Attached files

file filename
EX-31.1 - SECTION 302 CEO CERTIFICATION - Pinnacle Foods Finance LLCdex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Pinnacle Foods Finance LLCdex312.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - Pinnacle Foods Finance LLCdex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - Pinnacle Foods Finance LLCdex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2010

OR

 

¨ 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 333-148297

Pinnacle Foods Finance LLC

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

20-8720036

(I.R.S. Employer

Identification No.)

1 Old Bloomfield Avenue

Mt. Lakes, New Jersey

(Address of Principal Executive Offices)

 

07046

(Zip Code)

Registrant’s telephone number, including area code: (973) 541-6620

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  ¨    No   þ

(The Registrant believes it is a voluntary filer and it has filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer   þ    Smaller Reporting Company  ¨

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   ¨    No  ¨

 

* The registrant has not yet been phased into the interactive data requirements

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Securities Exchange Act of 1934).

Yes  ¨    No   þ

As of May 12, 2010, there were outstanding 100 shares of common stock, par value $0.01 per share, of the Registrant.

 

 

 


Table of Contents

TABLE OF CONTENTS

FORM 10-Q

 

              Page
No.
PART I – FINANCIAL INFORMATION    1

    ITEM 1:

   FINANCIAL STATEMENTS    1
  CONSOLIDATED STATEMENTS OF OPERATIONS    2
  CONSOLIDATED BALANCE SHEETS    3
  CONSOLIDATED STATEMENTS OF CASH FLOWS    4
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY    5
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    6
 

1.

   Summary of Business Activities    6
 

2.

   Interim Financial Statements    6
 

3.

   Acquisition    7
 

4.

   Fair Value Measurements    9
 

5.

   Other Expense (Income), net    11
 

6.

   Inventories    11
 

7.

   Goodwill and Other Assets    12
 

8.

   Restructuring Charges    14
 

9.

   Debt and Interest Expense    14
 

10.

   Pension and Retirement Plans    19
 

11.

   Financial Instruments    21
 

12.

   Commitments and Contingencies    27
 

13.

   Related Party Transactions    27
 

14.

   Segments    28
 

15.

   Income Taxes    29
 

16.

   Recently Issued Accounting Pronouncements    30
 

17.

   Guarantor and Nonguarantor Statements    31

    ITEM 2:

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    38
  RESULTS OF OPERATIONS    41
  LIQUIDITY AND CAPITAL RESOURCES    47
  INFLATION    55
  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS    55

    ITEM 3:

   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK    56

    ITEM 4:

   CONTROLS AND PROCEDURES    62
PART II – OTHER INFORMATION    63

    ITEM 1:

   LEGAL PROCEEDINGS    63

    ITEM 1A:

   RISK FACTORS    63

    ITEM 2:

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    63

    ITEM 3:

   DEFAULTS UPON SENIOR SECURITIES    63

    ITEM 4:

   RESERVED TO THE NEW VOTING REPORTING RULES    63

    ITEM 5:

   OTHER INFORMATION    63

    ITEM 6:

   EXHIBITS    63
SIGNATURES    69


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

Unaudited consolidated financial statements begin on the following page

 

1


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(thousands of dollars)

 

     Three months ended  
     March 28,
2010
   March 29,
2009
 

Net sales

   $ 656,436    $ 427,408   

Cost of products sold

     500,706      339,993   
               

Gross profit

     155,730      87,415   

Operating expenses

     

Marketing and selling expenses

     52,837      34,355   

Administrative expenses

     33,930      13,529   

Research and development expenses

     2,346      1,010   

Other expense (income), net

     4,523      4,197   
               

Total operating expenses

     93,636      53,091   
               

Earnings before interest and taxes

     62,094      34,324   

Interest expense

     55,211      29,610   

Interest income

     87      4   
               

Earnings before income taxes

     6,970      4,718   

Provision for income taxes

     3,040      6,818   
               

Net earnings (loss)

   $ 3,930    $ (2,100
               

See accompanying Notes to Unaudited Consolidated Financial Statements

 

2


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

(thousands of dollars)

 

     March 28,
2010
    December 27,
2009
 

Current assets:

    

Cash and cash equivalents

   $ 126,482      $ 73,874   

Accounts receivable, net

     193,927        158,004   

Inventories, net

     319,034        389,967   

Other current assets

     28,208        26,960   

Deferred tax assets

     41,186        25,670   
                

Total current assets

     708,837        674,475   

Plant assets, net

     411,994        412,208   

Tradenames

     1,658,812        1,658,812   

Other assets, net

     225,910        233,823   

Goodwill

     1,559,180        1,559,180   
                

Total assets

   $ 4,564,733      $ 4,538,498   
                

Current liabilities:

    

Short-term borrowings

   $ 1,103      $ 1,232   

Current portion of long-term obligations

     2,054        38,228   

Accounts payable

     119,626        130,360   

Accrued trade marketing expense

     53,371        49,048   

Accrued liabilities

     174,362        130,035   

Accrued income taxes

     5,394        455   
                

Total current liabilities

     355,910        349,358   

Long-term debt (includes $111,238 and $109,237 owed to related parties)

     2,856,472        2,849,251   

Pension and other postretirement benefits

     83,551        82,437   

Other long-term liabilities

     40,373        39,383   

Deferred tax liabilities

     352,326        343,716   
                

Total liabilities

     3,688,632        3,664,145   

Commitments and contingencies

    

Shareholder’s equity:

    

Pinnacle Common stock: par value $.01 per share, 100 shares authorized, issued 100 shares

     —          —     

Additional paid-in-capital

     693,394        693,196   

Notes receivable from officers

     —          (565

Retained earnings

     229,243        225,313   

Accumulated other comprehensive (loss) income

     (46,536     (43,591
                

Total shareholder’s equity

     876,101        874,353   
                

Total liabilities and shareholder’s equity

   $ 4,564,733      $ 4,538,498   
                

See accompanying Notes to Unaudited Consolidated Financial Statements

 

3


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(thousands of dollars)

 

     Three months ended  
     March 28,
2010
    March 29,
2009
 

Cash flows from operating activities

    

Net earnings (loss) from operations

   $ 3,930      $ (2,100

Non-cash charges (credits) to net earnings (loss)

    

Depreciation and amortization

     19,879        14,587   

Amortization of debt acquisition costs

     3,537        1,184   

Amortization of deferred mark-to-market adjustment on terminated swaps

     1,033        1,312   

Amortization of discount on term loan

     688        —     

Change in value of financial instruments

     (8     697   

Stock-based compensation charge

     205        227   

Postretirement healthcare benefits

     24        (6

Pension expense

     811        740   

Other long-term assets

     18        (1,350

Other long-term liabilities

     1,778        1,360   

Deferred income taxes

     (3,967     7,486   

Changes in working capital

    

Accounts receivable

     (35,817     (22,747

Inventories

     71,100        24,011   

Accrued trade marketing expense

     4,261        (866

Accounts payable

     (5,758     17,118   

Accrued liabilities

     41,489        6,790   

Other current assets

     (985     (2,323
                

Net cash provided by operating activities

     102,218        46,120   
                

Cash flows from investing activities

    

Capital expenditures

     (14,534     (12,858
                

Net cash used in investing activities

     (14,534     (12,858
                

Cash flows from financing activities

    

Change in bank overdrafts

     (5,140     —     

Repayment of capital lease obligations

     (322     (61

Repayment of notes receivable from officers

     565        —     

Reductions of equity contributions

     (8     —     

Debt acquisition costs

     (17     —     

Borrowings under revolving credit facility

     —          12,584   

Repayments of revolving credit facility

     —          (38,584

Proceeds from short-term borrowing

     497        —     

Repayments of short-term borrowing

     (626     (130

Repayments of long term obligations

     (30,143     (3,125
                

Net cash used in financing activities

     (35,194     (29,316
                

Effect of exchange rate changes on cash

     118        (24

Net change in cash and cash equivalents

     52,608        3,922   

Cash and cash equivalents - beginning of period

     73,874        4,261   
                

Cash and cash equivalents - end of period

   $ 126,482      $ 8,183   
                

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 25,413      $ 23,316   

Interest received

     87        4   

Income taxes paid

     8        201   

Non-cash investing activity:

    

Capital lease additions

     (822     —     

See accompanying Notes to Unaudited Consolidated Financial Statements

 

4


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (unaudited)

(thousands of dollars, except share amounts)

 

            Additional
Paid In
Capital
    Notes
Receivable
From Officers
    Retained
earnings

(Accumulated
Deficit)
    Accumulated
Other

Comprehensive
(Loss) Income
    Total
Shareholder’s
Equity
 
    Common Stock          
    Shares   Amount          

Balance at December 28, 2008

  100   $ —     $ 427,323      $ —        $ (77,290   $ (42,460   $ 307,573   
                                                 

Equity related compensation

        227              227   

Comprehensive income:

             

Net loss

            (2,100       (2,100

Swap mark to market adjustments

              (5,819     (5,819

Amortization of deferred mark-to-market adjustment on terminated swaps

              1,312        1,312   

Foreign currency translation

              (740     (740
                   

Total comprehensive loss

                (7,347
                                                 

Balance at March 29, 2009

  100   $ —     $ 427,550      $ —        $ (79,390   $ (47,707   $ 300,453   
                                                 

Balance at December 27, 2009

  100   $ —     $ 693,196      $ (565   $ 225,313      $ (43,591   $ 874,353   
                                                 

Equity contribution:

             

Cash

        —                —     

Reduction in equity contributions

        (7           (7

Equity related compensation

        205              205   

Notes receivable from officers

          565            565   

Comprehensive income:

             

Net loss

            3,930          3,930   

Swap mark to market adjustments

              (4,182     (4,182

Amortization of deferred mark-to-market adjustment on terminated swaps

              1,033        1,033   

Foreign currency translation

              204        204   
                   

Total comprehensive loss

                985   
                                                 

Balance at March 28, 2010

  100   $ —     $ 693,394      $ —        $ 229,243      $ (46,536   $ 876,101   
                                                 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

5


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

1. Summary of Business Activities

Business Overview

Pinnacle Foods Finance LLC (hereafter referred to as the “Company” or “PFF”) is a leading manufacturer, marketer and distributor of high quality, branded convenience food products, the products and operations of which are managed and reported in three operating segments: (i) Birds Eye Frozen, (ii) Duncan Hines Grocery and (iii) Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) will be reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations will be reported in the Duncan Hines Grocery Division. The Specialty Foods Division will consist of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses.

