Table of Contents
As filed with the Securities and
Exchange Commission on July 28, 2008
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x
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Quarterly
Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the quarterly period ended June 28, 2008
or
o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
.
Commission file number 001-32316
B&G FOODS,
INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
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13-3918742
(I.R.S. Employer Identification No.)
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|
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4 Gatehall Drive, Suite 110, Parsippany, New
Jersey
(Address of principal executive offices)
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07054
(Zip Code)
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Registrants telephone number, including area code:
(973) 401-6500
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See the
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
Accelerated filer
x
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Non-accelerated
filer
o
(Do not check if a smaller reporting company)
|
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 June 28, 2008, the registrant had 36,796,988 shares of Class A
common stock, par value $0.01 per share, issued and outstanding, 16,764,277 of
which were held in the form of Enhanced Income Securities (EISs) and 20,032,711
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 June 28, 2008, the registrant had
no shares of Class B common stock, par value $0.01 per share, issued or
outstanding.
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
B&G Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)
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June 28, 2008
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December 29, 2007
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Assets
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Current assets:
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Cash and cash equivalents
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$
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24,086
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$
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36,606
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Trade accounts receivable, net
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37,569
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42,362
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Inventories
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99,283
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93,181
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Prepaid expenses
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2,894
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3,556
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Income tax receivable
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301
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569
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Deferred income taxes
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648
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648
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Total current assets
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164,781
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176,922
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Property, plant and equipment, net of accumulated depreciation of
$59,954 and $55,679
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54,369
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49,658
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Goodwill
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253,353
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253,353
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Trademarks
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227,220
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227,220
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Customer relationship intangibles, net
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119,543
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122,768
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Net deferred debt issuance costs and other assets
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15,670
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17,669
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Total assets
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$
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834,936
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$
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847,590
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Liabilities and Stockholders
Equity
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Current liabilities:
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Trade accounts payable
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$
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27,817
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$
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32,126
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Accrued expenses
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16,363
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21,894
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Dividends payable
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7,801
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7,797
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Total current liabilities
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51,981
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61,817
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Long-term debt
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535,800
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535,800
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Other liabilities
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6,274
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6,376
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Deferred income taxes
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73,205
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68,962
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Total liabilities
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667,260
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672,955
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Stockholders equity:
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Preferred stock, $0.01 par value per share. Authorized 1,000,000
shares; no shares issued or outstanding
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Class A common stock, $0.01 par value per share. Authorized
100,000,000 shares; 36,796,988 and 36,778,988 shares issued and outstanding
as of June 28, 2008 and December 29, 2007
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368
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368
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Class B common stock, $0.01 par value per share. Authorized
25,000,000 shares; no shares issued or outstanding
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Additional paid-in capital
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186,957
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202,197
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Accumulated other comprehensive loss
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(3,376
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)
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(3,718
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)
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Accumulated deficit
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(16,273
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)
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(24,212
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)
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Total stockholders equity
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167,676
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174,635
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Total liabilities and stockholders equity
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$
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834,936
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$
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847,590
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See Notes to Consolidated
Financial Statements.
1
Table
of Contents
B&G Foods, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
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Thirteen Weeks Ended
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Twenty-six Weeks Ended
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June 28,2008
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June 30, 2007
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June 28, 2008
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June 30, 2007
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Net sales
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$
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119,184
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$
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118,204
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$
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235,526
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$
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221,949
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Cost of goods sold
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85,626
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80,881
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167,038
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151,943
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Gross profit
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33,558
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37,323
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68,488
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70,006
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Operating expenses:
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Sales, marketing and distribution expenses
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11,461
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12,566
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23,750
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24,070
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General and administrative expenses
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1,882
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1,598
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3,240
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3,428
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Amortization expensecustomer relationships
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1,612
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1,613
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3,225
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2,276
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Operating income
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18,603
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21,546
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38,273
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40,232
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Other expenses:
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Interest expense, net
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12,908
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15,529
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25,479
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27,654
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Income before income tax expense
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5,695
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6,017
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12,794
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12,578
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Income tax expense
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2,165
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2,280
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4,855
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4,767
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Net income
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$
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3,530
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$
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3,737
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7,939
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7,811
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Earnings per share calculations:
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Basic and diluted distributed earnings per share:
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Class A common stock
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$
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0.21
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$
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0.30
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$
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0.42
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$
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0.52
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Basic and diluted earnings (loss) per share:
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Class A common stock
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$
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0.10
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$
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0.17
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$
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0.22
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$
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0.38
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Class B common stock
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$
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$
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(0.13
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)
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$
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$
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(0.14
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)
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See Notes to Consolidated
Financial Statements.
2
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
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Twenty-six Weeks Ended
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June 28, 2008
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June 30, 2007
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Cash flows from operating activities:
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Net income
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$
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7,939
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$
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7,811
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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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7,533
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5,863
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Amortization of deferred debt issuance costs
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1,584
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1,605
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Deferred income taxes
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4,045
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3,842
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Write off of deferred debt issuance costs
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1,769
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Stock-based compensation expense
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358
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Changes in assets and liabilities, net of effects of business
acquired:
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Trade accounts receivable
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4,793
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(1,228
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)
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Inventories
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(6,102
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)
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(10,497
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)
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Prepaid expenses
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662
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|
484
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Income tax receivable
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268
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(61
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)
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Other assets
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415
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(8
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)
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Trade accounts payable
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(4,309
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)
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2,308
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Accrued expenses
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(5,516
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)
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117
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Other liabilities
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423
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(175
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)
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Net cash provided by operating activities
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12,093
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11,830
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Cash flows from investing activities:
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Capital expenditures
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(9,034
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)
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(6,496
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)
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Payments for acquisition of businesses
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(200,936
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)
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Net cash used in investing activities
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(9,034
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)
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(207,432
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)
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Cash flows from financing activities:
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Payments of long-term debt
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(100,000
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)
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Proceeds from issuance of long-term debt
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205,000
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Payments for repurchase of Class B common stock
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(82,417
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)
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Proceeds from issuance of Class A common stock, net
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193,226
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Dividends paid
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(15,594
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)
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(8,480
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)
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Payment of debt issuance costs
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(4,001
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)
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Net cash (used in) provided by financing activities
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(15,594
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)
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203,328
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Effect of exchange rate fluctuations on cash and cash equivalents
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15
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74
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Net (decrease) increase in cash and cash equivalents
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(12,520
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)
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7,800
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Cash and cash equivalents at beginning of period
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36,606
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29,626
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Cash and cash equivalents at end of period
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$
|
24,086
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$
|
37,426
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Supplemental disclosures of cash flow
information:
|
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Cash interest payments
|
|
$
|
23,928
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|
$
|
23,859
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|
Cash income tax payments
|
|
$
|
606
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|
$
|
547
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|
Cash income tax refunds
|
|
$
|
(60
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)
|
$
|
(91
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)
|
Non-cash transactions:
|
|
|
|
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|
Dividends declared and not yet paid
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|
$
|
7,801
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|
$
|
7,797
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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 through a nationwide network of
independent brokers and distributors to supermarket chains, food service
outlets, mass merchants, warehouse clubs, non-food outlets and specialty food
distributors. We distribute several of
our brands in the greater New York metropolitan area primarily through
direct-store-delivery.
Recent Acquisition
Effective
February 25, 2007, we completed the acquisition of the
Cream of Wheat
and
Cream of Rice
business
from Kraft Foods Global, Inc. The
final purchase price, including transaction costs, was $200.5 million. We refer to the
Cream of
Wheat
and
Cream of Rice
acquisition
as the
Cream of Wheat
acquisition and the
Cream of Wheat
and
Cream of Rice
businesses
collectively as the
Cream of Wheat
business.
The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets acquired and results of operations are included in our
consolidated financial statements from the date of the acquisition. The excess of the purchase price over the
fair value of identifiable net assets acquired represents goodwill. Trademarks are deemed to have an indefinite
useful life and are not amortized.
Customer relationship intangibles are amortized over 20 years. Goodwill, customer relationship intangibles
and trademarks amortization are deductible for income tax purposes.
Class A Common Stock Offering
On May 29,
2007, we completed a public offering of 15,985,000 shares of our Class A
common stock as a separately traded security, which includes 2,085,000 shares
issued pursuant to the fully exercised underwriters option to purchase
additional shares, at $13.00 per share.
The shares of our separately traded Class A common stock trade on
the New York Stock Exchange under the trading symbol BGS and trade separately
from our Enhanced Income Securities (EISs), which trade on the New York Stock
Exchange under the trading symbol BGF.
Each EIS represents one share of our Class A common stock and $7.15
principal amount of our senior subordinated notes.
The
proceeds of the Class A common stock offering were $193.2 million, after
deducting underwriting discounts and commissions and other expenses. In connection with the offering, we
repurchased 6,762,455 outstanding shares of our Class B common stock for
$82.4 million, and the remaining 793,988 shares of our outstanding Class B
common stock were exchanged for an equal number of shares of Class A
common stock. See note 9, Related-Party
Transactions. We also prepaid $100.0
million of our term loan borrowings under our senior secured credit
facility. The remaining funds were
allocated for general corporate purposes.
The
holders of our EISs may separate each EIS into one share of Class A common
stock and $7.15 principal amount of senior subordinated notes at any time. Upon the occurrence of certain events
(including redemption of the senior subordinated notes or upon maturity of the
senior subordinated notes), EISs will automatically separate. Conversely, subject to limitations, a holder
of separate shares of Class A common stock and senior subordinated notes
can combine such securities to form EISs.
Separation and combination of
4
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(1)
Nature of Operations (Continued)
EISs will automatically result in increases and
decreases, respectively, in the number of shares of Class A common stock
not held in the form of EISs. As of June 28,
2008, we had 36,796,988 shares of Class A common stock issued and
outstanding, 16,764,277 of which were held in the form of EISs and 20,032,711
of which were held separate from EISs.
As of June 30, 2007, we had 36,778,988 shares of Class A
common stock issued and outstanding, 18,895,867 of which were held in the form
of EISs and 17,883,121 of which were held separate from EISs.
(2)
Summary of Significant Accounting
Policies
Fiscal Year
Our
financial statements are presented on a consolidated basis. Typically, our fiscal quarters and fiscal
year consist of 13 and 52 weeks, respectively, ending on the Saturday closest
to December 31 in the case of our fiscal year and fourth fiscal quarter,
and on the Saturday closest to the end of the corresponding calendar quarter in
the case of our fiscal quarters. As a
result, a 53rd week is added to our fiscal year every five or six years. In a 53-week fiscal year our fourth fiscal
quarter contains 14 weeks. Our fiscal
year ending January 3, 2009 (fiscal 2008) contains 53 weeks and our fiscal
year ended December 29, 2007 (fiscal 2007) contains 52 weeks. Each quarter of fiscal 2008 and 2007 contains
13 weeks, except the fourth quarter of 2008 which will contain 14 weeks.
