B&G Foods, Inc. - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

As filed with the Securities and Exchange Commission on October 25, 2012

 

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 September 29, 2012

 

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 October 25, 2012, the registrant had 52,560,765 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 Comprehensive Income	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
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.	Mine Safety Disclosures	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)

 

		September 29, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents		$	15,350		$	16,738
Trade accounts receivable, net		41,124			39,476
Inventories		107,236			85,234
Prepaid expenses		2,723			4,551
Income tax receivable		3,383			2,529
Deferred income taxes		1,855			1,696
Total current assets		171,671			150,224
Property, plant and equipment, net of accumulated depreciation of $97,299 and $89,856		62,241			61,930
Goodwill		262,977			262,827
Other intangibles, net		628,455			634,522
Other assets		20,386			23,420
Total assets		$	1,145,730		$	1,132,923
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable		$	29,308		$	24,427
Accrued expenses		19,174			26,719
Current portion of long-term debt		15,375			9,750
Dividends payable		13,065			10,971
Total current liabilities		76,922			71,867
Long-term debt		698,019			710,357
Other liabilities		6,890			9,409
Deferred income taxes		117,180			105,743
Total liabilities		899,011			897,376
Commitments and contingencies (Note 10)
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; 48,387,225 and 47,700,132 shares issued and outstanding as of September 29, 2012 and December 31, 2011		484			477
Additional paid-in capital		120,953			159,916
Accumulated other comprehensive loss		(10,003		)	(10,430		)
Retained earnings		135,285			85,584
Total stockholders’ equity		246,719			235,547
Total liabilities and stockholders’ equity		$	1,145,730		$	1,132,923

 

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
		September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Net sales		$	154,155		$	133,010		$	460,106		$	393,868
Cost of goods sold		98,876			91,560			296,246			265,382
Gross profit		55,279			41,450			163,860			128,486
Operating expenses:
Selling, general and administrative expenses		14,937			12,725			46,206			41,069
Amortization expense		2,022			1,637			6,067			4,913
Operating income		38,320			27,088			111,587			82,504
Other expenses:
Interest expense, net		11,994			8,323			35,845			24,854
Income before income tax expense		26,326			18,765			75,742			57,650
Income tax expense		9,429			6,681			26,041			19,662
Net income		$	16,897		$	12,084		49,701			37,988
Weighted average shares outstanding:
Basic		48,387			47,822			48,267			47,903
Diluted		48,743			48,479			48,597			48,574
Earnings per share:
Basic		$	0.35		$	0.25		$	1.03		$	0.79
Diluted		$	0.35		$	0.25		$	1.02		$	0.78
Cash dividends declared per share		$	0.27		$	0.21		$	0.81		$	0.63

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Net income		$	16,897		$	12,084		$	49,701		$	37,988
Other comprehensive income:
Foreign currency translation adjustments		36			(8		)	26			(83		)
Amortization of unrecognized prior service cost and pension deferrals, net of tax		162			87			401			159
Reclassification to net interest expense for interest rate swap, net of tax		—			265			—			795
Other comprehensive income		198			344			427			871
Comprehensive income		$	17,095		$	12,428		$	50,128		$	38,859

 

