UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 26, 2016
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ____________to _____________. |
Commission File Number 001-35844
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Pinnacle Foods Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 35-2215019 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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399 Jefferson Road Parsippany, New Jersey | | 07054 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (973) 541-6620
___________________________________
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer," “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
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Large accelerated filer | ý | Accelerated filer | ¨ |
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Non-accelerated filer (Do not check if a smaller reporting company) | ¨ | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨ No ý
The Registrant had 117,975,249 shares of common stock, $0.01 par value, outstanding at July 25, 2016.
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| TABLE OF CONTENTS FORM 10-Q | Page No. |
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ITEM 1: | | |
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ITEM 1: | | |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands, except per share amounts)
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| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2016 |
| June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Net sales | $ | 756,381 |
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| $ | 631,746 |
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| $ | 1,510,636 |
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| $ | 1,297,027 |
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Cost of products sold | 535,189 |
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| 462,637 |
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| 1,090,877 |
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| 956,201 |
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Gross profit | 221,192 |
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| 169,109 |
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| 419,759 |
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| 340,826 |
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Marketing and selling expenses | 61,036 |
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| 45,698 |
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| 119,934 |
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| 92,707 |
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Administrative expenses | 43,703 |
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| 27,665 |
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| 89,591 |
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| 55,451 |
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Research and development expenses | 5,098 |
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| 3,589 |
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| 9,283 |
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| 6,641 |
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Other expense (income), net | 3,569 |
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| 2,342 |
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| 12,884 |
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| 7,743 |
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| 113,406 |
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| 79,294 |
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| 231,692 |
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| 162,542 |
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Earnings before interest and taxes | 107,786 |
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| 89,815 |
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| 188,067 |
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| 178,284 |
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Interest expense | 35,488 |
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| 22,187 |
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| 67,128 |
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| 43,815 |
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Interest income | 27 |
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| 12 |
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| 104 |
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| 165 |
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Earnings before income taxes | 72,325 |
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| 67,640 |
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| 121,043 |
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| 134,634 |
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Provision for income taxes | 26,542 |
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| 23,961 |
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| 50,423 |
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| 49,419 |
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Net earnings | 45,783 |
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| 43,679 |
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| 70,620 |
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| 85,215 |
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Less: Net loss attributable to non-controlling interest | (1 | ) | | — |
| | — |
| | — |
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Net earnings attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders | $ | 45,784 |
| | $ | 43,679 |
| | $ | 70,620 |
| | $ | 85,215 |