Basis of Presentation
The accompanying
consolidated interim financial statements for the thirteen and twenty-six week
periods ended June 28, 2008 (second quarter of 2008 and first two quarters
of 2008) and June 30, 2007 (second quarter of 2007 and first two quarters
of 2007) have been prepared by our company in accordance with accounting
principles generally accepted in the United States of America without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC), and
include
the accounts of B&G Foods, Inc. and its subsidiaries. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such rules and
regulations. However, our management
believes, to the best of their knowledge, that the disclosures herein are
adequate to make the information presented not misleading. All intercompany balances and
transactions have been eliminated. The
accompanying unaudited consolidated interim financial statements contain all
adjustments (consisting only of normal and recurring adjustments) that are, in
the opinion of management, necessary to present fairly our consolidated
financial position as of June 28, 2008, the results of our operations for
the second quarter and first two quarters of 2008 and 2007, and cash flows for
the first two quarters of 2008 and 2007.
Our results of operations for the second quarter and first two quarters
of 2008 are not necessarily indicative of the results to be expected for the
full year. The accompanying unaudited
consolidated interim financial statements should be read in conjunction with
the audited consolidated financial statements and notes for fiscal 2007
included in our Annual Report on Form 10-K for fiscal 2007 filed with the
SEC on March 6, 2008.
Use of Estimates
The preparation of
financial statements in accordance with U.S. generally accepted accounting
principles requires our management to make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Some of the more
significant estimates and assumptions made by management involve trade and consumer
promotion expenses; allowances for excess, obsolete and unsaleable inventories;
pension benefits; purchase accounting
5
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(2)
Summary
of Significant Accounting Policies (Continued)
allocations;
the recoverability of goodwill, trademarks, customer relationship intangibles,
property, plant and equipment and deferred tax assets;
the accounting for our enhanced income securities
(EISs); the accounting for earnings per share and the accounting for
stock-based compensation expense. Actual
results could differ from these estimates and assumptions.
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The provisions of SFAS No. 157 are
effective as of the beginning of our 2008 fiscal year, with the exception of
certain provisions deferred until the beginning of our 2009 fiscal year. In February 2008, the FASB issued FASB
Staff Position SFAS No. 157-2,
Effective
Date of FASB Statement No. 157
, which delayed the effective
date of SFAS No. 157 for all non-financial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until January 1, 2009. The impact of the adoption of SFAS No. 157
for financial assets and liabilities was not material to our consolidated
interim financial statements. The
expanded disclosures about fair value measurements for financial assets and
liabilities are presented in note 6. We
have not yet determined the impact that the adoption of SFAS No. 157 will
have on our non-financial assets and liabilities which are not recognized on a
recurring basis;
however
we do not anticipate it to materially impact our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
(SFAS No. 141R),
and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements
(SFAS No. 160). SFAS No. 141R requires an acquirer to
measure the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. SFAS No. 160 clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 141R
and SFAS No. 160 are effective as of the beginning of our 2009 fiscal
year. We are currently evaluating the
potential impact, if any, of the adoption of SFAS No. 141R and SFAS No. 160
on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
. This statement changes the disclosure
requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133
and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position, financial
performance, and cash flows. SFAS No. 161
is effective as of the beginning of our 2009 fiscal year. We are currently
evaluating the potential impact, if any, of the adoption of SFAS No. 161
on our consolidated financial statements.
In April 2008, the FASB
issued FASB Staff Position No. FAS 142-3,
Determination
of the Useful Life of Intangible Assets
(FSP No. FAS
142-3). FSP No. FAS 142-3 requires
companies estimating the useful life of a recognized intangible asset to
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, to consider
assumptions that market participants would use about renewal or extension as
adjusted for entity-specific factors.
FSP No. FAS 142-3 is effective as of the beginning of our 2009
fiscal year. We are currently evaluating
the potential impact, if any, of the adoption of FSP No. FAS 142-3 on our
consolidated financial statements.
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):
|
|
June 28, 2008
|
|
December 29, 2007
|
|
Raw materials and packaging
|
|
$
|
28,304
|
|
$
|
19,573
|
|
Work in process
|
|
1,759
|
|
2,641
|
|
Finished goods
|
|
69,220
|
|
70,967
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,283
|
|
$
|
93,181
|
|
(4)
Goodwill, Trademarks and
Customer Relationship Intangibles
There has been no change
in the carrying amount of goodwill for the period from December 29, 2007
to June 28, 2008.
There has been no change
in the carrying amount of trademarks for the period from December 29, 2007
to June 28, 2008.
Customer relationship
intangibles are presented at cost, net of accumulated amortization, and are
amortized on a straight-line basis over their estimated useful lives of 20
years.
|
|
Customer
Relationship
Intangibles
|
|
Less:
Accumulated
Amortization
|
|
Total
|
|
|
|
(dollars
in thousands)
|
|
Balance at December 29, 2007
|
|
$
|
129,000
|
|
$
|
(6,232
|
)
|
$
|
122,768
|
|
Amortization expense
|
|
|
|
(3,225
|
)
|
(3,225
|
)
|
Balance at June 28, 2008
|
|
$
|
129,000
|
|
$
|
(9,457
|
)
|
$
|
119,543
|
|
Amortization expense associated with customer
relationship intangibles for the second quarter and first two quarters of 2008
was $1.6 million and $3.2 million, respectively, and $1.6 million and $2.3
million, respectively, for the second quarter and first two quarters of 2007,
and is recorded in operating expenses.
We expect to recognize an additional $3.3 million of amortization
expense associated with our current customer relationship intangibles during
the remainder of fiscal 2008, and thereafter $6.5 million per year for each of
the next four succeeding fiscal years.
7
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(5)
Long-term
Debt
Long-term
debt consists of the following, as of the dates indicated (dollars in
thousands):
|
|
June 28, 2008
|
|
December 29, 2007
|
|
Revolving credit facility
|
|
$
|
|
|
$
|
|
|
Term loan
|
|
130,000
|
|
130,000
|
|
Total senior secured credit facility
|
|
130,000
|
|
130,000
|
|
|
|
|
|
|
|
12.0% Senior Subordinated Notes due October 30, 2016
|
|
165,800
|
|
165,800
|
|
8.0% Senior Notes due October 1, 2011
|
|
240,000
|
|
240,000
|
|
Total long-term debt
|
|
$
|
535,800
|
|
$
|
535,800
|
|
As of June 28, 2008, the aggregate
maturities of long-term debt are as follows (dollars in thousands):
Years ending December:
|
|
|
|
2008
|
|
$
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
240,000
|
|
2012
|
|
|
|
Thereafter
|
|
295,800
|
|
Total
|
|
$
|
535,800
|
|
Senior Secured Credit Facility
. In October 2004,
we entered into a $30.0 million senior secured revolving credit facility. In order to finance the
Grandmas
molasses acquisition, we amended
the credit facility in January 2006 to provide for, among other things, a
new $25.0 million term loan and a reduction in the revolving credit facility
commitments from $30.0 million to $25.0 million. In order to finance the
Cream of
Wheat
acquisition, our credit facility was amended and restated in February 2007
to provide for, among other things, an additional $205.0 million of term loan
borrowings. On May 29, 2007, we
prepaid $100.0 million of term loan borrowings.
Our $25.0 million revolving credit facility matures on January 10,
2011 and the remaining $130.0 million of term loan borrowings matures on February 26,
2013.
Interest under the revolving credit facility,
including any outstanding letters of credit, is determined based on alternative
rates that we may choose in accordance with the revolving credit facility,
including the base lending rate per annum plus an applicable margin, and LIBOR
plus an applicable margin. We pay a
commitment fee of 0.50% per annum on the unused portion of the revolving credit
facility. Interest under the term loan
facility is determined based on alternative rates that we may choose in
accordance with the credit facility, including the base lending rate per annum
plus an applicable margin of 1.00%, and LIBOR plus an applicable margin of
2.00%.
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 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.
8
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(5)
Long-term Debt (Continued)
Our obligations under the credit facility are
jointly and severally and fully and unconditionally guaranteed on a senior
basis by all of our existing and certain future domestic subsidiaries. The credit facility is secured by
substantially all of our and our subsidiaries assets except our and our subsidiaries
real property. The credit facility
provides for mandatory prepayment based on asset dispositions and certain
issuances of securities, as defined. The
credit facility contains covenants that restrict, among other things, our
ability to incur additional indebtedness, pay dividends and create certain
liens. The credit facility also contains
certain financial maintenance covenants, which, among other things, specify
maximum capital expenditure limits, a minimum interest coverage ratio and a maximum
senior and total leverage ratio, each ratio as defined. As of June 28, 2008, we were in
compliance with all of the covenants in the credit facility. Proceeds of the revolving credit facility are
restricted to funding our working capital requirements, capital expenditures
and acquisitions of companies in the same line of business as our company,
subject to specified criteria. The
revolving credit facility was undrawn on the date of its commencement in October 2004
and remained undrawn through June 28, 2008. The available borrowing capacity under our
revolving credit facility, net of outstanding letters of credit of $2.5
million, was $22.5 million at June 28, 2008. 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.
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 subsidiaries that are not
guarantors of our senior subordinated notes and senior notes are, individually
and in the aggregate, minor subsidiaries as that term is used in Rule 3-10
of Regulation S-X promulgated by the SEC.
There are no significant restrictions on our ability and the ability of
our subsidiaries to obtain funds from our respective subsidiaries by dividend
or loan. Consequently, separate
financial statements have not been presented for our subsidiaries because
management has determined that they would not be material to investors.
Deferred
Debt Issuance Costs
. In connection with the issuance of our senior
subordinated notes and our senior notes in October, 2004, we capitalized
approximately $23.1 million of financing costs, which will be amortized over
their respective terms. In connection
with the issuance of our term loan in January 2006, we capitalized approximately
$0.4 million of additional financing costs, which will be amortized over the
term of the loan. In connection with the
issuance of additional term loan borrowings of $205.0 million in February 2007
we capitalized approximately $4.0 million of additional debt issuance
costs. During the second quarter of 2007
we wrote-off and expensed $1.8 million of deferred debt issuance costs in
connection with our May 2007 prepayment of $100.0 million of term loan
borrowings. As of June 28, 2008 and
December 29, 2007 we had net deferred debt issuance costs of $14.8 million
and $16.4 million, respectively.
At June 28,
2008 and December 29, 2007 accrued interest of $8.9 million is included in
accrued expenses in the accompanying consolidated balance sheets.
(6)
Financial Instruments
We
adopted SFAS No. 157 on December 30, 2007, the first day of our 2008
fiscal year. SFAS No. 157 defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (an exit price). The standard outlines a valuation
framework and creates a fair value hierarchy in order to increase the
consistency and comparability of fair value measurements and the related
disclosures. Under generally accepted accounting principles, certain assets and
liabilities must be measured at fair value, and SFAS No. 157 details the
disclosures that are required for items measured at fair value.
9
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(6)
Financial Instruments
(Continued)
Financial assets and liabilities
are measured using inputs from the three levels of the SFAS No. 157 fair
value hierarchy. The three levels are as follows:
Level 1Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities.
