Attached files
file | filename |
---|---|
EX-32 - EX-32 - Connors Bros. Holdings, L.P. | a57663exv32.htm |
EX-31.2 - EX-31.2 - Connors Bros. Holdings, L.P. | a57663exv31w2.htm |
EX-31.1 - EX-31.1 - Connors Bros. Holdings, L.P. | a57663exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2010
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-166998-03
CONNORS BROS. HOLDINGS, L.P.
(Exact name of registrant as specified in its charter)
Delaware | N/A | |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
c/o Centre Partners Management, LLC
30 Rockefeller Plaza, 50th Floor
New York, NY 10020
(Address of principal executive offices, including zip code)
30 Rockefeller Plaza, 50th Floor
New York, NY 10020
(Address of principal executive offices, including zip code)
212-332-5800
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 o No þ
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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act).
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
CONNORS BROS. HOLDINGS, L.P.
INDEX
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONNORS
BROS. HOLDINGS, L.P.
Condensed Consolidated Balance Sheets
(in thousands)
(in thousands)
October 2, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 1,888 | $ | 4,491 | ||||
Accounts receivable, net |
72,464 | 63,123 | ||||||
Inventories |
223,972 | 233,206 | ||||||
Prepaid expenses and other assets |
12,614 | 16,669 | ||||||
Deferred income taxes |
| 1,467 | ||||||
Total current assets |
310,938 | 318,956 | ||||||
Property, plant and equipment, net |
86,706 | 90,287 | ||||||
Other assets |
21,796 | 21,106 | ||||||
Goodwill |
71,101 | 70,052 | ||||||
Trademarks |
204,996 | 203,409 | ||||||
Other intangible assets, net |
94,392 | 101,883 | ||||||
Deferred income taxes |
656 | 636 | ||||||
Total assets |
$ | 790,585 | $ | 806,329 | ||||
Liabilities and partnership equity |
||||||||
Current liabilities: |
||||||||
Current portion of senior term notes payable |
$ | 9,500 | $ | 9,500 | ||||
Current portion of capital leases and other debt |
2,276 | 4,178 | ||||||
Accounts payable |
95,473 | 70,254 | ||||||
Accrued expenses |
51,106 | 46,667 | ||||||
Income taxes payable |
42 | 285 | ||||||
Other current liabilities |
6,946 | 6,682 | ||||||
Total current liabilities |
165,343 | 137,566 | ||||||
Senior term notes payable, net of current portion and debt discount |
9,345 | 32,547 | ||||||
Revolving credit facilities, net of debt discount |
92,087 | 134,005 | ||||||
Capital leases and other debt, net of current portion |
| 2,277 | ||||||
Senior secured notes, net of debt discount |
195,952 | 217,417 | ||||||
Deferred income taxes |
18,005 | 13,195 | ||||||
Accrued pension and other obligations |
4,325 | 4,356 | ||||||
Total liabilities |
485,057 | 541,363 | ||||||
Limited partnership interests |
223,540 | 222,695 | ||||||
Retained earnings |
52,011 | 15,734 | ||||||
Accumulated other comprehensive income |
29,977 | 26,537 | ||||||
Total partnership equity |
305,528 | 264,966 | ||||||
Total liabilities and partnership equity |
$ | 790,585 | $ | 806,329 | ||||
See notes to condensed consolidated financial statements.
2
Table of Contents
CONNORS BROS. HOLDINGS, L.P.
Condensed Consolidated Statements of Operations
(in thousands)
(unaudited)
(in thousands)
(unaudited)
Three months ended | Nine months ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
$ | 243,365 | $ | 246,711 | $ | 732,225 | $ | 731,354 | ||||||||
Cost of revenue |
190,997 | 194,408 | 570,206 | 589,793 | ||||||||||||
Gross profit |
52,368 | 52,303 | 162,019 | 141,561 | ||||||||||||
Selling, general and
administrative expenses |
26,451 | 27,411 | 79,767 | 80,328 | ||||||||||||
Restructuring and other
transition costs, net |
792 | | 4,472 | | ||||||||||||
Operating income |
25,125 | 24,892 | 77,780 | 61,233 | ||||||||||||
Net interest expense |
7,051 | 11,550 | 22,378 | 36,025 | ||||||||||||
Loss on prepayment of debt |
1,969 | | 2,954 | | ||||||||||||
Other income, net |
(2,900 | ) | (3,560 | ) | (2,162 | ) | (4,977 | ) | ||||||||
Income before income taxes |
19,005 | 16,902 | 54,610 | 30,185 | ||||||||||||
Income taxes |
||||||||||||||||
Current |
1,579 | 1,230 | 6,701 | 2,196 | ||||||||||||
Deferred |
2,521 | 2,805 | 6,266 | 5,008 | ||||||||||||
Total income tax |
4,100 | 4,035 | 12,967 | 7,204 | ||||||||||||
Net income |
$ | 14,905 | $ | 12,867 | $ | 41,643 | $ | 22,981 | ||||||||
See notes to condensed consolidated financial statements.
3
Table of Contents
CONNORS BROS. HOLDINGS, L.P.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
(in thousands)
(unaudited)
Nine months ended | ||||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income |
$ | 41,643 | $ | 22,981 | ||||
Adjustments to reconcile net income
to net cash provided by operating activities: |
||||||||
Depreciation |
7,473 | 7,316 | ||||||
Amortization of intangible assets |
8,889 | 9,681 | ||||||
Amortization of debt issuance costs and debt discount |
3,343 | 3,136 | ||||||
Equity-based compensation |
845 | 854 | ||||||
Debt issuance and discount costs related to prepayment of debt |
1,957 | | ||||||
Non-cash inventory step-up charges |
| 8,217 | ||||||
Interest paid-in-kind |
| 4,475 | ||||||
Deferred income taxes |
6,266 | 5,008 | ||||||
Non-cash gain on remeasurement of debt |
(1,456 | ) | (4,919 | ) | ||||
Net loss (gain) on disposal of assets |
1,080 | (525 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Increase in accounts receivable |
(8,474 | ) | (7,478 | ) | ||||
Decrease in inventories |
10,792 | 18,950 | ||||||
Increase (decrease) in accounts payable |
24,443 | (5,241 | ) | |||||
Increase in accrued expenses |
4,038 | 9,771 | ||||||
Decrease (increase) in other working capital accounts |
2,857 | (10,040 | ) | |||||
Decrease (increase) in long-term assets and liabilities |
87 | (2,263 | ) | |||||
Cash provided by operating activities |
103,783 | 59,923 | ||||||
Investing activities |
||||||||
Purchase of property, plant and equipment |
(7,645 | ) | (9,082 | ) | ||||
Proceeds from the sale of assets |
497 | 1,623 | ||||||
Proceeds from government grant |
754 | | ||||||
Investments and acquisitions, net of cash acquired |
| (1,317 | ) | |||||
Cash used in investing activities |
(6,394 | ) | (8,776 | ) | ||||
Financing activities |
||||||||
Repayment of term loan, subordinated debt, capital leases and other debt |
(52,700 | ) | (17,248 | ) | ||||
Proceeds from issuance of debt |
2,767 | 3,397 | ||||||
Net payments on revolving credit facility |
(42,496 | ) | (37,350 | ) | ||||
Payment of debt issuance costs |
(2,131 | ) | | |||||
Cash distributions to partners |
(5,366 | ) | (3,874 | ) | ||||
Cash used in financing activities |
(99,926 | ) | (55,075 | ) | ||||
Effect of foreign currency translation |
(66 | ) | 413 | |||||
Decrease in cash |
(2,603 | ) | (3,515 | ) | ||||
Cash beginning of period |
4,491 | 4,695 | ||||||
Cash end of period |
$ | 1,888 | $ | 1,180 | ||||
Supplemental cash flow information: |
||||||||
Income taxes paid |
$ | 2,743 | $ | 7,422 | ||||
Interest paid |
$ | 15,568 | $ | 26,304 |
See notes to condensed consolidated financial statements.
