B&G Foods, Inc. - Quarter Report: 2015 October (Form 10-Q)

Table of Contents

 

As filed with the Securities and Exchange Commission on October 30, 2015

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark one)

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended October 3, 2015

 

or

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from           to          .

 

Commission file number 001-32316

 

B&G FOODS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code:  (973) 401-6500

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of October 30, 2015, the registrant had 57,976,744 shares of common stock, par value $0.01 per share, issued and outstanding.

 

 

Table of Contents

 

B&G Foods, Inc. and Subsidiaries
Index

 

			Page No.
PART I FINANCIAL INFORMATION			1
	Item 1.	Financial Statements (Unaudited)	1
		Consolidated Balance Sheets	1
		Consolidated Statements of Operations	2
		Consolidated Statements of Comprehensive Income (Loss)	3
		Consolidated Statements of Cash Flows	4
		Notes to Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
	Item 4.	Controls and Procedures	39
PART II OTHER INFORMATION			40
	Item 1. Legal Proceedings		40
	Item 1A. Risk Factors		40
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
	Item 3. Defaults Upon Senior Securities		40
	Item 4. Mine Safety Disclosures		40
	Item 5. Other Information		40
	Item 6. Exhibits		40
SIGNATURE			41

 

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PART I
FINANCIAL INFORMATION

 

Item 1.  Financial Statements (Unaudited)

 

B&G Foods, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

		October 3, 2015			January 3, 2015
Assets
Current assets:
Cash and cash equivalents		$	45,943		$	1,490
Trade accounts receivable, net		63,419			55,925
Inventories		133,209			106,557
Prepaid expenses and other current assets		9,389			14,830
Income tax receivable		3,057			14,442
Deferred income taxes		3,185			3,275
Total current assets		258,202			196,519
Property, plant and equipment, net of accumulated depreciation of $141,465 and $129,253		118,311			116,197
Goodwill		388,044			370,424
Other intangibles, net		982,622			947,895
Other assets		15,888			18,318
Total assets		$	1,763,067		$	1,649,353
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable		$	34,163		$	38,052
Accrued expenses		27,066			17,644
Current portion of long-term debt		24,375			18,750
Dividends payable		20,292			18,246
Total current liabilities		105,896			92,692
Long-term debt		954,491			1,007,107
Other liabilities		5,339			7,352
Deferred income taxes		230,638			204,207
Total liabilities		1,296,364			1,311,358
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value per share. Authorized 1,000,000 shares; no shares issued or outstanding		—			—
Common stock, $0.01 par value per share. Authorized 125,000,000 shares; 57,976,744 and 53,663,697 shares issued and outstanding as of October 3, 2015 and January 3, 2015		580			537
Additional paid-in capital		180,726			110,349
Accumulated other comprehensive loss		(10,876		)	(11,034		)
Retained earnings		296,273			238,143
Total stockholders’ equity		466,703			337,995
Total liabilities and stockholders’ equity		$	1,763,067		$	1,649,353

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Net sales		$	213,300		$	208,998		$	624,067		$	610,027
Cost of goods sold		141,704			145,936			423,066			419,269
Gross profit		71,596			63,062			201,001			190,758
Operating expenses:
Selling, general and administrative expenses		27,307			21,173			69,352			69,065
Amortization expense		2,726			3,391			8,072			9,986
Impairment of intangible assets		—			34,154			—			34,154
Gain on change in fair value of contingent consideration		—			—			—			(8,206		)
Operating income		41,563			4,344			123,577			85,759
Other expenses:
Interest expense, net		11,272			11,587			33,873			34,532
Loss on extinguishment of debt		—			—			—			5,748
Income (loss) before income tax expense (benefit)		30,291			(7,243		)	89,704			45,479
Income tax expense (benefit)		10,476			(2,830		)	31,574			15,977
Net income (loss)		$	19,815		$	(4,413	)	$	58,130		$	29,502
Weighted average shares outstanding:
Basic		57,977			53,664			56,121			53,656
Diluted		58,057			53,664			56,180			53,730
Basic earnings (loss) per share		$	0.34		$	(0.08	)	$	1.04		$	0.55
Diluted earnings (loss) per share		$	0.34		$	(0.08	)	$	1.03		$	0.55
Cash dividends declared per share		$	0.35		$	0.34		$	1.03		$	1.02

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Net income (loss)		$	19,815		$	(4,413	)	$	58,130		$	29,502
Other comprehensive income (loss):
Foreign currency translation adjustments		(78		)	(41		)	(190		)	(45		)
Amortization of unrecognized prior service cost and pension deferrals, net of tax		111			7			348			21
Other comprehensive income (loss)		33			(34		)	158			(24		)
Comprehensive income (loss)		$	19,848		$	(4,447	)	$	58,288		$	29,478

