B&G Foods, Inc. - Quarter Report: 2010 October (Form 10-Q)

Table of Contents

 

As filed with the Securities and Exchange Commission on October 26, 2010

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark one)

 

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended October 2, 2010

 

or

 

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                    to                   .

 

Commission file number 001-32316

 

B&G FOODS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code:  (973) 401-6500

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of October 26, 2010, the registrant had 47,635,640 shares of common stock, par value $0.01 per share, issued and outstanding.

 

 

Table of Contents

 

B&G Foods, Inc. and Subsidiaries

Index

 

	Page No.
PART I FINANCIAL INFORMATION	1
Item 1. Financial Statements (Unaudited)	1
Consolidated Balance Sheets	1
Consolidated Statements of Operations	2
Consolidated Statements of Cash Flows	3
Notes to Consolidated Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	30
Item 4. Controls and Procedures	31
PART II OTHER INFORMATION	33
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults Upon Senior Securities	33
Item 4. Reserved	33
Item 5. Other Information	33
Item 6. Exhibits	33
SIGNATURE	34

 

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PART I
FINANCIAL INFORMATION

 

Item 1.  Financial Statements (Unaudited)

 

B&G Foods, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

		October 2, 2010			January 2, 2010
Assets
Current assets:
Cash and cash equivalents		$	87,525		$	39,930
Trade accounts receivable, less allowance for doubtful accounts and discounts of $610 in 2010 and $631 in 2009		31,842			34,488
Inventories		89,355			86,134
Prepaid expenses		1,881			2,523
Income tax receivable		1,166			864
Deferred income taxes		1,671			1,981
Total current assets		213,440			165,920
Property, plant and equipment, net of accumulated depreciation of $78,543 in 2010 and $72,217 in 2009		54,425			53,598
Goodwill		253,353			253,353
Trademarks		227,220			227,220
Customer relationship intangibles, net		105,030			109,868
Net deferred debt financing costs and other assets		9,396			6,935
Total assets		$	862,864		$	816,894
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable		$	26,613		$	22,574
Accrued expenses		18,859			18,326
Dividends payable		8,098			8,052
Total current liabilities		53,570			48,952
Long-term debt		477,668			439,541
Other liabilities		19,422			19,265
Deferred income taxes		90,548			83,528
Total liabilities		641,208			591,286
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value per share. Authorized 1,000,000 shares; no shares issued or outstanding		—			—
Common stock, $0.01 par value per share. Authorized — 125,000,000 and 100,000,000 shares; 47,635,640 and 47,367,292 issued and outstanding as of October 2, 2010 and January 2, 2010		476			474
Additional paid-in capital		208,539			231,549
Accumulated other comprehensive loss		(8,422		)	(9,377		)
Retained earnings		21,063			2,962
Total stockholders’ equity		221,656			225,608
Total liabilities and stockholders’ equity		$	862,864		$	816,894

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009
Net sales		$	125,144		$	123,871		$	371,471		$	365,408
Cost of goods sold		85,960			87,647			250,861			253,569
Gross profit		39,184			36,224			120,610			111,839
Operating expenses:
Sales, marketing and distribution expenses		9,901			10,659			32,022			32,575
General and administrative expenses		2,534			2,936			7,928			7,753
Amortization expense—customer relationships		1,613			1,613			4,838			4,838
Operating income		25,136			21,016			75,822			66,673
Other expenses:
Interest expense, net		10,335			13,570			31,855			39,996
Loss on extinguishment of debt		—			674			15,224			674
Income before income tax expense		14,801			6,772			28,743			26,003
Income tax expense		5,519			2,611			10,642			9,900
Net income		$	9,282		$	4,161		18,101			16,103
Weighted average common shares outstanding:
Basic		47,636			37,790			47,563			36,644
Diluted		48,601			37,973			48,349			36,644
Earnings per common share:
Basic		$	0.19		$	0.11		$	0.38		$	0.44
Diluted		$	0.19		$	0.11		$	0.37		$	0.44
Cash dividends declared per common share		$	0.17		$	0.17		$	0.51		$	0.51

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Thirty-nine Weeks Ended
		October 2, 2010			October 3, 2009
Cash flows from operating activities:
Net income		$	18,101		$	16,103
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,118			10,847
Amortization of deferred debt financing costs and bond discount		1,515			2,222
Deferred income taxes		5,584			9,295
Loss on extinguishment of debt		15,224			674
Share-based compensation expense		2,413			3,273
Excess tax benefits from share-based compensation		(330		)	—
Unrealized loss (gain) on interest rate swap		1,820			(108		)
Reclassification to net interest expense for interest rate swap		1,270			1,270
Changes in assets and liabilities:
Trade accounts receivable		2,646			2,699
Inventories		(3,221		)	(14,655		)
Prepaid expenses		642			391
Income tax receivable		1,188			199
Other assets		(16		)	(198		)
Trade accounts payable		4,039			3,750
Accrued expenses		533			(1,260		)
Other liabilities		(1,385		)	(201		)
Net cash provided by operating activities		61,141			34,301
Cash flows from investing activities:
Capital expenditures		(7,082		)	(7,943		)
Net cash used in investing activities		(7,082		)	(7,943		)
Cash flows from financing activities:
Payments for repurchase of long-term debt		(320,259		)	(6,635		)
Proceeds from issuance of long-term debt		347,448			—
Payments for repurchase of common stock		—			(2,334		)
Proceeds from issuance of common stock, net		—			86,612
Dividends paid		(24,245		)	(18,388		)
Excess tax benefits from share-based compensation		330			—
Payments of tax withholding on behalf of employees for net share settlement of share-based compensation		(1,460		)	—
Payments of debt financing costs		(8,246		)	(668		)
Net cash (used in) provided by financing activities		(6,432		)	58,587
Effect of exchange rate fluctuations on cash and cash equivalents		(32		)	124
Net increase in cash and cash equivalents		47,595			85,069
Cash and cash equivalents at beginning of period		39,930			32,559
Cash and cash equivalents at end of period		$	87,525		$	117,628
Supplemental disclosures of cash flow information:
Cash interest payments		$	27,945		$	41,864
Cash income tax payments		$	3,909		$	1,602
Cash income tax refunds		$	(2	)	$	(1,179	)
Non-cash transactions:
Dividends declared and not yet paid		$	8,098		$	8,052

 

See Notes to Consolidated Financial Statements.

