Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under the heading Forward-Looking
Statements below and elsewhere in this report. The following discussion should
be read in conjunction with the unaudited consolidated interim financial
statements and related notes for the thirteen and thirty-nine weeks ended September 29,
2007 (third quarter of 2007 and first three quarters of 2007) included
elsewhere in this report and the audited consolidated financial statements and
related notes for the fiscal year ended December 30, 2006 (fiscal 2006)
included in our Annual Report on Form 10-K/A filed with the Securities and
Exchange Commission (SEC) on March 9, 2007.
General
We manufacture, sell and distribute a diversified
portfolio of high quality, shelf-stable, branded food products, many of which
have leading regional or national retail market shares. In general, we position
our branded products to appeal to the consumer desiring a high quality and
reasonably priced branded product.
Our business strategy is to continue to increase
sales, profitability and cash available to pay dividends by enhancing our
existing portfolio of branded shelf-stable products and by capitalizing on our
competitive strengths. We intend to implement our strategy through the
following initiatives: profitably growing our established brands, leveraging
our unique multiple-channel sales and distribution system, introducing new
products, capitalizing on the higher growth Mexican segment of the food
industry, designing new products and modifying existing products to address
consumer health and wellness concerns such as diabetes and natural/organic
foods, and expanding our brand portfolio through acquisitions.
Since 1996, we have
successfully acquired and integrated 18 separate brands into our operations. We
believe that successful future acquisitions, if any, will enhance our portfolio
of existing businesses, further leveraging our existing infrastructure.
We completed the acquisition
of the
Grandmas
molasses
business from Motts LLP, a Cadbury Schweppes Americas Beverages Company, on January 10,
2006. We completed the acquisition of the
Cream of Wheat
and
Cream of Rice
business from Kraft Foods
Global, Inc. effective February 25, 2007. We refer to the
Cream of Wheat
and
Cream of Rice
acquisition
as the
Cream of Wheat
acquisition and the
Cream of Wheat
and
Cream of Rice
businesses
collectively as the
Cream of Wheat
business. Both the
Grandmas
molasses acquisition and
Cream of Wheat
acquisition have been accounted for using the
purchase method of accounting and, accordingly, the assets acquired and results
of operations of the acquired businesses are included in our consolidated
financial statements from the respective dates of acquisition. These
acquisitions and the application of the purchase method of accounting for these
acquisitions affect comparability between periods.
We are subject to a number of challenges that may
adversely affect our businesses. These challenges, which are discussed below
and under the heading Forward-Looking Statements, include:
Fluctuations in Commodity Prices and Production and
Distribution Costs
. We purchase raw materials, including
agricultural products, meat, poultry, other raw materials, ingredients and
packaging materials from growers, commodity processors, other food companies
and packaging manufacturers. Raw materials, ingredients and packaging materials
are subject to fluctuations in price attributable to a number of factors. Fluctuations
in commodity prices can lead to retail price volatility and intensive price
competition, and can influence consumer and trade buying patterns. In the third
quarter and first three quarters of 2007, our commodity prices for maple syrup
and corn sweeteners were higher than those incurred during the thirteen and
thirty-nine weeks ended September 30, 2006 (third quarter of 2006 and
first three quarters of 2006). In addition, the cost of labor, manufacturing,
energy, fuel, packaging materials and other costs related to the
17
production and distribution of our food products have
risen significantly in recent years and at an increasing rate in recent months.
We expect that many of these costs will continue to rise for the foreseeable
future. We manage these risks by entering into short-term supply contracts and
advance commodities purchase agreements from time to time, implementing cost
saving measures and, if necessary, by raising sales prices. We cannot assure
you that any cost saving measures or sales price increases by us will offset
increases to our raw material, ingredient, packaging and distribution costs. To
the extent we are unable to offset these cost increases, our operating results
will be significantly impacted during the remainder of fiscal 2007 and fiscal
2008.
Consolidation in the Retail Trade and Consequent
Inventory Reductions
. As the retail grocery trade continues
to consolidate and our retail customers grow larger and become more
sophisticated, our retail customers may demand lower pricing and increased
promotional programs. These customers are also reducing their inventories and
increasing their emphasis on private label products.
Changing Customer Preferences
. Consumers
in the market categories in which we compete frequently change their taste
preferences, dietary habits and product packaging preferences.
Consumer Concern Regarding Food Safety, Quality and
Health
. The food industry is subject to consumer concerns
regarding the safety and quality of certain food products, including the health
implications of genetically modified organisms and obesity.
Changing Valuations of the Canadian Dollar in
Relation to the U.S. Dollar
. We purchase the majority of our
maple syrup requirements from manufacturers located in Quebec, Canada. Over the
past several years the U.S. dollar has weakened against the Canadian dollar,
which has in turn increased our costs relating to the production of our maple
syrup products.
To confront these challenges, we continue to take
steps to build the value of our brands, to improve our existing portfolio of
products with new product and marketing initiatives, to reduce costs through
improved productivity and to address consumer concerns about food safety,
quality and health.
Critical Accounting Policies; Use of Estimates
The preparation of financial statements in accordance
with U.S. generally accepted accounting principles requires our management to
make a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Some of the more significant
estimates and assumptions made by management involve trade and consumer
promotion expenses, allowances for excess, obsolete and unsaleable inventories,
pension benefits; purchase accounting allocations; the recoverability of
goodwill, trademarks, customer relationship intangibles, property, plant and
equipment, and deferred tax assets; the accounting for our EISs, including
their treatment in computing our income tax expense; and the accounting for
earnings per share. Actual results could differ from these estimates and
assumptions.
Summaries of our significant accounting policies are
described more fully in note 2 to our consolidated financial statements
included in our 2006 Annual Report on Form 10-K/A. We believe the
following critical accounting policies involve the most significant judgments
and estimates used in the preparation of our consolidated financial statements.
Trade and Consumer Promotion
Expenses
We offer various sales incentive programs to customers
and consumers, such as price discounts, in-store display incentives, slotting
fees and coupons. The recognition of expense for these programs involves the
use of judgment related to performance and redemption estimates. Estimates are
made based on historical
18
experience and other factors. Actual expenses may
differ if the level of redemption rates and performance vary from estimates.
