Table
of Contents
As filed with the Securities and Exchange Commission on October 30,
2008
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x
|
Quarterly
Report Pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
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|
For the
quarterly period ended September 27, 2008
or
o
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Transition
Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the
transition period from
to .
Commission
file number 001-32316
B&G FOODS, INC.
(Exact name of
Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
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13-3918742
(I.R.S. Employer Identification No.)
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|
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4 Gatehall Drive, Suite 110, Parsippany, New
Jersey
(Address of
principal executive offices)
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07054
(Zip Code)
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Registrants
telephone number, including area code:
(973) 401-6500
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer, and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated
filer
x
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Non-accelerated
filer
o
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Smaller
reporting company
o
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(Do
not check if a smaller reporting company)
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|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of September 27, 2008, the registrant had
36,796,988 shares of Class A common stock, par value $0.01 per share,
issued and outstanding, 17,077,331 of which were held in the form of Enhanced
Income Securities (EISs) and 19,719,657 of which were held separate from
EISs. Each EIS represents one share of Class A
common stock and $7.15 principal amount of 12% senior subordinated notes due
2016. As of September 27, 2008, the
registrant had no shares of Class B common stock, par value $0.01 per
share, issued or outstanding.
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
B&G Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)
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September 27, 2008
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December 29, 2007
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Assets
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Current assets:
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Cash and cash equivalents
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$
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31,899
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$
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36,606
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Trade accounts receivable, net
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38,414
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42,362
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Inventories
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95,688
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93,181
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Prepaid expenses
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3,174
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3,556
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Income tax receivable
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597
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569
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Deferred income taxes
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648
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648
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Total current assets
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170,420
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176,922
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Property, plant and equipment, net of
accumulated depreciation of $62,201 and $55,679
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52,878
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49,658
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Goodwill
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253,353
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253,353
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Trademarks
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227,220
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227,220
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Customer relationship intangibles, net
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117,930
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122,768
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Net deferred debt issuance costs and other
assets
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15,102
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17,669
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Total assets
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$
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836,903
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$
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847,590
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Liabilities
and Stockholders Equity
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Current liabilities:
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Trade accounts payable
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$
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30,045
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$
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32,126
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Accrued expenses
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20,314
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21,894
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Dividends payable
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7,801
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7,797
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Total current liabilities
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58,160
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61,817
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Long-term debt
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535,800
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535,800
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Other liabilities
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6,872
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6,376
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Deferred income taxes
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74,463
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68,962
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Total liabilities
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675,295
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672,955
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Stockholders equity:
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Preferred stock, $0.01 par value per share.
Authorized 1,000,000 shares; no shares issued or outstanding
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Class A common stock, $0.01 par value
per share. Authorized 100,000,000 shares; 36,796,988 and 36,778,988 shares
issued and outstanding as of September 27, 2008 and December 29,
2007
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368
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368
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Class B common stock, $0.01 par value
per share. Authorized 25,000,000 shares; no shares issued or outstanding
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Additional paid-in capital
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179,308
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202,197
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Accumulated other comprehensive loss
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(4,685
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)
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(3,718
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)
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Accumulated deficit
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(13,383
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)
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(24,212
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)
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Total stockholders equity
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161,608
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174,635
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Total liabilities and stockholders equity
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$
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836,903
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$
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847,590
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See Notes to Consolidated
Financial Statements.
1
Table
of Contents
B&G Foods, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
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Thirteen Weeks Ended
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Thirty-nine Weeks Ended
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September 27,
2008
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September 29,
2007
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September 27,
2008
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September 29,
2007
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|
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Net sales
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$
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116,515
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$
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117,003
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$
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352,041
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$
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338,952
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Cost of goods sold
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85,778
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78,725
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252,816
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230,668
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Gross profit
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30,737
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38,278
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99,225
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108,284
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Operating expenses:
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Sales, marketing and distribution expenses
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10,813
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13,114
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34,563
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37,184
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General and administrative expenses
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2,067
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3,374
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5,307
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6,802
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Amortization expensecustomer relationships
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1,613
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1,612
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4,838
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3,888
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Operating income
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16,244
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20,178
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54,517
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60,410
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Other expenses:
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Interest expense, net
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11,562
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12,374
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37,041
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40,028
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Income before income tax expense
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4,682
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7,804
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17,476
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20,382
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Income tax expense
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1,792
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2,958
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6,647
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7,725
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Net income
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$
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2,890
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$
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4,846
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$
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10,829
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$
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12,657
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Earnings per share calculations:
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Basic and diluted distributed earnings per
share:
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Class A common stock
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$
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0.21
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$
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0.21
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$
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0.64
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$
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0.72
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Basic and diluted earnings (loss) per
share:
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Class A common stock
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$
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0.08
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$
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0.13
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$
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0.29
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$
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0.49
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Class B common stock
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$
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$
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$
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$
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(0.23
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)
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See Notes to Consolidated
Financial Statements.
2
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
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Thirty-nine Weeks Ended
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September 27,
2008
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September 29,
2007
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Cash flows from operating activities:
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Net income
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$
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10,829
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$
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12,657
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Adjustments to reconcile net income to net
cash provided by operating activities:
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Depreciation and amortization
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11,420
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9,706
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Amortization of deferred debt issuance
costs
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2,376
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2,397
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Deferred income taxes
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6,087
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6,944
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Write off of deferred debt issuance costs
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1,769
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Unrealized gain on interest rate swap
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(1,514
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)
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Stock-based compensation expense
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510
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Other
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76
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Changes in assets and liabilities, net of
effects of business acquired:
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Trade accounts receivable
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3,948
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(6,659
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)
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Inventories
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(2,507
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)
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(15,660
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)
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Prepaid expenses
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382
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(17
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)
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Income tax receivable
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(28
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)
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(654
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)
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Other assets
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191
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(12
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)
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Trade accounts payable
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(2,081
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)
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3,627
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Accrued expenses
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(1,550
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)
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7,881
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Other liabilities
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387
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(779
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)
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Net cash provided by operating activities
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28,526
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21,200
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Cash flows from investing activities:
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Capital expenditures
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(9,832
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)
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(10,914
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)
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Payments for acquisition of businesses
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(200,850
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)
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Net cash used in investing activities
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(9,832
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)
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(211,764
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)
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Cash flows from financing activities:
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Payments of long-term debt
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(100,000
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)
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Proceeds from issuance of long-term debt
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205,000
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Payments for repurchase of Class B
common stock
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(82,417
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)
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Proceeds from issuance of Class A
common stock, net
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193,215
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Dividends paid
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(23,395
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)
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(16,277
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)
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Payment of debt issuance costs
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(4,001
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)
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Net cash (used in) provided by financing
activities
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(23,395
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)
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195,520
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Effect of exchange rate fluctuations on
cash and cash equivalents
|
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(6
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)
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42
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|
Net (decrease) increase in cash and cash
equivalents
|
|
(4,707
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)
|
4,998
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Cash and cash equivalents at beginning of
period
|
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36,606
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|
29,626
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Cash and cash equivalents at end of period
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$
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31,899
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$
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34,624
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Supplemental disclosures of cash flow
information:
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|
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Cash interest payments
|
|
$
|
31,336
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|
$
|
30,665
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|
Cash income tax payments
|
|
$
|
708
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|
$
|
947
|
|
Cash income tax refunds
|
|
$
|
(96
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)
|
$
|
(91
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)
|
Non-cash transactions:
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|
|
|
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Dividends declared and not yet paid
|
|
$
|
7,801
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|
$
|
7,797
|
|
See Notes to Consolidated
Financial Statements.
3
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Unaudited)
(1)
Nature of Operations
B&G
Foods, Inc. is a holding company, the principal assets of which are the
capital stock of its subsidiaries.
Unless the context requires otherwise, references in this report to B&G
Foods, our company, we, us and our refer to B&G Foods, Inc.
and its subsidiaries. We operate in one
industry segment and manufacture, sell and distribute a diverse portfolio of
high-quality shelf-stable foods across the United States, Canada and Puerto
Rico. Our products include hot cereals,
fruit spreads, canned meats and beans, spices, seasonings, marinades, hot
sauces, wine vinegar, maple syrup, molasses, salad dressings, Mexican-style
sauces, taco shells and kits, salsas, pickles, peppers and other specialty food
products. We compete in the retail
grocery, food service, specialty, private label, club and mass merchandiser
channels of distribution. We distribute
our products throughout the United States through a nationwide network of
independent brokers and distributors to supermarket chains, food service
outlets, mass merchants, warehouse clubs, non-food outlets and specialty food
distributors. We distribute several of
our brands in the greater New York metropolitan area primarily through
direct-store-delivery.
Recent Acquisition
Effective
February 25, 2007, we completed the acquisition of the
Cream of Wheat
and
Cream of Rice
business
from Kraft Foods Global, Inc. The
final purchase price, including transaction costs, was $200.5 million. We refer to the
Cream of
Wheat
and
Cream of Rice
acquisition
as the
Cream of Wheat
acquisition and the
Cream of Wheat
and
Cream of Rice
businesses
collectively as the
Cream of Wheat
business.
The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets acquired and results of operations are included in our
consolidated financial statements from the date of the acquisition. The excess of the purchase price over the
fair value of identifiable net assets acquired represents goodwill. Trademarks are deemed to have an indefinite
useful life and are not amortized.
Customer relationship intangibles are amortized over 20 years. Goodwill, customer relationship intangibles
and trademarks amortization are deductible for income tax purposes.
Class A Common Stock Offering
On May 29,
2007, we completed a public offering of 15,985,000 shares of our Class A
common stock as a separately traded security, which includes 2,085,000 shares
issued pursuant to the fully exercised underwriters option to purchase
additional shares, at $13.00 per share.
The shares of our separately traded Class A common stock trade on
the New York Stock Exchange under the trading symbol BGS and trade separately
from our Enhanced Income Securities (EISs), which trade on the New York Stock
Exchange under the trading symbol BGF.
Each EIS represents one share of our Class A common stock and $7.15
principal amount of our senior subordinated notes.
The
proceeds of the Class A common stock offering were $193.2 million, after
deducting underwriting discounts and commissions and other expenses. In connection with the offering, we
repurchased 6,762,455 outstanding shares of our Class B common stock for
$82.4 million, and the remaining 793,988 shares of our outstanding Class B
common stock were exchanged for an equal number of shares of Class A
common stock. See note 9, Related-Party
Transactions. We also prepaid $100.0
million of our term loan borrowings under our senior secured credit
facility. The remaining funds were
allocated for general corporate purposes.
The
holders of our EISs may separate each EIS into one share of Class A common
stock and $7.15 principal amount of senior subordinated notes at any time. Upon the occurrence of certain events
(including redemption of the senior subordinated notes or upon maturity of the
senior subordinated notes), EISs will automatically separate. Conversely, subject to limitations, a holder
of separate shares of Class A common stock and senior subordinated notes
can combine such securities to form EISs.
Separation and combination of
4
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(1)
Nature of Operations (Continued)
EISs will automatically result in increases and
decreases, respectively, in the number of shares of Class A common stock
not held in the form of EISs. As of September 27,
2008, we had 36,796,988 shares of Class A common stock issued and
outstanding, 17,077,331 of which were held in the form of EISs and 19,719,657
of which were held separate from EISs.
As of September 29, 2007, we had 36,778,988 shares of Class A
common stock issued and outstanding, 17,115,567 of which were held in the form
of EISs and 19,663,421 of which were held separate from EISs.
(2)
Summary of Significant Accounting
Policies
Fiscal Year
Our
financial statements are presented on a consolidated basis. Typically, our fiscal quarters and fiscal
year consist of 13 and 52 weeks, respectively, ending on the Saturday closest
to December 31 in the case of our fiscal year and fourth fiscal quarter,
and on the Saturday closest to the end of the corresponding calendar quarter in
the case of our fiscal quarters. As a
result, a 53rd week is added to our fiscal year every five or six years. In a 53-week fiscal year our fourth fiscal
quarter contains 14 weeks. Our fiscal
year ending January 3, 2009 (fiscal 2008) contains 53 weeks and our fiscal
year ended December 29, 2007 (fiscal 2007) contains 52 weeks. Each quarter of fiscal 2008 and 2007 contains
13 weeks, except the fourth quarter of 2008 which will contain 14 weeks.
Basis of Presentation
The accompanying
consolidated interim financial statements for the thirteen and thirty-nine week
periods ended September 27, 2008 (third quarter of 2008 and first three
quarters of 2008) and September 29, 2007 (third quarter of 2007 and first
three quarters of 2007) have been prepared by our company in accordance with
accounting principles generally accepted in the United States of America
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC), and
include the accounts of B&G Foods, Inc. and
its subsidiaries. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. However, our management believes, to the best
of their knowledge, that the disclosures herein are adequate to make the
information presented not misleading. All
intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated
interim financial statements contain all adjustments (consisting only of normal
and recurring adjustments) that are, in the opinion of management, necessary to
present fairly our consolidated financial position as of September 27,
2008, the results of our operations for the third quarter and first three
quarters of 2008 and 2007, and cash flows for the first three quarters of 2008
and 2007. Our results of operations for
the third quarter and first three quarters of 2008 are not necessarily
indicative of the results to be expected for the full year. The accompanying unaudited consolidated
interim financial statements should be read in conjunction with the audited
consolidated financial statements and notes for fiscal 2007 included in our
Annual Report on Form 10-K for fiscal 2007 filed with the SEC on March 6,
2008.
Use of Estimates
The preparation of
financial statements in accordance with U.S. generally accepted accounting
principles requires our management to make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Some of the more
significant estimates and assumptions made by management involve trade and
consumer promotion expenses; allowances for excess, obsolete and unsaleable
inventories; pension benefits; purchase accounting
5
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(2)
Summary of Significant Accounting
Policies
(Continued)
allocations;
the recoverability of goodwill, trademarks, customer relationship intangibles,
property, plant and equipment and deferred tax assets;
the accounting for our enhanced income securities
(EISs); the accounting for earnings per share and the accounting for
stock-based compensation expense. Actual
results could differ from these estimates and assumptions.