 

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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 are marketed under many recognized brands, including Ac’cent, B&G, B&M, Brer Rabbit, Cream of Rice, Cream of Wheat, Emeril’s, Grandma’s Molasses, Joan of Arc, Las Palmas, Maple Grove Farms of Vermont, Ortega, Polaner, Red Devil, Regina, Sa-són, Trappey’s, Underwood, Vermont Maid and Wright’s.  Our products include hot cereals, fruit spreads, canned meats and beans, spices, seasonings, marinades, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, Mexican-style sauces, taco shells and kits, salsas, pickles, peppers and other specialty food products.  We compete in the retail grocery, food service, specialty, private label, club and mass merchandiser channels of distribution.  We distribute our products throughout the United States via a nationwide network of independent brokers and distributors to supermarket chains, food service outlets, mass merchants, warehouse clubs, non-food outlets and specialty food distributors.

 

(2)           Summary of Significant Accounting Policies

 

Fiscal Year

 

Our financial statements are presented on a consolidated basis.  Typically, our fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to December 31 in the case of our fiscal year and fourth fiscal quarter, and on the Saturday closest to the end of the corresponding calendar quarter in the case of our fiscal quarters.  As a result, a 53rd week is added to our fiscal year every five or six years.  In a 53-week fiscal year our fourth fiscal quarter contains 14 weeks.  Our fiscal years ending January 1, 2011 (fiscal 2010) and January 2, 2010 (fiscal 2009) each contain 52 weeks.  Each quarter of fiscal 2010 and 2009 contains 13 weeks.

 

Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements for the thirteen and thirty-nine week periods ended October 2, 2010 (third quarter of 2010 and first three quarters of 2010) and October 3, 2009 (third quarter of 2009 and first three quarters of 2009) have been prepared by our company in accordance with accounting principles generally accepted in the United States of America 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 October 2, 2010, the results of our operations for the third quarter and first three quarters of 2010 and 2009, and cash flows for the first three quarters of 2010 and 2009.  Our results of operations for the third quarter and first three quarters of 2010 are not necessarily indicative of the results to be expected for the full year.  We have evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited consolidated interim financial statements.  The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes for fiscal 2009 included in our Annual Report on Form 10-K for fiscal 2009 filed with the SEC on March 1, 2010.

 

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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 accounting principles generally accepted in the Unites States of America 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; the recoverability of goodwill, trademarks, customer relationship intangibles, property, plant and equipment and deferred tax assets; and the accounting for share-based compensation expense.  Actual results could differ significantly from these estimates and assumptions.

 

Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believe to be reasonable under the circumstances, including the current economic environment.  We adjust such estimates and assumptions when facts and circumstances dictate.  Recent volatility in the credit and equity markets has increased the uncertainty inherent in certain of these estimates and assumptions.

 

Recently Issued Accounting Standards

 

There have been no significant developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements, from those disclosed in our 2009 Annual Report on Form 10-K.

 

(3)           Inventories

 

Inventories are stated at the lower of cost or market and include direct material, direct labor, overhead, warehousing and product transfer costs.  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 management’s review of inventories on hand compared to estimated future usage and sales.

 

Inventories consist of the following, as of the dates indicated (dollars in thousands):

 

		October 2, 2010			January 2, 2010
Raw materials and packaging		$	31,182		$	32,793
Work in process		527			1,239
Finished goods		57,646			52,102
Total		$	89,355		$	86,134

 

(4)           Goodwill, Trademarks and Customer Relationship Intangibles

 

There has been no change in the carrying amount of goodwill or trademarks (indefinite-lived intangibles) during the first three quarters of 2010.

 

The following table reconciles the changes in the carrying amount of customer relationship intangibles for the first three quarters of 2010 (dollars in thousands):

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(4)           Goodwill, Trademarks and Customer Relationship Intangibles (Continued)

 

		Customer Relationship Intangibles			Less: Accumulated Amortization			Total
Balance at January 2, 2010		$	129,000		$	(19,132	)	$	109,868
Amortization expense		—			(4,838		)	(4,838		)
Balance at October 2, 2010		$	129,000		$	(23,970	)	$	105,030

 

Customer relationship intangibles are presented at cost, net of accumulated amortization, and are amortized on a straight-line basis over their estimated useful lives of 20 years.  Amortization expense associated with customer relationship intangibles for each of the third quarter and first three quarters of 2010 and 2009 was $1.6 million and $4.8 million, respectively, and is recorded in operating expenses.  We expect to recognize an additional $1.7 million of amortization expense associated with our current customer relationship intangibles during the remainder of fiscal 2010, 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):

 

		October 2, 2010			January 2, 2010
Senior secured credit facility:
Revolving credit facility		$	—		$	—
Term loan		130,000			130,000
7.625% Senior Notes due 2018, net of unamortized discount of $2,332 at October 2, 2010		347,668			—
12% Senior Subordinated Notes due 2016		—			69,541
8% Senior Notes due 2011		—			240,000
Total long-term debt		$	477,668		$	439,541

 

As of October 2, 2010, the aggregate contractual maturities of long-term debt are as follows (dollars in thousands):

 

Years ending December:
2010		$	—
2011		—
2012		—
2013		130,000
2014		—
Thereafter		350,000
Total		$	480,000

 

Senior Secured Credit Facility.  As amended, our $25.0 million revolving credit facility and our $130.0 million of term loan borrowings mature in February 2013.  The following discussion of the credit

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)                                 Long-term Debt (Continued)

 

facility describes the credit facility as amended through the date of issuance of the accompanying unaudited interim consolidated financial statements.

 

Interest under the revolving credit facility, including any outstanding letters of credit, is determined based on alternative rates that we may choose in accordance with the revolving credit facility, including the base lending rate per annum plus an applicable margin of 2.00%, and LIBOR plus an applicable margin of 3.00%.  We pay a commitment fee of 0.50% per annum on the unused portion of the revolving credit facility.  Interest under the term loan facility is determined based on alternative rates that we may choose in accordance with the credit facility, including the base lending rate per annum plus an applicable margin of 1.00%, and LIBOR plus an applicable margin of 2.00%.

