Table of
Contents
As filed with the
Securities and Exchange Commission on October 27, 2009
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
For the quarterly period ended October 3, 2009
or
o
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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 has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
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.
Large accelerated filer
o
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|
Accelerated filer
x
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|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
|
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 October 3,
2009, the registrant had 47,367,292 shares of Class A common stock, par
value $0.01 per share, issued and outstanding, 18,199,058 of which were held in
the form of Enhanced Income Securities (EISs) and 29,168,234 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 October 3,
2009, the registrant had no shares of Class B common stock, par value
$0.01 per share, issued or outstanding.
Table of Contents
PART I
FINANCIAL
INFORMATION
Item 1. Financial Statements (Unaudited)
B&G Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
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October 3, 2009
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January 3, 2009
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Assets
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Current assets:
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Cash and cash equivalents
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$
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117,628
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$
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32,559
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Trade accounts receivable, less allowance for
doubtful accounts and discounts of $626 in 2009 and $745 in 2008
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33,879
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36,578
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Inventories
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103,554
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88,899
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Prepaid expenses
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2,084
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2,475
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Income tax receivable
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2,022
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2,221
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Deferred income taxes
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1,176
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1,110
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Total current assets
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260,343
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163,842
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Property, plant and equipment, net of accumulated
depreciation of $69,937 and $64,510
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53,062
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51,059
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Goodwill
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253,353
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253,353
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Trademarks
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227,220
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227,220
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Customer relationship intangibles, net
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111,480
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116,318
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Net deferred debt financing costs and other assets
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11,644
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13,298
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Total assets
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$
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917,102
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$
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825,090
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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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31,036
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$
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27,286
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Accrued expenses
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14,760
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16,023
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Dividends payable
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8,052
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6,162
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Long-term debt, current portion
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90,000
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Total current liabilities
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143,848
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49,471
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Long-term debt, less current portion
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439,541
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535,800
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Other liabilities
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22,790
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23,671
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Deferred income taxes
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81,560
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71,500
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Total liabilities
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687,739
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680,442
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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; 47,367,292 and 36,246,657 shares issued
and outstanding as of October 3, 2009 and January 3, 2009
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474
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362
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Class B common stock, $0.01 par value per
share. Authorized 25,000,000 shares; no shares issued or outstanding
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Additional paid-in capital
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238,287
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171,123
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Accumulated other comprehensive loss
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(11,022
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)
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(12,358
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)
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Retained earnings (accumulated deficit)
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1,624
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(14,479
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)
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Total stockholders equity
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229,363
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144,648
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Total liabilities and stockholders equity
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$
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917,102
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$
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825,090
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See Notes to
Consolidated Financial Statements.
1
Table of Contents
B&G Foods, Inc. and Subsidiaries
Consolidated Statements of Operations
(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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October 3,
2009
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September 27,
2008
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October 3,
2009
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September 27,
2008
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Net sales
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$
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123,871
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$
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116,515
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$
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365,408
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$
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352,041
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Cost of goods sold
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87,647
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85,778
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253,569
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252,816
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Gross profit
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36,224
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30,737
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111,839
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99,225
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Operating expenses:
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Sales, marketing and distribution expenses
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10,659
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10,813
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32,575
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34,563
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General and administrative expenses
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2,936
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2,067
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7,753
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5,307
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Amortization expensecustomer relationships
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1,613
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1,613
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4,838
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4,838
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Operating income
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21,016
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16,244
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66,673
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54,517
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Other expenses:
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Interest expense, net
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13,570
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11,562
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39,996
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37,041
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Loss on extinguishment of
debt
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674
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674
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Income before income tax expense
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6,772
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4,682
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26,003
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17,476
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Income tax expense
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2,611
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1,792
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9,900
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6,647
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Net income
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$
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4,161
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$
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2,890
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16,103
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10,829
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Basic and diluted weighted average shares
outstanding:
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Class A common stock
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37,790
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36,797
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36,644
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36,787
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Basic and diluted earnings per share:
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Class A common stock
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$
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0.11
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$
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0.08
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$
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0.44
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$
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0.29
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Cash dividends declared per share of Class A
common stock
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$
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0.17
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$
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0.21
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$
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0.51
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$
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0.64
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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
(In
thousands)
(Unaudited)
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Thirty-nine Weeks Ended
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October 3,
2009
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September 27,
2008
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Cash flows from operating
activities:
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Net income
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$
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16,103
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$
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10,829
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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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10,847
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11,420
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Amortization of deferred
debt financing costs
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2,222
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2,376
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Deferred income taxes
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9,295
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6,087
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Unrealized gain on interest
rate swap
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(108
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)
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(1,514
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)
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Loss on extinguishment of
debt
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674
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Reclassification to
interest expense, net for interest rate swap
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1,270
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76
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Share-based compensation
expense
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3,273
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510
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Changes in assets and
liabilities:
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Trade accounts receivable
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2,699
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3,948
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Inventories
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(14,655
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)
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(2,507
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)
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Prepaid expenses
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391
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382
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Income tax receivable
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199
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(28
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)
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Other assets
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(198
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)
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191
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Trade accounts payable
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3,750
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(2,081
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)
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Accrued expenses
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(1,260
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)
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(1,550
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)
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Other liabilities
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(201
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)
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387
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Net cash provided by
operating activities
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34,301
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28,526
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Cash flows from investing
activities:
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Capital expenditures
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(7,943
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)
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(9,832
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)
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Net cash used in investing
activities
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(7,943
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)
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(9,832
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)
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Cash flows from financing
activities:
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Dividends paid
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(18,388
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)
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(23,395
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)
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Repurchase of senior
subordinated notes
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(6,635
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)
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Payment of debt financing
costs
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(668
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)
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Proceeds from issuance of
Class A common stock, net
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86,612
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Repurchase of Class A
common stock
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(2,334
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)
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|
Net cash provided by (used
in) financing activities
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58,587
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(23,395
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)
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Effect of exchange rate
fluctuations on cash and cash equivalents
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124
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|
(6
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)
|
Net increase (decrease) in
cash and cash equivalents
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85,069
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(4,707
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)
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Cash and cash equivalents
at beginning of period
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32,559
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|
36,606
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|
Cash and cash equivalents
at end of period
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$
|
117,628
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$
|
31,899
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|
|
|
|
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Supplemental
disclosures of cash flow information:
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Cash interest payments
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|
$
|
41,864
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$
|
31,336
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|
Cash income tax payments
|
|
$
|
1,602
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|
$
|
708
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|
Cash income tax refunds
|
|
$
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(1,179
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)
|
$
|
(96
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)
|
Non-cash transactions:
|
|
|
|
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|
Dividends declared and not
yet paid
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|
$
|
8,052
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|
$
|
7,801
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|
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 via 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.
(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 2, 2010
(fiscal 2009) contains 52 weeks and our fiscal year ended January 3, 2009
(fiscal 2008) contained 53 weeks. Each
quarter of fiscal 2009 and 2008 contains 13 weeks, except the fourth quarter of
2008 which contained 14 weeks.
Basis of
Presentation
The
accompanying consolidated interim financial statements for the thirteen and
thirty-nine week periods ended October 3, 2009 (third quarter of 2009 and
first three quarters of 2009) and September 27, 2008 (third quarter of
2008 and first three quarters of 2008) 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
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 October 3, 2009,
the results of our operations for the third quarter and first three quarters of
2009 and 2008, and cash flows for the first three quarters of 2009 and
2008. Our results of operations for the
third quarter and first three quarters of 2009 are not necessarily indicative
of the results to be expected for the full year. We have evaluated subsequent events for
disclosure through October 27, 2009, the date of issuance of the
accompanying unaudited consolidated financial statements. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes for fiscal 2008 included in our Annual Report on
Form 10-K for fiscal 2008 filed with the SEC on March 5, 2009.
4
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(2)
Summary
of Significant Accounting Policies (Continued)
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 enhanced income securities (EISs); and the
accounting for share-based compensation expense. Actual results could differ significantly
from these estimates and assumptions.
Management evaluates its
estimates and assumptions on an ongoing basis using historical experience and
other factors, including the current economic environment, that management
believe to be reasonable under the circumstances. We adjust such estimates and assumptions when
facts and circumstances dictate. Recent
volatility in the credit, equity and foreign currency markets has increased the
uncertainty inherent in such estimates and assumptions.
Enhanced Income
Securities
Each of our EISs represents one share of our Class A
common stock and $7.15 principal amount of our senior subordinated notes. 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 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 October 3, 2009, we had 47,367,292 shares of Class A
common stock issued and outstanding, 18,199,058 of which were held in the form
of EISs and 29,168,234 of which were held separate from 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. See note 5 for
a discussion of the automatic separation of EISs that is scheduled to occur on October 30,
2009 in connection with the partial redemption of the senior subordinated notes
on November 2, 2009. Following the
automatic separation of the EISs, holders of shares of Class A common
stock and senior subordinated notes will no longer be able to combine such
securities to form EISs.
