As filed with the Securities and
Exchange Commission on April 30, 2008
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x
|
Quarterly
Report Pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
|
|
For the quarterly period ended March 29, 2008
or
o
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Transition
Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
|
|
For the transition period from
to
.
Commission file number 001-32316
B&G FOODS,
INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
13-3918742
(I.R.S. Employer Identification No.)
|
|
|
|
4 Gatehall Drive, Suite 110, Parsippany, New
Jersey
(Address of principal executive offices)
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07054
(Zip Code)
|
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
|
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 March 29, 2008, the registrant had 36,778,988 shares of Class A
common stock, par value $0.01 per share, issued and outstanding, 16,680,877 of
which were held in the form of Enhanced Income Securities (EISs) and 20,098,111
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 March 29, 2008, the registrant had
no shares of Class B common stock, par value $0.01 per share, issued or
outstanding.
B&G Foods, Inc. and Subsidiaries
Index
i
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
B&G Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)
|
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March 29, 2008
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December 29, 2007
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Assets
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Current assets:
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Cash and cash equivalents
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$
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33,326
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$
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36,606
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Trade accounts receivable, net
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35,161
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42,362
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Inventories
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95,137
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93,181
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Prepaid expenses
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2,551
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3,556
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Income tax receivable
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56
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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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166,879
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176,922
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Property, plant and equipment, net of accumulated depreciation of
$57,714 and $55,679
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53,983
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49,658
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Goodwill
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253,353
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253,353
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Trademarks
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227,220
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227,220
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Customer relationship intangibles, net
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121,155
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122,768
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Net deferred debt issuance costs and other assets
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16,621
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17,669
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Total assets
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$
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839,211
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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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25,706
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$
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32,126
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Accrued expenses
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20,741
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21,894
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Dividends payable
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7,797
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7,797
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Total current liabilities
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54,244
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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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12,312
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6,376
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Deferred income taxes
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69,057
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68,962
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Total liabilities
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671,413
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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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|
|
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Class A common stock, $0.01 par value per share. Authorized
100,000,000 shares; 36,778,988 shares issued and outstanding
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368
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368
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Class B common stock, $0.01 par value per share. Authorized
25,000,000 shares; no shares issued or outstanding
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Additional paid-in capital
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194,400
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202,197
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Accumulated other comprehensive loss
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|
(7,167
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)
|
(3,718
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)
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Accumulated deficit
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|
(19,803
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)
|
(24,212
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)
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Total stockholders equity
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167,798
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174,635
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Total liabilities and stockholders equity
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$
|
839,211
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$
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847,590
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|
See Notes to Consolidated
Financial Statements.
1
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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March 29, 2008
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March 31, 2007
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|
|
|
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Net sales
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$
|
116,342
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$
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103,745
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Cost of goods sold
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81,412
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|
71,062
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|
Gross profit
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34,930
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32,683
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|
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|
|
|
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Operating expenses:
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|
|
|
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Sales, marketing and distribution expenses
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12,289
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|
11,504
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|
General and administrative expenses
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|
1,358
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|
1,830
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|
Amortization expensecustomer relationships
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1,613
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|
663
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|
Operating income
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19,670
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18,686
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|
|
|
|
|
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Other expenses:
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|
|
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Interest expense, net
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12,571
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|
12,125
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|
Income before income tax expense
|
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7,099
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|
6,561
|
|
Income tax expense
|
|
2,690
|
|
2,487
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|
Net income
|
|
$
|
4,409
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|
$
|
4,074
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|
|
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Earnings per share calculations:
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|
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Basic and diluted distributed earnings per share:
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|
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|
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Class A common stock
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$
|
0.21
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$
|
0.21
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Basic and diluted earnings (loss) per share:
|
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Class A common stock
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$
|
0.12
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$
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0.20
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Class B common stock
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|
$
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|
|
$
|
(0.01
|
)
|
See Notes to Consolidated
Financial Statements.