On February 10, 2007, Crunch Holding Corp. (“CHC”), the parent company of Pinnacle Foods Group Inc. (“PFGI”), entered into an Agreement and Plan of Merger with Peak Holdings LLC (“Peak Holdings”), a Delaware limited liability company controlled by affiliates of The Blackstone Group, Peak Acquisition Corp. (“Peak Acquisition”), a wholly owned subsidiary of Peak Holdings, and Peak Finance LLC (“Peak Finance”), an indirect wholly owned subsidiary of Peak Acquisition, providing for the acquisition of CHC. Under the terms of the Agreement and Plan of Merger, the purchase price for CHC was $2,160.2 million in cash less the amount of indebtedness (including capital lease obligations) of CHC and its subsidiaries outstanding immediately prior to the closing and certain transaction costs. Pursuant to the Agreement and Plan of Merger, immediately prior to the closing, CHC contributed all of the outstanding shares of capital stock of its wholly owned subsidiary, PFGI, to a newly-formed Delaware limited liability company, PFF. At the closing, Peak Acquisition merged with and into CHC, with CHC as the surviving corporation, and Peak Finance merged with and into PFF, with PFF as the surviving entity.

As a result of the Merger, CHC became a wholly-owned subsidiary of Peak Holdings. This transaction closed on April 2, 2007 (the “Blackstone Transaction”).

On December 23, 2009 Pinnacle Foods Group LLC (“PFG LLC”), formerly known as PFGI, a subsidiary of PFF, purchased all of the outstanding common stock of Birds Eye Foods, Inc. (“Birds Eye”) (the “Birds Eye Acquisition”). See Note 3, for a full description of the transaction and brands of Birds Eye.

 

2. Interim Financial Statements

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of March 28, 2010, the results of operations for the three months ended March 28, 2010 and March 29, 2009, and the cash flows for the three months ended March 28, 2010 and March 29, 2009. The results of operations are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 27, 2009.

 

6


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

3. Acquisition

Acquisition of Birds Eye Foods, Inc.

On December 23, 2009, our wholly owned subsidiary, Pinnacle Foods Group LLC acquired all of the common stock of Birds Eye. Birds Eye’s product offering includes an expanding platform of healthy, high-quality frozen vegetables and frozen meals and a portfolio of primarily branded specialty foods which are highly-complimentary to Pinnacle’s existing product offerings. Frozen products are marketed under the Birds Eye brand name. Birds Eye markets traditional boxed and bagged frozen vegetables, as well as steamed vegetables using innovative steam-in-packaging technology, under the Birds Eye and Birds Eye Steamfresh brands. Birds Eye’s complete bagged meals, marketed primarily under the family-oriented Birds Eye Voila! brand, offer consumers value-added meal solutions that include a protein, starch, and vegetables in one convenient package. Birds Eye’s branded specialty food products hold leading market share positions in their core geographic markets, and include Comstock and Wilderness fruit pie fillings and toppings, Brooks and Nalley chili and chili ingredients, and snack foods by Tim’s Cascade and Snyder of Berlin.

The authoritative guidance for business combinations and goodwill and other intangible assets which established accounting and reporting for business combinations requires that all business combinations be accounted for using the purchase method of accounting. The guidance for goodwill and other intangible assets provides that goodwill and other intangible assets with indefinite lives not to be amortized, but tested for impairment on an annual basis.

In December 2007, the FASB updated the authoritative guidance for business combinations. The guidance required business combinations to still be accounted for using the purchase method of accounting, but changed the method of applying the method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. The Birds Eye Acquisition has been accounted for in accordance with these standards.

The cost of the Birds Eye Acquisition consisted of:

 

Stated purchase price

   $ 670,000

Net repayment of Birds Eye’s debt

     670,383
      

Total cost of acquisition

   $ 1,340,383
      

 

7


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The following table summarizes the allocation of the total cost of the Birds Eye Acquisition to the assets acquired and liabilities assumed:

 

Assets acquired:

  

Cash and cash equivalents

   $ 25,637

Account receivable

     67,697

Inventories

     212,612

Other current assets

     2,806

Assets held for sale

     7,402

Deferred tax assets

     797

Plant assets

     146,813

Tradenames

     750,000

Distributor relationships and license agreements

     52,875

Goodwill

     565,013

Other assets

     53
      

Fair value of assets acquired

     1,831,705

Liabilities assumed

  

Accounts payable

     78,652

Accrued liabilities

     59,455

Pension and post retirement benefit plans

     49,307

Capital leases

     1,657

Other long-term liabilities

     14,520

Deferred tax liabilities

     287,731
      

Total cost of acquisition

   $ 1,340,383
      

Based upon the allocation, the value assigned to intangible assets and goodwill totaled $1,367.9 million. Of the total intangible assets, $48.0 million has been assigned to distributor relationships. Distributor relationships are being amortized on an accelerated basis over 30 years, which life was based on an attrition rate based on industry experience which management believes is appropriate in the Company’s circumstances. The Company has also assigned $750.0 million to the value of the tradenames acquired, of which $624.0 million is allocated to the Birds Eye Frozen segment, $90.0 million is allocated to the Duncan Hines Grocery segment and $36.0 million is allocated to the Specialty Foods segment. The values of the tradenames are not subject to amortization but are reviewed annually for impairment. Goodwill, which is also not subject to amortization, totaled $565.0 million, of which $304.6 million is allocated to the Birds Eye Frozen segment, $107.2 million is allocated to the Duncan Hines Grocery segment and $153.2 million is allocated to the Specialty Foods segment. No new tax-deductible goodwill or intangible assets were created as a result of the Birds Eye Acquisition, but historical tax-deductible goodwill and intangible assets in the amount of $79.4 million existed as of the closing of the Birds Eye Acquisition.

In accordance with the requirements of the purchase method of accounting for acquisitions, inventories obtained in the Birds Eye Acquisition were required to be valued at fair value (net realizable value, which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity), which is $37.6 million higher than historical manufacturing cost. Cost of products sold for the three months ended March 28, 2010 and the fiscal year ended December 27, 2009 includes pre-tax charges of $17.3 million and $0.5 million, respectively, related to the finished products at December 23, 2009, which were subsequently sold. The remaining $19.8 million will be recognized principally in the second and third quarters of 2010.

 

8


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The Birds Eye Acquisition was financed through borrowings of $850.0 million in term loans (“the Tranche C Term Loans”), $300.0 million of 9  1/4 Senior Notes due 2015 (the “Senior Notes”), a $260.0 million equity contribution from The Blackstone Group L.P., a $3.1 million investment from members of the board and management, less transaction costs of $0.2 million and $24.1 million in the three months ended March 28, 2010 and fiscal year ended December 27, 2009, respectively, and deferred financing costs of $40.2 million. Included in the transaction costs of $0.2 million for the three months ended March 28, 2010 are primarily legal, accounting and other professional fees. Included in the transaction costs of $24.1 million for the fiscal year ended December 27, 2009 are: $19.3 million in merger, acquisition and advisory fees, $4.0 million in legal, accounting and other professional fees and $0.8 million in other costs. The costs are recorded in Other expense (income), net in the Consolidated Statements of Operations. The Company also incurred $11.8 million in original issue discount, in connection with the Tranche C Term Loans. This is recorded in Long-term debt on the Consolidated Balance Sheet and is being amortized over the life of the loan using the effective interest method which is consistent with the authoritative guidance for debt with conversion and other options

Pro forma Information

The following schedule includes consolidated statements of operations data for the unaudited pro forma results for the three months ended March 29, 2009 as if the Birds Eye Acquisition had occurred as of the beginning of fiscal 2009. The pro forma information includes the actual results with pro forma adjustments for the change in interest expense related to the Birds Eye Acquisition, purchase accounting adjustments related to fixed assets, intangible assets, pension and other post-employment benefit liabilities, and related adjustments to the provision for income taxes.

The unaudited pro forma information is provided for illustrative purposes only. It does not purport to represent what the consolidated results of operations would have been had the Birds Eye Acquisition occurred on the date indicated above, nor does it purport to project the consolidated results of operations for any future period or as of any future date.

 

     Three Months
ended
March 29, 2009
(unaudited)

Net sales

   $ 655,794

Earnings before interest and taxes

   $ 62,929

Net earnings

   $ 429

 

4. Fair Value Measurements

In January of 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value.

In the first quarter of 2009, the Company adopted the authoritative guidance for fair value disclosure as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. The guidance for nonfinancial assets and nonfinancial liabilities defines fair value, establishes a framework for fair value disclosure in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this guidance apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of the authoritative guidance for fair value disclosure, as it relates to nonfinancial assets and nonfinancial liabilities, had no impact on the Company’s consolidated financial statements. The provisions of the authoritative guidance for fair value disclosure will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of the guidance.

 

9


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The guidance for financial assets and liabilities discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1:

   Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:

   Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:

   Unobservable inputs that reflect the Company’s assumptions.

The Company’s population of financial assets and liabilities subject to recurring fair value measurements and the required disclosures are as follows:

 

     Fair Value
As of
March 28,

2010
   Fair Value Measurements
Using Fair Value Hierarchy
        Fair Value
As of
December 27,

2009
   Fair Value Measurements
Using Fair Value Hierarchy
        Level 1    Level 2    Level 3            Level 1    Level 2    Level 3

Assets

                           

Interest rate derivatives

   $ 1    $ —      $ 1    $ —          $ 165    $ —      $ 165    $ —  

Foreign currency derivatives

     —        —        —        —            —        —        —        —  

Heating oil derivatives

     —        —        —        —            25      —        25      —  

Diesel fuel derivatives

     1,237      —        1,237      —            902      —        902      —  
                                                           

Total assets at fair value

   $ 1,238    $ —      $ 1,238    $ —          $ 1,092    $ —      $ 1,092    $ —  
                                                           

Liabilities

                           

Interest rate derivatives

   $ 27,178    $ —      $ 27,178    $ —          $ 21,145    $ —      $ 21,145    $ —  

Foreign currency derivatives

     3,021      —        3,021      —            2,522      —        2,522      —  

Natural gas derivatives

     374      —        374      —            57      —        57      —  
                                                           

Total liabilities at fair value

   $ 30,573    $ —      $ 30,573    $ —          $ 23,724    $ —      $ 23,724    $ —  
                                                           

The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk.

Below are descriptions of the techniques used to estimate the fair value of financial instruments on the Company’s financial statements as of March 28, 2010.

The valuations of these instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of the authoritative guidance for fair value disclosure, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company had no fair value measurements based upon significant unobservable inputs (Level 3) as of March 28, 2010 or December 27, 2009.

 

10


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

5. Other Expense (Income), net

 

     Three months ended
     March 28,
2010
   March 29,
2009

Other expense (income), net consists of:

     

Amortization of intangibles/other assets

   $ 4,291    $ 4,197

Birds Eye Acquisition merger-related costs

     232      —  
             

Total other expense (income), net

   $ 4,523    $ 4,197
             

Birds Eye Acquisition merger-related costs. In connection with the Birds Eye Acquisition, as described in Note 3, the Company incurred costs of $232 in the three months ended March 28, 2010. These costs relate primarily to legal, accounting and other professional fees.

