B&G Foods, Inc. - Quarter Report: 2011 July (Form 10-Q)

Table of Contents

 

As filed with the Securities and Exchange Commission on July 26, 2011

 

 

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 July 2, 2011

 

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 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.

 

 

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 July 26, 2011, the registrant had 47,918,033 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		16
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		29
	Item 4. Controls and Procedures		31
PART II OTHER INFORMATION			32
	Item 1. Legal Proceedings		32
	Item 1A. Risk Factors		32
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
	Item 3. Defaults Upon Senior Securities		32
	Item 4. Reserved		32
	Item 5. Other Information		32
	Item 6. Exhibits		32
SIGNATURE			33

 

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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)

 

		July 2, 2011			January 1, 2011
Assets
Current assets:
Cash and cash equivalents		$	101,531		$	98,738
Trade accounts receivable, net		30,070			34,445
Inventories		89,905			74,563
Prepaid expenses		1,724			1,715
Income tax receivable		4,410			171
Deferred income taxes		1,514			5,439
Total current assets		229,154			215,071
Property, plant and equipment, net of accumulated depreciation of $85,571 and $80,862		60,198			60,812
Goodwill		253,744			253,744
Other intangibles, net		328,725			332,001
Other assets		9,409			10,095
Total assets		$	881,230		$	871,723
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable		$	23,535		$	15,531
Accrued expenses		25,733			25,584
Interest rate swap		—			12,012
Dividends payable		10,063			8,099
Total current liabilities		59,331			61,226
Long-term debt		477,908			477,748
Other liabilities		1,810			4,232
Deferred income taxes		104,534			97,932
Total liabilities		643,583			641,138
Commitments and contingencies (Note 12)
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 shares; 47,918,033 and 47,639,924 shares issued and outstanding as of July 2, 2011 and January 1, 2011		479			476
Additional paid-in capital		182,398			201,770
Accumulated other comprehensive loss		(6,475		)	(7,002		)
Retained earnings		61,245			35,341
Total stockholders’ equity		237,647			230,585
Total liabilities and stockholders’ equity		$	881,230		$	871,723

 

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						Twenty-six Weeks Ended
		July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Net sales		$	129,453		$	121,145		$	260,858		$	246,327
Cost of goods sold		87,284			81,747			173,822			164,901
Gross profit		42,169			39,398			87,036			81,426
Operating expenses:
Selling, general and administrative expenses		14,194			13,463			28,344			27,515
Amortization expense		1,637			1,612			3,276			3,225
Operating income		26,338			24,323			55,416			50,686
Other expenses:
Interest expense, net		8,341			10,898			16,531			21,520
Loss on extinguishment of debt		—			—			—			15,224
Income before income tax expense		17,997			13,425			38,885			13,942
Income tax expense		5,398			4,932			12,981			5,123
Net income		$	12,599		$	8,493		25,904			8,819
Weighted average shares outstanding:
Basic		47,906			47,625			47,944			47,526
Diluted		48,637			48,450			48,668			48,197
Earnings per share:
Basic		$	0.26		$	0.18		$	0.54		$	0.19
Diluted		$	0.26		$	0.18		$	0.53		$	0.18
Cash dividends declared per share		$	0.21		$	0.17		$	0.38		$	0.34