4
Table of Contents
CONNORS BROS. HOLDINGS, L.P.
Notes to the Condensed Consolidated Financial Statements
1. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements present the consolidated
financial position, results of operations and cash flows of Connors Bros. Holdings, L.P, a Delaware
limited partnership (CBH) and Bumble Bee Foods, L.P. (f/k/a Connors Bros., L.P.), a Delaware
limited partnership (BBFLP) (together with their subsidiaries on a consolidated basis, We,
Connors, or the Company).
CBH was formed by BBFLP on November 30, 2009 in connection with the issuance of the senior
secured notes described in Note 6 to the condensed consolidated financial statements. CBH is
controlled by its general partner, CB Holdings GP, LLC, and its sole limited partner is BBFLP.
BBFLP is also the sole member of CB Holdings GP, LLC, and, as such, holds either directly or
indirectly all of the partnership interests of CBH. On December 17, 2009, BBFLP transferred to CBH
all of its investments (the Transfer of Investments) in a series of holding companies and two
operating companies and their respective subsidiaries: Bumble Bee Foods, LLC (Bumble Bee) and
Connors Bros. Clover Leaf Seafoods Company (Clover Leaf). As a result, effective December 17,
2009, we became CBH. For the period from November 23, 2008 (inception) to December 16, 2009, we
were BBFLP.
The Transfer of Investments was accounted for by recording, on the books of CBH, the
investments at the same book value as the investments were carried on the books of BBFLP
immediately prior to their transfer. In connection with the transfer, CBH recorded the issuance of
partnership equity equal to the recorded value of the investments. The preferred partnership units
of BBFLP, the general and limited partnership equity of BBFLP, and the accumulated deficit of BBFLP
have been, effective with the Transfer of Investments on December 17, 2009, excluded from the
consolidated balance sheet of CBH.
The condensed consolidated interim financial statements reflect all adjustments that are, in
the opinion of management, normal and recurring in nature and necessary for a fair presentation of
the results for the interim period.
U.S. Operations
CBH owns Bumble Bee through its wholly owned subsidiary, Stinson Seafood (2001), Inc.
(Stinson), a Delaware corporation, which wholly owns Bumble Bee Holdings, Inc., a Georgia
corporation (BBH). BBH owns all of the membership interests of Bumble Bee. Bumble Bee is a
Delaware limited liability company. Bumble Bee (through its subsidiary BB Acquisition (PR), L.P.)
also operates a tuna cannery located in Mayaguez, Puerto Rico.
Canadian Operations
CBH owns Clover Leaf through a group of directly held and indirectly held companies domiciled
in the U.S., the Netherlands and Canada. The subsidiaries of Clover Leaf include various companies
which primarily operate fishing businesses.
Seasonality
Due to the seasonal nature of production and demand for product, the interim results of
operations are not necessarily indicative of the estimated results of operations for a full fiscal
year.
Reporting Periods
The Company reports its quarterly results of operations as fiscal quarters of approximately 13
weeks in length. The first and fourth quarters may be up to four days longer or shorter than a 13
week period, while the second and third quarters are always 13 weeks in duration. The quarterly
results of operations presented herein represent the 13 weeks ended October 2, 2010 and October 3,
2009, respectively. The year-to-date results of operations presented herein represent the period
from January 1, 2010 to October 2, 2010 and January 1, 2009 to October 3, 2009, respectively.
2. Summary of Significant Accounting Policies
Recently Adopted Accounting Standards
Effective January 1, 2010, we adopted Accounting Standards Update 2009-17 (Topic 810)
requiring companies to identify the primary beneficiary of a variable interest entity as the
enterprise that has both the power to direct the activities of a variable interest entity and the
obligation to absorb losses or the right to receive benefits of the entity that could potentially
be significant to the variable interest entity. Further, companies are required to perform on-going
reassessments of whether an enterprise is the primary beneficiary and eliminate the use of the
quantitative approach previously required for determining the primary beneficiary. Currently, we
are not the primary beneficiary of any variable interest entity.
5
Table of Contents
3. Inventories
Inventories were as follows (in thousands):
October 2, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 58,930 | $ | 58,118 | ||||
Work in process |
14,297 | 12,565 | ||||||
Finished goods |
150,745 | 162,523 | ||||||
Inventories |
$ | 223,972 | $ | 233,206 | ||||
In the second quarter of 2010, the Company changed its method of estimating the deferred
freight cost component of finished goods inventory. This resulted in a reduction to inventories
of $1.4 million, with a corresponding charge to cost of revenue on the accompanying condensed
consolidated statement of operations. In accordance with United States Generally Accepted
Accounting Principles, the Company accounted for this change in accounting estimate prospectively
beginning on April 4, 2010.
4. Strategic Investments
The Company held the following strategic investments, included in other assets on the
accompanying condensed consolidated balance sheets (in thousands):
October 2, | December 31, | |||||||
2010 | 2009 | |||||||
Sea Value |
$ | 5,181 | $ | 5,181 | ||||
KWL |
725 | 794 | ||||||
Other |
139 | 183 | ||||||
$ | 6,045 | $ | 6,158 | |||||
We
did not estimate fair values of our cost method investments as it was impractical to do
so due to the lack of liquid markets for private equity investments.
6
Table of Contents
5. Comprehensive Income
Comprehensive income was as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 14,905 | $ | 12,867 | $ | 41,643 | $ | 22,981 | ||||||||
Net unrealized foreign currency
translation gain |
6,608 | 11,781 | 4,961 | 18,848 | ||||||||||||
Unrealized gain (loss) on interest
rate swaps |
236 | (64 | ) | 280 | 255 | |||||||||||
Gain on interest rate swap contracts
realized in net income |
(291 | ) | (201 | ) | (886 | ) | (441 | ) | ||||||||
Unrealized gain (loss) on forward
foreign currency contracts |
561 | (675 | ) | 927 | (1,161 | ) | ||||||||||
Loss (gain) on forward foreign currency
contracts realized in net income |
(95 | ) | 655 | (79 | ) | 923 | ||||||||||
Unrealized gain (loss) on forward
commodity contracts |
2,559 | 712 | (287 | ) | 1,120 | |||||||||||
Loss (gain) on forward commodity
contracts realized in net income |
(676 | ) | (96 | ) | (1,476 | ) | 19 | |||||||||
Comprehensive income |
$ | 23,807 | $ | 24,979 | $ | 45,083 | $ | 42,544 | ||||||||
7
Table of Contents
6. Senior Credit Facilities and Other Debt
Debt was comprised of the following (in thousands):
October 2, | December 31, | |||||||
2010 | 2009 | |||||||
Senior term loan notes payable, maturing in quarterly
installments through November 2013, with interest payable monthly; weighted
average variable rate was 5.50% as of October 2, 2010 |
$ | 19,000 | $ | 42,750 | ||||
Unamortized debt discount related to the senior term loan notes payable |
(155 | ) | (703 | ) | ||||
Long-term revolving credit facilities, maturing November 18, 2013,
with interest payable monthly; weighted average variable rate, net of effect
of the interest rate swap, was 5.37% as of October 2, 2010 |
95,012 | 137,594 | ||||||
Unamortized debt discount related to long-term revolving credit facilities |
(2,925 | ) | (3,589 | ) | ||||
Senior secured notes, maturing December 15, 2015, with interest payable
semi-annually at 7.75% per annum |
198,000 | 220,000 | ||||||
Unamortized debt discount related to senior secured notes payable |
(2,048 | ) | (2,583 | ) | ||||
Capital lease obligations, installment notes, and demand notes; principal and
interest payable monthly at interest rates ranging from 2.20% to 13.25%,
with final payments due in months ranging from June 2011 to September 2011 |
2,276 | 6,455 | ||||||
Total long-term debt |
309,160 | 399,924 | ||||||
Less amounts due within one year |
11,776 | 13,678 | ||||||
Total long-term debt, net of amounts due within one year |
$ | 297,384 | $ | 386,246 | ||||
Senior Term Loan and Senior Revolving Credit Facilities
In connection with the November 2008 acquisition of Bumble Bee and Clover Leaf by BBFLP (the
Acquisition), Bumble Bee and Clover Leaf borrowed $133.0 million under a senior term loan
agreement (the Senior Term Loan), and entered into a senior revolving credit agreement allowing
for aggregate maximum borrowing of $150.0 million and Cdn$75.0 million (the Revolver) subject to
limitations based on advance rates against qualified assets as stipulated under the agreement. On
December 17, 2009, we prepaid $83.5 million of notes issued to certain lenders under the Senior
Term Loan, and incurred a 1% prepayment penalty in the amount of $0.8 million. In addition, on
December 17, 2009, we borrowed an additional $3.2 million under the Senior Term Loan.