Recently Issued Accounting Standards
In September 2006, the
FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. The provisions of SFAS No. 157
are effective as of the beginning of our 2008 fiscal year, with the exception
of certain provisions deferred until the beginning of our 2009 fiscal
year. In February 2008, the FASB
issued FASB Staff Position SFAS No. 157-2,
Effective Date of FASB Statement No. 157
, which
delayed the effective date of SFAS No. 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis, until January 1, 2009. The impact of the adoption of SFAS No. 157
for financial assets and liabilities was not material to our consolidated
interim financial statements. The
expanded disclosures about fair value measurements for financial assets and
liabilities are presented in note 6. We
have not yet determined the impact that the adoption of SFAS No. 157 will
have on our non-financial assets and liabilities which are not recognized on a
recurring basis;
however
we do not anticipate it to materially impact our consolidated financial
statements.
In October 2008, the
FASB issued FASB Staff Position No. FAS 157-3,
Determining
Fair Value of a Financial Asset in a Market That Is Not Active
(FSP
No. FAS 157-3). FSP No. FAS 157-3 clarified the application of SFAS No. 157
in an inactive market. It demonstrated how the fair value of a financial asset
is determined when the market for that financial asset is inactive. FSP No. FAS
157-3 was effective upon issuance, including prior periods for which financial
statements had not been issued. The implementation of this standard did not
have a material impact on our consolidated financial position and results of
operations.
In December 2007, the
FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(SFAS No. 141R) and SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
(SFAS No. 160). SFAS No. 141R requires an acquirer to
measure the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. SFAS No. 160 clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 141R
and SFAS No. 160 are effective as of the beginning of our 2009 fiscal
year. SFAS No. 141R will be applied
prospectively. The effects of SFAS No. 141R
will depend on future acquisitions. SFAS
No. 160 requires retroactive adoption.
We currently do not have any noncontrolling interests in subsidiaries.
In March 2008, the FASB
issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133
. This statement changes the disclosure
requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133
and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position, financial
performance, and cash flows. SFAS No. 161
is effective as of the beginning of our 2009 fiscal year. We are currently
evaluating the potential impact, if any, of the adoption of SFAS No. 161
on our consolidated financial statements.
In April 2008, the FASB
issued FASB Staff Position No. FAS 142-3,
Determination
of the Useful Life of Intangible Assets
(FSP No. FAS
142-3). FSP No. FAS 142-3 requires
companies estimating the
6
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(2)
Summary of Significant Accounting
Policies
(Continued)
useful life of a recognized
intangible asset to consider their historical experience in renewing or
extending similar arrangements or, in the absence of historical experience, to
consider assumptions that market participants would use about renewal or
extension as adjusted for entity-specific factors. FSP No. FAS 142-3 is effective as of the
beginning of our 2009 fiscal year. We
are currently evaluating the potential impact, if any, of the adoption of FSP No. FAS
142-3 on our consolidated financial statements.
(3)
Inventories
Inventories consist of the following, as of the dates
indicated (dollars in thousands):
|
|
September 27, 2008
|
|
December 29, 2007
|
|
Raw materials and packaging
|
|
$
|
24,552
|
|
$
|
19,573
|
|
Work in process
|
|
3,042
|
|
2,641
|
|
Finished goods
|
|
68,094
|
|
70,967
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,688
|
|
$
|
93,181
|
|
(4)
Goodwill, Trademarks and
Customer Relationship Intangibles
There
has been no change in the carrying amount of goodwill for the period from December 29,
2007 to September 27, 2008.
There has been no change
in the carrying amount of trademarks for the period from December 29, 2007
to September 27, 2008.
Customer relationship
intangibles are presented at cost, net of accumulated amortization, and are
amortized on a straight-line basis over their estimated useful lives of 20
years.
|
|
Customer
Relationship
Intangibles
|
|
Less:
Accumulated
Amortization
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Balance at December 29, 2007
|
|
$
|
129,000
|
|
$
|
(6,232
|
)
|
$
|
122,768
|
|
Amortization expense
|
|
|
|
(4,838
|
)
|
(4,838
|
)
|
Balance at September 27, 2008
|
|
$
|
129,000
|
|
$
|
(11,070
|
)
|
$
|
117,930
|
|
Amortization
expense associated with customer relationship intangibles for the third quarter
and first three quarters of 2008 was $1.6 million and $4.8 million,
respectively, and $1.6 million and $3.9 million, respectively, for the third
quarter and first three quarters of 2007, and is recorded in operating
expenses. We expect to recognize an
additional $1.7 million of amortization expense associated with our current
customer relationship intangibles during the remainder of fiscal 2008, and
thereafter $6.5 million per year for each of the next four succeeding fiscal
years.
7
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(5)
Long-term
Debt
Long-term debt consists of the following, as of the dates indicated
(dollars in thousands):
|
|
September 27, 2008
|
|
December 29, 2007
|
|
Revolving credit facility
|
|
$
|
|
|
$
|
|
|
Term loan
|
|
130,000
|
|
130,000
|
|
Total senior secured credit facility
|
|
130,000
|
|
130,000
|
|
|
|
|
|
|
|
12.0% Senior Subordinated Notes due
October 30, 2016
|
|
165,800
|
|
165,800
|
|
8.0% Senior Notes due October 1, 2011
|
|
240,000
|
|
240,000
|
|
Total long-term debt
|
|
$
|
535,800
|
|
$
|
535,800
|
|
As of September 27,
2008, the aggregate maturities of long-term debt are as follows (dollars in
thousands):
Years ending December:
|
|
|
|
2008
|
|
$
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
240,000
|
|
2012
|
|
|
|
Thereafter
|
|
295,800
|
|
Total
|
|
$
|
535,800
|
|
Senior Secured Credit Facility
. In October 2004,
we entered into a $30.0 million senior secured revolving credit facility. In order to finance the
Grandmas
molasses acquisition, we amended
the credit facility in January 2006 to provide for, among other things, a
new $25.0 million term loan and a reduction in the revolving credit facility
commitments from $30.0 million to $25.0 million. In order to finance the
Cream of
Wheat
acquisition, our credit facility was amended and restated in February 2007
to provide for, among other things, an additional $205.0 million of term loan
borrowings. On May 29, 2007, we prepaid
$100.0 million of term loan borrowings.
Our $25.0 million revolving credit facility matures on January 10,
2011 and the remaining $130.0 million of term loan borrowings matures on February 26,
2013, provided, however, that if we do not repay, redeem or refinance our
senior notes prior to April 1, 2011, the outstanding term loan borrowings
will become immediately due and payable on April 1, 2011.
Interest under the revolving
credit facility, including any outstanding letters of credit, is determined
based on alternative rates that we may choose in accordance with the revolving
credit facility, including the base lending rate per annum plus an applicable
margin, and LIBOR plus an applicable margin.
We pay a commitment fee of 0.50% per annum on the unused portion of the
revolving credit facility. Interest
under the term loan facility is determined based on alternative rates that we
may choose in accordance with the credit facility, including the base lending
rate per annum plus an applicable margin of 1.00%, and LIBOR plus an applicable
margin of 2.00%.
Our obligations under the
credit facility are jointly and severally and fully and unconditionally
guaranteed on a senior basis by all of our existing and certain future domestic
subsidiaries. The credit facility is
secured by substantially all of our and our subsidiaries assets except our and
our subsidiaries real property. The
credit facility provides for mandatory prepayment upon certain asset
dispositions and issuances of
8
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(5)
Long-term
Debt (Continued)
securities, as defined. The credit facility contains covenants that
restrict, among other things, our ability to incur additional indebtedness, pay
dividends and create certain liens. The
credit facility also contains certain financial maintenance covenants, which,
among other things, specify maximum capital expenditure limits, a minimum
interest coverage ratio and a maximum senior and total leverage ratio, each
ratio as defined. As of September 27,
2008, we were in compliance with all of the covenants in the credit
facility. Proceeds of the revolving
credit facility are restricted to funding our working capital requirements,
capital expenditures and acquisitions of companies in the same line of business
as our company, subject to specified criteria.
The maximum letter of credit capacity under the revolving credit
facility is $10.0 million, with a fronting fee of 3.0% per annum for all
outstanding letters of credit.
On September 15, 2008,
Lehman Brothers Holdings Inc. (Lehman) filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. Lehman
Commercial Paper Inc. (Lehman CPI), a Lehman subsidiary, is the administrative
agent under our credit facility. Lehman
CPI filed for protection under Chapter 11 of the U.S. Bankruptcy Code on October 3,
2008. None of our $130.0 million of
outstanding term loans is currently with Lehman, Lehman CPI or any other
subsidiary of Lehman. Lehman CPI is one
of the lenders participating in our $25.0 million revolving credit
facility. However, Lehman CPI has only $3.1
million of the $25.0 million commitment.
The other lenders under the revolving credit facility and their
respective commitments are as follows:
Bank of America, N.A., $9.4 million; Citibank, N.A., $9.4 million; and
Royal Bank of Canada, $3.1 million. We
do not believe that Lehman CPI would honor its funding commitment under the
revolving credit facility if we were to make a funding request. As a result, the effective available
borrowing capacity under our revolving credit facility, net of outstanding
letters of credit of $2.4 million, was $19.5 million at September 27,
2008. We have not drawn upon the
revolving credit facility since its inception in October 2004 and, based
upon our cash on hand and working capital requirements, we have no plans to do
so for the foreseeable future.
Effective as of February 26,
2007, we entered into a six year interest rate swap agreement in order to
effectively fix at 7.0925% the interest rate payable for $130.0 million of term
loan borrowings through the life of the term loan, ending on February 26,
2013. The interest rate for the
remaining $100.0 million of term loan borrowings, which we subsequently
prepaid, was 7.36% as of the prepayment date (based upon a three-month LIBOR
rate in effect at that time that expired on May 25, 2007). The counterparty to the swap is Lehman
Special Financing Inc. (Lehman SFI).
Lehman SFI filed for protection under Chapter 11 of the U.S. Bankruptcy
Code on October 3, 2008.
We initially designated the
swap as a cash flow hedge under the guidelines of SFAS No. 133. Prior to Lehmans bankruptcy filing, we
recorded changes in the fair value of the swap in other comprehensive income
(loss), net of tax in our consolidated balance sheet. However, as a result of the Lehman bankruptcy
filing, we determined that the interest rate swap was no longer an effective
hedge as defined by SFAS No. 133 and, accordingly, subsequent changes in
the swaps fair value are being recorded in current earnings in net interest
expense in the consolidated statements of operations. We obtain third-party verification of fair
value at the end of each reporting period.
As of September 27, 2008, the fair value of our interest rate swap
was $6.0 million and is recorded in other liabilities on our consolidated
balance sheet. The amount recorded in
accumulated other comprehensive income (loss) will be reclassified to net
interest expense over the remaining life of the term loan borrowings as we make
interest payments. During the third
quarter of 2008, we reclassified to net interest expense $0.1 million of the
amount recorded in accumulated other comprehensive income (loss) and expect to
reclassify to net interest expense $0.4 million during the fourth quarter of
2008. During fiscal 2009, we expect to
reclassify to net interest expense $1.7 million of the amount recorded in
accumulated other comprehensive income (loss).
Subsidiary
Guarantees
. We have no
assets or operations independent of our direct and indirect subsidiaries. All of our present domestic subsidiaries
jointly and severally and fully and unconditionally guarantee our senior
subordinated notes and our senior notes, and management has determined that our
Canadian subsidiary that is not a guarantor of our senior subordinated notes
and senior notes is a minor
9
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(5)
Long-term
Debt (Continued)
subsidiary as that term is used in Rule 3-10 of
Regulation S-X promulgated by the SEC.
There are no significant restrictions on our ability and the ability of
our subsidiaries to obtain funds from our respective subsidiaries by dividend
or loan. Consequently, separate
financial statements have not been presented for our subsidiaries because
management has determined that they would not be material to investors.
Deferred
Debt Issuance Costs
.
In connection with the issuance of our senior subordinated notes and our
senior notes in October, 2004, we capitalized approximately $23.1 million of
financing costs, which will be amortized over their respective terms. In connection with the issuance of our term
loan in January 2006, we capitalized approximately $0.4 million of
additional financing costs, which will be amortized over the term of the
loan. In connection with the issuance of
additional term loan borrowings of $205.0 million in February 2007 we
capitalized approximately $4.0 million of additional debt issuance costs. During the second quarter of 2007 we
wrote-off and expensed $1.8 million of deferred debt issuance costs in
connection with our May 2007 prepayment of $100.0 million of term loan
borrowings. As of September 27,
2008 and December 29, 2007 we had net deferred debt issuance costs of
$14.0 million and $16.4 million, respectively.
At September 27,
2008 and December 29, 2007 accrued interest of $13.7 million and $8.9
million, respectively, is included in accrued expenses in the accompanying
consolidated balance sheets.
(6)
Financial
Instruments
We
adopted SFAS No. 157 on December 30, 2007, the first day of our 2008
fiscal year. SFAS No. 157 defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (an exit price). The standard outlines a valuation
framework and creates a fair value hierarchy in order to increase the
consistency and comparability of fair value measurements and the related
disclosures. Under generally accepted accounting principles, certain assets and
liabilities must be measured at fair value, and SFAS No. 157 details the
disclosures that are required for items measured at fair value.
Financial assets and liabilities
are measured using inputs from the three levels of the SFAS No. 157 fair
value hierarchy. The three levels are as follows:
Level 1Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities.
Level 2Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or liability
(i.e., interest rates, yield curves, etc.), and inputs that are derived
principally from or corroborated by observable market data by correlation or
other means (market corroborated inputs).
Level 3Unobservable inputs that
reflect our assumptions about the assumptions that market participants would
use in pricing the asset or liability.
In accordance with the fair value
hierarchy described above, the following table shows the fair value of our
interest rate swap as of September 27, 2008, which is included in other
liabilities in our consolidated balance sheet (dollars in thousands):
10
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(6)
Financial
Instruments (Continued)
|
|
September 27,
|
|
Fair Value Measurements as of September 27, 2008
|
|
|
|
2008
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Interest rate swap
|
|
$
|
6,036
|
|
$
|
|
|
$
|
6,036
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
entered into the interest rate swap to manage variable interest rate exposure
on our $130.0 million of term loan borrowings.
Our objective for holding this derivative is to decrease the volatility
of future cash flows associated with interest payments on our variable rate
debt. As discussed in note 5 above, we
have determined that the interest rate swap is no longer an effective hedge as
defined by SFAS No. 133.
Cash
and cash equivalents, trade accounts receivable, income tax receivable, trade
accounts payable, accrued expenses and dividends payable are reflected in the
consolidated balance sheets at carrying value, which approximates fair value
due to the short-term nature of these instruments.