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
		September 29, 2012			October 1, 2011
Cash flows from operating activities:
Net income		$	49,701		$	37,988
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,443			11,964
Amortization of deferred debt financing costs and bond discount		3,771			1,500
Deferred income taxes		10,967			12,647
Share-based compensation expense		2,900			2,697
Excess tax benefits from share-based compensation		(8,031		)	(1,117		)
Realized gain on interest rate swap		—			(612		)
Reclassification to net interest expense for interest rate swap		—			1,270
Changes in assets and liabilities:
Trade accounts receivable		(1,648		)	1,163
Inventories		(22,002		)	(19,714		)
Prepaid expenses		1,828			(414		)
Income tax receivable		7,177			(1,848		)
Other assets		(63		)	(63		)
Trade accounts payable		4,881			12,541
Accrued expenses		(7,545		)	(5,404		)
Interest rate swap		—			(11,400		)
Other liabilities		(1,883		)	(1,905		)
Net cash provided by operating activities		53,496			39,293
Cash flows from investing activities:
Capital expenditures		(7,660		)	(6,881		)
Payment for acquisition of business		(150		)	—
Net cash used in investing activities		(7,810		)	(6,881		)
Cash flows from financing activities:
Payments of long-term debt		(7,312		)	—
Payments for repurchase of common stock		—			(3,652		)
Dividends paid		(37,096		)	(28,221		)
Excess tax benefits from share-based compensation		8,031			1,117
Payments of tax withholding on behalf of employees for net share settlement of share-based compensation		(10,696		)	(2,236		)
Net cash used in financing activities		(47,073		)	(32,992		)
Effect of exchange rate fluctuations on cash and cash equivalents		(1		)	(51		)
Net decrease in cash and cash equivalents		(1,388		)	(631		)
Cash and cash equivalents at beginning of period		16,738			98,738
Cash and cash equivalents at end of period		$	15,350		$	98,107
Supplemental disclosures of cash flow information:
Cash interest payments		$	38,742		$	29,988
Cash income tax payments		$	7,899		$	8,865
Cash income tax refunds		$	(3	)	$	(2	)
Non-cash transactions:
Dividends declared and not yet paid		$	13,065		$	10,017

 

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 shares of 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.  Our financial statements are presented on a consolidated basis.

 

We operate in a single industry segment and manufacture, sell and distribute a diverse portfolio of high-quality shelf-stable foods across the United States, Canada and Puerto Rico.  Our products include hot cereals, fruit spreads, canned meats and beans, spices, seasonings, 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 products.  Our products are marketed under many recognized brands, including Ac’cent, B&G, B&M, Baker’s Joy, 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, Molly McButter, Mrs. Dash, Ortega, Polaner, Red Devil, Regina, Sa- són, Sclafani, Sugar Twin, Trappey’s, Underwood, Vermont Maid and Wright’s.  We also sell and distribute two branded household products, Static Guard and Kleen Guard.  We compete in the retail grocery, food service, specialty, private label, club and mass merchandiser channels of distribution.  We distribute our products via a network of independent brokers and distributors to supermarket chains, food service outlets, mass merchants, warehouse clubs, non-food outlets and specialty distributors.

 

Acquisitions

 

On November 30, 2011, we completed the acquisition of the Mrs. Dash, Sugar Twin, Baker’s Joy, Molly McButter, Static Guard and Kleen Guard brands from Conopco, Inc. (dba Unilever United States, Inc.) for $326.0 million in cash.  We refer to this acquisition as the “Culver Specialty Brands acquisition.”  We have accounted for the Culver Specialty Brands acquisition using the acquisition method of accounting and, accordingly, have included the assets acquired and results of operations in our consolidated financial statements from the date of acquisition.  The excess of the purchase price over the fair value of identifiable net assets acquired represents goodwill.  Trademarks are deemed to have an indefinite useful life and are not amortized.  Customer relationship intangibles are amortized over 20 years.  Goodwill and other intangible assets are deductible for income tax purposes.  Inventory has been recorded at estimated selling price less costs of disposal and a reasonable profit and the property, plant and equipment and other intangible assets (including trademarks and customer relationships) acquired have been recorded at fair value as determined by our management with the assistance of a third-party valuation specialist.  See Note 4, “Goodwill and Other Intangible Assets.”

 

The following table sets forth the allocation of the Culver Specialty Brands acquisition purchase price to the estimated fair value of the net assets acquired at the date of acquisition.

 

Culver Specialty Brands Acquisition (dollars in thousands):
Deferred taxes		$	87
Equipment		129
Inventory		7,501
Goodwill		9,083
Customer relationship intangibles—amortizable intangible assets		30,800
Trademarks — indefinite life intangible assets		278,400
Total		$	326,000

 

In September 2012, we announced an agreement to acquire the New York Style and Old London brands from Chipita America, Inc. for approximately $62.5 million in cash.  The acquisition includes a

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(1)           Nature of Operations (Continued)

 

manufacturing facility in Yadkinville, North Carolina.  Subject to the satisfaction of customary closing conditions, we expect the acquisition to close during the fourth quarter of 2012.