As of October 2, 2010, Bumble Bee owed $89.8 million and Clover Leaf owed $5.2 million under
the Revolver. Under the Senior Term Loan and Revolver agreements, amounts borrowed are secured by
substantially all the assets of Bumble Bee and Clover Leaf. The loans and other obligations under
the Senior Term Loan and Revolver agreements are guaranteed by CBH and all of its subsidiaries.
Each of the U.S. and Canadian borrowers also guarantees the obligations of the other borrower.
The Senior Term Loan agreement calls for interest to be calculated at a base rate of not less
than 3.5% plus a margin of 3.0% or the London Interbank Offered Rate
(LIBOR) plus a margin of 4.0%. The Revolver agreement calls for
interest to be calculated at rates comprised of certain base rates to the specific borrowings plus
a margin ranging from 3.50% to 3.75%. We incur an unused line availability fee on the Revolver of
0.5% per annum of $150.0 million and Cdn$75.0 million, net of outstanding loan balances and letters
of credit, payable monthly.
The Senior Term Loan and Revolver agreements contain financial and other covenants that limit
or restrict the Companys ability to make capital expenditures; incur indebtedness; permit liens on
property; enter into transactions with affiliates; make restricted payments or investments; enter
into mergers, acquisitions or consolidations; conduct certain asset sales; pay dividends or
distributions and enter into other specified transactions and activities. The financial covenants
state that the Company must maintain at all times a fixed charge coverage ratio of not less than
1.025:1.00, except when average availability, as defined, under the Revolver is in excess of $35.0
million.
8
Table of Contents
We prepaid $10.0 million and $6.6 million of the Senior Term Loan in March and June of 2010,
respectively. As of October 2, 2010, future remaining aggregate installment payments due under the
Senior Term Loan were as follows (in thousands):
2010 (remaining) |
$ | 2,375 | ||
2011 |
9,500 | |||
2012 |
7,125 | |||
$ | 19,000 | |||
Senior Subordinated Notes
In connection with the Acquisition, Bumble Bee and Clover Leaf borrowed $135.0 million under a
senior subordinated loan agreement (the Subordinated Loan). Under the Subordinated Loan
agreement, interest was comprised of cash interest of 12.0% plus interest paid-in-kind at 4.25% per
annum. On December 17, 2009, we retired all $141.4 million of the notes then outstanding, including
interest paid-in-kind of $6.4 million. In connection with the
retirement of the notes, we incurred a prepayment penalty of $15.7 million.
7.75% Senior Secured Notes
On December 17, 2009, we issued $220.0 million in senior secured notes (Senior Secured
Notes) and used the proceeds, along with the proceeds from a draw on the Revolver, to retire $83.5
million of the Senior Term Loan and all $141.4 million of the notes then outstanding under the
Subordinated Loan. The Senior Secured Notes were issued net of original issue discount of $2.6
million, resulting in net proceeds (excluding debt issuance costs) of $217.4 million. The Senior
Secured Notes bear interest at a rate of 7.75% per annum, with interest payable semi-annually in
cash in arrears on each June 15th and December 15th (beginning on June 15,
2010), and mature on December 15, 2015. We may redeem some or all of the Senior Secured Notes as
stipulated in a note indenture (the Indenture). The Senior Secured Notes are secured, on a
subordinated basis, to the Senior Term Loan and the Revolver, by a third-party lien on
substantially all of our assets.
The
Indenture governing the Senior Secured Notes contains covenants that limit or restrict the
Companys ability to incur indebtedness; permit liens on property; enter into transactions with
affiliates; make restricted payments or investments; enter into mergers, acquisitions or
consolidations; conduct certain asset sales; pay dividends or distributions and enter into other
specified transactions and activities.
The Senior Secured Notes are guaranteed, jointly and severally, by CBH and the other
guarantors pursuant to the Indenture. Each of CBHs subsidiaries (other than the note issuers)
is a guarantor of the Senior Secured Notes.
2010 Losses on Prepayment of Debt
In March 2010, we prepaid $10.0 million of amounts due under the Senior Term Loan in advance
of the scheduled installment payment date, and we incurred a loss on prepayment in the amount of
$0.6 million arising from accelerated recognition of debt discount, debt issuance costs, as well as
a prepayment penalty. In June 2010, we prepaid an additional $6.6 million of amounts due under the
Senior Term Loan in advance of the scheduled installment payment date and incurred charges in the
amount of $0.4 million, comprised of the acceleration of recognition of debt issuance costs, debt
discount, and a pre-payment penalty. The early payment of debt effectively changes the maturity
date of amounts due under the Senior Term Loan to September 2012.
On September 15, 2010, we prepaid 10%, or $22.0 million of the Senior Secured Notes as
permitted under the Indenture and incurred charges in the amount of $1.8 million, comprised of the
acceleration of recognition of debt issuance costs, debt discount, and a pre-payment penalty.
Letters of Credit
In order to comply with certain vendor requirements, we had stand-by letters of credit in the
amount of $2.6 million as of October 2, 2010.
As of October 2, 2010, commitments under equipment capital leases and installment notes were
as follows (in thousands):
2010 (remaining) |
$ | 874 | ||
2011 |
1,430 | |||
2,304 | ||||
Less interest |
28 | |||
Capital lease and other debt obligations |
$ | 2,276 | ||
9
Table of Contents
7.
Restructuring and Other Transition Costs
In April 2010, Bumble Bee closed its Prospect Harbor, Maine sardine canning facility (the
Prospect Harbor Plant) as a result of reductions in the total allowable catch levels of herring,
as set by governmental agencies, for New England waters. We accrued costs to provide severance
payments to employees of the Prospect Harbor Plant, adjusted certain assets to fair values, and
accrued certain other costs related to managing the plant closure. Bumble Bee had assets held for
sale related to the Prospect Harbor Plant totaling $1.6 million included in other assets on the
accompanying condensed consolidated balance sheet at October 2, 2010.
In February 2010, we charged $1.3 million to restructuring and other transition costs to
terminate a contract with a freight carrier in order to ship product with other carriers on more
favorable terms. We paid $1.3 million to settle the contract termination costs in July 2010.
During
the second quarter of 2010, we charged to restructuring and other
transition costs certain legal and other expenses totaling
$0.6 million related to supporting a possible sale of the
operating companies.
Bumble Bee closed its meat and poultry plant located in Augusta, Georgia (the Augusta Plant)
in the fourth quarter of 2008. We incurred costs to maintain the property as we sought to complete
the closure, liquidate equipment not transferred to other facilities, terminate certain contracts,
make severance payments to the former employees and dispose of the real property. The Augusta Plant
was donated in June 2010.
