UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-Q
____________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 2014 | Commission File Number 001-33595 |
____________________________
Boulder Brands, Inc.
(Exact name of registrant as specified in its charter)
____________________________
Delaware | 20-2949397 |
(State of or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
1600 Pearl Street - Suite 300 Boulder, Colorado | 80302 |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (303) 652-0521
____________________________
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer x |
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 November 4, 2014, the Registrant had 61,133,443 shares of common stock, par value $.0001 per share, outstanding.
BOULDER BRANDS, INC. AND SUBSIDIARIES
INDEX
Page | ||
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Cautionary Note Regarding Forward Looking Statements
Statements made in this quarterly report that are not historical facts, including statements about the Company's plans, strategies, beliefs and expectations, are forward-looking and subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may include the use of the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe” and similar expressions. Actual results may differ materially from such forward-looking statements for a number of reasons, including those risks and uncertainties set forth in "Item 1A. Risk Factors," located in our annual report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"), as well as the following factors:
• | the Company’s ability to implement its growth strategy, including without limitation enhancing its brand recognition, increasing distribution of its existing products, attracting new consumers to its brands, and introducing new products and product extensions; |
• | the Company’s ability to drive compelling product innovation; |
• | the loss of a significant customer or a significant reduction in purchase volume by any such customer; |
• | erosion of the reputation of the Company’s brands; |
• | adverse developments with respect to the sale of Smart Balance® buttery spreads products; |
• | risks associated with maintaining and upgrading the Company’s manufacturing facilities in order to, among other things, keep up with demand, produce new products and increase margins; |
• | the loss of a manufacturer or the inability of a manufacturer to fulfill its orders or to maintain the quality of its products; |
• | the departure of one or more members of the Company’s executive management team; |
• | risks related to the Company’s rapid growth, including the need to build an infrastructure and workforce sufficient to meet the growing demand for the Company’s products; |
• | the termination of the Company’s relationship with Acosta, Inc. and/or Presence Marketing, Inc. to act as its primary sales agents for a significant portion of its products; |
• | changes in consumer preferences and discretionary spending; |
• | potential unavailability of necessary capital to fund the Company’s growth initiatives; |
• | price increases; |
• | the Company’s ability to protect its intellectual property; |
• | the Company’s obligations under its principal license agreement with Brandeis University; |
• | any sustained economic downturn in the U.S. and abroad and related consumer sentiment; |
• | fluctuations in various food and supply costs as well as increased costs associated with product processing and transportation; |
• | the Company’s ability to manage its supply chain effectively, including maintaining sufficient capacity to satisfy demand for its products; |
• | regulation of the Company’s advertising; |
• | adverse publicity or consumer concern regarding the safety and quality of food products or health concerns; |
• | the absence of long-term contracts with the Company’s customers; |
• | economic and political conditions in the U.S. and abroad; |
• | foreign currency fluctuations; |
• | the identification of new acquisition opportunities and the execution and integration of acquisitions; |
• | the realization of the expected growth benefits from our acquisitions; |
• | the risks involved in selling gluten-free products; |
• | the Company’s internal control over financial reporting; |
• | risks related to an increased number of employees, labor disputes and adverse employee relations; |
• | risks associated with conducting business outside of the U.S.; |
• | potential liabilities of litigation; |
• | the potential unavailability of insurance for potential liabilities; |
• | increases in costs of medical and other employee health and welfare benefits; |
• | the failure of the Company’s information technology systems to operate effectively; |
• | a further impairment in the carrying value of goodwill and other intangible assets; |
• | volatility of the market price and trading volume of the Company’s common stock; |
• | the numerous laws and governmental regulations the Company’s business operations may be subject to; |
• | liabilities resulting from claims, including defense costs and negative publicity, should the consumption of any food or beverage products manufactured or marketed by the Company cause injury, illness or death; |
• | risks that customers will not accept the Company’s products for their stores or set reasonable prices for the Company’s products; |
• | changes in retail distribution arrangements and the trend toward less products stocked at retail; |
• | competition; and |
1
• | the Company’s debt, including financial covenants that restrict the Company’s operations. |
Forward-looking statements speak only as of the date they are made, and, except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statement, whether to reflect actual results of operations, changes in financial condition, changes in general economic or business conditions, changes in estimates, expectations or assumptions, or circumstances or events arising after the filing of this quarterly report.
2
Part I. Financial Information
Item 1. Financial Statements
BOULDER BRANDS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30, 2014 | December 31, 2013 | ||||||
(unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash | $ | 18,907 | $ | 16,732 | |||
Accounts receivable, net of allowance of: $1,179 (2014) and $1,111 (2013) | 59,642 | 45,307 | |||||
Accounts receivable - other | 4,695 | 2,868 | |||||
Inventories | 52,007 | 35,908 | |||||
Prepaid taxes | 8,021 | 7,087 | |||||
Prepaid expenses and other assets | 8,417 | 2,305 | |||||
Deferred tax asset | 5,770 | 5,832 | |||||
Total current assets | 157,459 | 116,039 | |||||
Property and equipment, net | 52,909 | 51,408 | |||||
Other assets: | |||||||
Goodwill | 233,170 | 347,227 | |||||
Intangible assets, net | 195,067 | 242,296 | |||||
Deferred costs, net | 8,242 | 7,937 | |||||
Investments, at cost | 8,751 | 8,751 | |||||
Other assets | 2,103 | 1,825 | |||||
Total other assets | 447,333 | 608,036 | |||||
Total assets | $ | 657,701 | $ | 775,483 | |||
Liabilities and Equity | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 68,961 | $ | 67,316 | |||
Current portion of long-term debt | 4,081 | 3,863 | |||||
Total current liabilities | 73,042 | 71,179 | |||||
Long-term debt | 302,059 | 292,344 | |||||
Deferred tax liability | 39,734 | 52,873 | |||||
Contract payable | — | 1,375 | |||||
Other liabilities | 4,874 | 1,393 | |||||
Total liabilities | 419,709 | 419,164 | |||||
Commitments and contingencies | |||||||
Boulder Brands, Inc. and Subsidiaries stockholders' equity: | |||||||
Common stock, $.0001 par value, 250,000,000 shares authorized; 64,810,248 and 63,913,639 issued in 2014 and 2013, respectively and 61,119,585 and 60,222,976 outstanding in 2014 and 2013, respectively | 6 | 6 | |||||
Additional paid in capital | 572,118 | 560,120 | |||||
Accumulated deficit | (315,233 | ) | (186,338 | ) | |||
Accumulated other comprehensive loss | (4,326 | ) | (3,234 | ) | |||
Treasury stock, at cost (3,690,663 shares) | (15,595 | ) | (15,595 | ) | |||
Total Boulder Brands, Inc. and Subsidiaries stockholders' equity | 236,970 | 354,959 | |||||
Noncontrolling interest | 1,022 | 1,360 | |||||
Total equity | 237,992 | 356,319 | |||||
Total liabilities and equity | $ | 657,701 | $ | 775,483 |
See accompanying notes to the consolidated financial statements
3
BOULDER BRANDS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net sales | $ | 133,865 | $ | 118,512 | $ | 388,065 | $ | 335,834 | |||||||
Cost of goods sold | 83,422 | 70,242 | 244,319 | 195,699 | |||||||||||
Gross profit | 50,443 | 48,270 | 143,746 | 140,135 | |||||||||||
Operating expenses: | |||||||||||||||
Marketing | 6,206 | 8,048 | 16,840 | 23,017 | |||||||||||
Selling | 11,685 | 8,976 | 33,052 | 26,184 | |||||||||||
General and administrative | 20,378 | 19,781 | 63,706 | 54,741 | |||||||||||
Restructuring, acquisition and integration-related costs | (186 | ) | 3,066 | 3,900 | 4,373 | ||||||||||
Goodwill and tradename impairment | 150,507 | — | 150,507 | — | |||||||||||
Total operating expenses | 188,590 | 39,871 | 268,005 | 108,315 | |||||||||||
Operating income (loss) | (138,147 | ) | 8,399 | (124,259 | ) | 31,820 | |||||||||
Other income (expense): | |||||||||||||||
Interest expense | (5,341 | ) | (11,242 | ) | (13,906 | ) | (20,891 | ) | |||||||
Other (expense) income, net | (580 | ) | 594 | (714 | ) | (910 | ) | ||||||||
Total other (expense), net | (5,921 | ) | (10,648 | ) | (14,620 | ) | (21,801 | ) | |||||||
Income (loss) before income taxes | (144,068 | ) | (2,249 | ) | (138,879 | ) | 10,019 | ||||||||
Provision (benefit) for income taxes | (11,873 | ) | (612 | ) | (9,832 | ) | 4,601 | ||||||||
Net income (loss) | (132,195 | ) | (1,637 | ) | (129,047 | ) | 5,418 | ||||||||
Less: Net loss attributable to noncontrolling interest | 36 | 55 | 150 | 59 | |||||||||||
Net income (loss) attributable to Boulder Brands, Inc. and Subsidiaries common stockholders | $ | (132,159 | ) | $ | (1,582 | ) | $ | (128,897 | ) | $ | 5,477 | ||||
Earnings (loss) per share attributable to Boulder Brands, Inc. and Subsidiaries common stockholders: | |||||||||||||||
Basic | $ | (2.17 | ) | $ | (0.03 | ) | $ | (2.12 | ) | $ | 0.09 | ||||
Diluted | $ | (2.17 | ) | $ | (0.03 | ) | $ | (2.12 | ) | $ | 0.09 | ||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 61,032,874 | 59,605,890 | 60,803,632 | 59,539,397 | |||||||||||
Diluted | 61,032,874 | 59,605,890 | 60,803,632 | 62,635,507 | |||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Foreign currency translation adjustment | (803 | ) | 492 | (1,092 | ) | (690 | ) | ||||||||
Other comprehensive income (loss) | (803 | ) | 492 | (1,092 | ) | (690 | ) | ||||||||
Comprehensive income (loss) | (132,998 | ) | (1,145 | ) | (130,139 | ) | 4,728 | ||||||||
Less: Comprehensive loss attributable to noncontrolling interest | 36 | 55 | 150 | 59 | |||||||||||
Comprehensive income (loss) attributable to Boulder Brands, Inc. and Subsidiaries | $ | (132,962 | ) | $ | (1,090 | ) | $ | (129,989 | ) | $ | 4,787 |
See accompanying notes to the consolidated financial statements
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BOULDER BRANDS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
Cash flows from operating activities | |||||||
Net income (loss) | $ | (129,047 | ) | $ | 5,418 | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||
Depreciation and amortization of intangibles | 16,750 | 13,757 | |||||
Amortization and write-off of deferred financing costs | 1,399 | 7,599 | |||||
Deferred income taxes | (14,000 | ) | (61 | ) | |||
Excess tax benefit from stock-based payment arrangements | (4,548 | ) | (1,820 | ) | |||
Stock-based compensation | 7,162 | 7,032 | |||||
Asset write-offs | 584 | 2,395 | |||||
Loss on disposal of property and equipment | 192 | 217 | |||||
Impairment loss | 150,507 | — | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (14,535 | ) | (9,843 | ) | |||
Inventories | (16,367 | ) | (4,689 | ) | |||
Prepaid expenses and other assets | (7,541 | ) | 933 | ||||
Prepaid taxes | 3,613 | (642 | ) | ||||
Accounts payable and accrued expenses | 5,455 | (395 | ) | ||||
Net cash (used in) provided by operating activities | (376 | ) | 19,901 | ||||
Cash flows from investing activities | |||||||
Acquisitions, net of cash and cash equivalents acquired | (4 | ) | (6,180 | ) | |||
Purchase of investment | — | (8,751 | ) | ||||
Purchase of property and equipment | (9,284 | ) | (21,563 | ) | |||
Proceeds from disposal of property and equipment | 28 | 102 | |||||
Patent/trademark defense costs | (713 | ) | (1,522 | ) | |||
Net cash (used in) investing activities | (9,973 | ) | (37,914 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from issuance of long-term debt | 26,933 | 270,800 | |||||
Repayment of debt | (18,589 | ) | (239,934 | ) | |||
Payments for loan costs | (1,433 | ) | (3,743 | ) | |||
(Purchase of) contribution from noncontrolling interest | (280 | ) | 899 | ||||
Shares withheld for payment of employee payroll taxes | (2,510 | ) | (1,727 | ) | |||
Proceeds from exercise of stock options | 3,892 | 1,519 | |||||
Excess tax benefit from stock-based payment arrangements | 4,548 | 1,820 | |||||
Net cash provided by financing activities | 12,561 | 29,634 | |||||
Effects of exchange rate changes on cash and cash equivalents | (37 | ) | (9 | ) | |||
Net increase in cash and cash equivalents for the period | 2,175 | 11,612 | |||||
Cash and cash equivalents - beginning of period | 16,732 | 11,509 | |||||
Cash and cash equivalents - end of period | $ | 18,907 | $ | 23,121 | |||
Cash paid during the period for: | |||||||
Income taxes | $ | 172 | $ | 5,267 | |||
Interest | $ | 11,161 | $ | 9,317 |
See accompanying notes to the consolidated financial statements
5
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share data)
1. General and Basis of Presentation
Boulder Brands, Inc. (the "Company," "we" or "us") is a consumer foods company that markets and manufactures a wide array of consumer foods products for sale primarily in the U.S., Canada and the United Kingdom.