2
B&G
Foods, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
|
|
Thirteen Weeks Ended
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March 29, 2008
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March 31, 2007
|
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|
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Cash flows from operating activities:
|
|
|
|
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|
Net income
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|
$
|
4,409
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|
$
|
4,074
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|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
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|
|
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Depreciation and amortization
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3,689
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|
2,458
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|
Amortization of deferred debt issuance costs
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|
792
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|
773
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|
Deferred income taxes
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2,177
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|
2,076
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|
Changes in assets and liabilities, net of effects of business
acquired:
|
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|
|
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Trade accounts receivable
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|
7,201
|
|
(4,335
|
)
|
Inventories
|
|
(1,956
|
)
|
(7,848
|
)
|
Prepaid expenses
|
|
1,005
|
|
593
|
|
Income tax receivable
|
|
513
|
|
(75
|
)
|
Other assets
|
|
256
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|
(3
|
)
|
Trade accounts payable
|
|
(6,420
|
)
|
418
|
|
Accrued expenses
|
|
(1,134
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)
|
5,804
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Other liabilities
|
|
442
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|
882
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|
Net cash provided by operating activities
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10,974
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|
4,817
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|
|
|
|
|
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Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
|
(6,420
|
)
|
(2,283
|
)
|
Payments for acquisition of businesses
|
|
|
|
(200,887
|
)
|
Net cash used in investing activities
|
|
(6,420
|
)
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(203,170
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)
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|
|
|
|
|
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Cash flows from financing activities:
|
|
|
|
|
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Proceeds from issuance of long-term debt
|
|
|
|
205,000
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|
Dividends paid
|
|
(7,797
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)
|
(4,240
|
)
|
Payment of debt issuance costs
|
|
|
|
(3,991
|
)
|
Net cash (used in) provided by financing activities
|
|
(7,797
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)
|
196,769
|
|
|
|
|
|
|
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Effect of exchange rate fluctuations on cash and cash equivalents
|
|
(37
|
)
|
4
|
|
Net decrease in cash and cash equivalents
|
|
(3,280
|
)
|
(1,580
|
)
|
|
|
|
|
|
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Cash and cash equivalents at beginning of period
|
|
36,606
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|
29,626
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|
Cash and cash equivalents at end of period
|
|
$
|
33,326
|
|
$
|
28,046
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
|
|
|
|
|
|
Cash interest payments
|
|
$
|
7,012
|
|
$
|
5,414
|
|
Cash income tax payments
|
|
$
|
10
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|
$
|
47
|
|
Cash income tax refunds
|
|
$
|
(40
|
)
|
$
|
(92
|
)
|
Non-cash transactions:
|
|
|
|
|
|
Dividends declared and not yet paid
|
|
$
|
7,797
|
|
$
|
4,240
|
|
See
Notes to
Consolidated
Financial
Statements.
3
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
Acquisitions
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 described
above 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
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 March 29, 2008, we had 36,778,988
shares of Class A common stock issued and outstanding, 16,680,877 of which
were held in the form of EISs and 20,098,111 of which were held separate from
EISs. As of March 31, 2007, we had
20,000,000 shares of Class A common stock issued and outstanding, all of
which were held in the form of 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 week periods ended March 29, 2008 (first quarter of 2008) and
March 31, 2007 (first quarter 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 March 29, 2008, the results of our operations and
cash flows for the first quarter of 2008 and 2007. Our results of operations for the first
quarter 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.
5
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(2)
Summary
of Significant Accounting Policies (Continued)
Use of
Estimates
The preparation of financial statements in
accordance with U.S. generally accepted accounting principles requires our
management to make a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates and
assumptions made by management involve trade and consumer promotion expenses;
allowances for excess, obsolete and unsaleable inventories; pension benefits;
purchase accounting allocations; the recoverability of goodwill, trademarks,
customer relationship intangibles, property, plant and equipment and deferred
tax assets;
the accounting for our enhanced income securities (EISs) and the
accounting for earnings per share.
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
will have 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
will have on our consolidated financial statements.
6
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):
|
|
March 29, 2008
|
|
December 29, 2007
|
|
Raw materials and packaging
|
|
$
|
16,865
|
|
$
|
19,573
|
|
Work in process
|
|
2,265
|
|
2,641
|
|
Finished goods
|
|
76,007
|
|
70,967
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,137
|
|
$
|
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 March 29, 2008.