The balances representing the accrued restructuring costs are included in other current
liabilities on the accompanying condensed consolidated balance sheets. The estimated plant closure
costs accrued, the subsequent payments charged to settle the estimated accrued charges as well as
the adjustments to the accrued charges for changes in estimated costs were as follows (in
thousands):
Plant | Employee | |||||||||||
closure | severance | |||||||||||
cost | cost | Total | ||||||||||
Augusta Plant closure: |
||||||||||||
Accrual as of December 31, 2009 |
$ | 1,111 | $ | 94 | $ | 1,205 | ||||||
Payments and adjustments |
(1,111 | ) | (94 | ) | (1,205 | ) | ||||||
Accrual as of October 2, 2010 |
$ | | $ | | $ | | ||||||
Prospect Harbor Plant closure: |
||||||||||||
Accrual as of December 31, 2009 |
$ | | $ | | $ | | ||||||
Costs incurred |
2,027 | 977 | 3,004 | |||||||||
Payments and adjustments |
(2,027 | ) | (977 | ) | (3,004 | ) | ||||||
Accrual as of October 2, 2010 |
$ | | $ | | $ | | ||||||
8. Employee Benefit Plans
We have defined contribution retirement plans and defined benefit pension plans.
Defined contribution retirement plans
Current benefit costs under the defined contribution retirement plans are charged to expense
as they accrue. Expenses associated with these plans were $0.4 million and $1.2 million for the
three and nine months ended October 2, 2010, respectively, and $0.3 million and $1.1 million for
the three and nine months ended October 3, 2009, respectively.
10
Table of Contents
Defined benefit pension plans
The following table represents the components of net periodic defined benefit plan pension
cost (in thousands):
Three months ended | Nine months ended | |||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||||
Service cost |
$ | 105 | $ | 92 | $ | 349 | $ | 264 | ||||||||
Interest cost |
484 | 457 | 1,745 | 1,298 | ||||||||||||
Expected return on plan assets |
(437 | ) | (395 | ) | (1,575 | ) | (1,121 | ) | ||||||||
Amortization of net actuarial loss |
(6 | ) | 13 | (17 | ) | 37 | ||||||||||
Net periodic pension cost recognized |
$ | 146 | $ | 167 | $ | 502 | $ | 478 | ||||||||
We contributed $0.4 million and $0.6 million towards the required minimum funding levels of
our defined benefit plans during the three and nine months ended October 2, 2010, respectively.
Based on minimum funding requirements, the Company expects to contribute an estimated additional
$0.2 million to defined benefit pension plans during the remainder of 2010. We do not expect to
make additional voluntary contributions in 2010.
9. Income taxes
For interim income tax reporting, we estimate our annual effective tax rate which we then
apply to year-to-date income. Our effective tax rate was 21.6% and 23.7% for the three and nine
months ended October 2, 2010, respectively, and 23.9% for the three and nine months ended October
3, 2009. The effective tax rate for the periods presented results from the blending of income tax
provisions in relation to income earned by jurisdiction, primarily in the United States and Canada
which apply a differing range of federal, state and provincial income tax rates. Our provision for
income taxes is lower than the tax computed at the combined United States federal and state
statutory income tax rates primarily due to the recognition of U.S. deferred tax assets for which a
valuation allowance was previously established, the exclusion of partnership income not subject to
income tax and Canadian corporate income tax rates that are lower than U.S. corporate income tax
rates.
We had net operating losses applicable to U.S. federal and U.S. state income taxes amounting
to approximately $60.3 million as of December 31, 2009, which begin to expire in 2024 for federal
purposes and 2013 for state purposes. The utilization of our federal and state net operating loss
carry-forwards is dependent on the future profitability of the Company. Furthermore, the Internal
Revenue Code (IRC) imposes a substantial limitation on the annual utilization of net operating
losses in the event of an ownership change of more than 50% during any three year period. The
application of IRC Section 382 varies by state jurisdiction and could have a significant impact on
the state net operating losses available for deduction.
Due to uncertainties related to the future deduction of the cumulative federal and state net
operating losses, the Company maintains a full valuation allowance against its gross U.S. deferred
tax assets.
We have not recorded any liabilities for uncertain tax positions.
11
Table of Contents
10. Geographic Information
We operate in one industry, the processing, distribution and sale of shelf-stable protein
products, with primary operations in the U.S., Canada and Puerto Rico. Revenues in the countries
wherein customers are located were as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
United States |
$ | 192,065 | $ | 195,468 | $ | 580,465 | $ | 584,867 | ||||||||
Canada |
38,440 | 37,817 | 113,901 | 103,157 | ||||||||||||
Other |
12,860 | 13,426 | 37,859 | 43,330 | ||||||||||||
Revenue |
$ | 243,365 | $ | 246,711 | $ | 732,225 | $ | 731,354 | ||||||||
11. Fair Value of Financial Instruments and Risk Management
Authoritative guidance requires fair value measurements to be classified and disclosed in one
of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the
measurement date for assets or liabilities;
Level 2: Inputs other than quoted prices in active markets which are either directly or
indirectly observable; and
Level 3: Unobservable inputs are used when little or no market data is available.
We have determined the estimated fair values of our financial instruments based on appropriate
valuation methodologies, however considerable judgment is required to develop these estimates. The
fair values of financial instruments are not materially different from their carrying values.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying values of financial instruments measured at fair value on a recurring basis are
classified into the following categories (in thousands):
Fair value measurements at October 2, 2010 using: | ||||||||||||
Quoted prices in | ||||||||||||
active markets | Significant | Significant | ||||||||||
for identical | other observable | unobservable | ||||||||||
assets | inputs | inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: |
||||||||||||
Derivatives designated as effective hedges |
$ | | $ | 3,422 | $ | | ||||||
Liabilities: |
||||||||||||
Derivatives designated as effective hedges |
$ | | $ | 1,482 | $ | |
At October 2, 2010, the carrying value of financial instruments measured at fair value on
a recurring basis were all comprised of derivative contracts designated as effective hedges,
including interest rate swap contracts, forward foreign exchange contracts and commodities swap
contracts. The fair values of these contracts were marked to market value using a discounted cash
flow model.
The carrying values of financial instruments, including accounts receivable, prepaid expenses,
other current assets, accounts payable, accrued expenses and other current liabilities, approximate
fair value due to short-term maturities of those instruments.
The estimated fair value of certain debt instruments is based upon observable market
information. Notes issued under the Senior Term Loan are subject to variable rates of interest and
are considered to have fair values that approximate carrying values. The Revolver is subject to
variable interest rates that are considered to approximate market rates, and is therefore
considered to have a fair value that approximates the carrying value. Our Senior Secured Notes were
issued at market rates on December 17, 2009 and are considered to have a fair value that
approximates their carrying value as of October 2, 2010.
12
Table of Contents
Fair Value Measurements on a Nonrecurring Basis
Non-financial assets and liabilities are recognized at fair values subsequent to initial
recognition when they are deemed to be other than temporarily impaired. There were no material
non-financial assets and liabilities deemed to be other than temporarily impaired and measured at
fair value on a non-recurring basis as of October 2, 2010.
Foreign Currency Risk
Clover Leafs functional currency is the Canadian dollar, however it purchases and sells
products in transactions denominated in the U.S. dollar. As a strategy to be competitive in such
transactions, in 2009 and 2010, Clover Leaf entered into forward contracts to purchase
the U.S. dollar in amounts comparable to and maturing in periods that hedge the purchase of product
that will be transacted in the U.S. dollar at the forward purchase rate of exchange.
Clover Leaf has a series of forward contracts to purchase U.S. dollars, totaling $7.9 million
and a de minimis amount as of October 2, 2010 and December 31, 2009, respectively, as hedges
against purchases of certain products denominated in the U.S. dollar. Further, Bumble Bee has
entered into a series of forward contracts to purchase the Euro, totaling $6.3 million as of
October 2, 2010, as hedges against purchases of certain products denominated in the Euro. Assets
totaling $0.9 million and a de minimis amount (representing the fair value of these contracts) are
included in prepaid expenses and other assets on the accompanying condensed consolidated balance
sheet as of October 2, 2010 and December 31, 2009, respectively. Additionally, liabilities totaling
$0.1 million (representing the fair value of these contracts) are included in other current
liabilities on the accompanying condensed consolidated balance sheets as of October 2, 2010. No
such liability existed at December 31, 2009. Realized gains and losses on forward contracts are
included in other expense (income), net on the accompanying consolidated statements of
operations.