The significant accounting policies summarized in Note 2 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K") have been followed in preparing the accompanying consolidated financial statements.
The accompanying consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, considered necessary for a fair presentation of the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or "GAAP," have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in the 2013 Form 10-K. Results for interim periods are not necessarily indicative of the results to be expected for the full year.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.
Revenue Recognition
We offer our customers and consumers a variety of sales and incentive programs, including discounts, allowances, coupons, slotting fees, and advertising; such amounts are estimated and recorded as a reduction in revenue. For interim reporting, we estimate the total annual sales incentives for most programs and record a pro rata share in proportion to forecasted annual revenue. As a result, we have recorded a prepaid expense at September 30, 2014 of $4,249, which will be charged to expense over the remainder of the year.
Noncontrolling Interest
In 2013, we acquired 80% of GlucoBrands, LLC, owner of Level Life Foods, or “Level,” for $2,400. In February 2014, we acquired an additional 8% of Level for $238, thus decreasing the noncontrolling interest to 12%. In July 2014, we acquired approximately an additional 1% of Level for $42, thus decreasing the noncontrolling interest to approximately 11%.
Accumulated Other Comprehensive Loss
The change in Accumulated Other Comprehensive Loss from December 31, 2013 to September 30, 2014 of $1,092 includes $1,274 of losses on intra-entity foreign currency transactions that are of a long-term investment nature.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605, "Revenue Recognition," and most industry-specific guidance throughout the Codification. The standard requires entities to recognize the amount of revenue that reflects the consideration to which the company expects to be entitled in exchange for the transfer of promised goods or services to customers. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2014-09 on its financial position, results of operations, cash flows and financial statement disclosures.
6
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern: Disclosures about an Entity’s Ability to Continue as a Going Concern." The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter. The Company is currently assessing the impact of the adoption of ASU No. 2014-15 on its financial position, results of operations and financial statement disclosures.
2. Acquisitions
On December 23, 2013, we acquired all of the issued and outstanding units of Phil’s Fresh Foods, LLC, owner of EVOL Foods (EVOL). Total cash consideration was $48,941. We funded the purchase using a combination of cash on hand and borrowing under the amended Credit Agreement. Based in Boulder, Colorado, EVOL manufactures and markets frozen foods with a focus on pure and simple ingredients. EVOL’s products include offerings that are antibiotic-free, hormone-free and GMO-free and have no artificial preservatives or flavors.
We accounted for the acquisition pursuant to ASC No. 805, “Business Combinations.” Accordingly, we recorded net assets acquired and liabilities assumed at their fair values.
The following summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date:
Cash | $ | 121 | |
Accounts receivable | 2,059 | ||
Accounts receivable - other | 25 | ||
Inventories | 4,900 | ||
Prepaid expenses and other assets | 293 | ||
Property and equipment | 1,441 | ||
Intangible assets | 20,200 | ||
Goodwill | 23,150 | ||
Accounts payable, accrued expenses and other liabilities | (3,248 | ) | |
Total | $ | 48,941 |
Other intangible assets acquired and their amortization periods are as follows:
Useful life (in years) | Fair value | ||||
Customer relationships | 12 | $ | 10,000 | ||
Trademarks/tradenames | Indefinite | 10,000 | |||
Non-compete agreement | 2 | 200 | |||
Total | $ | 20,200 |
The goodwill associated with EVOL is a result of acquiring and retaining workforces and expected synergies from integrating their operations into ours. All such goodwill recognized as part of the EVOL acquisition is reported in the Natural segment and is expected to be deductible for tax purposes.
The following unaudited pro forma financial information presents our combined results as though the EVOL acquisition occurred on January 1, 2012.
Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | ||||||
Net sales | $ | 123,448 | $ | 348,278 | |||
Net income | $ | 2,827 | $ | 10,637 |
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BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
The pro forma amounts have been calculated after applying our accounting policies. Included in the pro forma results are the interest expense and amortization of deferred financing costs associated with the new debt structure in place at the time of the EVOL acquisition, as if it were in place as of January 1, 2012, and the amortization expense of the fair value of the finite-lived intangible assets, as though the acquisition had been consummated as of January 1, 2012.
The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the period indicated nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential net sales enhancements or operating efficiencies that could result from the acquisition.
On May 1, 2013, we acquired Davies, a United Kingdom based gluten-free bakery and bread manufacturer for approximately $3,900. On July 10, 2013, we acquired 80% of GlucoBrands, LLC, owner of Level, for $2,400. Level provides products to customers to help in the daily management of diabetes. These transactions have been accounted for using the acquisition method of accounting in accordance with GAAP and the operating results of Davies and Level, from the date of acquisition, are included in our Consolidated Statement of Operations.
3. Financial Instruments and Fair Value Measurements
Our financial instruments consist of cash and cash equivalents, short term trade receivables, payables, note payables, accrued expenses and derivative instruments. The carrying values of cash and cash equivalents, short term receivables and payables and accrued expenses approximate fair value because of their short maturities. Our debt bears interest at a variable interest rate plus an applicable margin and, therefore, approximates fair value. We measure fair value based on authoritative accounting guidance for “Fair Value Measurements,” which requires a three-tier fair value hierarchy that prioritizes inputs to measure fair value. These tiers include: Level 1, defined as inputs such as unadjusted quoted prices in an active market for identical assets or liabilities; Level 2, defined as inputs other than quoted market prices in active markets that are either directly or indirectly observable; or Level 3, defined as unobservable inputs for use when little or no market value exists, therefore requiring an entity to develop its own assumptions. When available, we use quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters.
The following table presents assets and liabilities measured at fair value on a recurring basis and nonrecurring basis:
Fair Value Measurements at Reporting Date | |||||||
September 30, 2014 | December 31, 2013 | ||||||
Assets: | |||||||
Recurring fair value measurements (1) | |||||||
Deferred compensation (a) | $ | 1,667 | $ | 1,381 | |||
Derivative assets (b) | 330 | 283 | |||||
Total recurring fair value measurements of assets | $ | 1,997 | $ | 1,664 | |||
Nonrecurring fair value measurements (2) | |||||||
Goodwill (3) | $ | 58,073 | $ | 171,557 | |||
Tradename intangible asset (4) | 65,669 | 102,115 | |||||
Total nonrecurring fair value measurements of assets | $ | 123,742 | $ | 273,672 | |||
Liabilities: | |||||||
Recurring fair value measurements (1) | |||||||
Deferred compensation (a) | $ | 1,586 | $ | 1,393 | |||
Total recurring fair value measurements of liabilities | $ | 1,586 | $ | 1,393 |
(1) All recurring fair value measurements were based upon significant other observable inputs (Level 2).
(a) | Deferred compensation assets are recorded in "Other assets" and deferred compensation liabilities are recorded in "Other liabilities" in the Consolidated Balance Sheets. |
(b) Derivative assets are recorded in "Accounts receivable - other."
(2) All nonrecurring fair value measurements were based upon unobservable inputs (Level 3).
8
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
(3) Goodwill for the Smart Balance reporting unit with a carrying amount of $171,557 was written down to its implied fair value of $58,073 during the three months ended September 30, 2014, resulting in an impairment charge of $113,484.
(4) The Smart Balance indefinite-lived tradename, with a carrying amount of $102,692, was written down to its implied fair value of $65,669 during the three months ended September 30, 2014, resulting in an impairment charge of $37,023.
The nonrecurring fair value measurements for Smart Balance goodwill and the Smart Balance tradename were calculated using a discounted cash flow approach, which includes unobservable inputs classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows was based on the Company’s most recent operational forecasts. The Company uses the assistance of an independent consulting firm to develop valuation assumptions. See Note 6 for additional discussion regarding the impairment of goodwill and tradename.
We use derivative financial instruments, principally commodity exchange contracts, to manage risks from fluctuations in commodity costs. Derivative financial instruments are not used for the purpose of creating speculative positions or for trading purposes. Related contracts are recorded in the balance sheet at fair value using market prices and rates prevailing at the balance sheet date obtained from independent exchanges. Changes in the fair value are recognized through earnings in the period in which they occur in "Other income (expense)" in the Consolidated Statement of Income and Comprehensive Income. Amounts recognized were gains of $445 and $342 for the three and nine months ended September 30, 2014, respectively, and a gain of $318 and loss of $3 for the three and nine months ended September 30, 2013, respectively. As of September 30, 2014, we had in place commodity exchange contracts to hedge future vegetable oil purchases totaling 11.7 million pounds. Contracts are entered into having maturities of generally no more than twelve months.
9
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
4. Inventory
Inventories consist of the following:
September 30, 2014 | December 31, 2013 | ||||||
Finished product | $ | 31,762 | $ | 23,950 | |||
Raw materials | 20,245 | 11,958 | |||||
Inventories | $ | 52,007 | $ | 35,908 |
5. Property and Equipment
Property and equipment, net consist of the following:
September 30, 2014 | December 31, 2013 | ||||||
Land | $ | 559 | $ | 572 | |||
Buildings and improvements | 2,457 | 2,511 | |||||
Software development costs | 10,905 | 8,911 | |||||
Machinery and equipment | 45,108 | 40,499 | |||||
Furniture and fixtures | 2,163 | 1,785 | |||||
Leasehold improvements | 11,198 | 10,891 | |||||
Gross assets | 72,390 | 65,169 | |||||
Less: accumulated depreciation | (19,481 | ) | (13,761 | ) | |||
Property and equipment, net | $ | 52,909 | $ | 51,408 |
Depreciation expense was $2,241 and $6,470 for the three and nine months ended September 30, 2014, respectively, and $1,632 and $4,327 for the three and nine months ended September 30, 2013, respectively.