Inventories
Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out and average cost methods. Inventories
have been reduced by an allowance for excess, obsolete and unsaleable
inventories. The allowance is an estimate based on our managements review of
inventories on hand compared to estimated future usage and sales.
Long-Lived Assets
Long-lived assets, such as property, plant and
equipment, and intangibles with estimated useful lives are depreciated or
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Recoverability of assets held for sale is measured by
a comparison of the carrying amount of an asset or asset group to their fair
value less estimated cost to sell. Calculating fair value of assets requires
significant estimates and assumptions by management.
Goodwill and
Trademarks
Goodwill and intangible assets with indefinite useful
lives (trademarks) are tested for impairment at least annually and whenever
events or circumstances occur indicating that goodwill or indefinite life intangibles
might be impaired.
We perform the annual impairment tests as of the last
day of each fiscal year. The annual goodwill impairment test involves a
two-step process. The first step of the impairment test involves comparing the
fair value of our company with our companys carrying value, including goodwill.
If the carrying value of our company exceeds our fair value, we perform the
second step of the impairment test to determine the amount of the impairment
loss. The second step of the goodwill impairment test involves comparing the
implied fair value of goodwill with the carrying value of that goodwill and
recognizing a loss for the difference. Calculating our fair value requires
significant estimates and assumptions by management. We estimate our fair value
by applying third party market value indicators to our earnings before
interest, taxes, depreciation and amortization (EBITDA). We test indefinite
life intangible assets for impairment by comparing their carrying value to
their fair value that is determined using a cash flow method and recognize a
loss to the extent the carrying value is greater.
We completed our annual impairment tests for fiscal
2006 with no adjustments to the carrying values of goodwill and indefinite life
intangibles. We did not note any events or circumstances during the first three
quarters of 2007 that would indicate that goodwill or indefinite life
intangibles might be impaired.
Cash Flow Hedge
We use an interest rate swap to manage variable
interest rate exposure on $130.0 million of term loan borrowings. Our objective
for holding this derivative is to decrease the volatility of future cash flows
associated with interest payments on our variable rate debt. This derivative is
recognized in other assets or liabilities on our consolidated balance sheet at
fair value. We record gains and losses on derivatives qualifying as a cash flow
hedge in comprehensive income (loss), to the extent that the hedge is effective
and
19
until we recognize the underlying transactions in net
income, at which time we recognize these gains and losses in our consolidated
statement of operations.
The unrealized amounts in comprehensive income (loss)
will fluctuate based on changes in the fair value of open contracts during each
reporting period. Our interest rate swap, which is described below under Liquidity
and Capital Resources
Debt
and in
note 5 and note 6 to our consolidated financial statements was an effective
hedge for the third quarter and first three quarters of 2007, meaning that it
qualified for hedge accounting treatment.
Accounting Treatment for EISs
Our EISs include Class A common stock and senior
subordinated notes. Upon completion of our 2004 EIS offering (including the
exercise of the over-allotment option), we allocated the proceeds from the
issuance of the EISs, based upon relative fair value at the issuance date, to
the Class A common stock and the senior subordinated notes. We have
assumed that the price paid in the 2004 EIS offering was equivalent to the
combined fair value of the Class A common stock and the senior
subordinated notes, and the price paid in the offering for the senior
subordinated notes sold separately (not in the form of EISs) was equivalent to
their initial stated principal amount. Therefore, we have allocated the entire
proceeds of the 2004 EIS offering to the Class A common stock and the
senior subordinated notes, and the allocation of the EIS proceeds to the senior
subordinated notes did not result in a premium or discount.
The Class A common stock portion of each EIS is
included in stockholders equity, net of the related portion of the EIS
transaction costs allocated to Class A common stock. Dividends paid on the
Class A common stock portion of each EIS are recorded as a decrease to
additional paid-in capital when declared by us. The senior subordinated note
portion of each EIS is included in long-term debt, and the related portion of
the EIS transaction costs allocated to the senior subordinated notes was
capitalized as deferred financing costs and is being amortized to interest
expense using the effective interest method. Interest on the senior
subordinated notes is charged to interest expense as accrued by us and deducted
for income tax purposes.
Income Tax Expense Estimates and
Policies
As part of the income tax provision process of
preparing our consolidated financial statements, we are required to estimate
our income taxes. This process involves estimating our current tax expenses
together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities. We then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to the
extent we believe the recovery is not likely, we establish a valuation
allowance. Further, to the extent that we establish a valuation allowance or
increase this allowance in a financial accounting period, we include such charge
in our tax provision, or reduce our tax benefits in our consolidated statement
of operations. We use our judgment to determine our provision or benefit for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets.
There are various factors that may cause these tax
assumptions to change in the near term, and we may have to record a valuation
allowance against our deferred tax assets. We cannot predict whether future
U.S. federal and state income tax laws and regulations might be passed that
could have a material effect on our results of operations. We assess the impact
of significant changes to the U.S. federal and state income tax laws and
regulations on a regular basis and update the assumptions and estimates used to
prepare our consolidated financial statements when new regulations and
legislation are enacted. We recognize the benefit of an uncertain tax position
that we have taken or expect to take on the income tax returns we file if it is
more likely than not that such tax position will be sustained based on its
technical merits.
20
Earnings Per Share
We currently have one class of common stock issued and
outstanding, designated as Class A common stock. Prior to May 29,
2007, we had two classes of common stock issued and outstanding, designated as Class A
common stock and Class B common stock. For periods in which we had shares
of both Class A and Class B common stock issued and outstanding, we
present earnings per share using the two-class method. The two-class method is
an earnings allocation formula that determines earnings per share for each
class of common stock according to dividends declared and participation rights
in undistributed earnings or losses.
Net income is allocated between the two classes of
common stock based upon the two-class method. Basic and diluted earnings per
share for the Class A common stock and Class B common stock is
calculated by dividing allocated net income by the weighted average number of
shares of Class A common stock and Class B common stock outstanding.
