Notes to Condensed Consolidated Financial Statements
(In thousands except per share data)
(Unaudited)
1. BASIS OF PRESENTATION
Overview.
As used in these notes to the Condensed Consolidated Financial Statements, unless otherwise noted or
the context otherwise requires, (1) references to the Company, we, our, or us are to AdvancePierre Foods Holdings, Inc. and its consolidated subsidiaries, and (2) references to
AdvancePierre are to AdvancePierre Foods Holdings, Inc. exclusive of its subsidiaries.
We operate on a
52-week
or
53-week
fiscal year ending on the Saturday closest to December 31. References to Fiscal 2016 are to the
52-week
period ended December 31, 2016 and Fiscal 2017 are to the
52-week
period ending December 30, 2017. The fiscal quarter ended April 1,
2017 (1
st
Quarter 2017) and the fiscal quarter ended April 2, 2016 (1
st
Quarter 2016) each consists of
13 weeks.
The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated
Financial Statements as of and for each of the three years ended December 31, 2016 and notes thereto that are included in our Annual Report on Form
10-K
that was filed with the Securities and Exchange
Commission (SEC) on March 9, 2017 (the Fiscal 2016 Consolidated Financial Statements). The Condensed Consolidated Balance Sheet as of December 31, 2016 was derived from the Fiscal 2016 Consolidated Financial
Statements, but does not include all of the disclosures required by accounting principles generally accepted in the US (GAAP). In the opinion of management, the Condensed Consolidated Financial Statements included herein contain all
required adjustments, consisting of normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of the
results for the entire year.
Description of Business.
We are a leading national producer and distributor of
value-added, convenient,
ready-to-eat
sandwiches, sandwich components and other entrées and snacks. We sell value-added products to the foodservice, retail,
convenience and industrial channels, which correspond to our reportable segments. We market and distribute a broad line of products in multiple product categories including
ready-to-eat
sandwiches (such as breakfast sandwiches, peanut butter and jelly (PB&J) sandwiches and hamburgers); sandwich components (such as
flame-grilled hamburgers, chicken patties and Philly steaks); and other entrées and snacks (such as country fried steak, stuffed entrées, chicken tenders and cinnamon dough bites).
Funds managed by Oaktree Capital Management, LP (Oaktree) control 42% of our common stock. AdvancePierre Foods, Inc.
(APF) is a wholly-owned indirect subsidiary of the Company.
Stock Split and Public Offerings.
On June 21,
2016, we effected a
49.313-for-one
stock split of our common stock (without a corresponding adjustment to the par value) and, on July 20, 2016, completed an initial
public offering (IPO) of 21,390,000 shares of our common stock, in which we sold 11,090,000 shares and the selling stockholders sold the remainder. Also, on January 24, 2017, we completed a secondary public offering in which Oaktree
and certain members of management sold 14,375,000 shares of common stock at a price of $27.00 per share, including 1,875,000 shares purchased by the underwriters who fully exercised their option to purchase such shares. We received no proceeds from
such offering but incurred fees of $1,166 ($508 in Fiscal 2016 and $658 in 1
st
Quarter 2017). Proceeds of $373,570, net of underwriting fees, were received by the selling stockholders. As a result
of such secondary offering, we ceased being a controlled company within the meaning of the corporate governance standards of the New York Stock Exchange.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The accompanying Condensed Consolidated Financial Statements include the accounts of
AdvancePierre Foods Holdings, Inc. and its subsidiaries. All intercompany transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. None of the reclassifications were
material.
Use of Estimates.
The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Significant accounting estimates include estimates of fair values for inventory, goodwill, other intangible assets, other long-lived assets and liabilities under income tax receivable agreements (TRA), in addition to
accounting estimates of sales discounts, promotional allowances,
sales-in-transit,
self-insurance reserves, fair value of stock-based compensation awards and useful
lives assigned to intangible assets, property, plant and equipment. Actual results could differ from those estimates.
7
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
New Accounting Pronouncements.
Pronouncements adopted by the Company.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU)
No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
The new guidance simplifies the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. This guidance was effective for us on January 1, 2017. The adoption did not materially impact our financial statements. In
connection with the adoption, we elected to account for forfeitures as they occur; previously, we were required to record stock compensation expense based on awards that were expected to vest, which had required us to apply an estimated forfeiture
rate. As required, the differential between the amount of compensation previously recorded and the amount that would have been recorded, if we did not assume a forfeiture rate, was recognized as a cumulative effect adjustment which resulted in an
increase of $426 to additional paid in capital, an increase in deferred tax assets of $84 and a decrease to retained earnings of $342.
In July 2015, the FASB issued ASU
No. 2015-11,
Simplifying the Measurement of
Inventory
, which requires entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market.
The updated guidance was effective for us on January 1, 2017 and did not materially impact our financial statements.
Pronouncements under
consideration by the Company.
In January 2017, the FASB issued ASU
2017-04,
Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
. The guidance eliminates the requirement to calculate the implied fair value of goodwill in connection with the measurement of a goodwill impairment
charge. Instead, entities are to record an impairment charge based on the excess of a reporting units carrying amount over its fair value. The revised guidance is to be applied prospectively, and is effective for calendar
year-end
SEC filers in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The new guidance is not expected to have a material impact on our financial statements.
In January 2017, the FASB issued ASU
2017-01,
Business Combinations (Topic 805): Clarifying
the Definition of a Business
. The ASU clarifies the definition of a business and provides guidance to assist entities in determining whether transactions should be accounted for as acquisitions or disposals of assets or whether they should be
accounted for as acquisitions or disposals of a businesses. The ASU is effective for us on January 1, 2018, and will be applied prospectively to future acquisitions or dispositions, and is not expected to have a material impact on our financial
statements.
In October 2016, the FASB issued ASU
2016-16,
Income Taxes (Topic 740):
Intra-Entity Transfers of Assets Other Than Inventory.
The new guidance requires the recognition of the tax consequences of intercompany asset transfers other than inventory when the transfer occurs. The guidance is effective for annual
reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period and will require a modified
retrospective adoption. We are in the process of evaluating this guidance.
In August 2016, the FASB issued ASU
2016-15,
Classification of Certain Cash Receipts and Cash Payments
. The new guidance was issued to reduce diversity in practice with respect to the presentation and classification of certain cash receipts and
payments in the statement of cash flows. The update addresses eight specific cash flow issues, including presentation of certain debt issuance costs, proceeds from settlement of insurance claims and contingent consideration entered into in
connection with acquisitions. The amendments are effective for us in fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require retrospective adoption for all periods presented. An entity that
elects early adoption must adopt all of the amendments in the same period. We are in the process of evaluating this guidance.