10
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
6. Goodwill and Intangible Assets
The following summarizes the changes in our goodwill, by segment:
Balance | Natural | Total | |||||||||
Goodwill | $ | 381,299 | $ | 95,928 | $ | 477,227 | |||||
Accumulated impairment loss | (130,000 | ) | — | (130,000 | ) | ||||||
Balance as of January 1, 2014 | 251,299 | 95,928 | 347,227 | ||||||||
Impairment loss | (113,484 | ) | — | (113,484 | ) | ||||||
Translation and other adjustments | — | (573 | ) | (573 | ) | ||||||
Balance as of September 30, 2014 | $ | 137,815 | $ | 95,355 | $ | 233,170 | |||||
Balance | Natural | Total | |||||||||
Goodwill | $ | 378,633 | $ | 73,558 | $ | 452,191 | |||||
Accumulated impairment loss | (130,000 | ) | — | (130,000 | ) | ||||||
Balance as of January 1, 2013 | 248,633 | 73,558 | 322,191 | ||||||||
Goodwill acquired during the year | 2,666 | 23,160 | 25,826 | ||||||||
Translation adjustments | — | (790 | ) | (790 | ) | ||||||
Balance as of December 31, 2013 | $ | 251,299 | $ | 95,928 | $ | 347,227 |
Intangible assets, net consisted of the following major classes as of September 30, 2014:
Gross Carrying Amount | Accumulated Amortization | Impairment Loss | Translation Adjustments | Net Carrying Value | |||||||||||||||
Patent technology | $ | 46,057 | $ | (33,871 | ) | $ | — | $ | — | $ | 12,186 | ||||||||
Proprietary recipes | 4,225 | (1,564 | ) | — | — | 2,661 | |||||||||||||
Non-compete agreement | 600 | (375 | ) | — | — | 225 | |||||||||||||
Supply relationships | 1,000 | (492 | ) | — | — | 508 | |||||||||||||
Customer relationships | 63,962 | (13,480 | ) | — | (2,758 | ) | 47,724 | ||||||||||||
Subscription database | 2,900 | (2,175 | ) | — | — | 725 | |||||||||||||
Trademarks/tradenames | 168,438 | (381 | ) | (37,023 | ) | 4 | 131,038 | ||||||||||||
Intangible assets, net | $ | 287,182 | $ | (52,338 | ) | $ | (37,023 | ) | $ | (2,754 | ) | $ | 195,067 |
Intangible assets, net consisted of the following major classes as of December 31, 2013:
Gross Carrying Amount | Accumulated Amortization | Translation Adjustments | Net Carrying Value | ||||||||||||
Patent technology | $ | 45,919 | $ | (29,113 | ) | $ | — | $ | 16,806 | ||||||
Proprietary recipes | 4,225 | (1,023 | ) | — | 3,202 | ||||||||||
Non-compete agreement | 600 | (200 | ) | — | 400 | ||||||||||
Supply relationships | 1,000 | (443 | ) | — | 557 | ||||||||||
Customer relationships | 63,962 | (9,515 | ) | (1,859 | ) | 52,588 | |||||||||
Subscription database | 2,900 | (1,740 | ) | — | 1,160 | ||||||||||
Trademarks/tradenames | 167,862 | (286 | ) | 7 | 167,583 | ||||||||||
Intangible assets, net | $ | 286,468 | $ | (42,320 | ) | $ | (1,852 | ) | $ | 242,296 |
11
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
As of September 30, 2014 and December 31, 2013, the total carrying amount of indefinite-lived intangible assets included in the tables above under trademarks was $130,376 and $166,559, respectively.
Amortization expense was $3,424 and $10,280 for the three and nine months ended September 30, 2014, respectively, and $3,196 and $9,429 for the three and nine months ended September 30, 2013, respectively. Based on our amortizable intangible assets as of September 30, 2014, amortization expense is expected to be approximately $3,384 for the remainder of 2014, $11,890 in 2015, $10,354 in 2016, $8,031 in 2017, $6,007 in 2018 and $5,674 in 2019.
Goodwill and tradename impairment
As required under ASC 350, “Goodwill and Other Intangible Assets,” we routinely review the carrying value of our net assets, including goodwill, to determine if any impairment has occurred. An assessment was conducted at June 30, 2014, at which time, based on existing conditions and management’s outlook, we determined there was no impairment. Due to the continued difficult environment for spreads and the Smart Balance brand’s lack of a key differentiator within the category, in early 2014, the Company began to implement a change in strategy to a non-GMO platform with respect to its Smart Balance spreads products. During the second quarter of 2014, the Company made capital investments relating to this strategy and also began to rollout the products to one of its largest customers. Initial performance at this customer, which the Company receives on a weekly basis, indicated that this transition to non-GMO was changing the trend by improving sales and serving to differentiate the Company’s Smart Balance spreads products and as such this was factored into the assumptions.
During the third quarter of 2014, our revenue, earnings expectations and long-term outlook for our Smart Balance reporting unit were not materializing as previously projected. In fact, the trend reversed at its largest customer and the initial improvement experienced after launching the non-GMO products did not significantly materialize at other conventional retailers. The rollout of the non-GMO products at other retailers occurred throughout the third quarter, as did the marketing support intended to drive consumer awareness. The Company analyzes performance at these customers via Nielsen consumption data, which is received on a monthly basis. As such, in connection with the annual operating plan for 2015, the Company made a strategic decision to substitute Earth Balance products for under-performing Smart Balance items and has lowered its long-term projections for Smart Balance. As a result, it became apparent that an indication of impairment was likely.
As such, in connection with the preparation of the September 30, 2014 financial statements, we performed an impairment test of our Smart Balance reporting unit goodwill following a two-step process as defined in ASC 350. The first step in this process compares the fair value of the Smart Balance reporting unit’s net assets, including goodwill, to its carrying value. If the carrying value exceeds the fair value, the second step of the impairment test is performed to measure the impairment. In the second step, the fair value is allocated to all assets and liabilities to determine the implied goodwill value. This allocation is similar to a purchase price allocation done under purchase accounting.
We determined the fair value of our Smart Balance reporting unit’s net assets primarily using a discounted cash flow (income) approach. Under the income approach, we used growth assumptions of our Smart Balance business we considered reasonable in light of current conditions and our change in strategies and goals. We also used numerous other assumptions including weighted average cost of capital to discount cash flows. Accordingly, the carrying value of our Smart Balance reporting unit’s net assets exceeded the estimated fair value of its net assets, indicating the second step of the impairment test was necessary.
To perform the second step of the impairment test, we, along with the help of an independent valuation firm, estimated the fair value of all of our Smart Balance reporting unit’s individual assets and liabilities, including identifiable intangible assets. The carrying value of current assets and liabilities, such as receivables, inventories and payables, were considered to be their fair value given their short-term nature. The carrying value of fixed assets were considered at their fair value since they were acquired in the last few years and are being depreciated or amortized in line with their useful life. The goodwill value implied from this analysis resulted in a goodwill impairment loss of $113.5 million at September 30, 2014.
In conjunction with performing an impairment test of goodwill in connection with the preparation of the September 30, 2014 financial statements, we also performed an impairment test of our Smart Balance indefinite-lived intangible asset, namely, its tradename. We used an income approach (relief-from-royalty method) to measure the fair value of this intangible. The result of this assessment indicated that the fair value of the tradename was below its carrying value and therefore an impairment loss of $37.0 million was recorded.
12
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
For other long-lived intangible assets, namely patents, we performed an assessment of the recoverability in accordance with the general valuation requirements set forth under ASC Topic 360 “Accounting for the Impairment of Long-Lived Assets.” The result of this assessment indicated that no impairment existed for other long-lived intangible assets.
13
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
7. Restructuring and Other Actions
In 2013, we began a process to increase efficiency at our Udi’s manufacturing facilities, which involved the consolidation of several facilities into one new, state-of the art facility. During 2013, charges of $2,395 were incurred for asset write-offs and $359 were incurred for related expenses associated with this restructuring effort. During the first three quarters of 2014, additional charges of $1,102 were incurred in connection with the Udi's facility consolidation, of which $518 were for lease exit costs, net of estimated subleases, and $584 were incurred for asset write-offs. In the first quarter of 2014, we also incurred additional charges associated with the restructuring of certain executive management positions. Restructuring charges are included in "Restructuring, acquisition and integration-related costs" in the Consolidated Statements of Operations and Comprehensive Income (Loss).
The following table sets forth the activity affecting the restructuring accrual:
Severance | Other Closure and Exit Costs | Total | |||||||||
Balance as of December 31, 2013 | $ | 6 | $ | 3 | $ | 9 | |||||
Charges incurred | 2,068 | 1,102 | 3,170 | ||||||||
Cash payments | (2,027 | ) | (231 | ) | (2,258 | ) | |||||
Other (1) | — | (584 | ) | (584 | ) | ||||||
Adjustments | — | (3 | ) | (3 | ) | ||||||
Balance as of September 30, 2014 | $ | 47 | $ | 287 | $ | 334 |
(1) Consists of asset write-offs.
The accrued restructuring costs as of September 30, 2014 of $334 are reflected in "Accounts payable and accrued expenses" in the Consolidated Balance Sheets. The liabilities for other closure and exit costs primarily relate to contractually required lease obligations and other contractually committed costs associated with facilities that are no longer used. We expect to pay the facility obligations through October 2020.
14
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
September 30, 2014 | December 31, 2013 | ||||||
Accounts payable | $ | 34,268 | $ | 29,699 | |||
Accrued trade spend | 10,265 | 6,774 | |||||
Accrued payroll-related | 4,681 | 4,282 | |||||
Accrued freight | 3,973 | 2,242 | |||||
Current portion of contract payable | 1,375 | 1,375 | |||||
Accrued incentives | 502 | 4,950 | |||||
Accrued restructuring | 334 | 9 | |||||
Accrued other | 13,563 | 17,985 | |||||
Accounts payable and accrued expenses | $ | 68,961 | $ | 67,316 |
9. Long-Term Debt and Contract Payable
Long-term debt consists of the following:
September 30, 2014 | December 31, 2013 | ||||||
Term Loan | $ | 297,194 | $ | 271,429 | |||
Revolving Facility | — | 15,000 | |||||
Capital lease | 8,946 | 9,778 | |||||
Total debt | 306,140 | 296,207 | |||||
Less: Current portion | 4,081 | 3,863 | |||||
Long-term debt | $ | 302,059 | $ | 292,344 |
As of September 30, 2014, $115,000 was available for borrowing under the Revolving Facility (as defined below).
The interest rate for outstanding obligations at September 30, 2014 was 4.50% for the Term Loan (as defined below) while the commitment fee on the unused line was 0.50%.
On July 9, 2013, the Company entered into a credit agreement by and among GFA Brands, Inc., UHF Acquisition Corp. and Udi's Healthy Foods, LLC, as borrowers, or the “Borrowers,” the Company, as a guarantor, the other guarantors from time to time party thereto, the lenders from time to time party thereto, or the “Lenders,” and Citibank, N.A., as administrative agent, or the “Agent,” pursuant to which the Borrowers established a senior secured credit facility, or the “Credit Facility,” in an aggregate principal amount of $330,000, consisting of a term loan B, or the “Term Loan,” in an aggregate principal amount of $250,000 and a revolving credit facility, or the “Revolving Facility,” in an aggregate principal amount of $80,000 (with sublimits for swingline loans and the issuance of letters of credit). The Term Loan will mature on July 9, 2020 and the Revolving Facility will mature on July 9, 2018.