 

Unaudited Pro Forma Summary of Operations

 

The following pro forma summary of operations for the third quarter and first three quarters of fiscal 2011 presents our operations as if the Culver Specialty Brands acquisition had occurred as of the beginning of the first quarter of 2011.  In addition to including the results of operations of the Culver Specialty Brands acquisition, the pro forma information gives effect to interest on additional borrowings and amortization of customer relationship intangibles.

 

		Thirteen Weeks Ended October 1, 2011			Thirty-nine Weeks Ended October 1, 2011
		(dollars in thousands)
Net sales		$	153,744		$	459,552
Net income		14,471			46,169
Basic earnings per share		$	0.30		$	0.96
Diluted earnings per share		$	0.30		$	0.95

 

The pro forma information presented above does not purport to be indicative of the results that actually would have been attained if the Culver Specialty Brands acquisition had occurred as of the beginning of the first quarter of fiscal 2011 and is not intended to be a projection of future results.

 

(2)           Summary of Significant Accounting Policies

 

Fiscal Year

 

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 29, 2012 (fiscal 2012) and December 31, 2011 (fiscal 2011) each contain 52 weeks.  Each quarter of fiscal 2012 and 2011 contains 13 weeks.

 

Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements for the thirteen and thirty-nine week periods ended September 29, 2012 (third quarter and first three quarters of 2012) and October 1, 2011 (third quarter and first three quarters of 2011) 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

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(2)           Summary of Significant Accounting Policies (Continued)

 

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 September 29, 2012, the results of our operations and comprehensive income for the third quarter and first three quarters of 2012 and 2011, and cash flows for the first three quarters of 2012 and 2011.  Our results of operations for the third quarter and first three quarters of 2012 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 2011 included in our Annual Report on Form 10-K for fiscal 2011 filed with the SEC on February 28, 2012.

 

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; acquisition accounting allocations; the recoverability of goodwill, other intangible assets, property, plant and equipment and deferred tax assets; the determination of the useful life of customer relationship intangibles; 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 believes 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.

 

Recently Issued Accounting Standards

 

Except as set forth below, 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 2011 Annual Report on Form 10-K.

 

In July 2012, the Financial Accounting Standards Board (FASB) issued an accounting standards update relating to the testing of indefinite-lived intangible assets for impairment.  This update, which amends the guidance on testing indefinite-lived intangible assets other than goodwill, for impairment, provides companies with the option to first perform a qualitative assessment before performing the quantitative impairment test.  If a company determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not to exceed its carrying amount, then the company would not need to perform the quantitative impairment test.  This update does not revise the requirement to test indefinite-lived intangible assets annually for impairment.  This update becomes effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption allowed.  We do not expect the adoption of this standard will have a material effect on our consolidated financial position, results of operations or liquidity.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

(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 (in thousands):

 

		September 29, 2012			December 31, 2011
Raw materials and packaging		$	30,096		$	22,822
Work in process		318			347
Finished goods		76,822			62,065
Total		$	107,236		$	85,234

 

(4)           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):

 

		September 29, 2012			December 31, 2011
Goodwill beginning balance		$	262,827		$	253,744
Acquisition of business		150			9,083
Goodwill		$	262,977		$	262,827
Non-amortizable intangible assets:
Trademarks		$	506,400		$	506,400
Amortizable intangible assets:
Customer relationships		$	160,240		$	160,240
Other intangible assets		150			150
		160,390			160,390
Less: accumulated amortization		(38,335		)	(32,268		)
Amortizable intangible assets, net		122,055			128,122
Total other intangible assets, net		$	628,455		$	634,522

 

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 the third quarter and first three quarters of 2012 was $2.0 million and $6.1 million, respectively, and is recorded in operating expenses.  Amortization expense associated with customer relationships and other intangible assets for the third quarter and first three quarters of 2011 was $1.6 million and $4.9 million, respectively, and is recorded in operating expenses.  We expect to recognize an additional $2.0 million of amortization expense associated with our customer relationships and other intangible assets during the remainder of fiscal 2012, and thereafter $8.0 million per year for each of the next four fiscal years.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)           Long-term Debt