The carrying values and fair
values of our senior notes and senior subordinated notes as of September 27,
2008 and December 29, 2007 are as follows (dollars in thousands):
|
|
September 27, 2008
|
|
December 29, 2007
|
|
|
|
Carrying Value
|
|
Fair Value
(1)(2)
|
|
Carrying Value
|
|
Fair Value
(1)(3)
|
|
8% Senior Notes due October 1, 2011
|
|
$
|
240,000
|
|
$
|
231,600
|
|
$
|
240,000
|
|
$
|
235,800
|
|
|
|
|
|
|
|
|
|
|
|
12% Senior Subordinated Notes due
October 30, 2016(2):
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
122,103
|
|
118,517
|
|
119,067
|
|
126,561
|
|
held separately
|
|
43,697
|
|
42,413
|
|
46,733
|
|
49,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Fair values are estimated based on quoted market prices, except as
otherwise noted in footnotes (2) and (3) below.
(2)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at September 27, 2008 was $6.94,
based upon the $7.50 per share closing price of our separately traded Class A
common stock and the $14.44 per EIS closing price of our EISs on the New York
Stock Exchange on September 26, 2008 (the last business day of the third
quarter of 2008). Each EIS represents
one share of Class A common stock and $7.15 principal amount of our senior
subordinated notes.
(3)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at December 29, 2007 was $7.60,
based upon the $10.07 per share closing price of our separately traded Class A
common stock and the $17.67 per EIS closing price of our EISs on the New York
Stock Exchange on December 28, 2007 (the last business day of fiscal
2007).
The
carrying value of our term loan borrowings approximates fair value because
interest rates under the term loan borrowings are variable, based on prevailing
market rates.
The
recent volatility in the global financial markets could negatively impact the
fair value of our debt obligations.
(7)
Comprehensive
Income Recognition
Comprehensive income
includes net income, foreign currency translation adjustments relating to
assets and liabilities located in our Canadian subsidiary, amortization of
unrecognized prior service cost and
11
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(7)
Comprehensive
Income Recognition (Continued)
pension deferrals, net of
tax and mark to market adjustments of our cash flow hedge, net of tax. The components of comprehensive income are as
follows (dollars in thousands):
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
September 27,
2008
|
|
September 29,
2007
|
|
September 27,
2008
|
|
September 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,890
|
|
$
|
4,846
|
|
$
|
10,829
|
|
$
|
12,657
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(21
|
)
|
(32
|
)
|
(6
|
)
|
42
|
|
Amortization of unrecognized prior service
cost and pension deferrals, net of tax
|
|
6
|
|
5
|
|
16
|
|
21
|
|
Mark to market adjustments of cash flow
hedge, net of tax
|
|
(1,340
|
)
|
(2,311
|
)
|
(1,023
|
)
|
(1,060
|
)
|
Comprehensive income
|
|
$
|
1,535
|
|
$
|
2,508
|
|
$
|
9,816
|
|
$
|
11,660
|
|
(8)
Pension
Benefits
Net
periodic costs for the third quarter and first three quarters of 2008 and 2007
include the following components (dollars in thousands):
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
September 27,
2008
|
|
September
29, 2007
|
|
September
27, 2008
|
|
September
29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Service costbenefits earned during the
period
|
|
$
|
350
|
|
$
|
332
|
|
$
|
1,010
|
|
$
|
1,060
|
|
Interest cost on projected benefit
obligation
|
|
389
|
|
322
|
|
1,109
|
|
982
|
|
Expected return on plan assets
|
|
(463
|
)
|
(371
|
)
|
(1,369
|
)
|
(1,113
|
)
|
Amortization of unrecognized prior service
cost
|
|
(3
|
)
|
(4
|
)
|
(9
|
)
|
|
|
Amortization of loss
|
|
11
|
|
11
|
|
33
|
|
33
|
|
Net pension cost
|
|
$
|
284
|
|
$
|
290
|
|
$
|
774
|
|
$
|
962
|
|
During the
third quarter and first three quarters of 2008, we have contributed $0.5
million to our defined benefit pension plans. We anticipate electing to make
additional contributions to our defined benefit pension plans of approximately
$0.6 million during the fourth quarter of 2008.
12
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(9)
Related-Party
Transactions
Roseland
Lease.
We lease a
manufacturing and warehouse facility from a former chairman of our board of
directors under an operating lease, which expires in April 2009. Total rent expense associated with this lease
was $0.6 million for the first three quarters of 2008 and 2007.
Repurchase
and Exchange of Class B Common Stock
. In May 2007, we used a portion of the
proceeds of the Class A common stock offering to repurchase 6,762,455
shares of our Class B common stock, which were held by, among others,
Bruckmann, Rosser, Sherrill & Co., L.P. (BRS), Stephen C. Sherrill,
the chairman of our board of directors, and certain of our current and former
executive officers, at a per share repurchase price equal to the offering price
of our Class A common stock, or $13.00 per share, less discounts and
commissions. BRS was our majority owner
prior to our EIS offering in October 2004 and remained a majority owner of
our Class B common stock prior to our Class A common stock offering
in May 2007. Mr. Sherrill is a
managing director of Bruckmann, Rosser, Sherrill & Co., Inc., the
manager of BRS. We also exchanged the
remaining 793,988 shares of our Class B common stock, which were held by
certain of our current and former executive officers, for an equal numbers of
shares of our Class A common stock in order to eliminate all of our
outstanding Class B common stock.
Our board of directors established a special committee comprised solely
of our independent directors to recommend to our board of directors the
repurchase price and exchange ratio for our Class B common stock, to
negotiate with the holders of the Class B common stock, and to recommend
to our board of directors if the transaction was in our best interests and fair
to the holders of our Class A common stock. The special committee retained a financial
advisor to provide information, advice and analysis to assist the special
committee in its review of the proposed transaction. The special committee also engaged its own
legal counsel to advise the special committee on its duties and
responsibilities. The financial advisor
delivered to the special committee an opinion that the proposed consideration
to be paid by us to the holders of the Class B common stock was fair to us
and the holders of the Class A common stock from a financial point of
view. After considering all of the
information it had gathered, the special committee recommended to our board of
directors that from a valuation standpoint, the purchase price for the Class B
common stock to be repurchased should be the offering price of the Class A
common stock in the offering, net of underwriting discounts and commissions,
and that each share of our Class B common stock to be exchanged should be
exchanged for one share of our Class A common stock. The special committee also recommended to our
board of directors that based on the repurchase price and Class A and Class B
exchange ratio and other material terms of the transaction, the transaction was
advisable and in our best interests and fair to the holders of our Class A
common stock.
(10)
Commitments
and Contingencies
We are
subject to environmental laws and regulations in the normal course of
business. Based on our experience to
date, management believes that the future cost of compliance with existing
environmental laws and regulations (and liability for any known environmental
conditions) will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity. However, we cannot predict what environmental
or health and safety legislation or regulations will be enacted in the future
or how existing or future laws or regulations will be enforced, administered or
interpreted, nor can we predict the amount of future expenditures that may be
required in order to comply with such environmental or health and safety laws
or regulations or to respond to such environmental claims.
During
an environmental compliance audit of our Hurlock, Maryland facility conducted by
a third-party consultant, we became aware of reporting violations of the
Emergency Planning and Community Right to Know Act (EPCRA). EPCRA requires companies that manufacture,
use or process more than a threshold amount of certain listed chemicals to file
an annual chemical release form with Environmental Protection Agency (EPA) and
the state and an annual chemical inventory form to the state and local
emergency planning and/or response commissions and the local fire department. For certain years we failed to file one or
more of such
13
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(10)
Commitments
and Contingencies (Continued)
reports with the EPA and/or duplicate copies with the
state and local government. We
voluntarily self-disclosed these potential violations to the EPA pursuant to
the EPAs self-disclosure policy. During
the third quarter of 2008 we entered into a consent agreement with the EPA
pursuant to which we settled the matter and agreed to a penalty of $94,509,
which we paid to the EPA during the fourth quarter of 2008. None of the reporting violations resulted in
any actual harm to the environment.
We are
from time to time involved in various claims and legal actions arising in the
ordinary course of business, including proceedings involving product liability
claims, workers compensation and other employee claims, and tort and other
general liability claims, as well as trademark, copyright, patent infringement
and related claims and legal actions. In
the opinion of our management, the ultimate disposition of any currently
pending claims or actions will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.
We have employment
agreements with our executive officers.
The agreements generally continue until terminated by the executive or by
us, and provide for severance payments under certain circumstances, including
termination by us without cause (as defined) or as a result of the employees
disability, or termination by us or a deemed termination upon a change of
control (as defined). Severance benefits
include payments for salary continuation, continuation of health care and
insurance benefits, present value of additional pension credits, accelerated
vesting under compensation plans and, in the case of a change of control,
potential excise tax liability and gross-up payments.
(11)
Earnings
per Share
We
currently have one class of common stock issued and outstanding, designated as Class A
common stock. Prior to May 29,
2007, we had two classes of common stock issued and outstanding, designated as Class A
common stock and Class B common stock.
For periods in which we had shares of both Class A and Class B
common stock issued and outstanding, we present earnings per share using the
two-class method. The two-class method
is an earnings allocation formula that determines earnings per share for each
class of common stock according to dividends declared and participation rights
in undistributed earnings or losses. Net
income is allocated between the two classes of common stock based upon the
two-class method. Basic and diluted
earnings per share for the Class A common stock and Class B common
stock is calculated by dividing allocated net income by the weighted average
number of shares of Class A common stock and Class B common stock
outstanding.
14
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(11)
Earnings
per Share (Continued)
|
|
Thirteen
Weeks Ended
|
|
Thirty-nine
Weeks Ended
|
|
|
|
September 27,
2008
|
|
September 29,
2007
|
|
September 27,
2008
|
|
September 29,
2007
|
|
|
|
(dollars in thousands)
|
|
Net income
|
|
$
|
2,890
|
|
$
|
4,846
|
|
$
|
10,829
|
|
$
|
12,657
|
|
Less: Class A common stock dividends
declared
|
|
7,801
|
|
7,797
|
|
23,399
|
|
19,834
|
|
Undistributed loss
|
|
$
|
(4,911
|
)
|
$
|
(2,951
|
)
|
$
|
(12,570
|
)
|
$
|
(7,177
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
36,796,988
|
|
36,778,988
|
|
36,786,768
|
|
27,621,225
|
|
Class B common stock
|
|
|
|
|
|
|
|
4,124,212
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted allocation of
undistributed loss:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
(4,911
|
)
|
$
|
(2,951
|
)
|
$
|
(12,570
|
)
|
$
|
(6,245
|
)
|
Class B common stock
|
|
|
|
|
|
|
|
(932
|
)
|
Total
|
|
$
|
(4,911
|
)
|
$
|
(2,951
|
)
|
$
|
(12,570
|
)
|
$
|
(7,177
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Undistributed (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
(0.13
|
)
|
$
|
(0.08
|
)
|
$
|
(0.35
|
)
|
$
|
(0.23
|
)
|
Class B common stock
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(0.23
|
)
|
Distributed earnings:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
0.21
|
|
$
|
0.21
|
|
$
|
0.64
|
|
$
|
0.72(1
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
0.08
|
|
$
|
0.13
|
|
$
|
0.29
|
|
$
|
0.49
|
|
Class B common stock
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(0.23
|
)
|
(1)
Distributed earnings differs from actual per
share amounts paid as dividends as the earnings per share computation under
GAAP requires the use of the weighted average, rather than the actual number of
shares outstanding.
Since May 29,
2007, we no longer have any shares of Class B common stock issued or
outstanding. In addition, no dividends
on our Class B common stock were ever declared prior to such date. Therefore, for purposes of the earnings per
share calculation, all distributed earnings are included in Class A common
stock earnings per share. Diluted
earnings per share for each of the periods presented is equal to basic earnings
per share as no dilutive securities were outstanding during either period.
(12)
Business
and Credit Concentrations and Geographic Information
Our
exposure to credit loss in the event of non-payment of accounts receivable by
customers is estimated in the amount of the allowance for doubtful
accounts. We perform ongoing credit
evaluations of our customers financial conditions. As of September 27, 2008, we do not
believe we have any significant concentration of credit risk with respect to
our trade accounts receivable. Our top
ten customers accounted for approximately 46.3%
and 44.8% of
consolidated net sales for the first three quarters of 2008 and 2007,
respectively. Other than Wal-Mart, which
accounted for 13.4% and 11.7% of our consolidated net sales for the first three
quarters of 2008 and 2007, respectively, no single customer accounted for more
than 10.0% of our consolidated net sales for the first three quarters of 2008
or 2007.
During the
third quarter of 2008 and 2007 and the first three quarters of 2008 and 2007,
respectively, our sales to foreign countries represented less than 1.0% of net
sales, respectively. Our foreign sales
are primarily to customers in Canada.
15
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(13)
Income Taxes
As of September 27,
2008 and December 29, 2007, we have approximately $0.2 million of total
unrecognized tax benefits, which includes interest and penalties, that if
recognized would have a favorable impact on our tax expense. We continue to classify interest and
penalties related to income tax uncertainties as income tax expense.
(14)
Insurance Recovery
During
the fourth quarter of fiscal 2006, we learned of an alleged theft of
approximately $0.8 million over several years at our Roseland, New Jersey
manufacturing facility resulting from overpayments allegedly authorized by a
former supervisor to direct-store-delivery independent contractor truck
drivers. While the cumulative amount of
the alleged theft may have been substantial, the related losses were reported
in each respective period and discovery of this alleged theft did not result in
changes to any previously reported results.
During the second quarter of 2007, we received insurance proceeds for
the entire amount of the loss, which is recorded as an offset to general and
administrative expenses.
(15)
Stock-Based Compensation
Expense
Upon
the recommendation of our compensation committee, our board of directors on March 10,
2008 adopted the B&G Foods, Inc. 2008 Omnibus Incentive Compensation
Plan, which we refer to as the 2008 Omnibus Plan, subject to stockholder
approval. Our stockholders approved the
2008 Omnibus Plan at our annual meeting on May 6, 2008.
The
2008 Omnibus Plan authorizes the grant of performance share awards, restricted
stock, options, stock appreciation rights, deferred stock, stock units and
cash-based awards to employees, non-employee directors and consultants. Subject to adjustment as provided in the
plan, the total number of shares of Class A common stock available for
awards under the plan is 2,000,000.