Recently Issued
Accounting Standards
In
June 2009,
the
Financial
Accounting
Standards
Board (FASB) established the FASB
Accounting Standards Codification
TM
(Codification) as the single source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative U.S. GAAP for SEC
registrants. The Codification, which is
effective as of our third quarter of fiscal 2009, supersedes all existing
non-SEC accounting and reporting standards.
All other nongrandfathered non-SEC accounting literature not included in
the Codification will become nonauthoritative.
The adoption of this standard did not have any impact on our results of
operations or financial position.
In September 2006, the
FASB issued a new standard relating to fair value measurements, which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.
This standard was effective as of the beginning of our fiscal 2008, with
the exception of certain provisions deferred until the beginning of our fiscal
2009. In February 2008, the FASB
delayed the effective date of the standard 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 the beginning of our fiscal
2009. We adopted the standard effective
at the beginning of our fiscal 2008 for financial assets and financial
liabilities, which did not have a material impact on our results of operations
or financial position. We adopted the
standard effective at the beginning of our fiscal 2009 for non-financial
5
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(2)
Summary
of Significant Accounting Policies (Continued)
assets
and non-financial liabilities, which did not have a material impact on our
results of operations or financial position.
In December 2007, the
FASB issued new standards relating to business combinations and noncontrolling
interests in consolidated financial statements.
The standard relating to business combinations 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. The noncontrolling interest
standard 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.
These standards were effective as of the beginning of our fiscal
2009. The business combinations standard
will be applied prospectively, and any effects will depend
on future acquisitions. The standard
relating to noncontrolling interests in consolidated financial statements
requires retroactive adoption. We
currently do not have any noncontrolling interests in subsidiaries.
In March 2008, the FASB
issued a standard that amended existing standards about derivative instruments
and hedging activities to require enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for and (c) how derivative
instruments and related hedged items affect an entitys financial position,
financial performance, and cash flows.
The amendments were effective as of the beginning of our fiscal
2009. Since the amendments require
enhanced disclosures, without a change to existing standards relative to
measurement and recognition, our adoption of the standard did not have any
effect on our results of operations or financial position. See notes 6 and 7 for the required
disclosures about our derivative instruments and hedging activities.
In April 2008, the FASB
issued a standard relating to how companies should determine the useful life of
intangible assets. The standard 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. We
adopted this standard effective at the beginning of our fiscal 2009, which did
not have a material impact on our results of operations or financial position.
In December 2008, the
FASB issued a standard relating to an employers disclosure about
postretirement benefit plan assets. The
standard requires additional disclosures about plan assets for defined benefit
pension and other postretirement benefit plans.
The standard will be effective as of the end of our fiscal 2009. Since this requires enhanced disclosures,
without a change to existing standards relative to measurement and recognition,
our adoption of the standard will not have a material impact on our results of
operations or financial position.
In May 2009, the FASB
established a general standard of accounting for, and requiring disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued.
The standard was effective beginning with our second quarter of fiscal
2009. The adoption of the standard did
not have a material effect on our on our results of operations or financial
position.
6
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(3)
Inventories
Inventories consist of the following, as of the dates
indicated (dollars in thousands):
|
|
October 3, 2009
|
|
January 3, 2009
|
|
Raw materials and
packaging
|
|
$
|
34,862
|
|
$
|
19,402
|
|
Work in process
|
|
1,290
|
|
2,658
|
|
Finished goods
|
|
67,402
|
|
66,839
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,554
|
|
$
|
88,899
|
|
(4)
Goodwill, Trademarks and
Customer Relationship Intangibles
There
has been no change in the carrying amount of goodwill for the period from January 3,
2009 to October 3, 2009.
There
has been no change in the carrying amount of trademarks (indefinite-lived
intangibles) for the period from January 3, 2009 to October 3, 2009.
The
following table reconciles the changes in the carrying amount of customer
relationship intangibles for the period from January 3, 2009 to October 3,
2009 (dollars in thousands):
|
|
Customer
Relationship
Intangibles
|
|
Less:
Accumulated
Amortization
|
|
Total
|
|
Balance at January 3,
2009
|
|
$
|
129,000
|
|
$
|
(12,682
|
)
|
$
|
116,318
|
|
Amortization expense
|
|
|
|
(4,838
|
)
|
(4,838
|
)
|
Balance at October 3,
2009
|
|
$
|
129,000
|
|
$
|
(17,520
|
)
|
$
|
111,480
|
|
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. Amortization
expense associated with customer relationship intangibles for each of the third
quarter and first three quarters of 2009 and 2008 was $1.6 million and $4.8
million, respectively, 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 2009, 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):
|
|
October 3, 2009
|
|
January 3, 2009
|
|
Senior secured credit
facility:
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
|
|
$
|
|
|
Term loan
|
|
130,000
|
|
130,000
|
|
|
|
|
|
|
|
12% Senior Subordinated
Notes due October 30, 2016
|
|
159,541
|
|
165,800
|
|
8% Senior Notes due
October 1, 2011
|
|
240,000
|
|
240,000
|
|
Total long-term debt
|
|
529,541
|
|
535,800
|
|
|
|
|
|
|
|
Less current portion
|
|
90,000
|
|
|
|
Long-term debt, less
current portion
|
|
$
|
439,541
|
|
$
|
535,800
|
|
As of October 3, 2009,
the aggregate maturities of long-term debt are as follows (dollars in
thousands):
Years ending December:
|
|
|
|
2009
|
|
$
|
90,000
|
|
2010
|
|
|
|
2011
|
|
240,000
|
|
2012
|
|
|
|
2013
|
|
130,000
|
|
Thereafter
|
|
69,541
|
|
Total
|
|
$
|
529,541
|
|
Senior Secured Credit
Facility
. During the third quarter of 2009, Credit Suisse
replaced Lehman Commercial Paper Inc. (Lehman CPI) as the administrative agent
under our credit facility. Also during
the third quarter of 2009, the credit facility was amended to, among other
things, extend the maturity date for the undrawn revolving credit facility from
January 2011 to February 2013.
As amended, our $25.0 million revolving credit facility and our
$130.0 million of term loan borrowings mature in February 2013, provided,
however, that if we do not repay, redeem or refinance our senior notes prior to
April 1, 2011, the revolving credit facility and the outstanding term loan
borrowings will become immediately due and payable on April 1, 2011. The
following discussion of the credit facility describes the credit facility as
amended through the date of issuance of the accompanying unaudited consolidated
financial statements.
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 of 2.00%, and LIBOR plus an applicable margin of 3.00%. 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
8
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(5)
Long-term Debt (Continued)
is
secured by substantially all of our and our domestic subsidiaries assets
except our and our domestic subsidiaries real property. The credit facility provides for mandatory
prepayment upon certain asset dispositions and 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 October 3, 2009, 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 CPI filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. Following that date, we no longer
believed that Lehman CPI would honor its $3.1 million funding commitment under
the revolving credit facility if we were to make a funding request. Therefore, when Lehman CPIs commitment was
assumed by other lenders during the third quarter of 2009, the effective
available borrowing capacity under our revolving credit facility, net of
outstanding letters of credit increased by $3.1 million. At October 3, 2009, the available
borrowing capacity under our revolving credit facility, net of outstanding
letters of credit of $0.5 million, was $24.5 million. 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 counterparty to the swap is
Lehman Special Financing Inc. (Lehman SFI) and the counterpartys guarantor is
Lehman Brothers Holdings Inc. On September 15,
2008, (Lehman) filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. 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. 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 in September 2008 that the
interest rate swap was no longer an effective hedge. Accordingly, subsequent to that
determination, we record changes in the swaps fair value in current earnings
in net interest expense in our consolidated statements of operations. We obtain third-party verification of fair
value at the end of each reporting period.