 

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

 

		September 29, 2012			December 31, 2011
Senior secured credit agreement:
Tranche A term loan due 2016		$	144,375		$	150,000
Tranche B term loan due 2018		223,313			225,000
7.625% senior notes due 2018		350,000			350,000
Unamortized discount		(4,294		)	(4,893		)
Total long-term debt, net of unamortized discount		713,394			720,107
Current portion of long-term debt		(15,375		)	(9,750		)
Long-term debt, net of unamortized discount and excluding current portion		$	698,019		$	710,357

 

As of September 29, 2012, the aggregate contractual maturities of long-term debt are as follows (in thousands):

 

Years ending December:
2012		$	2,438
2013		17,250
2014		24,750
2015		24,750
2016		84,750
Thereafter		563,750
Total		$	717,688

 

Senior Secured Credit Agreement.  On November 30, 2011, in connection with the Culver Specialty Brands acquisition, we entered into a new senior secured credit agreement, which includes a $200.0 million revolving credit facility, $150.0 million of tranche A term loans and $225.0 million of tranche B term loans.  The proceeds of the term loan borrowings, $25.0 million of revolving loans and cash on hand were used to repay all $130.0 million of outstanding borrowings under our prior credit agreement, fund the acquisition purchase price and pay related transaction fees and expenses.

 

At September 29, 2012, there were no outstanding loans under our revolving credit facility and the available borrowing capacity under the facility, net of outstanding letters of credit, was $199.5 million.  Proceeds of the revolving credit facility are restricted for use solely for general corporate purposes and acquisitions of targets in the same or a similar line of business as our company, subject to specified criteria.  We are required to pay a commitment fee of 0.50% per annum on the unused portion of the revolving credit facility.  The maximum letter of credit capacity under the revolving credit facility is $50.0 million, with a fronting fee of 0.25% per annum for all outstanding letters of credit and a letter of credit fee equal to the applicable margin for revolving loans that are LIBOR loans.

 

The tranche A term loans are subject to principal amortization at the following rates: 5% in the first year, 10% in the second year and 15% in each of the third and fourth years.  The balance of all borrowings under the tranche A term loan facility are due and payable at maturity on November 30, 2016.  The tranche B term loans are subject to principal amortization at the rate of 1% annually with the balance due at maturity on November 30, 2018.  The revolving credit facility matures on November 30, 2016.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)           Long-term Debt (Continued)

 

Interest under the revolving credit facility, including any outstanding letters of credit, and under the tranche A term loan facility, is determined based on alternative rates that we may choose in accordance with the credit agreement, including a base rate per annum plus an applicable margin ranging from 1.50% to 2.00%, and LIBOR plus an applicable margin ranging from 2.50% to 3.00%, in each case depending on our consolidated leverage ratio.  As of September 29, 2012, the tranche A term loan interest rate was 3.232%.  Interest under the tranche B term loan facility is determined based on alternative rates that we may choose in accordance with the credit agreement, including a base rate per annum plus an applicable margin of 2.50%, and LIBOR plus an applicable margin of 3.50%, in each case subject to a 1.0% LIBOR floor.  At September 29, 2012, the tranche B term loan interest rate was 4.50%.

 

We may prepay the term loans or permanently reduce the revolving credit facility commitment under the credit agreement at any time without premium or penalty (other than customary breakage costs with respect to the early termination of LIBOR loans, and only in the case of the tranche B term loans, a 1% prepayment penalty to be paid in the event of a repricing transaction (as defined in the credit agreement) that occurs within the first year of the credit agreement).  Subject to certain exceptions, the credit agreement provides for mandatory prepayment upon certain asset dispositions and issuances of securities.  The credit agreement is also subject to mandatory annual prepayments commencing in April 2013 if our senior secured leverage (defined as the ratio of our consolidated senior secured debt, as of the last day of any period of four consecutive fiscal quarters to our adjusted EBITDA for such period) exceeds certain ratios as follows: 50% of our adjusted excess cash flow (as defined in the credit agreement and which takes into account certain dividend payments and other adjustments) if our senior secured leverage ratio is greater than or equal to 3.00 to 1.00 (with step-downs to 25% and 0% if our senior secured leverage ratio is less than 3.00 to 1.00 and 2.50 to 1.00, respectively).