There has been no change in the carrying amount of
trademarks for the period from December 29, 2007 to March 29, 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
|
|
|
|
(1,613
|
)
|
(1,613
|
)
|
Balance at March 29, 2008
|
|
$
|
129,000
|
|
$
|
(7,845
|
)
|
$
|
121,155
|
|
Amortization expense associated with customer
relationship intangibles for the first quarter of 2008 and 2007 was $1.6
million and $0.7 million, respectively, and is recorded in operating
expenses. We expect to recognize an additional
$4.9 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.
(5)
Long-term
Debt
Long-term debt consists
of the following, as of the dates indicated (dollars in thousands):
|
|
March 29, 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
|
|
7
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(5)
Long-term Debt (Continued)
As of March 29,
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.
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 March 29, 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 March 29, 2008. The available borrowing capacity under our
revolving credit facility, net of
8
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(5)
Long-term Debt (Continued)
outstanding letters of credit of $2.4 million, was $22.6 million at March 29,
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 March 29,
2008 and December 29, 2007 we had net deferred debt issuance costs of
$15.6 million and $16.4 million, respectively.
At March 29, 2008
and December 29, 2007 accrued interest of $13.7 million and $8.9 million,
respectively, is included in accrued expenses in the accompanying consolidated
balance sheets.
(6)
Financial
Instruments
We adopted SFAS No. 157
on December 30, 2007, the first day of our 2008 fiscal year. SFAS No. 157 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date
(an exit price). The standard outlines a valuation framework and creates a fair
value hierarchy in order to increase the consistency and comparability of fair
value measurements and the related disclosures. Under generally accepted
accounting principles, certain assets and liabilities must be measured at fair
value, and SFAS No. 157 details the disclosures that are required for
items measured at fair value.
Financial assets and liabilities are measured using inputs
from the three levels of the SFAS No. 157 fair value hierarchy. The three
levels are as follows:
Level 1Inputs are unadjusted quoted prices in active
markets for identical assets or liabilities.
Level 2Inputs include quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices
that are observable for the asset or liability (i.e., interest rates, yield
curves, etc.), and inputs that are derived principally from or corroborated by
observable market data by correlation or other means (market corroborated
inputs).
Level 3Unobservable inputs that reflect our assumptions
about the assumptions that market participants would use in pricing the asset
or liability.
9
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(6)
Financial
Instruments (Continued)
In accordance with the fair value hierarchy described
above, the following table shows the fair value of our interest rate swap as of
March 29, 2008, which is included in Other long-term liabilities in our
consolidated balance sheet (dollars in thousands):
|
|
|
|
Fair Value Measurements as of March 29, 2008
|
|
|
|
March 29, 2008
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Interest rate derivatives
|
|
$
|
11,403
|
|
$
|
|
|
$
|
11,403
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 29, 2008 and December 29, 2007 are as follows
(dollars in thousands):
|
|
March 29, 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
|
|
$
|
232,800
|
|
$
|
240,000
|
|
$
|
235,800
|
|
12% Senior Subordinated Notes due October 30, 2016(2):
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
119,268
|
|
129,444
|
|
119,067
|
|
126,561
|
|
held separately
|
|
46,532
|
|
50,501
|
|
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 March 29, 2008 was $7.76, based
upon the $11.23 per share closing price of our separately traded Class A
common stock and the $18.99 per EIS closing price of our EISs on the New York
Stock Exchange on March 28, 2008 (the last business day of the first
quarter of 2008). Each EIS represents
one share of Class A common stock and $7.15 principal amount of our senior
subordinated notes.
(3)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at December 29, 2007 was $7.60,
based upon the $10.07 per share closing price of our separately traded Class A
common stock and the $17.67 per EIS closing price of our EISs on the New York
Stock Exchange on December 28, 2007 (the last business day of fiscal 2007).