Commodities Price Risk
We are exposed to changes in the price of fish, metals and fuel that are components of our
product costs. We monitor the pricing of these commodities and seek to make purchases in amounts
and at times that allow us to maintain a competitive position in the markets in which we sell our
finished products. We have, during 2009 and 2010, entered into purchases of swap contracts that
effectively fix the pricing of aluminum can content and fuel oil at levels we expected were lower
than planned purchases of such commodities.
As of October 2, 2010 and December 31, 2009, we had outstanding a series of commodity swap
contracts hedging future can and fuel oil purchases totaling $12.2 million and $17.0 million,
respectively. Assets representing unrealized gains totaling $2.5 million and $4.3 million are
included in prepaid expenses and other assets on the accompanying condensed consolidated balance
sheets as of October 2, 2010 and December 31, 2009, respectively. Realized gains and losses on swap
contracts are included in cost of revenue on the accompanying condensed consolidated statements
of operations.
Interest Rate Risk
We are exposed to interest rate risk related to interest payments on our debt instruments. As
a strategy to reduce risk of increases in borrowing rates, we may choose to hedge a portion of our
outstanding borrowing, as permitted under our borrowing arrangements, so as to effectively fix
variable interest rates. As of October 2, 2010 and December 31, 2009, we had outstanding an
interest rate swap contract hedging interest payments related to $75.0 million of borrowing under
the Revolver. The interest rate swap contract will mature in December of 2011, with 15 months
remaining under the contract as of October 2, 2010. Liabilities representing unrealized pre-tax
losses totaling $1.4 million and $0.8 million are included in other current liabilities on the
accompanying condensed consolidated balance sheets as of October 2, 2010 and December 31, 2009,
respectively. Realized gains and losses on interest rate swaps are included in net interest
expense on the accompanying condensed consolidated statements of operations.
Credit risk
Our financial assets are subject to credit risk. These financial assets include cash held at
financial institutions, derivative financial instruments that have positive value, and accounts
receivable. The maximum exposure to credit risk is equal to the carrying value of financial assets.
We assess the ability of debtors to settle amounts payable to us, taking into account financial
position, past experience, credit rating, credit reports and other factors. We set credit limits
regularly, and in cases where the credit quality of a customer does not meet our requirements, we
require a cash deposit before product is shipped.
The carrying value of accounts receivable are periodically adjusted to estimated net
realizable value through allowances for doubtful accounts, with the amounts of estimated losses
recognized as adjustments to selling, general and administrative (SG&A) expenses. We base our
estimate of uncollectible accounts receivable on such factors as the age of accounts, discussion
with creditors and initial assessment of ability to make timely payment. When a receivable balance
is considered uncollectible, it is written off against the allowance for doubtful accounts.
Subsequent recovery of amounts previously written off, if any, are credited to SG&A
expenses as collected. The allowances for doubtful accounts were $0.5 million and $0.6 million
as of October 2, 2010 and December 31, 2009, respectively, and are included as an adjustment to
accounts receivable, net on the accompanying condensed consolidated balance sheets.
13
Table of Contents
12. Commitments and Contingencies
We are a defendant from time to time in lawsuits and disputes arising in the normal course of
business. Management believes the ultimate outcome of these matters will not have a material
adverse effect on our consolidated financial position, results of operations, or cash flows.
In 2008, Bumble Bee engaged an environmental consulting firm to investigate a fuel oil leak
resulting in contamination of the soil at its Cape May, New Jersey clam packing facility. Our
estimate of the cost to remediate the damage related to the oil contamination is approximately $3.6
million. Bumble Bee recorded an estimated cost to remediate the soil contamination in the amount of
$1.0 million as of the date of the Acquisition and an additional $2.6 million, with a corresponding
increase to goodwill, in the third quarter of 2009 as a result of an updated estimate for a total
estimated cost of $3.6 million, which represents our best estimate of cost to remediate the damage.
The estimate will be updated upon the completion of further testing of the site and finalization of
the remediation plan, and further adjustments to the remediation cost will impact the consolidated
statement of operations. The remaining estimated $3.3 million liability is included in other
current liabilities on the accompanying condensed consolidated balance sheet as of October 2,
2010. We did not use any discounting convention in the measurement of the liability recorded
therein as the timing of the estimated settlement is not fixed or reliably determinable.
In October 2006, U.S. Customs and Border Control informed Bumble Bee that certain imports of
tuna loins were subject to duties at higher rates than claimed by Bumble Bee. Bumble Bee has filed
administrative protests locally and a request for additional review at customs headquarters.
Counsel has been retained to represent Bumble Bee in its opposition to the assessment of these
additional duties. The expected cost to bring the matter to a resolution is not yet determinable
given the length of time inherent in the protest process and the complexity of the issues involved.
Bumble Bee is a party to a consent decree, as amended, with the State of Maine which
established, among other requirements, that certain minimum case volumes be produced during each
calendar year until the decree expires on December 31, 2010. Bumble Bee achieved the minimum
production volume for 2009. In April 2010, Bumble Bee closed its facility in Maine due to
significant reductions in the total allowable herring catch. In connection with the closure, the
State of Maine waived the production requirement for the remainder of 2010. As such, management
considers this matter resolved.
As of October 2, 2010, commitments under operating leases of premises and equipment for each
of the next five years and in the aggregate thereafter were as follows (in thousands):
2010 (remaining) |
$ | 786 | ||
2011 |
2,656 | |||
2012 |
2,370 | |||
2013 |
2,240 | |||
2014 |
1,431 | |||
Thereafter |
3,744 | |||
$ | 13,227 | |||
As of October 2, 2010, commitments attributable to royalty contracts were as follows (in
thousands):
2010 (remaining) |
$ | 752 | ||
2011 |
850 | |||
2012 |
850 | |||
2013 |
850 | |||
$ | 3,302 | |||
13. Related Party Transactions
Certain executive officers of Connors own investments in a tuna fishing business that is an
indirect supplier of fish to Connors.
In November 2009, Bumble Bee sold its interest in Atlantic Natural Foods, LLC (ANF) to its
joint venture partner, in which an executive officer of Bumble Bee holds a significant ownership
interest, for $800,000, $200,000 of which was paid in cash at the closing and $200,000 of which was paid in May 2010. The remainder of the purchase price
consideration was comprised of a note that is payable in installments of $200,000 in each of
November 2010 and April 2011. Interest on the note accrues
at a rate of 8.5% per annum. The note was subsequently sold to BBFLP for its face amount on December 17, 2009 and is
therefore not reflected on the condensed consolidated balance sheet as of October 2, 2010. In
addition to the investment in ANF, Bumble Bee held $0.3 million in accounts receivable from ANF,
included in accounts receivable, net on the accompanying condensed consolidated balance sheet at
December 31, 2009. In March 2010, ANF paid the remaining $0.3 million of the outstanding
receivable.
14
Table of Contents
Centre Partners Management LLC (CPM), a U.S. private equity investment firm, together with
its affiliates, is the majority owner of Connors. We incurred charges for management fees payable
to CPM of approximately $0.3 million in each of the nine month periods ended October 2, 2010 and
October 3, 2009, respectively.
Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with the condensed
consolidated interim financial statements of Connors Bros. Holdings, L.P. and the accompanying
notes to those statements appearing elsewhere in this quarterly report. The statements in this
discussion regarding industry outlook, our expectations regarding our future performance, liquidity
and capital resources and other non-historical statements in this discussion are forward-looking
statements. These forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties described in the Risk Factors section
of our Registration Statement on Form S-4 initially filed with the Security and Exchange Commission on May 21, 2010, and
declared effective by the SEC on August 16, 2010 and the Cautionary Note Regarding Forward-Looking
Statements set forth below. Our actual results may differ materially from those contained in or implied by any
forward-looking statements.
