B&G Foods, Inc. - Quarter Report: 2016 July (Form 10-Q)

As filed with the Securities and Exchange Commission on August 4, 2016

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark one)

 

 

For the quarterly period ended July 2, 2016

 

or

 

 

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 ☒ No ☐

 

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

 

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

 

 

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

 

As of August 4, 2016, the registrant had 62,656,314 shares of common stock, par value $0.01 per share, issued and outstanding.

 

 

 

B&G Foods, Inc. and Subsidiaries

Index

 

 

 

 

 

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)

 

See Notes to Consolidated Financial Statements.

 

 

B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

See Notes to Consolidated Financial Statements.

B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

See Notes to Consolidated Financial Statements.

 

 

 

B&G Foods, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

See Notes to Consolidated Financial Statements.

 

 

(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 and frozen foods across the United States, Canada and Puerto Rico.  Our products include frozen and canned vegetables, hot cereals, fruit spreads, canned meats and beans, bagel chips, spices, seasonings, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, pizza crusts, 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,  Green Giant,  JJ Flats,  Joan of Arc,  Las Palmas,  Le Sueur,  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,  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 December 31, 2016 (fiscal 2016) and our fiscal year ended January 2, 2016 (fiscal 2015) each contain 52 weeks.  Each quarter of fiscal 2016 and 2015 contains 13 weeks.

Basis of Presentation 

The accompanying unaudited consolidated interim financial statements for the thirteen and twenty-six week periods ended July 2, 2016 (second quarter and first two quarters of 2016) and July 4, 2015 (second quarter and first two quarters of 2015) 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 that are, in the opinion of management, necessary to present fairly our consolidated financial position as of July 2, 2016, and the results of our operations and comprehensive income for the second quarter and first two quarters of 2016 and 2015 and cash flows for the first two quarters of 2016 and 2015.  Our results of operations for the second quarter and first two quarters of 2016 are not necessarily indicative of the results to be expected for the full year.  We have evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited consolidated interim financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for fiscal 2015 filed with the SEC on March 2, 2016.  Certain prior year amounts have been reclassified to conform to the current year presentation.

(2)Summary of Significant Accounting Policies (continued)

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 fair value allocations; the recoverability of goodwill, other intangible assets, property, plant and equipment and deferred tax assets; and the determination of the useful life of customer relationship and amortizable trademark intangibles.  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.

Newly Adopted Accounting Standards

In April 2015, the Financial Accounting Standards Board (FASB) issued a new accounting standards update (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. We adopted the provisions of this ASU at the beginning of fiscal 2016 and applied the required changes in accounting principle on a retrospective basis. Accordingly, in our consolidated balance sheet as of January 2, 2016, $28.1 million of unamortized deferring financing costs were reclassified from other assets to long-term debt. The update impacted presentation and disclosure only, and therefore, the adoption of this ASU did not have any impact on our consolidated financial position, results of operations or liquidity.

Recently Issued Accounting Standards 

In fiscal 2016, the FASB issued several new ASUs that provide for improvements to the revenue recognition accounting standard, including principal versus agent considerations, identifying performance obligations, licensing, narrow-scope improvements and practical expedients. The updates are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the impact of these new standards.

In March 2016, the FASB issued a new ASU that provides for the simplification of several aspects of the accounting for share-based payment awards, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We are currently evaluating the impact of this new standard.

In February 2016, the FASB issued a new ASU that requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current guidance. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently evaluating the impact of this new standard. 

In November 2015, the FASB issued a new ASU that requires deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The update impacts balance sheet presentation and disclosure only, and therefore, the adoption of this ASU will not have any impact on our consolidated financial position, results of operations or liquidity.

 

(3)Acquisitions

On November 2, 2015, we completed the acquisition of the Green Giant and Le Sueur brands from General Mills, Inc. for a purchase price of $765 million in cash plus an inventory adjustment at closing of $57.8 million. We refer to this acquisition as the “Green Giant acquisition.”  In connection with the acquisition, as of July 2, 2016 and January 2, 2016, we had receivables related to an ongoing transition services agreement with General Mills, of $10.0 million and $52.6 million, respectively, included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.