As of October 3, 2009, the fair value of our interest rate swap was
an unrealized loss of $13.0 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. Net interest
expense in the third quarter and first three quarters of 2009 includes a charge
of $0.6 million and a benefit of $0.1 million, respectively, relating to the
unrealized gain (loss) on our interest rate swap and a reclassification of $0.4
million and $1.3 million, respectively, of the amount recorded in accumulated
other comprehensive income (loss) related to the swap. During the remainder of fiscal 2009, we
expect to reclassify to net interest expense $0.4 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, which is our only subsidiary that
is not a guarantor of our senior subordinated notes and
9
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(5)
Long-term Debt
(Continued)
senior notes, is a minor 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 Financing 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
debt financing costs, which will be amortized over their respective terms. In connection with the issuance of term loan
borrowings of $25.0 million in January 2006, we capitalized approximately
$0.4 million of additional debt 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 financing costs,
which will be amortized over the term of the loan. During the second quarter of 2007 we
wrote-off and expensed $1.8 million of deferred debt financing costs in
connection with our May 2007 prepayment of $100.0 million of term loan
borrowings. During the third quarter of
2009, we wrote-off and expensed $0.3 million of deferred debt financing costs
relating to the repurchase during the quarter of $6.3 million principal amount
of senior subordinated notes. During the
third quarter of 2009, we also capitalized approximately $0.7 million of
additional debt financing costs in connection with an amendment to our credit
facility. As of October 3, 2009 and
January 3, 2009 we had net deferred debt financing costs of $11.3 million
and $13.2 million, respectively.
At October 3, 2009 and January 3, 2009
accrued interest of $4.5 million and $9.4 million, respectively, is included in
accrued expenses in the accompanying consolidated balance sheets.
Repurchase and Partial Redemption of Senior
Subordinated Notes.
During the
third quarter of 2009, we repurchased $6.3 million principal amount of senior
subordinated notes in a privately negotiated transaction, which resulted in a
pre-tax charge in our third quarter of $0.7 million, representing a cash charge
of $0.4 million relating to the repurchase premium and a non-cash charge of
$0.3 million relating to the write-off of unamortized deferred debt financing
costs.
Also
during the third quarter of 2009, we
issued a notice of partial redemption for $90.0 million principal amount of our
senior subordinated notes at a cash redemption price of 106% of the principal
amount of the notes being redeemed, plus accrued and unpaid interest on such
amount, to, but excluding, the redemption date of November 2, 2009. Upon completion of the redemption, $69.5
million principal amount of the senior subordinated notes will remain outstanding. As a result of the foregoing, we have
reclassified $90.0 million principal amount of our senior subordinated notes
from long-term debt to current portion of long-term debt in the accompanying
unaudited consolidated financial statements.
Pursuant to the terms of the indenture governing the
senior subordinated notes, the partial redemption of the senior subordinated
notes will result in an automatic separation of all of the EISs into the
component shares of Class A common stock and senior subordinated
notes. The automatic separation is
expected to occur on October 30, 2009.
The partial redemption of the senior subordinated
notes is expected to result in a pre-tax charge in our fourth quarter of fiscal
2009 of $9.5 million, which represents a cash charge of $5.4 million relating
to the call premium and a non-cash charge of $4.1 million relating to the
write-off of unamortized deferred debt financing costs.
10
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(6)
Fair Value Measurements
The FASB standard relating to fair value measurements
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 the standard 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
standards 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 October 3, 2009 and January 3,
2009, which is included in other liabilities in our consolidated balance sheet
(dollars in thousands):
|
|
|
|
Fair Value
Measurements
|
|
|
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
October 3, 2009
|
|
Interest rate swap
|
|
$
|
|
|
$
|
13,009
|
|
$
|
|
|
January 3, 2009
|
|
Interest rate swap
|
|
$
|
|
|
$
|
13,117
|
|
$
|
|
|
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 term loan borrowings, senior notes and senior subordinated notes
as of October 3, 2009 and January 3, 2009 are as follows (dollars in
thousands):
|
|
October 3,
2009
|
|
January 3,
2009
|
|
|
|
Carrying
Value
|
|
Fair
Value(1)(2)
|
|
Carrying
Value
|
|
Fair
Value(1)(3)
|
|
Senior Secured Term Loan
due February 26, 2013
|
|
$
|
130,000
|
|
$
|
128,375
|
|
$
|
130,000
|
|
$
|
107,900
|
|
8% Senior Notes due
October 1, 2011
|
|
240,000
|
|
241,800
|
|
240,000
|
|
207,600
|
|
12% Senior Subordinated
Notes due October 30, 2016:
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
123,864
|
|
127,502
|
|
124,793
|
|
90,235
|
|
held separately
|
|
35,677
|
|
36,725
|
|
41,007
|
|
29,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Fair values are estimated based on quoted market prices, except as
otherwise noted in footnotes (2) and (3) below.
11
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(6)
Fair
Value Measurements (Continued)
(2)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at October 3, 2009 was $7.36, based
upon the $7.84 per share closing price of our separately traded Class A
common stock and the $15.20 per EIS closing price of our EISs on the New York
Stock Exchange on October 2, 2009 (the last business day of the third
quarter of 2009). 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 January 3, 2009 was $5.17, based
upon the $5.49 per share closing price of our separately traded Class A
common stock and the $10.66 per EIS closing price of our EISs on the New York
Stock Exchange on January 2, 2009 (the last business day of fiscal 2008).
Our term loan borrowings are subject to an interest
rate swap discussed in notes 5 and 7.
(7)
Disclosures about
Derivative Instruments and Hedging Activities
We recognize all derivative instruments either as an
asset or a liability in the balance sheet and to measure such instruments at
fair value. We do not engage in
derivative instruments for trading purposes.
The following table presents the fair value and the
location within our consolidated balance sheet of all assets and liabilities
associated with derivative instruments not designated as hedging instruments
(dollars in thousands):
Derivatives not
|
|
|
|
Asset
|
|
Liability
|
|
designated as hedging
|
|
|
|
Derivatives
|
|
Derivatives
|
|
instruments under
FASB standards
|
|
Balance Sheet
Location
|
|
Fair Value at
October 3, 2009
|
|
Fair Value at
October 3, 2009
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Other liabilities
|
|
|
|
$
|
13,009
|
|
|
|
|
|
|
|
|
|
|
See notes 5
and 6 for additional information regarding our interest rate swap. We do not currently have any derivatives
designated as hedging instruments under FASB standards.
The following tables present the impact of derivative
instruments and their location within our consolidated statement of operations
(dollars in thousands):
Derivatives not
|
|
Amount of (Gain)
Loss Recognized in
Income on Derivatives
|
|
Amount of (Gain) Loss
Recognized in Income
on Derivatives
|
|
Location of (Gain)
|
|
designated as hedging
instruments under
FASB standards
|
|
Thirteen Weeks
Ended
October 3, 2009
|
|
Thirty-nine Weeks
Ended
October 3, 2009
|
|
Loss Recognized in
Income on
Derivatives
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
1,055
|
*
|
$
|
1,162
|
*
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
*
The amount included in net interest expense
for the third quarter and first three quarters of 2009 consists of $631
unrealized loss and $108 unrealized gain on our interest rate swap, and $424
and $1,270 (pre-tax) reclassified to net interest expense from accumulated
other comprehensive income, respectively.
12
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Continued)
(Unaudited)
(8)
Stockholders Equity
Sale of Class A Common Stock.
In September 2009, we completed an underwritten public
offering of 11,500,000 shares of our Class A common stock as a separately
traded security at $8.00 per share. The
proceeds of the offering were $86.6 million, after deducting underwriting
discounts and commissions and other transaction expenses. The offering was made by means of a
prospectus and the related prospectus supplement included as part of an
effective shelf registration statement previously filed with the SEC. The net proceeds of the offering, together
with cash on hand, will be used to fund a partial redemption of $90.0 million
principal amount of our senior subordinated notes. See note 5 for a discussion of the partial
redemption.
(9)
Comprehensive
Income
Comprehensive
income includes net income, foreign currency translation adjustments relating
to assets and liabilities located in our Canadian subsidiary, changes in our
pension benefits, net of tax and the change in the fair value of an interest
rate swap during the period it was designated as an effective cash flow hedge,
net of tax. The amount recorded in
accumulated other comprehensive income (loss) related to the swap will be
reclassified to net interest expense over the remaining life of the term loan
as we make interest payments.