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Twenty-six Weeks Ended
		July 2, 2011			July 3, 2010
Cash flows from operating activities:
Net income		$	25,904		$	8,819
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,926			7,357
Amortization of deferred debt financing costs and bond discount		1,000			1,015
Deferred income taxes		10,120			2,759
Loss on extinguishment of debt		—			15,224
Share-based compensation expense		1,872			1,470
Excess tax benefits from share-based compensation		(1,117		)	(330		)
Unrealized loss on interest rate swap		—			1,349
Realized gain on interest rate swap		(612		)	—
Reclassification to net interest expense for interest rate swap		847			847
Changes in assets and liabilities:
Trade accounts receivable		4,375			6,964
Inventories		(15,342		)	(7,976		)
Prepaid expenses		(9		)	771
Income tax receivable		(3,122		)	320
Other assets		(114		)	(16		)
Trade accounts payable		8,004			3,318
Accrued expenses		149			3,361
Interest rate swap		(11,400		)	—
Other liabilities		(2,300		)	(1,757		)
Net cash provided by operating activities		26,181			43,495
Cash flows from investing activities:
Capital expenditures		(4,009		)	(4,595		)
Net cash used in investing activities		(4,009		)	(4,595		)
Cash flows from financing activities:
Payments for repurchase of long-term debt		—			(320,259		)
Proceeds from issuance of long-term debt		—			347,448
Dividends paid		(18,158		)	(16,147		)
Excess tax benefits from share-based compensation		1,117			330
Payments of tax withholding on behalf of employees for net share settlement of share-based compensation		(2,236		)	(1,460		)
Payments of debt financing costs		—			(8,246		)
Net cash (used in) provided by financing activities		(19,277		)	1,666
Effect of exchange rate fluctuations on cash and cash equivalents		(102		)	4
Net increase in cash and cash equivalents		2,793			40,570
Cash and cash equivalents at beginning of period		98,738			39,930
Cash and cash equivalents at end of period		$	101,531		$	80,500
Supplemental disclosures of cash flow information:
Cash interest payments		$	15,851		$	12,973
Cash income tax payments		$	5,984		$	2,081
Cash income tax refunds		$	—		$	(2	)
Non-cash transactions:
Dividends declared and not yet paid		$	10,063		$	8,098

 

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, Don Pepino, Emeril’s, Grandma’s Molasses, Joan of Arc, Las Palmas, Maple Grove Farms of Vermont, Ortega, Polaner, Red Devil, Regina, Sa- són, Sclafani, Trappey’s, Underwood, Vermont Maid and Wright’s. Our products include hot cereals, fruit spreads, canned meats and beans, spices, seasonings, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, Mexican-style sauces, taco shells and kits, salsas, pickles, peppers, tomato-based products 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 December 31, 2011 (fiscal 2011) and January 1, 2011 (fiscal 2010) each contain 52 weeks.  Each quarter of fiscal 2011 and 2010 contains 13 weeks.

 

Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements for the thirteen and twenty-six week periods ended July 2, 2011 (second quarter and first two quarters of 2011) and July 3, 2010 (second quarter and first two quarters of 2010) 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 July 2, 2011, the results of our operations for the second quarter and first two quarters of 2011 and 2010, and cash flows for the first two quarters of 2011 and 2010.  Our results of operations for the second quarter and first two quarters of 2011 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.  Certain reclassifications have been made to the prior year amounts to conform to the current year. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes for fiscal 2010 included in our Annual Report on Form 10-K for fiscal 2010 filed with the SEC on March 1, 2011.

 

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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 United States 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, other intangible assets, 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.  Volatility in the credit and equity markets can increase the uncertainty inherent in such estimates and assumptions.

 

(3)          Recently Issued Accounting Standards

 

In May 2011, the Financial Accounting Standards Board (FASB) issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between accounting principles generally accepted in the United States (GAAP) and International Financial Reporting Standards (IFRS). This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, while other amendments change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In June 2011, the FASB issued an accounting standards update relating to the presentation of comprehensive income.  The objective of this update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of GAAP and IFRS, the FASB decided, to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in the update. The update require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. For public entities, the update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted.  The update does not require any transition disclosures.  We do not believe the adoption of this update will have a material impact on our consolidated financial statements.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(4)           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 (in thousands):

 

		July 2, 2011			January 1, 2011
Raw materials and packaging		$	32,711		$	23,000
Work in process		49			274
Finished goods		57,145			51,289
Total		$	89,905		$	74,563

 

(5)           Goodwill and Other Intangible Assets

 

The carrying amounts of goodwill and other intangible assets, as of the dates indicated, consist of the following (in thousands):

 

		July 2, 2011			January 1, 2011
Goodwill		$	253,744		$	253,744
Non-amortizable intangible assets:
Trademarks		$	228,000		$	228,000
Amortizable intangible assets:
Customer relationships		$	129,000		$	129,000
Other intangible assets		590			590
		129,590			129,590
Less: accumulated amortization		(28,865		)	(25,589		)
Amortizable intangible assets, net		100,725			104,001
Total other intangible assets, net		$	328,725		$	332,001

 