On July 10, 2015, we acquired Spartan Foods of America, Inc., and related entities, including the Mama Mary’s brand, 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.”

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 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 and amortizable trademarks acquired are amortized over 10 to 20 years. Seed technology assets acquired in the Green Giant acquisition are amortized over a period of 5 years. Goodwill and other intangible assets, except in the case of the Mama Mary’s acquisition, are deductible for income tax purposes.  Inventory has been recorded at estimated selling price less costs of disposal and a reasonable selling 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 Green Giant 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 fourth quarter of fiscal 2016.

(3)Acquisitions (continued)

The following table sets forth the allocation of the Mama Mary’s acquisition purchase price to the estimated fair value of the net assets acquired at the date of acquisition. During the second quarter of 2016, we recorded a purchase price allocation adjustment by decreasing goodwill and increasing other working capital by $0.6 million due to a change in our estimated accrued expenses as of the date of acquisition.

Unaudited Pro Forma Summary of Operations

The following pro forma summary of operations for the second quarter and first two quarters of 2015 presents our operations as if the Green Giant acquisition had occurred as of the beginning of fiscal 2015.  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 and seed technology intangibles.

The pro forma information presented above does not purport to be indicative of the results that actually would have been attained had the Green Giant acquisition occurred as of the beginning of fiscal 2015, 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.

(4)Inventories (continued)

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

 

(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):

 

Amortization expense associated with amortizable intangible assets for the second quarter and first two quarters of 2016 was $3.4 million and $6.8 million, respectively, and is recorded in operating expenses. Amortization expense associated with amortizable intangible assets for the second quarter and first two quarters of 2015 was $2.7 million and $5.3 million, respectively. We expect to recognize an additional $6.5 million of amortization expense associated with our amortizable intangible assets during the remainder of fiscal 2016, and thereafter $12.8 million, $12.6 million, $12.5 million and $12.4 million of amortization expense in fiscal years 2017, 2018, 2019 and 2020, respectively.  See Note 3, “Acquisitions.”

Rickland Orchards.     During the second quarter of 2016, we discontinued the Rickland Orchards brand because there was not sufficient demand to warrant continued production.  Accordingly, we wrote off the related intangible assets and recorded non-cash impairment charges to amortizable trademarks and customer relationship intangibles of $4.5 million and $0.9 million, respectively, which are recorded in “Impairment of intangible assets” in the accompanying unaudited consolidated statement of operations. 

We also recorded a charge to cost of goods sold of approximately $0.8 million in connection with the write-off of raw material and finished goods inventory for the Rickland Orchards brand.

(6)Long-Term Debt

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

As of July 2, 2016, the aggregate contractual maturities of long-term debt are as follows (in thousands):

 

Senior Secured Credit Agreement.  During the first quarter of 2016, we made an optional prepayment of $40.1 million aggregate principal amount of our tranche A term loans and $109.9 million aggregate principal amount of our tranche B term loans using the proceeds of a common stock offering.  See Note 8, “Stockholders’ Equity.”

At July 2, 2016, $233.6 million of tranche A term loans and $640.1 million of tranche B term loans were outstanding under our credit agreement.  There were no revolving loans outstanding under the credit agreement at July 2, 2016.

At July 2, 2016, 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.  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. $10.5 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 entire $640.1 million principal amount of tranche B term loans outstanding are due and payable at maturity on November 2, 2022.

We may prepay the term loans or permanently reduce the revolving credit facility commitment under the credit agreement at any time without premium or penalty (other than customary “breakage” costs with respect to the early termination of LIBOR loans).  Subject to certain exceptions, the credit agreement provides for mandatory prepayment upon certain asset dispositions or casualty events and issuances of indebtedness.