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Thirty-nine Weeks Ended
		October 3, 2015			September 27, 2014
Cash flows from operating activities:
Net income		$	58,130		$	29,502
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,512			20,783
Amortization of deferred debt financing costs and bond discount		2,631			2,907
Deferred income taxes		13,638			5,083
Interest accretion on contingent consideration		—			432
Gain on change in fair value of contingent consideration		—			(8,206		)
Impairment of intangible assets		—			34,154
Loss on disposal of inventory		—			2,978
Loss on extinguishment of debt		—			5,748
Share-based compensation expense		3,704			2,128
Excess tax benefits from share-based compensation		(518		)	(2,356		)
Provision for doubtful accounts		70			140
Changes in assets and liabilities, net of effects of businesses acquired:
Trade accounts receivable		(5,186		)	(6,039		)
Inventories		(25,464		)	(32,412		)
Prepaid expenses and other current assets		5,557			83
Income tax receivable		13,060			(2,765		)
Other assets		12			(941		)
Trade accounts payable		(6,193		)	3,281
Accrued expenses		8,236			5,917
Other liabilities		(1,492		)	272
Net cash provided by operating activities		86,697			60,689
Cash flows from investing activities:
Capital expenditures		(12,719		)	(13,901		)
Payments for acquisition of businesses, net of cash acquired		(51,025		)	(154,277		)
Net cash used in investing activities		(63,744		)	(168,178		)
Cash flows from financing activities:
Repayments of long-term debt		(13,125		)	(131,250		)
Proceeds from issuance of long-term debt		—			299,250
Borrowings under revolving credit facility		10,000			252,500
Repayments of borrowings under revolving credit facility		(44,000		)	(246,500		)
Proceeds from issuance of common stock, net		126,230			—
Dividends paid		(56,236		)	(54,124		)
Excess tax benefits from share-based compensation		518			2,356
Debt financing costs		(12		)	(8,473		)
Payments of tax withholding on behalf of employees for net share settlement of share-based compensation		(1,750		)	(4,374		)
Net cash provided by financing activities		21,625			109,385
Effect of exchange rate fluctuations on cash and cash equivalents		(125		)	(22		)
Net increase in cash and cash equivalents		44,453			1,874
Cash and cash equivalents at beginning of period		1,490			4,107
Cash and cash equivalents at end of period		$	45,943		$	5,981
Supplemental disclosures of cash flow information:
Cash interest payments		$	23,693		$	23,177
Cash income tax payments		$	4,898		$	13,629
Non-cash transactions:
Dividends declared and not yet paid		$	20,292		$	18,246

 

See Notes to Consolidated Financial Statements.

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)                                 Nature of Operations

 

B&G Foods, Inc. is a holding company whose principal assets are the shares of capital stock of its subsidiaries.  Unless the context requires otherwise, references in this report to “B&G Foods,” “our company,” “we,” “us” and “our” refer to B&G Foods, Inc. and its subsidiaries.  Our financial statements are presented on a consolidated basis.

 

We operate in a single industry segment and manufacture, sell and distribute a diverse portfolio of high-quality shelf-stable foods across the United States, Canada and Puerto Rico.  Our products include hot cereals, fruit spreads, canned meats and beans, bagel chips, spices, seasonings, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, Mexican-style sauces, dry soups, taco shells and kits, salsas, pickles, peppers, tomato-based products, puffed corn and rice snacks, nut clusters and other specialty products.  Our products are marketed under many recognized brands, including Ac’cent, B&G, B&M, Baker’s Joy, Bear Creek Country Kitchens, Brer Rabbit, Canoleo, Cary’s, Cream of Rice, Cream of Wheat, Devonsheer, Don Pepino, Emeril’s, Grandma’s Molasses, JJ Flats, Joan of Arc, Las Palmas, MacDonald’s, Mama Mary’s, Maple Grove Farms of Vermont, Molly McButter, Mrs. Dash, New York Flatbreads, New York Style, Old London, Original Tings, Ortega, Pirate’s Booty, Polaner, Red Devil, Regina, Rickland Orchards, Sa-són, Sclafani, Smart Puffs, Spring Tree, Sugar Twin, Trappey’s, TrueNorth, Underwood, Vermont Maid and Wright’s.  We also sell and distribute Static Guard, a household product brand.  We compete in the retail grocery, food service, specialty, private label, club and mass merchandiser channels of distribution.  We sell and distribute our products directly and via a network of independent brokers and distributors to supermarket chains, food service outlets, mass merchants, warehouse clubs, non-food outlets and specialty distributors.

 

(2)                                 Summary of Significant Accounting Policies

 

Fiscal Year

 

Typically, our fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to December 31 in the case of our fiscal year and fourth fiscal quarter, and on the Saturday closest to the end of the corresponding calendar quarter in the case of our fiscal quarters.  As a result, a 53rd week is added to our fiscal year every five or six years.  In a 53-week fiscal year our fourth fiscal quarter contains 14 weeks.  Our fiscal year ending January 2, 2016 (fiscal 2015) contains 52 weeks and our fiscal year ended January 3, 2015 (fiscal 2014) contained 53 weeks.  Each quarter of fiscal 2015 and 2014 contains 13 weeks, except the fourth quarter of 2014, which contained 14 weeks.

 

Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements for the thirteen and thirty-nine week periods ended October 3, 2015 (third quarter and first three quarters of 2015) and September 27, 2014 (third quarter and first three quarters of 2014) have been prepared by our company in accordance with accounting principles generally accepted in the United States of America pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and include the accounts of B&G Foods, Inc. and its subsidiaries.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations.  However, our management believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading.  All intercompany balances and transactions have been eliminated.  The accompanying unaudited consolidated interim financial statements contain all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary to present fairly our consolidated financial position as of October 3, 2015, and the results of our operations and comprehensive income (loss) for the third quarter and first three quarters of 2015 and 2014 and cash flows for the first three quarters of 2015 and 2014.  Our results of operations for the third quarter and first three quarters of 2015 are not necessarily indicative of the results to be expected for the full year.  We have evaluated subsequent events for disclosure through the date of issuance of the accompanying

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(2)           Summary of Significant Accounting Policies (Continued)

 

unaudited consolidated interim financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for fiscal 2014 filed with the SEC on March 4, 2015.

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires our management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Some of the more significant estimates and assumptions made by management involve trade and consumer promotion expenses; allowances for excess, obsolete and unsaleable inventories; pension benefits; acquisition accounting allocations; the recoverability of goodwill, other intangible assets, property, plant and equipment and deferred tax assets; the determination of the useful life of customer relationship and amortizable trademark intangibles; the fair value of contingent consideration; and the accounting for share-based compensation.  Actual results could differ significantly from these estimates and assumptions.

 

Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment.  We adjust such estimates and assumptions when facts and circumstances dictate.  Volatility in the credit and equity markets can increase the uncertainty inherent in such estimates and assumptions.

 

Recently Issued Accounting Standards

 

In September 2015, the Financial Accounting Standards Board (FASB) issued a new accounting standards update (ASU) that requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The update is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  We are currently evaluating the impact of this new standard.