In February
2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842)
. The new guidance will require lessees to recognize the assets and liabilities that arise from leases in the balance sheet, including
operating leases. The updated guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. We are in the process of evaluating this guidance
and, based on the progress to date, expect that certain of our operating leases will need to be recognized on our balance sheet (as assets and corresponding liabilities), and instead of recording rent expense (as we do now) for such leases, we will
recognize depreciation expense. Our assessment of the full impact of this guidance is not yet complete.
8
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
In May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers
.
ASU 2014-09
outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. ASU
2014-09,
as amended in August 2015, is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. We are continuing to assess the impact of ASU
2014-09
on our financial
statements, and, based on the progress to date, do not expect the adoption to have a material impact on the timing of our revenue recognition.
3. TAX
RECEIVABLE AGREEMENT
In connection with the IPO, we entered into a TRA with our
pre-IPO
stockholders that requires us to pay the
pre-IPO
stockholders 85% of any realized tax savings in US federal, state, local and foreign income tax that we actually realize (or that we are deemed to realize) as a
result of the utilization of tax attributes that originated during the
pre-IPO
period.
Such tax
savings or tax attributes relate to tax basis (including depreciation and amortization deductions),
pre-IPO
net operating losses (NOLs) and alternative minimum tax credit carryforwards (including
alternative minimum tax credits that arise after the IPO as a result of limitations on the use of NOLs under the alternative minimum tax). On the TRAs effective date of July 20, 2016, we recorded an initial obligation of $254,155 and,
since this represents a transaction with the shareholders at that time, we simultaneously recorded a reduction to additional paid in capital. Any changes to the liability due to early termination or acceleration will be recorded in additional paid
in capital. Any increases or decreases to the liability that are due to new or changed circumstances (such as changes in tax rates or significant disallowed deductions) will be recorded to
non-operating
income
or expenses.
The liability at July 20, 2016 was determined by comparing our expected tax liability if the
pre-IPO
tax attributes are utilized with the expected tax liability if those
pre-IPO
tax attributes are not utilized. The estimate of this liability was based on the tax
attributes available after our 2015 tax return and tax attributes generated between January 2, 2016 and July 19, 2016 along with projections of pretax income. Certain assumptions were made regarding the projected use of the tax attributes,
including NOLs. The use of different assumptions and/or estimates could have a material effect on the estimated liability. The liability, timing and/or payments of amounts due under the TRA will vary depending on a number of factors, including the
amount and timing of
pre-tax
income that we generate and the applicable tax rates.
Payments under
the TRA, along with interest, are due annually, after we file our federal tax return. Interest on the amounts due under the TRA will accrue from April 17 of each year until the payment is made and will be based on LIBOR plus 200 basis points.
Based on the date that we expect to file our tax returns, we expect to make each annual payment in the fourth quarter of each year. Payments under the TRA will continue until all
pre-IPO
tax attributes
are utilized or expired unless we exercise our right to terminate the TRA earlier or if termination is triggered as would occur if there were to be a change of control, as defined in the TRA (see Note 23 regarding an announcement of a merger
agreement between the Company and Tyson Foods, Inc. (Tyson). In the case of a voluntary early termination election by us or a change of control, we would be required to make a lump sum payment equal to the present value of expected
future payments, which would be based on certain assumptions. In certain other cases, such as the sale of any of our subsidiaries in a transaction that is not a change of control, we would be required to make a lump sum payment equal to the
present value of future payments under the TRA attributable to that subsidiary.
We expect to make the first payment in the fourth quarter
of Fiscal 2017 and have therefore classified the estimated amount of $35,793 as current. Interest will accrue on this amount at LIBOR plus 2% between April 17, 2017 and the date of payment.
4. ACQUISITIONS
On October 7,
2016, we acquired all of the issued and outstanding common stock of Allied Specialty Foods, Inc. (Allied) for a purchase price of $62,319 (net of cash acquired of $440). The purchase price was funded entirely from cash on hand at
the time of the acquisition. Allied is a manufacturer of raw and cooked beef and chicken Philly steak products. The acquisition of Allied provides us with additional sandwich component production capacity and expands our market position in the
Philly steak platform by providing entry into fully-cooked product offerings, and expands our geographic reach. We expect that the acquisition will provide certain cost synergies. Allieds customers are primarily in the Foodservice industry,
and prior to the opening of its new 70,000 square foot facility in Vineland, New Jersey in 1
st
Quarter 2017, such customers were being served from a 20,000 square foot manufacturing facility also
located in Vineland, New Jersey that had two cook lines, three raw slicing lines and one breakaway steak line. The new 70,000 square foot facility has seven raw slicing/breakaway lines and four cook lines.
9
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
In connection with the acquisition, we performed valuations of the acquired assets and
assumed liabilities. Intangible assets identified in the valuations included customer relationships, the Allied trade name and certain
non-compete
agreements. Fair values were derived using Level 3
inputs, as defined by ASC 820,
Fair Value Measurement
(ASC 820). The purchase price allocation is still preliminary, pending further information relating to a tax incentive. Such assets and liabilities include tangible
and intangible assets for which fair values were determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as methods for which the determination of fair value required significant management judgment and/or
estimates. Unobservable inputs were developed based on the best information available, which in some instances included our own data. Intangible assets with finite lives are being amortized over the estimated useful lives of such assets using a
method that is based on estimated future cash flows.
The acquisition was recorded in accordance with ASC 805,
Business
Combinations
(ASC 805) and the net purchase price was allocated to assets acquired and liabilities assumed based on estimated fair values at the date of the acquisition as follows:
|
|
|
|
|
Current assets
|
|
$
|
7,184
|
|
Property, plant and equipment
|
|
|
13,821
|
|
Other intangibles:
|
|
|
|
|
Customer relationships
(15-year
estimated useful
life)
|
|
|
17,682
|
|
Trade name
(20-year
weighted average life)
|
|
|
12,910
|
|
Non-compete
agreements (useful lives of between 3 and 5
years)
|
|
|
1,110
|
|
Goodwill
|
|
|
30,685
|
|
Deferred tax liabilities
|
|
|
(13,958
|
)
|
Assumed liabilities
|
|
|
(7,115
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
62,319
|
|
|
|
|
|
|
The goodwill arising from the acquisition is not deductible for tax purposes and consists largely of the
synergies and economies of scale expected from combining and integrating the acquired business into our business, as well as the assembled workforce.