(6)Long-Term Debt (continued)

Interest under the revolving credit facility, including any outstanding letters of credit, and under the tranche A term loan facility, is determined based on alternative rates that we may choose in accordance with the credit agreement, including a base rate per annum plus an applicable margin ranging from 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 July 2, 2016, the tranche A term loan interest rate was approximately 2.45%.  There were no outstanding borrowings under the revolving credit facility at July 2, 2016.

Interest under the tranche B term loan facility is determined based on alternative rates that we may choose in accordance with the credit agreement, including a base rate per annum plus an applicable margin of 2.00%, and LIBOR plus an applicable margin of 3.00%. At July 2, 2016, the tranche B term loan interest rate was approximately 3.75%.

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

The credit agreement also contains certain financial maintenance covenants, which, among other things, specify a maximum consolidated leverage ratio and a minimum interest coverage ratio, each ratio as defined in the credit agreement. Our consolidated leverage ratio (defined as the ratio of our consolidated 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 6.75 to 1.00 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 July 2, 2016, we were in compliance with all of the covenants, including the financial covenants, in the credit agreement.

The credit agreement also provides for an incremental term loan and revolving loan facility, pursuant to which we may request that the lenders under the 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 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 senior notes is payable on June 1 and December 1 of each year.  The senior notes will mature on June 1, 2021, unless earlier retired or redeemed.  We may redeem some or all of the 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, 2019, in each case plus accrued and unpaid interest to the date of redemption.  In addition, if we undergo a change of control or upon certain asset sales, we may be required to offer to repurchase the 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 senior notes through cash repurchases of the senior notes and/or exchanges of the senior notes for equity securities, in open market purchases, privately negotiated transactions or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved may be material.

Our obligations under the senior notes are jointly and severally and fully and unconditionally guaranteed on a senior basis by all of our existing and certain future domestic subsidiaries.  The senior notes and the subsidiary guarantees are our and the guarantors’ general unsecured obligations and are effectively junior in right of payment to all of our and the guarantors’ secured indebtedness and to all existing and future indebtedness and other liabilities of our

(6)Long-Term Debt (continued)

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 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 July 2, 2016, we were in compliance with all of the covenants in the indenture governing the 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.  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.  See Note 16, “Guarantor and Non-Guarantor Financial Information.”

Accrued Interest.  At July 2, 2016 and January 2, 2016, accrued interest of $4.9 million and $5.7 million, respectively, is included in accrued expenses in the accompanying unaudited consolidated balance sheets.

Loss on Extinguishment of Debt.  During the first quarter of 2016, we incurred a loss on extinguishment of debt in connection with the repayment of $40.1 million aggregate principal amount of our tranche A term loans and $109.9 million aggregate principal amount of our tranche B term loans. The loss on extinguishment includes the write-off of deferred debt financing costs of $2.2 million and the write-off of unamortized discount of $0.6 million.

(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, income tax payable 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.

(7)Fair Value Measurements (continued)

The carrying values and fair values of our revolving credit loans, term loans and senior notes as of July 2, 2016 and January 2, 2016 are as follows (in thousands):

There was no Level 3 activity during the second quarter or first two quarters of 2016 or 2015.

 

 

 

(8)Stockholders’ Equity

Common Stock Offering.  On March 15, 2016, we completed an underwritten public offering of 4,600,000 shares of our common stock at a price to the public of $33.55 per share. The proceeds of the offering were $152.0 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. See Note 6, “Long-Term Debt.”

(9)Accumulated Other Comprehensive Loss

The reclassifications from accumulated other comprehensive loss (AOCL) for the second quarter and first two quarters of 2016 and 2015 are as follows (in thousands):

(9)Accumulated Other Comprehensive Loss (continued)

Changes in AOCL for the first two quarters of 2016 are as follows (in thousands):

 

 

(10)Pension Benefits

Company Sponsored Defined Benefit Pension Plans.  Net periodic pension cost for company sponsored defined benefit pension plans for the second quarter and first two quarters of 2016 and 2015 include the following components (in thousands):

 

During the first two quarters of 2016, we made $3.5 million of defined benefit pension plan contributions. We do not plan to make additional contributions during the remainder of fiscal 2016.