 

In April 2015, the FASB issued a new ASU that requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts.  The update is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The update impacts presentation and disclosure only, and therefore, we do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations or liquidity.

 

(3)                                 Acquisitions

 

On July 10, 2015, we acquired Spartan Foods of America, Inc. dba Mama Mary’s and related entities from Linsalata Capital Partners and certain other sellers for a purchase price of $51.0 million in cash. We refer to this acquisition as the “Mama Mary’s acquisition.”

 

On April 23, 2014, we completed the acquisition of Specialty Brands of America, Inc. and related entities, including the Bear Creek Country Kitchens, Spring Tree, Cary’s, MacDonald’s, New York Flatbreads and Canoleo brands, from affiliates of American Capital, Ltd. and certain individual sellers for a purchase price of $154.3 million in cash.  We refer to this acquisition as the “Specialty Brands acquisition.”

 

We have accounted for each of these acquisitions using the acquisition method of accounting and, accordingly, have included the assets acquired, liabilities assumed and results of operations in our consolidated

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(3)                                 Acquisitions (Continued)

 

financial statements from the respective date of acquisition.  The excess of the purchase price over the fair value of identifiable net assets acquired represents goodwill. Unamortizable trademarks are deemed to have an indefinite useful life and are not amortized. Customer relationship intangibles acquired are amortized over 20 years.  Inventory has been recorded at estimated selling price less costs of disposal and a reasonable profit and the property, plant and equipment and other intangible assets (including trademarks, customer relationships and other intangibles) acquired have been recorded at fair value as determined by our management with the assistance of a third-party valuation specialist.  See Note 5, “Goodwill and Other Intangible Assets.”

 

The following table sets forth the preliminary allocation of the Mama Mary’s acquisition purchase price to the estimated fair value of the net assets acquired at the date of acquisition.  The preliminary purchase price allocation may be adjusted as a result of the finalization of our purchase price allocation procedures related to the assets acquired and the liabilities assumed.  We anticipate completing the purchase price allocation before or during the second quarter of fiscal 2016.

 

Mama Mary’s Acquisition (dollars in thousands):
Purchase Price:
Cash paid		$	51,025
Total		$	51,025
Preliminary Allocation:
Trademarks—unamortizable intangible assets		38,000
Goodwill		17,455
Customer relationship intangibles—amortizable intangible assets		4,800
Property, Plant and Equipment		1,900
Short-term deferred income tax assets		1,222
Other working capital		383
Long-term deferred income tax liabilities, net		(12,735		)
Total		$	51,025

 

The following table sets forth the allocation of the Specialty Brands acquisition purchase price to the estimated fair value of the net assets acquired at the date of acquisition.  During the first two quarters of fiscal 2015, we recorded a purchase price allocation adjustment by increasing goodwill and decreasing other working capital by $0.2 million due to a change in our valuation of inventory as of the date of acquisition. We completed the purchase price allocation during the second quarter of 2015.

 

Specialty Brands Acquisition (dollars in thousands):
Purchase Price:
Cash paid		$	154,277
Total		$	154,277
Allocation:
Income tax receivable		$	4,012
Short-term deferred income tax assets		1,786
Trademarks—unamortizable intangible assets		137,300
Goodwill		49,017
Customer relationship intangibles—amortizable intangible assets		13,300
Other working capital		(2,233		)
Long-term deferred income tax liabilities, net		(48,905		)
Total		$	154,277

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(3)                                 Acquisitions (Continued)

 

On September 3, 2015, we entered into an agreement to acquire the Green Giant and La Sueur brands from General Mills, Inc. for approximately $765 million in cash plus an inventory adjustment at closing.  We expect the acquisition to close during the fourth quarter of 2015, subject to customary closing conditions.  We refer to this acquisition as the pending Green Giant acquisition. We expect to fund the pending Green Giant acquisition and related fees and expenses with borrowings from our revolving credit facility and a new term loan under our amended and restated credit facility. See Note 6, “Long-Term Debt.”

 

Unaudited Pro Forma Summary of Operations

 

The following pro forma summary of operations for the first three quarters of 2014 presents our operations as if the Specialty Brands acquisition had occurred as of the beginning of fiscal 2014.  In addition to including the results of operations of this acquisition, the pro forma information gives effect to the interest on additional borrowings and the amortization of customer relationship intangibles.  On an actual basis, Specialty Brands contributed $33.5 million of net sales for the first three quarters of 2014.

 

		Thirty-nine Weeks Ended September 27, 2014
		(dollars in thousands, except per share data)
Net sales		$	636,420
Net income		30,694
Basic and diluted earnings per share		$	0.57

 

The pro forma information presented above does not purport to be indicative of the results that actually would have been attained had the Specialty Brands acquisition occurred as of the beginning of fiscal 2014, and is not intended to be a projection of future results.

 

The Mama Mary’s acquisition was not material to our consolidated results of operations or financial position and, therefore, pro forma financial information is not presented.

 

(4)                                 Inventories

 

Inventories are stated at the lower of cost or market and include direct material, direct labor, overhead, warehousing and product transfer costs.  Cost is determined using the first-in, first-out and average cost methods.  Inventories have been reduced by an allowance for excess, obsolete and unsaleable inventories.  The allowance is an estimate based on management’s review of inventories on hand compared to estimated future usage and sales.

 

Inventories consist of the following, as of the dates indicated (in thousands):

 

		October 3, 2015			January 3, 2015
Raw materials and packaging		$	29,843		$	23,795
Finished goods		103,366			82,762
Total		$	133,209		$	106,557

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(5)                                 Goodwill and Other Intangible Assets

 

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

 

		As of October 3, 2015									As of January 3, 2015
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Amortizable Intangible Assets
Trademarks		$	12,056		$	1,573		$	10,483		$	12,056		$	875		$	11,181
Customer relationships		197,713			65,774			131,939			192,913			58,400			134,513
		$	209,769		$	67,347		$	142,422		$	204,969		$	59,275		$	145,694
Unamortizable Intangible Assets
Goodwill		$	388,044								$	370,424
Trademarks		$	840,200								$	802,201

 

Note:      The increase in the carrying amounts of unamortizable intangible assets during the first three quarters of fiscal 2015 are attributable to the Mama Mary’s acquisition and purchase accounting adjustments related to the Specialty Brands acquisition.