The accompanying Condensed Consolidated Statement of Operations and Comprehensive Income for
1
st
Quarter 2017 include revenue and net income for Allied of $14,118 and $639, respectively. Pro forma information for 1
st
Quarter 2016 as if
the acquisition had occurred prior to January 2, 2016 is presented in the following table:
|
|
|
|
|
Net sales
|
|
$
|
407,657
|
|
Net income
|
|
$
|
17,280
|
|
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Trade accounts receivable
|
|
$
|
90,356
|
|
|
$
|
77,092
|
|
Other receivables
|
|
|
6,397
|
|
|
|
6,516
|
|
Reserves for sales returns and doubtful accounts
|
|
|
(1,200
|
)
|
|
|
(1,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,553
|
|
|
$
|
82,458
|
|
|
|
|
|
|
|
|
|
|
10
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
Other receivables at April 1, 2017 and December 31, 2016 includes $2,121 and
$2,329, respectively, for a product contamination insurance policy claim related to the recall of stuffed chicken breast products that occurred in fiscal 2015. Such amounts were recognized based on a loss contingency model and primarily relate
to a claim for net sales reductions due to product returns, marketing expenses to support post-recall sales, professional fees and travel. We expect to collect the remaining amounts in the second quarter of Fiscal 2017. The full amount of the
adjusted insurance claim is $18,592, of which $1,000 is subject to self-insurance retention. Also included in the full insurance claim amount are unrecorded contingent gains of $3,766 representing claims for business interruption, net of $1,500
which was received in 1
st
Quarter 2017. The amount of $1,500 that we received in 1
st
Quarter 2017 is included in Other (income)
expense, net in the Condensed Consolidated Statement of Operations and Comprehensive Income. The table below summarizes the activity in the recall receivables, which is included in other receivables in the table above:
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
2,329
|
|
Claim adjustment (recorded to cost of goods sold)
|
|
|
(4
|
)
|
Payments received
|
|
|
(204
|
)
|
|
|
|
|
|
Balance at April 1, 2017
|
|
$
|
2,121
|
|
|
|
|
|
|
6. INVENTORIES
Inventories are stated at the lower of cost
(first-in,
first-out)
or net realizable value. Cost for inventory is comprised of the purchase price of raw materials plus conversion costs. Inventories by major classification are as follows:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Finished goods
|
|
$
|
128,470
|
|
|
$
|
115,312
|
|
Raw materials
|
|
|
52,958
|
|
|
|
53,364
|
|
Work in process
|
|
|
2,611
|
|
|
|
2,810
|
|
Reserves for excess and obsolete inventory
|
|
|
(4,319
|
)
|
|
|
(5,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
179,720
|
|
|
$
|
165,626
|
|
|
|
|
|
|
|
|
|
|
7. PROPERTY, PLANT AND EQUIPMENT
Major components of property, plant and equipment along with their respective estimated useful lives are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
April 1,
|
|
|
December 31,
|
|
|
|
(years)
|
|
|
2017
|
|
|
2016
|
|
Land
|
|
|
n/a
|
|
|
$
|
6,459
|
|
|
$
|
5,866
|
|
Land improvements
|
|
|
5
|
|
|
|
4,978
|
|
|
|
4,959
|
|
Buildings
|
|
|
20 30
|
|
|
|
174,288
|
|
|
|
156,144
|
|
Machinery and equipment
|
|
|
5 15
|
|
|
|
219,537
|
|
|
|
214,999
|
|
Software
|
|
|
3 5
|
|
|
|
22,267
|
|
|
|
20,974
|
|
Furniture and fixtures
|
|
|
3 10
|
|
|
|
2,818
|
|
|
|
2,774
|
|
Vehicles
|
|
|
2 5
|
|
|
|
1,254
|
|
|
|
1,257
|
|
Construction in progress
|
|
|
n/a
|
|
|
|
15,595
|
|
|
|
26,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447,196
|
|
|
|
433,044
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
184,495
|
|
|
|
175,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
262,701
|
|
|
$
|
257,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value of
internal-use
software costs included in software
above was $5,708 and $5,261 as of April 1, 2017 and December 31, 2016, respectively. Depreciation of capitalized
internal-use
software costs included in depreciation expense was $869 and $749
for 1
st
Quarter 2017 and 1
st
Quarter 2016, respectively.
11
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
Depreciation expense was $8,979 and $8,058 for
1
st
Quarter 2017 and 1
st
Quarter 2016, respectively.
During 1
st
Quarter 2017, the Company announced its intention to close one of its
manufacturing facilities in Enid, Oklahoma effective May 1, 2017 and relocate the affected employees, production and inventory to another manufacturing facility. In connection with the announcement, the Company assessed the net book value of
the long-lived assets held at this facility for recoverability and concluded that the carrying amount was recoverable. The net book value of long-lived assets at the facility was $1,592 at April 1, 2017. Fair values were determined using level
3 inputs as defined by ASC 820. Unobservable inputs were developed based on the best estimates available, including the Companys projections of future cash inflows and outflows and an independent appraisal of the land and building.
8. GOODWILL
The carrying amounts
of goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foodservice
|
|
|
Retail
|
|
|
Convenience
|
|
|
Total
|
|
Balance at April 1, 2017 and December 31, 2016
|
|
$
|
217,255
|
|
|
$
|
58,031
|
|
|
$
|
55,107
|
|
|
$
|
330,393
|
|
There were no accumulated goodwill impairment losses as of April 1, 2017 and December 31, 2016.
9. DERIVATIVE FINANCIAL INSTRUMENTS
As more fully discussed in the Fiscal 2016 Consolidated Financial Statements, we periodically enter into swap agreements to mitigate our
exposure to fluctuations in the price of natural gas and diesel fuel, and, designate these derivatives as cash flow hedges. If there are diesel or natural gas hedge agreements in place, such derivatives are recognized in the financial statements at
fair value and the net amounts paid or received upon monthly settlement are generally recorded as adjustments to freight expense (in the case of diesel fuel hedging instruments) or utilities expense (in the case of natural gas hedging instruments),
while the effective changes in fair values are generally recorded as components of Accumulated Other Comprehensive Income or Loss (AOCI).
No fuel hedge agreements were in place at April 1, 2017 and December 31, 2016 and none were entered into during the fiscal year to
date periods ended on those dates.