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Net earnings per share attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders: |
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Basic | $ | 0.39 |
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| $ | 0.38 |
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| $ | 0.61 |
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| $ | 0.73 |
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Weighted average shares outstanding - basic | 116,657 |
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| 116,031 |
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| 116,387 |
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| 115,968 |
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Diluted | $ | 0.39 |
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| $ | 0.37 |
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| $ | 0.60 |
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| $ | 0.73 |
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Weighted average shares outstanding - diluted | 117,766 |
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| 117,281 |
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| 117,689 |
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| 117,158 |
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Dividends declared | $ | 0.255 |
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| $ | 0.235 |
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| $ | 0.510 |
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| $ | 0.470 |
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See accompanying Notes to Unaudited Consolidated Financial Statements
PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (unaudited)
(thousands)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax (expense) benefit | | After-tax amount |
Net earnings | | | | | $ | 45,783 |
| | | | | | $ | 43,679 |
| | | | | | $ | 70,620 |
| | | | | | $ | 85,215 |
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Other comprehensive earnings (loss) | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation: | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | 123 |
| | — |
| | 123 |
| | 623 |
| | (238 | ) | | 385 |
| | 5,566 |
| | — |
| | 5,566 |
| | (1,938 | ) | | 757 |
| | (1,181 | ) |
Cash-flow hedges: | | | | |
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Unrealized gains (losses) arising during the period | (7,996 | ) | | 3,116 |
| | (4,880 | ) | | 2,254 |
| | (843 | ) | | 1,411 |
| | (19,117 | ) | | 7,390 |
| | (11,727 | ) | | (10,362 | ) | | 4,056 |
| | (6,306 | ) |
Reclassification adjustment for (gains) losses included in net earnings | 2,230 |
| | (838 | ) | | 1,392 |
| | 402 |
| | (313 | ) | | 89 |
| | 3,616 |
| | (1,387 | ) | | 2,229 |
| | 91 |
| | (86 | ) | | 5 |
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Pension: | | | | |
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Reclassification of net actuarial loss included in net earnings | 309 |
| | (117 | ) | | 192 |
| | 244 |
| | (93 | ) | | 151 |
| | 617 |
| | (234 | ) | | 383 |
| | 519 |
| | (198 | ) | | 321 |
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Other comprehensive earnings (loss) | (5,334 | ) | | 2,161 |
| | (3,173 | ) | | 3,523 |
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| (1,487 | ) |
| 2,036 |
| | (9,318 | ) | | 5,769 |
| | (3,549 | ) | | (11,690 | ) | | 4,529 |
| | (7,161 | ) |
Total comprehensive earnings | | | | | 42,610 |
| | | | | | 45,715 |
| | | | | | 67,071 |
| | | | | | 78,054 |
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Less: Comprehensive loss attributable to non-controlling interest | | | | | (1 | ) | | | | | | — |
| | | | | | — |
| | | | | | — |
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Comprehensive earnings attributable to Pinnacle Foods Inc. and Subsidiaries | | | | | $ | 42,611 |
| | | | | | $ | 45,715 |
| | | | | | $ | 67,071 |
| | | | | | $ | 78,054 |
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See accompanying Notes to Unaudited Consolidated Financial Statements
PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands, except share and per share amounts)
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| June 26, 2016 | | December 27, 2015 |
Current assets: |
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Cash and cash equivalents | $ | 129,344 |
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| $ | 180,549 |
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Accounts receivable, net of allowances of $11,359 and $7,902, respectively | 270,200 |
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| 219,736 |
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Inventories | 441,240 |
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| 403,101 |
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Other current assets | 17,134 |
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| 13,677 |
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Deferred tax assets | 72,620 |
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| 40,571 |
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Total current assets | 930,538 |
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| 857,634 |
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Plant assets, net of accumulated depreciation of $450,605 and $408,294, respectively | 700,971 |
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| 631,109 |
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Tradenames | 2,540,938 |
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| 2,001,048 |
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Other assets, net | 180,606 |
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| 120,364 |