Performance
Share Awards.
On March 10, 2008, the compensation
committee granted the following performance share long-term incentive awards
(LTIAs) under the 2008 Omnibus Plan.
These awards were granted subject to stockholder approval of the 2008
Omnibus Plan, which was received on May 6, 2008.
Each
of our named executive officers and certain other members of senior management
were awarded performance share LTIAs that entitle the participant to earn
shares of Class A common stock upon the attainment of certain performance
goals over the applicable performance period.
The 2008 LTIAs have a one year performance period, fiscal 2008. The 2008 to 2009 LTIAs have a two-year
cumulative performance period, fiscal 2008 and fiscal 2009. The 2008 to 2010 LTIAs have a three-year
cumulative performance period, fiscal 2008 through fiscal 2010.
The
2008 LTIAs, 2008 to 2009 LTIAs and the 2008 to 2010 LTIAs, each have a
threshold, target and maximum payout.
The awards will be settled based upon our performance over the one, two
and three year cumulative performance periods, as applicable, with respect to excess
cash (as defined in the award agreements), the applicable performance
metric. If our performance fails to meet
the performance threshold, then the awards will not vest and no shares will be
issued pursuant to the awards. If our
performance meets or exceeds the performance threshold, then a varying amount
of shares from the threshold amount (0% of the target amount) up to the maximum
amount (300% of the target amount) may be earned. Shares of Class A common stock in
respect of the 2008 LTIAs, 2008 to 2009 LTIAs and 2008 to 2010 LTIAs will be
issued in March 2009, March 2010 and March 2011, respectively,
in each case subject to the performance goals for the applicable performance
period being certified in writing by our compensation committee as having been
achieved.
16
Table
of Contents
B&G Foods, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(15)
Stock-Based Compensation
Expense
The
recognition of compensation expense for the performance share LTIAs is
initially based on the probable outcome of the performance condition based on
the fair value of the award on the date of grant and the anticipated number of
shares to be awarded on a straight-line basis over the applicable performance
period. Our companys performance
against the defined performance goal will be re-evaluated on a quarterly basis
throughout the applicable performance period and the recognition of
compensation expense will be adjusted for subsequent changes in the estimated
or actual outcome. The cumulative effect
on current and prior periods of a change in the estimated number of performance
share awards is recognized as an adjustment to earnings in the period of the
revision.
During
the third quarter and first three quarters of 2008, we recognized $0.1 million
and $0.3 million of compensation expense related to the performance share
LTIAs, which is reflected in general and administrative expenses in our
consolidated statements of operations.
As of September 27, 2008, there was $1.3 million of unrecognized
compensation expense related to performance share LTIAs, which is expected to
be recognized over the next 27 months.
The
following table details the activity in our performance share LTIAs for the
first three quarters of 2008 as follows:
|
|
Number of
Performance Shares
(1)
|
|
Weighted Average
Grant Date Fair
Value (per share)
(2)
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
Granted
|
|
466,746
|
|
$
|
7.66
|
|
Vested
|
|
|
|
|
|
Released
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
End of first three quarters
|
|
466,746
|
|
$
|
7.66
|
|
(1)
The number of unvested
performance shares is based on the participants earning their target number of
performance shares at 100%.
(2)
The fair value of the awards
was determined based upon the closing price of our Class A common stock on
the applicable measurement dates (i.e., the deemed grant dates for accounting
purposes) reduced by the present value of expected dividends using the
risk-free interest-rate as the award holders are not entitled to dividends or
dividend equivalents during the vesting period.
Non-Employee
Director Stock Grants
. Commencing in fiscal 2008,
each of our non-employee directors receives an annual equity grant of $35,000
of Class A Common Stock as part of his or her non-employee director
compensation. These shares fully vest
when issued. On June 2, 2008, 18,000
shares of Class A common stock were issued to all non-employee directors
based upon the closing price of our Class A common stock on May 30,
2008 (the business day immediately prior to the date of grant) of $9.72 per
share. Total compensation expense of
$0.2 million is reflected in general and administrative expenses in our
consolidated statements of operations.
(16)
Subsequent Events
Workforce
Reduction.
In October 2008, B&G Foods
implemented a reduction in workforce that has reduced our workforce by
approximately 7.5%. On a pre-tax basis,
we expect that the reduction in workforce will save our company an estimated
$3.7 million on an annualized basis. We
expect to record severance and termination charges of approximately $0.8
million in the fourth quarter of 2008.
Substantially all of these
17
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(16)
Subsequent Events
charges will result in cash payments. These payments will be made during the
remainder of fiscal 2008 and in fiscal 2009.
Stock and
Debt Repurchase Plan.
On October 27, 2008, our board
of directors authorized a stock and debt repurchase program for the repurchase
of up to $10.0 million of our Class A common stock and/or senior notes
over the next twelve months. Under the
authorization, we may purchase shares of Class A common stock and/or
senior notes from time to time in the open market or in privately negotiated
transactions in compliance with the applicable rules and regulations of
the SEC.
The
timing and amount of such repurchases, if any, will be at the discretion of
management, and will depend on market conditions and other considerations. Therefore, there can be no assurance as to
the number of shares, if any, that will be repurchased under the stock and debt
repurchase program, or the aggregate dollar amount of the shares or principal
amount of senior notes, if any, repurchased.
We may discontinue the program at any time. Any shares repurchased pursuant to the stock
repurchase program will be cancelled.
Likewise, any senior notes repurchased will be cancelled. In general, our credit agreement prohibits us
from repurchasing our senior subordinated notes.
18
Table of Contents
Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The
following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under the
heading Forward-Looking Statements below and elsewhere in this report. The following discussion should be read in
conjunction with the unaudited consolidated interim financial statements and
related notes for the thirteen and thirty-nine weeks ended September 27,
2008 (third quarter of 2008 and first three quarters of 2008) included
elsewhere in this report and the audited consolidated financial statements and
related notes for the fiscal year ended December 29, 2007 (fiscal 2007)
included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC) on March 6, 2008 (which we refer to as our 2007
Annual Report on Form 10-K).
General
We
manufacture, sell and distribute a diverse portfolio of branded, high quality,
shelf-stable food products, many of which have leading regional or national
market shares. In general, we position
our branded products to appeal to the consumer desiring a high quality and
reasonably priced product. We complement
our branded product retail sales with institutional and food service sales and
limited private label sales.
Our
goal is to continue to increase sales, profitability and cash flows by
enhancing our existing portfolio of branded shelf-stable products and by
capitalizing on our competitive strengths.
We intend to implement our growth strategy through the following
initiatives: expanding our brand portfolio with acquisitions of complementary
branded businesses, continuing to develop new products and delivering them to
market quickly, leveraging our unique multiple channel sales and distribution
system and continuing to focus on higher growth customers and distribution
channels.
Since 1996, we have
successfully acquired and integrated 18 separate brands into our
operations. We completed the acquisition
of the
Cream of Wheat
and
Cream of
Rice
brands from Kraft Foods Global, Inc. effective February 25,
2007, which we refer to in this report as the
Cream of
Wheat
acquisition. The
Cream of Wheat
acquisition has been accounted for using the
purchase method of accounting and, accordingly, the assets acquired and results
of operations of the acquired business is included in our consolidated
financial statements from the date of acquisition. The
Cream of Wheat
acquisition
and the application of the purchase method of accounting for the acquisition
affect comparability between periods.
We are
subject to a number of challenges that may adversely affect our
businesses. These challenges, which are
discussed below and under the heading Forward-Looking Statements, include:
Fluctuations
in Commodity Prices and Production and Distribution Costs
.
We purchase raw materials, including agricultural products, meat,
poultry, other raw materials, ingredients and packaging materials from growers,
commodity processors, other food companies and packaging manufacturers. Raw materials, ingredients and packaging
materials are subject to fluctuations in price attributable to a number of
factors. Fluctuations in commodity
prices can lead to retail price volatility and intensive price competition, and
can influence consumer and trade buying patterns. In the third quarter and first three quarters
of 2008, our commodity prices for wheat, maple syrup, beans and corn sweeteners
were higher than those incurred during the thirteen and thirty-nine weeks ended
September 29, 2007 (third quarter and first three quarters of 2007).
In 2008,
maple syrup production in Canada, which represents the great majority of global
production, was significantly below industry needs due to poor crop yields and
growing global demand. As a result, the
price we pay for maple syrup has increased significantly and we are faced with
a shortfall in supply as compared to our needs, which has and will continue to
negatively impact our sales volume of maple syrup products through at least the
first quarter of fiscal 2009.
19
Table
of Contents
In
addition, the cost of labor, manufacturing, energy, fuel, packaging materials
and other costs related to the production and distribution of our food products
have risen significantly in recent years and at an increasing rate during
2008. We expect that many of these costs
will continue to rise for the foreseeable future. We attempt to manage these risks by entering
into short-term supply contracts and advance commodities purchase agreements
from time to time, implementing cost saving measures and, when necessary, by
raising sales prices. To date, our cost
saving measures and sales price increases have not fully offset increases to
our raw material, ingredient, packaging and distribution costs and as a result
our operating results have been negatively impacted. To the extent we are unable to offset present
and future cost increases, our operating results will continue to be negatively
impacted.
Consolidation
in the Retail Trade and Consequent Inventory Reductions
.
As the retail grocery trade continues to consolidate and our retail
customers grow larger and become more sophisticated, our retail customers may
demand lower pricing and increased promotional programs. These customers are also reducing their
inventories and increasing their emphasis on private label products.
Changing
Customer Preferences
. Consumers in the market categories in which
we compete frequently change their taste preferences, dietary habits and
product packaging preferences.
Consumer
Concern Regarding Food Safety, Quality and Health
.
The food industry is subject to consumer concerns regarding the safety
and quality of certain food products, including the health implications of
genetically modified organisms and obesity.
A
Weakening of the U.S. Dollar in Relation to the Canadian Dollar
.
We purchase the majority of our maple syrup requirements from suppliers
located in Québec, Canada. During the
third quarter of 2008, the U.S. dollar has begun strengthening against the
Canadian dollar. However, over the past
several years the U.S. dollar had weakened against the Canadian dollar, which
in turn significantly increased our costs relating to the production of our
maple syrup products.
To
confront these challenges, we continue to take steps to build the value of our
brands, to improve our existing portfolio of products with new product and
marketing initiatives, to reduce costs through improved productivity and to
address consumer concerns about food safety, quality and health.
Critical Accounting Policies; Use of Estimates
The
preparation of financial statements in accordance with U.S. generally accepted
accounting principles requires our management to make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Some of the more
significant estimates and assumptions made by management involve trade and
consumer promotion expenses; allowances for excess, obsolete and unsaleable
inventories; pension benefits; purchase accounting allocations; the
recoverability of goodwill, trademarks, customer relationship intangibles,
property, plant and equipment, and deferred tax assets; the accounting for our
EISs; the accounting for earnings per share and the accounting for stock-based
compensation expense. Actual
results could differ from these estimates and assumptions.
Our
significant accounting policies are described more fully in note 2 to our
consolidated financial statements included in our 2007 Annual Report on Form 10-K. We believe the following critical accounting
policies involve the most significant judgments and estimates used in the
preparation of our consolidated financial statements.
20
Table
of Contents
Trade and Consumer Promotion
Expense
s
We
offer various sales incentive programs to customers and consumers, such as
price discounts, in-store display incentives, slotting fees and coupons. The recognition of expense for these programs
involves the use of judgment related to performance and redemption
estimates. Estimates are made based on
historical experience and other factors.
Actual expenses may differ if the level of redemption rates and
performance vary from our estimates.
Inventories
Inventories
are stated at the lower of cost or market.
Cost is determined using the first-in, first-out and average cost
methods. Inventories have been reduced
by an allowance for excess, obsolete and unsaleable inventories. The allowance is an estimate based on our
managements review of inventories on hand compared to estimated future usage
and sales.
Long-Lived Assets
Long-lived
assets, such as property, plant and equipment, and intangibles with estimated
useful lives are depreciated or amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Recoverability of assets held for sale is
measured by a comparison of the carrying amount of an asset or asset group to
their fair value less estimated cost to sell.
Estimating future cash flows and calculating fair value of assets
requires significant estimates and assumptions by management.
Goodwill and Trademarks
Goodwill
and intangible assets with indefinite useful lives (trademarks) are tested for
impairment at least annually and whenever events or circumstances occur
indicating that goodwill or indefinite life intangibles might be impaired.
We
perform the annual impairment tests as of the last day of each fiscal
year. The annual goodwill impairment
test involves a two-step process. The
first step of the impairment test involves comparing the fair value of our
company with our companys carrying value, including goodwill. If the carrying value of our company exceeds
our fair value, we perform the second step of the impairment test to determine
the amount of the impairment loss. The
second step of the goodwill impairment test involves comparing the implied fair
value of goodwill with the carrying value of that goodwill and recognizing a
loss for the difference. Calculating our
fair value requires significant estimates and assumptions by management. We estimate our fair value by applying third
party market value indicators to our earnings before interest, taxes,
depreciation and amortization (EBITDA).
We test indefinite life intangible assets for impairment by comparing
their carrying value to their fair value that is determined using a cash flow
method and recognize a loss to the extent the carrying value is greater.
We
completed our annual impairment tests for fiscal 2007 with no adjustments to
the carrying values of goodwill and indefinite life intangibles. We did not note any events or circumstances
during the first three quarters of 2008 that would indicate that goodwill or
indefinite life intangibles might be impaired.
The recent volatility in our companys stock price and declines in our
market capitalization could put pressure on the carrying value of our goodwill
and other indefinite life intangibles and result in an impairment charge if
these conditions persist for an extended period of time. Management will continue to monitor these
assets in future periods.
21
Table
of Contents
Accounting Treatment for EISs
Our EISs include Class A
common stock and senior subordinated notes.
Upon completion of our 2004 EIS offering (including the exercise of the
over-allotment option), we allocated the proceeds from the issuance of the
EISs, based upon relative fair value at the issuance date, to the Class A
common stock and the senior subordinated notes.
We have assumed that the price paid in the EIS offering was equivalent
to the combined fair value of the Class A common stock and the senior
subordinated notes, and the price paid in the offering for the senior
subordinated notes sold separately (not in the form of EISs) was equivalent to
their initial stated principal amount.