The
components of comprehensive income are as follows (dollars in thousands):
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,161
|
|
$
|
2,890
|
|
$
|
16,103
|
|
$
|
10,829
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
270
|
|
(21
|
)
|
193
|
|
(6
|
)
|
Amortization of unrecognized prior service cost and
pension deferrals, net of tax
|
|
134
|
|
6
|
|
355
|
|
16
|
|
Cash flow hedge transaction, net of tax
|
|
|
|
(1,340
|
)
|
|
|
(1,023
|
)
|
Reclassification to interest expense, for interest
rate swap, net of tax
|
|
263
|
|
|
|
788
|
|
|
|
Comprehensive income
|
|
$
|
4,828
|
|
$
|
1,535
|
|
$
|
17,439
|
|
$
|
9,816
|
|
(10)
Pension Benefits
Net periodic costs for the third quarter and first
three quarters of 2009 and 2008 include the following components (dollars in
thousands):
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service costbenefits earned during the period
|
|
$
|
411
|
|
$
|
350
|
|
$
|
1,249
|
|
$
|
1,010
|
|
Interest cost on projected benefit obligation
|
|
461
|
|
389
|
|
1,323
|
|
1,109
|
|
Expected return on plan assets
|
|
(355
|
)
|
(463
|
)
|
(1,107
|
)
|
(1,369
|
)
|
Amortization of unrecognized prior service cost
|
|
11
|
|
11
|
|
33
|
|
33
|
|
Amortization of loss
|
|
205
|
|
(3
|
)
|
539
|
|
(9
|
)
|
Net pension cost
|
|
$
|
733
|
|
$
|
284
|
|
$
|
2,037
|
|
$
|
774
|
|
13
Table of
Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(10)
Pension Benefits
(Continued)
During
the first three quarters of 2009, we made approximately $2.8 million in
contributions to our defined benefit pension plans, $0.7 million of which were
made during the third quarter. We do not
anticipate electing to make contributions to our defined benefit pension plans
during the remainder of fiscal 2009.
(11)
Commitments and Contingencies
Environmental.
We are subject to environmental laws and regulations
in the normal course of business. We did
not make any material expenditures during the third quarter and first three
quarters of 2009 or in fiscal 2008 in order to comply with environmental laws
and regulations. 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.
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.
Collective Bargaining Agreements
.
Approximately 339 of our 724 employees, or 46.8%, as of October 3,
2009, were covered by collective bargaining agreements. None of our collective bargaining agreements
is scheduled to expire within one year.
Severance and Change of Control Agreements.
We have employment
agreements with each of our six 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 and, in the case of a change of control,
accelerated vesting under compensation plans and potential excise tax liability
and gross up payments.
(12)
Earnings per Share
We
currently have only one class of common stock issued and outstanding,
designated as Class A common stock.
During the periods presented there were no shares of Class B common
stock issued or outstanding. Basic
earnings per share for the Class A common stock is calculated by dividing
net income by the weighted average number of shares of Class A common
stock outstanding. Diluted earnings per
share for each of the periods presented are equal to basic earnings per share
because no potentially dilutive securities were outstanding during either
period.
14
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(13)
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. Our top ten customers accounted for
approximately 50.1%
and 46.3% of consolidated net sales
for the first three quarters of 2009 and 2008, respectively. Our top ten customers accounted for
approximately 53.2% and 56.1% of our receivables as of October 3, 2009 and
January 3, 2009, respectively.
Other than Wal-Mart, which accounted for 15.9% and 13.4% of our
consolidated net sales for the first three quarters of 2009 and 2008,
respectively, no single customer accounted for more than 10.0% of our
consolidated net sales for the first three quarters of 2009 or 2008. Other than C&S Wholesale Grocery and
Wal-Mart, which accounted for 13.8% and 11.8% of our consolidated receivables,
respectively, as of October 3, 2009, no single customer accounted for more
than 10.0% of our consolidated receivables as of the end of the first three
quarters of 2009. Other than C&S
Wholesale Grocery and Wal-Mart, which accounted for 17.7% and 13.2% of our
consolidated receivables, respectively, as of January 3, 2009, no single
customer accounted for more than 10.0% of our consolidated receivables as of
the end of fiscal 2008.
During
the third quarter and first three quarters of 2009 and 2008, our sales to
foreign countries represented less than 1.0% of net sales. Our foreign sales are primarily to customers
in Canada.
(14)
Share-Based Compensation
The
recognition of compensation expense for our performance share long-term
incentive awards (LTIAs) is initially based on the probable outcome of the
applicable 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
performance goal defined in the award agreements 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 2009, we recognized $1.5 million
and $3.1 million, respectively, of compensation expense related to performance
share LTIAs for the 2008 to 2009, 2008 to 2010 and 2009 to 2011 performance
periods, which is reflected in general and administrative and sales, marketing
and distribution expenses in our consolidated statements of operations. As of October 3, 2009, there was $3.2
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 2009:
|
|
Target Number
of Performance Shares
(1)
|
|
Estimated
Number
of Performance Shares
(1)
|
|
Weighted
Average
Grant Date Fair
Value (per share)
(2)
|
|
|
|
|
|
|
|
|
|
Beginning of year(3)
|
|
273,814
|
|
709,875
|
|
$
|
7.25
|
|
Granted(4)
|
|
392,824
|
|
1,045,611
|
|
$
|
1.88
|
|
Vested
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
End of first three quarters of 2009
|
|
666,638
|
|
1,755,486
|
|
$
|
4.09
|
|
15
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(14)
Share-Based Compensation
(Continued)
(1)
The target number of unvested
performance shares is based on the participants earning their target number of
performance shares at 100%. The ultimate
award, which we determine at the end of the applicable performance period, can
range from zero to 300% of the target number of performance shares. The estimated number of unvested performance
shares is based upon the quarterly evaluation we completed at the end of the
third quarter of 2009 of our companys performance goals against the
performance goals defined in the applicable award agreements.
(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 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.
(3)
Represents unvested 2008 to
2009 and 2008 to 2010 performance share LTIAs granted in fiscal 2008.
(4)
Represents unvested 2009 to
2011 performance share LTIAs granted in the first three quarters of 2009.
Non-Employee Director Stock Grants.
Each of our non-employee directors receives an annual
equity grant of approximately $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 1, 2009, 24,135 shares of Class A common stock in the
aggregate were issued to the non-employee directors based upon the closing
price of our Class A common stock on May 29, 2009 (the business day
immediately prior to the date of grant) of $7.25 per share. Share-based compensation expense of $0.2
million relating to the non-employee director grants is reflected in general
and administrative expenses in our consolidated statements of operations for
the first three quarters of 2009.
(15)
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.
On May 5, 2009, the board of directors authorized an increase in
the authorization to $25.0 million and extended the authorization through May 4,
2010. 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 or aggregate dollar amount of shares that will be repurchased under
the stock and debt repurchase program.
Likewise, there can be no assurance as to the principal amount of senior
notes, if any, that will be repurchased.
We may discontinue the program at any time. Any shares repurchased pursuant to the stock
repurchase program will be retired. Likewise,
any senior notes repurchased will be cancelled.
During the first two quarters of 2009 we repurchased
and retired 403,500 shares of Class A common stock at an average cost per
share (excluding fees and commissions) of $5.76, or $2.3 million in the
aggregate. We did not repurchase any
shares of Class A common stock during the third quarter of 2009. During the third quarter of 2009, we
repurchased $6.3 million principal amount of our senior subordinated notes for
$6.6 million plus accrued and unpaid interest.
As of October 3, 2009, we had $13.5 million available for future
repurchases of Class A common stock and/or senior notes under the stock
and debt repurchase plan.
16
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 financial statements and related
notes for the thirteen and thirty-nine weeks ended October 3, 2009 (third
quarter of 2009 and first three quarters of 2009) included elsewhere in this
report and the audited consolidated financial statements and related notes for
the fiscal year ended January 3, 2009 (fiscal 2008) included in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission
(SEC) on March 5, 2009 (which we refer to as our 2008 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 innovative new products and
delivering them to market quickly, leveraging our 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 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. Although our commodity prices for wheat were
lower in the first three quarters of 2009 than those incurred during the first
three quarters of 2008, our commodity prices for beans and packaging were
higher than those incurred during the first three quarters of 2008.
We
purchase maple syrup primarily from Canada and Vermont. In 2008, maple syrup production in Canada,
which represents the great majority of global production, was significantly
below industry needs due to growing global demand and one of the worst crop
yields in nearly 40 years. As a result,
the price we paid for maple syrup increased significantly and we were faced
with a shortfall in supply as compared to our needs, which had a negative
impact on our sales volume of maple syrup products during fiscal 2008 that
continued through the first two quarters of 2009. The 2009 maple syrup crop yield is more consistent
with historic levels. This together with
the granting of additional production quotas by the Federation of Québec Maple
Syrup Producers has brought global supply more in line with global demand and
is expected to reduce the price we will pay for maple syrup during the
remainder of 2009 as compared to 2008.
In addition, unlike 2008, we have been able to purchase sufficient maple
syrup in 2009 to meet our needs.
The
cost of labor, manufacturing, energy, fuel, packaging materials and other costs
related to the production and distribution of our food products have also risen
significantly in recent years. We
attempt to
17
Table of Contents
manage these risks by entering into short-term supply
contracts and advance commodities purchase agreements from time to time,
implementing cost saving measures and by raising sales prices. To date, our cost saving measures and sales
price increases have offset increases to our raw material, ingredient and
packaging costs, although in certain cases on a lagging basis. To the extent we are unable to offset present
and future cost increases, our operating results will 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.