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 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.  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.

B&G Foods made contributions to the plan of $0.4 million in the first two quarters of 2016 and expects to pay surcharges of less than $0.1 million in fiscal 2016 assuming consistent hours are worked.  B&G Foods contributed $0.8 million in fiscal 2015 and paid less than $0.1 million in surcharges. These contributions represented less than five percent of total contributions made to the plan.

(11)Commitments and Contingencies

Operating Leases.  As of July 2, 2016, future minimum lease payments under non-cancelable operating leases in effect at quarter-end (with initial lease terms in excess of one year) for the periods set forth below were as follows (in thousands):

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 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 have been vigorously defending 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 in these products before first being contacted by The Weston Firm and we no longer use partially hydrogenated oil in these products.  On February 8, 2016, the court ruled on our motion to dismiss, dismissing all of the plaintiff’s labeling claims and agreeing with our position that any claim for removal of partially hydrogenated oil would be moot after B&G Foods has done so.  Under the court’s ruling, the plaintiff’s only surviving claims relate to his alleged use of these products.  These claims have been stayed, however, pending further guidance from the FDA, which has already stated that companies may continue to use partially hydrogenated oil through at least 2018.  The plaintiff attempted to appeal the dismissal order, however, the Ninth Circuit granted B&G Foods’ motion to dismiss the appeal and sanctioned the plaintiff and his counsel.  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 two quarters of 2016 or 2015 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.

(11)Commitments and Contingencies (continued)

Collective Bargaining Agreements.  As of July 2, 2016, approximately 1,194 of our 1,967 employees, or 61%, were covered by collective bargaining agreements, of which approximately 83 were covered by a collective bargaining agreement expiring within the next 12 months.  Our collective bargaining agreement with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, AFL-CIO, Local No. 334 that covers certain employees at our Portland, Maine manufacturing facility is scheduled to expire on April 29, 2017.  We expect to begin negotiations for a new collective bargaining agreement during the fourth quarter of 2016 or the first quarter of 2017.  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 Portland, Maine 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 one year.

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.

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 two 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. There was no cost impact of this recall during the first two quarters of 2016, and we do not expect future expenses, if any, to be material.

(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 second quarter of 2016 there were 22,692 and for the second quarter of 2015 there were 551,330

(12)Earnings per Share (continued)

shares of common stock issuable upon the exercise of stock options excluded from the calculation of diluted weighted average shares outstanding because the effect would have been anti-dilutive on diluted earnings per share.

 

 

(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 56.9% and 51.9% of consolidated net sales for the first two quarters of 2016 and 2015, respectively.  Our top ten customers accounted for approximately 50.9% and 53.5% of our consolidated trade accounts receivables as of July 2, 2016 and January 2, 2016, respectively. Other than Wal-Mart, which accounted for 25.8% and 19.7% of our consolidated net sales for the first two quarters of 2016 and 2015, respectively, no single customer accounted for more than 10.0% of our consolidated net sales for the first two quarters of 2016 or 2015. Other than Wal-Mart, which accounted for 17.9% and 19.3% of our consolidated trade accounts receivables as of July 2, 2016 and January 2, 2016, respectively, no single customer accounted for more than 10.0% of our consolidated trade accounts receivables.  As of July 2, 2016, 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 two quarters of 2016 and 2015, our sales to customers in foreign countries represented approximately 8.4% and 3.7%, 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 LTIAs 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 and may elect to receive a portion of their annual cash retainer in stock options.

(14)Share-Based Payments (continued)

The following table details our stock option activity for the first two quarters of fiscal 2016 (dollars in thousands, except per share data):

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.

 

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) during the second quarter and first two quarters of 2016 and 2015 and where that expense is reflected in our consolidated statements of operations (in thousands):

As of July 2, 2016, there was $5.8 million of unrecognized compensation expense related to performance share LTIAs, which is expected to be recognized over the next 2.5 years and $2.4 million of unrecognized compensation expense related to stock options, which is expected to be recognized over the next 2.75 years.