We have concluded there are no embedded derivative features related to
the EIS that require bifurcation under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities,
as
amended (SFAS No. 133). We have
determined the fair value of the Class A common stock and the senior
subordinated notes with reference to a number of factors, including the sale of
the senior subordinated notes sold separately from the EISs that have the same
terms as the senior subordinated notes included in the EISs. Therefore, we have allocated the entire
proceeds of the EIS offering to the Class A common stock and the senior
subordinated notes, and the allocation of the EIS proceeds to the senior
subordinated notes did not result in a premium or discount.
We have concluded that the
call option and the change in control put option in the senior subordinated
notes do not warrant separate accounting under SFAS No. 133 because they
are clearly and closely related to the economic characteristics of the host
debt instrument. Therefore, we have allocated
the entire proceeds of the offering to the Class A common stock and the
senior subordinated notes. Upon
subsequent issuances of senior subordinated notes, if any, we will evaluate
whether the call option and the change in control put option in the senior
subordinated notes require separate accounting under SFAS No. 133. We expect that if there is a substantial
discount or premium upon a subsequent issuance of senior subordinated notes, we
may need to separately account for the call option and the change in control
put option features as embedded derivatives for such subsequent issuance. If we determine that the embedded
derivatives, if any, require separate accounting from the debt host contract
under SFAS No. 133, the call option and the change in control put option
associated with the senior subordinated notes will be recorded as derivative
liabilities at fair value, with changes in fair value recorded as other
non-operating income or expense. Any
discount on the senior subordinated notes resulting from the allocation of
proceeds to an embedded derivative will be amortized to interest expense over
the remaining life of the senior subordinated notes.
The Class A common
stock portion of each EIS is included in stockholders equity, net of the related
portion of the EIS transaction costs allocated to Class A common
stock. Dividends paid on our Class A
common stock portion of each EIS are recorded as a decrease to additional
paid-in capital when declared by us. The
senior subordinated note portion of each EIS is included in long-term debt, and
the related portion of the EIS transaction costs allocated to the senior
subordinated notes was capitalized as deferred debt issuance costs and is being
amortized to interest expense using the effective interest method. Interest on the senior subordinated notes is
charged to interest expense as accrued by us and deducted for income tax
purposes.
Income Tax Expense Estimates and Policies
As
part of the income tax provision process of preparing our consolidated
financial statements, we are required to estimate our income taxes. This process involves estimating our current
tax expense together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities. We then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe the recovery is not likely, we
establish a valuation allowance.
Further, to the extent that we establish a valuation allowance or
increase this allowance in a financial accounting period, we include such
charge in our tax provision, or reduce our tax benefits in our consolidated
statement of operations. We use our
judgment to determine our provision or benefit for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against our net
deferred tax assets.
22
Table
of Contents
There
are various factors that may cause these tax assumptions to change in the near
term, and we may have to record a valuation allowance against our deferred tax
assets. We cannot predict whether future
U.S. federal and state income tax laws and regulations might be passed that
could have a material effect on our results of operations. We assess the impact of significant changes
to the U.S. federal and state income tax laws and regulations on a regular
basis and update the assumptions and estimates used to prepare our consolidated
financial statements when new regulations and legislation are enacted. We recognize the benefit of an uncertain tax
position that we have taken or expect to take on the income tax returns we file
if it is more likely than not that such tax position will be sustained based
on its technical merits.
Earnings Per Share
We
currently have one class of common stock issued and outstanding, designated as Class A
common stock. Prior to May 29,
2007, we had two classes of common stock issued and outstanding, designated as Class A
common stock and Class B common stock.
For periods in which we had shares of both Class A and Class B
common stock issued and outstanding, we present earnings per share using the
two-class method. The two-class method
is an earnings allocation formula that determines earnings per share for each
class of common stock according to dividends declared and participation rights
in undistributed earnings or losses.
For
periods in which we had shares of both Class A and Class B common
stock issued and outstanding, net income is allocated between the two classes
of common stock based upon the two-class method. Basic and diluted earnings per share for the Class A
common stock and Class B common stock is calculated by dividing allocated
net income by the weighted average number of shares of Class A common
stock and Class B common stock outstanding.
Pension Expense
We have defined benefit
pension plans covering substantially all of our employees. Our funding policy is to contribute annually
the amount recommended by our actuaries.
The funded status of our pension plans is dependent upon many factors,
including returns on invested assets and the level of certain market interest
rates. We review pension assumptions
regularly and we may from time to time make voluntary contributions to our
pension plans, which exceed the amounts required by statute. During the first three quarters of 2008, we
made contributions of $0.5 million to our defined benefit pension plans, all of
which were made in the third quarter, as compared to $0.8 million and $2.1
million of contributions during the third quarter and first three quarters of
2007, respectively. We anticipate
electing to make approximately $0.6 million in additional contributions during
the fourth quarter of fiscal 2008.
Changes in interest rates and the market value of the securities held by
the plans could materially change, positively or negatively, the funded status
of the plans and affect the level of pension expense and required contributions
during the remainder of fiscal 2008 and beyond.
In addition, the recent volatility in the financial markets could affect
the valuation of our pension assets and liabilities, resulting in potentially
higher pension costs in future periods.
Our discount rate assumption
increased from 5.90% at December 30, 2006 to 6.50% at December 29,
2007 for our pension plans. This
increase in the discount rate, coupled with the amortization of deferred gains
and losses will result in a decrease in fiscal 2008 pre-tax pension expense of
approximately $0.8 million. While we do
not currently anticipate a change in our fiscal 2008 assumptions, as a
sensitivity measure, a 0.25% decline or increase in our discount rate would
increase or decrease our pension expense by approximately $0.1 million. Similarly, a 0.25% decrease or increase in
the expected return on pension plan assets would increase or decrease our
pension expense by approximately $0.1 million.
In August 2006, the
Pension Protection Act of 2006 was signed into law. The major provisions of the statute became
effective on January 1, 2008. Among
other things, the statute is designed to ensure timely and adequate funding of
qualified pension plans by shortening the time period within which employers
must fully fund pension benefits. Due to
the fully funded status of our defined benefit pension plans as of December 29,
2007, the Pension Protection Act of 2006 is not currently expected to have a
significant impact on our future pension funding requirements.
23
Table of Contents
Acquisition Accounting
We account for acquired
businesses using the purchase method of accounting, which requires that the
assets acquired and liabilities assumed be recorded at the date of acquisition
at their respective fair values. Our consolidated financial statements and
results of operations reflect an acquired business after the completion of the
acquisition. The cost to acquire a business, including transaction costs, is
allocated to the underlying net assets of the acquired business in proportion
to their respective fair values. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill.
The judgments made in
determining the estimated fair value assigned to each class of assets acquired
and liabilities assumed, as well as asset lives, can materially impact our
results of operations. Accordingly, for significant items, we typically obtain
assistance from third party valuation specialists.
Determining the useful life
of an intangible asset also requires judgment as different types of intangible
assets will have different useful lives and certain assets may even be
considered to have indefinite useful lives.
All of these judgments and
estimates can materially impact our results of operations.
Results
of Operations
The following table sets forth the percentages of net
sales represented by selected items for the third quarter of 2008 and 2007 and
the first three quarters of 2008 and 2007 reflected in our consolidated
statements of operations. The comparisons of financial results are not
necessarily indicative of future results:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
September 27,
2008
|
|
September 29,
2007
|
|
September 27,
2008
|
|
September 29,
2007
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
73.6
|
%
|
67.3
|
%
|
71.8
|
%
|
68.1
|
%
|
Gross profit
|
|
26.4
|
%
|
32.7
|
%
|
28.2
|
%
|
31.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing and distribution expenses
|
|
9.3
|
%
|
11.2
|
%
|
9.8
|
%
|
11.0
|
%
|
General and administrative expenses
|
|
1.8
|
%
|
2.9
|
%
|
1.5
|
%
|
2.0
|
%
|
Amortization expensecustomer relationships
|
|
1.4
|
%
|
1.4
|
%
|
1.4
|
%
|
1.1
|
%
|
Operating income
|
|
13.9
|
%
|
17.2
|
%
|
15.5
|
%
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
9.9
|
%
|
10.6
|
%
|
10.5
|
%
|
11.8
|
%
|
Income before income tax expense
|
|
4.0
|
%
|
6.7
|
%
|
5.0
|
%
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
1.5
|
%
|
2.5
|
%
|
1.9
|
%
|
2.3
|
%
|
Net income
|
|
2.5
|
%
|
4.1
|
%
|
3.1
|
%
|
3.7
|
%
|
As used in this section the terms listed below have
the following meanings:
Net Sales.
Our net
sales represents gross sales of products shipped to customers plus amounts
charged to customers for shipping and handling, less cash discounts, coupon
redemptions, slotting fees and trade promotional spending.
Gross Profit.
Our
gross profit is equal to our net sales less cost of goods sold. The primary
components of our cost of goods sold are cost of internally manufactured
products, purchases of finished goods from co-packers plus freight costs to our
distribution centers and to our customers.
24
Table of Contents
Sales, Marketing and Distribution
Expenses.
Our sales, marketing and distribution expenses
include costs for marketing personnel, consumer advertising programs, internal
sales forces, brokerage costs and warehouse facilities.
General and Administrative Expenses.
Our general and administrative expenses include
administrative employee compensation and benefit costs, as well as information
technology infrastructure and communication costs, office rent and supplies,
professional services and other general corporate expenses. For the first three
quarters of 2007, general and administrative expenses is net of insurance
proceeds relating to a previously reported employee theft.
Amortization ExpenseCustomer
Relationships.
Amortization expensecustomer relationships
includes the amortization expense associated with customer relationship
intangibles, which are amortized over their useful lives of 20 years.
Net Interest Expense.
Net
interest expense includes interest relating to our outstanding indebtedness and
amortization of deferred debt issuance costs, net of interest income and subsequent
to our determination that our interest rate swap is no longer effective,
unrealized gains on the interest rate swap and the reclassification of amounts
recorded in accumulated other comprehensive income (loss) related to the swap.
Non-GAAP Financial Measures
Certain disclosures in this report include non-GAAP
(generally accepted accounting principles) financial measures. A non-GAAP financial measure is defined as a
numerical measure of our financial performance that excludes or includes amounts
so as to be different than the most directly comparable measure calculated and
presented in accordance with GAAP in our consolidated balance sheets and
related consolidated statements of operations, changes in stockholders equity
and comprehensive income, and cash flows.
EBITDA is a measure used by management to measure
operating performance. EBITDA is defined as net income before net interest
expense, income taxes, depreciation, and amortization. Management believes that
it is useful to eliminate net interest expense, income taxes, depreciation and
amortization because it allows management to focus on what it deems to be a
more reliable indicator of ongoing operating performance and our ability to
generate cash flow from operations. We use EBITDA in our business operations,
among other things, to evaluate our operating performance, develop budgets and
measure our performance against those budgets, determine employee bonuses and
evaluate our cash flows in terms of cash needs. We also present EBITDA because
we believe it is a useful indicator of our historical debt capacity and ability
to service debt and because covenants in our credit facility, our senior notes
indenture and our senior subordinated notes indenture contain ratios based on
this measure. As a result, internal management reports used during monthly
operating reviews feature the EBITDA metric. However, management uses this
metric in conjunction with traditional GAAP operating performance and liquidity
measures as part of its overall assessment of company performance and liquidity
and therefore does not place undue reliance on this measure as its only measure
of operating performance and liquidity.
EBITDA is not a recognized term under GAAP and does
not purport to be an alternative to operating income or net income as an
indicator of operating performance or any other GAAP measure. EBITDA is not a
complete net cash flow measure because EBITDA is a measure of liquidity that
does not include reductions for cash payments for an entitys obligation to
service its debt, fund its working capital, capital expenditures and
acquisitions, if any, and pay its income taxes and dividends. Rather, EBITDA is
a potential indicator of an entitys ability to fund these cash requirements.
EBITDA is not a complete measure of an entitys profitability because it does
not include costs and expenses for depreciation and amortization, interest and
related expenses and income taxes. Because not all companies use identical
calculations, this presentation of EBITDA may not be comparable to other
similarly titled measures of other companies. However, EBITDA can still be
useful in evaluating our performance against our peer companies because
management believes this measure provides users with valuable insight into key
components of GAAP amounts.
25
Table of Contents
A reconciliation of EBITDA to net income and to net
cash provided by operating activities for the third quarter and first three
quarters of 2008 and 2007 along with the components of EBITDA follows:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
September 27,
2008
|
|
September 29,
2007
|
|
September 27,
2008
|
|
September 29,
2007
|
|
|
|
(Dollars in thousands)
|
|
Net income
|
|
$
|
2,890
|
|
$
|
4,846
|
|
$
|
10,829
|
|
$
|
12,657
|
|
Income tax expense
|
|
1,792
|
|
2,958
|
|
6,647
|
|
7,725
|
|
Interest expense, net
|
|
11,562
|
|
12,374
|
|
37,041
|
|
40,028
|
|
Depreciation and amortization
|
|
3,887
|
|
3,843
|
|
11,420
|
|
9,706
|
|
EBITDA
|
|
20,131
|
|
24,021
|
|
65,937
|
|
70,116
|
|
Income tax expense
|
|
(1,792
|
)
|
(2,958
|
)
|
(6,647
|
)
|
(7,725
|
)
|
Interest expense, net
|
|
(11,562
|
)
|
(12,374
|
)
|
(37,041
|
)
|
(40,028
|
)
|
Deferred income taxes
|
|
2,042
|
|
3,102
|
|
6,087
|
|
6,944
|
|
Amortization of deferred financing costs
|
|
792
|
|
792
|
|
2,376
|
|
2,397
|
|
Write off of deferred debt issuance costs
|
|
|
|
|
|
|
|
1,769
|
|
Unrealized gain on interest rate swap
|
|
(1,514
|
)
|
|
|
(1,514
|
)
|
|
|
Other
|
|
76
|
|
|
|
76
|
|
|
|
Stock-based compensation expense
|
|
152
|
|
|
|
510
|
|
|
|
Changes in assets and liabilities, net of
effects of business combination
|
|
8,108
|
|
(3,213
|
)
|
(1,258
|
)
|
(12,273
|
)
|
Net cash provided by operating activities
|
|
$
|
16,433
|
|
$
|
9,370
|
|
$
|
28,526
|
|
$
|
21,200
|
|
Third quarter of 2008 compared to the third quarter
of 2007.
Net Sales.