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 18 to 20 years.  Other intangible assets are presented at cost, net of accumulated amortization, and are amortized on a straight-line basis over their estimated useful lives of two years.  Amortization expense associated with customer relationships and other intangible assets for each of the second quarter and first two quarters of 2011 was $1.6 million and $3.3 million, respectively, and is recorded in operating expenses.  Amortization expense associated with customer relationships and other intangible assets for each of the second quarter and first two quarters of 2010 was $1.6 million and $3.2 million, respectively, and is recorded in operating expenses.  We expect to recognize an additional $3.3 million of amortization expense associated with our customer relationships and other intangible assets during the remainder of fiscal 2011, and thereafter $6.5 million per year for each of the next four succeeding fiscal years.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)           Long-term Debt

 

Long-term debt consists of the following, as of the dates indicated (in thousands):

 

		July 2, 2011			January 1, 2011
Senior secured credit facility:
Revolving credit facility		$	—		$	—
Term loan		130,000			130,000
7.625% Senior Notes due 2018, net of unamortized discount of $2,092 and $2,252		347,908			347,748
Total long-term debt		$	477,908		$	477,748

 

As of July 2, 2011, the aggregate contractual maturities of long-term debt are as follows (in thousands):

 

Years ending December:
2011		$	—
2012		—
2013		130,000
2014		—
2015		—
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 facility describes the credit facility as amended through the date of issuance of the accompanying unaudited consolidated interim 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 July 2, 2011, 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 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.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)           Long-term Debt (Continued)

 

At July 2, 2011, the available borrowing capacity under our revolving credit facility, net of outstanding letters of credit of $0.5 million, was $24.5 million.  We have not drawn upon the revolving credit facility since its inception in October 2004 and, based upon our cash on hand and working capital requirements, we have no plans to do so for the foreseeable future.

 

In February 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 under the credit agreement through the life of the term loan borrowings.  On January 18, 2011, we terminated the interest rate swap agreement by making a payment of $12.4 million, including $1.0 million of accrued interest, to the counterparty.  In connection with the termination, we and the counterparty released each other from all obligations under the interest rate swap agreement, including, without limitation, the obligation to make periodic payments thereunder.  We did not pay any termination penalty in connection with the termination of the interest rate swap agreement.  As a result of the termination, our interest obligations for the term loan borrowings through maturity in 2013 are now determined based upon a floating rate as described above.  As of July 2, 2011, the interest rate for the term loan was 2.26% based upon a three-month LIBOR contract that expires on September 2, 2011. 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 first two quarters of 2011 includes a benefit of $0.6 million, relating to the realized gain on the interest rate swap and in the second quarter and first two quarters of 2011 a reclassification of $0.4 million and $0.8 million, respectively, of the amount recorded in accumulated other comprehensive loss related to the swap.  Net interest expense in the second quarter and first two quarters of 2011 also includes a reduction in interest income primarily due to lower interest rates.  During the remainder of fiscal 2011, we expect to reclassify to net interest expense $0.9 million of the amount recorded in accumulated other comprehensive loss.

 

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 is being 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.

 

Beginning January 15, 2014, we may redeem some or all of the senior notes at a redemption price of 103.813%, and thereafter at prices declining annually to 100% on or after January 15, 2017, plus accrued and unpaid interest to the date of redemption.  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 at a redemption price of 107.625% plus accrued and unpaid interest to the date of redemption.  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 plus accrued and unpaid interest to the date of redemption.  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

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)           Long-term Debt (Continued)

 

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 July 2, 2011, we were in compliance with all of the covenants in the senior notes indenture.

 

12% Senior Subordinated Notes due 2016.  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.  In February 2010, 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.  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 July 2, 2011 and January 1, 2011 we had net deferred debt financing costs of $7.8 million and $8.7 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 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.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)           Long-term Debt (Continued)

 

Accrued Interest.  At July 2, 2011 and January 1, 2011 accrued interest of $12.6 million and $13.2 million, respectively, is included in accrued expenses in the accompanying consolidated balance sheets.

 

(7)           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.