Fluctuations
in Currency Exchange Rates:
We purchase
the majority of our maple syrup requirements from suppliers located in Québec,
Canada. Any weakening of the U.S. dollar
against the Canadian dollar, could significantly increase our costs relating to
the production of our maple syrup products to the extent that we have not
purchased Canadian dollars in advance of any such weakening of the U.S. dollar.
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 and to
favorably manage currency fluctuations.
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; and the
accounting for share-based compensation expense. Actual results could differ significantly
from these estimates and assumptions.
In our
2008 Annual Report on Form 10-K, we identified the critical accounting
policies which affect our more significant estimates and assumptions used in
preparing our consolidated financial statements. There have been no significant
changes to these policies since January 3, 2009.
18
Table of Contents
Results of Operations
The
following table sets forth the percentages of net sales represented by selected
items for the third quarter of 2009 and 2008 and first three quarters of 2009
and 2008 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
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of goods
sold
|
|
70.8
|
%
|
73.6
|
%
|
69.4
|
%
|
71.8
|
%
|
Gross profit
|
|
29.2
|
%
|
26.4
|
%
|
30.6
|
%
|
28.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing
and distribution expenses
|
|
8.6
|
%
|
9.3
|
%
|
8.9
|
%
|
9.8
|
%
|
General and
administrative expenses
|
|
2.3
|
%
|
1.8
|
%
|
2.2
|
%
|
1.5
|
%
|
Amortization
expensecustomer relationships
|
|
1.3
|
%
|
1.4
|
%
|
1.3
|
%
|
1.4
|
%
|
Operating income
|
|
17.0
|
%
|
13.9
|
%
|
18.2
|
%
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
11.0
|
%
|
9.9
|
%
|
10.9
|
%
|
10.5
|
%
|
Loss on
extinguishment of debt
|
|
0.5
|
%
|
|
|
0.2
|
%
|
|
|
Income before
income tax expense
|
|
5.5
|
%
|
4.0
|
%
|
7.1
|
%
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
|
2.1
|
%
|
1.5
|
%
|
2.7
|
%
|
1.9
|
%
|
Net income
|
|
3.4
|
%
|
2.5
|
%
|
4.4
|
%
|
3.1
|
%
|
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.
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.
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 financing costs, net of interest income and
subsequent to our determination in September 2008, that our interest rate
swap is no longer an effective hedge as defined by FASB standards, unrealized
gains (losses) on the interest rate swap and the reclassification of amounts
recorded in accumulated other comprehensive income (loss) related to the swap.
19
Table of Contents
Loss on Extinguishment of Debt.
Loss on extinguishment of debt for the third quarter and first three quarters
of 2009 includes costs relating to our repurchase of senior subordinated notes,
including the repurchase premium and the write-off of deferred debt financing
costs.
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. We define EBITDA as net income before net
interest expense (as defined above), income taxes, depreciation and
amortization and loss on extinguishment of debt (as defined above). Management
believes that it is useful to eliminate net interest expense, income taxes,
depreciation and amortization and loss on extinguishment of debt 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, loss on
extinguishment of debt 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.
A
reconciliation of EBITDA to net income and to net cash provided by operating
activities for the third quarter and first three quarters of 2009 and 2008
along with the components of EBITDA follows:
20
Table of Contents
|
|
Thirteen
Weeks Ended
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
|
|
(Dollars
in thousands)
|
|
Net income
|
|
$
|
4,161
|
|
$
|
2,890
|
|
$
|
16,103
|
|
$
|
10,829
|
|
Income tax expense
|
|
2,611
|
|
1,792
|
|
9,900
|
|
6,647
|
|
Interest expense, net
|
|
13,570
|
|
11,562
|
|
39,996
|
|
37,041
|
|
Depreciation and amortization
|
|
3,677
|
|
3,887
|
|
10,847
|
|
11,420
|
|
Loss on extinguishment of debt(A)
|
|
674
|
|
|
|
674
|
|
|
|
EBITDA
|
|
24,693
|
|
20,131
|
|
77,520
|
|
65,937
|
|
Income tax expense
|
|
(2,611
|
)
|
(1,792
|
)
|
(9,900
|
)
|
(6,647
|
)
|
Interest expense, net
|
|
(13,570
|
)
|
(11,562
|
)
|
(39,996
|
)
|
(37,041
|
)
|
Deferred income taxes
|
|
3,348
|
|
2,042
|
|
9,295
|
|
6,087
|
|
Amortization of deferred debt financing costs
|
|
610
|
|
792
|
|
2,222
|
|
2,376
|
|
Unrealized loss (gain) on interest rate swap
|
|
631
|
|
(1,514
|
)
|
(108
|
)
|
(1,514
|
)
|
Reclassification to interest expense, net for interest rate swap
|
|
424
|
|
76
|
|
1,270
|
|
76
|
|
Share-based compensation expense
|
|
1,471
|
|
152
|
|
3,273
|
|
510
|
|
Changes in assets and liabilities, net of effects of business
combination
|
|
1,973
|
|
8,108
|
|
(9,275
|
)
|
(1,258
|
)
|
Net cash provided by operating activities
|
|
$
|
16,969
|
|
$
|
16,433
|
|
$
|
34,301
|
|
$
|
28,526
|
|
(A)
Loss
on extinguishment of debt for the third quarter and first three quarters of
2009 includes costs relating to our repurchase of senior subordinated notes,
including the repurchase premium and the write-off of deferred debt financing
costs.
Third quarter of 2009 compared to the third quarter of 2008.
Net Sales.
Net sales increased $7.4 million or 6.3%
to $123.9 million for the third quarter of 2009 from $116.5 million for the
third quarter of 2008. Net sales for the
third quarter of 2009 were negatively impacted by the poor maple syrup crop in
Canada in 2008 that led to a global shortfall of pure maple syrup. Net sales of our
Maple Grove
Farms
pure maple syrup products decreased by $0.1 million,
consisting of a sales price decline of $0.5 million, partially offset by unit
volume increases of $0.4 million.
Excluding net sales of our pure maple syrup products, net sales for the
third quarter of 2009 increased $7.5 million or 7.1%. The $7.5 million increase was attributable to
sales price and unit volume increases of $6.7 million and $0.8 million,
respectively.
Net
sales of our lines of
Ortega, Cream of
Wheat, Accent, Las Palmas, Grandmas
and
Joan of Arc
products
increased
in the amounts of $6.0
million, $1.2 million, $0.9 million, $0.8 million, $0.7 million and $0.5
million or 24.3%, 7.9%, 22.3%, 12.5%, 29.5% and 18.4%, respectively. These increases were offset by a reduction in
net sales of
Bloch & Guggenheimer, B&M,
Emerils
and private label pickles and peppers products of $1.2
million, $0.7 million, $0.7 million and $0.3 million or 12.6%, 13.9%, 13.9% and
27.1%. In the aggregate, net sales for
all other brands increased $0.3 million, or 0.8%.
Gross Profit.
Gross profit increased $5.5 million or
17.9% to $36.2 million for the third quarter of 2009 from $30.7 million for the
third quarter of 2008. Gross profit
expressed as a percentage of net sales increased 2.8 percentage points to 29.2%
in the third quarter of 2009 from 26.4% in the third quarter of 2008. This increase in gross profit expressed as a
percentage of net sales was primarily attributable to increased sales prices of
$6.2 million and reduced wheat and maple syrup costs partially offset by
increased costs for beans and packaging and an increase in our accrual for
performance-based compensation of $0.4 million.
Sales, Marketing and Distribution Expenses.
Sales, marketing and distribution expenses decreased
$0.1 million or 1.4% to $10.7 million for the third quarter of 2009 from $10.8
million for the third quarter of
21
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2008. This
decrease is primarily due to a decrease in consumer marketing and trade spending
of $0.7 million and selling expense of $0.5 million, offset by an increase in
warehousing expense of $0.4 million and an increase in our accrual for
performance-based compensation of $0.7 million.
Expressed as a percentage of net sales, our sales, marketing and
distribution expenses decreased to 8.6% for the third quarter of 2009 from 9.3%
for the third quarter of 2008.
General and Administrative Expenses.
General and administrative expenses increased $0.8
million or 42.0% to $2.9 million for the third quarter of 2009 from $2.1
million in the third quarter of 2008.
The increase in general and administrative expenses primarily resulted
from an increase in our accrual for performance-based compensation of $1.5 million,
partially offset by a decrease in professional fees, reduced head count and a
decrease in other expenses.
Amortization Expense
Customer Relationships.
Amortization expensecustomer
relationships remained consistent at $1.6 million for the third quarter of 2009
as compared to the third quarter of 2008.