The carrying value of our
term loan borrowings approximates fair value because interest rates under the
term loan borrowings are variable, based on prevailing market rates. 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):
10
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(7)
Comprehensive
Income Recognition (Continued)
|
|
Thirteen Weeks Ended
|
|
|
|
March 29,
2008
|
|
March 31,
2007
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,409
|
|
$
|
4,074
|
|
Other comprehensive income:
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(37
|
)
|
4
|
|
Amortization of unrecognized prior service cost and pension
deferrals, net of tax
|
|
5
|
|
11
|
|
Mark to market adjustment of cash flow hedge transaction, net of tax
|
|
(3,417
|
)
|
(697
|
)
|
Comprehensive income
|
|
$
|
960
|
|
$
|
3,392
|
|
(8)
Pension Benefits
Net periodic costs for the first quarter of 2008 and
2007 include the following components (dollars in thousands):
|
|
Thirteen Weeks Ended
|
|
|
|
March 29, 2008
|
|
March 31, 2007
|
|
|
|
|
|
|
|
Service costbenefits earned during the period
|
|
$
|
330
|
|
$
|
385
|
|
Interest cost on projected benefit obligation
|
|
360
|
|
336
|
|
Expected return on plan assets
|
|
(453
|
)
|
(372
|
)
|
Amortization of unrecognized prior service cost
|
|
(3
|
)
|
6
|
|
Amortization of loss
|
|
11
|
|
11
|
|
Net pension cost
|
|
$
|
245
|
|
$
|
366
|
|
During the first quarter of 2008, we did not make any
contributions to our defined benefit pension plans. We anticipate electing to make payments of
approximately $1.0 million during the remainder of fiscal 2008 to fund our
defined benefit pension plan obligations.
(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 $0.2 million for the
first 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
11
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(9)
Related-Party
Transactions (Continued)
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
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.
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
12
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(11)
Earnings
per Share (Continued)
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.
|
|
Thirteen
Weeks Ended
|
|
|
|
March 29,
2008
|
|
March 31,
2007
|
|
|
|
(dollars in thousands)
|
|
Net income
|
|
$
|
4,409
|
|
$
|
4,074
|
|
Less: Class A common stock dividends declared
|
|
7,797
|
|
4,240
|
|
Undistributed loss
|
|
$
|
(3,388
|
)
|
$
|
(166
|
)
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding:
|
|
|
|
|
|
Class A common stock
|
|
36,778,988
|
|
20,000,000
|
|
Class B common stock
|
|
|
|
7,556,443
|
|
|
|
|
|
|
|
Basic and diluted allocation of undistributed loss:
|
|
|
|
|
|
Class A common stock
|
|
$
|
(3,388
|
)
|
$
|
(120
|
)
|
Class B common stock
|
|
|
|
(46
|
)
|
Total
|
|
$
|
(3,388
|
)
|
$
|
(166
|
)
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
Undistributed (loss) earnings per share:
|
|
|
|
|
|
Class A common stock
|
|
$
|
(0.09
|
)
|
$
|
(0.01
|
)
|
Class B common stock
|
|
$
|
|
|
$
|
(0.01
|
)
|
Distributed earnings:
|
|
|
|
|
|
Class A common stock
|
|
$
|
0.21
|
|
$
|
0.21
|
|
Earnings (loss) per share
:
|
|
|
|
|
|
Class A common stock
|
|
$
|
0.12
|
|
$
|
0.20
|
|
Class B common stock
|
|
$
|
|
|
$
|
(0.01
|
)
|
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 March 29, 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 46.7%
and
45.2% of consolidated net sales for the first quarter of 2008 and the first
quarter of
13
B&G
Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(12)
Business
and Credit Concentrations and Geographic Information (Continued)
2007, respectively.
Other than Wal-Mart, which accounted for 12.9% and 12.2% of our
consolidated net sales for the first quarter of 2008 and the first quarter of
2007, respectively, no single customer accounted for more than 10.0% of our
consolidated net sales for the first quarter of 2008 or the first quarter of 2007.
During the first quarter of 2008 and the first quarter
of 2007, respectively, our sales to foreign countries represented approximately
1.0% of net sales and less than 1.0% of net sales, respectively. Our foreign sales are primarily to customers
in Canada.