Pension Expense
We have defined benefit
pension plans covering substantially all of our employees. Our funding policy
is to contribute annually the amount recommended by our actuaries. The funded
status of our pension plans is dependent upon many factors, including returns
on invested assets and the level of certain market interest rates. We review
pension assumptions regularly and we may from time to time make voluntary
contributions to our pension plans, which exceed the amounts required by
statute. During the third quarter and first three quarters of 2007, we made
contributions of $0.8 million and $2.1 million, respectively, to our pension
plans. During the third quarter and first three quarters of 2006, we made
contributions of $0.6 million and $1.1 million, respectively, to our pension
plans. Changes in interest rates and the market value of the securities held by
the plans could materially change, positively or negatively, the underfunded
status of the plans and affect the level of pension expense and required
contributions during the remainder of fiscal 2007 and beyond.
Our discount rate assumption
increased from 5.65% at December 31, 2005 to 5.90% at December 30,
2006 for our pension plans. We presently anticipate that assumption changes,
coupled with the amortization of deferred gains and losses will result in a
decrease in fiscal 2007 pre-tax pension expense of approximately $0.3 million. In
addition, as a sensitivity measure, a 0.25% decline or increase in our discount
rate would increase or decrease our pension expense by approximately $0.1
million. Similarly, a 0.25% decrease or increase in the expected return on
pension plan assets would increase or decrease our pension expense by
approximately $0.1 million.
In August 2006, the
Pension Protection Act of 2006 was signed into law. The major provisions of the
statute will take effect January 1, 2008. Among other things, the statute
is designed to ensure timely and adequate funding of qualified pension plans by
shortening the time period within which employers must fully fund pension
benefits. We are currently evaluating the effect, if any, that the Pension
Protection Act of 2006 will have on future pension funding requirements.
The adoption of SFAS No. 158
as of December 30, 2006 required us to record an incremental after-tax
charge of $1.6 million in accumulated other comprehensive loss related to the
unrecognized net actuarial losses and unrecognized prior service costs.
Acquisition Accounting
We account for acquired
businesses using the purchase method of accounting, which requires that the
assets acquired and liabilities assumed be recorded at the date of acquisition
at their respective fair values. Our consolidated financial statements and
results of operations reflect an acquired business after the completion of the
acquisition. The cost to acquire a business, including transaction costs, is
allocated to the underlying net assets of the acquired business in proportion
to their respective fair values. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill.
21
The judgments made in determining
the estimated fair value assigned to each class of assets acquired and
liabilities assumed, as well as asset lives, can materially impact our results
of operations. Accordingly, for significant items, we typically obtain
assistance from third party valuation specialists.
Determining the useful life
of an intangible asset also requires judgment as different types of intangible
assets will have different useful lives and certain assets may even be
considered to have indefinite useful lives.
All of these judgments and
estimates can materially impact our results of operations.
Results
of Operations
The following table sets forth the percentages of net
sales represented by selected items for the third quarter of 2007 and 2006 and
the first three quarters of 2007 and 2006 reflected in our consolidated
statements of operations. The comparisons of financial results are not
necessarily indicative of future results:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
September 29,
2007
|
|
September 30,
2006
|
|
September 29,
2007
|
|
September 30,
2006
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of
goods sold
|
|
67.3
|
%
|
71.2
|
%
|
68.1
|
%
|
71.5
|
%
|
Gross profit
|
|
32.7
|
%
|
28.8
|
%
|
31.9
|
%
|
28.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Sales,
marketing and distribution expenses
|
|
11.2
|
%
|
11.3
|
%
|
11.0
|
%
|
11.2
|
%
|
General and
administrative expenses
|
|
2.9
|
%
|
1.6
|
%
|
2.0
|
%
|
1.7
|
%
|
Gain on sale
of property, plant and equipment
|
|
|
|
(0.5
|
)%
|
|
|
(0.2
|
)%
|
Amortization
expensecustomer relationships
|
|
1.4
|
%
|
0.2
|
%
|
1.1
|
%
|
0.2
|
%
|
Operating
income
|
|
17.2
|
%
|
16.3
|
%
|
17.8
|
%
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
10.6
|
%
|
10.8
|
%
|
11.8
|
%
|
10.9
|
%
|
Income
before income tax expense
|
|
6.7
|
%
|
5.5
|
%
|
6.0
|
%
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
|
2.5
|
%
|
2.1
|
%
|
2.3
|
%
|
1.8
|
%
|
Net income
|
|
4.1
|
%
|
3.4
|
%
|
3.7
|
%
|
2.9
|
%
|
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 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.
22
For the first three quarters of 2007, general and
administrative expenses is net of $0.8 million of insurance proceeds relating
to a previously reported employee theft.
Gain on Sale of Property, Plant and
Equipment.
Gain on sale of property, plant and equipment
includes any gain or loss on the sale of property, plant and equipment.
Amortization ExpensesCustomer
Relationships.
Amortization expensecustomer relationships
includes the amortization expense associated with customer relationship
intangibles and are amortized over their useful lives of 20 years.
Net Interest Expense.
Net
interest expense includes interest relating to our outstanding indebtedness and
amortization of deferred debt issuance costs, net of interest income.
Non-GAAP Financial Measures
Certain disclosures in this report include non-GAAP
(Generally Accepted Accounting Principles) financial measures. A non-GAAP financial measure is defined as a
numerical measure of our financial performance that excludes or includes
amounts so as to be different than the most directly comparable measure
calculated and presented in accordance with GAAP in our consolidated balance
sheets and related consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash flows.
EBITDA is a measure used by management to measure
operating performance. EBITDA is defined as net income before net interest
expense, income taxes, depreciation, and amortization. Management believes that
it is useful to eliminate net interest expense, income taxes, depreciation and
amortization because it allows management to focus on what it deems to be a
more reliable indicator of ongoing operating performance and our ability to
generate cash flow from operations. We use EBITDA in our business operations,
among other things, to evaluate our operating performance, develop budgets and
measure our performance against those budgets, determine employee bonuses and
evaluate our cash flows in terms of cash needs. We also present EBITDA because
we believe it is a useful indicator of our historical debt capacity and ability
to service debt and because covenants in our credit facility and the indentures
governing the senior notes and the senior subordinated notes contain ratios
based on these measures. 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, if any. Rather,
EBITDA is a potential indicator of an entitys ability to fund these cash
requirements. EBITDA also is not a complete measure of an entitys
profitability because it does not include costs and expenses for depreciation
and amortization, interest and related expenses and income taxes. Because not
all companies use identical calculations, this presentation of EBITDA may not
be comparable to other similarly titled measures of other companies. However,
EBITDA can still be useful in evaluating our performance against our peer
companies because management believes this measure provides users with valuable
insight into key components of GAAP amounts.