On December 20, 2013, the Company increased its senior secured term loan credit facility, at the same interest rate as the original loan, by $25,000 to $275,000. In addition, the Company amended the financial covenants on its revolving credit facility to increase the senior secured funded debt-to-EBITDA (as defined in the Credit Facility) covenant by 0.25x for each quarterly period.
On July 29, 2014, we entered into the Amendment Agreement (the “Third Amendment”) by and among GFA Brands, Inc., as borrower, the Company, as a guarantor, the other guarantors party thereto, the financial institutions party thereto, as lenders, and Citibank, N.A., as administrative agent. The Third Amendment amends the Credit Facility to, among other things, (a) increase the aggregate principal amount of the term loan facility by $27,000 (to approximately $299,300), (b) increase the aggregate principal amount of the revolving credit facility from $80,000 to $115,000, (c) subject to compliance with certain leverage-based criteria, decrease the interest rate margin with respect to the term loan facility by up to 0.50%, (d) increase the maximum total funded debt to consolidated EBITDA ratio to 6.50x for any fiscal quarter ending prior to December 31, 2015, and to 6.00x for the
15
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
fiscal quarter ending December 31, 2015 and each fiscal quarter thereafter and (e) revise the “incremental” term loan provision so that, upon the satisfaction of certain conditions, the borrower may increase the term and/or revolving commitments by an amount not to exceed the sum of (i) $100,000 and (ii) an additional amount so long as various specified leverage ratios are not exceeded, subject to receipt of additional lending commitments for such loans. Proceeds of the new term loans borrowed in connection with the Third Amendment were used to repay outstanding revolving loans under the Credit Agreement, to pay fees and expenses in connection with the Third Amendment and for cash on the balance sheet.
Interest
Outstanding amounts under the Term Loan bears interest at a rate per annum equal to, at the Borrowers' option, either (a) LIBOR plus 3.50% or (b) a Base Rate (equal in this context to the greatest of (i) the Agent's prime rate, (ii) the federal funds rate plus 1/2 of 1.00% and (iii) LIBOR plus 1.00%) (but subject to a minimum of 2.00%) plus 2.50%. The Term Loan amortizes in equal quarterly installments of 0.25% of the initial principal amount beginning on September 30, 2013, with the balance due at maturity. The margin over LIBOR and the Base Rate for the Term Loan may be adjusted periodically based on the Company's ratio of first lien funded debt to consolidated EBITDA, with 3.50% per annum being the maximum LIBOR margin and 2.50% per annum being the maximum Base Rate margin established by such adjustment mechanism.
Outstanding amounts under the Revolving Facility initially bear interest at a rate per annum equal to, at the Borrowers' option, either (a) LIBOR plus 3.50% or (b) a Base Rate (equal in this context to the greatest of (i) the Agent's prime rate, (ii) the federal funds rate plus 1/2 of 1.00% and (iii) LIBOR plus 1.00%) plus 2.50%. The margin over LIBOR and the Base Rate for the Revolving Facility may be adjusted periodically based on the Company's ratio of total funded debt to consolidated EBITDA, with 3.50% per annum being the maximum LIBOR margin and 2.50% per annum being the maximum Base Rate margin established by such adjustment mechanism. The Borrowers are required to pay a commitment fee on the unused commitments under the Revolving Facility at a rate equal to 0.50% per annum.
Guarantees
The loans and other obligations under the Credit Facility (including in respect of hedging agreements and cash management obligations) are (a) guaranteed by the Company and its existing and future wholly-owned domestic subsidiaries and (b) secured by substantially all of the assets of the Company and its existing and future wholly-owned domestic subsidiaries, in each case subject to certain customary exceptions and limitations.
Covenants
So long as any borrowings under the Revolving Facility are outstanding (other than letters of credit that have been cash collateralized in accordance with the terms of the Credit Facility) as of the last day of any fiscal quarter of the Company, the terms of the Credit Facility require the Company and its subsidiaries (on a consolidated basis and subject to certain customary exceptions) to maintain a maximum total funded debt to consolidated EBITDA ratio of not more than 6.50 to 1.0, for any fiscal quarter ending prior to December 31, 2015, and decreasing to 6.0 to 1.0 for the fiscal quarter ending December 31, 2015 and each fiscal quarter thereafter. As of September 30, 2014, we were in compliance with our financial covenants.
In addition, the Credit Facility contains (a) customary provisions related to mandatory prepayment of the loans thereunder with (i) 50% of Excess Cash Flow (as defined in the Credit Facility), subject to step-downs to 25% and 0% of Excess Cash Flow at certain leverage-based thresholds and (ii) the proceeds of asset sales and casualty events (subject to certain customary limitations, exceptions and reinvestment rights) and (b) certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, investments, acquisitions, loans and advances, mergers, consolidations and asset dispositions, dividends and other restricted payments, transactions with affiliates and other matters customarily restricted in such agreements, in each case, subject to certain customary exceptions.
The Credit Facility also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain material contracts and to other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, certain impairments to the guarantees or collateral documents, and change in control defaults.
Other
16
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
Certain of the lenders under the Credit Facility (or their affiliates) have provided, and may in the future provide, certain commercial banking, financial advisory, and investment banking services in the ordinary course of business for the Company and its subsidiaries, for which they receive customary fees and commissions.
Contract Payable and Capital Leases
In addition to the indebtedness under the Credit Facility, we have a contract payable of $1,375 representing the unpaid balance on a 2010 acquisition. This amount will be paid in the first quarter of 2015, together with related interest. As of September 30, 2014, this amount is due within twelve months and therefore included within "Accounts payable and accrued expenses" on the Consolidated Balance Sheet.
We have five capital leases resulting in $8,946 of capital lease obligations for certain of our manufacturing equipment as of September 30, 2014. These leases have terms that expire from June 30, 2015 through December 1, 2021.
Maturities
Under the Credit Facility and the contract payable, the Company and the Borrowers are required to pay the following amounts for their collective debt and contract obligations during the following years ending December 31:
Remainder of 2014 | $ | 1,016 | |
2015 | 5,473 | ||
2016 | 4,157 | ||
2017 | 4,230 | ||
2018 | 4,279 | ||
Thereafter | 290,478 | ||
Total | $ | 309,633 |
10. Stock-Based Compensation
Stock-based compensation consists of stock options and restricted stock units ("RSUs").
Total stock-based compensation expense for stock options and RSUs was $2,512 and $7,162 for the three and nine months ended September 30, 2014, respectively, and $3,267 and $7,032 for the three and nine months ended September 30, 2013, respectively.
Stock Options
We and our stockholders have authorized the issuance of up to 12,150,000 stock options under our Second Amended and Restated Stock and Awards Plan (the "Stock Plan"). As a result of the 2011 option exchange program (the "Option Exchange"), 432,178 of these options are no longer available to be granted. As of September 30, 2014, 464,222 options remained available for future grants.
During the third quarter of 2012, we adopted the Smart Balance, Inc. 2012 Inducement Award Plan which allows for the issuance of up to 1,300,000 inducement stock options to new employees. In the fourth quarter of 2013, an additional 2,000,000 inducement stock options were approved under this plan. The options have a ten-year term and an exercise price equal to the fair market value of our common stock on the date of grant. The options vest in four equal installments beginning on the first anniversary of the grant date. As of September 30, 2014, 893,750 options remained available for granting.
We utilize traditional service-based stock options typically with a four year graded vesting (25% vest each year). We have also granted market condition-based stock options which vest when the underlying stock price closes at $8.00, $12.00, $16.00, $16.75 and $20.25 for 20 out of 30 consecutive trading days. Stock options are granted to recipients at exercise prices not less than the fair market value of our stock on the dates of grant.
17
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
Additional information with respect to stock option activity is as follows:
Number of Outstanding Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | ||||||
Options outstanding at December 31, 2013 | 12,429,954 | $ | 8.65 | 6.28 | ||||
Options granted | 1,355,748 | 14.64 | 9.41 | |||||
Options exercised | (1,241,637 | ) | 6.87 | 5.53 | ||||
Options canceled/forfeited | (741,279 | ) | 9.36 | 6.44 | ||||
Options outstanding at September 30, 2014 | 11,802,786 | $ | 9.47 | 6.06 | ||||
Exercisable at September 30, 2014 | 6,483,415 | $ | 7.69 | 4.88 |
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2014 was $7.75.
As of September 30, 2014, the total compensation cost related to non-vested awards not yet recognized was $22,583 with a weighted average remaining period of 1.9 years over which it is expected to be recognized.
We account for our stock-based compensation awards in accordance with GAAP for share-based payments, which requires companies to recognize compensation expense for all equity-based compensation awards issued to employees that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date.
Stock-based compensation expense relating to stock options included in operations is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Service period-based | $ | 2,209 | $ | 1,781 | $ | 5,998 | $ | 4,522 | |||||||
Market price-based $16.00 | — | 483 | — | 578 | |||||||||||
Market price-based $16.75 | — | 21 | 6 | 83 | |||||||||||
Market price-based $20.25 | 3 | 27 | 33 | 80 | |||||||||||
Total | $ | 2,212 | $ | 2,312 | $ | 6,037 | $ | 5,263 |
For the traditional service-based stock options, we estimated the fair value, as of the date of grant, using a Black-Scholes pricing model with the following assumptions: risk-free interest rate of 1.07% - 4.67%, expected life of 6.25 years for the service-based options, no dividends and volatility of 35.9% - 55.08%. The cost of the service-based stock options is being amortized over a four-year vesting period. In the case of the market price-based stock options, we used the Monte Carlo valuation model and have assumed an expected life of ten years. We have incorporated a forfeiture rate of 2.5% - 4.0% on all stock options. We recognize compensation expense for the market price-based options over the estimated vesting period, which has been determined to be 1.43 years for the $8.00 awards, 2.92 years for the $12.00 awards, 3.90 years for the $16.00 awards, 2.75 - 4.82 years for the $16.75 awards and 3.68 - 5.53 years for the $20.25 awards. The $16.75 awards vested during the second quarter of 2014 as the required conditions were met.
Restricted Stock Units
In September 2011, we began granting RSUs to certain board members and employees. These RSUs were issued under the Stock Plan and are subject to its terms and conditions. We issued RSUs where the compensation cost is recognized on a straight-line basis over the requisite period the holder is required to render service. We also issued market condition-based RSUs which vest when the underlying stock price closes at $8.00, $12.00 and $16.00 for 20 out of 30 consecutive trading days. We recognize compensation expense for the market price-based RSUs over the estimated vesting period, which was determined to be 1.43 years for the $8.00 awards, 2.92 years for the $12.00 awards and 3.90 years for the $16.00 awards. The $8.00 and $12.00 awards vested during 2012 and the $16.00 awards vested during 2013 as the required conditions were met. We recognized $300 and $1,125 of
18
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
stock-based compensation for our RSUs in the three and nine months ended September 30, 2014, respectively, and $955 and $1,769 in the three and nine months ended September 30, 2013, respectively.
Additional information with respect to RSU activity is as follows:
Number of Outstanding Units | Weighted Average Remaining Life (Years) | ||||
RSUs outstanding (unvested) at December 31, 2013 | 420,000 | 2.23 | |||
RSUs granted | 170,000 | 3.51 | |||
RSUs vested | (137,500 | ) | — | ||
RSUs outstanding (unvested) at September 30, 2014 | 452,500 | 2.27 |
11. License
A portion of our business is dependent on our exclusive worldwide license of certain technology from Brandeis University. This license agreement, dated September 1996, imposes certain obligations upon us, such as diligently pursuing the development of commercial products under the licensed technology. The agreement for each country expires at the end of the term of each patent in such country and contains no minimum commitments. The amount of royalties due is based on a formula of the percentage of oil and/or fat utilized in the licensed products. Should Brandeis believe that we have failed to meet our obligations under the license agreement, Brandeis could seek to limit or terminate our license rights. Royalties earned by Brandeis, which are included within "General and Administrative" expenses in the Consolidated Statement of Operations and Comprehensive Income, were $143 and $680 for the three and nine months ended September 30, 2014, respectively, and $342 and $910 for the three and nine ended September 30, 2013, respectively.