(13)
Income Taxes
As of March 29, 2008 and December 29, 2007,
we have approximately $0.1 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
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 weeks ended March 29, 2008 (first quarter
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 affects 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 first quarter of 2008, our commodity prices for wheat, maple syrup, beans
and corn sweeteners were higher than those incurred during the first quarter of
2007.
Maple
syrup production in Canada, which represents the vast majority of global
production, is expected to be well below industry projections and global demand
in 2008 due to poor crop yields. As a
result, we expect to see significant further increases in the price we pay for
maple syrup in 2008 and likely will face a shortfall in supply as compared to
our needs, which would negatively impact our sales of maple syrup products.
15
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; and the accounting for earnings per share. 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
16
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 quarter 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
17
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, if any, of senior subordinated notes, 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 expenses together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities. We then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe the recovery is not likely, we
establish a valuation allowance.
Further, to the extent that we establish a valuation allowance or
increase this allowance in a financial accounting period, we include such
charge in our tax provision, or reduce our tax benefits in our consolidated
statement of operations. We use our
judgment to determine our provision or benefit for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against our net
deferred tax assets.
There
are various factors that may cause these tax assumptions to change in the near
term, and we may have to record a valuation allowance against our deferred tax
assets. We cannot predict whether future
U.S. federal and state income tax laws and regulations might be passed that
could have a material effect on our results of operations. We assess the impact of significant changes
to the U.S. federal and state income tax laws and regulations on a regular
basis and update the assumptions and estimates used to prepare our consolidated
financial statements when new regulations and legislation are enacted. We recognize the benefit of an uncertain tax
position that we have taken or expect to take on the income tax returns we file
if it is more likely than not that such tax position will be sustained based
on its technical merits.
18
Earnings Per Share
We currently have
one class of common stock issued and outstanding, designated as Class A
common stock. Prior to May 29,
2007, we had two classes of common stock issued and outstanding, designated as Class A
common stock and Class B common stock.
For periods in which we had shares of both Class A and Class B
common stock issued and outstanding, we present earnings per share using the
two-class method. The two-class method
is an earnings allocation formula that determines earnings per share for each
class of common stock according to dividends declared and participation rights
in undistributed earnings or losses.
For
periods in which we had shares of both Class A and Class B common
stock issued and outstanding, net income is allocated between the two classes
of common stock based upon the two-class method. Basic and diluted earnings per share for the Class A
common stock and Class B common stock is calculated by dividing allocated
net income by the weighted average number of shares of Class A common
stock and Class B common stock outstanding.
Pension Expense
We have defined benefit pension plans
covering substantially all of our employees. Our funding policy is to contribute annually
the amount recommended by our actuaries.
The funded status of our pension plans is dependent upon many factors,
including returns on invested assets and the level of certain market interest
rates. We review pension assumptions
regularly and we may from time to time make voluntary contributions to our
pension plans, which exceed the amounts required by statute. During the first quarter of 2008 and 2007, we
made no contributions to our defined benefit pension plans. We anticipate electing to make payments of
approximately $1.0 million during the remainder of fiscal 2008 to fund our
defined benefit pension plan obligations.
Changes in interest rates and the market value of the securities held by
the plans could materially change, positively or negatively, the underfunded
status of the plans and affect the level of pension expense and required
contributions during the remainder of fiscal 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.
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.
19
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 first quarter 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
|
|
|
|
March 29,
2008
|
|
March 31,
2007
|
|
Statement of Operations:
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
70.0
|
%
|
68.5
|
%
|
Gross profit
|
|
30.0
|
%
|
31.5
|
%
|
|
|
|
|
|
|
Sales, marketing and distribution expenses
|
|
10.6
|
%
|
11.1
|
%
|
General and administrative expenses
|
|
1.1
|
%
|
1.8
|
%
|
Amortization expensecustomer relationships
|
|
1.4
|
%
|
0.6
|
%
|
Operating income
|
|
16.9
|
%
|
18.0
|
%
|
|
|
|
|
|
|
Interest expense, net
|
|
10.8
|
%
|
11.7
|
%
|
Income before income tax expense
|
|
6.1
|
%
|
6.3
|
%
|
|
|
|
|
|
|
Income tax expense
|
|
2.3
|
%
|
2.4
|
%
|
Net income
|
|
3.8
|
%
|
3.9
|
%
|
As
used in this section the terms listed below have the following meanings:
Net Sales.