A reconciliation of EBITDA to net income and to net
cash provided by operating activities for the third quarter and first three
quarters of 2007 and 2006 along with the components of EBITDA follows:
23
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
September 29,
2007
|
|
September 30,
2006
|
|
September 29,
2007
|
|
September 30,
2006
|
|
|
|
(Dollars in thousands)
|
|
Net income
|
|
$
|
4,846
|
|
$
|
3,443
|
|
$
|
12,657
|
|
$
|
8,704
|
|
Income tax
expense
|
|
2,958
|
|
2,183
|
|
7,725
|
|
5,518
|
|
Interest
expense, net
|
|
12,374
|
|
11,009
|
|
40,028
|
|
32,796
|
|
Depreciation
and amortization
|
|
3,843
|
|
1,959
|
|
9,706
|
|
5,863
|
|
EBITDA
|
|
24,021
|
|
18,594
|
|
70,116
|
|
52,881
|
|
Income tax
expense
|
|
(2,958
|
)
|
(2,183
|
)
|
(7,725
|
)
|
(5,518
|
)
|
Interest
expense, net
|
|
(12,374
|
)
|
(11,009
|
)
|
(40,028
|
)
|
(32,796
|
)
|
Deferred
income taxes
|
|
3,102
|
|
2,116
|
|
6,944
|
|
4,910
|
|
Amortization
of deferred financing costs
|
|
792
|
|
710
|
|
2,397
|
|
2,122
|
|
Gain on sale
of property, plant and equipment
|
|
|
|
(525
|
)
|
|
|
(525
|
)
|
Write off of
deferred debt issuance costs
|
|
|
|
|
|
1,769
|
|
|
|
Changes in
assets and liabilities, net of effects of business combination
|
|
(3,213
|
)
|
(3,571
|
)
|
(12,273
|
)
|
(2,898
|
)
|
Net cash
provided by operating activities
|
|
$
|
9,370
|
|
$
|
4,132
|
|
$
|
21,200
|
|
$
|
18,176
|
|
Third quarter of 2007 compared to third quarter of
2006.
Net Sales.
Net
sales increased $15.1 million or 14.9% to $117.0 million for the third quarter
of 2007 from $101.9 million for the third quarter of 2006. The
Cream of Wheat
acquisition accounted for $15.4 million of
the net sales increase offset by a decrease in net sales of $1.1 million
relating to the termination of a temporary co-packing arrangement. The
remaining $0.8 million net sales increase related to increases in sales price
and unit volume. Net sales of our lines of
Maple Grove Farms
,
B&M
and
Ortega
products increased
in the amounts of $2.1 million, $0.5 million and $0.4
million or 13.6%, 9.2% and 1.8%, respectively. These increases were offset by a
reduction in net sales of
Underwood
,
B&G
and
Sa-són
products of $1.2 million, $0.6 million and
$0.3 million or 17.7%, 5.7% and 25.3%, respectively. In the aggregate, net
sales for all other brands decreased $0.1 million or 0.3%.
Gross Profit.
Gross
profit increased $8.9 million or 30.4% to $38.3 million for the third quarter
of 2007 from $29.4 million for the third quarter of 2006. Gross profit
expressed as a percentage of net sales increased 3.9% to 32.7% in the third
quarter of 2007 from 28.8% in the third quarter of 2006. The increase in gross
profit expressed as a percentage of net sales was primarily due to the positive
effect of the
Cream of Wheat
acquisition, which
improved our overall gross profit expressed as a percentage of net sales by
5.4%. Our gross profit expressed as a percentage of net sales for all other
brands in the aggregate decreased by 1.5% primarily due to the mix of products
sold and the higher costs for packaging, corn sweeteners and maple syrup
partially offset by sales price increases.
Sales, Marketing and Distribution
Expenses.
Sales, marketing and distribution expenses increased
$1.6 million or 14.4% to $13.1 million for the third quarter of 2007 from $11.5
million for the third quarter of 2006. This increase is primarily due to an
increase in brokerage and salesmen compensation of $1.1 million (relating to
increased sales volume from the
Cream of Wheat
acquisition
and internal sales growth) and an increase in consumer marketing of $0.5
million. Expressed as a percentage of net sales, our sales, marketing and
distribution expenses decreased to 11.2% for the third quarter of 2007 from
11.3% for the third quarter of 2006.
General and Administrative Expenses.
General and administrative expenses increased $1.8 million or
111.8% to $3.4 million for the third quarter of 2007 from $1.6 million for the
third quarter of 2006. The increase primarily resulted from a $1.4 million
accrual relating to special bonus awards to be paid in March 2008 to
certain executive officers and members of our senior management in recognition
of their
24
contributions to the successful completion of the
Cream of Wheat
acquisition and the Class A common stock
offering. In addition, general and administrative expenses increased by $0.4
million as a result of an increased incentive compensation accrual relating to
our 2007 annual bonus plan. During the fourth quarter of 2007, we expect to
accrue an additional expense of $0.5 million relating to the special bonus
awards.
Gain on Sale of Property, Plant and
Equipment.
Gain on
sale of property, plant and equipment for the third quarter of 2006 related to the gain on the sale of
our New Iberia facility of $0.5 million. There were no gains or losses on the
sale of property, plant and equipment for the third quarter of 2007.
Amortization Expense
Customer Relationships.
Amortization expensecustomer relationships, all of which relates
to the amortization of customer relationship intangibles acquired in the
Grandmas
molasses and
Cream of Wheat
acquisitions, increased
$1.4 million to $1.6 for the third quarter of 2007 from $0.2 million for the third quarter of 2006.
Operating Income.
As
a result of the foregoing, operating income increased $3.6 million or 21.3% to
$20.2 million for the third quarter of 2007 from $16.6 million for the third
quarter of 2006. Operating income expressed as a percentage of net sales
increased to 17.2% in the third quarter of 2007 from 16.3% in the third quarter
of 2006.