10. FINANCING ARRANGEMENTS
Our debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
2016 First Lien Term Loan, with floating interest rates, maturing June 2, 2023, net of
original issue discount of $4,364 and $4,526, respectively
|
|
$
|
663,882
|
|
|
$
|
663,720
|
|
2016 First Lien Term Loan, held by related party, net of original issue discount of $175 and $181
respectively
|
|
|
26,579
|
|
|
|
26,573
|
|
Senior Unsecured Notes (including related party principal of $40,000)
|
|
|
400,000
|
|
|
|
400,000
|
|
Debt issuance costs
|
|
|
(11,294
|
)
|
|
|
(11,638
|
)
|
Capitalized lease obligations maturing through Fiscal 2020
|
|
|
1,090
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080,257
|
|
|
|
1,078,931
|
|
Less: current maturities
|
|
|
(475
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
1,079,782
|
|
|
$
|
1,078,657
|
|
|
|
|
|
|
|
|
|
|
12
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
On June 2, 2016, we entered into a new first lien term loan in the aggregate amount of
$1,300,000, which matures on June 2, 2023 (the 2016 First Lien Term Loan) and an amendment to our asset-based revolving credit facility (the ABL Facility) to extend its maturity date to June 2, 2021. The net
proceeds from the 2016 First Lien Term Loan of $1,293,500 (which was net of original issue discount of $6,500), were used to repay the amounts outstanding under the 2012 issuance of a $925,000 first lien term loan (the 2012 First Lien Term
Loan) and the 2012 issuance of a $375,000 second lien term loan (the 2012 Second Lien Term Loan) (collectively, the Prior Term Loans), pay related accrued interest of $11,990, pay a prepayment penalty of $3,735 and pay
debt issuance costs of $15,449. Proceeds of $3,619 were retained for working capital and other purposes.
On July 21, 2016,
using proceeds from the sale of our common stock in the IPO, we voluntarily repaid $205,000 of the 2016 First Lien Term Loan. We applied the voluntary repayment to all the scheduled payments that would have fallen due prior to the maturity of the
2016 First Lien Term Loan and also to a portion of the single payment due June 2, 2023.
On December 7, 2016, we issued $400,000
in aggregate principal amount of 5.50% Senior Unsecured Notes due 2024 (the Senior Unsecured Notes) at an issue price of 100% of the principal amount of the Notes, in a private placement to qualified institutional buyers as
defined in Rule 144A under the Securities Act of 1933, and outside the US to
non-U.S.
persons pursuant to Regulation S under the Securities Act. We used the net proceeds of $395,931 together with cash on
hand, to voluntarily repay $400,000 of outstanding borrowings under the 2016 First Lien Term Loan.
Concurrently with the Senior Unsecured
Notes issuance, we completed a repricing amendment that resulted in a 75 basis point decrease in interest rates for the 2016 First Lien Term Loan. As a result of these repayments, at April 1, 2017, the only required future payment under the
2016 First Lien Term Loan was a single payment of $695,000 due on the maturity date of June 2, 2023.
Interest on borrowings under
the 2016 First Lien Term Loan varies based on either LIBOR or a bank base rate, plus a margin as set forth in the following table:
|
|
|
|
|
|
|
|
|
Total Net
|
|
LIBOR
|
|
|
Bank Base
|
|
Leverage Ratio
|
|
Loans
|
|
|
Rate Loans
|
|
Less than or equal to 4.00:1.00
|
|
|
3.00
|
%
|
|
|
2.00
|
%
|
Greater than 4.00:1.00
|
|
|
3.50
|
%
|
|
|
2.50
|
%
|
During both 1
st
Quarter 2017 and Fiscal 2016, our 2016
First Lien Term Loan was subject to LIBOR loan margins. At April 1, 2017 and December 31, 2016, the interest rate on the 2016 First Lien Term Loan was 4.00%.
The 2016 First Lien Term Loan is collateralized by a first-priority security interest in substantially all our assets, except for accounts
receivable, inventory and cash and cash equivalents, which together serve as first-priority collateral for the ABL Facility, on which the 2016 First Lien Term Loan maintains a second-priority interest. The 2016 First Lien Term Loan agreement
includes certain
non-financial
covenants, which include limitations on our ability to incur additional indebtedness, issue preferred stock, pay dividends, make distributions on our capital stock, repurchase
our capital stock, make certain investments, create liens on our assets, enter into transactions with affiliates, transfer and sell assets, merge, consolidate or sell all or substantially all of our assets. Such covenants also create
restrictions on dividends and certain payments by our restricted subsidiaries. At April 1, 2017, we were in compliance with all such covenants. The 2016 First Lien Term Loan agreement also includes financial maintenance covenants that apply
only under certain conditions, and also requires mandatory annual prepayment of certain excess cash flow, as applicable. No excess cash flow prepayment was required with respect to Fiscal 2016.
Interest on the Senior Unsecured Notes is payable semi-annually on June 15 and December 15 of each year, commencing on June 15,
2017. We incurred aggregate fees of $5,087 in connection with issuance of the Senior Unsecured Notes, which were capitalized and are being amortized over the term of the Senior Unsecured Notes and, as a result, the effective interest rate for the
Senior Unsecured Notes was 5.63% at December 7, 2016.
13
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
The Senior Unsecured Notes are guaranteed, jointly and severally, by all our subsidiaries and were issued
pursuant to an indenture which:
|
a)
|
Provides that we may redeem the Senior Unsecured Notes, in whole or in part as follows:
|
|
i)
|
at any time prior to December 15, 2019 at a redemption price equal to 100% of the principal amount, plus applicable accrued and unpaid interest, if any, plus a premium that is the greater of 1.0% of the principal
amount of such Note and the excess, if any, of the present value at such redemption date of the redemption price at December 15, 2019 plus all required interest payments due through December 15, 2019 (excluding accrued but unpaid interest
to the redemption date), computed using a discount rate equal to the treasury rate plus 50 basis points; over the then outstanding principal amount.
|
|
ii)
|
at any time on or after December 15, 2019, at a redemption price equal to the following percentages of the principal amount, plus applicable accrued and unpaid interest, if any:
|
|
|
|
|
|
Year ending December 14,
|
|
Percentage
|
|
2020
|
|
|
104.125
|
%
|
2021
|
|
|
102.750
|
%
|
2022
|
|
|
101.375
|
%
|
2023 and thereafter
|
|
|
100.000
|
%
|
|
iii)
|
at any time prior to December 15, 2019, up to 40% of the aggregate principal amount of the Senior Unsecured Notes with the proceeds from certain equity offerings at a redemption price equal to 105.50% of the
aggregate principal amount of the Senior Unsecured Notes, plus applicable accrued and unpaid interest, if any. Upon the occurrence of certain change of control transactions, we will be required to offer to repurchase the senior Unsecured Notes at
101% of the principal amount, plus applicable accrued and unpaid interest, if any.
|
|
b)
|
Contains covenants that, among other things, restrict our ability and those of our restricted subsidiaries to incur or guarantee additional indebtedness or issue disqualified stock or preferred stock; pay dividends and
make other restricted payments; incur restrictions on the payment of dividends or other distributions from restricted subsidiaries that are not guarantors; create or incur certain liens; make certain investments; transfer or sell assets; engage in
transactions with affiliates; and merge or consolidate with other companies or transfer all or substantially all of our assets.
|
|
c)
|
Provides for customary events of default, including failure to pay any principal or interest when due, failure to comply with covenants and cross acceleration provisions.