Our net sales
represents gross sales of products shipped to customers plus amounts charged to
customers for shipping and handling, less cash discounts, coupon redemptions,
slotting fees and trade promotional spending.
Gross Profit.
Our gross
profit is equal to our net sales less cost of goods sold. The primary components of our cost of goods
sold are cost of internally manufactured products, purchases of finished goods
from co-packers plus freight costs to our distribution centers and to our
customers.
Sales, Marketing and Distribution Expenses.
Our sales, marketing and distribution expenses include costs for
marketing personnel, consumer advertising programs, internal sales forces,
brokerage costs and warehouse facilities.
General and Administrative Expenses.
Our general and administrative expenses include administrative employee
compensation and benefit costs, as well as information technology
infrastructure and communication costs, office rent and supplies, professional
services and other general corporate expenses.
Amortization ExpenseCustomer Relationships.
Amortization expensecustomer
relationships includes the amortization expense associated with customer
relationship intangibles, which are amortized over their useful lives of 20
years.
20
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 first quarter of 2008 and 2007 along with the components of
EBITDA follows:
21
|
|
Thirteen Weeks Ended
|
|
|
|
March 29,
2008
|
|
March 31,
2007
|
|
|
|
(dollars in thousands)
|
|
Net income
|
|
$
|
4,409
|
|
$
|
4,074
|
|
Income tax expense
|
|
2,690
|
|
2,487
|
|
Interest expense, net
|
|
12,571
|
|
12,125
|
|
Depreciation and amortization
|
|
3,689
|
|
2,458
|
|
EBITDA
|
|
23,359
|
|
21,144
|
|
Income tax expense
|
|
(2,690
|
)
|
(2,487
|
)
|
Interest expense, net
|
|
(12,571
|
)
|
(12,125
|
)
|
Deferred income taxes
|
|
2,177
|
|
2,076
|
|
Amortization of deferred financing costs
|
|
792
|
|
773
|
|
Changes in assets and liabilities, net of effects of business
combination
|
|
(93
|
)
|
(4,564
|
)
|
Net cash provided by operating activities
|
|
$
|
10,974
|
|
$
|
4,817
|
|
First quarter of 2008 compared to the first quarter of 2007
Net Sales.
Net sales increased $12.6 million or
12.1% to $116.3 million for the first quarter of 2008 from $103.7 million for
the first quarter of 2007.
Cream of Wheat
, which was acquired by us effective February 25,
2007, accounted for $11.7 million of the net sales increase offset by a
decrease in net sales of $0.8 million relating to the termination of a
temporary co-packing arrangement. The
remaining $1.7 million increase in our net sales related to increases in unit
volume. Net sales of our lines of
Ortega, Las Palmas, Maple Grove Farms, Polaner
and
Sa-són
products increased
in
the amounts of $1.0 million, $0.6 million, $0.5 million, $0.5 million and $0.4
million or 3.9%, 11.0%, 3.4%, 4.9% and 50.6%, respectively. These increases were offset by a reduction in
net sales of
Underwood,
Emerils
,
B&M
and
Regina
products of $0.6 million, $0.5 million, $0.4
million and $0.3 million or 12.2%, 11.5%, 8.1% and 12.4%, respectively. In the aggregate, net sales for all other
brands increased $0.5 million, or 1.3%.
Cream of Wheat
net sales for January and February of
the first quarter of 2008, were $9.0 million.
We did not own the
Cream of Wheat
business
during January and February of the first quarter of 2007. Net sales of our
Cream of
Wheat
products increased $2.7 million or 41.1% during March 2008
as compared to March 2007, primarily as a result of increases in unit
volume through new distribution.
Gross Profit.