 

Our obligations under the credit agreement 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 agreement is secured by substantially all of our and our domestic subsidiaries’ assets except our and our domestic subsidiaries’ real property.  The credit agreement contains customary restrictive covenants, subject to certain permitted amounts and exceptions, including covenants limiting our ability to incur additional indebtedness, pay dividends and make other restricted payments, repurchase shares of our outstanding stock and create certain liens.

 

The credit agreement also contains certain financial maintenance covenants, which, among other things, specify maximum capital expenditure limits, a maximum consolidated leverage ratio and a minimum interest coverage ratio, each ratio as defined in the credit agreement.  Our consolidated leverage ratio (defined as the ratio of our consolidated total debt, as of the last day of any period of four consecutive fiscal quarters to our adjusted EBITDA for such period), commencing with the period ending March 31, 2012, may not exceed the ratios indicated below:

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)           Long-term Debt (Continued)

 

Fiscal Quarters Ending In		Consolidated Leverage Ratio
2012		6.25 to 1.00
2013		6.00 to 1.00
2014		5.50 to 1.00
2015		5.00 to 1.00
2016		4.50 to 1.00
2017		4.00 to 1.00
2018		4.00 to 1.00

 

We are also required to maintain a consolidated interest coverage ratio of at least 1.75 to 1.00 for any four quarter period, commencing with the four quarter period ending with the first quarter of 2012.  As of September 29, 2012, we were in compliance with all of the covenants in the credit agreement.

 

The credit agreement also provides for an incremental term loan facility, pursuant to which we may request that the lenders under the credit agreement, and potentially other lenders, provide an additional $200.0 million of term loans on terms substantially consistent with those provided under the credit agreement.  Among other things, the utilization of the incremental facility is conditioned on our ability to meet a senior secured leverage ratio of 3.50 to 1.00, and a sufficient number of lenders or new lenders agreeing to participate in the facility.

 

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 and debt financing costs are being amortized over the life of the senior 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 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

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)           Long-term Debt (Continued)

 

guarantors’ future subordinated debt.  Our foreign subsidiaries are not guarantors, and any future foreign or partially owned domestic subsidiaries will not be guarantors, of our senior notes.

 

Our senior notes indenture contains covenants with respect to us and the guarantors and restricts the incurrence of additional indebtedness and the issuance of capital stock; the payment of dividends or distributions on, and redemption of, capital stock; a number of other restricted payments, including certain investments; specified creation of liens, 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 September 29, 2012, we were in compliance with all of the covenants in the senior notes indenture.

 

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

 

Deferred Debt Financing Costs.  During the fourth quarter of fiscal 2011, we capitalized approximately $16.3 million of debt financing costs, which will be amortized over the five year term of our revolving credit facility and the tranche A term loans and the seven year term of the tranche B term loans.  As of September 29, 2012 and December 31, 2011 we had net deferred debt financing costs of $20.0 million and $23.1 million, respectively, included in other assets in the accompanying consolidated balance sheets.

 

Accrued Interest.  At September 29, 2012 and December 31, 2011 accrued interest of $6.5 million and $13.2 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.

 

Level 2—Inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.

 

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

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)                                 Fair Value Measurements (Continued)

 

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 September 29, 2012 and December 31, 2011 are as follows (in thousands):

 

		September 29, 2012				December 31, 2011
		Carrying Value		Fair Value(1)		Carrying Value		Fair Value(1)
Tranche A Term Loan due 2016		143,783	(2)	144,375		149,266	(2)	150,000
Tranche B Term Loan due 2018		221,303	(2)	225,322		222,773	(2)	226,125
7.625% Senior Notes due 2018		348,308	(2)	378,000		348,068	(2)	372,750

 

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

(2)   The carrying values of the tranche A term loan, tranche B term loan and 7.625% senior notes are net of discount.  The outstanding principal amounts of the tranche A term loan, tranche B term loan and senior notes as of September 29, 2012 are $144.4 million, $223.3 million and $350.0 million, respectively.  The outstanding principal amounts of the tranche A term loan, tranche B term loan and senior notes as of December 31, 2011 were $150.0 million, $225.0 million and $350.0 million, respectively.