|
The maximum borrowing limit on the ABL Facility is $175,000 and such maximum borrowing limit is further subject to a borrowing base
limitation that is derived from applying defined calculations to inventory and accounts receivable balances. The ABL Facility agreement includes certain
non-financial
covenants, as well as certain
financial maintenance covenants that apply only under certain conditions. Availability under the ABL Facility was as follows:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Borrowing base limitation
|
|
$
|
141,485
|
|
|
$
|
125,114
|
|
Less: outstanding letters of credit
|
|
|
5,289
|
|
|
|
5,469
|
|
|
|
|
|
|
|
|
|
|
Net availability
|
|
$
|
136,196
|
|
|
$
|
119,645
|
|
|
|
|
|
|
|
|
|
|
14
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
11. INCOME TAXES
A summary of our income tax provision and related effective tax rates follows:
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
1
st
Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Income Tax provision:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
4,786
|
|
|
$
|
426
|
|
Deferred
|
|
|
13,758
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,544
|
|
|
$
|
1,439
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
39.7
|
%
|
|
|
8.0
|
%
|
Income taxes are accounted for in accordance with authoritative guidance for accounting for income taxes under
which deferred tax assets and liabilities are determined based on the difference between their financial statement basis and their tax basis, using enacted rates in effect for the year in which the differences are expected to reverse. We have
favorable tax attributes, such as significant
tax-deductible
depreciation and amortization and U.S. federal and state net operating losses which result in minimal cash paid for income taxes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. At each reporting date, we consider both negative and positive evidence that impacts the assessment of the realization of deferred tax
assets. During the periods through 1
st
Quarter 2016, we maintained a full valuation allowance against our deferred tax assets because the negative evidence, at that time, outweighed the positive
evidence, such that management concluded that it was not more likely than not that the deferred tax assets were realizable during those periods. Principal among the negative evidence were the sustained history of cumulative tax losses, in part
related to fluctuations in commodity costs and our high degree of financial leverage at those times. Although we reported
pre-tax
income in fiscal 2015, we continued to provide for a full valuation
allowance against our deferred tax assets through April 2, 2016 because we reported significant
pre-tax
losses in previous historical periods.
In the second quarter of Fiscal 2016, we continued the trend of realizing
pre-tax
income that began in
the first quarter of fiscal 2015 and our cumulative income at that time became positive. In addition, our forecasts for the remainder of Fiscal 2016 and Fiscal 2017 indicated continued
pre-tax
income. Additionally, we were able to refinance our debt during Fiscal 2016 on more favorable terms, which resulted in significant annual savings. We also considered forecasts of future taxable income and evaluated the utilization of tax
attributes prior to their expiration. After considering these factors, we determined that the positive evidence outweighed the negative evidence and concluded during the second quarter of Fiscal 2016, that it was more likely than not that our
deferred tax assets were realizable. As a result, we made the determination to release the full valuation allowance of $109,690 in Fiscal 2016. Of the amount released in Fiscal 2016, $73,784 was released through the second quarter, $13,922 in
the third quarter and the remainder in the fourth quarter.
Our effective tax rate for
1
st
Quarter 2017 differs from the expected federal rate of 35% due primarily to the effect of state income taxes. Our effective tax rate for
1
st
Quarter 2016 differs from the expected federal rate of 35% in part due to the utilization of deferred tax assets and the effect of valuation allowances.
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As of April 1, 2017, our federal and
state tax returns for fiscal 2011 through fiscal 2015 remain open under the relevant statutes.
We believe that substantially all tax
positions taken and expected to be taken and reflected in the accompanying Condensed Consolidated Financial Statements are more likely than not to be sustained, based upon their technical merits, upon examination. As a result, no material
amounts were recorded to reverse the impact of tax benefits as of April 1, 2017 or April, 2, 2016.
15
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
12. STOCKHOLDERS EQUITY
Concurrent with the restricted stock awards discussed in Note 16, employees and other recipients made elections under section 83(b) of the
Internal Revenue Code (the 83(b) elections), which triggered instant recognition of compensation for federal income tax purposes. To assist the recipients with the tax liability arising from the 83(b) elections, we
provided loans to these employees, evidenced by promissory notes (the Stockholder Notes), for amounts that approximated each recipients tax liability under the 83(b) elections. The Stockholder Notes are secured by the
shares issued to the respective recipients under our 2009 Omnibus Equity Incentive Plan which, effective August 18, 2016, was renamed the AdvancePierre Foods Holdings, Inc. 2009 Omnibus Equity Incentive Plan (the Equity Incentive
Plan) or any other equity incentive plan. In addition, the Stockholder Notes have recourse in the event of default by the recipient. Interest is charged on the outstanding balances at the
mid-term
applicable federal rate in effect at the issue date. As of April 1, 2017 and December 31, 2016, the interest rates on the Stockholder Notes ranged from 0.95% to 2.04%. Balances
outstanding at April 1, 2017 and December 31, 2016 (which represent principal and related accrued interest) were $721 and $902, respectively, and are presented in the Condensed Consolidated Balance Sheets as deductions from
stockholders equity. Interest on such Stockholder Notes, which are included in related party interest in our Condensed Consolidated Statements of Operations and Comprehensive Income, were nominal for the periods presented. During Fiscal
2016, prior to the IPO, all Stockholder Notes due from our executive officers were repaid and/or retired. Accordingly, Stockholder Notes at April 1, 2017 and December 31, 2016 represent amounts due from other employees.
13. LEASED PROPERTIES
Our leased
properties are fully discussed in the Fiscal 2016 Consolidated Financial Statements and there have been no significant changes since the release of those statements.
14. OTHER LONG-TERM LIABILITIES
In
connection with the acquisition of Landshire, Inc. (Landshire) on January 30, 2015, we recorded a liability of $19,293 as of the acquisition date, for contingent consideration related to certain
earn-out
payments based on the expectation that certain minimum annual volume targets would be achieved. At December 31, 2016, the fair value of the liability for the earn out payments was $9,875 of which
$6,621 was included in other accrued liabilities and the remainder included in other long-term liabilities. We made the payment that was due in 1
st
Quarter 2017 but, with respect to the
remaining balance, we do not believe that the minimum annual target for Fiscal 2017 will be met, and, accordingly, concluded that the remaining fair value balance of $6,582 should be reduced to $0. The fair value reduction is included in Other
(income) expense, net on the Condensed Consolidated Statement of Operations and Comprehensive Income. The activity related to the contingent consideration was as follows:
|
|
|
|
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
9,875
|
|
Accruals
|
|
|
41
|
|
Payments
|
|
|
(3,334
|
)
|
Reduction
|
|
|
(6,582
|
)
|
|
|
|
|
|
Balance at April 1, 2017
|
|
$
|
|
|
|
|
|
|
|
In connection with the acquisition of Better Bakery, LLC (Better Bakery) on April 24, 2015,
we assumed an onerous broker contract. At April 1, 2017 and December 31, 2016, the liability for this contract was $3,538 and $4,198, respectively. These amounts are reflected in other accrued liabilities as the contract expires in Fiscal
2017.