Gross profit increased $2.2 million or
6.9% to $34.9 million for the first quarter of 2008 from $32.7 million for the
first quarter of 2007. Gross profit
expressed as a percentage of net sales decreased 1.5% to 30.0% in the first
quarter of 2008 from 31.5% in the first quarter of 2007. This decrease in gross profit expressed as
percentage of net sales was primarily attributable to increased spending on
trade promotions and slotting and increased costs for packaging, wheat, maple
syrup, transportation and corn sweeteners, partially offset by the positive
impact of the
Cream of Wheat
acquisition.
Sales, Marketing and Distribution Expenses.
Sales, marketing and distribution expenses increased
$0.8 million or 6.8% to $12.3 million for the first quarter of 2008 from $11.5
million for the first quarter of 2007.
This increase is primarily due to an increase in consumer marketing of
$0.8 million. Expressed as a percentage
of net sales, our sales, marketing and distribution expenses decreased to 10.6%
for the first quarter of 2008 from 11.1% for the first quarter of 2007.
General and Administrative Expenses.
General and administrative expenses decreased $0.4
million or 25.8% to $1.4 million for the first quarter of 2008 from $1.8
million in the first quarter of 2007.
The decrease in general and administrative expenses primarily resulted
from a decreased accrual for incentive compensation of $0.2 million,
professional fees of $0.1 million and other expenses of $0.1 million.
22
Amortization Expense
Customer
Relationships.
Amortization expensecustomer relationships increased $0.9
million to $1.6 million for the first quarter of 2008 from $0.7 million for the
first quarter 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 increased $1.0 million or 5.3% to $19.7 million for the first quarter of
2008 from $18.7 million for the first quarter of 2007. Operating income expressed as a percentage of
net sales decreased to 16.9% in the first quarter of 2008 from 18.0% in the
first quarter of 2007.
Net Interest Expense.
Net
interest expense increased $0.5 million or 3.4% to $12.6 million for the first
quarter of 2008 from $12.1 million in the first quarter of 2007. Our average debt outstanding during the first
quarter of 2008 was approximately $36.7 million higher than during the first
quarter of 2007 as a result of $205.0 million of additional term loan
borrowings made in February 2007 in connection with the
Cream of Wheat
acquisition partially offset by term loan
prepayments of $100.0 million made in May 2007 with a portion of the
proceeds from our Class A common stock offering. See Liquidity and Capital ResourcesDebt
below.
Income Tax Expense.
Income tax expense increased $0.2 million
to $2.7 million for the first quarter of 2008 from $2.5 million for the first
quarter of 2007. Our effective tax rate
was 37.9% for the first quarter 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 $6.2 million to $11.0 million for the first
quarter of 2008 from $4.8 million for the first quarter 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 first quarter of 2007 from the
Cream of Wheat
acquisition) and inventory
offset by a decrease in accounts payable and accrued expenses. Working capital at March 29, 2008 was
$112.6 million, a decrease of $2.5 million from working capital at December 29,
2007 of $115.1 million.
Net
cash used in investing activities for the first quarter of 2008 was $6.4
million as compared to $203.2 million for the first quarter of 2007. Investment expenditures for the first quarter
of 2007 included $200.9 million for the
Cream of Wheat
acquisition. Capital expenditures during the first quarter
of 2008 increased $4.1 million to $6.4 million from $2.3 million during the
first quarter of 2007 and included expenditures of $5.1 million relating to the
expansion of our Stoughton, Wisconsin facility and the pending transfer of a
portion of the
Cream of Wheat
production to that
facility.
Net
cash used in financing activities for the first quarter of 2008 was $7.8
million as compared to $196.8 million for the first quarter of 2007. Net cash used in financing activities for the
first quarter of 2008 consists of $7.8 million for the payment of dividends to
holders of our Class A common stock.
Net cash provided by financing activities for the first quarter of 2007
consisted of $205.0 million in additional term loan borrowings ($100 million of
which we subsequently prepaid during the second quarter of 2007), offset by
$4.2 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
23
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 quarter of 2008 and 2007, we had cash flows provided by operating
activities of $11.0 million and $4.8 million, and distributed $7.8 million and
$4.2 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.