Level 2Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or liability
(i.e., interest rates, yield curves, etc.), and inputs that are derived
principally from or corroborated by observable market data by correlation or
other means (market corroborated inputs).
Level 3Unobservable inputs that
reflect our assumptions about the assumptions that market participants would
use in pricing the asset or liability.
In accordance with the fair value hierarchy
described above, the following table shows the fair value of our interest rate
swap as of June 28, 2008, which is included in Other long-term
liabilities in our consolidated balance sheet (dollars in thousands):
|
|
|
|
Fair Value Measurements as of June 28, 2008
|
|
|
|
June 28, 2008
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Interest rate derivatives
|
|
$
|
5,392
|
|
$
|
|
|
$
|
5,392
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use
our interest rate swap to manage variable interest rate exposure on our $130.0
million of term loan borrowings. Our
objective for holding this derivative is to decrease the volatility of future
cash flows associated with interest payments on our variable rate debt.
Cash and
cash equivalents, trade accounts receivable, income tax receivable, trade
accounts payable, accrued expenses and dividends payable are reflected in the
consolidated balance sheets at carrying value, which approximates fair value
due to the short-term nature of these instruments.
The carrying values and fair values of our
senior notes and senior subordinated notes as of June 28, 2008 and December 29,
2007 are as follows (dollars in thousands):
|
|
June 28, 2008
|
|
December 29, 2007
|
|
|
|
Carrying Value
|
|
Fair Value(1)(2)
|
|
Carrying Value
|
|
Fair Value(1)(3)
|
|
8% Senior Notes due October 1, 2011
|
|
$
|
240,000
|
|
$
|
238,800
|
|
$
|
240,000
|
|
$
|
235,800
|
|
12% Senior Subordinated Notes due October 30, 2016(2):
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
119,865
|
|
127,576
|
|
119,067
|
|
126,561
|
|
held separately
|
|
45,935
|
|
48,891
|
|
46,733
|
|
49,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Fair values are estimated based on quoted
market prices, except as otherwise noted in footnotes (2) and (3) below.
(2)
Solely for purposes of this presentation, we
have assumed that the fair value of each senior subordinated note at June 28,
2008 was $7.61, based upon the $9.10 per share closing price of our separately
traded Class A common stock and the $16.71 per EIS closing price of our
EISs on the New York Stock Exchange on June 27, 2008 (the last business
day of the second quarter of 2008). Each
EIS represents one share of Class A common stock and $7.15 principal
amount of our senior subordinated notes.
(3)
Solely for purposes of this presentation, we
have assumed that the fair value of each senior subordinated note at December 29,
2007 was $7.60, based upon the $10.07 per share closing price of our separately
traded Class A common stock and the
10
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(6)
Financial Instruments (Continued)
$17.67 per EIS closing price of our EISs on
the New York Stock Exchange on December 28, 2007 (the last business day of
fiscal 2007).
The
carrying value of our term loan borrowings approximates fair value because
interest rates under the term loan borrowings are variable, based on prevailing
market rates. Our term loan borrowings
are subject to the interest rate swap discussed above.
(7)
Comprehensive
Income Recognition
Comprehensive income
includes net income, foreign currency translation adjustments relating to
assets and liabilities located in our foreign subsidiaries, amortization of
unrecognized prior service cost and pension deferrals, net of tax and mark to
market adjustments of our cash flow hedge, net of tax. The components of comprehensive income are as
follows (dollars in thousands):
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,530
|
|
$
|
3,737
|
|
$
|
7,939
|
|
$
|
7,811
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
52
|
|
70
|
|
15
|
|
74
|
|
Amortization of unrecognized prior service cost and pension
deferrals, net of tax
|
|
5
|
|
5
|
|
10
|
|
16
|
|
Mark to market adjustment of cash flow hedge transaction, net of tax
|
|
3,734
|
|
1,948
|
|
317
|
|
1,251
|
|
Comprehensive income
|
|
$
|
7,321
|
|
$
|
5,760
|
|
$
|
8,281
|
|
$
|
9,152
|
|
(8)
Pension Benefits
Net
periodic costs for the second quarter and first two quarters of 2008 and 2007
include the following components (dollars in thousands):
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Service costbenefits earned during the period
|
|
$
|
330
|
|
$
|
343
|
|
$
|
660
|
|
$
|
728
|
|
Interest cost on projected benefit obligation
|
|
360
|
|
324
|
|
720
|
|
660
|
|
Expected return on plan assets
|
|
(453
|
)
|
(370
|
)
|
(906
|
)
|
(742
|
)
|
Amortization of unrecognized prior service cost
|
|
(3
|
)
|
(2
|
)
|
(6
|
)
|
4
|
|
Amortization of loss
|
|
11
|
|
11
|
|
22
|
|
22
|
|
Net pension cost
|
|
$
|
245
|
|
$
|
306
|
|
$
|
490
|
|
$
|
672
|
|
During the second quarter
and first two quarters of 2008, we did not make any contributions to our
defined benefit pension plans. We have
subsequently made a $0.5 million contribution during the third quarter of 2008
and we do not anticipate making any further contributions during the remainder
of fiscal 2008 to fund our defined benefit pension plan obligations.
11
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(9)
Related-Party
Transactions
Roseland
Lease.
We lease a manufacturing and warehouse
facility from a former chairman of our board of directors under an operating
lease, which expires in April 2009.
Total rent expense associated with this lease was $0.4 million for the
first two quarters of 2008 and 2007.
Repurchase
and Exchange of Class B Common Stock
. We used a
portion of the proceeds of the Class A common stock offering to repurchase
6,762,455 shares of our Class B common stock, which were held by, among
others, Bruckmann, Rosser, Sherrill & Co., L.P. (BRS), Stephen C.
Sherrill, the chairman of our board of directors, and certain of our current
and former executive officers, at a per share repurchase price equal to the offering
price of our Class A common stock, or $13.00 per share, less discounts and
commissions. BRS was our majority owner
prior to our EIS offering in October 2004 and remained a majority owner of
our Class B common stock prior to our Class A common stock offering
in May 2007. Mr. Sherrill is a
managing director of Bruckmann, Rosser, Sherrill & Co., Inc., the
manager of BRS. We also exchanged the
remaining 793,988 shares of our Class B common stock, which were held by
certain of our current and former executive officers, for an equal numbers of
shares of our Class A common stock in order to eliminate all of our
outstanding Class B common stock.
Our board of directors established a special committee comprised solely
of our independent directors to recommend to our board of directors the
repurchase price and exchange ratio for our Class B common stock, to
negotiate with the holders of the Class B common stock, and to recommend
to our board of directors if the transaction was in our best interests and fair
to the holders of our Class A common stock. The special committee retained a financial
advisor to provide information, advice and analysis to assist the special
committee in its review of the proposed transaction. The special committee also engaged its own
legal counsel to advise the special committee on its duties and
responsibilities. The financial advisor
delivered to the special committee an opinion that the proposed consideration
to be paid by us to the holders of the Class B common stock was fair to us
and the holders of the Class A common stock from a financial point of
view. After considering all of the
information it had gathered, the special committee recommended to our board of
directors that from a valuation standpoint, the purchase price for the Class B
common stock to be repurchased should be the offering price of the Class A
common stock in the offering, net of underwriting discounts and commissions,
and that each share of our Class B common stock to be exchanged should be
exchanged for one share of our Class A common stock. The special committee also recommended to our
board of directors that based on the repurchase price and Class A and Class B
exchange ratio and other material terms of the transaction, the transaction was
advisable and in our best interests and fair to the holders of our Class A
common stock.
(10)
Commitments and
Contingencies
We are
subject to environmental laws and regulations in the normal course of
business. Based on our experience to
date, management believes that the future cost of compliance with existing
environmental laws and regulations (and liability for any known environmental
conditions) will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity. However, we cannot predict what environmental
or health and safety legislation or regulations will be enacted in the future
or how existing or future laws or regulations will be enforced, administered or
interpreted, nor can we predict the amount of future expenditures that may be
required in order to comply with such environmental or health and safety laws
or regulations or to respond to such environmental claims.
During
an environmental compliance audit of our Hurlock, Maryland facility conducted
by a third-party consultant, we became aware of reporting violations of the
Emergency Planning and Community Right to Know Act (EPCRA) and other
environmental regulations. We
voluntarily self-disclosed these potential violations to the Environmental
Protection Agency (EPA) pursuant to the EPAs self-disclosure policy. At the current time, we cannot reasonably
estimate the penalty, if any, that may be imposed, but are working closely with
the EPA to resolve this matter. If a
penalty is imposed, we do not expect that it will have a material adverse
affect on our consolidated financial position, results of operations or
liquidity.
12
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(10)
Commitments
and Contingencies (Continued)
We are
from time to time involved in various claims and legal actions arising in the
ordinary course of business, including proceedings involving product liability
claims, workers compensation and other employee claims, and tort and other
general liability claims, as well as trademark, copyright, patent infringement
and related claims and legal actions. In
the opinion of our management, the ultimate disposition of any currently
pending claims or actions will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.
We have employment agreements with our
executive officers. The agreements
generally continue until terminated by the executive or by us, and provide for
severance payments under certain circumstances, including termination by us
without cause (as defined) or as a result of the employees disability, or
termination by us or a deemed termination upon a change of control (as
defined). Severance benefits include
payments for salary continuation, continuation of health care and insurance
benefits, present value of additional pension credits, accelerated vesting
under compensation plans and, in the case of a change of control, potential
excise tax liability and gross-up payments.
(11)
Earnings per Share
We
currently have one class of common stock issued and outstanding, designated as Class A
common stock. Prior to May 29,
2007, we had two classes of common stock issued and outstanding, designated as Class A
common stock and Class B common stock.
For periods in which we had shares of both Class A and Class B
common stock issued and outstanding, we present earnings per share using the
two-class method. The two-class method
is an earnings allocation formula that determines earnings per share for each
class of common stock according to dividends declared and participation rights
in undistributed earnings or losses. Net
income is allocated between the two classes of common stock based upon the
two-class method. Basic and diluted
earnings per share for the Class A common stock and Class B common
stock is calculated by dividing allocated net income by the weighted average
number of shares of Class A common stock and Class B common stock
outstanding.