Results of Operations
Quarter Ended October 2, 2010 Compared to the Quarter Ended October 3, 2009
Quarter Ended | ||||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Revenue |
$ | 243,365 | $ | 246,711 | ||||
Gross profit |
52,368 | 52,303 | ||||||
Selling, general and administrative expenses |
26,451 | 27,411 | ||||||
Restructuring and other transition costs |
792 | | ||||||
Net interest expense |
7,051 | 11,550 | ||||||
Loss on prepayment of debt |
1,969 | | ||||||
Other income, net |
2,900 | 3,560 | ||||||
Net income |
$ | 14,905 | $ | 12,867 |
Revenue. Revenue for the third quarter of 2010 decreased $3.3 million, or 1.4%, to $243.4
million as compared to revenue of $246.7 million for the third quarter of 2009. The decrease in
revenue was primarily a result of price reductions in both the U.S. and Canadian businesses in
response to lower fish costs, which offset increased volumes in the U.S. and the benefit to
Canadian revenues, as translated to the U.S. dollar, of the strengthening of the Canadian dollar.
Consolidated volumes were essentially flat for the third quarter of 2010 as compared to the third
quarter of 2009.
Gross Profit. Gross profit for the third quarter of 2010 increased $0.1 million, or 0.1%, to
$52.4 million as compared to gross profit of $52.3 million for the third quarter of 2009. Lower
revenues in the third quarter of 2010 were generally offset by lower product costs. While we
incurred increased sardine costs due to a lower-than-expected herring catch in the third quarter of
2010, this was offset by higher salmon costs in the third quarter of 2009. Due to the offsetting
gross profit variances and no significant change in volumes in the third quarter of 2010 as
compared to the third quarter of 2009, gross profit was essentially the same.
Selling, General and Administrative Expenses. Selling, general and administrative
(SG&A) expenses for the third quarter of 2010 decreased $1.0 million, or 3.5% to $26.5 million as
compared to $27.4 million for the third quarter of 2009. SG&A expenses were 10.9% of revenue for
the third quarter of 2010 as compared to 11.1% for the third quarter of 2009. The decrease was
attributable to lower advertising expenses, primarily related to a radio advertising campaign in
the third quarter of 2009 which was not repeated in the third quarter of 2010, lower amortization of intangible assets, lower product liability
self-insurance expenses and lower professional and consulting expenses, which were partially offset
by increased compensation expenses.
15
Table of Contents
Restructuring and Other Transition Costs. Restructuring and other transition costs for the
third quarter of 2010 of $0.8 million represented costs related to the closure of our sardine
cannery located in Prospect Harbor, Maine and expenses related primarily to legal advisory services
related to a possible sale or refinancing of the operating
businesses. There were no such comparable costs in the third quarter of 2009.
Net Interest Expense. Net interest expense totaled $7.1 million for the third quarter of 2010
as compared to $11.6 million for the third quarter of 2009, a decrease of $4.5 million. The
decrease was a result of decreased debt levels and lower interest rates on debt following the December 2009
refinancing.
Loss on Prepayment of Debt. In August 2010, we prepaid certain capital leases and other debt.
In September 2010, we prepaid $22.0 million of our 7.75% senior secured notes and incurred charges of $2.0 million. These prepayments
took place in advance of the scheduled installments and we incurred a loss on the prepayment
comprised of the acceleration of the recognition of deferred debt issuance cost charges and debt
discount, as well as prepayment premiums. There were no such comparable costs in the third quarter of 2009.
Other Income, Net. Other income, net of $2.9 million for the third quarter of 2010 included
$2.4 million in foreign currency gains, including a $2.0 million unrealized gain on the
remeasurement of debt denominated in U.S. dollars on the books of Clover Leaf, as well as gains on
the disposal of certain capital assets and income from joint ventures. Other income, net of $3.6
million for the third quarter of 2009, included $3.1 million of foreign currency gains, including
unrealized foreign currency gains related to remeasurement of Clover Leafs debt that was
denominated in U.S. dollars, as well as gains on the disposal of certain assets.
Net Income. Net income for the third quarter of 2010 was $14.9 million as compared to $12.9
million for the third quarter of 2009. The increase in net income was primarily a result of reduced
interest expense, offset, in part, by losses on the prepayment of debt and lower other income, net.
Nine Months Ended October 2, 2010 Compared to the Nine Months Ended October 3, 2009
Nine Months Ended | ||||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Revenue |
$ | 732,225 | $ | 731,354 | ||||
Gross profit |
162,019 | 141,561 | ||||||
Selling, general and administrative expenses |
79,767 | 80,328 | ||||||
Restructuring and other transition costs |
4,472 | | ||||||
Net interest expense |
22,378 | 36,025 | ||||||
Loss on prepayment of debt |
2,954 | | ||||||
Other income, net |
2,162 | 4,977 | ||||||
Net income |
$ | 41,643 | $ | 22,981 |
Revenue. Revenue for the first nine months of 2010 increased by $0.9 million or 0.1% to $732.2
million as compared to revenue of $731.4 million for the first nine months of 2009. Revenue
increases arising from higher volume and the increase in the value of the Canadian dollar, which
resulted in the revenue of Clover Leaf increasing when translated to U.S. dollars, were offset in
part by lower pricing. Price reductions in both the U.S. and Canadian businesses were taken in
response to lower fish costs. U.S. volumes increased by 3.6% in the first nine months of 2010 as
compared to the first nine months of 2009, with albacore tuna, lightmeat tuna and clams generating
most of the U.S. volume increase. Canadian domestic volumes also increased, while international
volumes declined due to weak economies in international markets.
Gross Profit. Gross profit for the first nine months of 2010 increased $20.5 million, or
14.5%, to $162.0 million as compared to gross profit of $141.6 million for the first nine months of
2009. Cost of sales for the first nine months of 2009 included $8.2 million in non-cash charges
arising from the step-up of inventory costs to fair value in connection with the Acquisition. Gross
profit for the first nine months of 2010 as compared to gross profit excluding inventory step-up
charges for the first nine months of 2009 increased by $12.2 million, or 8.2%. The increase in
gross profit, excluding step-up charges, was a result of improved gross margin performance in both
the U.S. and Canadian markets. Gross margins improved as a result of lower can and fish costs, and
a strengthening of the Canadian dollar, which was partially offset by lower gross profit from
international sales due to weak economic conditions. For the
U.S., tuna and sardines were the primary contributors to the improvement in gross profit margin for
the first nine months of 2010 as compared to the first nine months of 2009. Canadian gross margins
improved in the first nine months of 2010 as compared to the first nine months of 2009, and the
gross profit contribution from the Canadian business also improved as a result of the increase in
the exchange rate used to translate gross profit from the Canadian dollar to the U.S. dollar.
16
Table of Contents
Selling, General and Administrative Expenses. SG&A expenses for the first nine months of 2010
decreased $0.6 million, or 0.7%, to $79.8 million as compared
to $80.3 million for the first nine
months of 2009. SG&A expenses as a percentage of revenue were 10.9% for the first nine months of
2010 as compared to 11.0% for the first nine months of 2009. SG&A expenses for the first nine
months of 2010 were lower as a result of lower advertising costs, lower amortization of intangible
assets and decreased workers compensation expenses, offset in part by higher compensation expenses,
consulting expenses and the effect of the change in foreign exchange rates on the translation of
Canadian SG&A expenses. The increased compensation expense was related primarily to increased bonus
accruals as a result of improved performance of the business. Increased consulting expenses were
related to a special project that is not expected to be repeated. In addition, the increase in the
rate of exchange used to translate SG&A expenses of the Canadian business to the U.S. dollar was
offset, in part, by a decrease in consumer marketing expenses in Canada.