Net Interest Expense.
Net
interest expense increased $1.4 million or 12.4% to $12.4 million for the third
quarter of 2007 from $11.0 million in the third quarter of 2006. Our average
debt outstanding was approximately $105.0 million higher for the third quarter
of 2007 as compared to the third quarter of 2006. See Liquidity and Capital
ResourcesDebt below.
Income Tax Expense.
Income
tax expense increased $0.8 million to $3.0 for the third quarter of 2007 from
$2.2 million for the third quarter of 2006. Our effective tax rate was 37.9%
for the third quarter of 2007 and 38.8% for the third quarter of 2006.
First three quarters of 2007 compared to first three
quarters of 2006.
Net Sales.
Net
sales increased $38.9 million or 13.0% to $339.0 million for the first three quarters of 2007 from $300.1
million for the first three
quarters of 2006. The net sales increase for the first three quarters of 2007
included $34.2 million from the
Cream of Wheat
acquisition
offset by a decrease in net sales of $2.4 million relating to the termination
of a temporary co-packing arrangement. The remaining $7.1 million net sales
increase related to increases in sales price and unit volume. Net sales of our
lines of
Maple Grove
Farms, Grandmas
,
Ortega, Polaner, Las
Palmas,
B&M
and
Joan
of Arc
products increased
in
the amounts of $7.1 million, $1.4 million, $0.8 million, $0.6 million, $0.5
million, $0.4 million and $0.3 million or 17.1%, 28.7%, 1.2%, 2.2%, 2.7%, 1.9%
and 5.0%, respectively. These increases were offset by a reduction in net sales
of
Emerils,
B&G,
Regina
and
Underwood
products of $1.9 million, $1.0
million, $0.7 million and $0.7 million or 12.2%, 2.9%, 8.0% and 4.2%,
respectively. In the aggregate, net sales for all other brands increased $0.3
million or 0.7%.
Gross Profit.
Gross
profit increased $22.7 million or 26.5% to $108.3 million for the first three
quarters of 2007 from $85.6 million for the first three quarters of 2006. Gross
profit expressed as a percentage of net sales increased 3.4% to 31.9% in the
first three quarters of 2007 from 28.5% in the first three quarters of 2006. The
increase in gross profit expressed as a percentage of net sales was primarily
due to the positive effect of the
Cream of Wheat
acquisition,
which improved our overall gross profit expressed as a percentage of net sales
by 3.8%. Our gross profit expressed as a percentage of net sales for all other
brands in the aggregate decreased by 0.4% primarily due to the mix of products
sold and the higher costs for packaging, corn sweeteners and maple syrup
partially offset by sales price increases.
Sales, Marketing and Distribution
Expenses.
Sales, marketing and distribution expenses
increased $3.7 million or 10.9% to $37.2 million for the first three quarters
of 2007 from $33.5 million for the first three
25
quarters of 2006. The increase is primarily due to an
increase in brokerage and salesmen compensation of $2.3 million (relating to
increased sales volume from the
Cream of Wheat
acquisition
and internal sales growth), an increase in consumer marketing of $1.1 million
and an increase in distribution costs of $0.3 million. Expressed as a
percentage of net sales, our sales, marketing and distribution expenses
decreased to 11.0% for the first three quarters of 2007 from 11.2% for the
first three quarters of 2006.
General and Administrative Expenses.
General and administrative expenses increased $1.7 million or
34.5% to $6.8 million for the first three quarters of 2007 from $5.1 million in
the first three quarters of 2006. The increase in general and administrative
expenses primarily resulted from an accrual of $1.4 million for special bonus
awards, an increased incentive compensation accrual of $0.7 million relating to
our 2007 annual bonus plan and an increase in other miscellaneous expenses of
$0.4 million, offset by an insurance reimbursement of $0.8 million relating to
a previously reported employee theft. During the fourth quarter of 2007, we
expect to accrue an additional expense of $0.5 million relating to the special
bonus awards.
Gain on Sale of Property, Plant and
Equipment.
Gain on
sale of property, plant and equipment for the first three quarters of
2006 related to the gain on the
sale of our New Iberia facility of $0.5 million. There were no gains or losses
on the sale of property, plant and equipment for the first three quarters of
2007.
Amortization ExpenseCustomer
Relationships.
Amortization expensecustomer relationships,
all of which relates to the amortization of customer relationship intangibles
acquired in the
Grandmas
molasses and
Cream of Wheat
acquisitions, increased $3.4 million to $3.9
million for the first three quarters of 2007 from $0.5 million for the first
three quarters of 2006.
Operating Income.
As
a result of the foregoing, operating income increased $13.4 million or 28.5% to
$60.4 million for the first three quarters of 2007 from $47.0 million for the
first three quarters of 2006. Operating income expressed as a percentage of net
sales increased to 17.8% in the first three quarters of 2007 from 15.7% in the
first three quarters of 2006.
Net Interest Expense.
Net
interest expense increased $7.2 million or 22.1% to $40.0 million for the first
three quarters of 2007 from $32.8 million in the first three quarters of 2006. Interest
expense for the first three quarters of 2007 included a write-off of deferred
financing costs of $1.8 million relating to our prepayment of $100.0 million of
term loan borrowings with a portion of the proceeds of our public offering of Class A
common stock in May 2007. Our average debt outstanding was approximately
$115.0 million higher for the first three quarters of 2007 as compared to the
first three quarters of 2006. See Liquidity and Capital ResourcesDebt
below.
Income Tax Expense.
Income
tax expense increased $2.2 million or 40.0% to $7.7 million for the first three
quarters of 2007 from $5.5 million for the first three quarters of 2006. Our
effective tax rate was 37.9% for the first three quarters of 2007 and 38.8% for
the first three quarters of 2006.
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 financing for acquisitions and dividend
payments, if any, 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 $3.0 million to $21.2 million for
the first three quarters of 2007 from $18.2 million for the first three
quarters of 2006. The increase was due to changes relating to an increase in
net income, trade accounts payable and accrued expenses offset by an increase
in accounts receivable and inventory. Working capital at September 29,
2007 was $117.4 million, an increase of $14.4 million over working capital at December 30,
2006 of $103.0 million.