 

Amortization expense associated with amortizable trademarks and customer relationship intangibles for the third quarter and first three quarters of 2015 was $2.7 million and $8.1 million, respectively, and is recorded in operating expenses.  Amortization expense associated with amortizable trademarks and customer relationship intangibles for the third quarter and first three quarters of 2014 was $3.4 million and $10.0 million, respectively, and is recorded in operating expenses.  We expect to recognize an additional $2.8 million of amortization expense associated with our amortizable trademarks and customer relationship intangibles during the remainder of fiscal 2015, and thereafter $10.9 million per year for each of the next four fiscal years.

 

See Note 3, “Acquisitions.”

 

(6)                                 Long-Term Debt

 

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

 

		October 3, 2015			January 3, 2015
Amended and restated senior secured credit agreement:
Revolving credit facility		$	—		$	34,000
Tranche A term loans due 2019		279,375			292,500
4.625% senior notes due 2021		700,000			700,000
Unamortized discount		(509		)	(643		)
Total long-term debt, net of unamortized discount		978,866			1,025,857
Current portion of long-term debt		(24,375		)	(18,750		)
Long-term debt, net of unamortized discount and excluding current portion		$	954,491		$	1,007,107

 

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B&G Foods, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)                                 Long-Term Debt (Continued)

 

 

As of October 3, 2015, the aggregate contractual maturities of long-term debt are as follows (in thousands):

 

Years ending December:
2015		$	5,625
2016		26,250
2017		24,375
2018		76,875
2019		146,250
Thereafter		700,000
Total		$	979,375

 

Amended and Restated Senior Secured Credit Agreement.  On October 2, 2015, we amended and restated our existing senior secured credit agreement dated as of June 5, 2014. The amendment provides for an incremental tranche B term loan facility to be made available under the amended and restated credit agreement to finance a portion of the purchase price for the pending Green Giant acquisition. Subject to the satisfaction of customary conditions precedent set forth in the amended and restated credit agreement, we expect that $750 million of incremental tranche B term loans will be funded at the closing of the acquisition, which we expect to occur during the fourth quarter of 2015. We expect to fund the remainder of the purchase price, the closing inventory adjustment, initial working capital requirements and related fees and expenses for the pending Green Giant acquisition with additional revolving loans under the amended and restated credit agreement. See Note 3, “Acquisitions.”

 

At October 3, 2015, $279.4 million of tranche A term loans were outstanding and no tranche B term loans or revolving loans were outstanding under our amended and restated senior secured credit agreement.

 

At October 3, 2015, the available borrowing capacity under our revolving credit facility, net of outstanding letters of credit of $2.0 million, was $498.0 million.  Proceeds of the revolving credit facility may be used for general corporate purposes, including acquisitions of targets in the same or a similar line of business as our company, subject to specified criteria.  Proceeds of the tranche B term loans may be used to pay a portion of the purchase price and related costs and expenses for the pending Green Giant acquisition.  We are required to pay a commitment fee of 0.50% per annum on the unused portion of the revolving credit facility.  The maximum letter of credit capacity under the revolving credit facility is $50.0 million, with a fronting fee of 0.25% per annum for all outstanding letters of credit and a letter of credit fee equal to the applicable margin for revolving loans that are Eurodollar (LIBOR) loans. The revolving credit facility matures on June 5, 2019.

 

The tranche A term loans are subject to principal amortization.  $7.5 million was due and paid in fiscal 2014, $18.8 million is due and payable in fiscal 2015, of which $13.2 million has been paid as of October 3, 2015, $26.2 million is due and payable in fiscal 2016, $24.4 million is due and payable in fiscal 2017 and $76.9 million is due and payable in fiscal 2018.  The balance of all borrowings under the tranche A term loan facility, or $146.2 million, is due and payable at maturity on June 5, 2019. The tranche B term loans will mature on the seventh anniversary of the date of funding of the tranche B term loans and will be subject to amortization at the rate of 1% per year with the balance due and payable on the maturity date.

 

If we prepay all or any portion of the tranche B term loans within six months of the funding of the tranche B term loans in connection with a financing that has a lower interest rate or weighted average yield than the tranche B term loans, we will owe a repayment fee equal to 1% of the amount prepaid. Otherwise, we may prepay the term loans or permanently reduce the revolving credit facility commitment under the amended and restated credit agreement at any time without premium or penalty (other than customary breakage costs

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)                                 Long-Term Debt (Continued)

 

with respect to the early termination of LIBOR loans).  Subject to certain exceptions, the amended and restated credit agreement provides for mandatory prepayment upon certain asset dispositions or casualty events and issuances of indebtedness.

 

Interest under the revolving credit facility, including any outstanding letters of credit, and under the tranche A term loan facility, is determined based on alternative rates that we may choose in accordance with the amended and restated credit agreement, including a base rate per annum plus an applicable margin ranging from 0.50% to 1.00%, and LIBOR plus an applicable margin ranging from 1.50% to 2.00%, in each case depending on our consolidated leverage ratio.  At October 3, 2015, the revolving credit facility and the tranche A term loan interest rates were each approximately 2.21%.  Interest under the tranche B term loan facility will be determined based on alternative rates that we may choose in accordance with the amended and restated credit agreement, including a base rate per annum plus an applicable margin to be determined prior to the funding date, and LIBOR plus an applicable margin to be determined prior to the funding date.  The applicable margin in effect for the tranche A term loans will not be increased as a result of the funding of the tranche B term loans.