 

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 used a discounted cash flow analysis of the implied yield curves to value the interest rate swap. While these inputs were observable, they were not all quoted market prices, so the fair values of our interest rate swap fell 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 the interest rate swap as of January 1, 2011, which as of such date is included in current liabilities in our consolidated balance sheet (in thousands):

 

				Fair Value Measurements
		Description		Level 1			Level 2			Level 3
January 1, 2011		Interest rate swap		$	—		$	12,012		$	—

 

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 and senior notes as of July 2, 2011 and January 1, 2011 are as follows (in thousands):

 

		July 2, 2011						January 1, 2011
		Carrying Value			Fair Value(1)			Carrying Value			Fair Value(1)
Senior Secured Term Loan due 2013		$	130,000		$	130,488		$	130,000		$	128,050
7.625% Senior Notes due 2018		347,908		(2)	372,750			347,748		(2)	362,250

 

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

(2) The carrying values of the 7.625% senior notes are net of discount.  The face amount of the senior notes is $350.0 million.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(8)           Disclosures about Derivative Instruments and Hedging Activities

 

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

 

				Asset Derivatives			Liability Derivatives
Derivatives not designated as hedging instruments		Balance Sheet Location		Fair Value at January 1, 2011			Fair Value at January 1, 2011
Interest rate swap		Current liabilities		$	—		$	12,012

 

See notes 6 and 7 for additional information regarding the interest rate swap.  We do not currently have any derivatives designated as hedging instruments.

 

The following table presents the impact of derivative instruments and their location within our consolidated statement of operations (in thousands):

 

Amount of Loss Recognized in Income on Derivatives

Location of Loss

Derivatives not designated

Thirteen Weeks Ended

Twenty-six Weeks Ended

Recognized in Income

as hedging instruments

July 2, 2011

July 3, 2010

July 2, 2011

July 3, 2010

on Derivatives

Interest rate swap

$

424

*

$

1,470

*

$

235

*

$

2,196

*

Interest expense, net

 

*      The amount included in net interest expense for the second quarter and first two quarters of 2011 consists of $0 and $612 realized gain on the interest rate swap, and $424 and $847 (pre-tax) reclassified to net interest expense from accumulated other comprehensive loss, respectively.  The amount included in net interest expense for the second quarter and first two quarters of 2010 consists of $1,046 and $1,349 unrealized loss on the interest rate swap, and $424 and $847 (pre-tax) reclassified to net interest expense from accumulated other comprehensive loss, respectively.

 

(9)           Comprehensive Income

 

Comprehensive income includes net income, foreign currency translation adjustments relating to assets and liabilities located in our Canadian subsidiary, changes in our pension benefits, net of tax and the change in the fair value of an interest rate swap during the period it was designated as an effective cash flow hedge, net of tax.  The amount recorded in accumulated other comprehensive 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 (in thousands):

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(9)           Comprehensive Income (Continued)

 

		Thirteen Weeks Ended						Twenty-six Weeks Ended
		July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Net income		$	12,599		$	8,493		$	25,904		$	8,819
Other comprehensive income:
Foreign currency translation adjustments		11			12			(75		)	(1		)
Amortization of unrecognized prior service cost and pension deferrals, net of tax		21			48			72			124
Reclassification to net interest expense for interest rate swap, net of tax		265			263			530			526
Comprehensive income		$	12,896		$	8,816		$	26,431		$	9,468

 

(10)         Stock and Debt Repurchase Program

 

On February 22, 2011, our board of directors authorized a stock and debt repurchase program for the repurchase of up to $25.0 million of our common stock and/or 7.625% senior notes through March 31, 2012.  Under the authorization, our company may purchase shares of common stock and/or senior notes from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission.

 

The timing and amount of stock and/or debt repurchases under the program, if any, will be at the discretion of management, and will depend on available cash, market conditions and other considerations.  Therefore, there can be no assurance as to the number of shares, if any, that will be repurchased under the repurchase program, or the aggregate dollar amount of the shares or principal amount of senior notes, if any, repurchased.  We may discontinue the program at any time.  Any shares or senior notes repurchased pursuant to the repurchase program will be cancelled.

 

We did not repurchase any shares of common stock or 7.625% senior notes during the first two quarters of 2011 or 2010.

 

(11)         Pension Benefits

 

Net periodic pension costs for the second quarter and first two quarters of 2011 and 2010 include the following components (in thousands):

 

		Thirteen Weeks Ended						Twenty-six Weeks Ended
		July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Service cost—benefits earned during the period		$	456		$	352		$	893		$	793
Interest cost on projected benefit obligation		488			444			975			931
Expected return on plan assets		(627		)	(522		)	(1,253		)	(1,009		)
Amortization of unrecognized prior service cost		11			11			22			22
Amortization of loss		70			67			140			178
Net periodic pension cost		$	398		$	352		$	777		$	915

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(11)         Pension Benefits (Continued)

 

During the second quarter and first two quarters of 2011, we made $1.5 million and $3.1 million, respectively, of defined benefit pension plan contributions.  We do not plan to make additional contributions during the remainder of fiscal 2011.