 

6. Inventories

 

     March 28,
2010
    December 27,
2009
 

Raw materials, containers and supplies

   $ 43,618      $ 41,523   

Finished product

     279,254        350,424   
                
     322,872        391,947   

Reserves

     (3,838     (1,980
                

Total

   $ 319,034      $ 389,967   
                

Reserves represent amounts necessary to adjust the carrying value of inventories to the lower of cost or net realizable value, including any costs to sell or dispose.

The Company has various purchase commitments for raw materials, containers, supplies and certain finished products incident to the ordinary course of business. Such commitments are not at prices in excess of current market.

In the fourth quarter of 2009, in connection with the Birds Eye Acquisition, inventories were required to be valued at fair value, which is $37.6 million higher than historical manufacturing cost. Cost of products sold for the three months ended March 28, 2010 and the fiscal year ended December 27, 2009 includes pre-tax charges of $17.3 million and $0.5 million, respectively, related to the finished products at December 23, 2009, which were subsequently sold. The remaining $19.8 million will be recognized principally in the second and third quarters of 2010.

 

11


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

7. Goodwill and Other Assets

Goodwill by segment is as follows:

 

     Birds Eye
Frozen
   Duncan Hines
Grocery
   Specialty
Foods
   Total

Balance, December 27, 2009

   $ 606,512    $ 708,922    $ 243,746    $ 1,559,180
                           

Balance, March 28, 2010

   $ 606,512    $ 708,922    $ 243,746    $ 1,559,180
                           

The authoritative guidance for business combinations requires that all business combinations be accounted for at fair value under the acquisition method of accounting. The authoritative guidance for goodwill and other intangible assets provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate.

The Blackstone Transaction was accounted for in accordance with the authoritative guidance for business combinations and resulted in $996,546 in goodwill for PFF, as of April 2, 2007.

The Birds Eye Acquisition was accounted for in accordance the authoritative guidance for business combinations and resulted in $565,013 in goodwill, as of December 27, 2009.

In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) will be reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations will be reported in the Duncan Hines Grocery Division. The Specialty Foods Division will consist of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses.

As a result of the reorganization, the goodwill reallocation by segment resulted in $606,512 allocated to the Birds Eye Frozen segment, $708,922 allocated to the Duncan Hines Grocery segment and $243,746 allocated to the Specialty Foods segment.

The authoritative guidance for accounting for goodwill states that impairment is to be tested on an annual basis, unless an event occurs that could potentially reduce the fair value of a reporting unit below its book value. The Company’s reorganization into new segments constituted such a change and goodwill was tested for impairment which resulted in no impairment charges.

 

12


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Other Assets, net

 

     March 28,
2010
   December 27,
2009

Amortizable intangibles, net of accumulated amortization of $56,939 and $52,648, respectively

   $ 171,548    $ 175,698

Deferred financing costs, net of accumulated amortization of $27,369 and $23,833, respectively

     53,377      56,897

Foreign currency swap (See Note 14)

     80      165

Notes receivable - Roskam Baking

     843      1,009

Other

     62      54
             

Total

   $ 225,910    $ 233,823
             

In fiscal 2007, the Blackstone Transaction was accounted for in accordance with the authoritative guidance for business combinations and resulted in $175,471 in amortizable intangibles for PFF; $52,810 was allocated to recipes with a life of ten years and $122,661 was allocated to customer relationships with useful lives ranging between 7 and 40 years.

In fiscal 2009, the Birds Eye Acquisition was accounted for in accordance with the authoritative guidance for business combinations and resulted in $53,016 in amortizable intangibles: $48,141 in distributor relationship and $4,875 in license agreement. The distributor relationships have a useful life of 30 years. The license agreement has a useful life of 6.5 years.

Amortization during the three months ended March 28, 2010 and March 29, 2009 was $4,291 and $4,197, respectively. Estimated amortization expense for each of the next five years and thereafter is as follows: remainder of 2010 - $12,877, 2011 - $16,167, 2012 - $15,808, 2013 - $15,471, 2014 - $12,188 and thereafter - $99,037.

Deferred financing costs, which relate to the Senior Secured Credit Facility, Senior Notes and Senior Subordinated Notes entered into in connection with the Blackstone Transaction, amounted to $40,567. Deferred financing costs in connection with the Birds Eye Acquisition, amounted to $40,179. Amortization of the deferred financing costs during the three months ended March 28, 2010 and March 29, 2009 was $3,536 and $1,184, respectively.

In February 2009, the Company entered into an agreement with Roskam Baking, which began co-packing certain Duncan Hines products in April 2009. This agreement included a provision to loan Roskam $1,900. As of March 28, 2010 the balance of the notes receivable is $1,393, of which $550 is recorded on the Consolidated Balance Sheet in Other Current Assets and $843 is recorded in Other Assets, net. This loan is being paid back to the Company based on cases produced and will be paid back in no longer than 5 years.

 

13


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

8. Restructuring Charges

Rochester, NY Office

The Rochester, NY office is the former headquarters of Birds Eye Foods, Inc. which was acquired by PFG on December 23, 2009, as described in Note 3. In connection with the consolidation of activities into PFG’s New Jersey offices, the Rochester office will be closed. Notification letters under the Worker Adjustment and Retraining Notification (WARN) Act of 1988 were issued in the first quarter of 2010. Activities related to the closure of the Rochester office will begin in the 2nd quarter of 2010 and will result in the elimination of approximately 200 positions.

In accordance with the authoritative guidance with respect to accounting for costs associated with exit or disposal activities, the full cost of termination benefits of $7,587 related to employees who will not be retained beyond the minimum retention period were recorded in the first quarter and the full cost of termination benefits of $5,360 related to employees who will be retained beyond the minimum retention period will be recorded in the future service periods. Of the $5,360, $1,146 was recorded in the first quarter, and $2,455, $1,486 and $273 is expected to be recorded in the 2nd quarter, 3rd quarter and 4th quarter, respectively.

The total cost of termination benefits recorded in the first quarter of 2010 was $8,733 and was recorded in the segments as follows: Birds Eye Frozen segment $6,172, Duncan Hines Grocery segment $1,591 and Specialty Foods segment $970.

The following table summarizes restructuring charges accrued as of March 28, 2010. These amounts are recorded in our Consolidated Balance Sheets, of which $6,654 is recorded in Accrued liabilities and $2,079 is recorded in Other long-term liabilities.

 

Description

   Balance at
March 27,
2010

Employee severance

   $ 8,733
      

Total

   $ 8,733
      

 

9. Debt and Interest Expense

 

     March 28,
2010
    December 27,
2009
 

Short-term borrowings

    

- Revolving Credit Facility

   $ —        $ —     

- Notes payable

     1,103        1,232   
                

Total short-term borrowings

     1,103        1,232   
                

Long-term debt

    

- Senior secured credit facility - term loans

   $ 1,199,422      $ 1,221,875   

- Senior secured credit facility - Tranche C term loans

     842,310        850,000   

- 9.25% Senior notes

     625,000        625,000   

- 10.625% Senior subordinated notes

     199,000        199,000   

- Unamortized discount on long term debt

     (11,034     (11,722

- Capital lease obligations

     3,827        3,326   
                
     2,858,525        2,887,479   

Less: current portion of long-term obligations

     2,053        38,228   
                

Total long-term debt

   $ 2,856,472      $ 2,849,251   
                

 

14


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Interest expense

 

      Three months ended
     March 28,
2010
   March 29,
2009

Third party interest expense

   $ 45,704    $ 22,934

Related party interest expense

     527      634

Amortization of debt acquisition costs

     3,536      1,184

Amortization of deferred mark-to-market adjustment on terminated swap (Note 11)

     1,033      1,312

Interest rate swap (gains) losses (Note 11)

     4,411      3,546
             

Total interest expense

   $ 55,211    $ 29,610
             

As part of the Blackstone Transaction as described in Note 1, Peak Finance LLC entered into a $1,375.0 million credit agreement (the “Senior Secured Credit Facility”) in the form of (i) term loans in an initial aggregate amount of $1,250.0 million (the “Term Loans”) and (ii) revolving credit commitments in the initial aggregate amount of $125.0 million (the “Revolving Credit Facility”). Peak Finance LLC merged with and into PFF on April 2, 2007 at the closing of the Blackstone Transaction. The term loan matures April 2, 2014. The Revolving Credit Facility matures April 2, 2013.

As part of the Birds Eye Acquisition on December 23, 2009, as described in Note 3, the Company entered into an amendment to the Senior Secured Credit Facility in the form of (i) incremental term loans in the amount of $850.0 million (the “Tranche C Term Loans”) and (ii) an incremental revolving credit facility the amount of $25.0 million, bringing our total revolving credit commitment to $150.0 million. In connection with the Tranche C Term Loans, the Company also incurred $11.8 million in original issue discount fees. These fees are recorded in Long-term debt on the Consolidated Balance Sheet and will be amortized over the life of the loan using the effective interest method.

There were no borrowings outstanding under the Revolving Credit Facility as of March 28, 2010 and December 27, 2009.

The total amount of the Term Loans and the Tranche C Term Loans that were owed to affiliates of the Blackstone Group as of March 28, 2010 and December 27, 2009, was $111,238 and $109,237, respectively.

The Company’s borrowings under the Senior Secured Credit Facility, as amended, bear interest at a floating rate and are maintained as base rate loans or as Eurodollar loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as defined in the Senior Secured Credit Facility. The base rate is defined as the higher of (i) the prime rate and (ii) the Federal Reserve reported overnight funds rate plus 1/2 of 1%. Eurodollar loans bear interest at the adjusted Eurodollar rate, as described in the Senior Secured Credit Facility, plus the applicable Eurodollar rate margin. Solely with respect to Tranche C Term Loans, the Eurocurrency rate shall be no less than 2.50% per annum. Solely with respect to Tranche C Term Loans, the base rate shall be no less than 3.50% per annum.

The applicable margins with respect to the Company’s Senior Secured Credit Facility vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on the Company’s leverage ratio as defined in the credit agreement. The applicable margins with respect to the Senior Secured Credit Facility are currently:

Applicable Margin (per annum)

 

Revolving Credit Facilty and Letters of Credit   Term Loans   Tranche C Term Loans

Eurocurrency
Rate for
Revolving Loans
and Letter of
Credit Fees

   Base Rate for
Revolving Loans
  Commitment
Fees Rate
  Eurocurrency
Rate for Term
Loans
  Base Rate for
Term Loans
  Eurocurrency
Rate for -
Term Loan C
  Base Rate for -
Term Loan C
2.75%    1.75%   0.50%   2.75%   1.75%   5.00%   4.00%

 

15


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The obligations under the Senior Secured Credit Facility are unconditionally and irrevocably guaranteed by each of the Company’s direct or indirect domestic subsidiaries (collectively, the “Guarantors”). In addition, the Senior Secured Credit Facility is collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each direct or indirect domestic subsidiary of the Company and 65% of the capital stock of, or other equity interests in, each direct foreign subsidiaries of the Company, or any of its domestic subsidiaries and (ii) certain tangible and intangible assets of the Company and those of the Guarantors (subject to certain exceptions and qualifications).