Operating Income.
As a result of the foregoing, operating
income increased $4.8 million or 29.4% to $21.0 million for the third quarter
of 2009 from $16.2 million for the third quarter of 2008. Operating income expressed as a percentage of
net sales increased to 17.0% in the third quarter of 2009 from 13.9% in the
third quarter of 2008.
Net Interest Expense.
Net
interest expense increased $2.0 million or 17.4% to $13.6 million for the third
quarter of 2009 from $11.6 million in the third quarter of 2008. Net interest expense in the third quarter of
2009 includes a $0.6 million charge relating to an unrealized loss on our
interest rate swap, and a reclassification of $0.4 million of the amount recorded
in accumulated other comprehensive income (loss) related to the swap. Net interest expense for the third quarter of
2009 also reflects a reduction in interest income primarily due to lower
interest rates. See Liquidity and
Capital ResourcesDebt below.
Loss on Extinguishment of Debt.
Loss on extinguishment of debt for the third quarter
includes
$0.7 million of costs relating to our repurchase of senior subordinated
notes during the third quarter, including $0.4 million for the payment of a
repurchase premium and a non-cash charge of $0.3 million for the write-off of
unamortized deferred debt financing costs associated with the notes repurchased
.
During the third quarter of 2008 we did not extinguish any debt.
Income Tax Expense.
Income tax expense increased $0.8 million
to $2.6 million for the third quarter of 2009 from $1.8 million for the third
quarter of 2008. Our effective tax rate
was 37.9% for the third quarter of 2009 and 2008. In the third quarter of 2009 and 2008, we
recorded a true-up for year-end tax provisions, which, for each period, was
less than $0.1 million.
First three quarters of 2009 compared to first three
quarters of 2008.
Net Sales.
Net sales increased $13.4 million or 3.8%
to $365.4 million for the first three quarters of 2009 from $352.0 million for
the first three quarters of 2008. Net
sales for the first three quarters of 2009 were negatively impacted by the poor
maple syrup crop in Canada in 2008 that led to a global shortfall of pure maple
syrup. Net sales of our
Maple Grove Farms
pure maple syrup products decreased by
$2.8 million, consisting of a unit volume decline of $4.1 million, partially
offset by sales price increases of $1.3 million. Excluding net sales of our pure maple syrup
products, net sales for the first three quarters of 2009 increased $16.2
million or 5.1%. The $16.2 million
increase was attributable to sales price increases of $21.8 million partially
offset by a decrease in unit volume of $5.6 million.
Net
sales of our lines of
Ortega, Las Palmas, Accent,
Joan of Arc, B&M
and
Grandmas
products increased
in the amounts of $12.8 million, $1.8
million, $1.5 million, $1.3 million, $0.8 million and $0.6 million or 16.9%,
9.2%, 12.3%, 18.2%, 4.2% and 10.1%, respectively. These increases were offset by a reduction in
net sales of our
Bloch & Guggenheimer,
private
label pickles and peppers, and
Cream of Wheat
22
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products of $1.8 million, $1.0 million and $0.6
million or 6.6%, 29.0% and 1.4%. In the
aggregate, net sales for all other brands increased $0.8 million, or 0.8%.
Gross Profit.
Gross profit increased $12.6 million or
12.7% to $111.8 million for the first three quarters of 2009 from $99.2 million
for the first three quarters of 2008.
Gross profit expressed as a percentage of net sales increased 2.4
percentage points to 30.6% in the first three quarters of 2009 from 28.2% in
the first three quarters of 2008. The
increase in gross profit expressed as percentage of net sales was primarily
attributable to increased sales prices of $23.2 million and reduced wheat and
maple syrup costs offset by increased costs for beans and packaging and an
increase in our accrual for performance-based compensation of $0.9 million.
Sales, Marketing and Distribution Expenses.
Sales, marketing and distribution expenses decreased
$2.0 million or 5.8% to $32.6 million for the first three quarters of 2009 from
$34.6 million for the first three quarters of 2008. The decrease is primarily due to a decrease
in consumer marketing and trade spending of $2.9 million and selling expense of
$0.9 million, offset by an increase in our accrual for performance-based
compensation of $1.2 million and an increase in warehousing expenses of $0.6
million. Expressed as a percentage of
net sales, our sales, marketing and distribution expenses decreased to 8.9% for
the first three quarters of 2009 from 9.8% for the first three quarters of
2008.
General and Administrative Expenses.
General and administrative expenses increased $2.5
million or 46.1% to $7.8 million for the first three quarters of 2009 from $5.3
million in the first three quarters of 2008.
The increase in general and administrative expenses primarily resulted
from an increase in our accrual for performance-based compensation of $3.2
million offset by a decrease in professional fees, reduced head count and a
decrease in other expenses.
Amortization ExpenseCustomer Relationships.
Amortization expensecustomer relationships remained consistent at $4.8
million for the first three quarters of 2009 as compared to the first three
quarters of 2008.
Operating Income.
As a result of the foregoing, operating
income increased $12.2 million or 22.3% to $66.7 million for the first three
quarters of 2009 from $54.5 million for the first three quarters of 2008. Operating income expressed as a percentage of
net sales increased to 18.2% in the first three quarters of 2009 from 15.5% in
the first three quarters of 2008.
Net Interest Expense.
Net
interest expense increased $3.0 million or 8.0% to $40.0 million for the first
three quarters of 2009 from $37.0 million in the first three quarters of
2008. Net interest expense in the first
three quarters of 2009 included a $0.1 million benefit relating to an
unrealized gain on our interest rate swap, partially offset by a
reclassification of $1.3 million of the amount recorded in accumulated other
comprehensive income (loss) related to the swap. Net interest expense for the first three quarters
of 2009 also reflects a reduction in interest income primarily due to lower
interest rates. See Liquidity and
Capital ResourcesDebt below.
Loss on Extinguishment of Debt.
Loss on extinguishment of debt for the first three
quarters of 2009 includes
$0.7 million of costs relating to our
repurchase of senior subordinated notes during the third quarter, including
$0.4 million for the payment of a repurchase premium and a non-cash charge of
$0.3 million for the write-off of unamortized deferred debt financing costs
associated with the notes repurchased
. During the
first three quarters of 2008 we did not extinguish any debt.
Income Tax Expense.
Income tax expense increased $3.3 million
to $9.9 million for the first three quarters of 2009 from $6.6 million for the
first three quarters of 2008. Our
effective tax rate was 37.9% for the first three quarters of 2009 and
2008. In the first three quarters of
2009 and 2008, we recorded a true-up for year-end tax provisions, which, for
each period, was less than $0.1 million.
23
Table of Contents
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 $5.8 million to $34.3 million for the first
three quarters of 2009 from $28.5 million for the first three quarters of
2008. Net income, excluding non-cash
items such as depreciation and amortization, amortization of deferred debt
financing costs, deferred income taxes, unrealized gain on our interest rate swap,
a reclassification to net interest expense, a loss on extinguishment of debt
and share-based compensation, increased by $13.8 million. This increase was offset by an increase in
net changes in assets and liabilities of $8.0 million due in large part to an
increase in working capital primarily attributable to an increase in maple
syrup inventory offset by an increase in accounts payable.
Net
cash used in investing activities for the first three quarters of 2009
decreased $1.9 million to $7.9 million from $9.8 million for the first three
quarters of 2008. Net cash used in
investing activities for the first three quarters of 2009 and 2008 consisted
entirely of capital spending. Capital
expenditures in the first three quarters of 2009 and 2008 included expenditures
for building improvements, purchases of manufacturing and computer equipment
and capitalized interest. Capital
expenditures for the first three quarters of 2008 also included expenditures
for the expansion of our Stoughton, Wisconsin facility and the transfer of a
portion of the
Cream of Wheat
production to that
facility. That project was completed
during fiscal 2008 and is the primary reason that capital spending decreased in
the first three quarters of 2009 as compared to the first three quarters of 2008.
Net
cash provided by financing activities for the first three quarters of 2009 was
$58.6 million as compared to net cash used in financing activities of $23.4
million for the first three quarters of 2008.
The primary reason for the increase in net cash provided by financing
activities for the first three quarters of 2009 as compared to the first three
quarters of 2008 was our public offering of Class A common stock completed
during the third quarter of 2009, which resulted in net proceeds of $86.6
million, after deducting underwriting discounts and commissions and other
transaction expenses, and a reduction in dividend payments of $5.0 million due
to a reduction in our dividend rate from $0.848 per share per annum to $0.68
per share per annum, partially offset by our repurchase of $6.3 million
principal
amount of our senior subordinated notes for $6.6 million plus accrued and
unpaid interest and our repurchase of Class A common stock for $2.3
million.