 

Our obligations under the credit facility are jointly and severally and fully and unconditionally guaranteed on a senior basis by all of our existing and certain future domestic subsidiaries.  The credit facility is secured by substantially all of our and our domestic subsidiaries’ assets except our and our domestic subsidiaries’ real property.  The credit facility provides for mandatory prepayment upon certain asset dispositions and issuances of securities, as defined.  The credit facility contains covenants that restrict, among other things, our ability to incur additional indebtedness, pay dividends and create certain liens.  The credit facility also contains certain financial maintenance covenants, which, among other things, specify maximum capital expenditure limits, a minimum interest coverage ratio and a maximum senior and total leverage ratio, each ratio as defined.  As of October 2, 2010, 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 or a similar line of business as our company, subject to specified criteria.  The maximum letter of credit capacity under the revolving credit facility is $10.0 million, with a fronting fee of 3.0% per annum for all outstanding letters of credit.

 

At October 2, 2010, the available borrowing capacity under our revolving credit facility, net of outstanding letters of credit of $0.5 million, was $24.5 million.  We have not drawn upon the revolving credit facility since its inception in October 2004 and, based upon our cash and cash equivalents on hand and working capital requirements, we have no plans to do so for the foreseeable future.

 

Effective as of February 26, 2007, we entered into a six year interest rate swap agreement in order to effectively fix at 7.0925% the interest rate payable for $130.0 million of term loan borrowings through the life of the term loan, ending on February 26, 2013.  The counterparty to the swap is Lehman Special Financing Inc. (Lehman SFI) and the counterparty’s guarantor is Lehman Brothers Holdings Inc. (Lehman).  On September 15, 2008, Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code.  Lehman SFI filed for protection under Chapter 11 of the U.S. Bankruptcy Code on October 3, 2008.

 

We initially designated the swap as a cash flow hedge.  Prior to Lehman’s bankruptcy filing, we recorded changes in the fair value of the swap in accumulated other comprehensive loss, net of tax in our consolidated balance sheet.  However, as a result of the Lehman bankruptcy filing, we determined in September 2008 that the interest rate swap was no longer an effective hedge for accounting purposes.  Accordingly, subsequent to that determination, we record changes in the swap’s fair value in current earnings in net interest expense in our consolidated statements of operations.  We obtain third-party verification of the fair value at the end of each reporting period.  As of October 2, 2010, the fair value of our interest rate swap was an unrealized loss of $13.4 million and is recorded in other liabilities on our consolidated balance sheet.  The amount recorded in accumulated other comprehensive loss will be reclassified to net interest expense over the remaining life of the term loan borrowings as we make interest payments.  Net interest expense in the third quarter and first three quarters of 2010 includes a charge of $0.5 million and $1.8 million, respectively, relating to the unrealized loss on our interest rate swap and a reclassification of $0.4 million and $1.3 million,

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)                                 Long-term Debt (Continued)

 

respectively, of the amount recorded in accumulated other comprehensive loss related to the swap.  Net interest in the third quarter and first three quarters of 2010 also includes a reduction in interest income primarily due to lower interest rates.  As of October 2, 2010, we expect to reclassify $4.1 million to net interest expense during the remainder of the life of the swap, with $1.7 million being reclassified in the next twelve months.

 

7.625% Senior Notes due 2018.  In January 2010, we issued $350.0 million aggregate principal amount of 7.625% senior notes due 2018 at a public offering price of 99.271% of face value.  The original issue discount of $2.6 million will be amortized over the life of the notes as interest expense.  Interest on the senior notes is payable on January 15 and July 15 of each year.  The senior notes will mature on January 15, 2018, unless earlier retired or redeemed as described below.

 

On or after January 15, 2014, we may redeem some or all of the senior notes at a redemption price of 103.813% beginning January 15, 2014 and thereafter at prices declining annually to 100% on or after January 15, 2017.  We may redeem up to 35% of the aggregate principal amount of the notes prior to January 15, 2013 with the net proceeds from certain equity offerings.  We may also redeem some or all of the notes at any time prior to January 15, 2014 at a redemption price equal to a specified make-whole amount.  In addition, if we undergo a change of control, we may be required to offer to repurchase the notes at the repurchase price of 101% plus accrued and unpaid interest to the date of redemption.

 

We may also, from time to time, seek to retire senior notes through cash repurchases of senior notes and/or exchanges of senior notes for equity securities, in open market purchases, privately negotiated transactions or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved may be material.

 

Our obligations under the senior notes are jointly and severally and fully and unconditionally guaranteed on a senior basis by all of our existing and certain future domestic subsidiaries.  The senior notes and the subsidiary guarantees are our and the guarantors’ general unsecured obligations and are effectively junior in right of payment to all of our and the guarantors’ secured indebtedness and to the indebtedness and other liabilities of our non-guarantor subsidiaries; are pari passu in right of payment to all of our and the guarantors’ existing and future unsecured senior debt; and are senior in right of payment to all of our and the guarantors’ future subordinated debt.  Our foreign subsidiary is not a guarantor, and any future foreign or partially owned domestic subsidiaries will not be guarantors, of our senior notes.

 

Our senior notes indenture contains covenants with respect to us and the guarantors and restricts the incurrence of additional indebtedness and the issuance of capital stock; the payment of dividends or distributions on, and redemption of, capital stock; a number of other restricted payments, including certain investments; specified creation of liens, certain sale-leaseback transactions and sale of certain specified assets; fundamental changes, including consolidation, mergers and transfers of all or substantially all of our assets; and specified transactions with affiliates.  Each of the covenants is subject to a number of important exceptions and qualifications.  As of October 2, 2010, we were in compliance with all of the covenants in the senior notes indenture.

 

12% Senior Subordinated Notes due 2016.  During the third quarter and first three quarters of 2009, we repurchased $6.3 million principal amount of our senior subordinated notes for $6.6 million plus accrued and unpaid interest.  In January 2010, we repurchased $44.7 million aggregate principal amount of the senior subordinated notes with a portion of the proceeds of our public offering of 7.625% senior notes due 2018 at a repurchase price of 106.5% of such principal amount plus accrued and unpaid interest, and set aside sufficient proceeds of the offering to repurchase or redeem the remaining senior subordinated notes.  In February 2010,

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)                                 Long-term Debt (Continued)

 

we repurchased or redeemed the remaining $24.8 million aggregate principal amount of the senior subordinated notes at a price equal to 106.0% of such principal amount, plus accrued and unpaid interest.

