Both PepsiCo, the giant in snack foods, and Snyder’s-
Lance, a competitor of similar size and scope utilized debt finance, as shown in Exhibit
2. PepsiCo’s debt-to-capital ratio was 49.6%, but it earned bond ratings of “Aa” from
Moody’s and “A” from Standard & Poor’s, due to its strong interest coverage and low
level of business risk. This ratio was lower for Snyder’s-Lance, but debt still provided
nearly one-fourth of the company’s investment capital. None of their debt was publicly
held, however, so Snyder’s-Lance was not rated by any credit agency.
The question posed to Keener in the January analyst conference call reflected the
opinion of many shareholders that the company would benefit from a more aggressive
capital structure policy. Debt was less expensive than equity due to its contractual
nature and priority claim, and interest payments were deductible for income tax
purposes. In addition, interest rates were at unprecedented levels in early 2012: market
yields on 10-year treasury bonds were under 2%; and publicly-traded 10-year bonds
issued by “A” rated corporations were trading at 3.8% yields to maturity. These data
and other current information about interest rates and bond ratings are presented in
Exhibit 3.
A pro forma financial analysis is presented in Exhibits 4 and 5, which was prepared to
address speculation about how a change to Hill Country’s capital structure would affect
its financial results. Exhibit 4 shows the company’s actual 2011 financial results and
pro forma restatements of 2011 results under three alternative capital structures: 20%
debt-to-capital; 40% debt-to-capital; and 60% debt-to-capital. Exhibit 5 presents the
details and assumptions of the recapitalizations that produce the alternative pro forma
capital structures, in every case assuming the company issued debt and used the
proceeds, plus $55 millions of excess cash, to repurchase common stock at the end of
January 2012. The pro forma analysis also assumes the repurchase premiums paid
above the current market price of $41.67 per share increase as the stock repurchase
increases in size. Other alternatives exist to significantly increase the proportion of debt
in the firm’s capital structure—issuing debt to fund a large specially-designated
dividend, for example—but Exhibits 4 and 5 present an analysis that estimates the
financial impact of increasing debt and decreasing equity in Hill Country’s capital
structure through a stock repurchase.
Given the company’s culture of caution and risk-aversion, it would be unrealistic for
analysts and external shareholders to expect a major and immediate change in the use
of debt finance, no matter how attractive the pro forma results presented in Exhibits 4
and 5 . The recent birthday and pending retirement of CEO Keener, however, whose
personal preferences had a substantial influence on company culture, created
speculation that a more aggressive capital structure might be implemented in the near
future. The questions being considered by many members of the investment community
were, “What is the optimal capital structure for Hill Country Snack Foods, and how
large are the payoffs associated with a change to a more leveraged capital structure?”
希尔乡村休闲食品有限公司
Hill Country Snack Foods 的首席执行官从未享受过分析师电话会议，但在 2012
年 1 月下旬，Howard Keener 再次被问及该公司的现金余额，资本结构和绩效指
标。一位分析师抱怨说，希尔国家不断增长的现金状况，缺乏债务融资以及大量
股权平衡，这使得成熟行业的公司难以获得高回报率，并建议采用更积极的资本
结构。 “也许我并不完全理解资本结构理论和实践，”基纳回答说，“但我观察到
公司不会遇到麻烦，因为他们有太多的现金;他们陷入困境，因为他们有太多的
债务。“希尔国家在基纳担任首席执行官期间，其销售额和利润稳定增长，并且
在 2011 年底公司的债务和现金余额为零，相当于 18％的总资产和市值的 13％。
刚刚庆祝了他的 62 岁生日，基纳即将退休，投资者和分析师猜测该公司可能会
在不久的将来转变为更积极的资本结构。

公司背景
Hill Country Snack Foods 位于德克萨斯州奥斯汀，生产，销售和分销各种小吃，
包括油条，玉米片，莎莎，椒盐卷饼，爆米花，饼干，皮塔饼和冷冻零食。虽然
它的许多产品都具有西南风味，但它也提供了更多的传统休闲食品，最终消费者
每天在超市，批发俱乐部，便利店和其他分销商店购买数千次。公司的成长和成
功得益于其高效的运营;优质产品;在一个正在经历人口和经济增长的地区的强势
地位;它有能力将其超越过道的存在扩展到体育赛事，电影院和其他消费者更有
可能购买休闲食品的休闲场所。 Hill Country 的许多产品也通过学校系统销售，
这要求该公司减少其产品的脂肪和糖含量。这只是该公司不断努力征求，收集，
分析和内部分发客户反馈的一个例子，因此公司可以快速响应客户要求或偏好，
并根据需要重新发明和扩展其产品，以在瞬息万变的市场中取得成功。