12. Income Taxes
Our effective tax rate for the year is dependent on many factors, including the impact of enacted tax laws in jurisdictions in which we operate and the amount of taxable income we earn. The effective tax rate was 8.2% and 7.1% for the three and nine months ended September 30, 2014, respectively, primarily as a result of goodwill and tradename impairment charges which were treated as discrete items in the quarter, and 27.2% and 45.9% for the three and nine months ended September 30, 2013, respectively.
19
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
13. Earnings Per Share
Basic earnings per share has been computed based upon the weighted average number of common shares outstanding. Diluted earnings per share has been computed based upon the weighted average number of common shares outstanding plus the effect of all potentially dilutive common stock equivalents, except when the effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Basic and diluted earnings per share: | |||||||||||||||
Numerator: | |||||||||||||||
Net income (loss) attributable to Boulder Brands, Inc. and Subsidiaries common stockholders | $ | (132,159 | ) | $ | (1,582 | ) | $ | (128,897 | ) | $ | 5,477 | ||||
Denominator: | |||||||||||||||
Weighted average shares used in basic computation | 61,033 | 59,606 | 60,804 | 59,539 | |||||||||||
Add: Stock options and RSUs | — | — | — | 3,097 | |||||||||||
Weighted average shares used in diluted computation | 61,033 | 59,606 | 60,804 | 62,636 | |||||||||||
Earnings (loss) per share, basic | $ | (2.17 | ) | (0.03 | ) | $ | (2.12 | ) | $ | 0.09 | |||||
Earnings (loss) per share, diluted | $ | (2.17 | ) | (0.03 | ) | $ | (2.12 | ) | $ | 0.09 |
Diluted earnings per share excluded the weighted-average impact of the assumed exercise of approximately 12.3 million stock options and RSUs in both the three and nine months ended September 30, 2014, and approximately 12.3 million and 3.7 million stock options and RSUs in the three and nine ended September 30, 2013, respectively, because such impact would be anti-dilutive.
14. Legal Proceedings and Contingencies
Commitments
In addition to those disclosed in the Company's 2013 Form 10-K, as of September 30, 2014, we had the following commitments:
Forward purchase commitments for a portion of our projected commodity requirements may be stated at a firm price or as a discount or premium from a future commodity market price. These commitments totaled approximately $80,651 as of September 30, 2014. The majority of these commitments are expected to be liquidated within one year.
In March, June and August 2014, we entered into amendments to existing building operating leases to extend the term and/or expand the amount of space under such leases. The additional contractual payment obligations of the amendments to the leases as of September 30, 2014 are $229 for the remainder of 2014, $1,268 for 2015, $1,781 for 2016, $1,800 for 2017, $1,829 for 2018, $2,327 for 2019 and $8,748 thereafter.
Legal Proceedings
We are party to litigation in the normal course of business that we do not believe would have a material adverse effect on our business, results of operations or financial condition.
15. Segments
With the Company's recent acquisitions, the Company's previous Natural and Smart Balance segments have evolved into its current Natural and Balance segments, which aligns with the way the Company began to operate its business in the first quarter
20
BOULDER BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(In thousands, except share and per share data)
of 2014. The Natural segment consists of our Udi's, Glutino, Davies and EVOL branded products. The Balance segment consists of Smart Balance, Earth Balance and Level life branded products. Prior period amounts have been reclassified to conform with current period's presentation.
Net sales and brand profit are the primary measures used by our Chief Operating Decision Maker (“CODM”) to evaluate segment operating performance and to decide how to allocate resources to segments. Our CODM is the Company's Chairman of the Board and Chief Executive Officer. Brand profit is calculated as gross profit less marketing, selling and royalty expense (income), net. Assets are reviewed by the CODM on a consolidated basis and are not reported by operating segment.
The contribution of our reportable segments to net sales and brand profit and the reconciliation to consolidated amounts are summarized below.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net Sales: | |||||||||||||||
Natural | $ | 83,460 | $ | 66,376 | $ | 236,921 | $ | 171,198 | |||||||
Balance | 50,405 | 52,136 | 151,144 | 164,636 | |||||||||||
$ | 133,865 | $ | 118,512 | $ | 388,065 | $ | 335,834 | ||||||||
Brand Profit: | |||||||||||||||
Natural | $ | 14,891 | $ | 13,958 | $ | 41,315 | $ | 38,954 | |||||||
Balance | 18,344 | 18,000 | 55,031 | 53,549 | |||||||||||
Total reportable segments | 33,235 | 31,958 | 96,346 | 92,503 | |||||||||||
Less: | |||||||||||||||
General and administrative, excluding royalty expense (income), net | 21,061 | 20,493 | 66,198 | 56,310 | |||||||||||
Restructuring, acquisition and integration-related costs | (186 | ) | 3,066 | 3,900 | 4,373 | ||||||||||
Goodwill and tradename impairment | 150,507 | — | 150,507 | — | |||||||||||
Interest expense | 5,341 | 11,242 | 13,906 | 20,891 | |||||||||||
Other (income) expense, net | 580 | (594 | ) | 714 | 910 | ||||||||||
Income (loss) before income taxes | $ | (144,068 | ) | $ | (2,249 | ) | $ | (138,879 | ) | $ | 10,019 |
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the September 30, 2014 Consolidated Financial Statements and the related Notes contained in this quarterly report on Form 10-Q for the quarter ended September 30, 2014 and our 2013 Form 10-K. Forward-looking statements in this section are qualified by the cautionary statements included under the heading “Cautionary Note Regarding Forward Looking Information,” above.
Company Overview
Boulder Brands is committed to creating food solutions that give people opportunities to improve their lives, one product at a time. We distribute our products in all major retail channels, including natural, grocery, club, mass, food, and drug. Our product portfolio consists of a wide variety of food products marketed under the Udi's®, Glutino®, Gluten-Free Pantry®, Earth Balance®, Level Life™, EVOL and Smart Balance® brands. Our corporate vision is to create a health and wellness innovation platform that builds brands targeted to highly motivated consumer needs. These “need states” include gluten-free diets (Glutino and Udi's), plant-based diets (Earth Balance), diabetic diets (Level Life), pure & simple ingredients (EVOL), and heart-health (Smart Balance).
With our recent acquisitions, our previous Natural and Smart Balance segments have evolved into our current Natural and Balance segments, which aligns with the way we began to operate our business in the first quarter of 2014. The Natural segment consists of our Udi's, Glutino, Davies and EVOL branded products. The Balance segment consists of Smart Balance, Earth Balance and Level Life branded products.
Restructuring
In 2013, we began a process to increase efficiency at our Udi’s manufacturing facilities, which involved the consolidation of several facilities into one new, state-of the art facility. During 2013, charges of $2.4 million were incurred for asset write-offs and $0.4 million were incurred for related expenses associated with this restructuring effort. During the nine months ended September 30, 2014, additional charges of $1.1 million were incurred in connection with the Udi's facility consolidation, of which $0.5 million were for lease exit costs, net of estimated subleases, and $0.6 million were incurred for asset write-offs. In the first quarter of 2014, we also incurred additional charges associated with the restructuring of certain executive management positions.
Goodwill and tradename impairment
As required under ASC 350, “Goodwill and Other Intangible Assets,” we routinely review the carrying value of our net assets, including goodwill, to determine if any impairment has occurred. An assessment was conducted at June 30, 2014, at which time, based on existing conditions and management’s outlook, we determined there was no impairment. Due to the continued difficult environment for spreads and the Smart Balance brand’s lack of a key differentiator within the category, in early 2014, the Company began to implement a change in strategy to a non-GMO platform with respect to its Smart Balance spreads products. During the second quarter of 2014, the Company made capital investments relating to this strategy and also began to rollout the products to one of its largest customers. Initial performance at this customer, which the Company receives on a weekly basis, indicated that this transition to non-GMO was changing the trend by improving sales and serving to differentiate the Company’s Smart Balance spreads products and as such this was factored into the assumptions.
During the third quarter of 2014, our revenue, earnings expectations and long-term outlook for our Smart Balance reporting unit were not materializing as previously projected. In fact, the trend reversed at its largest customer and the initial improvement experienced after launching the non-GMO products did not significantly materialize at other conventional retailers. The rollout of the non-GMO products at other retailers occurred throughout the third quarter, as did the marketing support intended to drive consumer awareness. The Company analyzes performance at these customers via Nielsen consumption data, which is received on a monthly basis. As such, in connection with the annual operating plan for 2015, the Company made a strategic decision to substitute Earth Balance products for under-performing Smart Balance items and has lowered its long-term projections for Smart Balance. As a result, it became apparent that an indication of impairment was likely.
As such, in connection with the preparation of the September 30, 2014 financial statements, we performed an impairment test of our Smart Balance reporting unit goodwill following a two-step process as defined in ASC 350. The first step in this process compares the fair value of the Smart Balance reporting unit’s net assets, including goodwill, to its carrying value. If the carrying value exceeds the fair value, the second step of the impairment test is performed to measure the impairment. In the second step, the fair value is allocated to all assets and liabilities to determine the implied goodwill value. This allocation is similar to a purchase price allocation done under purchase accounting.
22
We determined the fair value of our Smart Balance reporting unit’s net assets primarily using a discounted cash flow (income) approach. Under the income approach, we used growth assumptions of our Smart Balance business we considered reasonable in light of current conditions and our change in strategies and goals. We also used numerous other assumptions including weighted average costs of capital to discount cash flows. Accordingly, the carrying value of our Smart Balance reporting unit’s net assets exceeded the estimated fair value of its net assets, indicating the second step of the impairment test was necessary.
To perform the second step of the impairment test, we, along with the help of an independent valuation firm, estimated the fair value of all of our Smart Balance reporting unit’s individual assets and liabilities, including identifiable intangible assets. The carrying value of current assets and liabilities, such as receivables, inventories and payables, were considered to be their fair value given their short-term nature. The carrying value of fixed assets were considered at their fair value since they were acquired in the last few years and are being depreciated or amortized in line with their useful life. The goodwill value implied from this analysis resulted in a goodwill impairment loss of $113.5 million at September 30, 2014.
In conjunction with performing an impairment test of goodwill in connection with the preparation of the September 30, 2014 financial statements, we also performed an impairment test of our Smart Balance indefinite-lived intangible asset, namely, its tradename. We used an income approach (relief-from-royalty method) to measure the fair value of this intangible. The result of this assessment indicated that the fair value of the tradename was below its carrying value and therefore an impairment loss of $37.0 million was recorded.
For other long-lived intangible assets, namely patents, we performed an assessment of the recoverability in accordance with the general valuation requirements set forth under ASC Topic 360 “Accounting for the Impairment of Long-Lived Assets.” The result of this assessment indicated that no impairment existed for other long-lived intangible assets.