Net
sales decreased $0.5 million or 0.4% to $116.5 million for the third quarter of
2008 from $117.0 million for the third quarter of 2007. Price increases that we
recently implemented improved net sales by $4.7 million during the third
quarter of 2008. These pricing gains, however, were offset by a decrease in net
sales of $5.2 million attributable to a unit volume decline. A substantial
portion of the unit volume decline was attributable to (1) the poor maple
syrup crop in Canada in 2008 that resulted in an industry-wide shortfall of
maple syrup and (2) a management decision to eliminate unprofitable sales
to certain customers of private label pickles and peppers. Net sales of our
Maple Grove Farms
pure maple syrup and our private label
pickles and peppers declined in the third quarter of 2008 by $1.4 million and
$0.2 million, respectively. In the case of pure maple syrup, this decline was
attributable to the unit volume decline partially offset by pricing gains.
Net sales of our
Ortega
,
Emerils
,
B&G
(excluding private label)
and
Maple
Grove Farms
(excluding pure maple syrup)
products increased
in by $0.6 million, $0.4 million, $0.4 million and $0.3 million, or
2.4%, 8.8%, 4.9% and 5.4%, respectively. These increases were offset by a
reduction in net sales of
Polaner
and
B&M
products of $0.5 million and $0.4 million, or 5.1% and 6.5%,
respectively. In the aggregate, net sales for all other brands increased by
$0.3 million, or 0.6%.
Gross Profit.
Gross
profit decreased $7.6 million or 19.7% to $30.7 million for the third quarter
of 2008 from $38.3 million for the third quarter of 2007. Gross profit
expressed as a percentage of net sales decreased 6.3% to 26.4% in the third
quarter of 2008 from 32.7% in the third quarter of 2007. This decrease in gross
profit expressed as a percentage of net sales was primarily attributable to
increased costs for wheat, maple syrup, corn, packaging, transportation and
sweeteners, partially offset by $4.7 million in sales price increases.
Sales, Marketing and Distribution
Expenses.
Sales, marketing and distribution expenses
decreased $2.3 million or 17.6% to $10.8 million for the third quarter of 2008
from $13.1 million for the third quarter of
26
Table of Contents
2007. This
decrease is primarily due to a decrease in consumer marketing of $1.3 million
and a decrease in brokerage and employee compensation of $0.9 million Expressed as a percentage of net sales, our
sales, marketing and distribution expenses decreased to 9.3% for the third
quarter of 2008 from 11.2% for the third quarter of 2007.
General and Administrative Expenses.
General and administrative expenses decreased $1.3 million or
38.7% to $2.1 million for the third quarter of 2008 from $3.4 million in the
third quarter of 2007. This decrease was primarily the result of a decrease in
compensation expense and bonus accruals of $1.6 million partially offset by an
increase in professional fees of $0.2 million.
Amortization Expense
Customer Relationships.
Amortization expensecustomer relationships remained consistent
at $1.6 million for the third quarter of 2008 and for the third quarter of
2007.
Operating Income.
As
a result of the foregoing, operating income decreased $4.0 million or 19.5% to
$16.2 million for the third quarter of 2008 from $20.2 million for the third
quarter of 2007. Operating income expressed as a percentage of net sales
decreased to 13.9% in the third quarter of 2008 from 17.2% in the third quarter
of 2007.
Net Interest Expense.
Net
interest expense decreased $0.8 million or 6.6% to $11.6 million for the third
quarter of 2008 from $12.4 million in the third quarter of 2007. Interest
expense in the third quarter of 2008 includes a reduction of $1.5 million
relating to the unrealized gain on our interest rate swap subsequent to the
Lehman bankruptcy filing offset by a reclassification of $0.1 million of the
amount recorded in accumulated other comprehensive income (loss) related to the
swap and a reduction in interest income and capitalized interest on qualifying
assets based on our effective interest rate. See Liquidity and Capital
ResourcesDebt below.
Income Tax Expense.
Income
tax expense decreased $1.2 million to $1.8 million for the third quarter of
2008 from $3.0 million for the third quarter of 2007. Our effective tax rate
was 38.3% and 37.9% for the third quarter of 2008 and 2007, respectively. The
difference in the effective tax rate is attributable to the difference in
timing in the recording of our annual true-up expense. In 2008, we recorded the
annual true-up expense during the third quarter. The comparable true-up expense
in 2007 was not recorded until the fourth quarter.
First three quarters of 2008 compared to first three
quarters of 2007.
Net Sales.
Net
sales increased $13.0 million or 3.9% to $352.0 million for the first three
quarters of 2008 from $339.0 million for the first three quarters of 2007. We
completed the
Cream of Wheat
acquisition in
late February 2007. Excluding the impact of the
Cream of
Wheat
acquisition (which positively impacted net sales by $10.0
million), and the termination of a temporary co-packing arrangement (which
negatively impacted net sales by $0.8 million), net sales increased $3.8
million or 1.2% during the first three quarters of 2008.
Price increases that we recently implemented improved
net sales by $5.3 million during the first three quarters of 2008. These
pricing gains, however, were offset by a decrease in net sales of $1.5 million
attributable to a unit volume decline. A substantial portion of the unit volume
decline was attributable to (1) the poor maple syrup crop in Canada in
2008 that resulted in an industry-wide shortfall of maple syrup and (2) a
management decision to eliminate unprofitable sales to certain customers of
private label pickles and peppers. For the first three quarters of 2008, net
sales of our
Maple Grove Farms
pure maple
syrup increased by $0.3 million as pricing gains offset the unit volume decline.
Net sales of our private label pickles and peppers declined in the first three
quarters of 2008 by $0.4 million.
Net sales of our lines of
Ortega
,
Maple Grove
Farms
(excluding pure maple syrup),
Las Palmas
,
Joan of Arc
and
B&M
products increased
in the amounts of $3.0 million, $1.5
million, $1.2 million, $0.4 million
27
Table of Contents
and
$0.4 million, or 4.1%, 9.4%, 6.8%, 6.4% and 2.1%, respectively. These increases
were offset by a reduction in net sales of
Underwood,
Regina,
Polaner
and
Emerils
products of $0.8 million, $0.7 million, $0.6
million and $0.4 million, or 4.9%, 7.9%, 2.0% and 2.8%, respectively. In the
aggregate, net sales for all other brands decreased $0.1 million, or 0.1%.
Gross Profit.
Gross
profit decreased $9.1 million or 8.4% to $99.2 million for the first three
quarters of 2008 from $108.3 million for the first three quarters of 2007. Gross
profit expressed as a percentage of net sales decreased 3.7% to 28.2% in the
first three quarters of 2008 from 31.9% in the first three quarters of 2007. The
decrease in gross profit expressed as percentage of net sales was primarily
attributable to increased costs for wheat, maple syrup, corn, packaging,
transportation and sweeteners, partially offset by $5.3 million in sales price
increases.
Sales, Marketing and Distribution
Expenses.
Sales, marketing and distribution expenses
decreased $2.6 million or 7.1% to $34.6 million for the first three quarters of
2008 from $37.2 million for the first three quarters of 2007. The decrease is
primarily due to a decrease in consumer marketing of $1.3 million, brokerage
and salesmen commissions of $1.0 million as well as general selling expenses of
$0.5 million, offset by an increase in warehousing of $0.2 million. Expressed
as a percentage of net sales, our sales, marketing and distribution expenses
decreased to 9.8% for the first three quarters of 2008 from 11.0% for the first
three quarters of 2007.
General and Administrative Expenses.
General and administrative expenses decreased $1.5 million or
22.0% to $5.3 million for the first three quarters of 2008 from $6.8 million in
the first three quarters of 2007. Excluding the impact of the $0.8 million
insurance reimbursement received in the second quarter of 2007 (which was
recorded as an offset to general and administrative expense), general and
administrative expenses decreased by $2.3 million in the first three quarters
of 2008 as compared to the first three quarters of 2007. This decrease was
primarily the result of a decrease in compensation expense and bonus accruals
of $2.0 million, professional fees of $0.2 million and other expenses of $0.1
million.
Amortization ExpenseCustomer
Relationships.
Amortization expensecustomer relationships
increased $0.9 million to $4.8 million for the first three quarters of 2008
from $3.9 million for the first three quarters of 2007. This increase is attributable to the
Cream
of Wheat
acquisition, which was completed during the first quarter
of 2007.
Operating Income.
As
a result of the foregoing, operating income decreased $5.9 million or 9.8% to
$54.5 million for the first three quarters of 2008 from $60.4 million for the
first three quarters of 2007. Operating income expressed as a percentage of net
sales decreased to 15.5% in the first three quarters of 2008 from 17.8% in the
first three quarters of 2007.
Net Interest Expense.
Net
interest expense decreased $3.0 million or 7.5% to $37.0 million for the first
three quarters of 2008 from $40.0 million in the first three quarters of 2007. Interest
expense for the first three quarters of 2007 included a write-off of deferred
financing costs of $1.8 million relating to our prepayment of $100.0 million of
term loan borrowings with a portion of the proceeds of our public offering of Class A
common stock in May 2007. Our average debt outstanding was approximately
$10.0 million lower for the first three quarters of 2008 as compared to the
first three quarters of 2007. Interest expense in 2008 includes a reduction of
$1.5 million relating to the unrealized gain on our interest rate swap
subsequent to the Lehman bankruptcy filing offset by a reclassification of $0.1
million of the amount recorded in accumulated other comprehensive income (loss)
related to the swap and a reduction in interest income and capitalized interest
on qualifying assets based on our effective interest rate. See Liquidity and
Capital ResourcesDebt below.
Income Tax Expense.
Income
tax expense decreased $1.1 million to $6.6 million for the first three quarters
of 2008 from $7.7 million for the first three quarters of 2007. Our effective
tax rate was 38.0% and
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37.9%
for the first three quarters of 2008 and 2007, respectively. The difference in
the effective tax rate is attributable to the difference in timing in the
recording of our annual true-up expense.
Liquidity and Capital Resources
Our primary liquidity requirements include debt
service, capital expenditures and working capital needs. See also, Dividend
Policy and Commitments and Contractual Obligations below. We fund our liquidity
requirements, as well as our dividend payments and financing for acquisitions,
primarily through cash generated from operations and to the extent necessary,
through borrowings under our credit facility.
Cash Flows
. Cash
provided by operating activities increased $7.3 million to $28.5 million for
the first three quarters of 2008 from $21.2 million for the first three
quarters of 2007. The increase was due to changes relating to a decrease in
accounts receivable (primarily as a result of an increase in accounts
receivable at the end of the third quarter of 2007 from the
Cream of Wheat
acquisition) and inventory
offset by a decrease in accounts payable and accrued expenses. Working capital
at September 27, 2008 was $112.3 million, a decrease of $2.8 million from
working capital at December 29, 2007 of $115.1 million.
Net cash used in investing activities for the first
three quarters of 2008 was $9.8 million as compared to $211.8 million for the
first three quarters of 2007. Investment expenditures for the first three
quarters of 2007 included $200.9 million for the
Cream of
Wheat
acquisition. Capital expenditures during the first three
quarters of 2008 decreased $1.1 million to $9.8 million from $10.9 million
during the first three quarters of 2007 and included expenditures of $7.8
million relating to the expansion of our Stoughton, Wisconsin facility and the
transfer of a portion of the
Cream of Wheat
production
to that facility.
Net cash used in financing activities for the first
three quarters of 2008 was $23.4 million as compared to net cash provided by
financing activities of $195.5 million for the first three quarters of 2007. Net
cash used in financing activities for the first three quarters of 2008 was
entirely for the payment of dividends to holders of our Class A common
stock. Net cash provided by financing activities for the first three quarters
of 2007 consisted of $205.0 million in additional term loan borrowings ($100.0
million of which we subsequently prepaid during the second quarter of 2007),
$193.2 million from the issuance of Class A common stock, net of
underwriting discounts and commissions and other expenses, offset by $82.4
million for the repurchase of Class B common stock, $16.3 million in
dividends paid on our Class A common stock and $4.0 million in debt
issuance costs.
Based on a number of
factors, including our trademark, goodwill and customer relationship
intangibles amortization for tax purposes from our prior acquisitions, we
realized a significant reduction in cash taxes in fiscal 2007 and 2006 as
compared to our tax expense for financial reporting purposes. While we expect
our cash taxes to continue to increase in fiscal 2008 as compared to the prior
two years, we believe that we will realize a benefit to our cash taxes payable
from amortization of our trademarks, goodwill and customer relationship
intangibles for the taxable years 2008 through 2022.
Dividend Policy
Our dividend policy reflects a basic judgment that our
stockholders would be better served if we distributed a substantial portion of
our cash available to pay dividends to them instead of retaining it in our
business. Under this policy, a substantial portion of the cash generated by our
company in excess of operating needs, interest and principal payments on indebtedness,
capital expenditures sufficient to maintain our properties and other assets is
in general distributed as regular quarterly cash dividends (up to the intended
dividend rate as determined by our board of directors) to the holders of our
common stock and not retained by us. From the date of our initial public
offering of EISs in October 2004 through the dividend payment we made on October 30,
2008, the dividend rate for our Class A common stock was $0.848 per share
per annum. Beginning with the dividend
payment previously declared and payable on January 30, 2009, the current
intended dividend rate for our Class A common stock is $0.68 per share per
annum.
Dividend payments, however, are not mandatory or
guaranteed and holders of our common stock do not have any legal right to
receive, or require us to pay, dividends. Furthermore, our board of directors
may, in
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its
sole discretion, amend or repeal this dividend policy. Our board of directors
may decrease the level of dividends below the intended dividend rate or
discontinue entirely the payment of dividends. Future dividends with respect to
shares of our common stock depend on, among other things, our results of
operations, cash requirements, financial condition, contractual restrictions,
business opportunities, acquisition opportunities, the condition of the debt
and equity financing markets, provisions of applicable law and other factors
that our board of directors may deem relevant. Our board of directors is free
to depart from or change our dividend policy at any time and could do so, for
example, if it was to determine that we have insufficient cash to take
advantage of growth opportunities. In addition, over time, our EBITDA and
capital expenditure, working capital and other cash needs will be subject to
uncertainties, which could impact the level of dividends, if any, we pay in the
future. Our senior subordinated notes indenture, the terms of our revolving
credit facility and our senior notes indenture contain significant restrictions
on our ability to make dividend payments. In addition, certain provisions of
the Delaware General Corporation Law may limit our ability to pay dividends.