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Goodwill | 2,169,799 |
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| 1,714,008 |
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Total assets | $ | 6,522,852 |
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| $ | 5,324,163 |
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Current liabilities: |
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Short-term borrowings | $ | 1,758 |
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| $ | 2,225 |
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Current portion of long-term obligations | 21,754 |
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| 14,847 |
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Accounts payable | 218,244 |
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| 211,039 |
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Accrued trade marketing expense | 41,450 |
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| 46,228 |
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Accrued liabilities | 144,156 |
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| 100,510 |
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Dividends payable | 30,998 |
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| 30,798 |
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Total current liabilities | 458,360 |
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| 405,647 |
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Long-term debt | 3,135,016 |
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| 2,257,012 |
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Pension and other postretirement benefits | 62,903 |
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| 63,454 |
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Other long-term liabilities | 64,359 |
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| 54,506 |
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Deferred tax liabilities | 962,459 |
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| 738,015 |
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Total liabilities | 4,683,097 |
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| 3,518,634 |
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Commitments and contingencies (Note 13) |
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Shareholders' equity: |
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Pinnacle preferred stock: $.01 per share, 50,000,000 shares authorized, none issued | — |
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| — |
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Pinnacle common stock: par value $.01 per share, 500,000,000 shares authorized; issued 118,577,288 and 117,619,695, respectively | 1,186 |
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| 1,176 |
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Additional paid-in-capital | 1,404,567 |
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| 1,378,521 |
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Retained earnings | 528,180 |
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| 517,330 |
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Accumulated other comprehensive loss | (62,937 | ) |
| (59,388 | ) |
Capital stock in treasury, at cost, 1,000,000 common shares | (32,110 | ) | | (32,110 | ) |
Total Pinnacle Foods Inc. and Subsidiaries stockholders' equity | 1,838,886 |
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| 1,805,529 |
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Non-controlling interest | 869 |
| | — |
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Total Equity | 1,839,755 |
| | 1,805,529 |
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Total liabilities and equity | $ | 6,522,852 |
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| $ | 5,324,163 |
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See accompanying Notes to Unaudited Consolidated Financial Statements
PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
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| | | | | | | |
| Six months ended |
| June 26, 2016 |
| June 28, 2015 |
Cash flows from operating activities |
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Net earnings | $ | 70,620 |
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| $ | 85,215 |
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Non-cash charges (credits) to net earnings |
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Depreciation and amortization | 51,672 |
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| 43,157 |
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Amortization of debt acquisition costs and discount on term loan | 4,657 |
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| 3,130 |
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Change in value of financial instruments | (7,494 | ) |
| (4,566 | ) |
Equity-based compensation charges | 5,131 |
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| 8,062 |
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Pension expense, net of contributions | 66 |
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| (2,704 | ) |
Other long-term liabilities | 1,198 |
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| (638 | ) |
Other long-term assets | (1,635 | ) |
| — |
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Foreign exchange (gains) / losses | (1,283 | ) | | 1,578 |
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Excess tax benefits on equity-based compensation
| (6,369 | ) | | (1,076 | ) |
Deferred income taxes | 19,027 |
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| 33,123 |