13
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(11)
Earnings per Share
(Continued)
|
|
Thirteen
Weeks Ended
|
|
Twenty-six
Weeks Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
|
|
(dollars
in thousands)
|
|
Net income
|
|
$
|
3,530
|
|
$
|
3,737
|
|
$
|
7,939
|
|
$
|
7,811
|
|
Less: Class A common stock dividends declared
|
|
7,801
|
|
7,797
|
|
15,598
|
|
12,037
|
|
Undistributed loss
|
|
$
|
(4,271
|
)
|
$
|
(4,060
|
)
|
$
|
(7,659
|
)
|
$
|
(4,226
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
36,784,329
|
|
26,084,688
|
|
36,781,659
|
|
23,042,344
|
|
Class B common stock
|
|
|
|
4,816,194
|
|
|
|
6,186,319
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted allocation of undistributed loss:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
(4,271
|
)
|
$
|
(3,427
|
)
|
$
|
(7,659
|
)
|
$
|
(3,332
|
)
|
Class B common stock
|
|
|
|
(633
|
)
|
|
|
(894
|
)
|
Total
|
|
$
|
(4,271
|
)
|
$
|
(4,060
|
)
|
$
|
(7,659
|
)
|
$
|
(4,226
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Undistributed (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
(0.11
|
)
|
$
|
(0.13
|
)
|
$
|
(0.20
|
)
|
$
|
(0.14
|
)
|
Class B common stock
|
|
$
|
|
|
$
|
(0.13
|
)
|
$
|
|
|
$
|
(0.14
|
)
|
Distributed earnings:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
0.21
|
|
$
|
0.30
|
|
$
|
0.42
|
|
$
|
0.52
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
0.10
|
|
$
|
0.17
|
|
$
|
0.22
|
|
$
|
0.38
|
|
Class B common stock
|
|
$
|
|
|
$
|
(0.13
|
)
|
$
|
|
|
$
|
(0.14
|
)
|
Since May 29,
2007, we no longer have any shares of Class B common stock issued or
outstanding. In addition, no dividends
on our Class B common stock were ever declared prior to such date. Therefore, for purposes of the earnings per
share calculation, all distributed earnings are included in Class A common
stock earnings per share. Diluted
earnings per share for each of the periods presented is equal to basic earnings
per share as no dilutive securities were outstanding during either period.
(12)
Business and Credit
Concentrations and Geographic Information
Our
exposure to credit loss in the event of non-payment of accounts receivable by
customers is estimated in the amount of the allowance for doubtful
accounts. We perform ongoing credit
evaluations of our customers financial conditions. As of June 28, 2008, we do not believe
we have any significant concentration of credit risk with respect to our trade
accounts receivable. Our top ten
customers accounted for approximately 46.1%
and 44.6% of consolidated net sales
for the first two quarters of 2008 and 2007, respectively. Other than Wal-Mart, which accounted for
13.3% and 11.8% of our consolidated net sales for the first two quarters of
2008 and 2007, respectively, no single customer accounted for more than 10.0%
of our consolidated net sales for the first two quarters of 2008 or 2007.
During the second quarter of
2008 and 2007 and the first two quarters of 2008 and 2007, respectively, our
sales to foreign countries represented less than 1.0% of net sales,
respectively. Our foreign sales are
primarily to customers in Canada.
14
Table
of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(13)
Income Taxes
As of June 28,
2008 and December 29, 2007, we have approximately $0.2 million of total
unrecognized tax benefits, which includes interest and penalties, that if
recognized would have a favorable impact on our tax expense. We continue to classify interest and
penalties related to income tax uncertainties as income tax expense.
(14)
Insurance Recovery
During
the fourth quarter of fiscal 2006, we learned of an alleged theft of
approximately $0.8 million over several years at our Roseland, New Jersey
manufacturing facility resulting from overpayments allegedly authorized by a
former supervisor to direct-store-delivery independent contractor truck
drivers. While the cumulative amount of
the alleged theft may have been substantial, the related losses were reported
in each respective period and discovery of this alleged theft did not result in
changes to any previously reported results.
During the second quarter of 2007, we received insurance proceeds for
the entire amount of the loss, which is recorded as an offset to general and
administrative expenses.
(15)
Stock-Based Compensation
Expense
Upon
the recommendation of our compensation committee, our board of directors on March 10,
2008 adopted the B&G Foods, Inc. 2008 Omnibus Incentive Compensation
Plan, which we refer to as the 2008 Omnibus Plan, subject to stockholder
approval. Our stockholders approved the
2008 Omnibus Plan at our annual meeting on May 6, 2008.
The
2008 Omnibus Plan authorizes the grant of performance share awards, restricted
stock, options, stock appreciation rights, deferred stock, stock units and
cash-based awards to employees, non-employee directors and consultants. Subject to adjustment as provided in the
plan, the total number of shares of Class A common stock available for
awards under the plan is 2,000,000.
Performance
Share Awards.
On March 10,
2008, the compensation committee granted the following performance share
long-term incentive awards (LTIAs) under the 2008 Omnibus Plan. These awards were granted subject to
stockholder approval of the 2008 Omnibus Plan, which was received on May 6,
2008.
Each
of our named executive officers and certain other members of senior management
were awarded performance share LTIAs that entitle the participant to earn
shares of Class A common stock upon the attainment of certain performance
goals over the applicable performance period.
The 2008 LTIAs have a one year performance period, fiscal 2008. The 2008 to 2009 LTIAs have a two-year
cumulative performance period, fiscal 2008 and fiscal 2009. The 2008 to 2010 LTIAs have a three-year
cumulative performance period, fiscal 2008 through fiscal 2010.
The
2008 LTIAs, 2008 to 2009 LTIAs and the 2008 to 2010 LTIAs, each have a
threshold, target and maximum payout.
The awards will be settled based upon our performance over the one, two
and three year cumulative performance periods, as applicable, with respect to excess
cash (as defined in the award agreements), the applicable performance
metric. If our performance fails to meet
the performance threshold, then the awards will not vest and no shares will be
issued pursuant to the awards. If our
performance meets or exceeds the performance threshold, then a varying amount
of shares from the threshold amount (0% of the target amount) up to the maximum
amount (300% of the target amount) may be earned. Shares of Class A common stock in
respect of the 2008 LTIAs, 2008 to 2009 LTIAs and 2008 to 2010 LTIAs will be
issued in March 2009, March 2010 and March 2011, respectively,
in each case subject to the performance goals for the applicable performance
period being certified in writing by our compensation committee as having been
achieved.
The
recognition of compensation expense for the performance share LTIAs is
initially based on the probable outcome of the performance condition based on
the fair value of the award on the date of grant and
15
Table of Contents
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
(15)
Stock-based Compensation Expense
(Continued)
the anticipated number of shares to be awarded on a
straight-line basis over the applicable performance period. Our companys performance against the defined
performance goal will be re-evaluated on a quarterly basis throughout the
applicable performance period and the recognition of compensation expense will
be adjusted for subsequent changes in the estimated or actual outcome. The cumulative effect on current and prior
periods of a change in the estimated number of performance share awards is
recognized as an adjustment to earnings in the period of the revision.
During
the second quarter of 2008, we recognized $0.2 million of compensation expense
related to the performance share LTIAs, which is reflected in general and
administrative expenses in our consolidated statements of operations. As of June 28, 2008, there was $1.9
million of unrecognized compensation expense related to performance share
LTIAs, which is expected to be recognized over a weighted average period of
2.67 years.
The
following table details the activity in our performance share LTIAs for the
first two quarters of 2008 as follows:
|
|
Number of
Performance Shares (1)
|
|
Weighted Average
Grant Date Fair
Value (per share)(2)
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
Granted
|
|
466,746
|
|
$
|
7.66
|
|
Vested
|
|
|
|
|
|
Released
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
End of first two quarters
|
|
466,746
|
|
$
|
7.66
|
|
(1)
The number of unvested performance shares is based on the participants
earning their target number of performance shares at 100%.
(2)
The fair value of the awards was determined based upon the closing price
of our Class A common stock on the applicable measurement dates (i.e., the
deemed grant dates for accounting purposes) reduced by the present value of
expected dividends using the risk-free interest-rate as the award holders are
not entitled to dividends or dividend equivalents during the vesting period.
Non-Employee
Director Stock Grants
.
Commencing in fiscal 2008, each of our non-employee directors receives
an annual equity grant of $35,000 of Class A Common Stock as part of his
or her non-employee director compensation.
These shares fully vest when issued.
On June 2, 2008, 18,000 shares of Class A common stock were
issued to all non-employee directors based upon the closing price of our Class A
common stock on May 30, 2008 (the business day immediately prior to the
date of grant) of $9.72 per share. Total
compensation expense of $0.2 million is reflected in general and administrative
expenses in our consolidated statements of operations.
16
Table of Contents
Item
2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The
following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under the
heading Forward-Looking Statements below and elsewhere in this report. The following discussion should be read in
conjunction with the unaudited consolidated interim financial statements and
related notes for the thirteen and twenty-six weeks ended June 28, 2008
(second quarter of 2008 and first two quarters of 2008) included elsewhere in
this report and the audited consolidated financial statements and related notes
for the fiscal year ended December 29, 2007 (fiscal 2007) included in our
Annual Report on Form 10-K filed with the Securities and Exchange
Commission (SEC) on March 6, 2008 (which we refer to as our 2007 Annual
Report on Form 10-K).
General
We
manufacture, sell and distribute a diverse portfolio of branded, high quality,
shelf-stable food products, many of which have leading regional or national
market shares. In general, we position
our branded products to appeal to the consumer desiring a high quality and
reasonably priced product. We complement
our branded product retail sales with growing 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 unique multiple channel sales
and distribution system and continuing to focus on higher growth customers and
distribution channels.
Since 1996, we have successfully acquired and
integrated 18 separate brands into our operations. We completed the acquisition of the
Cream of Wheat
and
Cream of Rice
brands
from Kraft Foods Global, Inc. effective February 25, 2007, which we
refer to in this report as the
Cream of Wheat
acquisition. The
Cream of Wheat
acquisition
has been accounted for using the purchase method of accounting and,
accordingly, the assets acquired and results of operations of the acquired
business is included in our consolidated financial statements from the date of
acquisition. The
Cream of
Wheat
acquisition and the application of the purchase method of
accounting for the acquisition affect comparability between periods.
We are
subject to a number of challenges that may adversely affect our
businesses. These challenges, which are
discussed below and under the heading Forward-Looking Statements, include:
Fluctuations
in Commodity Prices and Production and Distribution Costs
. We purchase raw materials, including
agricultural products, meat, poultry, other raw materials, ingredients and
packaging materials from growers, commodity processors, other food companies
and packaging manufacturers. Raw
materials, ingredients and packaging materials are subject to fluctuations in
price attributable to a number of factors.
Fluctuations in commodity prices can lead to retail price volatility and
intensive price competition, and can influence consumer and trade buying patterns. In the second quarter and first two quarters
of 2008, our commodity prices for wheat, maple syrup, beans and corn sweeteners
were higher than those incurred during the thirteen and twenty-six weeks ended June 30,
2007 (second quarter of 2007 and first two quarters of 2007).
Maple
syrup production in Canada, which represents the vast majority of global
production, was significantly below industry projections due to poor crop
yields and global demand in 2008. As a
result, the price we pay for maple syrup has increased significantly and we
will likely face a shortfall in supply as compared to our needs, which will
negatively impact our sales volume of maple syrup products.
17
Table of Contents
In
addition, the cost of labor, manufacturing, energy, fuel, packaging materials
and other costs related to the production and distribution of our food products
have risen significantly in recent years and at an increasing rate 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 negatively impacted
during the remainder of 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.