 

(7)                                 Disclosures about Derivative Instruments and Hedging Activities

 

As of September 29, 2012, we did not have any derivatives designated as a hedging instrument.  From February 2007 until January 2011, we maintained an interest rate swap that was designated as a hedging instrument.  The following table presents the impact of that interest rate swap and its location within our consolidated statement of operations (in thousands):

 

		Thirteen Weeks Ended October 1, 2011			Thirty-nine Weeks Ended October 1, 2011
Derivatives not designated as hedging instruments		Amount of Gain Recognized in Income on Derivatives						Location of Gain Recognized in Income on Derivatives
Interest rate swap		$	423	*	$	658	*	Interest expense, net

 

*      The amount included in net interest expense for the third quarter and first three quarters of 2011 consists of $0 and $612 realized gain on the interest rate swap, and $423 and $1,270 (pre-tax) reclassified to net interest expense from accumulated other comprehensive loss, respectively.

 

(8)           Stock and Debt Repurchase Program

 

We did not repurchase any shares of common stock during the first three quarters of 2012.  During the first three quarters of 2011 we repurchased and retired 217,901 shares of common stock at an average cost per share (excluding fees and commissions) of $16.73, or $3.6 million in the aggregate.  All of such shares were repurchased during the third quarter of 2011.  We did not repurchase any senior notes during the first three quarters of 2012 or 2011.  Our stock and debt repurchase program expired pursuant to its terms at the end of the first quarter of 2012.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(9)           Pension Benefits

 

Company Sponsored Defined Benefit Pension Plans.  Net periodic pension costs for company sponsored defined benefit pension plans for the third quarter and first three quarters of 2012 and 2011 include the following components (in thousands):

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Service cost—benefits earned during the period		$	602		$	525		$	1,790		$	1,418
Interest cost on projected benefit obligation		512			538			1,524			1,513
Expected return on plan assets		(734		)	(688		)	(2,184		)	(1,941		)
Amortization of unrecognized prior service cost		11			11			33			33
Amortization of loss		244			133			678			273
Net periodic pension cost		$	635		$	519		$	1,841		$	1,296

 

During the first three quarters of 2012, we made $3.6 million of defined benefit pension plan contributions to company sponsored plans.  We plan to make approximately $0.6 million of additional contributions during the remainder of fiscal 2012.

 

Multi-Employer Defined Benefit Pension Plan.  In connection with the collective bargaining agreement for our Portland, Maine facility, we also make contributions to the Bakery and Confectionary Union and Industry International Pension Fund (EIN 52-6118572, Plan No. 001), a multi-employer defined benefit pension plan, sponsored by the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union (BCTGM).  The plan provides multiple plan benefits with corresponding contribution rates that are collectively bargained between participating employers and their affiliated BCTGM local unions.  As previously reported in our 2011 Annual Report, the plan was not in endangered nor in critical status as of the most recent annual period, no surcharge was imposed, and it was classified in the Green Zone for both plan years ending December 31, 2010 and December 31, 2009.  There were no significant changes in the contractual employer contribution rate or number of employees for 2010 or 2009.  B&G Foods made contributions to the plan of $1.0 million, $1.1 million and $1.1 million for fiscal 2011, 2010 and 2009, respectively.  These contributions represented less than five percent of total contributions made to the plan.

 

In April 2012, we were notified that for the plan year ended December 31, 2011, the plan was not in endangered nor in critical status as the most recent annual period, no surcharge was imposed, and it was classified in the Green Zone.  We were also notified that for the plan year beginning January 1, 2012, the plan is in critical status and classified in the Red Zone.  The law requires that all contributing employers pay to the plan a surcharge to help correct the plan’s financial situation.  The amount of the surcharge is equal to a percentage of the amount an employer is otherwise required to contribute to the plan under the applicable collective bargaining agreement.  A 5% surcharge payable on hours worked on and after June 1, 2012 until December 31, 2012 will be applicable for plan year 2012, the initial critical year.  A 10% surcharge payable on hours worked on and after January 1, 2013 will be applicable for each succeeding plan year that the plan is in critical status until we agree to a collective bargaining agreement that implements a rehabilitation plan.