 

8% Senior Notes due 2011.  In January 2010, we repurchased $238.9 million aggregate principal amount of the 8% senior notes with a portion of the proceeds of our public offering of 7.625% senior notes due 2018 at a repurchase price of 102.375% of such principal amount plus accrued and unpaid interest, and set aside sufficient proceeds of the offering to repurchase or redeem the remaining 8% senior notes.  In February 2010, we repurchased or redeemed the remaining $1.1 million aggregate principal amount of the 8% senior notes at a price equal to 102.0% of such principal amount, plus accrued and unpaid interest.

 

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 long-term debt, and management has determined that our Canadian subsidiary, which is our only subsidiary that is not a guarantor of our long-term debt, is a “minor subsidiary” as that term is used in Rule 3-10 of Regulation S-X promulgated by the SEC.  There are no significant restrictions on our ability and the ability of our subsidiaries to obtain funds from our respective subsidiaries by dividend or loan.  Consequently, separate financial statements have not been presented for our subsidiaries because management has determined that they would not be material to investors.

 

Deferred Debt Financing Costs.  In connection with the issuance of our 7.625% senior notes in January 2010, we capitalized approximately $8.2 million of debt financing costs during the first quarter of 2010, which will be amortized over the term of the senior notes.  During the first quarter of 2010, we wrote-off and expensed $4.5 million of deferred debt financing costs relating to the retirement during the quarter of our remaining $69.5 million principal amount of 12% senior subordinated notes and $240.0 million principal amount of 8% senior notes.  As of October 2, 2010 and January 2, 2010 we had net deferred debt financing costs of $9.1 million and $6.7 million, respectively.

 

In connection with the retirement of our remaining 8% senior notes and 12% senior subordinated notes, we incurred a loss on extinguishment of debt of approximately $15.2 million during the first quarter of fiscal 2010, including the repurchase premium and other expenses of $10.7 million and a write-off and expense of $4.5 million of deferred debt financing costs.

 

At October 2, 2010 and January 2, 2010 accrued interest of $6.6 million and $7.3 million, respectively, is included in accrued expenses in the accompanying consolidated balance sheets.

 

(6)                                 Fair Value Measurements

 

The authoritative accounting literature relating to fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The accounting literature outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under generally accepted accounting principles, certain assets and liabilities must be measured at fair value, and the accounting literature 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 fair value hierarchy under the accounting literature. The three levels are as follows:

 

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)                                 Fair Value Measurements (Continued)

 

Level 2—Inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.  We use a discounted cash flow analysis of the implied yield curves to value our interest rate swap. We also consider our credit risk and counterparty credit risk in estimating the fair value of our interest rate swap. While these inputs are observable, they are not all quoted market prices, so the fair values of our interest rate swap fall in Level 2.

 

Level 3—Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

In accordance with the fair value hierarchy described above, the following table shows the fair value of our interest rate swap as of October 2, 2010 and January 2, 2010, which is included in other liabilities in our consolidated balance sheet (dollars in thousands):

 

				Fair Value Measurements
		Description		Level 1			Level 2			Level 3
October 2, 2010		Interest rate swap		$	—		$	13,396		$	—
January 2, 2010		Interest rate swap		$	—		$	11,576		$	—

 

Cash and cash equivalents, trade accounts receivable, income tax receivable, trade accounts payable, accrued expenses and dividends payable are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

 

The carrying values and fair values of our term loan borrowings, senior notes and senior subordinated notes as of October 2, 2010 and January 2, 2010 are as follows (dollars in thousands):

 

		October 2, 2010						January 2, 2010
		Carrying Value			Fair Value(1)			Carrying Value			Fair Value(1)
Senior Secured Term Loan due 2013		$	130,000		$	129,025		$	130,000		$	127,400
8% Senior Notes due 2011		—			—			240,000			243,000
7.625% Senior Notes due 2018		347,668		(2)	364,875			—			—
12% Senior Subordinated Notes due 2016		—			—			69,541			69,172

 

(1)          Fair values are estimated based on quoted market prices.

(2)          The carrying value of the 7.625% senior notes is net of discount.

 

Our term loan borrowings are subject to an interest rate swap discussed in Notes 5 and 7.

 

(7)                                 Disclosures about Derivative Instruments and Hedging Activities

 

We recognize all derivative instruments either as an asset or a liability on our balance sheet and measure such instruments at fair value.  We do not engage in derivative instruments for trading purposes.

 

The following table presents the fair value and the location within our consolidated balance sheets of all assets and liabilities associated with derivative instruments not designated as hedging instruments for accounting purposes (dollars in thousands):

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(7)                                 Disclosures about Derivative Instruments and Hedging Activities (Continued)

 

Derivatives not

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

designated as hedging instruments

Balance Sheet Location

Fair Value at October 2, 2010

Fair Value at October 2, 2010

Fair Value at January 2, 2010

Fair Value at January 2, 2010

Interest rate swap

Other liabilities

—

$

13,396

—

$

11,576

 

See notes 5 and 6 for additional information regarding our interest rate swap.  We do not currently have any derivatives designated as hedging instruments.

 

The following tables present the impact of derivative instruments and their location within our consolidated statements of operations (dollars in thousands):

 

Derivatives not

Amount of (Gain) Loss Recognized in Income on Derivatives

Amount of (Gain) Loss Recognized in Income on Derivatives

Amount of (Gain) Loss Recognized in Income on Derivatives

Amount of (Gain) Loss Recognized in Income on Derivatives

Location of (Gain) Loss Recognized

designated as hedging instruments

Thirteen Weeks Ended October 2, 2010

Thirteen Weeks Ended October 3, 2009

Thirty-nine Weeks Ended October 2, 2010

Thirty-nine Weeks Ended October 3, 2009

in Income on Derivatives

Interest rate swap

$

894

*

$

1,055

*

$

3,090

*

$

1,162

*

Interest expense, net

 

*                The amount included in net interest expense for the third quarter and first three quarters of 2010 consists of $471 and $1,820 unrealized loss on our interest rate swap, and $423 and $1,270 (pre-tax) reclassified to net interest expense from accumulated other comprehensive loss, respectively.  The amount included in net interest expense for the third quarter and first three quarters of 2009 consists of $631 unrealized loss and $108 unrealized gain on our interest rate swap, and $424 and $1,270 (pre-tax) reclassified to net interest expense from accumulated other comprehensive income, respectively.