A
Weakening of the U.S. Dollar in Relation to the Canadian Dollar
. We purchase the majority of our maple syrup
requirements from suppliers located in Québec, Canada. Over the past several years the U.S. dollar
has weakened against the Canadian dollar, which has in turn significantly
increased our costs relating to the production of our maple syrup products.
To
confront these challenges, we continue to take steps to build the value of our
brands, to improve our existing portfolio of products with new product and
marketing initiatives, to reduce costs through improved productivity and to
address consumer concerns about food safety, quality and health.
Critical Accounting Policies; Use of Estimates
The
preparation of financial statements in accordance with U.S. generally accepted
accounting principles requires our management to make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Some of the more
significant estimates and assumptions made by management involve trade and
consumer promotion expenses; allowances for excess, obsolete and unsaleable
inventories; pension benefits; purchase accounting allocations; the
recoverability of goodwill, trademarks, customer relationship intangibles,
property, plant and equipment, and deferred tax assets; the accounting for our
EISs; the accounting for earnings per share and the accounting for stock-based
compensation expense. Actual
results could differ from these estimates and assumptions.
Our
significant accounting policies are described more fully in note 2 to our
consolidated financial statements included in our 2007 Annual Report on Form 10-K. We believe the following critical accounting
policies involve the most significant judgments and estimates used in the
preparation of our consolidated financial statements.
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
Table of Contents
experience and other factors. Actual expenses may differ if the level of
redemption rates and performance vary from our estimates.
Inventories
Inventories are
stated at the lower of cost or market.
Cost is determined using the first-in, first-out and average cost
methods. Inventories have been reduced
by an allowance for excess, obsolete and unsaleable inventories. The allowance is an estimate based on our
managements review of inventories on hand compared to estimated future usage
and sales.
Long-Lived Assets
Long-lived
assets, such as property, plant and equipment, and intangibles with estimated
useful lives are depreciated or amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Recoverability of assets held for sale is
measured by a comparison of the carrying amount of an asset or asset group to
their fair value less estimated cost to sell.
Estimating future cash flows and calculating fair value of assets
requires significant estimates and assumptions by management.
Goodwill and Trademarks
Goodwill and
intangible assets with indefinite useful lives (trademarks) are tested for
impairment at least annually and whenever events or circumstances occur
indicating that goodwill or indefinite life intangibles might be impaired.
We
perform the annual impairment tests as of the last day of each fiscal
year. The annual goodwill impairment
test involves a two-step process. The
first step of the impairment test involves comparing the fair value of our
company with our companys carrying value, including goodwill. If the carrying value of our company exceeds
our fair value, we perform the second step of the impairment test to determine
the amount of the impairment loss. The
second step of the goodwill impairment test involves comparing the implied fair
value of goodwill with the carrying value of that goodwill and recognizing a
loss for the difference. Calculating our
fair value requires significant estimates and assumptions by management. We estimate our fair value by applying third
party market value indicators to our earnings before interest, taxes,
depreciation and amortization (EBITDA).
We test indefinite life intangible assets for impairment by comparing
their carrying value to their fair value that is determined using a cash flow
method and recognize a loss to the extent the carrying value is greater.
We
completed our annual impairment tests for fiscal 2007 with no adjustments to
the carrying values of goodwill and indefinite life intangibles. We did not note any events or circumstances
during the first two quarters of 2008 that would indicate that goodwill or
indefinite life intangibles might be impaired.
Accounting Treatment for EISs
Our EISs include Class A common stock
and senior subordinated notes. Upon
completion of our 2004 EIS offering (including the exercise of the
over-allotment option), we allocated the proceeds from the issuance of the
EISs, based upon relative fair value at the issuance date, to the Class A
common stock and the senior subordinated notes.
We have assumed that the price paid in the EIS offering was equivalent
to the combined fair value of the Class A common stock and the senior
subordinated notes, and the price paid in the offering for the senior
subordinated notes sold separately (not in the form of EISs) was equivalent to
their
19
Table of Contents
initial stated principal
amount. We have concluded there are no
embedded derivative features related to the EIS that require bifurcation under
FASB Statement No. 133,
Accounting for Derivative
Instruments and Hedging Activities,
as amended (SFAS No. 133). We have determined the fair value of the Class A
common stock and the senior subordinated notes with reference to a number of
factors, including the sale of the senior subordinated notes sold separately
from the EISs that have the same terms as the senior subordinated notes
included in the EISs. Therefore, we have
allocated the entire proceeds of the EIS offering to the Class A common
stock and the senior subordinated notes, and the allocation of the EIS proceeds
to the senior subordinated notes did not result in a premium or discount.
We have concluded that the call option and
the change in control put option in the senior subordinated notes do not
warrant separate accounting under SFAS No. 133 because they are clearly
and closely related to the economic characteristics of the host debt
instrument. Therefore, we have allocated
the entire proceeds of the offering to the Class A common stock and the
senior subordinated notes. Upon
subsequent issuances of senior subordinated notes, if any, we will evaluate
whether the call option and the change in control put option in the senior
subordinated notes require separate accounting under SFAS No. 133. We expect that if there is a substantial
discount or premium upon a subsequent issuance of senior subordinated notes, we
may need to separately account for the call option and the change in control
put option features as embedded derivatives for such subsequent issuance. If we determine that the embedded
derivatives, if any, require separate accounting from the debt host contract
under SFAS No. 133, the call option and the change in control put option
associated with the senior subordinated notes will be recorded as derivative
liabilities at fair value, with changes in fair value recorded as other
non-operating income or expense. Any
discount on the senior subordinated notes resulting from the allocation of
proceeds to an embedded derivative will be amortized to interest expense over
the remaining life of the senior subordinated notes.
The Class A common stock portion of each
EIS is included in stockholders equity, net of the related portion of the EIS
transaction costs allocated to Class A common stock. Dividends paid on our Class A common
stock portion of each EIS are recorded as a decrease to additional paid-in
capital when declared by us. The senior
subordinated note portion of each EIS is included in long-term debt, and the
related portion of the EIS transaction costs allocated to the senior
subordinated notes was capitalized as deferred debt issuance costs and is being
amortized to interest expense using the effective interest method. Interest on the senior subordinated notes is
charged to interest expense as accrued by us and deducted for income tax
purposes.
Income Tax Expense Estimates and Policies
As
part of the income tax provision process of preparing our consolidated
financial statements, we are required to estimate our income taxes. This process involves estimating our current
tax expense together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities. We then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe the recovery is not likely, we
establish a valuation allowance.
Further, to the extent that we establish a valuation allowance or
increase this allowance in a financial accounting period, we include such
charge in our tax provision, or reduce our tax benefits in our consolidated
statement of operations. We use our
judgment to determine our provision or benefit for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against our net
deferred tax assets.
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
Table of Contents
Earnings Per Share
We currently have
one class of common stock issued and outstanding, designated as Class A
common stock. Prior to May 29,
2007, we had two classes of common stock issued and outstanding, designated as Class A
common stock and Class B common stock.
For periods in which we had shares of both Class A and Class B
common stock issued and outstanding, we present earnings per share using the
two-class method. The two-class method
is an earnings allocation formula that determines earnings per share for each
class of common stock according to dividends declared and participation rights
in undistributed earnings or losses.
For
periods in which we had shares of both Class A and Class B common
stock issued and outstanding, net income is allocated between the two classes
of common stock based upon the two-class method. Basic and diluted earnings per share for the Class A
common stock and Class B common stock is calculated by dividing allocated
net income by the weighted average number of shares of Class A common
stock and Class B common stock outstanding.
Pension Expense
We have defined benefit pension plans
covering substantially all of our employees.
Our funding policy is to contribute annually the amount recommended by
our actuaries. The funded status of our
pension plans is dependent upon many factors, including returns on invested
assets and the level of certain market interest rates. We review pension assumptions regularly and
we may from time to time make voluntary contributions to our pension plans,
which exceed the amounts required by statute.
During the second quarter of 2008 we did not make any contribution to
our defined benefit pension plans as compared to $1.3 million of contributions
during the second quarter of 2007.
During the third quarter of 2008, we have subsequently made
contributions of $0.5 million to fund our defined benefit pension plan
obligations and we do not anticipate making any further contributions during
the remainder of fiscal 2008. Changes in
interest rates and the market value of the securities held by the plans could
materially change, positively or negatively, the funded status of the plans and
affect the level of pension expense and required contributions during the
remainder of fiscal 2008 and beyond.
Our discount rate assumption increased from
5.90% at December 30, 2006 to 6.50% at December 29, 2007 for our
pension plans. This increase in the
discount rate, coupled with the amortization of deferred gains and losses will
result in a decrease in fiscal 2008 pre-tax pension expense of approximately
$0.5 million. While we do not currently
anticipate a change in our fiscal 2008 assumptions, as a sensitivity measure, a
0.25% decline or increase in our discount rate would increase or decrease our
pension expense by approximately $0.1 million.
Similarly, a 0.25% decrease or increase in the expected return on pension
plan assets would increase or decrease our pension expense by approximately
$0.1 million.
In August 2006, the Pension Protection
Act of 2006 was signed into law. The
major provisions of the statute became effective on January 1, 2008. Among other things, the statute is designed
to ensure timely and adequate funding of qualified pension plans by shortening
the time period within which employers must fully fund pension benefits. Due to the fully funded status of our defined
benefit pension plans as of December 29, 2007, the Pension Protection Act
of 2006 is not currently expected to have a significant impact on our future
pension funding requirements.
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
Table of Contents
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 second quarter of 2008 and 2007 and the first two quarters of
2008 and 2007 reflected in our consolidated statements of operations. The comparisons of financial results are not
necessarily indicative of future results:
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
71.8
|
%
|
68.4
|
%
|
70.9
|
%
|
68.5
|
%
|
Gross profit
|
|
28.2
|
%
|
31.6
|
%
|
29.1
|
%
|
31.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing and distribution expenses
|
|
9.6
|
%
|
10.6
|
%
|
10.1
|
%
|
10.8
|
%
|
General and administrative expenses
|
|
1.6
|
%
|
1.4
|
%
|
1.4
|
%
|
1.5
|
%
|
Amortization expensecustomer relationships
|
|
1.4
|
%
|
1.4
|
%
|
1.4
|
%
|
1.0
|
%
|
Operating income
|
|
15.6
|
%
|
18.2
|
%
|
16.2
|
%
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
10.8
|
%
|
13.1
|
%
|
10.8
|
%
|
12.5
|
%
|
Income before income tax expense
|
|
4.8
|
%
|
5.1
|
%
|
5.4
|
%
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
1.8
|
%
|
1.9
|
%
|
2.1
|
%
|
2.1
|
%
|
Net income
|
|
3.0
|
%
|
3.2
|
%
|
3.4
|
%
|
3.5
|
%
|
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. For the second quarter and first two quarters
of 2007, general and administrative expenses is net of insurance proceeds
relating to a previously reported employee theft.
22
Table of Contents
Amortization ExpenseCustomer Relationships.