26
Net cash used in investing activities for the first
three quarters of 2007 was $211.8 million as compared to $34.6 million for the
first three quarters of 2006. Capital expenditures during the first three
quarters of 2007 were $10.9 million and included expenditures relating to the
expansion of our Stoughton, Wisconsin facility and the pending transfer of a
portion of the
Cream of Wheat
production to that
facility as well as the routine purchase of manufacturing and computer
equipment. Capital expenditures during the first three quarters of 2007 were
$5.1 million greater than our capital expenditures of $5.8 million during the
first three quarters of 2006. Investment expenditures for the first three
quarters of 2007 included $200.9 million for the
Cream of
Wheat
acquisition. Investment expenditures for the first three
quarters of 2006 included $30.1 million for the
Grandmas
molasses acquisition. We received net proceeds from the sale of property of
$1.3 million during the first three quarters of 2006.
Net cash provided by financing activities for the
first three quarters of 2007 was $195.5 million as compared to $11.9 million
for the first three quarters of 2006. Net cash provided by financing activities
for the first three quarters of 2007 consists of $205.0 million from additional
term loan borrowings and $193.2 million from the issuance of Class A
common stock, net of underwriting discounts and commissions and other expenses,
offset by $100.0 million for the prepayment of term loan borrowings, $82.4
million for the repurchase of Class B common stock, $16.3 million for the
payment of dividends to holders of our Class A common stock and $4.0
million in debt issuance costs. Net cash provided by financing activities for
the first three quarters of 2006 consisted of $25.0 million from term loan
borrowings, offset by $12.7 million in dividends paid to holders of our Class A
common stock and $0.4 million in debt issuance costs.
Based on a number of
factors, including our trademark and goodwill amortization for tax purposes
from our prior acquisitions, we realized a significant reduction in cash taxes
in 2006 and 2005 as compared to our tax expense for financial reporting
purposes. While we expect cash taxes to increase beginning in 2007 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 2007 through 2022 that will not
be reflected in our income tax expense for financial statement purposes.
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. The current intended
dividend rate for our Class A common stock is $0.848 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, if any, depend on, among other things, our
results of operations, cash requirements, financial condition, contractual
restrictions, business opportunities, provisions of applicable law and other
factors that our board of directors may deem relevant. 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. The indenture governing our senior subordinated notes, the terms of
our revolving credit facility and the indenture governing the senior notes
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
27
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 2007 and 2006, we had
cash flows provided by operating activities of $21.2 million and $18.2 million,
and distributed $16.3 million and $12.7 million as dividends, respectively. If
our cash flows from operating activities for future periods were to fall below
our minimum expectations (or if our assumptions as to capital expenditures or
interest expense were too low or our assumptions as to the sufficiency of our
revolving credit facility to finance our working capital needs were to prove
incorrect), we would need either to reduce or eliminate dividends or, to the
extent permitted under the indenture governing our senior notes, the indenture
governing our senior subordinated notes and the terms of our credit facility,
fund a portion of our dividends with borrowings or from other sources. If we
were to use working capital or permanent borrowings to fund dividends, we would
have less cash and/or borrowing capacity available for future dividends and
other purposes, which could negatively impact our financial position, our
results of operations, our liquidity and our ability to maintain or expand our
business.
Acquisitions
Our liquidity and capital resources have been
significantly impacted by acquisitions and may be impacted in the foreseeable
future by additional acquisitions. We have historically financed acquisitions
with borrowings and cash flows from operating activities. Our interest expense
has increased significantly as a result of additional indebtedness we have
incurred as a result of the
Grandmas
molasses
acquisition in January 2006 and the
Cream of Wheat
acquisition in February 2007, and will increase with any additional
indebtedness we may incur to finance potential future acquisitions, if any. To
the extent future acquisitions, if any, are financed by additional
indebtedness, the resulting increase in debt and interest expense could have a
negative impact on liquidity.
Environmental and Health and
Safety Costs
We have not made any material expenditures during the
first three quarters of 2007 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
. In October 2004, we entered into a $30.0
million senior secured revolving credit facility. In order to finance the
Grandmas
molasses acquisition, we amended the credit
facility in January 2006 to provide for, among other things, a new $25.0
million term loan and a reduction in the revolving credit facility commitments
from $30.0 million to $25.0 million. In order to finance the
Cream of Wheat
acquisition, our credit facility was amended
and restated in February 2007 to provide for, among other things, an additional
$205.0 million of term loan borrowings. On May 29, 2007 we prepaid $100.0
million of term loan borrowings. Our $25.0 million revolving credit facility
matures on January 10, 2011 and the remaining $130.0 million of term loan
borrowings matures on February 26, 2013.
Interest under the revolving
credit facility, including any outstanding letters of credit, is determined
based on alternative rates that we may choose in accordance with the revolving
credit facility, including the base lending rate per annum plus an applicable
margin, and LIBOR plus an applicable margin. We pay a commitment fee of 0.50%
per annum on the unused portion of the revolving credit facility. Interest
under the
28
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%.
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. The interest rate for the remaining $100.0 of term loan
borrowings, which we subsequently prepaid, was 7.36% as of the prepayment date
(based upon a three-month LIBOR rate contract that expired on May 25,
2007). The swap is designated as a cash flow hedge under the guidelines of SFAS
No. 133. The swap is in place through the life of the term loan, ending on
February 26, 2013. Changes in fair value of the swap are recorded in
accumulated other comprehensive income (loss), net of tax on our consolidated
balance sheet.
Our obligations under the
credit facility are jointly and severally and fully and unconditionally
guaranteed on a senior basis by all of our existing and certain future domestic
subsidiaries. The credit facility is secured by substantially all of our and
our subsidiaries assets except our and our subsidiaries real property. The
credit facility provides for mandatory prepayment based on asset dispositions
and certain issuances of securities, as defined. The credit facility contains
covenants that restrict, among other things, our ability to incur additional
indebtedness, pay dividends and create certain liens. The credit facility also
contains certain financial maintenance covenants, which, among other things,
specify maximum capital expenditure limits, a minimum interest coverage ratio
and a maximum senior and total leverage ratio, each ratio as defined. 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 revolving
credit facility was undrawn on the date of consummation of our 2004 EIS
offering and concurrent offerings and remained undrawn through September 29,
2007. The available borrowing capacity under our revolving credit facility, net
of outstanding letters of credit of $2.6 million, was $22.4 million at September 29,
2007. 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.