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.
D
uring the third quarter of 2009, we issued a notice of partial
redemption for $90.0 million principal amount of our senior subordinated notes
at a cash redemption price of 106% of the principal amount of the notes being
redeemed, plus accrued and unpaid interest on such amount, to, but excluding,
the redemption date of November 2, 2009.
We will use the net proceeds of the Class A common stock offering
plus cash on hand to fund the partial redemption.
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 2008 and 2007 as compared to our tax expense for financial
reporting purposes. While we expect our
cash taxes to continue to increase in fiscal 2009 and fiscal 2010 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 2009 through 2022.
24
Table of Contents
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 we made 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 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 2009 and 2008, we had cash flows provided by
operating activities of $34.3 million and $28.5 million, and distributed $18.4
million and $23.4 million, respectively, as dividends. At our current intended dividend rate of
$0.17 per share per quarter, the additional 11.5 million shares of Class A
commons stock that we issued in the underwritten public offering we completed
in the third quarter of 2009, are expected to increase our aggregate dividend
payments for fiscal 2010 by $7.8 million.
However, by using the net proceeds of the offering to redeem $90.0
million principal amount of our senior subordinated notes during the fourth
quarter of 2009, our payment of dividends on the additional 11.5 million shares
outstanding will not have an adverse impact on our liquidity as the increased
aggregate dividend payments will be offset by the after-tax effect of the
reduction in interest payments relating to the senior subordinated notes.
Nevertheless,
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 further 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.
25
Table of Contents
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. Historically, our interest expense has
increased as a result of additional indebtedness we have incurred in connection
with acquisitions, and will increase with any additional indebtedness we may
incur to finance future acquisitions, if any.
To the extent future acquisitions 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 2009
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.
Debt
Senior Secured Credit Facility
.
During the third quarter of 2009, Credit Suisse replaced Lehman Commercial
Paper Inc. (Lehman CPI) as the administrative agent under our credit
facility. Also during the third quarter
of 2009, the credit facility was amended to, among other things, extend the
maturity date for the undrawn revolving credit facility from January 2011
to February 2013. As amended, our
$25.0 million revolving credit facility and our $130.0 million of term loan
borrowings mature in February 2013, provided, however, that if we do not repay,
redeem or refinance our senior notes prior to April 1, 2011, the revolving
credit facility and the outstanding term loan borrowings will become
immediately due and payable on April 1, 2011.
The following discussion of the credit facility describes the credit
facility as amended through the date of issuance of the accompanying unaudited
consolidated financial statements.
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 of 2.00%,
and LIBOR plus an applicable margin of 3.00%.
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 domestic subsidiaries assets except our and our domestic
subsidiaries real property. The credit
facility provides for mandatory prepayment upon certain asset dispositions and
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 October 3, 2009, 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
26
Table of Contents
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 CPI filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. Following that date, we no longer believed
that Lehman CPI would honor its $3.1 million funding commitment under the
revolving credit facility if we were to make a funding request. Therefore, when Lehman CPIs commitment was
assumed by other lenders during the third quarter of 2009, the effective
available borrowing capacity under our revolving credit facility, net of
outstanding letters of credit increased by $3.1 million. At October 3, 2009, the available
borrowing capacity under our revolving credit facility, net of outstanding
letters of credit of $0.5 million, was $24.5 million. 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 counterparty to the swap is
Lehman Special Financing Inc. (Lehman SFI) and the counterpartys guarantor is
Lehman Brothers Holdings Inc. On September 15,
2008, (Lehman) filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. 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. 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 in September 2008 that the interest rate swap was no
longer an effective hedge. Accordingly,
subsequent to that determination, we record changes in the swaps fair value in
current earnings in net interest expense in our consolidated statements of
operations. We obtain third-party
verification of fair value at the end of each reporting period. As of October 3, 2009, the fair value of
our interest rate swap was an unrealized loss of $13.0 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. Net interest expense in the third quarter and
first three quarters of 2009 includes a charge of $0.6 million and a benefit of
$0.1 million, respectively, relating to the unrealized gain on our interest
rate swap and a reclassification of $0.4 million and $1.3 million,
respectively, of the amount recorded in accumulated other comprehensive income
(loss) related to the swap. During the
remainder of fiscal 2009, we expect to reclassify to net interest expense $0.4
million of the amount recorded in accumulated other comprehensive income
(loss).
12% Senior
Subordinated Notes due 2016
. In October 2004,
we issued $165.8 million aggregate principal amount of 12% senior subordinated
notes due 2016, $143.0 million of which in the form of EISs and $22.8 million
separate from EISs. As of October 3,
2009, there was $159.5 million aggregate principal amount of senior
subordinated notes outstanding, $123.8 million aggregate principal amount was
held in the form of EISs and $35.7 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.
27
Table of Contents
We may, from time to time, seek to retire
senior subordinated notes through cash repurchases of EISs or separate senior
subordinated notes and/or exchanges of EISs or separate senior subordinated
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. The amounts involved may be material. During the third quarter of 2009, we
repurchased in a privately negotiated transaction $6.3 million principal amount
of the senior subordinated notes for $6.6 million plus accrued and unpaid
interest.
In addition, beginning October 30, 2009,
we may redeem for cash all or part of the senior subordinated notes at a
redemption price of 106% and thereafter at prices declining annually to 100% on
or after October 30, 2012.
D
uring the third quarter of 2009, we issued a notice of partial
redemption for $90.0 million principal amount of the senior subordinated notes
at a cash redemption price of 106% of the principal amount of the notes being
redeemed, plus accrued and unpaid interest on such amount, to, but excluding,
the redemption date of November 2, 2009.
Upon completion of the redemption, $69.5 million principal amount of the
senior subordinated notes will remain outstanding.
Pursuant
to the terms of the indenture governing the senior subordinated notes, the
partial redemption of the senior subordinated notes will result in an automatic
separation of all of the EISs on the redemption date into the component shares
of Class A common stock and senior subordinated notes.
The partial redemption of the senior
subordinated notes is expected to result in a pre-tax charge in our fourth
quarter of fiscal 2009 of $9.5 million, which represents a cash charge of $5.4
million relating to the call premium and a non-cash charge of $4.1 million
relating to the write-off of unamortized deferred debt financing costs.
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 October 3, 2009, we were in compliance with all of the
covenants in the senior subordinated notes indenture.
8% Senior Notes due 2011
. In October 2004,
we issued $240.0 million aggregate principal amount of 8% 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.
28
Table of Contents
We may redeem some or all of the senior notes
at a redemption price of 102% through September 30, 2010, and at a
redemption price of 100% 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.
We may also, 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. The amounts involved may be
material.
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 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 October 3, 2009, 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.
On May 5, 2009, the board of directors authorized an increase in
the authorization to $25.0 million and extended the authorization through May 4,
2010. 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 or aggregate dollar amount of shares that will be repurchased under
the stock and debt repurchase program.
Likewise, there can be no assurance as to the principal amount of senior
notes, if any, that will be repurchased.
We may discontinue the program at any time. Any shares repurchased pursuant to the stock
repurchase program will be retired.
Likewise, any senior notes repurchased will be cancelled.
During the first three quarters of 2009, we
repurchased and retired 403,500 shares of Class A common stock at an
average cost per share (excluding fees and commissions) of $5.76, or $2.3
million in the aggregate. During the
third quarter of 2009, we repurchased $6.3 million principal amount of senior
subordinated notes, which resulted in a pre-tax charge in our third quarter of
$0.7 million, representing a cash charge of $0.4 million relating to the
repurchase premium and a non-cash charge of $0.3 million relating to the
write-off of unamortized deferred debt financing costs. As of October 3, 2009, we had $13.5
million available for future repurchases of Class A common stock and/or
senior notes under the stock and debt repurchase plan.
29
Table of Contents
Future Capital
Needs
We are highly leveraged. On October 3, 2009, our total long-term
debt and stockholders equity was $529.5 million and $229.4 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 2009, $7.9 million
of which have already been made during the first three quarters, and
approximately $11.0 million in the aggregate during fiscal 2010.
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
During fiscal the
past several years, we have been faced with increasing prices in certain
commodities and packaging materials. We
manage this risk by entering into short-term supply contracts and advance
commodities purchase agreements from time to time, and if necessary, by raising
prices. We believe that through sales
price increases and our cost saving efforts we have to a large degree been able
to offset the impact of recent raw material, packaging and transportation cost
increases, although in certain cases on a lagging basis. There can be no assurance, however, that we
will be able to offset any present or future increases in the cost of raw
materials, packaging and transportation, with additional sales price increases
or cost reductions.