During 1
st
Quarter 2017, payments made with respect to the
earn-out
agreement and the onerous broker contract were $3,333 and $699, respectively.
16
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
15. RESTRUCTURING EXPENSES AND OTHER (INCOME) EXPENSE, NET
During fiscal 2015 and fiscal 2014, we initiated a number of restructuring programs, including initiatives to integrate acquired businesses,
improve the efficiency of our manufacturing and distribution network, as well as initiatives to consolidate certain activities and reorganize our management structure. Expenses incurred with respect to these initiatives were minimal in 1
st
Quarter 2016 as these initiatives were substantially complete in fiscal 2015.
The
amount recorded in Other (income) expense, net for 1
st
Quarter 2017 consisted primarily of the fair value adjustment to the contingent consideration that is discussed in Note 14
($6,582) and income related to a product recall that is discussed in Note 5 ($1,500), partially offset by certain public filing expenses ($727) and loss on disposal of fixed assets ($695). Other expense, net for 1
st
Quarter 2016 consisted primarily of public filing expenses.
16. STOCK-BASED COMPENSATION
Stock-based Compensation
To provide additional incentives to selected employees, directors and consultants whose contributions are considered essential to the growth
and success of our business, our board of directors adopted the Equity Incentive Plan, effective January 15, 2009. The Equity Incentive Plan provides for the grant of stock options, share appreciation rights, restricted stock, restricted stock
units (RSUs), deferred shares, performance shares, unrestricted shares and other share-based awards. Awards under the Equity Incentive Plan, as amended on July 20, 2016 and August 18, 2016, are limited to 16,562,730 shares
of our common stock, subject to adjustment as provided for in the Equity Incentive Plan document. Board of director discretion is allowed, under the Equity Incentive Plan, with respect to the determination of vesting periods, contractual lives and
stock option exercise prices. The amendment on July 20, 2016 provided for the increase in the maximum grants allowed to 16,562,730 shares, and the amendment on August 18, 2016 effected the name change to the Equity Incentive Plan that is
disclosed in Note 12.
Restricted Stock
Prior to July 20, 2016, the only awards issued under the Equity Incentive Plan were restricted stock, and, pursuant to the First Amended
and Restated Stockholders Agreement by and among the Company and its stockholders and the individual award agreements, transfers of such awards were restricted. In addition, prior to July 20, 2016, such restricted stock provided us
with the right, but not the obligation to repurchase all or any portion of a recipients vested equity interests in the event such recipients employment was terminated for any reason. The purchase price that we paid for the restricted
stock was based on a valuation made in good faith by our board of directors. Since we had previously exercised this right in every instance of employment termination, the awardees did not bear the risks and rewards of ownership. Therefore, we
determined that liability classification of these awards was appropriate until the point that the shares had been vested for six months, a sufficient period of time (six months) to allow the holder to fully bear the risks and rewards of ownership.
If the employee remained with us after the six month period, the award was reclassified from liabilities to equity. In connection with the IPO, The First Amended and Restated Stockholders Agreement was terminated.
Under liability classification, we were required to recognize a liability based on the stock awards fair value at each reporting date
with reference to its vesting schedule. Following the IPO, more than 25% of our common stock was available for trading on the New York Stock Exchange (NYSE) on July 20, 2016, thereby resulting in a termination of the call right on
that date. Hence, 24 awardees began to bear the risks and rewards of ownership. As a result, the liability award was converted to an equity award as of July 20, 2016, since the call right feature was the only condition that prevented it from
being classified as an equity award. As of that date, the fair value of the award was determined to be $23.53, based on the opening price of our common stock, and accordingly, additional compensation expense of $6,477 was recognized for the period
that spanned the beginning of the third fiscal quarter of 2016 to July 20, 2016. On the same date, the amount of $35,312 was transferred from liabilities to equity. While the award was a liability award, pursuant to ASC 718,
Compensation Stock Compensation,
we were required to
re-measure
the fair value of the award at each reporting date and record additional compensation with reference to the vesting
schedule. Fair values were, at those times, estimated at the grant dates using estimates of enterprise value, adjusted by liquidity discounts. The enterprise value estimates were calculated by applying market benchmark multiples to the most
recent quarters adjusted earnings before interest, taxes, depreciation and amortization for the trailing twelve months period. Annually, those computations were also compared with our estimated future discounted cash flows.
17
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
Further, during the third quarter of 2016, the dividend provision of the restricted stock
award agreement was modified to provide for the payment of
non-forfeitable
dividends on vested and unvested restricted stock.
The table below reflects the restricted stock activity for the year to date period as well as other information related to awards of
restricted stock that were granted under the Equity Incentive Plan. Restricted stock granted under the Equity Incentive Plan generally vests over a three- or four-year period on a graded-vesting basis with equal proportions of the shares vesting on
the annual anniversary date of the grant in each of the three or four years in the vesting period.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair value
per Share
|
|
Unvested Restricted Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year
|
|
|
551,511
|
|
|
$
|
5.99
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(69,585
|
)
|
|
$
|
5.62
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
481,926
|
|
|
$
|
6.05
|
|
|
|
|
|
|
|
|
|
|
Vested Restricted Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year
|
|
|
3,866,430
|
|
|
$
|
2.05
|
|
Vested
|
|
|
69,585
|
|
|
|
5.62
|
|
Repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
3,936,015
|
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
Compensation expense, included in selling, general and administrative expenses, associated with outstanding
restricted stock awards, including credits for stock forfeitures, was $1,204 and $2,739 for 1
st
Quarter 2017 and 1
st
Quarter 2016,
respectively. As of April 1, 2017, total unrecognized compensation cost related to unvested restricted stock awards granted under the Equity Incentive Plan was approximately $4,836. This cost is expected to be recognized over the weighted
average period of 1.3 years.
Since all of the restricted stock awards were reclassified from liabilities to equity as of
July 20, 2016, there was no liability to holders of grants as of April 1, 2017 and December 31, 2016. No restricted stock was granted in 1
st
Quarter 2017.
RSUs and Stock Options
Between August 26, 2016 and December 31, 2016, we awarded certain employees and nonemployee directors RSUs as well as nonqualified
stock options (stock options) with the right to acquire shares of our common stock. These awards vest on a graded-vesting basis over varying periods ranging from two to four years. The awards are subject to service conditions only. Each
RSU may be exchanged on the vesting date for one share of our common stock and can only be settled in shares. Awardees of the RSUs are also entitled to
non-forfeitable
dividend-equivalent payments on vested
and unvested RSUs. The contractual term of the stock option award is 10 years. No awards of RSUs and stock options were made in 1
st
Quarter 2017.