Restructuring and Other Transition Costs. Restructuring and other transition costs for the
first nine months of 2010 of $4.5 million represented $2.6 million in costs related to plant
closures, $1.3 million in contract termination costs, and $0.6 million in expenses related
primarily to legal advisory services related to a possible sale or refinancing of the operating
businesses. The plant closure costs were primarily related to the closure of our sardine cannery
formerly operated in Prospect Harbor, Maine, including severance costs, property impairment charges
and other closure preparation costs. We also reduced the accrual related to the maintenance of the
former meats processing plant in Augusta, Georgia as we completed the disposal of that former plant
by donating it. Substantially all of the costs related to the closures of the Prospect Harbor,
Maine and Augusta, Georgia plants were incurred by the end of the third quarter of 2010, and we expect
only minimal final expenses related to these plant closures during the balance of 2010. In February
2010, we incurred $1.3 million in costs to terminate a contract with a freight carrier which had
unfavorable terms. No such plant closure or contract termination costs were incurred in the first
nine months of 2009. In July 2010, we announced that we had hired an investment banking firm to
review strategic alternatives, including the possible sale of the operating companies, and we
subsequently incurred $0.6 million in expenses related to legal and contracted administrative
services in connection with reviewing those alternatives.
Net Interest Expense. Net interest expense totaled $22.4 million for the first nine months of
2010 as compared to $36.0 million for the first nine months of 2009, a decrease of $13.6 million.
The decrease was a result of decreased debt levels and lower interest rates on debt as a result of the
December 2009 refinancing.
Loss on Prepayment of Debt. We prepaid $10.0 million and $6.6 million of our senior secured
notes in March and June of 2010, respectively. In August 2010, we prepaid certain capital leases
and other debt. In September 2010, we prepaid $22.0 million
of our 7.75% senior secured notes and incurred charges of $3.0 million.
These prepayments were done in advance of the installment schedules, and we incurred a loss on the
extinguishment comprised of the acceleration of the recognition of deferred debt issuance cost
charges and debt discount, as well as prepayment premiums.
Other Income, Net. Other income, net totaled $2.2 million for the first nine months of 2010 as
compared to other income, net, of $5.0 million for the first nine months of 2009. Other income, net
for the first nine months of 2010 was primarily comprised of foreign exchange gains on the
remeasurement of Clover Leafs debt denominated in the U.S. dollar.
Net Income. Net income for the first nine months of 2010 was $41.6 million as compared to
$23.0 million for the first nine months of 2009. The increase in net income was a result of
improved gross profit and lower interest expense, offset, in part, by charges related to
restructuring and other transition costs, losses on debt prepayments, lower foreign currency gains,
and higher income taxes. Income taxes increased as a result of increased pre-tax earnings.
Cash Flows, Liquidity and Capital Resources
Cash totaled $1.9 million at October 2, 2010. Our cash flows from operations, together with
borrowings under our senior revolving credit facility, have historically been sufficient to meet
our working capital and substantially all of our capital expenditure requirements. Our primary
sources of liquidity will be cash flow from operations and borrowings under our senior revolving
credit facility. We will also seek to finance our capital expenditures under capital leases or
other debt arrangements that provide liquidity or favorable borrowing terms. Based on our current
level of operations, we believe our cash flows from operations and available borrowings under our
senior revolving credit facility, augmented by ad hoc borrowing for certain capital projects or
insurance premiums, will meet our liquidity needs for the foreseeable future and allow for
continued reduction in debt levels or distributions to owners, as permitted under our debt
agreements.
17
Table of Contents
Cash Flows from Operating Activities
Cash provided by operating activities for the first nine months of 2010 was $103.8 million
compared to $59.9 million for the first nine months of 2009, an increase of $43.9 million. The
increase in operating cash flows was primarily a result of improved earnings and reductions in
working capital levels. For the first nine months of 2010, net income, as adjusted to exclude
income and expenses not affecting cash (and exclusive of working capital changes) was $70.0
million, as compared to $56.2 million for the first nine months of 2009. Working capital for the
first nine months of 2010, excluding the impact of changes occurring as a result of foreign
currency translation, decreased by $33.7 million as compared to a decrease in working capital of
$6.0 million for the first nine months of 2009. For the first nine months of 2010, the most
significant changes to working capital resulted from increased accounts payable, lower inventories,
increased accounts receivable, and increased accrued expenses. Accounts payable increased due to
the seasonal timing of purchases and settlements. The decrease in inventories occurred as a result
of the timing of sales, production and purchasing activity as well as improved supply chain
management. Accounts receivable increased as a result of the timing of sales and cash collections.
The increase in accrued expenses was primarily a result of increased trade promotions. For the first
nine months of 2009, the net decrease in working capital was primarily a result of sales
transaction timing and seasonal changes in inventories and accounts payable, as well as an increase
in accrued expenses and a decrease in other liabilities. Management does not expect the decrease in
working capital that occurred in the first nine months of 2010 to continue, and working capital
levels are expected to modestly increase during the fourth quarter.
Cash Flows Used in Investing Activities
Cash used in investing activities for the first nine months of 2010 totaled $6.4 million
compared to $8.8 million for the first nine months of 2009, a decrease of $2.4 million. Cash used
in investing activities for the first nine months of 2010 was comprised of $7.6 million in
additions to property, plant and equipment partially offset by $0.5 million in proceeds from the
sale of assets and approximately $0.8 million in cash receipts from government grants. Cash used in investing
activities for the first nine months of 2009 included $9.1 million in additions to property, plant
and equipment, and $1.3 million in additional costs incurred related to the Acquisition partially
offset by $1.6 million in proceeds from the sale of assets.
Cash Flows Used in Financing Activities
Cash used in financing activities for the first nine months of 2010 totaled $99.9 million and
included $42.5 million in net payments on the senior revolving credit facility, $52.7 million in
payments on other debt obligations (including the pre-payment of $16.6 million of the senior term
loan and $22.0 million of the 7.75% senior secured notes),
cash distributions to owners for partnership tax obligations of $5.4 million, and payment of $2.1
million in debt issuance costs related to the completion of the registration and exchange of registered
for non-registered senior secured notes, all of which were partially offset by proceeds from the issuance
of debt of $2.8 million. Cash used in financing activities for the first nine
months of 2009 totaled $55.1 million and included $37.4 million in net payments on the senior
revolving credit facility, $17.2 million in payments on other debt obligations and cash distributions
to owners for partnership tax obligations of $3.9 million, all of which were partially offset by
proceeds from the issuance of debt of $3.4 million.
18
Table of Contents
Contractual Obligations
The following is a summary of contractual obligations as of October 2, 2010 and for each of
the next five years and thereafter (in thousands):
2010 | ||||||||||||||||||||||||
(remaining) | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||
Term loan |
$ | 2,375 | $ | 9,500 | $ | 7,125 | $ | | $ | | $ | | ||||||||||||
Revolving credit facility |
| | | 95,012 | | | ||||||||||||||||||
Senior secured notes |
| | | | | 198,000 | ||||||||||||||||||
Minimum royalty payments |
752 | 850 | 850 | 850 | | | ||||||||||||||||||
Installment notes |
861 | 1,408 | | | | | ||||||||||||||||||
Capital lease obligations |
2 | 5 | | | | | ||||||||||||||||||
Operating lease obligations |
786 | 2,656 | 2,370 | 2,240 | 1,431 | 3,744 | ||||||||||||||||||
$ | 4,776 | $ | 14,419 | $ | 10,345 | $ | 98,102 | $ | 1,431 | $ | 201,744 | |||||||||||||
Pension Funding
We contributed $0.4 million and $0.6 million towards the required minimum funding levels
during the three and nine months ended October 2, 2010, respectively, and expect to contribute an
estimated additional $0.2 million to defined benefit pension plans during the remainder of 2010.
Capital Expenditures
We anticipate incurring a total of approximately $10.0 million to $12.0 million in capital
expenditures in 2010, including the $6.9 million incurred during the first nine months of 2010 (net
of government loans). We have secured a government sponsored loan for approximately $3.0 million,
which will, including interest accrued, be forgiven by the applicable government agency three years
after the borrowing takes place if we maintain current employment levels at the location at which
the capital projects will take place.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current
or future material effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources.