Amortization expensecustomer relationships includes the amortization expense
associated with customer relationship intangibles, which are amortized over
their useful lives of 20 years.
Net Interest Expense.
Net interest expense includes interest
relating to our outstanding indebtedness and amortization of deferred debt
issuance costs, net of interest income.
Non-GAAP Financial Measures
Certain
disclosures in this report include non-GAAP (generally accepted accounting
principles) financial measures. A
non-GAAP financial measure is defined as a numerical measure of our financial
performance that excludes or includes amounts so as to be different than the
most directly comparable measure calculated and presented in accordance with
GAAP in our consolidated balance sheets and related consolidated statements of
operations, changes in stockholders equity and comprehensive income, and cash
flows.
EBITDA
is a measure used by management to measure operating performance. EBITDA is defined as net income before net
interest expense, income taxes, depreciation, and amortization. Management
believes that it is useful to eliminate net interest expense, income taxes,
depreciation and amortization because it allows management to focus on what it
deems to be a more reliable indicator of ongoing operating performance and our
ability to generate cash flow from operations. We use EBITDA in our business
operations, among other things, to evaluate our operating performance, develop
budgets and measure our performance against those budgets, determine employee
bonuses and evaluate our cash flows in terms of cash needs. We also present EBITDA
because we believe it is a useful indicator of our historical debt capacity and
ability to service debt and because covenants in our credit facility, our
senior notes indenture and our senior subordinated notes indenture contain
ratios based on this measure. As a
result, internal management reports used during monthly operating reviews
feature the EBITDA metric. However, management uses this metric in conjunction
with traditional GAAP operating performance and liquidity measures as part of
its overall assessment of company performance and liquidity and therefore does
not place undue reliance on this measure as its only measure of operating
performance and liquidity.
EBITDA
is not a recognized term under GAAP and does not purport to be an alternative
to operating income or net income as an indicator of operating performance or
any other GAAP measure. EBITDA is not a complete net cash flow measure because
EBITDA is a measure of liquidity that does not include reductions for cash
payments for an entitys obligation to service its debt, fund its working
capital, capital expenditures and acquisitions, if any, and pay its income
taxes and dividends. Rather, EBITDA is a potential indicator of an entitys
ability to fund these cash requirements. EBITDA is not a complete measure of an
entitys profitability because it does not include costs and expenses for
depreciation and amortization, interest and related expenses and income taxes.
Because not all companies use identical calculations, this presentation of
EBITDA may not be comparable to other similarly titled measures of other
companies. However, EBITDA can still be useful in evaluating our performance
against our peer companies because management believes this measure provides
users with valuable insight into key components of GAAP amounts.
A
reconciliation of EBITDA to net income and to net cash provided by operating
activities for the second quarter and first two quarters of 2008 and 2007 along
with the components of EBITDA follows:
23
Table of Contents
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
|
|
(Dollars in thousands)
|
|
Net income
|
|
$
|
3,530
|
|
$
|
3,737
|
|
$
|
7,939
|
|
$
|
7,811
|
|
Income tax expense
|
|
2,165
|
|
2,280
|
|
4,855
|
|
4,767
|
|
Interest expense, net
|
|
12,908
|
|
15,529
|
|
25,479
|
|
27,654
|
|
Depreciation and amortization
|
|
3,844
|
|
3,405
|
|
7,533
|
|
5,863
|
|
EBITDA
|
|
22,447
|
|
24,951
|
|
45,806
|
|
46,095
|
|
Income tax expense
|
|
(2,165
|
)
|
(2,280
|
)
|
(4,855
|
)
|
(4,767
|
)
|
Interest expense, net
|
|
(12,908
|
)
|
(15,529
|
)
|
(25,479
|
)
|
(27,654
|
)
|
Deferred income taxes
|
|
1,868
|
|
1,766
|
|
4,045
|
|
3,842
|
|
Amortization of deferred financing costs
|
|
792
|
|
832
|
|
1,584
|
|
1,605
|
|
Write off of deferred debt issuance costs
|
|
|
|
1,769
|
|
|
|
1,769
|
|
Stock-based compensation expense
|
|
358
|
|
|
|
358
|
|
|
|
Changes in assets and liabilities, net of
effects of business combination
|
|
(9,273
|
)
|
(4,496
|
)
|
(9,366
|
)
|
(9,060
|
)
|
Net cash provided by operating activities
|
|
$
|
1,119
|
|
$
|
7,013
|
|
$
|
12,093
|
|
$
|
11,830
|
|
Second quarter of 2008 compared to the second quarter of
2007.
Net Sales.
Net
sales increased $1.0 million or 0.8% to $119.2 million for the second quarter
of 2008 from $118.2 million for the second quarter of 2007. The increase in our net sales related to
increases in unit volume. Net sales of
our lines of
Maple Grove Farms, Ortega,
B&M
and
Las Palmas
products increased
in the amounts of $2.3 million, $1.5
million, $1.1 million and $0.5 million or 15.0%, 6.1%, 12.7% and 9.3%,
respectively. These increases were
offset by a reduction in net sales of
Cream of Wheat,
Sa-són, Polaner, B&G, Underwood
and
Emeril
products of $1.8 million, $0.6 million, $0.6 million, $0.5
million, $0.3 million and $0.3 million or 14.5%, 36.5%, 5.7%, 4.5%, 5.4% and
5.2%, respectively. In the aggregate,
net sales for all other brands decreased $0.3 million, or 2.5%.
Gross Profit.
Gross
profit decreased $3.7 million or 10.1% to $33.6 million for the second quarter
of 2008 from $37.3 million for the second quarter of 2007. Gross profit expressed as a percentage of net
sales decreased 3.4% to 28.2% in the second quarter of 2008 from 31.6% in the
second quarter of 2007. This decrease in
gross profit expressed as a percentage of net sales was primarily attributable
to increased spending on trade promotions and increased costs for wheat, maple
syrup, corn, packaging, transportation and sweeteners.
Sales, Marketing and Distribution Expenses.
Sales, marketing and
distribution expenses decreased $1.1 million or 8.8% to $11.5 million for the
second quarter of 2008 from $12.6 million for the second quarter of 2007. This decrease is primarily due to a decrease
in consumer marketing of $0.7 million and a decrease in selling expense of $0.6
million offset by an increase in warehousing expense of $0.2 million. Expressed as a percentage of net sales, our
sales, marketing and distribution expenses decreased to 9.6% for the second
quarter of 2008 from 10.6% for the second quarter of 2007.
General and Administrative Expenses.
General and administrative
expenses increased $0.3 million or 17.8% to $1.9 million for the second quarter
of 2008 from $1.6 million in the second quarter of 2007. Excluding the impact of the $0.8 million
insurance reimbursement received in the second quarter of 2007, general and
administrative expenses decreased by $0.5 million in the second quarter of 2008
as compared to the second quarter of 2007.
This decrease was primarily the result of a decrease in professional
fees of $0.3 million and compensation expense of $0.3 million partially offset
by an increase in other expenses of $0.1 million.
24
Table of Contents
Amortization Expense
Customer Relationships.
Amortization expensecustomer
relationships remained consistent at $1.6 million for the second quarter of
2008 and for the second quarter of 2007.
Operating Income.
As
a result of the foregoing, operating income decreased $2.9 million or 13.7% to
$18.6 million for the second quarter of 2008 from $21.5 million for the second
quarter of 2007. Operating income
expressed as a percentage of net sales decreased to 15.6% in the second quarter
of 2008 from 18.2% in the second quarter of 2007.
Net Interest Expense.
Net interest expense decreased $2.6 million or 16.9%
to $12.9 million for the second quarter of 2008 from $15.5 million in the
second quarter of 2007. Interest expense
for the second quarter 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
borrowing with a portion of the proceeds of our public offering of Class A
common stock in May 2007. Our
average debt outstanding during the second quarter of 2008 was approximately
$66.7 million lower than during the second quarter of 2007. See Liquidity and Capital ResourcesDebt
below.
Income Tax Expense.
Income
tax expense decreased $0.1 million to $2.2 million for the second quarter of
2008 from $2.3 million for the second quarter of 2007. Our effective tax rate was 37.9% for the
second quarter of 2008 and 2007.
First two quarters of 2008 compared to first two quarters of
2007.
Net Sales.
Net
sales increased $13.6 million or 6.1% to $235.5 million for the first two
quarters of 2008 from $221.9 million for the first two quarters of 2007. Excluding the impact of the
Cream of Wheat
acquisition and the termination of a
temporary co-packing arrangement, net sales increased $4.5 million or 2.0%
relating to increases in sales price and unit volume. The
Cream of Wheat
acquisition, which was completed in late February 2007, accounted for $9.9
million of the net sales increase, offset by a decrease in net sales of $0.8
million relating to the termination of the temporary co-packing
arrangement. Net sales of our lines of
Maple Grove Farms, Ortega,
Las Palmas, B&M, Joan of Arc
and
Grandmas
products increased
in the amounts of $2.8 million, $2.4
million, $1.2 million, $0.8 million, $0.3 million and $0.3 million or 9.1%,
5.0%, 10.1%, 5.7%, 8.8% and 9.0%, respectively.
These increases were offset by a reduction in net sales of
Underwood, Emerils, Regina
and
B&G
products
of $0.9 million, $0.8 million, $0.5 million and $0.5 million or 8.7%, 8.2%,
9.3% and 2.4%, respectively. In the
aggregate, net sales for all other brands decreased $0.6 million, or 1.5%.
Gross Profit.
Gross
profit decreased $1.5 million or 2.2% to $68.5 million for the first two
quarters of 2008 from $70.0 million for the first two quarters of 2007. Gross profit expressed as a percentage of net
sales decreased 2.4% to 29.1% in the first two quarters of 2008 from 31.5% in
the first two quarters of 2007. The
decrease in gross profit expressed as percentage of net sales was primarily
attributable to increased spending on trade promotions and increased costs for
wheat, maple syrup, corn, packaging, transportation and sweeteners.
Sales, Marketing and Distribution Expenses.
Sales, marketing and
distribution expenses decreased $0.3 million or 1.3% to $23.8 million for the
first two quarters of 2008 from $24.1 million for the first two quarters of
2007. The decrease is primarily due to a
decrease in brokerage and salesmen commissions of $0.3 million as well as
general selling expenses of $0.3 million, offset by an increase in warehousing
of $0.3 million. Expressed as a
percentage of net sales, our sales, marketing and distribution expenses
decreased to 10.1% for the first two quarters of 2008 from 10.8% for the first
two quarters of 2007.
General and Administrative Expenses.
General and administrative
expenses decreased $0.2 million or 5.5% to $3.2 million for the first two
quarters of 2008 from $3.4 million in the first two quarters of 2007. Excluding the impact of the $0.8 million
insurance reimbursement received in the second quarter of 2007,
25
Table of Contents
general and administrative expenses decreased by $1.0
million in the first two quarters of 2008 as compared to the first two quarters
of 2007. This decrease was primarily the
result of a decrease in professional fees of $0.4 million, compensation expense
of $0.4 million and other expenses of $0.2 million.