 

(10)         Commitments and Contingencies

 

Operating Leases.  As of September 29, 2012, future minimum lease payments under non-cancelable operating leases in effect at quarter-end (with initial lease terms in excess of one year) were as follows (in thousands):

 

Fiscal year ending:
2012		$	1,424
2013		4,443
2014		3,369
2015		3,006
2016		3,047
Thereafter		2,313
Total		$	17,602

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(10)         Commitments and Contingencies (Continued)

 

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 three quarters of 2012 or 2011 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.  As of September 29, 2012, approximately 336 of our 740 employees, or 45.4%, 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 in the agreements) 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 in the agreements).  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.

 

(11)         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.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(11)         Earnings per Share (Continued)

 

		Thirteen Weeks Ended				Thirty-nine Weeks Ended
		September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Weighted average shares outstanding:
Basic		48,387,225		47,821,907		48,267,133		47,903,475
Net effect of potentially dilutive share-based compensation awards		355,937		657,441		330,032		670,130
Diluted		48,743,162		48,479,348		48,597,165		48,573,605

 

(12)         Business and Credit Concentrations and Geographic Information

 

Our exposure to credit loss in the event of non-payment of accounts receivable by customers is estimated in the amount of the allowance for doubtful accounts.  We perform ongoing credit evaluations of our customers’ financial condition.  Our top ten customers accounted for approximately 51.3% and 50.8% of consolidated net sales for the first three quarters of 2012 and 2011, respectively.  Our top ten customers accounted for approximately 56.0% and 53.2% of our receivables as of September 29, 2012 and December 31, 2011, respectively.  Other than Wal-Mart, which accounted for 19.8% and 17.1% of our consolidated net sales for the first three quarters of 2012 and 2011, no single customer accounted for more than 10.0% of our consolidated net sales for the first three quarters of 2012 or 2011.  Other than Wal-Mart, which accounted for 15.3% and 14.4% of our consolidated receivables as of September 29, 2012 and December 31, 2011, respectively, no single customer accounted for more than 10.0% of our consolidated receivables.  As of September 29, 2012, we do not believe we have any significant concentration of credit risk with respect to our trade accounts receivable.

 

During the first three quarters of 2012 and 2011, our sales to foreign countries represented approximately 2.4% and less than 1.0%, respectively, of net sales.  Our foreign sales are primarily to customers in Canada.

 

(13)         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 sets forth the compensation expense recognized for share-based payments (performance share long-term incentive awards, non-employee director stock grants and other share based compensation) during the third quarter and first three quarters of 2012 and 2011 and where that expense is reflected in our consolidated statements of operations (in thousands):

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(13)         Share-Based Payments (Continued)

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
Consolidated Statements of Operations Location		September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Compensation expense included in cost of goods sold		$	199		$	198		$	567		$	572
Compensation expense included in selling, general and administrative expenses		672			627			2,333			2,125
Total compensation expense for share-based payments		$	871		$	825		$	2,900		$	2,697

 

As of September 29, 2012, there was $3.7 million of unrecognized compensation expense related to performance share long-term incentive awards, which is expected to be recognized over the next 2.25 years.

 

The following table details the activity in our non-vested performance share long-term incentive awards for the first three quarters of 2012:

 

		Number of Performance Shares		Weighted Average Grant Date Fair Value (per share)(2)
Beginning of fiscal 2012		1,985,697	(1)	$	5.25
Granted		159,722	(1)	$	20.34
Vested		(1,124,205	)	$	2.30
Forfeited		—		—
End of first three quarters of 2012		1,021,214	(1)	$	10.86

 

(1)   Solely for purposes of this table, the number of performance shares is based on the participants earning the maximum number of performance shares (i.e., 200% or 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 third quarter and first three quarters of 2012 and 2011 upon the vesting of performance share long-term incentive awards and for non-employee director annual equity grants and other share based compensation:

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Number of performance shares vested		—			—			1,124,205			403,431
Shares withheld to fund statutory minimum tax withholding		—			—			463,942			152,126
Shares of common stock issued for performance share long-term incentive awards		—			—			660,263			251,305
Shares of common stock issued to non-employee directors for annual equity grants		—			—			17,436			17,796
Shares of common stock issued for other share based compensation, net of shares withheld to fund statutory minimum tax withholding		—			—			9,394			9,008
Total shares of common stock issued		—			—			687,093			278,109
Excess tax benefit recorded to additional paid in capital		$	43		$	—		$	8,031		$	1,117

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(14)         Income Taxes

 

During the second quarter of 2012, a change in the group of states in which we are subject to state income taxes caused a decrease in our blended state tax rate, resulting in a deferred tax benefit of $0.9 million.  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.

 

(15)         Subsequent Events

 

Sale of Common Stock.  On October 9, 2012, we completed an underwritten public offering of 4,173,540 shares of our common stock.  The proceeds of the offering were approximately $120.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses.  The offering was made by means of a prospectus and the related prospectus supplement included as part of an effective shelf registration statement previously filed with the SEC.  We expect to use the net proceeds of the offering for general corporate purposes, which may include among other things, the payment of all or a portion of the purchase price and related transaction costs for the recently announced New York Style and Old London brands acquisition or any future acquisitions, and the repayment or retirement of a portion of our long-term debt.

 

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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 September 29, 2012 (third quarter and first three quarters of 2012) included elsewhere in this report and the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2011 (fiscal 2011) included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 28, 2012 (which we refer to as our 2011 Annual Report on Form 10-K).

 

General

 

We manufacture, sell and distribute a diverse portfolio of branded, high quality, shelf-stable foods and household 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.

 

On November 30, 2011, we completed the acquisition of the Mrs. Dash, Sugar Twin, Baker’s Joy, Molly McButter, Static Guard and Kleen Guard brands from Conopco, Inc. dba Unilever United States, Inc., which we refer to in this report as the “Culver Specialty Brands acquisition.”  The Culver Specialty Brands acquisition has been accounted for using the acquisition method of accounting and, accordingly, the assets acquired and results of operations of the acquired business is included in our consolidated financial statements from the date of acquisition.  This acquisition and the application of the acquisition method of accounting affect comparability between periods.

 

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

 

Fluctuations in Commodity Prices and Production and Distribution Costs.  We purchase raw materials, including agricultural products, meat, poultry, 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 and transportation, 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.

 

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We are currently locked into our supply and prices for a majority of our most significant commodities (excluding, among others, maple syrup) through 2012 at cost increase of less than 2.0% of projected 2012 cost of goods sold.  During fiscal 2011, 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 present 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.

 

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; acquisition accounting allocations; the recoverability of goodwill, other intangible assets, property, plant and equipment, and deferred tax assets; the determination of the useful life of customer relationship intangibles; and the accounting for share-based compensation expense.  Actual results could differ significantly from these estimates and assumptions.

 

In our 2011 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 from those disclosed in our 2011 Annual Report on Form 10-K.

 

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Table of Contents

 

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 2012 and 2011 reflected in our consolidated statements of operations.  The comparisons of financial results are not necessarily indicative of future results:

 

		Thirteen Weeks Ended				Thirty-nine Weeks Ended
		September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Statement of Operations:
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold		64.1	%	68.8	%	64.4	%	67.4	%
Gross profit		35.9	%	31.2	%	35.6	%	32.6	%
Selling, general and administrative expenses		9.7	%	9.6	%	10.0	%	10.5	%
Amortization expense		1.3	%	1.2	%	1.3	%	1.2	%
Operating income		24.9	%	20.4	%	24.3	%	20.9	%
Interest expense, net		7.8	%	6.3	%	7.8	%	6.3	%
Income before income tax expense		17.1	%	14.1	%	16.5	%	14.6	%
Income tax expense		6.1	%	5.0	%	5.7	%	5.0	%
Net income		11.0	%	9.1	%	10.8	%	9.6	%

 

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 realized gain relating to a prior 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 repurchase premium and write-off of deferred debt financing costs.

 

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