A commitment fee of 0.50% per annum is applied to the unused portion of the Revolving Credit Facility. For the three months ended March 28, 2010 and March 29, 2009, the weighted average interest rate on the term loan was 4.87% and 3.33%, respectively. For the three months March 29, 2009, the weighted average interest rate on the Revolving Credit Facility was 3.29%. As of March 28, 2010 and March 29, 2009, the Eurodollar interest rate on the term loan facility was 4.78% and 3.25%, respectively.

The Company pays a fee for all outstanding letters of credit drawn against the Revolving Credit Facility at an annual rate equivalent to the Applicable Margin then in effect with respect to Eurodollar loans under the Revolving Credit Facility, less the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to 0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the Revolving Credit Facility cannot exceed $50,000 as of March 24, 2010 (previously $25,000). As of March 28, 2010 and December 27, 2009, the Company had utilized $24,791 and $22,072, respectively of the Revolving Credit Facility for letters of credit. As of March 28, 2010, were no borrowings under the Revolving Credit Facility, therefore, of the $150,000 Revolving Credit Facility available, the Company had an unused balance of $125,209 available for future borrowing and letters of credit. As of December 27, 2009, there were no borrowings under the Revolving Credit Facility, therefore, of the $150,000 Revolving Credit Facility available, the Company had an unused balance of $127,928 available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of March 28, 2010 and December 27, 2009 was $25,209 and $2,928, respectively. As of December 27, 2009, the Company was unable to use the Revolving Credit Facility for a $9,175 letter of credit and instead had to deposit cash collateral for that amount. The cash collateral deposit also existed at March 28, 2010. Total letters of credit as of March 28, 2010 and December 27, 2009 were $33,966 and $31,247, respectively.

In accordance with the “Excess Cash Flow” requirements of the Senior Secured Credit Facility the Company made a mandatory prepayment of the Term Loans of $27.0 million in March 2010.

The Term Loans mature in quarterly 0.25% installments from September 2007 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the term loan outstanding as of March 28, 2010 are no payment in 2010, $2.5 million in 2011, $12.5 million in 2012, $12.5 million in 2013 and $1,171.9 million in 2014. The Tranche C Term Loans matures in quarterly 0.25% installments from January 2010 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the Tranche C Term Loans outstanding as of December 27, 2009 are no payment in 2010, $7.2 million in 2011, $8.5 million in 2012, $8.5 million in 2013 and $818.1 million in 2014.

On April 2, 2007, as part of the Blackstone Transaction described in Note 1, the Company issued $325.0 million of 9.25% Senior Notes (the “Senior Notes”) due 2015, and $250.0 million of 10.625% Senior Subordinated Notes (the “Senior Subordinated Notes”) due 2017. On December 23, 2009, as part of the Birds Eye Acquisition described in Note 3, the Company issued an additional $300 million of 9.25% Senior Notes due in 2015 (the “Additional Senior Notes”). The Senior Notes and the Additional Senior Notes are collectively referred to herein as Senior Notes. The Senior Notes are general unsecured obligations of the Company, effectively subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. See Note 17 of the Consolidated Financial Statements for Guarantor and Nonguarantor Financial Statements.

 

16


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The Company may redeem some or all of the Senior Notes at any time prior to April 1, 2011, and some or all of the Senior Subordinated Notes at any time prior to April 1, 2012, in each case at a price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” is defined as the greater of (1) 1.0% of the principal amount of such note and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such Senior Note at April 1, 2011 or Senior Subordinated Note at April 1, 2012, plus (ii) all required interest payments due on such Senior Note through April 1, 2011 or Senior Subordinated Note through April 1, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate plus 50 basis points over (b) the principal amount of such note.

The Company may redeem the Senior Notes or the Senior Subordinated Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on April 1st of each of the years indicated below:

Senior Notes

 

Year

   Percentage  

2011

   104.625

2012

   102.313

2013 and thereafter

   100.000

Senior Subordinated Notes

 

Year

   Percentage  

2012

   105.313

2013

   103.542

2014

   101.771

2015 and thereafter

   100.000

In addition, until April 1, 2010, the Company may redeem up to 35% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a premium equal to the rate per annum on the Senior Notes or Senior Subordinated Notes, as the case may be, plus accrued and unpaid interest and Additional Interest, if any, to the redemption date, subject to the right of holders of Senior Notes or Senior Subordinated Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by the Company from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes, as the case may be, originally issued under the applicable indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 90 days of the date of closing of each such equity offering.

In December 2007, the Company repurchased $51.0 million in aggregate principal amount of the 10.625% Senior Subordinated Notes at a discount price of $44.2 million. The Company currently has outstanding $199.0 million in aggregate principal amount of Senior Subordinated Notes.

As market conditions warrant, the Company and its subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Company’s outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.

 

17


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The estimated fair value of the Company’s long-term debt, including the current portion, as of March 28, 2010, is as follows:

 

     March 28, 2010

Issue

   Recorded
Amount
   Fair Value

Senior Secured Credit Facility - Term Loans

   $ 1,199,422    $ 1,157,442

Senior Secured Credit Facility - Tranche C Term Loans

     842,310      850,733

9.25% Senior Notes

     625,000      645,313

10.625% Senior Subordinated Notes

     199,000      210,940
             
   $ 2,865,732    $ 2,864,428
             

The fair value is based on the quoted market price for such notes and borrowing rates currently available to the Company for loans with similar terms and maturities.

 

18


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

10. Pension and Retirement Plans

Pinnacle Foods Pension Plan

The Company maintains a noncontributory defined benefit pension plan (“Pinnacle Foods Pension Plan”) that covers eligible union employees and provides benefits generally based on years of service and employees’ compensation. The Pinnacle Foods Pension Plan is funded in conformity with the funding requirements of applicable government regulations. Plan assets consist principally of cash equivalent, equity and fixed income common collective trusts. Plan assets do not include any of the Company’s own equity or debt securities. In fiscal 2010, the Company expects to make contributions of $5.6 million to the Pinnacle Foods Pension Plan, of which $0.6 million was made in the first quarter of 2010. The Company made contributions to the pension plan totaling $2.8 million in fiscal 2009, of which $0.4 million was made in the first quarter of 2009.

The following represents the components of net periodic benefit costs:

Pension Benefits

 

     Pinnacle Foods Pension Plan
Pension Benefits
Three months ended
 
     March 28,
2010
    March 29,
2009
 

Service cost

   $ 477      $ 451   

Interest cost

     1,142        1,111   

Expected return on assets

     (870     (774

Amortization of:

    

prior service cost

     35        35   

loss

     222        344   
                

Net periodic benefit cost

   $ 1,006      $ 1,167   
                

Birds Eye Foods Pension Plan

The Company’s Birds Eye Foods Pension Plan (“Birds Eye Foods Pension Plan”) consists of hourly and salaried employees and has primarily noncontributory defined-benefit schedules. In September 2001, this plan was amended to freeze benefit accruals for salaried employees effective September 28, 2001. Salaried participants who, on that date, were actively employed and who had attained age 40, completed 5 years of vesting service, and whose sum of age and vesting services was 50 or more, were grandfathered. Grandfathered participants were entitled to continue to earn benefit service in accordance with the provisions of the plan with respect to periods of employment after September 28, 2001 but in no event beyond September 28, 2006. In the first quarter of 2010, benefits of certain hourly employees were frozen. The curtailment gain recorded in the first quarter was $64.

The Company maintains an Excess Benefit Retirement Plan which serves to provide employees with the same retirement benefit they would have received from the Company’s retirement plan under the career average base pay formula, but for changes required under the 1986 Tax Reform Act and the compensation limitation under Section 401(a)(17) of the Internal Revenue Code having been revised in the 1992 Omnibus Budget Reform Act. This plan was amended to freeze benefit accruals effective September 28, 2001. Participants who, on that date, were actively employed and who had attained age 40, completed 5 years of vesting service, and whose sum of age and vesting services was 50 or more, were grandfathered. Grandfathered participants were entitled to continue to earn benefit service in accordance with the provisions of the plan with respect to periods of employment after September 28, 2001 but in no event beyond September 28, 2006.

For purposes of this disclosure, all defined-benefit pension plans acquired with Birds Eye Foods have been combined. The benefits for these plans are based primarily on years of service and employees’ pay near retirement. The Company’s funding policy is consistent with the funding requirements of Federal laws and regulations. Plan assets consist principally of common stocks, corporate bonds and US government obligations. Plan assets do not include any of the Company’s own equity or debt securities.

In fiscal 2010, the Company expects to make contributions of $2.7 million to the Birds Eye Foods Pension Plan. No contributions were made for the Birds Eye Foods Pension Plan in the three months ended March 28, 2010.

 

19


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Pension Benefits

 

     Birds Eye Foods Pension
Plan
Pension Benefits
Three months ended
March 28, 2010
 

Service cost

   $ 530   

Interest cost

     2,099   

Expected return on assets

     (2,021

Amortization of:

  

curtailment gain

     (64
        

Net periodic benefit cost

   $ 544   
        

Pinnacle Foods Other Postretirement Benefits Plan

The Company maintains a postretirement benefits plan (“Pinnacle Foods Other Postretirement Benefits Plan”) that provides health care and life insurance benefits to eligible retirees, covers certain U.S. employees and their dependents and is self-funded. Employees who have 10 years of service after the age of 45 and retire are eligible to participate in the postretirement benefit plan.

 

     Pinnacle Foods
Other Postretirement Benefits Plan
Three months ended
 
     March 28, 2010     March 29, 2009  

Interest cost

   $ 5      $ 5   

Amortization of:

    

Net actuarial gain

     (11     (11
                

Net periodic benefit cost

   $ (6   $ (6
                

Birds Eye Foods Other Postretirement Benefits Plan

The Company sponsors benefit plans that provide postretirement medical and life insurance benefits for certain current and former employees. For the most part, current employees are not eligible for the postretirement medical coverage. Generally, other than pensions, the Company does not pay retirees’ benefit costs. Various exceptions exist, which have evolved from union negotiations, early retirement incentives and existing retiree commitments from acquired companies.

The Company has not prefunded any of its retiree medical or life insurance liabilities. Consequently there are no plan assets held in a trust, and there is no expected long-term rate of return assumption for purposes of determining the annual expense.

 

     Birds Eye Foods
Other Postretirement
Benefits Plan
Three months ended
March 28, 2010

Interest cost

   $ 44

Amortization of:

  

Net actuarial gain

     —  
      

Net periodic benefit cost

   $ 44
      

 

20


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

11. Financial Instruments

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices.

The Company manages interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including the Company’s revolving line of credit. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, or hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.

Certain parts of the Company’s foreign operations in Canada expose the Company to fluctuations in foreign exchange rates. The Company’s goal is to reduce its exposure to such foreign exchange risks on its foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

The Company purchases raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. The Company generally enters into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. Forward derivative contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges in accordance with the authoritative guidance for derivative and hedge accounting involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.