 

(8)                                 Comprehensive Income

 

Comprehensive income includes net income, foreign currency translation adjustments relating to assets and liabilities located in our Canadian subsidiary, changes in our pension benefits, net of tax and the change in the fair value of an interest rate swap during the period it was designated as an effective cash flow hedge, net of tax.  The amount recorded in accumulated other comprehensive loss related to the swap will be reclassified to net interest expense over the remaining life of the term loan as we make interest payments.

 

The components of comprehensive income are as follows (dollars in thousands):

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009
Net income		$	9,282		$	4,161		$	18,101		$	16,103
Other comprehensive income:
Foreign currency translation adjustments		(6		)	270			(7		)	193
Amortization of unrecognized prior service cost and pension deferrals, net of tax		49			134			173			355
Reclassification to net interest expense for interest rate swap, net of tax		263			263			789			788
Comprehensive income		$	9,588		$	4,828		$	19,056		$	17,439

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(9)                                 Capital Stock

 

Authorized Common Stock.  During the third quarter of 2010, we amended our certificate of incorporation to (1) rename our Class A common stock simply as “common stock,” (2) eliminate our 25,000,000 authorized shares of Class B common stock, none of which were then outstanding, and (3) increase our authorized shares of common stock from 100 million to 125 million.

 

Common Stock Repurchases.  We did not repurchase any shares of common stock during the first three quarters of fiscal 2010 or during the third quarter of 2009.  During the first three quarters of 2009 we repurchased and retired 403,500 shares of common stock at an average cost per share (excluding fees and commissions) of $5.76, or $2.3 million in the aggregate.  Our stock repurchase program expired pursuant to its terms during the third quarter of 2010.

 

(10)                          Pension Benefits

 

Net pension costs for the third quarter and first three quarters of 2010 and 2009 include the following components (dollars in thousands):

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009
Service cost—benefits earned during the period		$	352		$	411		$	1,145		$	1,249
Interest cost on projected benefit obligation		443			461			1,374			1,323
Expected return on plan assets		(521		)	(355		)	(1,530		)	(1,107		)
Amortization of unrecognized prior service cost		11			11			33			33
Amortization of loss		67			205			245			539
Net pension cost		$	352		$	733		$	1,267		$	2,037

 

During the first three quarters of 2010, we made approximately $2.6 million of contributions to our defined benefit pension plans, half of which was made in each of the first two quarters of 2010.  We do not expect to make any contributions to our defined benefit pension plans during the remainder of fiscal 2010.

 

(11)                          Commitments and Contingencies

 

Environmental.  We are subject to environmental laws and regulations in the normal course of business.  We did not make any material expenditures during the third quarter or first three quarters of 2010 or 2009 in order to comply with environmental laws and regulations.  Based on our experience to date, management believes that the future cost of compliance with existing environmental laws and regulations (and liability for any known environmental conditions) will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.  However, we cannot predict what environmental or health

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(11)                          Commitments and Contingencies (Continued)

 

and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted, nor can we predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to such environmental claims.

 

Legal Proceedings.  We are from time to time involved in various claims and legal actions arising in the ordinary course of business, including proceedings involving product liability claims, worker’s 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.

 

In April 2008, the U.S. Government informed us that it was investigating SK Foods, LP, then one of our suppliers.  The Government believed, and subsequent plea agreements confirmed, that SK Foods, together with a broker acting at the direction of certain SK Foods executives, was bribing purchasing managers at several large food companies, including, among others, Frito Lay, Kraft and B&G Foods.  As a result of the investigation, several senior executives at SK Foods have pleaded guilty to various criminal charges, including conspiracy to commit honest services fraud through bribery, resulting in the sale of products at inflated prices and the fraudulent labeling of such products.  In addition, the former owner and president of SK Foods has been charged with violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), wire fraud, obstruction of justice, and conspiracy to fix prices and rig bids in violation of the Sherman Antitrust Act, and is currently under house arrest pending trial.  As a result of SK Foods’ criminal and civil misconduct and numerous material breaches of a Co-Pack Agreement between B&G Foods and SK Foods, B&G Foods terminated the Co-Pack Agreement in April 2009.  On May 7, 2009, SK Foods filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code.  In September 2009, B&G Foods filed proofs of claim in SK Foods’ bankruptcy cases to assert substantial damage claims against SK Foods and its affiliates for, among other things, fraud, breach of contract, indemnity, RICO and antitrust violations, and to preserve offset and recoupment rights for such claims against any amounts allegedly owing to SK Foods or its affiliates and certain other claims against SK Foods and its affiliates.  On March 24, 2010, the bankruptcy trustee in the bankruptcy proceedings involving SK Foods filed an adversary proceeding against our company alleging, among other things, breach of contract, avoidance of setoff, violation of the automatic stay, goods sold and delivered, objection to claims and equitable subordination and asserting damages of approximately $16.0 million.  B&G Foods answered the complaint denying the bankruptcy trustee’s allegations against B&G Foods as being without merit and we are vigorously defending against the trustee’s action.  In addition, B&G Foods filed a counterclaim alleging, among other things, breach of multiple contracts, breach of express indemnity, breach of warranties, fraudulent inducement, negligent and intentional misrepresentation, violations of the Sherman Antitrust Act, violations of the Robinson-Patman Act, violations of California’s Cartwright Act, violations of California’s Unfair Practices Act, violations of California’s Unfair Competition Law, RICO violations, account stated and recoupment.  During the third quarter of 2010, to avoid expense and the uncertainly of litigation, we entered into a settlement agreement with the bankruptcy trustee and the Bank of Montreal, the agent for SK Foods’ secured lenders, pursuant to which we have agreed to pay the Bank of Montreal, on behalf of the secured lenders, $1.6 million in exchange for a mutual release pursuant to which the bankruptcy trustee and the Bank of Montreal (as agent for the secured lenders), on the one hand, and B&G Foods, on the other, will release each other from all claims and counter-claims related to the adversary proceeding and B&G Foods’ proofs of claim in SK Foods’ bankruptcy cases.  The settlement remains subject to approval by the bankruptcy court.  If approved, we expect to record a gain of approximately $1.3 million related to the settlement during the fourth quarter of 2010, resulting from the write-off of $3.1 million of accounts payable on our books relating to SK Foods, partially offset by the $1.6 million settlement payment and approximately $0.2 million of related expenses.  There can be no assurance, however, that the settlement agreement will be approved by the bankruptcy court.