Compensation expense for the RSUs and the stock options are being recognized over the vesting period on a graded-vesting basis based on their
grant-date fair values or modified fair values, as applicable. The grant date fair values or modified fair values of the RSUs are based on the closing price of our common stock on the date of grant or date of modification. The grant-date fair values
or modified fair values of the stock option awards granted during Fiscal 2016 were determined using the Black-Scholes model, and the weighted average inputs to that model are disclosed in our Fiscal 2016 Consolidated Financial Statements.
18
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
The table below provides additional information relating to the RSU awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Fair value
|
|
|
|
Shares
|
|
|
per Share
|
|
Unvested RSUs:
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year
|
|
|
820,409
|
|
|
$
|
25.69
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(61,856
|
)
|
|
$
|
27.58
|
|
Forfeited
|
|
|
(1,521
|
)
|
|
$
|
25.69
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
757,032
|
|
|
$
|
25.68
|
|
|
|
|
|
|
|
|
|
|
RSUs Expected to vest
|
|
|
709,702
|
|
|
$
|
25.69
|
|
|
|
|
|
|
|
|
|
|
Vested RSUs
:
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year
|
|
|
4,948
|
|
|
$
|
25.69
|
|
Vested
|
|
|
61,856
|
|
|
$
|
27.58
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
66,804
|
|
|
$
|
27.44
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to the RSUs was $14,858 at April 1, 2017, which is expected to
be recognized over the weighted average period of 1.7 years (if there are no forfeitures). Compensation expense recognized with respect to the RSUs in 1
st
Quarter 2017 was $3,315.
The table below provides additional information with respect to our stock option awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value (1)
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
(in thousands)
|
|
Unvested stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year
|
|
|
649,385
|
|
|
$
|
25.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(185,567
|
)
|
|
$
|
25.69
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4,562
|
)
|
|
$
|
25.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at end of period
|
|
|
459,256
|
|
|
$
|
25.71
|
|
|
|
9.41 years
|
|
|
$
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest
|
|
|
431,992
|
|
|
$
|
25.71
|
|
|
|
8.85 years
|
|
|
$
|
2,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested stock options
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
185,567
|
|
|
$
|
25.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
185,567
|
|
|
$
|
25.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the total
pre-tax
intrinsic value, based on the closing price of our common stock on the NYSE on April 1, 2017 and is the amount the option holders would have
received had all option holders exercised their options on April 1, 2017.
|
None of the stock options have been
exercised and none have expired. Unrecognized compensation expense related to the stock options was $1,339 on April 1, 2017, which is expected to be recognized over the weighted average period of 1.3 years (if there are no forfeitures).
Compensation expense recognized with respect to the stock options in 1
st
Quarter 2017 was $632.
On April 1, 2017, a total of 5,053,192 shares remained available for grant under the Equity Incentive Plan.
19
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is the amount that would be received from the sale of an asset or paid for transfer of a liability in an orderly transaction between
market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The three-level hierarchy for fair value measurements is based upon the transparency of inputs to the valuation of an asset or liability as of
the measurement date. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability. The hierarchy is as follows:
|
|
|
|
|
|
|
☐
|
|
Level 1 Valuation based upon unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
|
☐
|
|
Level 2 Valuation based upon quoted prices for similar assets or liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instruments.
|
|
|
☐
|
|
Level 3 Valuation based upon other unobservable inputs that are significant to the fair value measurements and are developed based on the best information available, which in some instances include a
companys own data.
|
In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of
the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
Our
non-derivative
financial instruments consist primarily of cash and cash equivalents (including
commercial paper and money market instruments with original maturities of three months or less), trade receivables, trade payables and long-term debt.
On April 1, 2017 and December 31, 2016, except for the 2016 First Lien Term Loan and the Senior Unsecured Notes, the book values of
non-derivative
financial instruments recorded in the accompanying Condensed Consolidated Balance Sheets are considered to approximate fair values due to those instruments being subject to variable interest rates,
having short terms to maturity and/or being outstanding for short periods of time.
Principal, net of original issue discount, of our 2016
First Lien Term Loan, on April 1, 2017 was $690,461. Principal outstanding under the Senior Unsecured Notes was $400,000 on April 1, 2017. The following table summarizes the fair values of the 2016 First Lien Term Loan, the Senior
Unsecured Notes and the contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2017
|
|
|
December 31, 2016
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
2016 First Lien Term Loan
|
|
$
|
703,688
|
|
|
|
|
|
|
$
|
705,425
|
|
|
$
|
|
|
Senior Unsecured Notes
|
|
|
408,000
|
|
|
|
|
|
|
|
404,000
|
|
|
|
|
|
Contingent consideration (see Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,875
|
|
The 2016 First Lien Term Loan and the Senior Unsecured Notes were based on Level 2 inputs, based on the
observable trading value of each respective instrument. The estimated fair values of the financial instruments have been determined using available market information and appropriate valuation techniques. Considerable judgment is required,
however, to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
20
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
18. TRANSACTIONS WITH RELATED PARTIES
Prior to July 20, 2016, Oaktree provided certain management, advisory and consulting services to us pursuant to a Management Services
Agreement that became effective on September 30, 2010. In consideration for the services provided, we were required to pay Oaktree a quarterly management fee of $750, in advance, and were also required to reimburse them for certain
out-of-pocket
expenses incurred with respect to the performance of services. The Management Services Agreement with Oaktree was terminated effective July 20, 2016 in
connection with our IPO. Pursuant to the Management Services Agreement with Oaktree, we recorded expenses of $4,201, representing fees and
out-of-pocket
expenses, in 1
st
Quarter 2016. Such expenses were included in selling, general and administrative expenses. We also paid Oaktree an aggregate success fee of $9,000 on July 20, 2016 pursuant to the
Management Services Agreement, which required payment in an amount equal to three times the annual management fee in the event of consummation of an IPO of our equity securities or equity interests or a sale of all or substantially all of our
assets.
As discussed in Note 3, on July 20, 2016, we entered into a TRA with our
pre-IPO
stockholders, including affiliates of Oaktree, Maine Street Holdings, Inc. (a company controlled by certain of our minority shareholders), certain members of management and our board members. Substantially all of the liabilities under the TRA is
considered to be due from related parties, and is therefore disclosed as primarily due from related parties in the accompanying Condensed Consolidated Balance Sheets.