As of March 28, 2010, the Company had the following interest rate swaps and caps (in aggregate) that were designated as cash flow hedges of interest rate risk:

 

Product

   Number of
Instruments
   Notional Amount   Fixed Rate Range    Index    Trade Dates    Maturity Dates

Interest Rate Swaps

   8    $945,925   1.43% - 3.33%    USD-LIBOR-BBA    Oct 2008 - Mar 2009    Jan 2011 - July 2012

Interest Rate Swaps with Floors

   4    —   (1)   2.96% - 3.58%    USD-LIBOR-BBA    Jan 2010    Jan 2012 - Jul 2012

Interest Rate Caps

   2    800,000   2.50%    USD-LIBOR-BBA    Dec 2009    Jan 2011

 

(1) Interest rate swaps with floors are hedging the same debt as the interest rate caps and become effective after the interest rate caps mature. At that point, in January 2011 they will have a notional value of $300,000.

 

21


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive (loss) income (“AOCI”) on the Consolidated Balance Sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 28, 2010 and March 29, 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly as Interest expense in the Consolidated Statements of Operations. There was no hedge ineffectiveness on interest rate cash flow hedges recognized in the three months ended March 28, 2010 and March 29, 2009.

Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt. Due to the counterparty bank declaring bankruptcy in October 2008, the Company discontinued prospectively the hedge accounting on its interest rate derivatives with Lehman Brothers Specialty Financing on the bankruptcy date as those hedging relationships no longer met the authoritative guidance for derivative and hedge accounting. The Company terminated these positions during the fourth quarter of 2008. The Company continues to report the net gain or loss related to the discontinued cash flow hedge in AOCI which is expected to be reclassified into earnings during the original contractual terms of the derivative agreements as the hedged interest payments are expected to occur as forecasted. For the three months ended March 28 2010, $1,033 was reclassified as an increase to Interest expense relating to the terminated hedges. For the three months ended March 29 2009, $1,312 was reclassified as an increase to Interest expense relating to the terminated hedges. During the next twelve months, the Company estimates that an additional $18,659 will be reclassified as an increase to Interest expense relating to both active and terminated hedges.

Cash Flow Hedges of Foreign Exchange Risk

The Company’s operations in Canada have exposed the Company to changes in the US Dollar – Canadian Dollar (USD-CAD) foreign exchange rate. From time to time, the Company’s Canadian subsidiary purchases inventory denominated in US Dollars (USD), a currency other than its functional currency. The subsidiary sells that inventory in Canadian dollars. The subsidiary uses currency forward and collar agreements to manage its exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of Canadian Dollar (CAD) currency in exchange for receiving US dollars if exchange rates rise above an agreed upon rate and sale of USD currency in exchange for receiving CAD dollars if exchange rates fall below an agreed upon rate at specified dates.

As of March 28, 2010, the Company had the following foreign currency exchange contracts (in aggregate) that were designated as cash flow hedges of foreign exchange risk:

 

Product

   Number of
Instruments
   Notional Sold in
Aggregate
   Notional Purchased
in Aggregate
   USD to CAD
Exchange Rates
   Trade Date    Maturity Dates

CAD Forward

   39    $57,305 CAD    $52,986 USD    1.038-1.177    May 2009 - Mar 2010    Apr 2010 - Dec 2011

CAD Collar

   9    $9,000 CAD    $7,965 USD    1.13    May 2009    Apr 2010 - Dec 2010

According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI on the Consolidated Balance Sheet and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portions of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, are recognized directly in Cost of products sold in the Consolidated Statements of Operations. Hedge ineffectiveness on foreign exchange cash flow hedges amounted to a $19 gain in the three months ended March 28, 2010. No hedge ineffectiveness on foreign exchange cash flow hedges was recognized in the three months ended March 29, 2009.

 

22


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Non-designated Hedges of Commodity Risk

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet the authoritative guidance for derivative and hedge accounting. From time to time, the Company enters into commodity forward contracts to fix the price of natural gas and diesel fuel purchases at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.

As of March 28, 2010, the Company had the following natural gas swaps (in aggregate) and diesel fuel swaps (in aggregate) that were not designated in qualifying hedging relationships:

 

Product

   Number of
Instruments
   Notional Amount    Price    Trade Dates    Maturity Dates

Natural Gas Swap

   3    366,497 MMBTU’s    $5.20 - $6.05 per MMBTU    Mar 2009 - Feb 2010    Apr 2010 - Oct 2010

Diesel Fuel Swap

   3    4,391,947 Gallons    $2.46 - $2.96 per Gallon    Feb 2009 - Mar 2010    Jun 2010 - Dec 2010

 

23


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The tables below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of March 28, 2010 and December 27, 2009.

 

     Tabular Disclosure of Fair Values of Derivative Instruments
     Asset Derivatives    Liability Derivatives
     Balance Sheet Location    Fair Value
As of
March 28,
2010
   Balance Sheet Location    Fair Value
As of
March 28,
2010

Derivatives designated as hedging instruments

           

Interest Rate Contracts

   Other current assets    $ 1    Accrued liabilities    $ 3,222
        —      Other long-term liabilities      23,956

Foreign Exchange Contracts

        —      Accrued liabilities      2,841
        —      Other long-term liabilities      180
                   

Total derivatives designated as hedging instruments

      $ 1       $ 30,199
                   

Derivatives not designated as hedging instruments

           

Natural Gas Contracts

      $ —      Accrued liabilities    $ 374

Diesel Fuel Contracts

   Other current assets      1,237         —  
                   

Total derivatives not designated as hedging instruments

      $ 1,237       $ 374
                   
     Balance Sheet Location    Fair Value
As of
December 27,
2009
   Balance Sheet Location    Fair Value
As of
December 27,
2009

Derivatives designated as hedging instruments

           

Interest Rate Contracts

   Other assets, net    $ 165    Other long-term liabilities    $ 21,145

Foreign Exchange Contracts

        —      Accrued liabilities      2,522
                   

Total derivatives designated as hedging instruments

      $ 165       $ 23,667
                   

Derivatives not designated as hedging instruments

           

Natural Gas Contracts

      $ —      Accrued liabilities    $ 57

Heating Oil Contracts

   Other current assets      25         —  

Diesel Fuel Contracts

   Other current assets      902         —  
                   

Total derivatives not designated as hedging instruments

      $ 927       $ 57
                   

 

24


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

The table below present the effect of our derivative financial instruments on the Consolidated Statements of Operations and Accumulated other comprehensive (loss) income as of the three months ending March 28, 2010 and March 29, 2009.

Tabular Disclosure of the Effect of Derivative Instruments

Gain/(Loss)

 

Derivatives in Cash Flow Hedging Relationships

   Recognized
in AOCI
on Derivative
(Effective
Portion)
    Effective portion
reclassified from AOCI
to:
   Reclassified
from AOCI
into
Earnings
(Effective
Portion)
    Ineffective portion
reclassified from AOCI
to:
   Recognized
in Earnings
on Derivative
(Ineffective
Portion)

Interest Rate Contracts

   $ (10,608   Interest expense    $ (5,444   Interest expense    $ —  

Foreign Exchange Contracts

     (1,092   Cost of products sold      (593   Cost of products sold      19
                            

Three months ended March 28, 2010

   $ (11,700      $ (6,037      $ 19
                            

Interest Rate Contracts

   $ (8,599   Interest expense    $ (4,857   Interest expense    $ —  

Foreign Exchange Contracts

     378      Cost of products sold      1,143      Cost of products sold      —  
                            

Three months ended March 29, 2009

   $ (8,221      $ (3,714      $ —  
                            

 

Derivatives Not Designated as Hedging Instruments

   Recognized in Earnings
on:
   Recognized in
Earnings on
Derivative
 

Natural Gas Contracts

   Cost of products sold    $ (441

Diesel Contracts

   Cost of products sold      335   
           

Three months ended March 28, 2010

      $ (106
           

Natural Gas Contracts

   Cost of products sold    $ (1,088

Heating Oil Swaps

   Cost of products sold      (33
           

Three months ended March 29, 2009

      $ (1,121
           

 

25


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Credit-risk-related Contingent Features

The Company has an agreement with Barclays that contains a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of March 28, 2010, the fair value of interest rate contracts in a net liability position related to these agreements was $27,190, which includes accrued interest of $1,328 but excludes any adjustment for nonperformance risk of $884. For the same counterparty, the fair value of foreign exchange derivative contracts in a net liability position related to these agreements was $3,101 which excludes any adjustment for nonperformance risk of $80. For the same counterparty, the fair value of natural gas contracts in a net liability position related to these agreements was $374. For the same counterparty, the fair value of diesel contracts in a net asset position related to these agreements was $680. If the Company breached any of these provisions, it could be required to settle its obligations under the agreements at their termination value of $29,985. As of March 28, 2010, the Company has not posted any collateral related to these agreements. As of December 27, 2009, the fair value of interest rate contracts in a net liability position related to these agreements was $23,089, which includes accrued interest of $1,044 but excludes any adjustment for nonperformance risk of $983. For the same counterparty, the fair value of foreign exchange derivative contracts in a net liability position related to these agreements was $2,599, which excludes any adjustment for nonperformance risk of $77. For the same counterparty, the fair value of natural gas contracts in a net liability position related to these agreements was $57. For the same counterparty, the fair value of heating oil contracts in a net asset position related to these agreements was $25. If the Company breached any of these provisions, it could be required to settle its obligations under the agreements at their termination value of $25,720. As of December 27, 2009, the Company has not posted any collateral related to these agreements.

The Company also has an agreement with Credit Suisse Group that contains a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of March 28, 2010, the fair value of interest rate contracts in a net liability position related to these agreements was $934, which excludes any adjustment for nonperformance risk of $64. As of December 27, 2009, the fair value of interest rate contracts in a net liability position related to these agreements was $83, which does not include any adjustment for nonperformance risk.

 

26


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

12. Commitments and Contingencies

General

From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations, and proceedings, which are being handled and defended in the ordinary course of business. Although the outcome of such items cannot be determined with certainty, the Company’s general counsel and management are of the opinion that the final outcome of these matters should not have a material effect on the Company’s financial condition, results of operations or cash flows.

No single item individually is, nor are all of them in aggregate, material.

 

13. Related Party Transactions

At the closing of the Blackstone Transaction, the Company entered into an advisory agreement with an affiliate of The Blackstone Group pursuant to which such entity or its affiliates provide certain strategic and structuring advice and assistance to us. In addition, under this agreement, affiliates of The Blackstone Group provide certain monitoring, advisory and consulting services to the Company for an aggregate annual management fee equal to the greater of $2,500 or 1.0% of Consolidated EBITDA (as defined in the credit agreement governing the Company’s Senior Secured Credit Facility). Affiliates of Blackstone also receive reimbursement for out-of-pocket expenses. Expenses relating to the management fee were $1,125 in the three months ended March 28, 2010 and $625 in the three months ended March 29, 2009. In addition, the Company reimbursed the Blackstone group out-of-pocket expenses totaling $55 and $20 in the three months ended March 28, 2010 and March 29, 2009.