 

Our obligations under the amended and restated credit agreement are jointly and severally and fully and unconditionally guaranteed on a senior basis by all of our existing and certain future domestic subsidiaries (other than a domestic subsidiary that is a holding company for one or more of our foreign subsidiaries).  The credit facility is secured by substantially all of our and our domestic subsidiaries’ assets except our and our domestic subsidiaries’ real property.  The amended and restated credit agreement contains customary restrictive covenants, subject to certain permitted amounts and exceptions, including covenants limiting our ability to incur additional indebtedness, pay dividends and make other restricted payments, repurchase shares of our outstanding stock and create certain liens.

 

The amended and restated credit agreement also contains certain financial maintenance covenants, which, among other things, specify a maximum consolidated leverage ratio and a minimum interest coverage ratio, each ratio as defined in the amended and restated credit agreement.  Our consolidated leverage ratio (defined as the ratio of our consolidated net debt, as of the last day of any period of four consecutive fiscal quarters to our adjusted EBITDA for such period) may not exceed 7.00 to 1.00 through the fourth quarter of 2015; 6.75 to 1.00 for the first quarter of 2016 through the fourth quarter of 2016; and 6.50 to 1.00 for the first quarter of 2017 and thereafter.  We are also required to maintain a consolidated interest coverage ratio of at least 1.75 to 1.00 as of the last day of any period of four consecutive fiscal quarters.  As of October 3, 2015, we were in compliance with all of the covenants, including the financial covenants, in the credit agreement.

 

The amended and restated credit agreement also provides for an incremental term loan and revolving loan facility, pursuant to which we may request that the lenders under the amended and restated credit agreement, and potentially other lenders, provide unlimited additional amounts of term loans or revolving loans or both on terms substantially consistent with those provided under the amended and restated credit agreement.  Among other things, the utilization of the incremental facility is conditioned on our ability to meet a maximum senior secured leverage ratio of 4.00 to 1.00, and a sufficient number of lenders or new lenders agreeing to participate in the facility.

 

4.625% Senior Notes due 2021.  On June 4, 2013, we issued $700.0 million aggregate principal amount of 4.625% senior notes due 2021 at a price to the public of 100% of their face value.  Interest on the 4.625% senior notes is payable on June 1 and December 1 of each year.  The 4.625% senior notes will mature on June 1, 2021, unless earlier retired or redeemed.

 

On or after June 1, 2016, we may redeem some or all of the 4.625% senior notes at a redemption price of 103.469% beginning June 1, 2016 and thereafter at prices declining annually to 100% on or after June 1,

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)                                 Long-Term Debt (Continued)

 

2019, in each case plus accrued and unpaid interest to the date of redemption.  We may redeem up to 35% of the aggregate principal amount of the 4.625% senior notes prior to June 1, 2016 with the net proceeds from certain equity offerings at a redemption price of 104.625% plus accrued and unpaid interest to the date of redemption.  We may also redeem some or all of the 4.625% senior notes at any time prior to June 1, 2016 at a redemption price equal to the make-whole amount set forth in the indenture governing the 4.625% senior notes.  In addition, if we undergo a change of control or upon certain asset sales, we may be required to offer to repurchase the 4.625% senior notes at the repurchase price set forth in the indenture plus accrued and unpaid interest to the date of repurchase.

 

We may also, from time to time, seek to retire the 4.625% senior notes through cash repurchases of the 4.625% senior notes and/or exchanges of the 4.625% senior notes for equity securities, in open market purchases, privately negotiated transactions or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved may be material.

 

Our obligations under the 4.625% senior notes are jointly and severally and fully and unconditionally guaranteed on a senior basis by all of our existing and certain future domestic subsidiaries.  The 4.625% senior notes and the subsidiary guarantees are our and the guarantors’ general unsecured obligations and are effectively junior in right of payment to all of our and the guarantors’ secured indebtedness and to all existing and future indebtedness and other liabilities of our non-guarantor subsidiaries; are pari passu in right of payment to all of our and the guarantors’ existing and future unsecured senior debt; and are senior in right of payment to all of our and the guarantors’ future subordinated debt.  Our foreign subsidiaries are not guarantors, and any future foreign or partially owned domestic subsidiaries will not be guarantors, of the 4.625% senior notes.

 

The indenture contains covenants with respect to us and the guarantors and restricts the incurrence of additional indebtedness and the issuance of capital stock; the payment of dividends or distributions on, and redemption of, capital stock; a number of other restricted payments, including certain investments; creation of specified liens, certain sale-leaseback transactions and sales of certain specified assets; fundamental changes, including consolidation, mergers and transfers of all or substantially all of our assets; and specified transactions with affiliates.  Each of the covenants is subject to a number of important exceptions and qualifications.  As of October 3, 2015, we were in compliance with all of the covenants in the indenture governing the 4.625% senior notes.

 

Subsidiary Guarantees.  We have no assets or operations independent of our direct and indirect subsidiaries.  All of our present domestic subsidiaries jointly and severally and fully and unconditionally guarantee our long-term debt, and management has determined that our Canadian and Mexican subsidiaries, which are our only subsidiaries that are not guarantors of our long-term debt, are “minor subsidiaries” as that term is used in Rule 3-10 of Regulation S-X promulgated by the SEC.  There are no significant restrictions on our ability and the ability of our subsidiaries to obtain funds from our respective subsidiaries by dividend or loan.  Consequently, separate financial statements have not been presented for our subsidiaries because management has determined that they would not be material to investors.

 

Deferred Debt Financing Costs.  During the second quarter of 2014, we wrote-off and expensed $5.4 million of deferred debt financing costs relating to the termination of our prior credit agreement, which included the repayment of $121.9 million aggregate principal amount of our tranche A term loans and $215.0 million of revolving loans. During the second quarter of 2014, we also capitalized $5.7 million and $2.9 million of debt financing costs relating to our current revolving credit facility and tranche A term loans, respectively, which is being amortized over the five year scheduled term of the credit agreement. As of

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(6)                                 Long-Term Debt (Continued)

 

October 3, 2015 and January 3, 2015, we had net deferred debt financing costs of $14.7 million and $17.2 million, respectively, included in other assets in the accompanying unaudited consolidated balance sheets.