Recent Accounting
Pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) established the FASB
Accounting Standards Codification
TM
(Codification) as the single source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC
registrants. The Codification, which is
effective as of our third quarter of fiscal 2009, supersedes all existing
non-SEC accounting and reporting standards.
All other nongrandfathered non-SEC accounting literature not included in
the Codification will become nonauthoritative.
The adoption of this standard did not have any impact on our results of
operations or financial position.
In September 2006, the FASB
issued a new standard relating to fair value measurements, which defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. This
standard was effective as of the beginning of our fiscal 2008, with the
exception of certain provisions deferred until the beginning of our fiscal
2009. In February 2008, the FASB
delayed the effective date of the standard 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 the beginning of our fiscal
2009. We adopted the standard effective
at the beginning of our fiscal 2008 for financial assets and financial
liabilities, which did not have a material impact on our results of operations
or financial position. We adopted the
standard effective at the beginning of our fiscal 2009 for non-financial assets
and non-financial liabilities, which did not have a material impact on our
results of operations or financial position.
In December 2007, the
FASB issued new standards relating to business combinations and noncontrolling
interests in consolidated financial statements.
The standard relating to business combinations 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
30
Table of Contents
the net identifiable assets
acquired. The noncontrolling interest
standard 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.
These standards were effective as of the beginning of our fiscal
2009. The business combinations standard
will be applied prospectively, and any effects will depend
on future acquisitions. The standard
relating to noncontrolling interests in consolidated financial statements
requires retroactive adoption. We
currently do not have any noncontrolling interests in subsidiaries.
In March 2008, the FASB issued a
standard that amended existing standards about derivative instruments and
hedging activities to require enhanced disclosures about (a) how and why
an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for and (c) how derivative instruments
and related hedged items affect an entitys financial position, financial
performance, and cash flows. The
amendments were effective as of the beginning of our fiscal 2009. Since the amendments require enhanced
disclosures, without a change to existing standards relative to measurement and
recognition, our adoption of the standard did not have any effect on our
results of operations or financial position.
See notes 6 and 7 for the required disclosures about our derivative
instruments and hedging activities.
In April 2008, the FASB issued a
standard relating to how companies should determine the useful life of
intangible assets. The standard 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. We
adopted this standard effective at the beginning of our fiscal 2009, which did
not have a material impact on our results of operations or financial position.
In December 2008, the FASB issued a
standard relating to an employers disclosure about postretirement benefit plan
assets. The standard requires additional
disclosures about plan assets for defined benefit pension and other
postretirement benefit plans. The
standard will be effective as of the end of our fiscal 2009. Since this requires enhanced disclosures,
without a change to existing standards relative to measurement and recognition,
our adoption of the standard will not have a material impact on our results of
operations or financial position.
In May 2009, the FASB established a
general standard of accounting for, and requiring disclosure of, events that
occur after the balance sheet date but before financial statements are issued
or are available to be issued. The
standard was effective beginning with our second quarter of fiscal 2009. The adoption of the standard did not have a
material effect on our on our results of operations or financial position.
Off-balance Sheet Arrangements
As
of October 3, 2009, we
did
not
have
any
off-balance
sheet
arrangements
as
defined
in Item 303(a)(4)(ii) of Regulation S-K.
31
Table of Contents
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 2009,
there were no material changes outside the ordinary course of business in the
specified contractual obligations set forth in our 2008 Annual Report on Form 10-K,
except as follows:
·
During the first quarter of 2009, we entered
into a new warehouse lease that will require us to make additional rent
payments of approximately $11.5 million in the aggregate over the course of the
lease, which expires in 2016. These
additional rent payments are being partially offset by a reduction in rent
payments relating to a warehouse lease that we let expire pursuant to its
terms;
·
Our expected contributions to our defined
benefit pension plans for fiscal 2009 have increased from $1.2 million to $2.8
million because, although not obligated to do so, we made $1.6 million of
voluntary contributions to our defined benefit plans during the first three
quarters of 2009. We do not expect to
make additional voluntary contributions during the remainder of fiscal 2009;
and
·
As discussed elsewhere in this report, during
the third quarter of 2009, we issued a notice of partial redemption for $90.0
million principal amount of our senior subordinated notes at a cash redemption
price of 106% of the principal amount of the notes being redeemed, plus accrued
and unpaid interest on such amount, to, but excluding, the redemption date of November 2,
2009. In addition, during the third
quarter of 2009, we repurchased in a privately negotiated transaction $6.3
million principal amount of senior subordinated notes for $6.6 million
plus accrued
and unpaid interest. As a result of the
partial redemption during the fourth quarter of 2009 and the repurchase of
senior subordinates notes during the third quarter of 2009, our interest
payment commitments for 2010 through October 2016 will be reduced by $11.6
million per year on an annualized basis.
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 any 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;
32
Table of Contents
·
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:
·
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;
·
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 2008 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 of 2.00%, and LIBOR plus an applicable margin of 3.00%. 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 October 3,
2009, and we currently have no plans to draw upon the facility for the
foreseeable future. The available
borrowing capacity under our revolving credit facility, net of outstanding
letters of credit of $0.5 million, was $24.5 million at October 3, 2009.
We have outstanding $130.0 million of term
loan borrowings at October 3, 2009 and January 3, 2009. The term loan borrowings are fixed at 7.0925%
based upon a six year interest rate swap agreement that we
33
Table of Contents
entered into on February 26,
2007 with an affiliate of Lehman. See
the discussion of the interest rate swap and the Lehman bankruptcy filing above
under the heading Liquidity and Capital Resources-Debt-Senior Secured Credit
Facility in Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations for additional information.
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 term loan borrowings, senior notes and senior subordinated notes
as of October 3, 2009 and January 3, 2009 are as follows (dollars in
thousands):
|
|
October 3, 2009
|
|
January 3, 2009
|
|
|
|
Carrying Value
|
|
Fair Value(1)(2)
|
|
Carrying Value
|
|
Fair Value(1)(3)
|
|
Senior Secured Term Loan due February 26, 2013
|
|
$
|
130,000
|
|
$
|
128,375
|
|
$
|
130,000
|
|
$
|
107,900
|
|
8% Senior Notes due October 1, 2011
|
|
240,000
|
|
241,800
|
|
240,000
|
|
207,600
|
|
12% Senior Subordinated Notes due October 30,
2016:
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
123,864
|
|
127,502
|
|
124,793
|
|
90,235
|
|
held separately
|
|
35,677
|
|
36,725
|
|
41,007
|
|
29,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 October 3, 2009 was $7.36, based
upon the $7.84 per share closing price of our separately traded Class A
common stock and the $15.20 per EIS closing price of our EISs on the New York
Stock Exchange on October 2, 2009 (the last business day of the third
quarter of 2009). 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 January 3, 2009 was $5.17, based
upon the $5.49 per share closing price of our separately traded Class A
common stock and the $10.66 per EIS closing price of our EISs on the New York
Stock Exchange on January 2, 2009 (the last business day of fiscal 2008).
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.
34
Table of Contents
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.
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.
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
35
Table of Contents
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
Except for the additional
risk factor set forth below, we do not believe there have been any material
changes in our risk factors as previously disclosed in our 2008 Annual Report
on Form 10-K.
Following
the partial redemption of the senior subordinated notes and the automatic
separation of the EISs, the limited liquidity of the trading market for the
senior subordinated notes may adversely affect the trading price of the senior
subordinated notes and/or require that investors hold the notes until maturity
or an earlier redemption, if any.
Pursuant to the
terms of the indenture, the partial redemption of the senior subordinated notes
by B&G Foods will result in an automatic separation (or splitting) of all
of the EISs on October 30, 2009. As
a result, the last day of trading of the EISs on the New York Stock Exchange
under the symbol BGF was October 26, 2009. When the market opened on October 27,
2009, those shares of Class A common stock represented by the EISs, began
trading on the New York Stock Exchange under the symbol BGS, together with
all other outstanding shares of the Companys Class A common stock. The remaining senior subordinated notes that
are not redeemed, whether previously represented by EISs or held separately,
will not be listed on an exchange and we do not intend to create or sustain a
market for such notes following the redemption date. Thus, the extent of any market for the
remaining senior subordinated notes will depend upon, among other things, the
principal amount of the senior subordinated notes that remain outstanding after
the redemption date, the number of holders remaining at such time and the
interest in maintaining a market in the senior subordinated notes on the part
of securities firms. The limited liquidity may adversely affect the trading
price of the senior subordinated notes and/or require that investors hold their
senior subordinated notes until maturity or an earlier redemption, if any, by
B&G Foods.
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.
36
Table of Contents
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.
|
37
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 27, 2009
|
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)
|
38
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