Supplier Costs

Graham Packaging, which is owned by affiliates of The Blackstone Group, supplies packaging for some of the Company’s products. Purchases from Graham Packaging were $1,776 and $1,715 for the three months ended March 28, 2010 and March 29, 2009, respectively.

Customer Purchases

Performance Food Group, which is owned by affiliates of The Blackstone Group, is a food service supplier that purchases products from the Company. Sales to Performance Food Group were $1,569 and $1,395 in the three months ended March 28, 2010 and March 29, 2009, respectively.

Interest Expense

For the three months ended March 28, 2010 and March 29, 2009, fees and interest expense recognized in the Consolidated Statement of Operations for debt to the related party Blackstone Advisors L.P. totaled $527 and $634, respectively.

Notes receivable from officers

In connection with the capital contributions at the time of the Birds Eye Acquisition on December 23, 2009, certain members of the Board of Directors and management purchased ownership units of our ultimate parent Peak Holdings LLC. To fund these purchases, certain members of management signed 30 day notes receivable at a market interest rate. The total of the notes receivable were $565 and were fully paid in January 2010.

 

27


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

14. Segments

In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) will be reported in the Birds Eye Frozen segment. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations will be reported in the Duncan Hines Grocery segment. The Specialty Foods segment will consist of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses. Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets and assets held for sale. Unallocated corporate expenses consist of corporate overhead such as executive management, finance and legal functions and the costs to integrate the Birds Eye Foods Acquisition. Prior period amounts have been reclassified for consistent presentation.

 

     Three months ended  
     March 28,
2010
    March 29,
2009
 

SEGMENT INFORMATION

    

Net sales

    

Birds Eye Frozen

   $ 324,400      $ 146,346   

Duncan Hines Grocery

     226,140        196,394   

Specialty Foods

     105,896        84,668   
                

Total

   $ 656,436      $ 427,408   
                

Earnings (loss) before interest and taxes

    

Birds Eye Frozen

   $ 29,411      $ 9,154   

Duncan Hines Grocery

     36,884        28,400   

Specialty Foods

     5,458        361   

Unallocated corporate expenses

     (9,659     (3,591
                

Total

   $ 62,094      $ 34,324   
                

Depreciation and amortization

    

Birds Eye Frozen

   $ 9,161      $ 4,898   

Duncan Hines Grocery

     5,861        5,071   

Specialty Foods

     4,857        4,618   
                

Total

   $ 19,879      $ 14,587   
                

Capital expenditures

    

Birds Eye Frozen

   $ 9,433      $ 8,099   

Duncan Hines Grocery

     3,852        4,251   

Specialty Foods

     2,071        508   
                

Total

   $ 15,356      $ 12,858   
                

GEOGRAPHIC INFORMATION

    

Net sales

    

United States

   $ 651,335      $ 424,751   

Canada

     16,249        15,262   

Intercompany

     (11,148     (12,605
                

Total

   $ 656,436      $ 427,408   
                

 

28


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

      March 28,
2010
   December 27,
2009

SEGMENT INFORMATION

     

Total assets

     

Birds Eye Frozen

   $ 2,043,023    $ 2,068,569

Duncan Hines Grocery

     1,975,476      1,952,399

Specialty Foods

     499,197      485,975

Corporate

     47,037      31,555
             

Total

   $ 4,564,733    $ 4,538,498
             

GEOGRAPHIC INFORMATION

     

Long-lived assets

     

United States

   $ 411,960    $ 412,171

Canada

     34      37
             

Total

   $ 411,994    $ 412,208
             

 

15. Income Taxes

The Company’s liability for unrecognized tax benefits (“UTB”) as of March 28, 2010 is $3,450. The amount, if recognized, that would impact the effective tax rate as of March 28, 2010 was $2,416. The amount of the liability for UTB classified as a long-term liability on the Consolidated Balance Sheet was $2,416. Certain statutes of limitation may expire within the next twelve months and that could cause a decrease of $413 in the UTB liability and a benefit to the provision for income taxes.

Income taxes are accounted for in accordance with the authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

The Company reviews its deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Company’s tax provision in the period of change

Based on a review of both the positive and negative evidence as of December 27, 2009, it was determined that the Company had sufficient positive evidence to outweigh any negative evidence and support that it is more likely that not that substantially all of deferred tax assets will be realized.

For the three month period ended March 28, 2010 we maintained a valuation allowance for certain state net operating loss carryovers, state tax credit carryovers, and foreign loss carryovers. For the three-month period ended March 29, 2009 we maintained a full valuation allowance against net federal and state deferred tax assets excluding indefinite lived intangible assets

 

29


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

16. Recently Issued Accounting Pronouncements

In June 2009, the FASB issued the authoritative guidance for variable interest entities. This guidance clarifies the characteristics that identify a variable interest entity (VIE) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This guidance requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. The authoritative guidance for variable interest entities is effective for fiscal years beginning after November 15, 2009. The Company adopted this guidance in the first quarter of 2010 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

In January of 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value. The updated guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2010 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

 

30


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

17. Guarantor and Nonguarantor Statements

In connection with the Blackstone Transaction described in Note 1 and as a part of the related financings, the Company issued $325 million of 9.25% Senior Notes and $250 million ($199 million outstanding as of December 27, 2009) of 10.625% Senior Subordinated Notes in private placements pursuant to Rule 144A and Regulation S. An additional $300 million of Senior Notes were issued on December 23, 2009 in connection with the Birds Eye Acquisition.

The Senior Notes are general unsecured obligations of the Company, effectively subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The following consolidating financial information presents:

 

  (1) (a) Consolidating balance sheets as of March 28, 2010 and December 27, 2009.

(b) The related consolidating statements of operations for the Company, all guarantor subsidiaries and the non- guarantor subsidiary for the following:

 

  i. Three months ended March 28, 2010.

 

  ii. Three months ended March 29, 2009.

(c) The related consolidating statements of cash flows for the Company, all guarantor subsidiaries and the non-guarantor subsidiary for the following:

 

  i. Three months ended March 28, 2010.

 

  ii. Three months ended March 29, 2009.

 

  (2) Elimination entries necessary to consolidate the Company with its guarantor subsidiaries and non-guarantor subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions and include a reclassification entry of net non-current deferred tax assets to non-current deferred tax liabilities.

 

31


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Pinnacle Foods Finance LLC

Consolidating Balance Sheet

March 28, 2010

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations
and
Reclassifications
    Consolidated
Total
 

Current assets:

          

Cash and cash equivalents

   $ —        $ 121,394      $ 5,088      $ —        $ 126,482   

Accounts receivable, net

     —          188,195        5,732        —          193,927   

Intercompany accounts receivable

     —          47,012        —          (47,012     —     

Inventories, net

     —          313,576        5,458        —          319,034   

Other current assets

     11,159        16,409        640        —          28,208   

Deferred tax assets

     —          40,169        1,017        —          41,186   
                                        

Total current assets

     11,159        726,755        17,935        (47,012     708,837   

Plant assets, net

     —          411,960        34        —          411,994   

Investment in subsidiaries

     1,662,293        4,707        —          (1,667,000     —     

Intercompany note receivable

     1,994,769        —          —          (1,994,769     —     

Tradenames

     —          1,658,812        —          —          1,658,812   

Other assets, net

     53,457        172,453        —          —          225,910   

Deferred tax assets

     128,220        —          —          (128,220     —     

Goodwill

     —          1,559,180        —          —          1,559,180   
                                        

Total assets

   $ 3,849,898      $ 4,533,867      $ 17,969      $ (3,837,001   $ 4,564,733   
                                        

Current liabilities:

          

Short-term borrowings

   $ —        $ 1,103      $ —        $ —        $ 1,103   

Current portion of long-term obligations

     810        1,244        —          —          2,054   

Accounts payable

     —          118,278        1,348        —          119,626   

Intercompany accounts payable

     38,986        —          8,026        (47,012     —     

Accrued trade marketing expense

     —          50,087        3,284        —          53,371   

Accrued liabilities

     55,497        118,261        604        —          174,362   

Accrued income taxes

     480        4,914        —          —          5,394   
                                        

Total current liabilities

     95,773        293,887        13,262        (47,012     355,910   

Long-term debt

     2,853,888        2,584        —          —          2,856,472   

Intercompany note payable

     —          1,994,769        —          (1,994,769     —     

Pension and other postretirement benefits

     —          83,551        —          —          83,551   

Other long-term liabilities

     24,136        16,237        —          —          40,373   

Deferred tax liabilities

     —          480,546        —          (128,220     352,326   
                                        

Total liabilities

     2,973,797        2,871,574        13,262        (2,170,001     3,688,632   

Commitments and contingencies

     —          —          —          —          —     

Shareholder’s equity:

          

Pinnacle Common Stock, $.01 par value

   $ —        $ —        $ —        $ —          —     

Additional paid-in-capital

     693,394        1,284,155        2,324        (1,286,479     693,394   

Retained earnings

     229,243        398,512        5,512        (404,024     229,243   

Accumulated other comprehensive (loss) income

     (46,536     (20,374     (3,129     23,503        (46,536
                                        

Total shareholder’s equity

     876,101        1,662,293        4,707        (1,667,000     876,101   
                                        

Total liabilities and shareholder’s equity

   $ 3,849,898      $ 4,533,867      $ 17,969      $ (3,837,001   $ 4,564,733   
                                        

 

32


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Pinnacle Foods Finance LLC

Consolidating Balance Sheet

December 27, 2009

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations
and
Reclassifications
    Consolidated
Total
 

Current assets:

          

Cash and cash equivalents

   $ —        $ 68,249      $ 5,625      $ —        $ 73,874   

Accounts receivable, net

     —          152,961        5,043        —          158,004   

Intercompany accounts receivable

     —          68,227        —          (68,227     —     

Inventories, net

     —          384,787        5,180        —          389,967   

Other current assets

     9,200        17,060        700        —          26,960   

Deferred tax assets

     —          24,839        831        —          25,670   
                                        

Total current assets

     9,200        716,123        17,379        (68,227     674,475   

Plant assets, net

     —          412,171        37        —          412,208   

Investment in subsidiaries

     1,642,385        4,695        —          (1,647,080     —     

Intercompany note receivable

     2,044,797        —          —          (2,044,797     —     

Tradenames

     —          1,658,812        —          —          1,658,812   

Other assets, net

     57,062        176,761        —          —          233,823   

Deferred tax assets

     115,733        —          —          (115,733     —     

Goodwill

     —          1,559,180        —          —          1,559,180   
                                        

Total assets

   $ 3,869,177      $ 4,527,742      $ 17,416      $ (3,875,837   $ 4,538,498   
                                        

Current liabilities:

          

Short-term borrowings

   $ —        $ 1,232      $ —        $ —        $ 1,232   

Current portion of long-term obligations

     37,170        1,058        —          —          38,228   

Accounts payable

     —          129,142        1,218        —          130,360   

Intercompany accounts payable

     60,376        —          7,851        (68,227     —     

Accrued trade marketing expense

     —          46,067        2,981        —          49,048   

Accrued liabilities

     29,150        100,214        671        —          130,035   

Accrued income taxes

     —          455        —          —          455   
                                        

Total current liabilities

     126,696        278,168        12,721        (68,227     349,358   

Long-term debt

     2,846,983        2,268        —          —          2,849,251   

Intercompany note payable

     —          2,044,797        —          (2,044,797     —     

Pension and other postretirement benefits

     —          82,437        —          —          82,437   

Other long-term liabilities

     21,145        18,238        —          —          39,383   

Deferred tax liabilities

     —          459,449        —          (115,733     343,716   
                                        

Total liabilities

     2,994,824        2,885,357        12,721        (2,228,757     3,664,145   

Commitments and contingencies

     —          —          —          —          —     

Shareholder’s equity:

          

Pinnacle Common Stock, $.01 par value

   $ —        $ —        $ —        $ —          —     

Additional paid-in-capital

     693,196        1,284,155        2,324        (1,286,479     693,196   

Notes receivable from officers

     (565     —          —          —          (565

Retained earnings

     225,313        378,809        5,341        (384,150     225,313   

Accumulated other comprehensive (loss) income

     (43,591     (20,579     (2,970     23,549        (43,591
                                        

Total shareholder’s equity

     874,353        1,642,385        4,695        (1,647,080     874,353   
                                        

Total liabilities and shareholder’s equity

   $ 3,869,177      $ 4,527,742      $ 17,416      $ (3,875,837   $ 4,538,498   
                                        

 

33


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Pinnacle Foods Finance LLC

Consolidated Statement of Operations

For the three months ended March 28, 2010

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
   Eliminations     Consolidated
Total

Net sales

   $ —        $ 651,335      $ 16,249    $ (11,148   $ 656,436

Cost of products sold

     (1     497,575        14,073      (10,941     500,706
                                     

Gross profit

     1        153,760        2,176      (207     155,730

Operating expenses

           

Marketing and selling expenses

     84        51,505        1,248      —          52,837

Administrative expenses

     1,295        32,155        480      —          33,930

Research and development expenses

     9        2,337        —        —          2,346

Intercompany royalties

     —          —          19      (19     —  

Intercompany technical service fees

     —          —          188      (188     —  

Other expense (income), net

     —          4,523        —        —          4,523

Equity in (earnings) loss of investees

     (19,703     (171     —        19,874        —  
                                     

Total operating expenses

     (18,315     90,349        1,935      19,667        93,636
                                     

Earnings (loss) before interest and taxes

     18,316        63,411        241      (19,874     62,094

Intercompany interest (income) expense

     (31,128     31,128        —        —          —  

Interest expense

     55,068        143        —        —          55,211

Interest income

     10        77        —        —          87
                                     

Earnings (loss) before income taxes

     (5,614     32,217        241      (19,874     6,970

Provision for income taxes

     (9,544     12,514        70      —          3,040
                                     

Net earnings

   $ 3,930      $ 19,703      $ 171    $ (19,874   $ 3,930
                                     

 

34


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Pinnacle Foods Finance LLC

Consolidated Statement of Operations

For the three months ended March 29, 2009

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiary
    Eliminations     Consolidated
Total
 

Net sales

   $ —        $ 424,751      $ 15,262      $ (12,605   $ 427,408   

Cost of products sold

     35        337,798        14,592        (12,432     339,993   
                                        

Gross profit

     (35     86,953        670        (173     87,415   

Operating expenses

          

Marketing and selling expenses

     47        32,431        1,877        —          34,355   

Administrative expenses

     802        12,233        494        —          13,529   

Research and development expenses

     5        1,005        —          —          1,010   

Intercompany royalties

     —          —          15        (15     —     

Intercompany technical service fees

     —          —          158        (158     —     

Other expense (income), net

     —          4,197        —          —          4,197   

Equity in (earnings) loss of investees

     (21,041     1,250        —          19,791        —     
                                        

Total operating expenses

     (20,187     51,116        2,544        19,618        53,091   
                                        

Earnings (loss) before interest and taxes

     20,152        35,837        (1,874     (19,791     34,324   

Intercompany interest (income) expense

     (7,470     7,470        —          —          —     

Interest expense

     29,722        (112     —          —          29,610   

Interest income

     —          1        3        —          4   
                                        

Earnings (loss) before income taxes

     (2,100     28,480        (1,871     (19,791     4,718   

Provision for income taxes

     —          7,439        (621     —          6,818   
                                        

Net (loss) earnings

   $ (2,100   $ 21,041      $ (1,250   $ (19,791   $ (2,100
                                        

 

35


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Pinnacle Foods Finance LLC

Consolidating Statement of Cash Flows

For the three months ended March 28, 2010

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Cash flows from operating activities

          

Net earnings from operations

   $ 3,930      $ 19,703      $ 171      $ (19,874   $ 3,930   

Non-cash charges (credits) to net earnings

          

Depreciation and amortization

     —          19,876        3        —          19,879   

Amortization of debt acquisition costs

     3,537        —          —          —          3,537   

Amortization of deferred mark-to-market adjustment on terminated swaps

     1,033        —          —          —          1,033   

Amortization of discount on term loan

     688        —          —          —          688   

Change in value of financial instruments

     (18     10        —          —          (8

Equity in loss (earnings) of investees

     (19,703     (171     —          19,874        —     

Stock-based compensation charges

     —          205        —          —          205   

Postretirement healthcare benefits

     —          24        —          —          24   

Pension expense

     —          811        —          —          811   

Other long-term assets

     —          18        —          —          18   

Other long-term liabilities

     —          1,778        —          —          1,778   

Deferred income taxes

     (10,024     6,057        —          —          (3,967

Changes in working capital, net of acquisition

          

Accounts receivable

     —          (35,234     (583     —          (35,817

Intercompany accounts receivable/payable

     (33,684     34,100        (416     —          —     

Inventories

     —          71,269        (169     —          71,100   

Accrued trade marketing expense

     —          4,021        240        —          4,261   

Accounts payable

     —          (5,862     104        —          (5,758

Accrued liabilities

     22,489        19,081        (81     —          41,489   

Other current assets

     (1,383     323        75        —          (985
                                        

Net cash provided by operating activities

     (33,135     136,009        (656     —          102,218   
                                        

Cash flows from investing activities

          

Capital expenditures

     —          (14,534     —          —          (14,534
                                        

Net cash used in investing activities

     —          (14,534     —          —          (14,534
                                        

Cash flows from financing activities

          

Change in bank overdrafts

     —          (5,140     —          —          (5,140

Repayment of capital lease obligations

     —          (322     —          —          (322

Repayments of intercompany loans

     62,738        (62,738     —          —          —     

Repayment of notes receivable from officers

     565        —          —          —          565   

Reduction of equity contributions

     (8     —          —          —          (8

Debt acquisition costs

     (17     —          —          —          (17

Proceeds from short-term borrowing

     —          497        —          —          497   

Repayments of short-term borrowing

     —          (626     —          —          (626

Repayments of long term obligations

     (30,143     —          —          —          (30,143
                                        

Net cash provided by (used in) financing activities

     33,135        (68,329     —          —          (35,194
                                        

Effect of exchange rate changes on cash

     —          —          118        —          118   
             —     

Net change in cash and cash equivalents

     —          53,146        (538     —          52,608   

Cash and cash equivalents-beginning of period

     —          68,249        5,625        —          73,874   
                                        

Cash and cash equivalents-end of period

   $ —        $ 121,395      $ 5,087      $ —        $ 126,482   
                                        

Supplemental disclosures of cash flow information:

          

Interest paid

   $ 25,275      $ 138      $ —        $ —        $ 25,413   

Interest received

     9        78        —          —          87   

Income taxes paid

     —          6        2        —          8   

Non-cash investing activity:

          

Capital lease additions

     —          (833     —          —          (833

 

36


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

 

Pinnacle Foods Finance LLC

Consolidating Statement of Cash Flows

For the three months ended March 29, 2009

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiary
    Eliminations     Consolidated
Total
 

Cash flows from operating activities

          

Net (loss) earnings from operations

   $ (2,100   $ 21,041      $ (1,250   $ (19,791   $ (2,100

Non-cash charges (credits) to net (loss)

          

Depreciation and amortization

     —          14,584        3        —          14,587   

Amortization of debt acquisition costs

     1,184        —          —          —          1,184   

Amortization of deferred mark-to-market adjustment on terminated swaps

     1,312        —          —          —          1,312   

Change in value of financial instruments

     —          697        —          —          697   

Equity in loss (earnings) of investees

     (21,041     1,250        —          19,791        —     

Stock-based compensation charges

     —          227        —          —          227   

Postretirement healthcare benefits

     —          (6     —          —          (6

Pension expense

     —          740        —          —          740   

Other long-term assets

     —          (1,350     —          —          (1,350

Other long-term liabilities

     —          1,360        —          —          1,360   

Deferred income taxes

     —          7,486        —          —          7,486   

Changes in working capital, net of acquisition

          

Accounts receivable

     —          (23,075     328        —          (22,747

Intercompany accounts receivable/payable

     (121,419     117,986        3,433        —          —     

Inventories

     —          23,696        315        —          24,011   

Accrued trade marketing expense

     —          39        (905     —          (866

Accounts payable

     —          14,843        2,275        —          17,118   

Accrued liabilities

     3,966        4,980        (2,156     —          6,790   

Other current assets

     767        (2,270     (820     —          (2,323
                                        

Net cash provided by operating activities

     (137,331     182,228        1,223        —          46,120   
                                        

Cash flows from investing activities

          

Capital expenditures

     —          (12,858     —          —          (12,858
                                        

Net cash used in investing activities

     —          (12,858     —          —          (12,858
                                        

Cash flows from financing activities

          

Repayment of capital lease obligations

     —          (61     —          —          (61

Repayments of short-term borrowing

     —          (130     —          —          (130

Repayments of intercompany loans

     166,456        (166,456     —          —          —     

Borrowings under revolving credit facility

     12,584        —          —          —          12,584   

Repayments of revolving credit facility

     (38,584     —          —          —          (38,584

Repayments of long term obligations

     (3,125     —          —          —          (3,125
                                        

Net cash used in financing activities

     137,331        (166,647     —          —          (29,316
                                        

Effect of exchange rate changes on cash

     —          —          (24     —          (24
             —     

Net change in cash and cash equivalents

     —          2,723        1,199        —          3,922   

Cash and cash equivalents-beginning of period

     —          2,257        2,004        —          4,261   
                                        

Cash and cash equivalents-end of period

   $ —        $ 4,980      $ 3,203      $ —        $ 8,183   
                                        

Supplemental disclosures of cash flow information:

          

Interest paid

   $ 23,273      $ 43      $ —        $ —        $ 23,316   

Interest received

     —          1        3        —          4   

Income taxes paid

     —          14        187        —          201   

 

37


Table of Contents
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except where noted)

You should read the following discussion of our results of operations and financial condition together with the “Selected Financial Data” and the audited consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 27, 2009. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Item 1A: Risk Factors” section of our annual report on Form 10-K for the year ended December 27, 2009. Actual results may differ materially from those contained in any forward-looking statements.