On April 1, 2017 and December 31, 2016, Oaktree and its affiliates held $26,335 and $26,320 of the carrying value of the 2016 First
Lien Term Loan, respectively and $40,000 of the Senior Unsecured Notes. Oaktree and its affiliates also held a portion of the Prior Term Loans. Interest expense relating to the portion of these instruments that was held by Oaktree and its affiliates
was $827 and $768 for 1
st
Quarter 2017 and 1
st
Quarter 2016, respectively, and interest accrued was $801 and $153 at April 1, 2017 and
December 31, 2016, respectively. Interest on related party debt, net of interest income earned on Stockholders Notes Receivable is reflected in the Condensed Consolidated Statements of Operations and Comprehensive Income as Related Party
Interest.
Written procedures adopted by us and our Audit Committee currently restrict and govern related party
transactions. Pursuant to those procedures, related party transactions require review by our general counsel, and certain related party transactions require
pre-approval
by the Audit Committee before such
transactions can be binding.
21
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
19. EARNINGS PER COMMON SHARE
For 1
st
Quarter 2017, we computed earnings per share using the
two-class
method, in which there was an allocation of our earnings between holders of our common stock and holders of our participating securities. We applied this method in 1
st
Quarter 2017 since during the third quarter of Fiscal 2016, holders of our restricted stock and vested and unvested RSUs were granted
non-forfeitable
rights
to dividends and dividend-equivalents, respectively, and hence became participating holders of our common stock for purposes of computing basic earnings per share (see Note 16). Basic earnings per share for all periods presented were calculated
based on the weighted average number of outstanding shares of common stock for the period. Diluted earnings per share was calculated consistent with the basic earnings per share calculation plus the effect of dilutive unissued shares of common
stock related to stock options, restricted stock and RSUs, as applicable, to the extent that they were considered dilutive. The table below details the computation of our basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
1
st
Quarter
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,208
|
|
|
$
|
16,564
|
|
Less: Distributed earnings allocated to nonvested awards
|
|
|
(208
|
)
|
|
|
|
|
Less: Undistributed earnings allocated to nonvested awards
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share
|
|
$
|
27,758
|
|
|
$
|
16,564
|
|
|
|
|
|
|
|
|
|
|
Denominator
:
|
|
|
|
|
|
|
|
|
Average shares outstanding Basic
|
|
|
78,126
|
|
|
|
66,025
|
|
Potential effect of nonvested restricted stock awards
|
|
|
|
|
|
|
856
|
|
Potential effect of nonvested stock options
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding Diluted
|
|
|
78,173
|
|
|
|
66,881
|
|
|
|
|
|
|
|
|
|
|
Net income per common shareBasic
|
|
$
|
0.36
|
|
|
$
|
0.25
|
|
Net income per common shareDiluted
|
|
$
|
0.36
|
|
|
$
|
0.25
|
|
Dividend per share
|
|
$
|
0.16
|
|
|
$
|
|
|
Antidilutive awards excluded from the computation of diluted EPS (incremental
shares):
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
305
|
|
|
|
|
|
RSUs
|
|
|
227
|
|
|
|
|
|
As indicated previously, for 1
st
Quarter 2017, we
applied the
two-class
method of computing earnings per share, which is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends
distributed and participation rights in undistributed earnings. For diluted earnings per share, it requires dilutive earnings per share to be computed using two methods, and the most dilutive method selected. The incremental shares shown in the
table above were excluded from the computation of diluted earnings per share because the treasury stock method was determined to be less dilutive.
20. SEGMENT INFORMATION
We operate
in four reportable segments: Foodservice, Retail, Convenience and Industrial.
The Foodservice segment supplies the diverse US
food-away-from-home industry. Our Foodservice customers include leading national and regional distributors with whom we have long-standing and collaborative relationships. We supply 95 of the largest 100 school districts in the
U.S., working closely with schools to develop nutritious meal options of good quality and value. Our diverse portfolio of products includes
ready-to-eat
sandwiches (such
as breakfast sandwiches and PB&J sandwiches), sandwich components (such as Philly steaks and flame-grilled hamburger-patties), and other entrées and snacks (such as country-fried steak, stuffed entrées and chicken tenders).
22
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)
The Retail segment supplies national and regional grocery chains, major warehouse club
stores, mass retailers and dollar stores. We sell both branded and private label
ready-to-eat
sandwiches (such as grilled chicken sandwiches and stuffed pockets),
sandwich components (such as chicken patties and Philly steaks), and other entrées and snacks (such as stuffed chicken breasts and breaded poultry).
Customers in our Convenience segment include national and regional convenience chains and vending providers. In the Convenience segment, we
sell customized
ready-to-eat
sandwiches (such as breakfast sandwiches and burgers), sandwich components (such as chicken patties) and other entrées and snacks
(such as cinnamon dough bites).
The Industrial segment primarily supplies other food producers, such as packaged food companies under
short-term
co-manufacturing
agreements.
Segment performance is evaluated by our chief operating
decision maker (CODM) and is based on net sales and operating income. Unallocated corporate income (expenses) primarily relate to executive management, finance and legal functions and refinancing related charges.
The following summarizes our net sales and operating income by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
1
st
Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
|
|
|
|
|
|
|
Foodservice
|
|
$
|
217,406
|
|
|
$
|
216,040
|
|
Retail
|
|
|
107,531
|
|
|
|
105,899
|
|
Convenience
|
|
|
53,827
|
|
|
|
53,023
|
|
Industrial
|
|
|
23,965
|
|
|
|
19,533
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
402,729
|
|
|
$
|
394,495
|
|
|
|
|
|
|
|
|
|
|
Operating income (expenses)
|
|
|
|
|
|
|
|
|
Foodservice
|
|
$
|
40,992
|
|
|
$
|
37,448
|
|
Retail
|
|
|
10,987
|
|
|
|
9,104
|
|
Convenience
|
|
|
10,074
|
|
|
|
8,750
|
|
Industrial
|
|
|
1,704
|
|
|
|
513
|
|
Unallocated corporate expenses, net
|
|
|
(3,066
|
)
|
|
|
(12,005
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,691
|
|
|
$
|
43,810
|
|
|
|
|
|
|
|
|
|
|
We manage assets on a total company basis, not by operating segment. Our CODM does not regularly review
any asset information by operating segment and, accordingly, we do not report asset information by operating segment. Total assets were approximately $1,279,795 and $1,247,011 at April 1, 2017 and December 31, 2016, respectively.
Net sales by product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
1
st
Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
|
|
|
|
|
|
|
Sandwiches
|
|
$
|
119,878
|
|
|
$
|
123,819
|
|
Sandwich components
|
|
|
152,375
|
|
|
|
136,686
|
|
Other entrees and snacks
|
|
|
130,476
|
|
|
|
133,990
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
402,729
|
|
|
$
|
394,495
|
|
|
|
|
|
|
|
|
|
|
23
AdvancePierre Foods Holdings, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(In thousands except per share data)
(Unaudited)