23
Results of Operations
The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(In millions, except per share data) | 2014 | 2013 | $ Change | % Change | 2014 | 2013 | $ Change | % Change | |||||||||||||||||||||
Net sales | $ | 133.9 | $ | 118.5 | $ | 15.4 | 13.0 | % | $ | 388.1 | $ | 335.8 | $ | 52.3 | 15.6 | % | |||||||||||||
Cost of goods sold | 83.4 | 70.2 | 13.2 | 18.8 | % | 244.3 | 195.7 | 48.6 | 24.8 | % | |||||||||||||||||||
Gross profit | 50.4 | 48.3 | 2.1 | 4.5 | % | 143.7 | 140.1 | 3.6 | 2.6 | % | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||
Marketing | 6.2 | 8.0 | (1.8 | ) | (22.9 | )% | 16.8 | 23.0 | (6.2 | ) | (26.8 | )% | |||||||||||||||||
Selling | 11.7 | 9.0 | 2.7 | 30.2 | % | 33.1 | 26.2 | 6.9 | 26.2 | % | |||||||||||||||||||
General and administrative | 20.4 | 19.8 | 0.6 | 3.0 | % | 63.7 | 54.7 | 9.0 | 16.4 | % | |||||||||||||||||||
Restructuring, acquisition and integration-related costs | (0.2 | ) | 3.1 | (3.3 | ) | (106.1 | )% | 3.9 | 4.4 | (0.5 | ) | (10.8 | )% | ||||||||||||||||
Goodwill and tradename impairment | 150.5 | — | 150.5 | NM | 150.5 | — | 150.5 | NM | |||||||||||||||||||||
Total operating expenses, net | 188.6 | 39.9 | 148.7 | 373.0 | % | 268.0 | 108.3 | 159.7 | 147.4 | % | |||||||||||||||||||
Operating income (loss) | (138.1 | ) | 8.4 | (146.5 | ) | NM | (124.3 | ) | 31.8 | (156.1 | ) | (490.5 | )% | ||||||||||||||||
Interest expense | (5.3 | ) | (11.2 | ) | 5.9 | (52.5 | )% | (13.9 | ) | (20.9 | ) | 7.0 | (33.4 | )% | |||||||||||||||
Other income (expense), net | (0.6 | ) | 0.6 | (1.2 | ) | (197.6 | )% | (0.7 | ) | (0.9 | ) | 0.2 | (21.5 | )% | |||||||||||||||
Total other (expense) | (5.9 | ) | (10.6 | ) | 4.7 | (44.4 | )% | (14.6 | ) | (21.8 | ) | 7.2 | (32.9 | )% | |||||||||||||||
Income (loss) before income taxes | (144.1 | ) | (2.2 | ) | (141.9 | ) | NM | (138.9 | ) | 10.0 | (148.9 | ) | NM | ||||||||||||||||
Provision (benefit) for income taxes | (11.9 | ) | (0.6 | ) | (11.3 | ) | NM | (9.8 | ) | 4.6 | (14.4 | ) | (313.7 | )% | |||||||||||||||
Net income (loss) | (132.2 | ) | (1.6 | ) | (130.6 | ) | NM | (129.0 | ) | 5.4 | (134.4 | ) | NM | ||||||||||||||||
Less: Net loss attributable to noncontrolling interest | — | 0.1 | (0.1 | ) | (34.5 | )% | 0.2 | 0.1 | 0.1 | 154.2 | % | ||||||||||||||||||
Net income (loss) attributable to Boulder Brands, Inc. and Subsidiaries common stockholders | $ | (132.2 | ) | $ | (1.6 | ) | $ | (130.6 | ) | NM | $ | (128.9 | ) | $ | 5.5 | $ | (134.4 | ) | NM | ||||||||||
Earnings (loss) per share attributable to Boulder Brands, Inc. and Subsidiaries common stockholders: | |||||||||||||||||||||||||||||
Basic | $ | (2.17 | ) | $ | (0.03 | ) | $ | (2.14 | ) | NM | $ | (2.12 | ) | $ | 0.09 | $ | (2.21 | ) | NM | ||||||||||
Diluted | $ | (2.17 | ) | $ | (0.03 | ) | $ | (2.14 | ) | NM | $ | (2.12 | ) | $ | 0.09 | $ | (2.21 | ) | NM |
Note: Amounts may not add due to rounding.
NM = Not meaningful
Results of Operations for the Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013
Net Sales
24
Total net sales of $133.9 million for the three months ended September 30, 2014 increased by $15.4 million, or 13.0%, from $118.5 million in 2013. The increase was related to an increase in our Natural segment net sales, partly offset by a decrease in our Balance segment net sales.
Net sales from our Natural segment of $83.5 million for the three months ended September 30, 2014 increased by $17.1 million from $66.4 million in 2013. The increase was related to increases in EVOL of $12.1 million (acquired in December 2013) and Udi’s products of $9.5 million, partly offset by a decrease in Glutino products of $4.5 million.
Net sales from our Balance segment of $50.4 million for the three months ended September 30, 2014 decreased by $1.7 million, or 3.3%, from $52.1 million in 2013. The decrease was primarily related to the decrease in volume of Smart Balance spreads and Smart Balance grocery products due to competitive promotional levels and continued consumer price sensitivity to premium products. The decrease in sales of Smart Balance spreads and grocery products was partly offset by an increase in sales of Earth Balance products. Volume decreases resulted in a decrease in net sales of approximately $1.7 million.
Cost of Goods Sold
Total cost of goods sold of $83.4 million for the three months ended September 30, 2014 increased by $13.2 million, or 18.8%, from $70.2 million in 2013. The increase was related to an increase in our Natural segment cost of goods sold, partly offset by a decrease in our Balance segment cost of goods sold.
Cost of goods sold for our Natural segment was $56.8 million for the three months ended September 30, 2014, an increase of $14.1 million from $42.7 million in 2013. The increase was related to increases in cost of goods sold for EVOL (acquired in December 2013) of $8.6 million and Udi's of $7.3 million, partly offset by a decrease in Glutino of $1.8 million. The increases primarily related to the increases in net sales as well as an increase in certain raw material costs. The decrease in Glutino related to the decrease in net sales.
Cost of goods sold for our Balance segment was $26.6 million for the three months ended September 30, 2014, a decrease of $1.0 million, or 3.5%, from $27.6 million in 2013. The decrease was primarily related to the decrease in net sales.
Brand Profit
The Company uses the term "brand profit" as its segment measure of profitability. Brand profit is a non-GAAP measure. Brand profit is calculated as gross profit less marketing, selling and royalty expense (income), net. Brand profit is the measure utilized by the Chief Operating Decision Maker, or "CODM," in making decisions about allocating resources to segments and measuring their performance. For a reconciliation of brand profit to income (loss) before income taxes, see "Non-GAAP Financial Measure" below.
Total brand profit of $33.2 million for the three months ended September 30, 2014 increased by $1.2 million, or 4.0%, from $32.0 million in 2013. The increase was related to increases in brand profit for our Natural and Balance segments.
Brand profit from our Natural segment of $14.9 million for the three months ended September 30, 2014 increased by $0.9 million from $14.0 million in 2013. Gross profit increased $3.0 million in 2014 compared to 2013 and as a percentage of net sales was 31.9% for the three months ended September 30, 2014 compared to 35.7% during the same period in 2013. The decrease in margins primarily relates to increased costs for certain raw materials and an increase in plant capacity associated with a new production facility at Udi’s, which resulted in lower utilization. The increase in gross profit and a decrease in non-promotional marketing of $0.4 million were partly offset by an increase in selling expenses of $2.5 million.
Brand profit from our Balance segment of $18.3 million for the three months ended September 30, 2014 increased by $0.3 million, or 1.9%, from $18.0 million in 2013. Gross profit decreased $0.8 million in 2014 compared to 2013, and as a percentage of net sales was 47.2% in both the three months ended September 30, 2014 and 2013. The decrease in gross profit was more than offset by a decrease in non-promotional marketing of $1.5 million, partly offset by increases in selling expenses of $0.2 million and a decrease in royalty income, net of $0.1 million.
General and Administrative
General and administrative expenses of $20.4 million for the three months ended September 30, 2014 increased $0.6 million, or 3.0%, from $19.8 million in 2013. The increase primarily related to $1.1 million of severance and relocation expenses in 2014.
25
Restructuring, Acquisition and Integration-related Costs
Restructuring, acquisition and integration-related costs for the three months ended September 30, 2014 were $(0.2) million mainly relating to adjustments to sub-lease assumptions made on exited space. Restructuring, acquisition and integration-related costs for the three months ended September 30, 2013 were $3.1 million primarily due to the Udi’s facilities consolidation.
Goodwill and Tradename Impairment
During the third quarter of 2014, we recorded an impairment charge of $150.5 million, of which $113.5 million related to goodwill of our Smart Balance reporting unit and $37.0 million related to our Smart Balance tradename.
Total Other Income (Expense), Net
We had total other income (expense), net of $(5.9) million for the three months ended September 30, 2014 and $(10.6) million in the corresponding period in 2013. The results for 2014 and 2013 included interest expense of $(5.3) million and $(11.2) million, respectively. Interest expense included write-offs of debt costs associated with the refinancing of our debt of $1.0 million in 2014 and $7.0 million in 2013. Also included in total other income (expense), net in 2014 were gains of $0.4 million on commodity hedging and currency translation losses of $(0.9) million. Also included in total other income (expense), net in 2013 were gains of $0.3 million on commodity hedging derivatives and currency translation gains of $0.2 million.
Benefit for Income Taxes
The benefit for income taxes for the three months ended September 30, 2014 was $11.9 million compared with $0.6 million in 2013. The effective tax rate for the three months ended September 30, 2014 was a benefit of 8.2% primarily as a result of goodwill and tradename impairment charges which were treated as discrete items in the quarter. The effective tax rate for the three months ended September 30, 2013 was a benefit of 27.2%.
Net Loss Attributable to Boulder Brands, Inc. and Subsidiaries Common Stockholders, or “Net Loss Attributable to Boulder Brands”
Our net loss attributable to Boulder Brands, Inc. for the three months ended September 30, 2014 was $132.2 million compared to $1.6 million in 2013. The $130.6 million increase in net loss was primarily due to the goodwill and intangible impairment charge in 2014 of $136.1 million, net of tax, partly offset by decreases in interest expense and restructuring, acquisition and integration-related costs, as well as an increase in the benefit for income taxes.
Results of Operations for the Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013
Net Sales
Total net sales of $388.1 million for the nine months ended September 30, 2014 increased by $52.3 million, or 15.6%, from $335.8 million in 2013. The increase was related to an increase in our Natural segment net sales, partly offset by a decrease in our Balance segment net sales.
Net sales from our Natural segment of $236.9 million for the nine months ended September 30, 2014 increased by $65.7 million from $171.2 million in 2013. The increase was primarily related to increases in Udi’s products of $34.6 million, EVOL of $30.5 million (acquired in December 2013), and Glutino products of $0.3 million.
Net sales from our Balance segment of $151.2 million for the nine months ended September 30, 2014 decreased by $13.5 million, or 8.2%, from $164.6 million in 2013. The decrease was primarily related to the licensing of milk in the third quarter of 2013 and a decrease in volume of Smart Balance spreads due to competitive promotional levels and continued consumer price sensitivity to premium products. The decrease in sales of Smart Balance spreads and milk was partly offset by an increase in sales of Earth Balance products. Volume decreases resulted in a decrease in net sales of approximately $12.3 million.
Cost of Goods Sold
Total cost of goods sold of $244.3 million for the nine months ended September 30, 2014 increased by $48.6 million, or 24.8%, from $195.7 million in 2013. The increase was related to an increase in our Natural segment cost of goods sold, partly offset by a decrease in our Balance segment cost of goods sold.