 

Collective Bargaining Agreements.  As of October 2, 2010, approximately 340 of our 719 employees, or 47.3%, were covered by collective bargaining agreements, of which 162 were covered by collective

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(11)                          Commitments and Contingencies (Continued)

 

bargaining agreements expiring within the next 12 months.  Our collective bargaining agreement with the Drivers, Salesmen, Warehousemen, Milk Processors, Cannery, Dairy Employees and Helpers Union (Local No. 695) that covers are Stoughton, Wisconsin employees is scheduled to expire on March 31, 2011.  We expect to begin negotiations for a new collective bargaining agreement for our Stoughton, Wisconsin employees during the first quarter of 2011.  While we believe that our relations with our union employees are good, we cannot assure you that we will be able to negotiate the Stoughton, Wisconsin collective bargaining agreement on terms satisfactory to us, or at all, and without production interruptions, including labor stoppages.  At this time, however, management does not expect that the outcome of these negotiations will have a material adverse impact on our business, financial condition or results of operations.

 

Severance and Change of Control Agreements.  We have employment agreements with each of our six executive officers.  The agreements generally continue until terminated by the executive or by us, and provide for severance payments under certain circumstances, including termination by us without cause (as defined) or as a result of the employees’ disability, or termination by us or a deemed termination upon a change of control (as defined).  Severance benefits include payments for salary continuation, continuation of health care and insurance benefits, present value of additional pension credits and, in the case of a change of control, accelerated vesting under compensation plans and potential excise tax liability and gross up payments.

 

(12)                          Earnings per Share

 

Basic earnings per share for our common stock is calculated by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted earnings per share for the common stock is calculated by dividing net income by the weighted average number of shares of common stock outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares related to performance shares that may be earned under long-term incentive awards had been issued as of the beginning of the period using the treasury stock method.

 

		Thirteen Weeks Ended				Thirty-nine Weeks Ended
		October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009
		(Shares in thousands)
Weighted average common shares outstanding:
Basic		47,636		37,790		47,563		36,644
Net effect of dilutive share-based compensation awards		965		183		786		—
Diluted		48,601		37,973		48,349		36,444

 

(13)                          Business and Credit Concentrations and Geographic Information

 

Our exposure to credit loss in the event of non-payment of accounts receivable by customers is estimated in the amount of the allowance for doubtful accounts.  We perform ongoing credit evaluations of our customers’ financial conditions.  Our top ten customers accounted for approximately 50.1% of consolidated net sales for the first three quarters of 2010 and 2009.  Our top ten customers accounted for approximately 48.8% and 52.7% of our receivables as of October 2, 2010 and January 2, 2010, respectively.  Other than Wal-Mart, which accounted for 16.1% and 15.9% of our consolidated net sales for the first three quarters of 2010 and 2009, respectively, no single customer accounted for more than 10.0% of our consolidated net sales for the first three quarters of 2010 or 2009.  Other than Wal-Mart, which accounted for 13.5% of our consolidated receivables as of October 2, 2010, no single customer accounted for more than 10.0% of our consolidated receivables as of the end of the first three quarters of 2010.  Other than Wal-Mart and C&S Wholesale

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(13)                          Business and Credit Concentrations and Geographic Information (Continued)

 

Grocery, which accounted for 12.5% and 11.1% of our consolidated receivables, respectively, as of January 2, 2010, no single customer accounted for more than 10.0% of our consolidated receivables as of the end of fiscal 2009.

 

During the first three quarters of 2010 and 2009, our sales to foreign countries represented less than 1.0% of net sales.  Our foreign sales are primarily to customers in Canada.

 

(14)                          Share-Based Compensation

 

Beginning in fiscal 2008, our compensation committee has made annual grants of performance share long-term incentive awards (LTIAs) to our executive officers and certain other members of senior management under the 2008 Omnibus Incentive Compensation Plan.  The LTIAs entitle the participant to earn shares of common stock upon the attainment of certain performance goals over the applicable performance period.  The LTIAs, each have a threshold, target and maximum payout.  The awards are settled based upon our performance over the applicable performance period.  For the LTIAs granted to date, the applicable performance metric is and has been “excess cash” (as defined in the award agreements).  If our performance fails to meet the performance threshold, then the awards will not vest and no shares will be issued pursuant to the awards.  If our performance meets or exceeds the performance threshold, then a varying amount of shares from the threshold amount (50% of the target number of shares) up to the maximum amount (300% of the target number of shares) may be earned.  No shares are earned if the performance threshold is not met.

 

Based on the actual results of our company for the 2008 to 2009 performance period, 399,842 shares of common stock were earned under the 2008 to 2009 LTIAs.  During the first quarter of 2010, 251,368 shares of common stock were issued to participants with a market price at the date of issuance of $9.83 per share.  The remaining 148,474 shares of common stock were withheld to fund required statutory minimum withholding taxes on behalf of employees.  The excess tax benefit recorded to additional paid in capital as a result of the issuance of common stock was $0.3 million.

 

During the third quarter and first three quarters of 2010, we recognized $0.9 million and $2.2 million, respectively, of compensation expense for performance share LTIAs.  Of the $0.9 million recognized during the third quarter of 2010, $0.6 million is reflected in general and administrative expenses, $0.1 million is reflected in cost of goods sold and $0.2 million is reflected in sales, marketing and distribution expenses in our consolidated statement of operations.  Of the $2.2 million recognized during the first three quarters of 2010, $1.4 million is reflected in general and administrative expenses, $0.4 million in cost of goods sold, and $0.4 million is reflected in sales, marketing and distribution expenses in our consolidated statement of operations.  During the third quarter and first three quarters of 2009, we recognized $1.5 million and $3.1 million, respectively, of compensation expense for performance share LTIAs. Of the $1.5 million recognized during the third quarter of 2009, $0.9 million is reflected in general and administrative expenses, $0.3 million is reflected cost of goods sold and $0.3 million is reflected in sales, marketing and distribution expenses in our consolidated statement of operations.   Of the $3.1 million recognized during the first three quarters of 2009, $1.9 million is reflected in general and administrative expenses, $0.6 million is reflected in sales, marketing and distribution expenses, and $0.6 million is reflected in cost of goods sold in our consolidated statement of operations.  As of October 2, 2010, there was $4.6 million of unrecognized compensation expense related to performance share LTIAs, which is expected to be recognized over the next 27 months.