Amortization ExpenseCustomer Relationships.
Amortization expensecustomer relationships
increased $0.9 million to $3.2 million for the first two quarters of 2008 from
$2.3 million for the first two quarters of 2007. This increase is attributable to the
Cream
of Wheat
acquisition, which was completed during the first quarter
of 2007.
Operating Income.
As
a result of the foregoing, operating income decreased $1.9 million or 4.9% to
$38.3 million for the first two quarters of 2008 from $40.2 million for the
first two quarters of 2007. Operating
income expressed as a percentage of net sales decreased to 16.2% in the first
two quarters of 2008 from 18.1% in the first two quarters of 2007.
Net Interest Expense.
Net interest expense decreased $2.2 million or 7.9% to
$25.5 million for the first two quarters of 2008 from $27.7 million in the
first two quarters of 2007. Interest
expense for the first two 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 $15.0 million lower for the first
two quarters of 2008 as compared to the first two quarters of 2007. See Liquidity and Capital ResourcesDebt
below.
Income Tax Expense.
Income
tax expense remained constant at $4.8 million for the first two quarters of
2008 and the first two quarters of 2007.
Our effective tax rate was 37.9% for the first two quarters of 2008 and
2007.
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 $0.3 million to $12.1 million for the first two quarters of 2008 from
$11.8 million for the first two quarters of 2007. The increase was due to changes relating to a
decrease in accounts receivable (primarily as a result of an increase in
accounts receivable at the end of the second quarter of 2007 from the
Cream of Wheat
acquisition) and inventory
offset by a decrease in accounts payable and accrued expenses. Working capital at June 28, 2008 was
$112.8 million, a decrease of $2.3 million from working capital at December 29,
2007 of $115.1 million.
Net
cash used in investing activities for the first two quarters of 2008 was $9.0
million as compared to $207.4 million for the first two quarters of 2007. Investment expenditures for the first two
quarters of 2007 included $200.9 million for the
Cream of
Wheat
acquisition. Capital
expenditures during the first two quarters of 2008 increased $2.5 million to
$9.0 million from $6.5 million during the first two quarters of 2007 and
included expenditures of $7.3 million relating to the expansion of our
Stoughton, Wisconsin facility and the transfer of a portion of the
Cream of Wheat
production to that facility.
Net
cash used in financing activities for the first two quarters of 2008 was $15.6
million as compared to net cash provided by financing activities of $203.3
million for the first two quarters of 2007.
Net cash used in financing activities for the first two quarters of 2008
was entirely for the payment of dividends to holders of our Class A common
stock. Net cash provided by financing
activities for the first two quarters of 2007 consisted of $205.0 million in
additional term loan borrowings ($100.0 million of which we subsequently
prepaid during the second quarter of 2007), $193.2 million from the issuance of
Class A common stock, net of
26
Table of Contents
underwriting discounts and commissions and other
expenses, offset by $82.4 million for the repurchase of Class B common
stock, $8.5 million in dividends paid on our Class A common stock and $4.0
million in debt issuance costs.
Based on a number of factors, including our
trademark, goodwill and customer relationship intangibles amortization for tax
purposes from our prior acquisitions, we realized a significant reduction in
cash taxes in fiscal 2007 and 2006 as compared to our tax expense for financial
reporting purposes. While we expect our
cash taxes to continue to increase in fiscal 2008 as compared to the prior two
years, we believe that we will realize a benefit to our cash taxes payable from
amortization of our trademarks, goodwill and customer relationship intangibles
for the taxable years 2008 through 2022.
Dividend
Policy
Our dividend
policy reflects a basic judgment that our stockholders would be better served
if we distributed a substantial portion of our cash available to pay dividends
to them instead of retaining it in our business. Under this policy, a substantial portion of
the cash generated by our company in excess of operating needs, interest and
principal payments on indebtedness, capital expenditures sufficient to maintain
our properties and other assets is in general distributed as regular quarterly
cash dividends (up to the intended dividend rate as determined by our board of
directors) to the holders of our common stock and not retained by us. 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 depend on, among other things, our
results of operations, cash requirements, financial condition, contractual
restrictions, business opportunities, acquisition opportunities, 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 two quarters of 2008 and 2007, we had cash flows provided by
operating activities of $12.1 million and $11.8 million, and distributed $15.6
million and $8.5 million, respectively, as dividends. If our cash flows from
operating activities for future periods were to fall below our minimum
expectations (or if our assumptions as to capital expenditures or interest
expense were too low or our assumptions as to the sufficiency of our revolving
credit facility to finance our working capital needs were to prove incorrect),
we would need either to reduce or eliminate dividends or, to the extent
permitted under our senior notes indenture, our senior subordinated notes
indenture and the terms of our credit facility, fund a portion of our dividends
with borrowings or from other sources.
If we were to use working capital or permanent borrowings to fund
dividends, we would have less cash and/or borrowing capacity available for
future dividends and other purposes, which could negatively impact our
financial position, our results of operations, our liquidity and our ability to
maintain or expand our business.
27
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. Our interest expense will increase with any
additional indebtedness we may incur to finance future acquisitions, if
any. To the extent future acquisitions,
if any, are financed by additional indebtedness, the resulting increase in debt
and interest expense could have a negative impact on liquidity.
Environmental
and Health and Safety Costs
We have not made
any material expenditures during the first two quarters of 2008 in order to
comply with environmental laws or regulations.
Based on our experience to date, we believe that the future cost of
compliance with existing environmental laws and regulations (and liability for
known environmental conditions) will not have a material adverse effect on our
consolidated financial condition, results of operations or liquidity. However, we cannot predict what environmental
or health and safety legislation or regulations will be enacted in the future
or how existing or future laws or regulations will be enforced, administered or
interpreted, nor can we predict the amount of future expenditures that may be
required in order to comply with such environmental or health and safety laws
or regulations or to respond to such environmental claims.
During
an environmental compliance audit of our Hurlock, Maryland facility conducted
by a third-party consultant, we became aware of reporting violations of the
Emergency Planning and Community Right to Know Act (EPCRA) and other
environmental regulations. We
voluntarily self-disclosed these potential violations to the Environmental
Protection Agency (EPA) pursuant to the EPAs self-disclosure policy. At the current time, we cannot reasonably
estimate the penalty, if any, that may be imposed, but are working closely with
the EPA to resolve this matter. If a
penalty is imposed, we do not expect that it will have a material adverse
affect on our consolidated financial position, results of operations or
liquidity.
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 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 million of term loan borrowings, which we subsequently
prepaid, was 7.36% as of the prepayment date (based upon a three-month LIBOR
rate in effect at that time that expired on May 25, 2007). The swap is designated as a cash flow hedge
under the guidelines of SFAS No. 133.
The swap is in
28
Table of Contents
place through the life of
the term loan, ending on February 26, 2013. Changes in fair value of the swap are
recorded in other comprehensive income, net of tax in our consolidated
statements of operations.
Our obligations under the credit facility are
jointly and severally and fully and unconditionally guaranteed on a senior
basis by all of our existing and certain future domestic subsidiaries. The credit facility is secured by
substantially all of our and our subsidiaries assets except our and our
subsidiaries real property. The credit
facility provides for mandatory prepayment based on asset dispositions and
certain issuances of securities, as defined.
The credit facility contains covenants that restrict, among other
things, our ability to incur additional indebtedness, pay dividends and create
certain liens. The credit facility also
contains certain financial maintenance covenants, which, among other things, specify
maximum capital expenditure limits, a minimum interest coverage ratio and a
maximum senior and total leverage ratio, each ratio as defined. As of June 28, 2008, we were in
compliance with all of the covenants in the credit facility. Proceeds of the revolving credit facility are
restricted to funding our working capital requirements, capital expenditures
and acquisitions of companies in the same line of business as our company,
subject to specified criteria. The
revolving credit facility was undrawn on the date of commencement in October 2004
and remained undrawn through June 28, 2008. The available borrowing capacity under our
revolving credit facility, net of outstanding letters of credit of $2.5
million, was $22.5 million at June 28, 2008. 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 are in the form of EISs and $22.8 million separate from
EISs. As of June 28, 2008, $119.9
million aggregate principal amount of senior subordinated notes was held in the
form of EISs and $45.9 million aggregate principal amount of senior
subordinated notes was held separate from EISs.
Interest on the senior subordinated notes is
payable quarterly in arrears on each January 30, April 30, July 30
and October 30 through the maturity date.
The senior subordinated notes will mature on October 30, 2016,
unless earlier retired or redeemed as described below.
Upon the occurrence of a change of control
(as defined in the indenture), unless we have retired the senior subordinated
notes or exercised our right to redeem all senior subordinated notes as
described below, each holder of the senior subordinated notes has the right to
require us to repurchase that holders senior subordinated notes at a price
equal to 101.0% of the principal amount of the senior subordinated notes being
repurchased, plus any accrued and unpaid interest to the date of
repurchase. In order to exercise this
right, a holder must separate the senior subordinated notes and Class A
common stock represented by such holders EISs.
We may not redeem the senior subordinated
notes prior to October 30, 2009. On and after October 30, 2009, we
may redeem for cash all or part of the senior subordinated notes at a
redemption price of 106.0% beginning October 30, 2009 and thereafter at
prices declining annually to 100% on or after October 30, 2012. If we redeem any senior subordinated notes,
the senior subordinated notes and Class A common stock represented by each
EIS will be automatically separated.
The senior subordinated notes are unsecured
obligations and are subordinated in right of payment to all of our existing and
future senior secured and senior unsecured indebtedness, including the
indebtedness under our credit facility and our senior notes. The senior
subordinated notes rank pari passu in right of payment with any of our other
subordinated indebtedness.
Our obligations under the senior subordinated
notes are jointly and severally and fully and unconditionally guaranteed by all
of our existing domestic subsidiaries and certain future domestic subsidiaries
on an unsecured and subordinated basis on the terms set forth in our senior
subordinated notes indenture. The senior
subordinated note guarantees are subordinated in right of payment to all
existing and future senior
29
Table of Contents
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.
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 June 28, 2008, we were in compliance with all of the
covenants in the senior subordinated notes indenture.
8.0% Senior Notes due 2011
. In October 2004,
we issued $240.0 million aggregate principal amount of 8.0% senior notes due
2011. Interest on the senior notes is
payable on April 1 and October 1 of each year. The senior notes will mature on October 1,
2011, unless earlier retired or redeemed as described below.
We may not redeem the senior notes prior to October 1,
2008. On and after October 1, 2008,
we may redeem some or all of the senior notes at a redemption price of 104.0%
beginning October 1, 2008 and thereafter at prices declining annually to
100.0% on or after October 1, 2010.
If we or any of the guarantors sell certain assets or experience
specific kinds of changes in control, we must offer to purchase the senior
notes at the prices as described in our senior notes indenture plus accrued and
unpaid interest to the date of redemption.