 

(12)         Commitments and Contingencies

 

Operating Leases.  As of July 2, 2011, future minimum lease payments under non-cancelable operating leases in effect at quarter-end were as follows (in thousands):

 

Fiscal year ending:		Third Parties
2011		$	2,818
2012		5,389
2013		4,359
2014		3,282
2015		621
Thereafter		2,737
Total		$	19,206

 

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.

 

Environmental.  We are subject to environmental laws and regulations in the normal course of business.  We did not make any material expenditures during the first two quarters of 2011 or 2010 in order to comply with environmental laws and regulations.  Based on our experience to date, management believes that the future cost of compliance with existing environmental laws and regulations (and liability for any known environmental conditions) will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.  However, we cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted, nor can we predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to such environmental claims.

 

Collective Bargaining Agreements.  Approximately 351 of our 742 employees, or 47.3%, as of July 2, 2011, were covered by collective bargaining agreements.  None of our collective bargaining agreements is scheduled to expire within one year.

 

Severance and Change of Control Agreements.  We have employment agreements with each of our six executive officers.  The agreements generally continue until terminated by the executive or by us, and provide for severance payments under certain circumstances, including termination by us without cause (as defined) or as a result of the employees’ death or 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

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(12)         Commitments and Contingencies (Continued)

 

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.

 

(13)         Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding plus all additional shares of common stock that would have been outstanding if potentially dilutive shares of common stock 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				Twenty-six Weeks Ended
		July 2, 2011		July 3, 2010		July 2, 2011		July 3, 2010
Weighted average shares outstanding:
Basic		47,906,495		47,624,818		47,944,256		47,526,439
Net effect of potentially dilutive share-based compensation awards		730,344		824,796		723,375		670,827
Diluted		48,636,839		48,449,614		48,667,631		48,197,266

 

(14)         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 50.7% and 53.6% of consolidated net sales for the first two quarters of 2011 and 2010, respectively.  Our top ten customers accounted for approximately 53.7% and 53.2% of our receivables as of July 2, 2011 and January 1, 2011, respectively.  Other than Wal-Mart, which accounted for 16.5% and 16.1% of our consolidated net sales for the first two quarters of 2011 and 2010, no single customer accounted for more than 10.0% of our consolidated net sales for the first two quarters of 2011 or 2010.  Other than Wal-Mart, which accounted for 16.0% and 15.0% of our consolidated receivables as of July 2, 2011 and January 1, 2011, respectively, no single customer accounted for more than 10.0% of our consolidated receivables.

 

During the first two quarters of 2011 and 2010, our sales to foreign countries represented less than 1.0% of net sales.  Our foreign sales are primarily to customers in Canada.

 

(15)         Share-Based Payments

 

Our company makes annual grants of performance share long-term incentive awards to our executive officers and certain other members of senior management.  The performance share long-term incentive awards entitle the participants to earn shares of common stock upon the attainment of certain performance goals.  In addition, our non-employee directors receive annual equity grants as part of their non-employee director compensation.

 

The following table summarizes amounts related to share-based payments (in thousands):

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(15)         Share-Based Payments (Continued)

 

		Thirteen Weeks Ended						Twenty-six Weeks Ended
Consolidated Statements of Operations Location		July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Compensation expense included in cost of goods sold		$	200		$	152		$	374		$	237
Compensation expense included in selling, general and administrative expenses		957			855			1,498			1,233
Total compensation expense for share-based payments		$	1,157		$	1,007		$	1,872		$	1,470

 

As of July 2, 2011, there was $4.5 million of unrecognized compensation expense related to performance share long-term incentive awards, which is expected to be recognized over the next 30 months.

 

The following table details the activity in our non-vested performance share long-term incentive awards for the first two quarters of 2011:

 

		Number of Performance Shares		Weighted Average Grant Date Fair Value (per share)(2)
Beginning of fiscal 2011		2,041,440	(1)	$	4.46
Granted		347,688	(1)	$	11.78
Vested		(403,431	)	$	6.85
Forfeited		—		—
At July 2, 2011		1,985,697	(1)	$	5.25

 

(1)   Solely for purposes of this table, the number of performance shares is based on the participants earning 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.