As a result of our dividend policy, we may not retain
a sufficient amount of cash to finance growth opportunities or unanticipated
capital expenditure needs or to fund our operations in the event of a
significant business downturn. We may have to forego growth opportunities or
capital expenditures that would otherwise be necessary or desirable if we do
not find alternative sources of financing. If we do not have sufficient cash
for these purposes, our financial condition and our business will suffer.
For the first three quarters of 2008 and 2007, we had
cash flows provided by operating activities of $28.5 million and $21.2 million,
and distributed $23.4 million and $16.3 million, respectively, as dividends. If
our cash flows from operating activities for future periods were to fall below
our minimum expectations (or if our assumptions as to capital expenditures or
interest expense were too low or our assumptions as to the sufficiency of our
revolving credit facility to finance our working capital needs were to prove
incorrect), we would need either to reduce or eliminate dividends or, to the
extent permitted under our senior notes indenture, our senior subordinated
notes indenture and the terms of our credit facility, fund a portion of our
dividends with borrowings or from other sources. If we were to use working
capital or permanent borrowings to fund dividends, we would have less cash
and/or borrowing capacity available for future dividends and other purposes,
which could negatively impact our financial position, our results of
operations, our liquidity and our ability to maintain or expand our business.
Acquisitions
Our liquidity and capital resources have been
significantly impacted by acquisitions and may be impacted in the foreseeable
future by additional acquisitions. We have historically financed acquisitions
with borrowings and cash flows from operating activities. Our interest expense
will increase with any additional indebtedness we may incur to finance future
acquisitions, if any. To the extent future acquisitions, if any, are financed
by additional indebtedness, the resulting increase in debt and interest expense
could have a negative impact on liquidity.
Environmental and Health and
Safety Costs
We have not made any material expenditures during the
first three quarters of 2008 in order to comply with environmental laws or
regulations. Based on our experience to date, we believe that the future cost
of compliance with existing environmental laws and regulations (and liability
for known environmental conditions) will not have a material adverse effect on
our consolidated financial condition, results of operations or liquidity. However,
we cannot predict what environmental or health and safety legislation or
regulations will be enacted in the future or how existing or future laws or
regulations will be enforced, administered or interpreted, nor can we predict
the amount of future expenditures that may be required in order to comply with
such environmental or health and safety laws or regulations or to respond to
such environmental claims.
During an environmental compliance audit of our
Hurlock, Maryland facility conducted by a third-party consultant, we became
aware of reporting violations of the Emergency Planning and Community Right
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to Know
Act (EPCRA). EPCRA requires companies that manufacture, use or process more
than a threshold amount of certain listed chemicals to file an annual chemical
release form with Environmental Protection Agency (EPA) and the state and an
annual chemical inventory form to the state and local emergency planning and/or
response commissions and the local fire department. For certain years we failed
to file one or more of such reports with the EPA and/or duplicate copies with
the state and local government. We voluntarily self-disclosed these potential
violations to the EPA pursuant to the EPAs self-disclosure policy. During the
third quarter of 2008 we entered into a consent agreement with the EPA pursuant
to which we settled the matter and agreed to a penalty of $94,509, which we
paid to the EPA during the fourth quarter of 2008. None of the reporting
violations resulted in any actual harm to the environment.
Debt
Senior Secured Credit Facility
. In October 2004, we entered into a $30.0
million senior secured revolving credit facility. In order to finance the
Grandmas
molasses acquisition, we amended the credit
facility in January 2006 to provide for, among other things, a new $25.0
million term loan and a reduction in the revolving credit facility commitments
from $30.0 million to $25.0 million. In order to finance the
Cream of Wheat
acquisition, our credit facility was amended
and restated in February 2007 to provide for, among other things, an
additional $205.0 million of term loan borrowings. On May 29, 2007, we
prepaid $100.0 million of term loan borrowings. Our $25.0 million revolving
credit facility matures on January 10, 2011 and the remaining $130.0
million of term loan borrowings matures on February 26, 2013, provided,
however, that if we do not repay, redeem or refinance our senior notes prior to
April 1, 2011, the outstanding term loan borrowings will become
immediately due and payable on April 1, 2011.
Interest under the revolving
credit facility, including any outstanding letters of credit, is determined
based on alternative rates that we may choose in accordance with the revolving
credit facility, including the base lending rate per annum plus an applicable
margin, and LIBOR plus an applicable margin. We pay a commitment fee of 0.50%
per annum on the unused portion of the revolving credit facility. Interest
under the term loan facility is determined based on alternative rates that we
may choose in accordance with the credit facility, including the base lending
rate per annum plus an applicable margin of 1.00%, and LIBOR plus an applicable
margin of 2.00%.
Our obligations under the
credit facility are jointly and severally and fully and unconditionally
guaranteed on a senior basis by all of our existing and certain future domestic
subsidiaries. The credit facility is secured by substantially all of our and
our subsidiaries assets except our and our subsidiaries real property. The
credit facility provides for mandatory prepayment based on asset dispositions
and certain issuances of securities, as defined. The credit facility contains
covenants that restrict, among other things, our ability to incur additional
indebtedness, pay dividends and create certain liens. The credit facility also
contains certain financial maintenance covenants, which, among other things,
specify maximum capital expenditure limits, a minimum interest coverage ratio and
a maximum senior and total leverage ratio, each ratio as defined. As of September 27,
2008, we were in compliance with all of the covenants in the credit facility. Proceeds
of the revolving credit facility are restricted to funding our working capital
requirements, capital expenditures and acquisitions of companies in the same
line of business as our company, subject to specified criteria. The maximum
letter of credit capacity under the revolving credit facility is $10.0 million,
with a fronting fee of 3.0% per annum for all outstanding letters of credit.
On September 15, 2008,
Lehman Brothers Holdings Inc. (Lehman) filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. Lehman Commercial Paper Inc. (Lehman CPI), a Lehman
subsidiary, is the administrative agent under our credit facility. Lehman CPI
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on October 3,
2008. None of our $130.0 million of outstanding term loans is currently with
Lehman, Lehman CPI or any other subsidiary of Lehman. Lehman CPI is one of the
lenders participating in our $25.0 million revolving credit facility. However,
Lehman CPI has only $3.1 million of the $25.0 million commitment. The other
lenders under the revolving credit facility and their respective commitments
are as
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follows:
Bank of America, N.A., $9.4 million; Citibank, N.A., $9.4 million; and
Royal Bank of Canada, $3.1 million. We do not believe that Lehman CPI would
honor its funding commitment under the revolving credit facility if we were to
make a funding request. As a result, the effective available borrowing capacity
under our revolving credit facility, net of outstanding letters of credit of
$2.4 million, was $19.5 million at September 27, 2008. We have not drawn
upon the revolving credit facility since its inception in October 2004
and, based upon our cash on hand and working capital requirements, we have no
plans to do so for the foreseeable future.
Effective as of February 26,
2007, we entered into a six year interest rate swap agreement in order to
effectively fix at 7.0925% the interest rate payable for $130.0 million of term
loan borrowings through the life of the term loan, ending on February 26,
2013. The interest rate for the remaining $100.0 million of term loan
borrowings, which we subsequently prepaid, was 7.36% as of the prepayment date
(based upon a three-month LIBOR rate in effect at that time that expired on May 25,
2007). The counterparty to the swap is Lehman Special Financing Inc (Lehman
SFI). Lehman SFI filed for protection under Chapter 11 of the U.S. Bankruptcy
Code on October 3, 2008.
We initially designated the
swap as a cash flow hedge under the guidelines of SFAS No. 133. Prior to
Lehmans bankruptcy filing, we recorded changes in the fair value of the swap
in other comprehensive income (loss), net of tax in our consolidated balance
sheet. However, as a result of the Lehman bankruptcy filing, we determined that
the interest rate swap was no longer an effective hedge as defined by SFAS No. 133
and, accordingly, subsequent changes in the swaps fair value are being
recorded in current earnings in net interest expense in the consolidated
statements of operations. We obtain third-party verification of fair value at
the end of each reporting period. As of September 27, 2008, the fair value
of our interest rate swap was $6.0 million and is recorded in other liabilities
on our consolidated balance sheet. The amount recorded in accumulated other
comprehensive income (loss) will be reclassified to net interest expense over
the remaining life of the term loan borrowings as we make interest payments. During
the third quarter of 2008, we reclassified to net interest expense $0.1 million
of the amount recorded in accumulated other comprehensive income (loss) and
expect to reclassify to net interest expense $0.4 million during the fourth
quarter of 2008. During fiscal 2009, we expect to reclassify to net interest
expense $1.7 million of the amount recorded in accumulated other comprehensive
income (loss).
12.0% Senior Subordinated Notes due 2016
.
In October 2004, we issued $165.8 million aggregate principal amount of
12.0% senior subordinated notes due 2016, $143.0 million of which in the form
of EISs and $22.8 million separate from EISs. As of September 27, 2008,
$122.1 million aggregate principal amount of senior subordinated notes was held
in the form of EISs and $43.7 million aggregate principal amount of senior
subordinated notes was held separate from EISs.
Interest on the senior
subordinated notes is payable quarterly in arrears on each January 30, April 30,
July 30 and October 30 through the maturity date. The senior
subordinated notes will mature on October 30, 2016, unless earlier retired
or redeemed as described below.
Upon the occurrence of a
change of control (as defined in the indenture), unless we have retired the
senior subordinated notes or exercised our right to redeem all senior
subordinated notes as described below, each holder of the senior subordinated
notes has the right to require us to repurchase that holders senior
subordinated notes at a price equal to 101.0% of the principal amount of the
senior subordinated notes being repurchased, plus any accrued and unpaid
interest to the date of repurchase. In order to exercise this right, a holder
must separate the senior subordinated notes and Class A common stock
represented by such holders EISs.
We may not redeem the senior
subordinated notes prior to October 30, 2009. On and after October 30,
2009, we may redeem for cash all or part of the senior subordinated notes at a
redemption price of 106.0% beginning October 30, 2009 and thereafter at
prices declining annually to 100% on or after October 30, 2012.
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If we redeem any senior subordinated notes,
the senior subordinated notes and Class A common stock represented by each
EIS will be automatically separated.
The senior subordinated
notes are unsecured obligations and are subordinated in right of payment to all
of our existing and future senior secured and senior unsecured indebtedness,
including the indebtedness under our credit facility and our senior notes. The
senior subordinated notes rank pari passu in right of payment with any of our
other subordinated indebtedness.
Our obligations under the
senior subordinated notes are jointly and severally and fully and
unconditionally guaranteed by all of our existing domestic subsidiaries and
certain future domestic subsidiaries on an unsecured and subordinated basis on
the terms set forth in our senior subordinated notes indenture. The senior
subordinated note guarantees are subordinated in right of payment to all existing
and future senior indebtedness of the guarantors, including the indebtedness
under our credit facility and the senior notes. Our foreign subsidiary is not a
guarantor, and any future foreign or partially owned domestic subsidiaries will
not be guarantors, of our senior subordinated notes.
Our senior subordinated
notes indenture contains covenants with respect to us and the guarantors and
restricts the incurrence of additional indebtedness and the issuance of capital
stock; the payment of dividends or distributions on, and redemption of, capital
stock; a number of other restricted payments, including certain investments;
specified creation of liens, sale-leaseback transactions and sales of assets;
fundamental changes, including consolidation, mergers and transfers of all or
substantially all of our assets; and specified transactions with affiliates. Each
of the covenants is subject to a number of important exceptions and
qualifications. As of September 27, 2008, we were in compliance with all
of the covenants in the senior subordinated notes indenture.
8.0% Senior Notes due 2011
. In October 2004, we issued $240.0
million aggregate principal amount of 8.0% senior notes due 2011. Interest on
the senior notes is payable on April 1 and October 1 of each year. The
senior notes will mature on October 1, 2011, unless earlier retired or
redeemed as described below.
We may not redeem the senior
notes prior to October 1, 2008. However, we may, from time to time, seek
to retire senior notes through cash repurchases of senior notes and/or
exchanges of senior notes for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors.
On and after October 1,
2008, we may redeem some or all of the senior notes at a redemption price of
104.0% beginning October 1, 2008 and thereafter at prices declining
annually to 100.0% on or after October 1, 2010. If we or any of the
guarantors sell certain assets or experience specific kinds of changes in
control, we must offer to purchase the senior notes at the prices as described
in our senior notes indenture plus accrued and unpaid interest to the date of
redemption.
Our obligations under the
senior notes are jointly and severally and fully and unconditionally guaranteed
on a senior basis by all of our existing and certain future domestic
subsidiaries. The senior notes and the subsidiary guarantees are our and the
guarantors general unsecured obligations and are effectively junior in right
of payment to all of our and the guarantors secured indebtedness and to the
indebtedness and other liabilities of our non-guarantor subsidiaries; are pari
passu in right of payment to all of our and the guarantors existing and future
unsecured senior debt; and are senior in right of payment to all of our and the
guarantors future subordinated debt, including the senior subordinated notes. Our
foreign subsidiary is not a guarantor, and any future foreign or partially
owned domestic subsidiaries will not be guarantors, of our senior notes.
Our senior notes indenture
contains covenants with respect to us and the guarantors and restricts the
incurrence of additional indebtedness and the issuance of capital stock; the
payment of dividends or
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distributions on, and redemption of, capital
stock; a number of other restricted payments, including certain investments;
specified creation of liens, sale-leaseback transactions and sales of assets;
fundamental changes, including consolidation, mergers and transfers of all or
substantially all of our assets; and specified transactions with affiliates. Each
of the covenants is subject to a number of important exceptions and
qualifications. As of September 27, 2008, we were in compliance with all
of the covenants in the senior notes indenture.
Stock and Debt
Repurchase Plan
On October 27, 2008, our board of directors authorized
a stock and debt repurchase program for the repurchase of up to $10.0 million
of our Class A common stock and/or senior notes over the next twelve
months. Under the authorization, we may purchase shares of Class A common
stock and/or senior notes from time to time in the open market or in privately
negotiated transactions in compliance with the applicable rules and
regulations of the SEC.
The timing and amount of such repurchases, if any,
will be at the discretion of management, and will depend on market conditions
and other considerations. Therefore, there can be no assurance as to the number
of shares, if any, that will be repurchased under the stock and debt repurchase
program, or the aggregate dollar amount of the shares or principal amount of
senior notes, if any, repurchased. We may discontinue the program at any time. Any
shares repurchased pursuant to the stock repurchase program will be cancelled. Likewise,
any senior notes repurchased will be cancelled. In general, our credit
agreement prohibits us from repurchasing our senior subordinated notes.