 

Loss on Extinguishment of Debt.  During the second quarter of 2014, we incurred a loss on extinguishment of debt in connection with the termination of our prior credit agreement and the repayment of all outstanding obligations thereunder.  The loss on extinguishment includes the write-off of deferred debt financing costs of $5.4 million discussed above and the write-off of unamortized discount of $0.3 million.

 

Accrued Interest.  At October 3, 2015 and January 3, 2015, accrued interest of $11.0 million and $3.5 million, respectively, is included in accrued expenses in the accompanying unaudited consolidated balance sheets.

 

(7)                                 Fair Value Measurements

 

The authoritative accounting literature relating to fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The accounting literature outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under generally accepted accounting principles, certain assets and liabilities must be measured at fair value, and the accounting literature details the disclosures that are required for items measured at fair value.

 

Financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy under the accounting literature.  The three levels are as follows:

 

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value driver is observable for the asset or liability, either directly or indirectly.

 

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

 

Cash and cash equivalents, trade accounts receivable, income tax receivable, trade accounts payable, accrued expenses and dividends payable are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

 

The carrying values and fair values of our revolving credit loans, term loans and senior notes as of October 3, 2015 and January 3, 2015 are as follows (in thousands):

 

		October 3, 2015				January 3, 2015
		Carrying Value		Fair Value		Carrying Value		Fair Value
Revolving Credit Loans		—		—		34,000		34,000	(1)
Tranche A Term Loans due 2019		278,866	(2)	279,375	(1)	291,857	(2)	292,500	(1)
4.625% Senior Notes due 2021		700,000		675,500	(3)	700,000		675,500	(3)

 

(1)         Fair values are estimated based on Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(7)                                 Fair Value Measurements (Continued)

 

(2)         The carrying values of the tranche A term loans are net of discount.  At October 3, 2015 and January 3, 2015, the face amounts of the tranche A term loans were $279.4 million and $292.5 million, respectively.

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

 

In October 2013, we acquired Rickland Orchards, LLC.  In connection with that acquisition, additional purchase price payments ranging from zero to $15.0 million are contingent upon the achievement of certain revenue growth targets during fiscal 2014, 2015 and 2016 meant to achieve revenue growth in excess of base purchase price acquisition model assumptions.  We estimated the original fair value of the contingent consideration as the present value of the expected contingent payments, determined using the weighted probabilities of the possible payments.  As of the date of acquisition, we estimated the original fair value of the contingent consideration to be approximately $7.6 million.

 

During the first two quarters of 2014, we recorded interest accretion expense on the contingent consideration liability of $0.4 million. We are required to reassess the fair value of the contingent consideration at each reporting period.  At June 28, 2014, we remeasured the fair value of the contingent consideration using actual operating results through June 28, 2014 and revised our forecasted operating results for Rickland Orchards for the remainder of fiscal 2014, 2015 and 2016.  As a result of lower than expected net sales results for Rickland Orchards and the unlikelihood of Rickland Orchards achieving the revenue growth targets, the fair value of the contingent consideration was reduced to zero.  Therefore, during the first three quarters of 2015, we did not record interest accretion expense on the contingent consideration liability.  The significant inputs used in these estimates include numerous possible scenarios for the contingent earn-out payments based on the contractual terms of the contingent consideration, for which probabilities are assigned to each scenario, which are then discounted based on an individual risk analysis of the respective liabilities. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.

 

The following table summarized the Level 3 activity (in thousands):

 

		October 3, 2015			September 27, 2014
Balance at beginning of year		$	—		$	7,774
Contingent consideration accretion expense		—			432
Gain on change in fair value of contingent consideration		—			(8,206		)
Balance at end of quarter		$	—		$	—

 

(8)                                 Stockholders’ Equity

 

Common Stock Offering.  In May 2015, we completed an underwritten public offering of 4,200,000 shares of our common stock at a price to the public of $30.60 per share. The proceeds of the offering were approximately $126.2 million, after deducting underwriting discounts and commissions and other offering expenses. The offering was made by means of a prospectus and related prospectus supplement included as part of an effective shelf registration statement previously filed with the SEC. We used the net proceeds of the offering to repay a portion of our long-term debt, to pay the purchase price and related transaction costs for the Mama Mary’s acquisition, see Note 3, “Acquisitions,” and for general corporate purposes.

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(9)                                 Accumulated Other Comprehensive Loss

 

The reclassification from accumulated other comprehensive loss (AOCL) as of October 3, 2015 and September 27, 2014 are as follows (in thousands):

 

		Amount Reclassified from AOCL
		Thirteen Weeks Ended						Thirty-nine Weeks Ended						Affected Line Item in the
Details about AOCL Components		October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014			Statement Where Net Income (Loss) is Presented
Defined benefit pension plan items
Amortization of prior service cost		$	11		$	11		$	33		$	33		See (1) below
Amortization of unrecognized loss		176			—			528			—			See (1) below
		187			11			561			33			Total before tax
		(76		)	(4		)	(213		)	(12		)	Income tax expense
Total reclassification		$	111		$	7		$	348		$	21		Net of tax

 

(1)         These items are included in the computation of net periodic pension cost.  See Note 10, “Pension Benefits” for additional information.

 

Changes in accumulated other comprehensive loss as of October 3, 2015 is as follows (in thousands):

 

		Defined Benefit Pension Plan Items			Foreign Currency Translation Adjustments			Total
Beginning balance		$	(10,787	)	$	(247	)	$	(11,034	)
Other comprehensive loss before reclassifications		—			(190		)	(190		)
Amounts reclassified from AOCL		348			—			348
Net current period other comprehensive income (loss)		348			(190		)	158
Ending balance		$	(10,439	)	$	(437	)	$	(10,876	)

 

(10)                          Pension Benefits

 

Company Sponsored Defined Benefit Pension Plans.  Net periodic pension costs for company sponsored defined benefit pension plans for the third quarter and first three quarters of 2015 and 2014 include the following components (in thousands):

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Service cost—benefits earned during the period		$	1,001		$	768		$	3,003		$	2,173
Interest cost on projected benefit obligation		640			592			1,919			1,794
Expected return on plan assets		(1,042		)	(1,089		)	(3,124		)	(3,258		)
Amortization of unrecognized prior service cost		11			11			33			33
Amortization of unrecognized loss		176			—			528			—
Net periodic pension cost		$	786		$	282		$	2,359		$	742

 

During the first three quarters of 2015, we made $3.5 million of defined benefit pension plan contributions.  We do not plan to make additional contributions during the remainder of fiscal 2015.