Overview

On December 23, 2009, we acquired all of the common stock of Birds Eye Foods, Inc. (“Birds Eye”) (the “Birds Eye Acquisition”). Birds Eye’s product offering includes an expanding platform of healthy, high-quality frozen vegetables and frozen meals and a portfolio of primarily branded specialty foods which are highly-complimentary to our existing product offerings. Frozen products are marketed under the Birds Eye brand name. Frozen food products are marketed under the Birds Eye brand name, which holds the #1 market share in frozen vegetables and the #1 market share in the family-oriented sub-segment of complete bagged meals. Birds Eye markets traditional boxed and bagged frozen vegetables, as well as steamed vegetables using innovative steam-in-packaging technology, under the Birds Eye and Birds Eye Steamfresh brands. Birds Eye’s complete bagged meals, marketed primarily under the family-oriented Birds Eye Voila! brand, offer consumers value-added meal solutions that include a protein, starch, and vegetables in one convenient package. Birds Eye’s branded specialty food products hold leading market share positions in their core geographic markets, and include Comstock and Wilderness fruit pie fillings and toppings, Brooks and Nalley chili and chili ingredients, and snack foods by Tim’s Cascade and Snyder of Berlin.

We are a leading producer, marketer and distributor of high quality, branded food products. In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) will be reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations will be reported in the Duncan Hines Grocery Division. The Specialty Foods Division will consist of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses. Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets. Unallocated corporate expenses consist of corporate overhead such as executive management, and finance and legal functions. Prior period amounts have been reclassified for consistent presentation of our segments.

 

38


Table of Contents

Business Drivers and Measures

In operating our business and monitoring its performance, we pay attention to trends in the food manufacturing industry and a number of performance measures and operational factors. This discussion includes forward-looking statements that are based on our current expectations.

Industry Factors

Our industry is characterized by the following general trends:

 

   

Industry Growth. Growth in our industry is driven primarily by population and modest product selling price increases. Incremental growth is principally driven by product, packaging and process innovation.

 

   

Competition. The food products business is competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, convenience, price, trade promotion, consumer promotion, brand recognition and loyalty, customer service and the ability to identify and satisfy emerging consumer preferences. In order to maintain and grow our business, we must be able to react to these competitive pressures.

 

   

Consumer Tastes and Trends. Consumer trends, such as changing health trends and focus on convenience and products tailored for busy lifestyles, present both opportunities and challenges for our business. In order to maintain and grow our business, we must react to these trends by offering products that respond to evolving consumer needs. In the current economic climate, the long term trend for food consumption at home is flat and the increase that was experienced during the most severe part of the recession is now moderating. Additionally, consumers are looking for value alternatives, which have caused a shifting from traditional retail grocery to mass merchandisers and the value channel.

 

   

Customer Consolidation. In recent years, our industry had been characterized by consolidation in the retail grocery and food service industries, with mass merchandisers gaining market share. This trend could increase customer concentration within the industry.

Revenue Factors

Our net sales are driven principally by the following factors:

 

   

Shipments, which change as a function of changes in volume and in price; and

 

   

the costs that we deduct from shipments to reach net sales, which consist of:

 

   

Trade marketing expenses, which include the cost of temporary price reductions (“on sale” prices), promotional displays and advertising space in store circulars.

 

   

Slotting expenses, which are the costs of having certain retailers stock a new product, including amounts retailers charge for updating their warehousing systems, allocating shelf space and in-store systems set-up, among other things.

 

   

Consumer coupon redemption expenses, which are costs from the redemption of coupons we circulate as part of our marketing efforts.

We give detailed information on these factors below under “—Results of Operations.”

Cost Factors

Our important costs include the following:

 

   

Raw materials, such as sugar, cucumbers, broccoli, corn, peas, green beans, flour (wheat), poultry, seafood, vegetable oils, shortening, meat and corn syrup, among others, are available from numerous independent suppliers but are subject to price fluctuations due to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, weather conditions and insects, among others.

 

39


Table of Contents
   

Packaging costs. Our broad array of products entails significant costs for packaging and is subject to fluctuations in the price of aluminum, glass jars, plastic trays, corrugated fiberboard, and plastic packaging materials.

 

   

Freight and distribution. We use a combination of common carriers and inter-modal rail to transport our products from our manufacturing facilities to distribution centers and to deliver products to retailers from both those centers and directly from our manufacturing plants. Our freight and distribution costs are influenced by fuel costs.

 

   

Advertising and other marketing expenses. We record expenses related to advertising and other consumer and trade-oriented marketing programs under “Marketing and selling expenses” in our consolidated financial statements. A key strategy is to continue to invest in marketing that builds our iconic brands.

We give detailed information on these factors below under “—Results of Operations.”

Working Capital

Our working capital is primarily driven by accounts receivable and inventories, which fluctuate throughout the year due to seasonality in both sales and production, as described below in “—Seasonality.” We will continue to focus on reducing our working capital requirements while simultaneously maintaining our customer service levels and production needs. We have historically relied on internally generated cash flows and temporary borrowings under our revolving credit facility to satisfy our working capital requirements.

Other Factors

Other factors that have influenced our results of operations and may do so in the future include:

 

   

Interest Expense. As a result of the Blackstone Transaction and Birds Eye Acquisition, we have significant indebtedness. Although we expect to reduce our leverage over time, we expect interest expense to continue to be a significant component of our expenses. See “Liquidity and Capital Resources.”

 

   

Cash Taxes. We have significant tax-deductible intangible asset amortization and federal and state net operating losses, which resulted in minimal federal and state cash taxes in recent years. We expect to continue to realize significant reductions in federal and state cash taxes in the future attributable to amortization of intangible assets and realization of net operating losses.

 

   

Acquisitions and Consolidations. We believe we have the expertise to identify and integrate value-enhancing acquisitions to further grow our business. In recent years we have successfully integrated acquisitions. We have, however, incurred significant costs in connection with integrating these businesses and streamlining our operations.

 

   

Impairment of Goodwill and Long-Lived Assets. We test our goodwill and intangible assets annually or more frequently (if necessary) for impairment and have recorded impairment charges in recent years. The value of goodwill and intangibles from the allocation of purchase price from the Blackstone Transaction and the Birds Eye Acquisition is derived from our business operating plans at that time and is therefore susceptible to an adverse change that could require an impairment charge. In the first quarter of 2010, we tested for impairment due to our reorganization into new segments and it resulted in no impairment charges.

We give detailed information on these factors below under “—Results of Operations.”

Seasonality

Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including seafood, frozen vegetables, and complete bagged meals tend to be marginally higher during the winter months. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines products, Birds Eye vegetables and our fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. We pack the majority of our pickles during a season extending from May through September, and also increase our Duncan Hines inventories at that time, in advance of the selling season. Since many of the raw materials we processes under the Birds Eye brand are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months. We are a seasonal net user of cash in the third quarter of the calendar year.

 

40


Table of Contents

Restructuring Charges

Rochester, NY Office

The Rochester, NY office is the former headquarters of Birds Eye Foods, Inc, which we acquired on December 23, 2009, as described in Note 3. In connection with the consolidation of activities into Pinnacle’s New Jersey offices, the Rochester office will be closed. Notification letters under the Worker Adjustment and Retraining Notification (WARN) Act of 1988 were issued in the first quarter of 2010. Activities related to the closure of the Rochester office will begin in the 2nd quarter of 2010, and will result in the elimination of approximately 200 positions.

In accordance with the authoritative guidance with respect to accounting for costs associated with exit or disposal activities, the full cost of termination benefits of $7,587 related to employees who will not be retained beyond the minimum retention period were recorded in the first quarter and the full cost of termination benefits of $5,360 related to employees who will be retained beyond the minimum retention period will be recorded in the future service periods. Of the $5,360, $1,146 was recorded in the first quarter, and $2,455, $1,486 and $273 is expected to be recorded in the 2nd quarter, 3rd quarter and 4th quarter, respectively.

The total cost of termination benefits recorded in the first quarter of 2010 was $8,733 and was recorded in the segments as follows: Birds Eye Frozen segment $6,724, Duncan Hines Grocery segment $961 and Specialty Foods segment $1,048.

RESULTS OF OPERATIONS

The discussion below for each of the comparative periods is based upon net sales. We determine net sales in accordance with generally accepted accounting principles, or “GAAP”. We calculate our net sales by deducting trade marketing, slotting and consumer coupon redemption expenses from shipments. “Shipments” means gross sales less cash discounts, returns and “non-marketing” allowances. We calculate gross sales by multiplying the published list price of each product by the number of units of that product sold.

Shipments is a non-GAAP financial measure. We include it in our management’s discussion and analysis because we believe that it is a relevant financial performance indicator for our company as it measures the increase or decrease in our revenues caused by shipping more or less physical case volume multiplied by our published list prices. It is also a measure used by our management to evaluate our revenue performance. This measure is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. Using only this non-GAAP financial measure to analyze our performance would have material limitations because the calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. Management compensates for these limitations by presenting both the GAAP and non-GAAP measures of these results.

 

41


Table of Contents

The following table reconciles shipments to net sales for the total company, the Birds Eye Frozen, Duncan Hines Grocery and the Specialty Foods segments for the three months ended March 28, 2010 and the three months ended March 29, 2009.

 

     Total
     Three months
Ended
March 28,
2010
   Three months
Ended
March 29,
2009

Shipments

   $ 865.4    $ 560.9

Less: Aggregate trade marketing and consumer coupon redemption expenses

     205.3      130.1

Less: Slotting expense

     3.7      3.4
             

Net sales

   $ 656.4    $ 427.4
             
     Birds Eye Frozen
     Three months
Ended
March 28,
2010
   Three months
Ended
March 29,
2009

Shipments

   $ 450.0    $ 210.9

Less: Aggregate trade marketing and consumer coupon redemption expenses

     123.4      62.4

Less: Slotting expense

     2.3      2.2
             

Net sales

   $ 324.3    $ 146.3
             
     Duncan Hines Grocery
     Three months
Ended
March 28,
2010
   Three months
Ended
March 29,
2009

Shipments

   $ 299.8    $ 259.7

Less: Aggregate trade marketing and consumer coupon redemption expenses

     72.4      62.1

Less: Slotting expense

     1.2      1.2
             

Net sales

   $ 226.2    $ 196.4
             
     Specialty Foods