Future Capital
Needs
We are highly leveraged. On September 27,
2008, our total long-term debt and stockholders equity was $535.8 million and
$161.6 million, respectively.
Our ability to generate
sufficient cash to fund our operations depends generally on our results of
operations and the availability of financing. Our management believes that our
cash on hand, cash flow from operating activities and available borrowing
capacity under our revolving credit facility will be sufficient for the
foreseeable future to fund operations, meet debt service requirements, fund
capital expenditures, and pay our anticipated dividends on our Class A
common stock.
We expect to make capital expenditures of approximately
$11.0 million in the aggregate during fiscal 2008, $9.8 million of which have
already been made, and approximately $9.0 million during 2009.
Seasonality
Sales of a number of our
products tend to be seasonal. In the aggregate, however, our sales are not
heavily weighted to any particular quarter due to the diversity of our product
and brand portfolio. Sales during the first quarter of the fiscal year a
re
generally below those of the following three quarters.
We purchase most of the produce used to make our
shelf-stable pickles, relishes, peppers and other related specialty items
during the months of July through October, and we purchase substantially
all of our maple syrup requirements during the months of April through
July. Consequently, our liquidity needs are greatest during these periods.
Inflat
ion
In addition, the cost of
labor, manufacturing, energy, fuel, packaging materials and other costs related
to the production and distribution of our food products have risen
significantly in recent years and at an increasing rate during 2008. We expect
that many of these costs will continue to rise for the foreseeable future. We
attempt to manage these risks by entering into short-term supply contracts and
advance
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commodities purchase agreements from time to
time, implementing cost saving measures and, when necessary, by raising sales
prices. To date, our cost saving measures and sales price increases have not
fully offset increases to our raw material, ingredient, packaging and
distribution costs and as a result our operating results have been negatively
impacted. To the extent we are unable to offset present and future cost
increases, our operating results will continue to be negatively impacted.
Recent
Accounting Pronouncements
In September 2006, the
FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are effective as of the beginning of our 2008
fiscal year, with the exception of certain provisions deferred until the
beginning of our 2009 fiscal year. In February 2008, the FASB issued FASB
Staff Position SFAS No. 157-2,
Effective
Date of FASB Statement No. 157
, which delayed the effective
date of SFAS No. 157 for all non-financial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until January 1, 2009. The impact of the
adoption of SFAS No. 157 for financial assets and liabilities was not
material to our consolidated interim financial statements. We have not yet
determined the impact that the adoption of SFAS No. 157 will have on our
non-financial assets and liabilities which are not recognized on a recurring
basis;
however we do not
anticipate it to materially impact our consolidated financial statements.
In October 2008, the
FASB issued FASB Staff Position No. FAS 157-3,
Determining
Fair Value of a Financial Asset in a Market That Is Not Active
(FSP
No. FAS 157-3). FSP No. FAS 157-3 clarified the application of SFAS No. 157
in an inactive market. It demonstrated how the fair value of a financial asset
is determined when the market for that financial asset is inactive. FSP No. FAS
157-3 was effective upon issuance, including prior periods for which financial
statements had not been issued. The implementation of this standard did not
have a material impact on our consolidated financial position and results of
operations.
In December 2007, the
FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(SFAS No. 141R) and SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
(SFAS No. 160). SFAS No. 141R
requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 141R and SFAS No. 160 are effective as
of the beginning of our 2009 fiscal year. SFAS No. 141R will be applied
prospectively. The effects of SFAS No. 141R will depend on future
acquisitions. SFAS No. 160 requires retroactive adoption. We currently do
not have any noncontrolling interests in subsidiaries.
In March 2008, the FASB
issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133
. This statement changes the disclosure
requirements for derivative instruments and hedging activities. SFAS No. 161
requires enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. SFAS No. 161 is effective
as of the beginning of our 2009 fiscal year. We are currently evaluating the
potential impact, if any, of the adoption of SFAS No. 161 on our
consolidated financial statements.
In April 2008, the FASB
issued FASB Staff Position No. FAS 142-3,
Determination
of the Useful Life of Intangible Assets
(FSP No. FAS 142-3). FSP
No. FAS 142-3 requires companies estimating the useful life of a
recognized intangible asset to consider their historical experience in renewing
or extending similar arrangements or, in the absence of historical experience,
to consider assumptions that market participants would use about renewal or
extension as adjusted for entity-specific factors. FSP No. FAS 142-3 is
effective as of the beginning of our 2009 fiscal year. We are currently
evaluating the potential impact, if any, of the adoption of FSP No. FAS
142-3 on our consolidated financial statements.
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Off-balance Sheet Arrangements
As of September 27, 2008, we did not have any
off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
Commitments
and Contractual Obligations
Our contractual obligations
and commitments principally include obligations associated with our outstanding
indebtedness, future minimum operating lease obligations and future pension
obligations. During the first three quarters of 2008, there were no material
changes outside the ordinary course of business in the specified contractual
obligations set forth in our 2007 Annual Report on Form 10-K, except that
we entered into a new lease in Tennessee (in connection with the transfer of
our warehousing operations in Tennessee from one leased location to another
leased location) that will require us to make rental payments of approximately
$4.0 million in the aggregate over the course of the lease, which expires in
2013. In addition, our expected contributions to our defined benefit pension
plans for fiscal 2008 have increased from $0.1 million to $1.1 because,
although not obligated to do so, we made $0.5 million of contributions to our
defined benefit pension plans during the third quarter of 2008 and expect to
make an additional contribution of $0.6 million during the fourth quarter.
Forward-Looking
Statements
This report includes forward-looking statements,
including without limitation the statements under Managements Discussion and
Analysis of Financial Condition and Results of Operations. The words believes, anticipates, plans,
expects, intends, estimates, projects and similar expressions are
intended to identify forward-looking statements. These forward looking
statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance and achievements, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by any forward-looking statements. We believe
important factors that could cause actual results to differ materially from our
expectations include the following:
·
our substantial leverage;
·
the effects of rising costs
for our raw materials, packaging and ingredients;
·
crude oil prices and their
impact on distribution, packaging and energy costs;
·
our ability to successfully
implement sales price increases and cost saving measures to offset cost
increases;
·
intense competition, changes
in consumer preferences, demand for our products and local economic and market
conditions;
·
our continued ability to
promote brand equity successfully, to anticipate and respond to new consumer
trends, to develop new products and markets, to broaden brand portfolios in
order to compete effectively with lower priced products and in markets that are
consolidating at the retail and manufacturing levels and to improve
productivity;
·
the risks associated with
the expansion of our business;
·
our possible inability to
integrate any businesses we acquire;
·
our ability to access the
credit markets and our borrowing costs and credit ratings, which may be
influenced by credit markets generally and the credit ratings of our
competitors;
·
the effects of currency
movements of the Canadian dollar as compared to the U.S. dollar;
·
other factors that affect
the food industry generally, including:
36
Table of Contents
·
recalls if
products become adulterated or misbranded, liability if product consumption
causes injury, ingredient disclosure and labeling laws and regulations and the
possibility that consumers could lose confidence in the safety and quality of
certain food products, as well as recent publicity concerning the health
implications of obesity and trans fatty acids;
·
competitors
pricing practices and promotional spending levels;
·
the risks
associated with third-party suppliers and co-packers, including the risk that
any failure by one or more of our third-party suppliers or co-packers to comply
with food safety or other laws and regulations may disrupt our supply of raw
materials or certain finished goods products; and
·
fluctuations in
the level of our customers inventories and credit and other business risks
related to our customers operating in a challenging economic and competitive
environment; and
·
other factors
discussed elsewhere in this report and in our other public filings with the SEC,
including under Item 1A, Risk Factors in our 2007 Annual Report on Form 10-K.
Developments in any of these areas could cause our
results to differ materially from results that have been or may be projected by
or on our behalf.
All forward-looking statements included in this report
are based on information available to us on the date of this report. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained in this report.
We caution that the foregoing list of important
factors is not exclusive. We urge investors not to unduly rely on
forward-looking statements contained in this report.
Item
3.
Quantitative and Qualitative Disclosures
About Market Risk
In the normal course of operations, we are exposed to
market risks arising from adverse changes in interest rates. Market risk is
defined for these purposes as the potential change in the fair value of a
financial asset or liability resulting from an adverse movement in interest
rates.
Interest under our $25.0
million revolving credit facility, including any outstanding letters of credit,
is determined based on alternative rates that we may choose in accordance with
the revolving credit facility, including the base lending rate per annum plus
an applicable margin, and LIBOR plus an applicable margin. Interest under our
term loan facility is determined based on alternative rates that we may choose
in accordance with the credit facility, including the base lending rate per
annum plus an applicable margin of 1.00%, and LIBOR plus an applicable margin
of 2.00%. The revolving credit facility was undrawn at September 27, 2008.
Lehman CPI is one of the lenders participating in our revolving credit
facility. Lehman CPI has only $3.1
million of the $25.0 million commitment. As a result of the bankruptcy filings
by Lehman and Lehman CPI discussed above in Item 2, we do not believe that
Lehman CPI would honor its funding commitment under the revolving credit
facility if we were to make a funding request. As a result, the effective available
borrowing capacity under our revolving credit facility, net of outstanding
letters of credit of $2.4 million, was $19.5 million at September 27,
2008.
We have outstanding $130.0
million of term loan borrowings at September 27, 2008 and December 29,
2007. The interest rate payable for our term loan borrowings is effectively
fixed at 7.0925% based upon a six year interest rate swap agreement that we
entered into on February 26, 2007. However, as a result of the bankruptcy
filings by Lehman and Lehman SFI discussed above in Item 2, we have determined
that the interest rate swap is no longer an effective hedge as defined by SFAS No. 133.
The carrying value of our term loan borrowings approximates fair value because
interest rates under the term loan borrowings are variable, based on prevailing
market rates. A 1.0% increase in interest rates, applied to our variable rate
borrowings at
37
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September 27, 2008, would result in an
annual increase in interest expense and a corresponding reduction in cash flow
of $1.3 million.
The information regarding our interest rate swap under
the heading Liquidity and Capital ResourcesDebtSenior Secured Credit
Facility in Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations is incorporated herein by reference.
The
carrying values and fair values of our senior notes and senior subordinated
notes as of September 27, 2008 and December 29, 2007 are as follows
(dollars in thousands):
|
|
September 27, 2008
|
|
December 29, 2007
|
|
|
|
Carrying Value
|
|
Fair Value(1)(2)
|
|
Carrying Value
|
|
Fair Value(1)(3)
|
|
8% Senior Notes due October 1, 2011
|
|
$
|
240,000
|
|
$
|
231,600
|
|
$
|
240,000
|
|
$
|
235,800
|
|
|
|
|
|
|
|
|
|
|
|
12% Senior Subordinated Notes due
October 30, 2016(2):
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
122,103
|
|
118,517
|
|
119,067
|
|
126,561
|
|
held separately
|
|
43,697
|
|
42,413
|
|
46,733
|
|
49,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Fair values are estimated based on quoted market prices, except as
otherwise noted in footnotes (2) and (3) below.
(2)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at September 27, 2008 was $6.94 based
upon the $7.50 per share closing price of our separately traded Class A
common stock and the $14.44 per EIS closing price of our EISs on the New York
Stock Exchange on September 26, 2008 (the last business day of the first
three quarters of 2008). Each EIS represents one share of Class A common
stock and $7.15 principal amount of our senior subordinated notes.
(3)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at December 29, 2007 was $7.60,
based upon the $10.07 per share closing price of our separately traded Class A
common stock and the $17.67 per EIS closing price of our EISs on the New York
Stock Exchange on December 28, 2007 (the last business day of fiscal
2007).
The recent volatility in the global financial markets
could negatively impact the fair value of our debt obligations.
The information under the heading Inflation in Item
2, Managements Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
Item
4.
Controls and Procedures
Evaluation of Disclosure Controls
and Procedures.
As required by Rule 13a-15(b) under
the Securities Exchange Act of 1934, as amended, our management, including our
chief executive officer and our chief financial officer, conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report. As
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
disclosure controls and procedures are controls and other procedures that we
use that are designed to ensure that information required to be disclosed by us
in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and our
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
Based on that evaluation, our chief executive officer
and our chief financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report.
38
Table of Contents
Changes in Internal Control Over
Financial Reporting
. As required by Rule 13a-15(d) under
the Exchange Act, our management, including our chief executive officer and our
chief financial officer, also conducted an evaluation of our internal control
over financial reporting to determine whether any change occurred during the
quarter covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. Based
on that evaluation, our chief executive officer and our chief financial officer
concluded that there has been no change during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls.
Our
companys management, including the chief executive officer and chief financial
officer, does not expect that our disclosure controls or our internal control
over financial reporting will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control systems objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within our company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
39
Table of Contents
PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
We are from time to time
involved in various claims and legal actions arising in the ordinary course of
business, including proceedings involving product liability claims, workers
compensation and other employee claims, and tort and other general liability
claims, as well as trademark, copyright, patent infringement and related claims
and legal actions. In the opinion of our management, the ultimate disposition
of any currently pending claims or actions will not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity.
Item 1A. Risk Factors
We do not believe there
have been any material changes in our risk factors as previously disclosed in
our 2007 Annual Report on Form 10-K.
Item 2.
Unregistered Sales of Equity Securities and Use
of Proceeds
Not applicable.
Item 3.
Defaults Upon Senior Securities
Not applicable.
Item 4.
Submission of Matters to a Vote of Security
Holders
Not applicable.
Item 5.
Other Information
Not applicable.
Item 6. Exhibits
EXHIBIT
NO.
|
|
DESCRIPTION
|
|
|
|
31.1
|
|
Certification pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 of the Chief Executive Officer.
|
31.2
|
|
Certification pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 of the Chief Financial Officer.
|
32.1
|
|
Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of the Chief Executive Officer and Chief
Financial Officer.
|
40
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Dated: October 30, 2008
|
B&G FOODS, INC.
|
|
|
|
|
|
|
|
By:
|
/s/ Robert C. Cantwell
|
|
|
Robert C. Cantwell
|
|
|
Executive Vice President and Chief
Financial
Officer (Principal Financial and Accounting
Officer and Authorized Officer)
|
41
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