 

Multi-Employer Defined Benefit Pension Plan.  We also contribute to the Bakery and Confectionery Union and Industry International Pension Fund (EIN 52-6118572, Plan No. 001), a multi-employer defined benefit pension plan, sponsored by the Bakery, Confectionery, Tobacco Workers and Grain Millers

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(10)                          Pension Benefits (Continued)

 

International Union (BCTGM).  The plan provides multiple plan benefits with corresponding contribution rates that are collectively bargained between participating employers and their affiliated BCTGM local unions.

 

We were notified that for the plan year beginning January 1, 2012, the plan was in critical status and classified in the Red Zone.  As of the date of the accompanying unaudited consolidated interim financial statements, the plan remains in critical status.  The law requires that all contributing employers pay to the plan a surcharge to help correct the plan’s financial situation.  The amount of the surcharge is equal to a percentage of the amount an employer is otherwise required to contribute to the plan under the applicable collective bargaining agreement.  A 5% surcharge payable on hours worked on and after June 1, 2012 until December 31, 2012 was charged for plan year 2012, the initial critical year.  A 10% surcharge payable on hours worked on and after January 1, 2013 was applicable for each succeeding plan year that the plan was in critical status until we agreed to a collective bargaining agreement that implements a rehabilitation plan.

 

During the second quarter of 2015, we agreed to a collective bargaining agreement that, among other things, implements a rehabilitation plan.  As a result, our contributions to the plan are expected to increase by at least 5.0% per year above what we are currently contributing.

 

B&G Foods made contributions to the plan of $1.0 million in fiscal 2014. These contributions represented less than five percent of total contributions made to the plan.  In fiscal 2014, we paid less than $0.1 million in surcharges and expect to pay surcharges of less than $0.1 million in fiscal 2015 assuming consistent hours are worked.

 

(11)                          Commitments and Contingencies

 

Operating Leases.  As of October 3, 2015, future minimum lease payments under non-cancelable operating leases in effect at quarter-end (with initial lease terms in excess of one year) were as follows (in thousands):

 

Fiscal year ending:		Third Parties
2015		$	1,908
2016		7,683
2017		5,236
2018		5,137
2019		5,212
Thereafter		7,938
Total		$	33,114

 

Legal Proceedings.  We are from time to time involved in various claims and legal actions arising in the ordinary course of business, including proceedings involving product liability claims, product labeling claims, worker’s compensation and other employee claims, and tort and other general liability claims, as well as trademark, copyright, patent infringement and related claims and legal actions.  While we cannot predict with certainty the results of these claims and legal actions in which we are currently or in the future may be involved, we do not expect that the ultimate disposition of any currently pending claims or actions will have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

B&G Foods has been named as a defendant in a putative class action lawsuit filed by The Weston Firm on behalf of Troy Walker in August 2015 in the United States District Court for the Northern District of California.  The lawsuit alleges that our company has violated California’s Consumer Legal Remedies Act and

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(11)                          Commitments and Contingencies (Continued)

 

Unfair Competition Law, with respect to the advertising, marketing and labeling of certain Ortega taco shells.  Specifically, the plaintiff alleges, among other things, that the products are deceptively marketed because the products are labeled “0g trans fat” on the front of the package and contain partially hydrogenated oil.  The complaint seeks monetary damages, injunctive relief and attorneys’ fees.  We intend to vigorously defend this lawsuit and believe that the plaintiff’s claims are without merit and that the products are and have at all times been properly labeled in compliance with applicable law.  We also believe the claims are moot because, among other things, we began transitioning away from partially hydrogenated oil before first being contacted by The Weston Firm and we no longer use partially hydrogenated oil in these Ortega products.  No discovery has commenced in this lawsuit, and a motion to dismiss the claims is pending.  Based upon information currently available, we do not believe the ultimate resolution of this matter will have a material adverse effect on B&G Foods’ consolidated financial position, results of operations or liquidity.

 

Environmental.  We are subject to environmental laws and regulations in the normal course of business.  We did not make any material expenditures during the first three quarters of 2015 or 2014 in order to comply with environmental laws and regulations.  Based on our experience to date, management believes that the future cost of compliance with existing environmental laws and regulations (and liability for any known environmental conditions) will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.  However, we cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted, nor can we predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to such environmental claims.

 

Collective Bargaining Agreements.  As described in Note 10, “Pension Benefits—Multi-Employer Defined Benefit Pension Plan” above, during the second quarter of 2015 we reached an agreement with the BCTGM, AFL-CIO (Local No. 334) to extend for an additional two-year period ending April 29, 2017, a collective bargaining agreement that covers approximately 92 employees at our Portland, Maine facility.

 

As of October 3, 2015, approximately 338 of our 964 employees, or 35%, were covered by collective bargaining agreements, of which approximately 195 were covered by a collective bargaining agreement expiring within the next 12 months. Our collective bargaining agreement with the Drivers, Salesmen, Warehousemen, Milk Processors, Cannery, Dairy Employees and Helpers Union, Local No. 695, that covers certain employees at our Stoughton, Wisconsin manufacturing facility is scheduled to expire on March 31, 2016. We expect to begin negotiations for a new collective bargaining agreement during the fourth quarter of 2015 or the first quarter of 2016. While we believe that our relations with our union employees are good, we cannot be certain that we will be able to negotiate a new collective bargaining agreement for the Stoughton, Wisconsin manufacturing facility on terms satisfactory to us, or at all, and without production interruptions, including labor stoppages. At this time, however, management does not expect the outcome of these negotiations to have a material adverse effect on our business, financial condition, or results of operations. None of our other collective bargaining agreements is scheduled to expire within the next 12 months.