24
Acquisitions
Our liquidity and
capital resources have been significantly impacted by acquisitions and may be
impacted in the foreseeable future by additional acquisitions. We have historically financed acquisitions
with borrowings and cash flows from operating activities. Our interest expense has increased
significantly as a result of additional indebtedness we have incurred as a
result of the
Cream of Wheat
acquisition in February 2007,
and 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 quarter 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.
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 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
25
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 March 29, 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 March 29, 2008. The available borrowing capacity under our
revolving credit facility, net of outstanding letters of credit of $2.4
million, was $22.6 million at March 29, 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 March 29, 2008, $119.3 million aggregate principal amount of senior
subordinated notes was held in the form of EISs and $46.5 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 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,
26
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 March 29, 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 March 29, 2008, we were in compliance with all of the
covenants in the senior notes indenture.
Future Capital
Needs
We are highly leveraged. On March 29, 2008, our total long-term
debt and stockholders equity was $535.8 million and $167.8 million,
respectively.
Our ability to generate sufficient cash to fund our
operations depends generally on our results of operations and the availability
of financing. Our management believes
that our cash on hand, cash flow from operating activities and available
borrowing capacity under our revolving credit facility will be sufficient for
the foreseeable future to fund operations, meet debt service requirements, fund
capital expenditures, and pay our anticipated dividends on our Class A
common stock.
We expect to make capital expenditures of
approximately $11.0 million in the aggregate during fiscal 2008.
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.
27
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 quarter 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 quarter 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
will have 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
will have on our consolidated financial statements.
28
Off-balance Sheet Arrangements
As of March 29,
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 quarter of 2008, there were
no material changes outside the ordinary course of business in the specified
contractual obligations set forth in our 2007 Annual Report on Form 10-K,
except that we entered into a new lease in Tennessee (in connection with the
transfer of our warehousing operations in Tennessee from one leased location to
another leased location) that will require us to make rental payments of
approximately $4.0 million in the aggregate over the course of the lease, which
expires in 2013. In addition, our
expected contributions to our defined benefit pension plans for fiscal 2008
have increased from $0.1 million to $1.0 because, although not obligated to do
so, we anticipate electing to make $1.0 million of contributions during the
remainder of fiscal 2008. During the
first quarter of 2008, we made no contributions to our defined benefit pension
plans.
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;
·
other factors that affect the food industry
generally, including:
29
·
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 March 29, 2008. We have outstanding $130.0 million of term
loan borrowings at March 29, 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 March 29,
2008 and December 29, 2007 are as follows (dollars in thousands):
30
|
|
March 29, 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
|
|
$
|
232,800
|
|
$
|
240,000
|
|
$
|
235,800
|
|
12% Senior Subordinated Notes due October 30, 2016(2):
|
|
|
|
|
|
|
|
|
|
represented by EISs
|
|
119,268
|
|
129,444
|
|
119,067
|
|
126,561
|
|
held separately
|
|
46,532
|
|
50,501
|
|
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 March 29, 2008 was $7.76, based
upon the $11.23 per share closing price of our separately traded Class A
common stock and the $18.99 per EIS closing price of our EISs on the New York
Stock Exchange on March 28, 2008 (the last business day of the first
quarter of 2008). Each EIS represents
one share of Class A common stock and $7.15 principal amount of our senior
subordinated notes.
(3)
Solely for purposes of this presentation, we have assumed that the fair
value of each senior subordinated note at December 29, 2007 was $7.60,
based upon the $10.07 per share closing price of our separately traded Class A
common stock and the $17.67 per EIS closing price of our EISs on the New York
Stock Exchange on December 28, 2007 (the last business day of fiscal
2007).
The
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,
31
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
Not applicable.
Item 5.
Other Information
Not
applicable.
32
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.
|
33
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:
April 30, 2008
|
B&G
FOODS, INC.
|
|
|
|
|
|
By:
|
/s/
Robert C. Cantwell
|
|
|
Robert
C. Cantwell
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer and Authorized Officer)
|
34
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