希尔国家的企业文化
Hill Country 是一家管理良好的公司，所有决策都是根据一个标准做出的：这一
行动是否会增加股东价值？这种独特的管理重点直接来自该公司首席执行官霍
华德基纳超过 15 年，他坚信管理层的工作是最大化股东价值。这种理念适用于
组织的各个层面和所有运营决策。许多经理谈论股东的价值，但基纳很自豪，在
希尔国家，股东价值是一种生活方式，而不仅仅是一个谈论点。基纳和其他管理
层内部人士也占公司普通股的很大一部分，约占 3390 万股流通股的六分之一，
因此这种关注建立股东价值也对管理团队成员个人有利。
公司文化的另一个重要组成部分是对效率和控制成本的坚定承诺。休闲食品行业
非常具有竞争力，希尔乡村每天都面临着行业巨头百事可乐和像斯奈德兰斯这样
的小公司。有效的运营和严格的成本控制是成功的必要条件;公司不能依赖这个
高竞争行业的价格上涨。运营和资本预算是精益和积极的，Keener 本人积极参与
预算审批流程，并确保业务管理到预算中的数字。不利的成本差异导致管理行动
使成本重新与计划保持一致，即使成本增加是由于外部因素造成的。管理层并不
总能找到不利差异的解决方案，但他们竭尽全力控制成本。
Hill Country 的文化和管理哲学的最后一个组成部分是谨慎和风险规避。当确定
了具有吸引力的机会时，该公司投资了新产能和新产品，但它没有在其产品市场
上进行高风险的赌注。在现有产品的扩展和小型专业公司的收购的推动下，增长
是低风险和增量的。这一策略产生的销售增长率稳定，如果不引人注目，但也增
加了客户对公司新产品做出积极回应的可能性。管理层避免了其产品市场的巨大
飞跃，相信一系列小而成功的产品发布，加上公司的运营和成本效率，将迅速带
来积极的营业利润。
希尔国家的风险规避文化也体现在其融资决策中。首席执行官对股权融资和债务
融资有强烈的偏好，公司的管理与这些信念一致。债务被避免，投资由内部资助，
资产负债表很强劲。该公司还持有大量现金余额以增加安全性和灵活性。分析师
和投资界的一些成员质疑这些政策，但首席执行官基纳认为他们适合该公司。

财务绩效
良好的产品，高效率和低成本的运营以及全股权融资的结合产生了持续强劲的财
务业绩，如图 1 所示。除 2007 年和 2008 年经济困难年份外，销售额稳步增长，
净收入也遵循类似的增长模式。该公司 2007 年的收益减少，并且在 2008 年努力
提高盈利能力，但自 2009 年经济衰退结束以来，销售额的增长和对成本的持续
关注推动了净收入的大幅增长。资产回报和股本回报率同样如此在过去几年中，
资产回报率达到 10％，2011 年股本回报率超过 12％.Hill Country 的谨慎增长策
略也使该公司能够持续支付不断增长的股息;经过仔细考虑和控制的增长意味着
公司的现金流足以为资本投资和股东支付股息提供资金。在过去五年的每一年，
股息支付率都略低于净收入的 30％，管理层计划维持这一分配比率。
然而，公司的现金状况和保守的资本结构对其财务业绩指标产生了负面影响。
Hill Country 的大量现金余额以两种方式减少了资产回报率。投资现金赚取的利
率几乎不超过 0％，对净收入几乎没有贡献，更多现金意味着更多的总资产。通
过避免债务和完全依赖股权资本，同样降低了股本回报率。 Hill Country 的普通
股被投资者广泛持有并受到分析师的支持，反映了股市对公司产品，前景和管理
的好评。投资界的许多成员也对公司流动性过剩和缺乏债务融资感到沮丧。即使
适度减少现金，增加债务和减少所有者权益也会显着提高股本回报率。然而，对
于这个问题没有明确的共识，因为其他人担心要求成功公司改变的智慧。

资本结构
截至 2011 年底，美国非金融公司的现金持有量已增至创纪录的水平;因此，希尔
国家的大量现金余额并不罕见。相比之下，公司的债务融资为零的资本结构相当
独特，特别是在其行业内。如图 2 所示，百事可乐（休闲食品巨头）和类似规模
和范围的竞争对手 Snyder's-Lance 使用债务融资，百事公司的债务与资本比率为
49.6％，但它获得的债券评级为“Aa”。 “来自穆迪和标准普尔的”A“，由于其强
大的利息覆盖率和低水平的商业风险。 Snyder's-Lance 的这一比率较低，但债务
仍占该公司投资资本的近四分之一。然而，他们的债务都没有公开持有，因此
Snyder's-Lance 没有被任何信贷机构评级。
在一月份的分析师电话会议上，基纳提出的问题反映了许多股东的意见，即公司
将受益于更积极的资本结构政策。由于合同性质和优先权要求，债务比股权低，
并且利息支付可以用于所得税目的。此外，2012 年初利率处于前所未有的水平：
10 年期国债的市场收益率低于 2％;由“A”级公司发行的公开交易的 10 年期债券
的到期收益率为 3.8％。有关利率和债券评级的这些数据和其他当前信息见图表
3。
图 4 和图 5 中提供了备考财务分析，该分析旨在解决有关希尔国家资本结构变
化如何影响其财务业绩的猜测。图表 4 显示了公司 2011 年的实际财务业绩和
2011 年业绩的三种替代资本结构的形式重述：20％的债务对资本; 40％的债务对
资本;和 60％的债务对资本。图表 5 显示了产生替代形式资本结构的资本重组的
详细信息和假设，在每种情况下，假设公司发行债务并使用所得款项加上 5500
万美元的超额现金，在 2012 年 1 月底回购普通股。备考分析还假设，随着股票
回购规模的增加，回购溢价高于目前每股 41.67 美元的市场价格。其他替代方案
可以显着增加公司资本结构中债务的比例 - 例如发行债务以为特定的大额股息
提供资金 - 但是图表 4 和图 5 提供了一个分析，估计增加债务和减少股权的财
务影响。 Hill Country 的资本结构通过股票回购。
考虑到公司的谨慎和风险规避的文化，分析师和外部股东预计债务融资的使用会
发生重大而直接的变化是不现实的，无论表格 4 和 5 中的预测结果如何具有吸
引力。然而，首席执行官基纳最近的生日和退休，其个人偏好对公司文化产生了
重大影响，这引发了人们猜测在不久的将来可能会实施更积极的资本结构。投资
界的许多成员正在考虑的问题是，“希尔国家休闲食品的最佳资本结构是什么，
以及更改杠杆资本结构所带来的收益有多大？”