12.0% Senior Subordinated Notes due 2016
.
In October 2004, we issued $165.8 million aggregate principal amount of
12.0% senior subordinated notes due 2016, $143.0 million of which in the form
of EISs and $22.8 million separate from EISs. As of September 29, 2007,
$122.4 million aggregate principal amount of senior subordinated notes was held
in the form of EISs and $43.4 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 at our option as described below.
Upon the occurrence of a
change of control (as defined in the indenture), unless we have retired the
senior subordinated notes or exercised our right to redeem all senior
subordinated notes as described below, each holder of the senior subordinated
notes has the right to require us to repurchase that holders senior
subordinated notes at a price equal to 101.0% of the principal amount of the
senior subordinated notes being repurchased, plus any accrued and unpaid
interest to the date of repurchase. In order to exercise this right, a holder
must separate the senior subordinated notes and Class A common stock
represented by such holders EISs.
We may not redeem the notes
prior to October 30, 2009. However, we may, from time to time, seek to
retire the 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. We expect that any repurchase of
EISs or senior subordinated notes would be funded with our existing cash
balances and cash from operations. The amounts involved may be material.
29
In addition, on and after October 30,
2009, we may redeem for cash all or part of the senior subordinated notes at a
redemption price of 106.0% beginning October 30, 2009 and thereafter at
prices declining annually to 100% on or after October 30, 2012. If we
redeem any senior subordinated notes, the senior subordinated notes and Class A
common stock represented by each EIS will be automatically separated.
The senior subordinated
notes are unsecured obligations and are subordinated in right of payment to all
of our existing and future senior secured and senior unsecured indebtedness,
including the indebtedness under our credit facility and our senior notes. The
senior subordinated notes rank pari passu in right of payment with any of our
other subordinated indebtedness.
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 the indenture
governing the senior subordinated notes. 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 present foreign subsidiaries are not
guarantors, and any future foreign or partially owned domestic subsidiaries
will not be guarantors, of our senior subordinated notes.
The indenture governing the
senior subordinated notes contains covenants with respect to us 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.
8.0% Senior Notes due 2011
. In October 2004, we issued $240.0
million aggregate principal amount of 8.0% senior notes due 2011. Interest on
the senior notes is payable on April 1 and October 1 of each year. The
senior notes will mature on October 1, 2011, unless earlier retired or
redeemed at our option as described below.
We may not redeem the notes
prior to October 1, 2008. However, we may, from time to time, seek to retire
the senior notes through cash repurchases of senior subordinated notes and/or
exchanges of senior notes for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors.
On or after October 1,
2008, we may redeem some or all of the senior notes at a redemption price of
104.0% beginning October 1, 2008 and thereafter at prices declining
annually to 100% on or after October 1, 2010. Prior to October 1,
2007, we may redeem up to 35% of the aggregate principal amount of the senior
notes issued in the senior note offering with the net proceeds of one or more
equity offerings at the redemption price as described in the indenture
governing the senior notes. 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 the indenture governing the
senior notes plus accrued and unpaid interest to the date of redemption.
Our obligations under the
senior notes are jointly and severally and fully and unconditionally guaranteed
on a senior basis by all of our existing and certain future domestic
subsidiaries. The senior notes and the subsidiary guarantees are our and the
guarantors general unsecured obligations and are effectively junior in right
of payment to all of our and the guarantors secured indebtedness and to the
indebtedness and other liabilities of our non-guarantor subsidiaries; are pari
passu in right of payment to all of our and the guarantors existing and future
unsecured senior debt; and are senior in right of payment to all of our and the
guarantors future subordinated debt, including the senior subordinated notes. Our
present foreign subsidiaries
30
are
not guarantors, and any future foreign or partially owned domestic subsidiaries
will not be guarantors, of our senior notes.
The indenture governing the
senior notes 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.
Future Capital
Needs
We are highly leveraged. On September 29,
2007, our total long-term debt and stockholders equity was $535.8 million and
$178.1 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, make future acquisitions within our line of business, if
any, and pay our anticipated dividends on our Class A common stock.
We
expect to make capital expenditures of approximately $13.0 million in the
aggregate during fiscal 2007.
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 2006 and the
first three quarters of 2007, we were faced with increasing prices in certain commodities
and packaging materials and we expect this trend may continue. 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. Our
cost increases in fiscal 2006 and the first three quarters of 2007 were
partially attributable to the spike in oil and natural gas prices, which have
had a substantial impact on our raw material, packaging and transportation
costs. We believe that through sales price increases and our cost saving
efforts we have to some degree been able to offset the impact of recent raw
material, packaging and transportation cost increases. There can be no
assurance, however, that any future sales price increases or cost saving efforts
by us will offset the increased cost of raw material, packaging and
transportation costs, or that we will be able to raise prices or reduce costs
at all.
Recent
Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation
No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that the company has taken or expects to
31
take on a tax return. FIN 48 states that a tax benefit
from an uncertain tax position may be recognized only if it is more likely
than not that the position is sustainable, based on its technical merits. The tax
benefit of a qualifying position is the largest amount of tax benefit that is
greater than 50% likely of being realized upon settlement with a taxing
authority having full knowledge of all relevant information. A tax benefit from
an uncertain position was previously recognized if it was probable of being
sustained. Under FIN 48, the liability for unrecognized tax benefits is
classified as non-current unless the liability is expected to be settled in
cash within 12 months of the reporting date. FIN 48 is effective as of the
beginning of the first fiscal year beginning after December 15, 2006. We
adopted the provisions of FIN 48 at the beginning of fiscal 2007. On May 2,
2007, the FASB issued FASB Staff Position No. 48-1,
Definition
of Settlement in FASB Interpretation 48
(FIN 48-1). FIN 48-1 amends
FIN 48 to provide guidance on how an enterprise should determine whether a tax
position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The guidance in FIN 48-1 is to be applied upon the
initial adoption of FIN 48. Accordingly, we have applied the provisions of FIN
48-1 at the beginning of fiscal 2007. As a result of the adoption of FIN 48, as
amended by FIN 48-1, we reclassified $0.2 million to other non-current liabilities.