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Changes in working capital (net of effects of acquisition) |
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Accounts receivable | (7,557 | ) |
| (4,528 | ) |
Inventories | 28,351 |
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| (9,652 | ) |
Accrued trade marketing expense | (4,923 | ) |
| (4,668 | ) |
Accounts payable | 2,128 |
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| (15,049 | ) |
Accrued liabilities | 3,041 |
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| (4,693 | ) |
Other current assets | 8,473 |
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| (2,257 | ) |
Net cash provided by operating activities | 165,103 |
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| 124,434 |
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Cash flows from investing activities |
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Business acquisition activity (net of cash acquired) | (985,365 | ) | | 1,102 |
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Capital expenditures | (60,187 | ) |
| (48,168 | ) |
Net cash used in investing activities | (1,045,552 | ) |
| (47,066 | ) |
Cash flows from financing activities |
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Proceeds from bank term loans | 547,250 |
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| — |
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Proceeds from notes offerings | 350,000 |
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| — |
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Repayments of long-term obligations | (6,478 | ) |
| (4,422 | ) |
Proceeds from short-term borrowings | 1,604 |
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| 1,710 |
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Repayments of short-term borrowings | (2,060 | ) |
| (2,312 | ) |
Repayment of capital lease obligations | (1,574 | ) |
| (1,871 | ) |
Dividends paid | (59,460 | ) | | (54,747 | ) |
Net proceeds from issuance of common stock | 15,642 |
| | 824 |
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Excess tax benefits on equity-based compensation | 6,369 |
| | 1,076 |
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Taxes paid related to net share settlement of equity awards | (1,087 | ) | | (2,401 | ) |
Debt acquisition costs | (21,262 | ) |
| — |
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Net cash provided by (used in) financing activities | 828,944 |
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| (62,143 | ) |
Effect of exchange rate changes on cash | 300 |
|
| (346 | ) |
Net change in cash and cash equivalents | (51,205 | ) |
| 14,879 |
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Cash and cash equivalents - beginning of period | 180,549 |
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| 38,477 |
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Cash and cash equivalents - end of period | $ | 129,344 |
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| $ | 53,356 |
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Supplemental disclosures of cash flow information: |
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Interest paid | $ | 48,083 |
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| $ | 39,453 |
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Interest received | 104 |
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| 165 |
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Income taxes paid | 19,145 |
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| 17,341 |
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Non-cash investing and financing activities: |
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New capital leases | 4,586 |
| | — |
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Dividends payable | 30,998 |
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| 28,059 |
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Accrued additions to plant assets | 10,570 |
| | 17,767 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements
PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(thousands, except share and per share amounts)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity | | Non-Controlling Interest | | Total Equity |
Shares | | Amount | | Shares | | Amount | |
Balance, December 28, 2014 | 117,293,745 |
| | $ | 1,173 |
| | (1,000,000 | ) | | $ | (32,110 | ) | | $ | 1,363,129 |
| | $ | 419,531 |
| | $ | (37,734 | ) | | $ | 1,713,989 |
| | $ | — |
| | $ | 1,713,989 |
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Equity-based compensation plans | 290,689 |
| | 3 |
| | | | | | 7,560 |
| | | | | | 7,563 |
| | | | 7,563 |
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Dividends ($0.47 per share) (a) | | | | | | | | | | | (54,955 | ) | | | | (54,955 | ) | | | | (54,955 | ) |
Comprehensive earnings | | | | | | | | | | | 85,215 |
| | (7,161 | ) | | 78,054 |
| | | | 78,054 |
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Balance, June 28, 2015 | 117,584,434 |
| | $ | 1,176 |
| | (1,000,000 | ) | | $ | (32,110 | ) | | $ | 1,370,689 |
| | $ | 449,791 |
| | $ | (44,895 | ) | | $ | 1,744,651 |
| | $ | — |
| | $ | 1,744,651 |
|
| | | | | | | | | | | | | | | | | | | |
Balance, December 27, 2015 | 117,619,695 |
| | $ | 1,176 |
| | (1,000,000 | ) | | $ | (32,110 | ) | | $ | 1,378,521 |
| | $ | 517,330 |
| | $ | (59,388 | ) | | $ | 1,805,529 |
| | $ | — |
| | $ | 1,805,529 |
|
Equity-based compensation plans | 957,593 |
| | 10 |
| | | | | | 26,046 |
| | | | | | 26,056 |
| | | | 26,056 |
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Dividends ($0.51 per share) (b) | | | | | | | | | | | (59,770 | ) | | | | (59,770 | ) | | | | (59,770 | ) |