26
Cost of goods sold for our Natural segment was $163.8 million for the nine months ended September 30, 2014, an increase of $55.6 million from $108.2 million in 2013. The increase was primarily related to increases in cost of goods sold for Udi's of $31.9 million, EVOL (acquired in December 2013) of $22.1 million and Glutino of $1.6 million. The increases primarily related to the increases in net sales as well as an increase in certain raw material costs.
Cost of goods sold for our Balance segment was $80.5 million for the nine months ended September 30, 2014, a decrease of $7.0 million, or 8.0%, from $87.5 million in 2013. The decrease was primarily related to the decrease in net sales, partly offset by an increase in commodity costs.
Brand Profit
Total brand profit of $96.3 million for the nine months ended September 30, 2014 increased by $3.8 million, or 4.2%, from $92.5 million in 2013. The increase was related to increases in brand profit for our Natural and Balance segments.
Brand profit from our Natural segment of $41.3 million for the nine months ended September 30, 2014 increased by $2.3 million from $39.0 million in 2013. Gross profit increased $10.2 million in 2014 compared to 2013 and as a percentage of net sales was 30.9% for the nine months ended September 30, 2014 compared to 36.8% during the same period in 2013. The decrease in margins primarily relates to increased costs for certain raw materials and an increase in plant capacity associated with a new production facility at Udi’s, which resulted in lower utilization. The increase in gross profit was partly offset by increases in selling expenses of $7.6 million and non-promotional marketing of $0.5 million.
Brand profit from our Balance segment of $55.0 million for the nine months ended September 30, 2014 increased by $1.5 million, or 2.8%, from $53.5 million in 2013. Gross profit decreased $6.6 million in 2014 compared to 2013, and as a percentage of net sales was 46.7% for the nine months ended September 30, 2014 compared to 46.9% during the same period in 2013. The decrease in gross profit was more than offset by decreases in non-promotional marketing of $6.7 million and selling expenses of $0.7 million and an increase in royalty income, net of $0.7 million.
General and Administrative
General and administrative expenses of $63.7 million for the nine months ended September 30, 2014 increased $9.0 million, or 16.4%, from $54.7 million in 2013. The increase primarily related to increased compensation and benefits of approximately $3.7 million primarily due to increased headcount and the inclusion of EVOL, acquired in December 2013. The increase also related to $1.9 million of severance, relocation expenses and a settlement of a class action lawsuit and a $1.3 million increase in depreciation and amortization expense primarily relating to the inclusion of EVOL.
Restructuring, Acquisition and Integration-related Costs
Restructuring, acquisition and integration-related costs for the nine months ended September 30, 2014 were $3.9 million, comprised of restructuring costs associated with the consolidation of several of Udi’s manufacturing facilities and the restructuring of certain executive management positions of $3.2 million and acquisition and integration-related costs of $0.7 million, primarily related to the acquisition of EVOL. Restructuring, acquisition and integration-related costs for the nine months ended September 30, 2013 were $4.4 million primarily due to the acquisitions of Udi's and Davies, as well as certain restructuring charges associated with facilities consolidation at Udi's.
Goodwill and Tradename Impairment
During the third quarter of 2014, we recorded an impairment charge of $150.5 million, of which $113.5 million related to goodwill of our Smart Balance reporting unit and $37.0 million related to our Smart Balance tradename.
Total Other Income (Expense), Net
We had total other expenses, net of $(14.6) million for the nine months ended September 30, 2014 and $(21.8) million in the corresponding period in 2013. The results for 2014 and 2013 included interest expense of $(13.9) million and $(20.9) million, respectively. Interest expense included write-offs of debt costs associated with the refinancing of our debt of $1.0 million in 2014 and $7.0 million in 2013. Also included in total other income (expense), net in 2014 were currency translation losses of $(0.7) million, other taxes of $(0.3) million and gains of $0.3 million on commodity hedging. Also included in total other income (expense), net in 2013 were currency translation losses of $(0.5) million, other taxes of $(0.3) million and the loss on disposal of certain equipment of $(0.2) million.
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Provision/Benefit for Income Taxes
The benefit for income taxes for the nine months ended September 30, 2014 was $9.8 million compared with a provision of $4.6 million in 2013. The effective tax rate for the nine months ended September 30, 2014 was 7.1% primarily as a result of goodwill and tradename impairment charges which were treated as discrete items in the quarter. The effective tax rate for the nine months ended September 30, 2013 was 45.9%.
Net Income (Loss) Attributable to Boulder Brands, Inc. and Subsidiaries Common Stockholders, or “Net Income (Loss) Attributable to Boulder Brands”
Our net loss attributable to Boulder Brands, Inc. for the nine months ended September 30, 2014 was $128.9 million compared to net income of $5.5 million in 2013. The $134.4 million decrease was primarily due to the goodwill and intangible impairment charge in 2014 of $136.1 million, net of tax, partly offset by a decrease in interest expense and an increase in the benefit for income taxes.
Non-GAAP Financial Measure
The Company reports its financial results in accordance with accounting principles generally accepted in the United States, or ��GAAP.”
The Company uses the term “brand profit” as its segment measure of profitability. Brand profit is a non-GAAP measure. Brand profit is calculated as gross profit less marketing, selling and royalty expense (income), net. Brand profit is the measure utilized by our CODM in making decisions about allocating resources to segments and measuring their performance. Management believes this measure best reflects each segment's financial results from ongoing operations. The following table reconciles brand profit by segment to income before income taxes calculated in accordance with GAAP:
(in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net Sales: | |||||||||||||||
Natural | $ | 83.5 | $ | 66.4 | $ | 236.9 | $ | 171.2 | |||||||
Balance | 50.4 | 52.1 | 151.1 | 164.6 | |||||||||||
$ | 133.9 | $ | 118.5 | $ | 388.1 | $ | 335.8 | ||||||||
Brand Profit: | |||||||||||||||
Natural | $ | 14.9 | $ | 14.0 | $ | 41.3 | $ | 39.0 | |||||||
Balance | 18.3 | 18.0 | 55.0 | 53.5 | |||||||||||
Total reportable segments | 33.2 | 32.0 | 96.3 | 92.5 | |||||||||||
Less: | |||||||||||||||
General and administrative, excluding royalty expense (income), net | 21.1 | 20.5 | 66.2 | 56.3 | |||||||||||
Restructuring, acquisition and integration-related costs | (0.2 | ) | 3.1 | 3.9 | 4.4 | ||||||||||
Goodwill and tradename impairment | 150.5 | — | 150.5 | — | |||||||||||
Interest expense | 5.3 | 11.2 | 13.9 | 20.9 | |||||||||||
Other expense | 0.6 | (0.6 | ) | 0.7 | 0.9 | ||||||||||
Income (loss) before income taxes | $ | (144.1 | ) | $ | (2.2 | ) | $ | (138.9 | ) | $ | 10.0 |
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Liquidity and Capital Resources
Cash Flows
As of September 30, 2014, we had cash and cash equivalents of $18.9 million, an increase of $2.2 million from December 31, 2013. The following table summarizes the change:
Nine Months Ended September 30, | |||||||||||
(in millions) | 2014 | 2013 | $ Change | ||||||||
Cash provided by (used in): | |||||||||||
Operating activities | $ | (0.4 | ) | $ | 19.9 | $ | (20.3 | ) | |||
Investing activities | (10.0 | ) | (37.9 | ) | 27.9 | ||||||
Financing activities | 12.6 | 29.6 | (17.0 | ) | |||||||
Net change in cash and cash equivalents | $ | 2.2 | $ | 11.6 | $ | (9.4 | ) |
Note: Amounts may not add due to rounding.
Cash used in operating activities was $0.4 million for the nine months ended September 30, 2014 compared to cash provided of $19.9 million in the corresponding period in 2013. This change was mostly due to increased working capital needs as well as a decrease in net income before depreciation and amortization.
Cash used in investing activities decreased $27.9 million to $10.0 million in the nine months ended September 30, 2014 from $37.9 million in 2013, primarily due to lower capital expenditures in 2014 compared to 2013 as well as the acquisitions of Davies and Level and an investment purchase in 2013.
We generated $17.0 million less cash from financing activities during the nine months ended September 30, 2014 compared with the same period in 2013, primarily due to the decreased borrowings under our Term Loan (as defined below) in the 2014 period.
Liquidity
Our liquidity planning is largely dependent on our operating cash flows, which is highly sensitive to changes in demand, operating costs and pricing for our major products. While changes in key operating costs, such as outsourced production, advertising, promotion and distribution, may adversely affect cash flows, we have been able to continue to generate significant cash flows by adjusting costs. Our principal liquidity requirements are to finance current operations, pay down existing indebtedness and fund future expansion. Under our Credit Facility (as defined below), we can also repurchase common stock subject to the satisfaction of certain conditions. No shares were repurchased during the nine months ended September 30, 2014. Currently, our primary source of liquidity is cash generated by operations. We may from time to time, depending on market conditions, seek to refinance our debt, issue debt or equity securities or engage in other capital markets or financing activities. However, there can be no assurance that we will consummate such transactions.
We believe that cash flows generated from operations, existing cash and cash equivalents and borrowing capacity under our Revolving Facility should be sufficient to finance working capital requirements for our business for the foreseeable future.
As of September 30, 2014, $115.0 million was available for borrowing under our Credit Facility and we had $18.9 million of cash.
Financing
As of September 30, 2014, we had $297.2 million outstanding under the Term Loan (as defined below) and no borrowings outstanding under our Revolving Facility.
Cash paid for interest during the nine months ended September 30, 2014 was $11.2 million. The interest rates for outstanding obligations at September 30, 2014 were 4.50% for the Term Loan while the commitment fee on the unused line was 0.50%.
During the nine months ended September 30, 2014, we repaid $1.4 million under the Term Loan.
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On July 9, 2013, the Company entered into a credit agreement by and among GFA Brands, Inc., UHF Acquisition Corp. and Udi's Healthy Foods, LLC, as borrowers, or the “Borrowers,” the Company, as a guarantor, the other guarantors from time to time party thereto, the lenders from time to time party thereto, or the “Lenders,” and Citibank, N.A., as administrative agent, or the “Agent,” pursuant to which the Borrowers established a senior secured credit facility, or the “Credit Facility,” in an aggregate principal amount of $330 million, consisting of a term loan B, or the “Term Loan,” in an aggregate principal amount of $250 million and a revolving credit facility, or the “Revolving Facility,” in an aggregate principal amount of $80 million (with sublimits for swingline loans and the issuance of letters of credit). The Term Loan will mature on July 9, 2020 and the Revolving Facility will mature on July 9, 2018.
On December 20, 2013, the Company increased its senior secured term loan credit facility, at the same interest rate as the original loan, by $25 million to $275 million. In addition, the Company amended the financial covenants on its revolving credit facility to increase the senior secured funded debt-to-EBITDA covenant by 0.25x for each quarterly period.
On July 29, 2014, we entered into the Amendment Agreement (the “Third Amendment”) by and among GFA Brands, Inc., as borrower, the Company, as a guarantor, the other guarantors party thereto, the financial institutions party thereto, as lenders, and Citibank, N.A., as administrative agent. The Third Amendment amends the Credit Facility to, among other things, (a) increase the aggregate principal amount of the term loan facility by $27 million (to approximately $299.3 million), (b) increase the aggregate principal amount of the Revolving Facility from $80 million to $115 million, (c) subject to compliance with certain leverage-based criteria, decrease the interest rate margin with respect to the term loan facility by up to 0.50%, (d) increase the maximum total funded debt to consolidated EBITDA ratio to 6.50x for any fiscal quarter ending prior to December 31, 2015, and to 6.00x for the fiscal quarter ending December 31, 2015 and each fiscal quarter thereafter and (e) revise the “incremental” term loan provision so that, upon the satisfaction of certain conditions, the borrower may increase the term and/or revolving commitments by an amount not to exceed the sum of (i) $100 million and (ii) an additional amount so long as various specified leverage ratios are not exceeded, subject to receipt of additional lending commitments for such loans. Proceeds of the new term loans borrowed in connection with the Third Amendment were used to repay outstanding revolving loans under the Credit Agreement, to pay fees and expenses in connection with the Third Amendment and for cash on the balance sheet.