We operate in multiple taxing jurisdictions within the
United States and Canada and from time to time face audits from various tax
authorities regarding the deductibility of certain expenses, state income tax
nexus, intercompany transactions, transfer pricing and other matters. At the
beginning of fiscal 2007, our liability for unrecognized tax benefits was
approximately $0.2 million (of which the entire amount would impact our
effective tax rate if recognized) plus approximately $0.1 million of accrued
interest and penalties. This liability for unrecognized tax benefits all
related to state income taxes and Canadian income taxes. During the third
quarter of 2007, we paid the Canadian income tax liability in full. There was
no material change in the net amount of unrecognized tax benefits during the
first three quarters of 2007.
Although we do not believe that we are currently under
examination in any of our major tax jurisdictions, we remain subject to
examination in all of our tax jurisdictions until the applicable statutes of
limitations expire. As of September 29, 2007, a summary of the tax years
that remain subject to examination in our major tax jurisdictions are:
United StatesFederal
|
|
2003 and forward
|
United StatesStates
|
|
2002 and forward
|
Canada
|
|
2006 and forward
|
Based upon the expiration of statutes of limitations
and the conclusion of tax examinations in several jurisdictions, we believe it
is reasonably possible that the total amount of previously unrecognized tax
benefits may decrease by $0.1 million within twelve months of the reporting
date.
Our policy is to classify interest and penalties
related to income tax uncertainties as income tax expense.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The provisions of SFAS No. 157
are effective as of the beginning of our 2008 fiscal year. We are currently
evaluating the impact, if any, of adopting SFAS No. 157 on our
consolidated financial statements.
Off-balance Sheet Arrangements
As of September 29, 2007, we did not have any
off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
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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 2007, there were no material
changes outside the ordinary course of business in the specified contractual
obligations, except that in February 2007 we incurred additional long-term
debt of $205.0 million in the form of additional term loan borrowings under our
credit facility, $100.0 million of which we prepaid in May 2007. As
amended, our $25.0 million revolving credit facility matures on January 10,
2011 and $130.0 million of our term loan borrowings matures on February 26,
2013. See DebtSenior Secured Credit Facility above. In addition, during the
first three quarters of 2007, we made contributions to our defined benefit
pension plans of $2.1 million and currently anticipate electing to make
additional payments of approximately $1.6 million during the remainder of
fiscal 2007.
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
transportation, packaging and energy costs;
our ability to successfully implement sales
price increases and cost saving measures to offset cost increases;
intense competition, changes in consumer preferences,
demand for our products and local economic and market conditions;
our continued ability to promote brand equity
successfully, to anticipate and respond to new consumer trends, to develop new
products and markets, to broaden brand portfolios in order to compete
effectively with lower priced products and in markets that are consolidating at
the retail and manufacturing levels and to improve productivity;
the risks associated with the expansion of
our business;
our possible inability to integrate any
businesses we acquire;
our ability to maintain access to 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 in Canada;
and
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, as well as recent publicity concerning the health
implications of obesity;
competitors
pricing practices and promotional spending levels; and
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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 Annual Report on Form 10-K/A for fiscal 2006.
Developments in any of these areas could cause our
results to differ materially from results that have been or may be projected by
or on our behalf.
All forward-looking statements included in this report
are based on information available to us on the date of this report. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained in this report. We caution that the
foregoing list of important factors is not exclusive. We urge investors not to
unduly rely on forward-looking statements contained in this report.
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk
In the normal course of operations, we are exposed to
market risks arising from adverse changes in interest rates. Market risk is
defined for these purposes as the potential change in the fair value of a
financial asset or liability resulting from an adverse movement in interest
rates.
Interest under our $25.0
million revolving credit facility, including any outstanding letters of credit,
is determined based on alternative rates that we may choose in accordance with
the revolving credit facility, including the base lending rate per annum plus
an applicable margin, and LIBOR plus an applicable margin. Interest under our
term loan facility is determined based on alternative rates that we may choose
in accordance with the credit facility, including the base lending rate per
annum plus an applicable margin of 1.00%, and LIBOR plus an applicable margin
of 2.00%. The interest rate payable for our $130.0 million of term loan
borrowings is effectively fixed at 7.0925% based upon a six year interest rate
swap agreement that we entered into on February 26, 2007.
We also have outstanding $240.0 million principal
amount of 8.0% senior notes due October 1, 2011, with interest payable
semiannually on April 1 and October 1 of each year. The fair value of
the senior notes at September 29, 2007 and December 30, 2006, based
on quoted market prices, was $238.8 million and $244.8 million, respectively.
We also have outstanding $165.8 million principal
amount of 12.0% senior subordinated notes due 2016. Of such outstanding
principal amount, $122.4 million principal amount was represented by 17,115,567
EISs as of September 29, 2007, and $143.0 million principal amount was
represented by 20,000,000 EISs as of December 30, 2006. Each EIS
represents one share of our Class A common stock and $7.15 principal
amount of our senior subordinated notes. As of September 29, 2007, the
fair value of the EISs, based on the per EIS closing price on the New York
Stock Exchange was $355.1 million. As of December 30, 2006, the fair value
of the EISs, based on the per EIS closing price on the American Stock Exchange
was $400.4 million. It is not practicable to estimate the fair value of the
principal amount of senior subordinated notes represented by EISs.
Of the $165.8 million aggregate principal amount of
senior subordinated notes outstanding, $43.4 million and $22.8 million
principal amount as of September 29, 2007 and December 31, 2006,
respectively, was not represented by EISs and traded separately. The fair value
of the separate senior subordinated notes at September 29, 2007 and December 30,
2006, based on quoted market prices, was $47.1 million and $25.5 million,
respectively.
The information under the heading Inflation under
Item 2, Managements Discussion and Analysis of Financial Condition and
Results of Operations is incorporated herein by reference.
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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.
35