 

The following table details the activity in our performance share LTIAs for the first three quarters of 2010:

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(14)                          Share-Based Compensation (Continued)

 

		Number of Performance Shares (1)		Weighted Average Grant Date Fair Value (per share)(2)
Beginning of fiscal 2010		1,918,466		$	4.09
Granted		595,254		$	7.63
Vested		(399,842	)	$	7.65
Forfeited		(72,441	)	$	3.13
At October 2, 2010		2,041,437		$	4.46

 

(1)         Solely for purposes of this table, the number of performance shares granted is based on the participants earnings their maximum number of performance shares (i.e., 300% of the target number of performance shares).

(2)         The fair value of the awards was determined based upon the closing price of our common stock on the applicable measurement dates (i.e., the deemed grant dates for accounting purposes) reduced by the present value of expected dividends using the risk-free interest-rate as the award holders are not entitled to dividends or dividend equivalents during the vesting period.

 

Non-Employee Director Stock Grants.  Each of our non-employee directors receives an annual equity grant as part of his or her non-employee director compensation.  These shares fully vest when issued.  On June 1, 2010, 16,980 shares of common stock in the aggregate were issued to the non-employee directors based upon the closing price of our common stock on May 28, 2010 (the business day immediately prior to the date of grant) of $10.60 per share.  On June 1, 2009, 24,135 shares of common stock in the aggregate were issued to the non-employee directors based upon the closing price of our common stock on May 29, 2009 (the business day immediately prior to the date of grant) of $7.25 per share.  For the first three quarters of 2010 and 2009, share-based compensation expense of $0.2 million relating to the non-employee director grants is reflected in general and administrative expenses in our consolidated statements of operations.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Forward-Looking Statements” below and elsewhere in this report.  The following discussion should be read in conjunction with the unaudited consolidated interim financial statements and related notes for the thirteen and thirty-nine weeks ended October 2, 2010 (third quarter of 2010 and first three quarters of 2010) included elsewhere in this report and the audited consolidated financial statements and related notes for the fiscal year ended January 2, 2010 (fiscal 2009) included in our 2009 Annual Report on Form 10-K.

 

General

 

We manufacture, sell and distribute a diverse portfolio of branded, high quality, shelf-stable food products, many of which have leading regional or national market shares.  In general, we position our branded products to appeal to the consumer desiring a high quality and reasonably priced product.  We complement our branded product retail sales with institutional and food service sales and limited private label sales.

 

Our goal is to continue to increase sales, profitability and cash flows by enhancing our existing portfolio of branded shelf stable products and by capitalizing on our competitive strengths.  We intend to implement our growth strategy through the following initiatives: expanding our brand portfolio with disciplined acquisitions of complementary branded businesses, continuing to develop new products and delivering them to market quickly, leveraging our multiple channel sales and distribution system and continuing to focus on higher growth customers and distribution channels.  Since 1996, we have successfully acquired and integrated 18 separate brands into our operations.

 

We are subject to a number of challenges that may adversely affect our businesses.  These challenges, which are discussed below and under the heading “Forward-Looking Statements,” include:

 

Fluctuations in Commodity Prices and Production and Distribution Costs:  We purchase raw materials, including agricultural products, meat, poultry, other raw materials, ingredients and packaging materials from growers, commodity processors, other food companies and packaging manufacturers.  Raw materials, ingredients and packaging materials are subject to fluctuations in price attributable to a number of factors.  Fluctuations in commodity prices can lead to retail price volatility and intensive price competition, and can influence consumer and trade buying patterns.

 

We purchase maple syrup primarily from Quebec, Canada and Vermont.  In 2008, maple syrup production in Canada, which represents the great majority of global production, was significantly below industry needs due to growing global demand and one of the worst crop yields in nearly 40 years.  As a result, the price we paid for maple syrup increased significantly and we were faced with a shortfall in supply as compared to our needs, which had a negative impact on our sales volume of maple syrup products during fiscal 2008 that continued through the first two quarters of 2009.  The 2010 maple syrup crop yield was more consistent with historic levels.

 

The cost of labor, manufacturing, energy, fuel, packaging materials and other costs related to the production and distribution of our food products can from time to time increase significantly and unexpectedly.  We attempt to manage these risks by entering into short-term supply contracts and advance commodities purchase agreements from time to time, by implementing cost saving measures and by raising sales prices.  To date, our cost saving measures and sales price increases have offset increases to our raw material, ingredient and packaging costs.  To the extent we are unable to offset present and future cost increases, our operating results will be negatively impacted.

 

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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.  If consumers in our principal markets lose confidence in the safety and quality of our food products even as a result of a product liability claim or a product recall by a food industry competitor, our business could be adversely affected.

 

Fluctuations in Currency Exchange Rates:  We purchase the majority of our maple syrup requirements from suppliers located in Québec, Canada.  Any weakening of the U.S. dollar against the Canadian dollar, could significantly increase our costs relating to the production of our maple syrup products to the extent we have not purchased Canadian dollars in advance of any such weakening of the U.S. dollar.

 

To confront these challenges, we continue to take steps to build the value of our brands, to improve our existing portfolio of products with new product and marketing initiatives, to reduce costs through improved productivity, to address consumer concerns about food safety, quality and health and to favorably manage currency fluctuations.

 

Critical Accounting Policies; Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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; the recoverability of goodwill, trademarks, customer relationship intangibles, property, plant and equipment, and deferred tax assets; and the accounting for share-based compensation expense.  Actual results could differ significantly from these estimates and assumptions.

 

In our 2009 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. There have been no significant changes to these policies since January 2, 2010.