 

Severance and Change of Control Agreements.  We have employment agreements with each of our seven executive officers.  The agreements generally continue until terminated by the executive or by us, and provide for severance payments under certain circumstances, including termination by us without cause (as defined in the agreements) or as a result of the employee’s death or disability, or termination by us or a deemed termination upon a change of control (as defined in the agreements).  Severance benefits generally include payments for salary continuation, continuation of health care and insurance benefits, present value of additional pension credits and, in the case of a change of control, accelerated vesting under compensation plans and, in certain cases, potential gross up payments for excise tax liability.

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(11)                          Commitments and Contingencies (Continued)

 

Ortega and Las Palmas Recall.  On November 14, 2014, we announced a voluntary recall for certain Ortega and Las Palmas products after learning that one or more of the spice ingredients purchased from a third party supplier contained peanuts and almonds, allergens that are not declared on the products’ ingredient statements.  A significant majority of the costs of this recall were incurred in the fourth quarter of 2014.  The cost impact of this recall during the first three quarters of 2015 was $1.9 million, of which $1.2 million was recorded as a decrease in net sales related to customer refunds; $0.5 million was recorded as an increase in cost of goods sold primarily related to costs associated with product retrieval, destruction charges and customer fees; and $0.2 million was recorded as an increase in selling, general, and administrative expenses related to administrative costs.  The charges we recorded are based upon costs incurred to date and management’s estimates of costs that have yet to be incurred.  As of October 3, 2015, accounts receivables in our unaudited consolidated balance sheet includes a $0.3 million reserve relating to the recall.

 

(12)                          Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding plus all additional shares of common stock that would have been outstanding if potentially dilutive shares of common stock had been issued upon the exercise of stock options or in connection with performance shares that may be earned under long-term incentive awards as of the grant date, in the case of the stock options, and as of the beginning of the period, in the case of the performance shares, using the treasury stock method.  For the third quarter of 2015, 551,330 shares of common stock issuable upon the exercise of stock options have not been included in the calculation of diluted weighted average shares outstanding because the effect would have been anti-dilutive on diluted earnings per share.  For the third quarter of 2014, 101,428 shares of common stock issuable upon the achievement of performance goals in connection with share-based compensation awards have not been included in the calculation of diluted weighted average shares outstanding because the effect would have been anti-dilutive on diluted loss per share.

 

		Thirteen Weeks Ended				Thirty-nine Weeks Ended
		October 3, 2015		September 27, 2014		October 3, 2015		September 27, 2014
Weighted average shares outstanding:
Basic		57,976,744		53,663,697		56,120,780		53,655,743
Net effect of potentially dilutive share-based compensation awards		79,979		—		58,929		74,638
Diluted		58,056,723		53,663,697		56,179,709		53,730,381

 

(13)                          Business and Credit Concentrations and Geographic Information

 

Our exposure to credit loss in the event of non-payment of accounts receivable by customers is estimated in the amount of the allowance for doubtful accounts.  We perform ongoing credit evaluations of the financial condition of our customers.  Our top ten customers accounted for approximately 51.9% of consolidated net sales for the first three quarters of 2015 and 2014.  Our top ten customers accounted for approximately 51.6% and 51.7% of our consolidated trade accounts receivables as of October 3, 2015 and January 3, 2015, respectively.  Other than Wal-Mart, which accounted for 19.3% and 18.6% of our consolidated net sales for the first three quarters of 2015 and 2014, respectively, no single customer accounted for more than 10.0% of our consolidated net sales for the first three quarters of 2015 or 2014.  Other than Wal-Mart, which accounted for 15.6% and 16.7% of our consolidated trade accounts receivables as of October 3, 2015 and January 3, 2015, respectively, no single customer accounted for more than 10.0% of our consolidated

 

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

(13)         Business Credit Concentrations and Geographic Information (Continued)

 

trade accounts receivables.  As of October 3, 2015, we do not believe we have any significant concentration of credit risk with respect to our consolidated trade accounts receivable with any single customer whose failure or nonperformance would materially affect our results other than as described above with respect to Wal-Mart.

 

During the first three quarters of 2015 and 2014, our sales to foreign countries represented approximately 3.6% and 3.3%, respectively, of net sales.  Our foreign sales are primarily to customers in Canada.

 

(14)                          Share-Based Payments

 

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

 

Employee Stock Options.  The following table details our stock option activity for the first three quarters of fiscal 2015:

 

		Options		Weighted Average Exercise Price			Weighted Average Contractual Life Remaining (Years)		Aggregate Intrinsic Value
Outstanding at beginning of fiscal 2015		418,158		$	30.94
Granted		133,172		$	27.89
Exercised		—		N/A
Forfeited		—		N/A
Outstanding at end of third quarter of 2015		551,330		$	30.20		9.3		$	677
Exercisable at end of third quarter of 2015		—		—			—		—

 

The fair value of the options was estimated on the date of grant using the Black-Scholes option-pricing model utilizing certain assumptions.  Expected volatility was based on both historical and implied volatilities of our common stock over the estimated expected term of the award. The expected term of the options granted represents the period of time that options were expected to be outstanding and is based on the “simplified method” in accordance with accounting guidance. We utilized the simplified method to determine the expected term of the options as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options.

 

		2015		2014
Weighted average grant date fair value		$6.00		$6.74
Expected volatility		36%		34.8%
Expected term		6.5 years		6.5 years
Risk-free interest rate		1.6% - 1.9%		1.9%
Dividend yield		4.7% - 4.9%		4.4%

 

The following table sets forth the compensation expense recognized for share-based payments (performance share LTIAs, stock options, non-employee director stock grants and other share based payments)

 

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