Our obligations under the senior notes are
jointly and severally and fully and unconditionally guaranteed on a senior
basis by all of our existing and certain future domestic subsidiaries. The senior notes and the subsidiary guarantees
are our and the guarantors general unsecured obligations and are effectively
junior in right of payment to all of our and the guarantors secured
indebtedness and to the indebtedness and other liabilities of our non-guarantor
subsidiaries; are pari passu in right of payment to all of our and the
guarantors existing and future unsecured senior debt; and are senior in right
of payment to all of our and the guarantors future subordinated debt,
including the senior subordinated notes.
Our present foreign subsidiaries are not guarantors, 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 June 28, 2008, we were in compliance with all of the
covenants in the senior notes indenture.
Future Capital
Needs
We are highly leveraged. On June 28, 2008, our total long-term
debt and stockholders equity was $535.8 million and $167.7 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
30
Table of Contents
our anticipated dividends on
our Class A common stock.
We
expect to make capital expenditures of approximately $11.0 million in the
aggregate during fiscal 2008.
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 2007 and the first two quarters
of 2008, we were faced with increasing prices in certain commodities and
packaging materials and we expect this trend to 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 2007 and the
first two quarters of 2008 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 September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The provisions of SFAS No. 157 are
effective as of the beginning of our 2008 fiscal year, with the exception of
certain provisions deferred until the beginning of our 2009 fiscal year. In February 2008, the FASB issued FASB
Staff Position SFAS No. 157-2,
Effective
Date of FASB Statement No. 157
, which delayed the effective
date of SFAS No. 157 for all non-financial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until January 1, 2009. The impact of the adoption of SFAS No. 157
for financial assets and liabilities was not material to our consolidated
interim financial statements. We have
not yet determined the impact that the adoption of SFAS No. 157 will have
on our non-financial assets and liabilities which are not recognized on a
recurring basis;
however
we do not anticipate it to materially impact our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
(SFAS No. 141R),
and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements
(SFAS No. 160). SFAS No. 141R requires an acquirer to
measure the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. SFAS No. 160 clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 141R
and SFAS No. 160 are effective as of the beginning of our 2009 fiscal
year. We are currently evaluating the
potential impact, if any, of the adoption of SFAS No. 141R and SFAS No. 160
on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
. This statement changes the disclosure
31
Table of Contents
requirements for derivative
instruments and hedging activities. SFAS
No. 161 requires enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash
flows. SFAS No. 161 is effective as
of the beginning of our 2009 fiscal year. We are currently evaluating the
potential impact, if any, of the adoption of SFAS No. 161 on our
consolidated financial statements.
In April 2008, the FASB issued FASB
Staff Position No. FAS 142-3,
Determination of the
Useful Life of Intangible Assets
(FSP No. FAS 142-3). FSP No. FAS 142-3 requires companies
estimating the useful life of a recognized intangible asset to consider their
historical experience in renewing or extending similar arrangements or, in the
absence of historical experience, to consider assumptions that market
participants would use about renewal or extension as adjusted for
entity-specific factors. FSP No. FAS
142-3 is effective as of the beginning of our 2009 fiscal year. We are currently evaluating the potential
impact, if any, of the adoption of FSP No. FAS 142-3 on our consolidated
financial statements.
32
Table of Contents
Off-balance Sheet Arrangements
As of June 28,
2008, we did not have any off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K.
Commitments and Contractual
Obligations
Our contractual obligations and commitments
principally include obligations associated with our outstanding indebtedness,
future minimum operating lease obligations and future pension obligations. During the first two quarters of 2008, there
were no material changes outside the ordinary course of business in the
specified contractual obligations set forth in our 2007 Annual Report on Form 10-K,
except that we entered into a new lease in Tennessee (in connection with the transfer
of our warehousing operations in Tennessee from one leased location to another
leased location) that will require us to make rental payments of approximately
$4.0 million in the aggregate over the course of the lease, which expires in
2013. In addition, our expected
contributions to our defined benefit pension plans for fiscal 2008 have
increased from $0.1 million to $0.5 because, although not obligated to do so,
we made $0.5 million of contributions to our defined benefit pension plans
during the third quarter of 2008. We do
not anticipate making any further contributions to our defined benefit pension
plans during the remainder of fiscal 2008.
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 of the
Canadian dollar as compared to the U.S. dollar;
33
Table of Contents
·
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 and trans fatty acids;
·
competitors
pricing practices and promotional spending levels;
·
the risks
associated with third-party suppliers and co-packers, including the risk that
any failure by one or more of our third-party suppliers or co-packers to comply
with food safety or other regulations may disrupt our supply of raw materials
or certain finished goods products; and
·
fluctuations in
the level of our customers inventories and credit and other business risks
related to our customers operating in a challenging economic and competitive
environment; and
·
other factors discussed elsewhere in this
report and in our other public filings with the SEC, including under Item 1A, Risk
Factors in our 2007 Annual Report on Form 10-K.
Developments
in any of these areas could cause our results to differ materially from results
that have been or may be projected by or on our behalf.
All
forward-looking statements included in this report are based on information
available to us on the date of this report. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
in this report.
We
caution that the foregoing list of important factors is not exclusive. We urge investors not to unduly rely on
forward-looking statements contained in this report.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
In the
normal course of operations, we are exposed to market risks arising from
adverse changes in interest rates.
Market risk is defined for these purposes as the potential change in the
fair value of a financial asset or liability resulting from an adverse movement
in interest rates.
Interest under our $25.0
million revolving credit facility, including any outstanding letters of credit,
is determined based on alternative rates that we may choose in accordance with
the revolving credit facility, including the base lending rate per annum plus
an applicable margin, and LIBOR plus an applicable margin. Interest under our term loan facility is
determined based on alternative rates that we may choose in accordance with the
credit facility, including the base lending rate per annum plus an applicable
margin of 1.00%, and LIBOR plus an applicable margin of 2.00%. The revolving credit facility was undrawn at June 28,
2008. We have outstanding $130.0 million
of term loan borrowings at June 28, 2008 and December 29, 2007. The interest rate payable for our term loan
borrowings is effectively fixed at 7.0925% based upon a six year interest rate
swap agreement that we entered into on February 26, 2007.
The carrying value of our
term loan borrowings approximates fair value because interest rates under the
term loan borrowings are variable, based on prevailing market rates. Our term loan borrowings are subject to the
interest rate swap discussed above and in note 6 to our consolidated financial
statements included herein.
The carrying values and fair
values of our senior notes and senior subordinated notes as of June 28,
2008 and December 29, 2007 are as follows (dollars in thousands):
34
Table of Contents
|
|
June 28, 2008
|
|
December 29, 2007
|
|
|
|
Carrying Value
|
|
Fair Value(1)(2)
|
|
Carrying Value
|
|
Fair Value(1)(3)
|
|
8% Senior Notes due October 1, 2011
|
|
$
|
240,000
|
|
$
|
238,800
|
|
$
|
240,000
|
|
$
|
235,800
|
|
12% Senior Subordinated Notes due
October 30, 2016(2):
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
119,865
|
|
127,576
|
|
119,067
|
|
126,561
|
|
held separately
|
|
45,935
|
|
48,891
|
|
46,733
|
|
49,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Fair values are estimated based on quoted market prices, except as
otherwise noted in footnotes (2) and (3) below.
(2)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at June 28, 2008 was $7.61 based
upon the $9.10 per share closing price of our separately traded Class A
common stock and the $16.71 per EIS closing price of our EISs on the New York
Stock Exchange on June 27, 2008 (the last business day of the first two
quarters of 2008). Each EIS represents
one share of Class A common stock and $7.15 principal amount of our senior
subordinated notes.
(3)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at December 29, 2007 was $7.60,
based upon the $10.07 per share closing price of our separately traded Class A
common stock and the $17.67 per EIS closing price of our EISs on the New York
Stock Exchange on December 28, 2007 (the last business day of fiscal
2007).
The
information under the heading Inflation in Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations is incorporated
herein by reference.
Item 4. Controls
and Procedures
Evaluation of Disclosure Controls and Procedures.
As required by Rule 13a-15(b) under
the Securities Exchange Act of 1934, as amended, our management, including our
chief executive officer and our chief financial officer, conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this
report. As defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, disclosure controls and procedures are
controls and other procedures that we use that are designed to ensure that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
chief executive officer and our chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
Based
on that evaluation, our chief executive officer and our chief financial officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
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,
35
Table
of Contents
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
pending claims or actions will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.
Item 1A. Risk Factors
We do
not believe there have been any material changes in our risk factors as
previously disclosed in our 2007 Annual Report on Form 10-K.
Item 2.
Unregistered Sales of
Equity Securities and Use of Proceeds
Not
applicable.
Item 3.
Defaults Upon Senior
Securities
Not
applicable.
Item 4. Submission of Matters
to a Vote of Security Holders
Our
annual meeting of stockholders was held on May 6, 2008. At the annual meeting, our stockholders
considered and voted upon the election of seven directors to serve until the
next annual meeting of stockholders and until their successors have been
elected and qualified. All seven of the
nominees for the board of directors were elected by the following vote:
Class A Director Nominee
|
|
For
|
|
Withheld
|
|
|
|
|
|
|
|
Robert C. Cantwell
|
|
33,127,788
|
|
1,105,280
|
|
|
|
|
|
|
|
James R. Chambers
|
|
34,199,810
|
|
33,258
|
|
|
|
|
|
|
|
Cynthia T. Jamison
|
|
33,902,925
|
|
330,143
|
|
|
|
|
|
|
|
Dennis Mullen
|
|
33,925,062
|
|
308,006
|
|
|
|
|
|
|
|
Alfred Poe
|
|
33,100,167
|
|
1,132,901
|
|
|
|
|
|
|
|
Steven C. Sherrill
|
|
33,128,612
|
|
1,104,456
|
|
|
|
|
|
|
|
David L. Wenner
|
|
33,118,944
|
|
1,114,124
|
|
36
Table of Contents
Our
stockholders ratified the appointment of KPMG LLP as our independent registered
public accounting firm for the fiscal year ending January 3, 2009, by the
following vote:
For
|
|
Against
|
|
Abstain
|
|
34,240,767
|
|
208,197
|
|
106,161
|
|
Our
stockholders approved the B&G Foods, Inc. 2008 Omnibus Incentive
Compensation Plan by the following vote:
For
|
|
Against
|
|
Abstain
|
|
22,980,703
|
|
3,130,458
|
|
376,930
|
|
Item 5. Other Information
Not
applicable.
Item 6. Exhibits
EXHIBIT
NO.
|
|
DESCRIPTION
|
|
|
|
31.1
|
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 of the Chief Executive Officer.
|
31.2
|
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 of the Chief Financial Officer.
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive
Officer and Chief Financial Officer.
|
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: July 28, 2008
|
B&G
FOODS, INC.
|
|
|
|
|
|
By:
|
/s/ Robert C. Cantwell
|
|
|
Robert C.
Cantwell
|
|
|
Executive
Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer and Authorized Officer)
|
38
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