Environmental Matters
We continue to assess the fuel oil damage to the soils and groundwater in an area of our Cape
May, New Jersey facility. See Note 12 to our condensed consolidated financial statements included
elsewhere herein.
Critical Accounting Policies
There have been no changes to our critical accounting policies as disclosed in our
Registration Statement on Form S-4 initially filed with the SEC on May 21, 2010, and declared
effective by the SEC on August 16, 2010, except as discussed in the Recently Adopted Accounting
Standards section of this Managements Discussion and Analysis of Financial Condition and Results
of Operations.
Recently Adopted Accounting Standards
Effective January 1, 2010, we adopted Accounting Standards Update 2009-17 (Topic 810)
requiring companies to identify the primary beneficiary of a variable interest entity as the
enterprise that has both the power to direct the activities of a variable interest entity and the
obligation to absorb losses or the right to receive benefits of the entity that could potentially
be significant to the variable interest entity. Further, companies are required to perform on-going
reassessments of whether an enterprise is the primary beneficiary and eliminate the use of the
quantitative approach previously required for determining the primary beneficiary. Currently, we
are not the primary beneficiary of any variable interest entity.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking statements are based on our managements beliefs and assumptions and on information
currently available to us. The use of any words such as anticipate, continue, estimate,
expect, may, might, will, project, should, believe, intend, continue, could,
plan, predict and negatives of these words and similar expressions are intended to identify
forward-looking statements. In particular, statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance contained in this report are
forward-looking statements. These statements are based on, but not limited to, managements
assessment of such factors as expected consumer demand, resource supply and competitive
environment. These assessments could prove inaccurate.
19
Table of Contents
We have based these forward-looking statements on our current expectations, assumptions,
estimates and projections. While we believe these expectations, assumptions, estimates and
projections are reasonable, such forward-looking statements are only predictions and involve known
and unknown risks and uncertainties, many of which are beyond our ability to control. These and
other important factors, including those discussed in this report under the heading Managements
Discussion and Analysis of Financial Condition and Results of Operations may cause our actual
results, performance or achievements to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking statements. Some of the key factors that
could cause actual results to differ from our expectations include:
| fluctuations in commodity prices, including wholesale tuna and energy costs; | ||
| the competitive environment in the shelf-stable seafood industry; | ||
| continued consolidation of our retail customers or the loss of a significant customer; | ||
| the decline in the supply of tuna or biomass of wild fish stocks in the fisheries in which we operate or disruption in our ability to procure such biomass; | ||
| reduction in revenue due to declining consumption trends; | ||
| certain hazards and liability risks associated with canned food products, including the impact of recalls; | ||
| uninsured and underinsured losses; | ||
| pension plans that are not fully funded; | ||
| our exposure to changes in foreign currency exchange rates and variations in interest rates; | ||
| changes in U.S. government trade policy; | ||
| our exposure to product liability and product safety-related claims; | ||
| changes in the laws, rules, regulations and policies with respect to the production, processing, preparation, distribution, packaging and labeling of food products; | ||
| our failure to comply with, or adverse changes to, environmental, health and safety regulations; | ||
| the actual or perceived health risks posed by methylmercury in seafood products, including tuna; | ||
| employment disputes, deterioration of labor relations and our inability to attract and retain qualified employees; | ||
| changes in import and export duties, wage rates and political or economic climates in the countries in which we operate; | ||
| failure by a supplier or co-packer to fulfill its obligations to supply us with certain products; | ||
| general risks of the food industry; | ||
| our breach of any of the covenants or other provisions in our debt agreements; | ||
| the success of our marketplace initiatives and acceptance by consumers of our products; | ||
| risks related to our substantial indebtedness; | ||
| downgrades in our credit ratings; | ||
| the loss or dilution of important intellectual property rights; | ||
| our inability to improve productivity and control or reduce costs; | ||
| departure of members of senior management; | ||
| the control of our operation by Centre Partners V L.P.; | ||
| impact of severe weather, natural disasters and climate change; and | ||
| other risks and uncertainties detailed elsewhere in this report. |
Given these risks and uncertainties, you are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included in this report are made only as
of the date hereof. We do not undertake and specifically decline any obligation to update any such
statements or to publicly announce the results of any revisions to any such statements to reflect
future events or developments.
20
Table of Contents
Item 3. Qualitative and Quantitative Disclosures about Market Risk
For information regarding the companys exposure to market risk, see the section entitled
Qualitative and Quantitative Disclosures about Market Risk In our Registration Statement on Form
S-4 initially filed with the SEC on May 21, 2010, and declared effective by the SEC on August 16,
2010. Refer to the footnote entitled Fair Value of Financial Instruments and Risk Management
included in the Item 1 of this report for information regarding our use of derivatives to hedge
certain financial risks.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, together with our CEO and CFO, evaluated the effectiveness of our disclosure
controls and procedures (as defined by Rule 13a-15(e) of the Securities and Exchange Act of 1934) as of
the end of the period covered by this report. Based upon that evaluation, the CEO and CFO concluded
that, as of the end of the period covered by this report, our disclosure controls and procedures
were effective.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
We are a defendant from time to time in lawsuits and disputes arising in the normal
course of business. Management believes the ultimate outcome of these matters will not have a
material adverse effect on our consolidated financial position, results of operations, or cash
flows.
In 2008, Bumble Bee engaged an environmental consulting firm to investigate a fuel oil leak
resulting in contamination of the soil at its Cape May, New Jersey clam packing facility. Our
estimate of the cost to remediate the damage related to the oil contamination ranges from
approximately $3.6 million. Bumble Bee recorded an estimated cost to remediate the
soil contamination in the amount of $1.0 million as of the date of the Acquisition and an
additional $2.6 million, with a corresponding increase to goodwill, in the third quarter of 2009 as
a result of an updated estimate for a total estimated cost of $3.6 million, which represents our
best estimate of cost to remediate the damage. The estimate will be updated upon the completion of
further testing of the site and finalization of the remediation plan, and further adjustments to
the remediation cost will impact the consolidated statement of operations. The remaining estimated
$3.3 million liability is included in other current liabilities on the accompanying condensed
consolidated balance sheet as of October 2, 2010. We did not use any discounting convention in the
measurement of the liability recorded therein as the timing of the estimated settlement is not
fixed or reliably determinable.
In October 2006, U.S. Customs and Border Control informed Bumble Bee that certain imports of
tuna loins were subject to duties at higher rates than claimed by Bumble Bee. Bumble Bee has filed
administrative protests locally and a request for additional review at customs headquarters.
Counsel has been retained to represent Bumble Bee in its opposition to the assessment of these
additional duties. The expected cost to bring the matter to a resolution is not yet determinable
given the length of time inherent in the protest process and the complexity of the issues involved.
Bumble Bee is a party to a consent decree, as amended, with the State of Maine which established,
among other requirements, that certain minimum case volumes be produced during each calendar year
until the decree expires on December 31, 2010. Bumble Bee achieved the minimum production volume
for 2009. In April 2010, Bumble Bee closed its facility in Maine due to significant reductions in
the total allowable herring catch. In connection with the closure, the State of Maine waived the
production requirement for the remainder of 2010. As
such, management considers this matter resolved.
Item 1A. | Risk Factors |
There have
been no material changes in the risks and uncertainties described in the
Risk Factors in our Registration Statement on Form S-4 initially
filled with the SEC on May 21, 2010, and declared effective by the
SEC on August 16, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None. |
Item 3. | Defaults Upon Senior Securities |
None. |
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
The list of exhibits required by Item 601 of Regulation S-K to be filed as part of this report is
incorporated by reference to the Index to Exhibits following the signatures herein.
21
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CONNORS BROS. HOLDINGS, L.P. (Registrant) |
||||
/s/ Christopher Lischewski | ||||
Christopher Lischewski | ||||
President and Chief Executive Officer | ||||
Date:
October 29, 2010
22
Table of Contents
INDEX TO EXHIBITS
Exhibit No. | Description | |
31.1* |
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* |
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32* |
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
23