 

Results of Operations

 

The following table sets forth the percentages of net sales represented by selected items for the third quarter and first three quarters of 2010 and 2009 reflected in our consolidated statements of operations.  The comparisons of financial results are not necessarily indicative of future results:

 

		Thirteen Weeks Ended				Thirty-nine Weeks Ended
		October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009
Statement of Operations:
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold		68.7	%	70.8	%	67.5	%	69.4	%
Gross profit		31.3	%	29.2	%	32.5	%	30.6	%
Sales, marketing and distribution expenses		7.9	%	8.6	%	8.6	%	8.9	%
General and administrative expenses		2.0	%	2.3	%	2.2	%	2.2	%
Amortization expense—customer relationships		1.3	%	1.3	%	1.3	%	1.3	%
Operating income		20.1	%	17.0	%	20.4	%	18.2	%
Interest expense, net		8.3	%	11.0	%	8.6	%	10.9	%
Loss on extinguishment of debt		—		0.5	%	4.0	%	0.2	%
Income before income tax expense		11.8	%	5.5	%	7.8	%	7.1	%
Income tax expense		4.4	%	2.1	%	2.9	%	2.7	%
Net income		7.4	%	3.4	%	4.9	%	4.4	%

 

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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 Expense—Customer Relationships. Amortization expense—customer relationships includes the amortization expense associated with customer relationship intangibles, which are amortized over their useful lives of 20 years.

 

Net Interest Expense.  Net interest expense includes interest relating to our outstanding indebtedness, amortization of bond discount and amortization of deferred debt financing costs, net of interest income and subsequent to our determination in September 2008 that our interest rate swap was no longer an effective hedge for accounting purposes, unrealized gains or losses on the interest rate swap and the reclassification of amounts recorded in accumulated other comprehensive loss related to the swap.

 

Loss on Extinguishment of Debt.  Loss on extinguishment of debt includes costs relating to the retirement of indebtedness, including any repurchase premium and write-off of deferred debt financing costs.

 

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Non-GAAP Financial Measures

 

Certain disclosures in this report include non-GAAP financial measures.  A non-GAAP financial measure is defined as a numerical measure of our financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated balance sheets and related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows.

 

EBITDA is a measure used by management to measure operating performance.  We define EBITDA as net income before net interest expense (as defined above), income taxes, depreciation and amortization and loss on extinguishment of debt (as defined above). Management believes that it is useful to eliminate net interest expense, income taxes, depreciation and amortization and loss on extinguishment of debt because it allows management to focus on what it deems to be a more reliable indicator of ongoing operating performance and our ability to generate cash flow from operations. We use EBITDA in our business operations, among other things, to evaluate our operating performance, develop budgets and measure our performance against those budgets, determine employee bonuses and evaluate our cash flows in terms of cash needs. We also present EBITDA because we believe it is a useful indicator of our historical debt capacity and ability to service debt and because covenants in our credit facility and our senior 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 entity’s obligation to service its debt, fund its working capital, capital expenditures and acquisitions and pay its income taxes and dividends. Rather, EBITDA is a potential indicator of an entity’s ability to fund these cash requirements. EBITDA is not a complete measure of an entity’s profitability because it does not include costs and expenses for depreciation and amortization, interest and related expenses, loss on extinguishment of debt and income taxes. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly titled measures of other companies. However, EBITDA can still be useful in evaluating our performance against our peer companies because management believes this measure provides users with valuable insight into key components of GAAP amounts.

 

A reconciliation of EBITDA to net income and to net cash provided by operating activities for the third quarter and first three quarters of 2010 and 2009 along with the components of EBITDA follows:

 

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		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009
		(Dollars in thousands)
Net income		$	9,282		$	4,161		$	18,101		$	16,103
Income tax expense		5,519			2,611			10,642			9,900
Interest expense, net		10,335			13,570			31,855			39,996
Depreciation and amortization		3,761			3,677			11,118			10,847
Loss on extinguishment of debt		—			674			15,224			674
EBITDA		28,897			24,693			86,940			77,520
Income tax expense		(5,519		)	(2,611		)	(10,642		)	(9,900		)
Interest expense, net		(10,335		)	(13,570		)	(31,855		)	(39,996		)
Deferred income taxes		2,825			3,348			5,584			9,295
Amortization of deferred financing costs and bond discount		500			610			1,515			2,222
Unrealized loss (gain) on interest rate swap		471			631			1,820			(108		)
Reclassification to net interest expense for interest rate swap		423			424			1,270			1,270
Share-based compensation expense		943			1,471			2,413			3,273
Excess tax benefits from share-based compensation		—			—			(330		)	—
Changes in assets and liabilities		(559		)	1,973			4,426			(9,275		)
Net cash provided by operating activities		$	17,646		$	16,969		$	61,141		$	34,301

 

Third quarter of 2010 compared to the third quarter of 2009.

 

Net Sales.  Net sales increased $1.2 million or 1.0% to $125.1 million for the third quarter of 2010 from $123.9 million for the third quarter of 2009.  The increase was attributable to sales price and unit volume increases of $0.4 million and $0.3 million, respectively, and a reduction in coupons and slotting expenses of $0.5 million.  Net sales of our lines of Ortega, B&M and Polaner products increased by $2.1 million, $0.6 million and $0.6 million or 6.8%, 12.2% and 6.2%, respectively.  These increases were offset by a reduction in net sales of our Cream of Wheat and B&G products of $1.5 million and $0.7 million or 9.2% and 8.4%, respectively.  In the aggregate, net sales for all other brands increased $0.1 million, or 0.7%.

 

Gross Profit.  Gross profit increased $3.0 million or 8.2% to $39.2 million for the third quarter of 2010 from $36.2 million for the third quarter of 2009.  Gross profit expressed as a percentage of net sales increased 2.1 percentage points to 31.3% in the third quarter of 2010 from 29.2% in the third quarter of 2009.  This increase in gross profit expressed as a percentage of net sales was attributable to increased sales prices and a reduction in coupons and slotting, which accounted for 0.5 percentage points.  The remaining 1.6 percentage points is attributable to decreases in commodity and ingredient costs and a sales mix shift to higher margin products, slightly offset by an increase in packaging and fuel surcharge costs.

 

Sales, Marketing and Distribution Expenses.  Sales, marketing and distribution expenses decreased $0.8 million or 7.1% to $9.9 million for the third quarter of 2010 from $10.7 million for the third quarter of 2009.  This decrease is primarily due to a decrease in warehousing costs of $0.6 million attributable to warehouse consolidations, and a decrease in consumer marketing and trade spending of $0.2 million.  Expressed as a percentage of net sales, our sales, marketing and distribution expenses decreased to 7.9% for the third quarter of 2010 from 8.6% for the third quarter of 2009.

 

General and Administrative Expenses.  General and administrative expenses decreased $0.4 million or 13.7% to $2.5 million for the third quarter of 2010 from $2.9 million in the third quarter of 2009.  The decrease in general and administrative expenses primarily resulted from a reduction in share based compensation expense.

 

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