 

The following table details the number of shares of common stock issued by our company during the first two quarters of 2011 and 2010 upon the vesting of performance share long-term incentive awards:

 

		Thirteen Weeks Ended						Twenty-six Weeks Ended
		July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Number of performance shares vested		—			—			403,431			399,842
Shares withheld to fund statutory minimum tax withholding		—			—			152,126			148,474
Number of shares of common stock issued		—			—			251,305			251,368
Excess tax benefit recorded to additional paid in capital		$	—		$	—		$	1,117		$	330

 

(16)         Income Taxes

 

During the second quarter of 2011, changes in state tax laws impacting apportionment rates resulted in a decrease in our blended state tax rate, resulting in a deferred tax benefit of $1.1 million.

 

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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 twenty-six weeks ended July 2, 2011 (second quarter and first two quarters of 2011) included elsewhere in this report and the audited consolidated financial statements and related notes for the fiscal year ended January 1, 2011 (fiscal 2010) included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 1, 2011 (which we refer to as our 2010 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.

 

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, ingredients and packaging materials from growers, commodity processors, other food companies and packaging suppliers located in U.S. and foreign locations.  Raw materials and other input costs, such as fuel, 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.  The cost of raw materials, fuel, labor, distribution and other costs related to our operations can increase from time to time significantly and unexpectedly.

 

We attempt to manage cost inflation risks by locking in prices through short-term supply contracts and advance commodities purchase agreements and by implementing cost saving measures.  We also attempt to offset rising input costs by raising sales prices to our customers.  However, increases in the prices we charge our customers may lag behind rising input costs.  Competitive pressures also may limit our ability to quickly raise prices in response to rising costs.

 

We currently expect our input and other operating costs for fiscal 2011 as compared to fiscal 2010 to increase in the aggregate by approximately 1.5% of projected 2011 net sales.  This expectation is based in part on having locked into pricing and supply for substantially all of our major commodities and packaging through 2011.  During 2010, our sales price increases and our cost saving measures more than offset our cost increases. To the extent we are unable to avoid or offset the impact of 2011 and future cost increases by locking in our costs, implementing cost saving measures or increasing prices to our customers, our operating results could be materially adversely affected.  In addition, should input costs begin to decline, customers may look for price reductions in situations where we have locked into purchases at higher costs.

 

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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 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, other intangible assets, 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 2010 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 1, 2011.

 

Results of Operations

 

The following table sets forth the percentages of net sales represented by selected items for the second quarter and first two quarters of 2011 and 2010 reflected in our consolidated statements of operations.  The comparisons of financial results are not necessarily indicative of future results:

 

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		Thirteen Weeks Ended				Twenty-six Weeks Ended
		July 2, 2011		July 3, 2010		July 2, 2011		July 3, 2010
Statement of Operations:
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold		67.4	%	67.5	%	66.6	%	66.9	%
Gross profit		32.6	%	32.5	%	33.4	%	33.1	%
Selling, general and administrative expenses		11.0	%	11.1	%	10.9	%	11.2	%
Amortization expense		1.3	%	1.3	%	1.3	%	1.3	%
Operating income		20.3	%	20.1	%	21.2	%	20.6	%
Interest expense, net		6.4	%	9.0	%	6.3	%	8.7	%
Loss on extinguishment of debt		—		—		—		6.2	%
Income before income tax expense		13.9	%	11.1	%	14.9	%	5.7	%
Income tax expense		4.2	%	4.1	%	5.0	%	2.1	%
Net income		9.7	%	7.0	%	9.9	%	3.6	%

 

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.

 

Selling, General and Administrative Expenses.  Our selling, general and administrative expenses include costs related to selling our products, as well as all other general and administrative expenses.  Some of these costs include administrative, marketing and internal sales force employee compensation and benefits costs, consumer advertising programs, brokerage costs, warehouse facility and distribution costs, information technology and communication costs, office rent, utilities, supplies, professional services and other general corporate expenses.

 

Amortization Expense. Amortization expense includes the amortization expense associated with customer relationship and other intangibles.

 

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.

 

18