As of September 30, 2014, we were in compliance with our financial covenants.
Interest
Outstanding amounts under the Term Loan bears interest at a rate per annum equal to, at the Borrowers' option, either (a) LIBOR plus 3.50% or (b) a Base Rate (equal in this context to the greatest of (i) the Agent's prime rate, (ii) the federal funds rate plus 1/2 of 1.00% and (iii) LIBOR plus 1.00%) (but subject to a minimum of 2.00%) plus 2.50%. The Term Loan amortizes in equal quarterly installments of 0.25% of the initial principal amount beginning on September 30, 2013, with the balance due at maturity. The margin over LIBOR and the Base Rate for the Term Loan may be adjusted periodically based on the Company's ratio of first lien funded debt to consolidated EBITDA, with 3.50% per annum being the maximum LIBOR margin and 2.50% per annum being the maximum Base Rate margin established by such adjustment mechanism.
Outstanding amounts under the Revolving Facility initially bear interest at a rate per annum equal to, at the Borrowers' option, either (a) LIBOR plus 3.50% or (b) a Base Rate (equal in this context to the greatest of (i) the Agent's prime rate, (ii) the federal funds rate plus 1/2 of 1.00% and (iii) LIBOR plus 1.00%) plus 2.50%. The margin over LIBOR and the Base Rate for the Revolving Facility may be adjusted periodically based on the Company's ratio of total funded debt to consolidated EBITDA, with 3.50% per annum being the maximum LIBOR margin and 2.50% per annum being the maximum Base Rate margin established by such adjustment mechanism. The Borrowers are required to pay a commitment fee on the unused commitments under the Revolving Facility at a rate equal to 0.50% per annum.
Guarantees
The loans and other obligations under the Credit Facility (including in respect of hedging agreements and cash management obligations) are (a) guaranteed by the Company and its existing and future wholly-owned domestic subsidiaries and (b) secured by substantially all of the assets of the Company and its existing and future wholly-owned domestic subsidiaries, in each case subject to certain customary exceptions and limitations.
Contract Payable and Capital Leases
In addition to the indebtedness under our Credit Facility, we have a contract payable of $1.4 million representing the unpaid balance on a 2010 acquisition. This amount will be paid in the first quarter of 2015, together with related interest. As of September 30, 2014, this amount is included within "Accounts payable and accrued expenses" on the Consolidated Balance Sheet.
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We have five capital leases resulting in $8.9 million of capital lease obligations for certain of our manufacturing equipment as of September 30, 2014. These leases have terms that expire from June 30, 2015 through December 1, 2021.
Maturities
Under the Credit Facility and the contract payable, the Company and the Borrowers are required to pay the following amounts for their collective debt and contract obligations during the years ending December 31 (in millions):
Remainder of 2014 | $ | 1.0 | |
2015 | 5.5 | ||
2016 | 4.2 | ||
2017 | 4.2 | ||
2018 | 4.3 | ||
Thereafter | 290.5 | ||
Total | $ | 309.7 |
Contractual Obligations
In March, June and August 2014, we entered into amendments to existing building operating leases to extend the term and/or expand the amount of space under such leases. The additional contractual payment obligations of the amendments to the leases as of September 30, 2014 are $0.2 million for the remainder of 2014, $1.3 million for 2015, $1.8 million for 2016, $1.8 million for 2017, $1.8 million for 2018, $2.3 million for 2019 and $8.7 million thereafter. Besides the foregoing, there has been no material change to our contractual obligations as disclosed in our 2013 Form 10-K, other than those disclosed in the Notes to our Consolidated Financial Statements contained herein.
Off Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “variable interest entities.”
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks due primarily to changes in interest rates on our variable interest rate debt. The impact on earnings is subject to change as a result of movements in market rates. A hypothetical increase in interest rates of 100 basis points would result in a potential reduction of future pre-tax earnings of approximately $3.0 million per year. Under our Credit Facility, we are subject to changes in interest rates, but are not required to enter into an interest rate swap until the market LIBOR rate exceeds 1.25% for 20 of the last 30 consecutive business days. The three-month LIBOR rate at September 30, 2014 was 0.23%. Our ability to meet our debt service obligations will be dependent upon our future performance which, in turn, is subject to future economic conditions and to financial, business and other factors.
We are exposed to market risk from commodity pricing changes. We purchase significant amounts of soy, palm and canola oil, peanuts, rice products and egg whites to support the needs of our brands. The price and availability of these commodities directly impacts our results of operations and can be expected to impact our future results of operations. These forward purchase commitments qualify as normal purchases and sales in the normal course of business and accordingly, do not qualify as derivatives under existing authoritative accounting guidance, namely ASC 815, “Accounting for Derivative Instruments and Hedging Activities.” Based on the most recent prices for soy, palm and canola oil and peanuts, rice products and egg whites, as of September 30, 2014 we had commitments of $80.7 million. We also enter into derivative hedging arrangements with counterparties for vegetable oil. These derivatives must be net settled in cash and are marked-to-market each period within the consolidated statement of operations.
We sell and produce products in Canada and in the United Kingdom for both sale and distribution in the Canadian, U.S. and U.K. markets. By doing business in foreign markets, we are subject to risks associated with currency fluctuations which can reduce the ultimate amount of money we receive for the sales of our products into other foreign markets or add costs to the products we purchase from others in other foreign markets. In order to minimize the adverse effect of foreign currency fluctuations, we may use foreign currency contracts and other hedging arrangements as needed.
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Item 4. Controls and Procedures
Conclusion regarding the effectiveness of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Principal Financial and Accounting Officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30, 2014. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on management's evaluation of our disclosure controls and procedures as of September 30, 2014, our Chief Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in internal control over financial reporting
During the three months ended September 30, 2014, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Transition of enterprise resource planning system
During the first and second quarters of 2014, the Company completed the process of installing an ERP system at one of its plants in the U.S. and one in Canada as part of a phased implementation schedule. The installed ERP system was currently used by the legacy Company and will replace existing systems of acquired companies over the next several quarters. The implementation of this ERP system involves changes in the Company’s procedures for internal control over financial reporting. The Company follows a system implementation life cycle process that requires significant pre-implementation planning, design and testing. The Company also conducted and will continue to conduct extensive post-implementation monitoring and process modifications to ensure that internal controls over financial reporting are properly designed. The Company has not experienced any significant difficulties to date in connection with the implementation or the operation of this ERP system.
Note regarding acquisitions
In making our assessment of disclosure controls and procedures and of changes in internal control over financial reporting as of September 30, 2014, we have excluded certain of the operations of EVOL. We are currently assessing the control environment of this acquired business. The portion of EVOL's net sales that is not integrated into our existing control and procedural environment constitutes 0.0% and 3.9% of our net sales for the three and nine months ended September 30, 2014, respectively, and their total assets constitute 8.8% of our total assets as of September 30, 2014.
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Part II. Other Information
Item 1. Legal Proceedings
We are currently involved in the following legal proceedings:
In 2007, three parties filed Oppositions to European Patent No. 0820307 relating to increasing the HDL level and the HDL/LDL ratio in human serum by balancing saturated and polyunsaturated dietary fatty acids. In July 2010, a hearing was held on this matter in Munich, Germany, and the patent panel ruled against us. We have appealed the ruling. The appeal is fully briefed and oral proceedings are scheduled for March 10, 2015. We believe that neither this proceeding, nor its ultimate outcome, will have any material adverse effect on our business.
On February 21, 2013, a putative class action lawsuit relating to the labeling of Smart Balance® Fat Free Milk products was filed in the U.S. District Court for the Southern District of New York alleging that the label and marketing was misleading because, although the labels says “Fat Free Milk” the product contains 1g of fat from the Omega-3 fatty acid oil blend in the products. After our motion to dismiss was partially granted by the court, it answered the remaining allegations of the complaint, denying the substantive allegations. On July 8, 2014, without any admission of liability, we reached a settlement whereby we agreed to pay the two plaintiffs and their counsel $0.3 million in full and final settlement. The settlement payment was made and the case was formally dismissed with prejudice on July 15, 2014. The matter is now fully and finally concluded.
On July 28, 2012, a putative class action lawsuit was filed in the U.S. District Court for the Southern District of California claiming that the labeling and marketing of Smart Balance® Butter & Canola Oil Blend products is false, misleading and deceptive (the "California Case"). The plaintiffs filed a Second Amended Complaint and substituted a new plaintiff. We moved to dismiss the Second Amended Complaint. That motion is pending. A substantially similar class action lawsuit related to the labeling and marketing of Smart Balance® Butter & Canola Oil Blend products was filed on August 9, 2012 in the Southern District of New York. In light of its similarity to the California Case, the Southern District of New York stayed all activity in the case pending a decision in the California Case on class certification. We believe the allegations contained in both of these complaints are without merit and we intend to vigorously defend ourselves against these allegations.
On August 29, 2012, legal proceedings were filed against us and others in Canada, Province of Quebec, District of Montreal, by Stepworth Holdings Inc. in connection with an indemnification claim made by us against Stepworth, which sold Glutino to us. In those legal proceedings, Stepworth seeks a declaration that it is not required to indemnify us for losses arising from a claim made by Osem and Carmit, two Glutino suppliers, against us. As such, it seeks a declaration that it is entitled to the purchase price for Glutino placed in escrow to cover indemnification claims made by us against Stepworth. In a related proceeding, on September 24, 2012, we filed proceedings in the same court in Canada against the Glutino suppliers and others, seeking a declaration that the suppliers' claims against us are not valid. On December 4, 2012, Osem filed proceedings against us, in the same Canadian court seeking $16.9 million (in Canadian dollars) for our reduction in the volume of purchases from Osem. We intend to vigorously defend ourselves in this litigation.
We do not expect that the resolution of any of the matters described above will have a material adverse effect on our business, although it could have a material adverse effect on our results in any given quarter in the event of an adverse judgment or settlement.
We are not a party to any other legal proceeding that we believe would have a material adverse effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
An investment in our securities involves a high degree of risk. There have been no material changes to the risk factors previously reported under Item 1A of our 2013 Form 10-K.
Item 6. Exhibits
See the exhibit index located elsewhere in this quarterly report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 6, 2014 | BOULDER BRANDS, INC. (Registrant) |
/s/ Stephen B. Hughes | |
Stephen B. Hughes Chairman and Chief Executive Officer (Authorized officer of Registrant) | |
/s/ Christine Sacco | |
Christine Sacco Chief Financial Officer (Principal financial officer of Registrant) |
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Exhibit Index
10.1 | Amendment Agreement, dated as of July 29, 2014, by and among GFA Brands, Inc., a Delaware corporation, as borrower, Boulder Brands, Inc., a Delaware corporation, as a guarantor, the other guarantors party thereto, the financial institutions party thereto, as lenders, and Citibank, N.A., as administrative agent (1) |
31.1 | Certification of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Label Linkbase Document |
101.PRE | XBRL Extension Presentation Linkbase Document |
(1) | Incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed with the SEC on July 31, 2014. |
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