Non-controlling interest in acquisition | | | | | | | | | | | | | | | — |
| | 869 |
| | 869 |
|
Comprehensive earnings | | | | | | | | | | | 70,620 |
| | (3,549 | ) | | 67,071 |
| | — |
| | 67,071 |
|
Balance, June 26, 2016 | 118,577,288 |
| | $ | 1,186 |
| | (1,000,000 | ) | | $ | (32,110 | ) | | $ | 1,404,567 |
| | $ | 528,180 |
| | $ | (62,937 | ) | | $ | 1,838,886 |
| | $ | 869 |
| | $ | 1,839,755 |
|
| | | | | | | | | | | | | | | | | | | |
(a) $0.235 per share declared February 2015 and June 2015
(b) $0.255 per share declared February 2016 and June 2016
See accompanying Notes to Unaudited Consolidated Financial Statements
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
1. Summary of Business Activities
Business Overview
Pinnacle Foods Inc. (the "Company") is a leading manufacturer, marketer and distributor of high quality, branded convenience food products, the products and operations of which are managed and reported in four operating segments: (i) Birds Eye Frozen, (ii) Duncan Hines Grocery, (iii) Boulder Brands and (iv) Specialty Foods. The Company’s United States retail frozen vegetables (Birds Eye), frozen complete bagged meals (Birds Eye Voila!), frozen seafood (Van de Kamp’s and Mrs. Paul’s), plant-based protein frozen products (gardein), full-calorie single-serve frozen dinners and entrées (Hungry-Man), frozen breakfast (Aunt Jemima), frozen and refrigerated bagels (Lender’s), and frozen pizza for one (Celeste) are reported in the Birds Eye Frozen segment. The Company’s baking mixes and frostings (Duncan Hines), shelf-stable pickles (Vlasic), liquid and dry-mix salad dressings (Wish-Bone and Western), table syrups (Mrs. Butterworth’s and Log Cabin), canned meat (Armour, Nalley and Brooks), pie and pastry fillings (Duncan Hines Comstock and Wilderness), barbecue sauces (Open Pit) and Canadian operations other than gardein are reported in the Duncan Hines Grocery segment. The Boulder Brands segment is comprised of health and wellness brands including gluten-free products (Udi's and Glutino), natural frozen meal offerings (EVOL), refrigerated and shelf-stable spreads (Smart Balance), and plant-based refrigerated and shelf-stable spreads (Earth Balance). The Specialty Foods segment consists of snack products (Tim’s Cascade and Snyder of Berlin) and the Company’s food service and private label businesses, other than Boulder Brands and gardein.
History and Current Ownership
On April 2, 2007, the Company was acquired by, and became a wholly owned subsidiary of Peak Holdings LLC (“Peak Holdings”), an entity controlled by investment funds affiliated with The Blackstone Group L.P. (“Blackstone”). We refer to this merger transaction and related financing transactions as the Blackstone Transaction. As a result of the Blackstone Transaction, Blackstone owned, through Peak Holdings, approximately 98% of the common stock of the Company.
As of the launch of our initial public offering on April 3, 2013 (the “IPO”), we were controlled by Blackstone. Effective September 12, 2014, as a result of Blackstone’s reduced ownership in the Company, we no longer qualified as a “controlled company” under applicable New York Stock Exchange listing standards. On May 8, 2015, Blackstone sold their final 5,000,000 shares in an underwritten public offering. Upon completion of the offering, Blackstone no longer beneficially owned any of the Company's outstanding common stock.
2. Interim Financial Statements
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting primarily of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of June 26, 2016, the results of operations for the three and six months ended June 26, 2016 and June 28, 2015, and the cash flows for the six months ended June 26, 2016 and June 28, 2015. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 27, 2015.
Recently Adopted Accounting Pronouncements
In 2016, the Company changed the presentation of debt issuance costs in line with the guidance set forth by Accounting Standards Update ("ASU") No. 2015-03 "Simplifying the Presentation of Debt Issuance Costs". The Company now presents such costs in the balance sheet as a direct deduction from the related debt liability, rather than as an asset. Amortization of the costs continue to be reported as interest expense. The changes in presentation were applied retrospectively to all periods presented. As of December 27, 2015 the cumulative effect of these changes on the balance sheet were decreases of $15.9 million in Long-term debt as well as in Other assets, net.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
3. Acquisitions
The Company accounts for business combinations by using the acquisition method of accounting. The following acquisition has been accounted for in accordance with these standards.
Acquisition of Boulder Brands Inc. (the "Boulder acquisition")
On January 15, 2016, the Company acquired 100% of the capital stock of Boulder Brands Inc. ("Boulder") which manufactures a portfolio of health and wellness brands, including Udi's and Glutino gluten-free products, EVOL natural frozen meal offerings, Smart Balance refrigerated and shelf-stable spreads and Earth Balance plant-based refrigerated and shelf-stable spreads. The Boulder acquisition expands the Company's presence in growing and complementary health and wellness categories and in the natural and organic retail channels.
The Company has preliminarily allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The Company is in the process of completing the valuation of various assets and pre-acquisition contingencies and, therefore, the fair values set forth below are subject to adjustment upon finalizing the valuations. The amount of these potential adjustments could be significant.
The cost of the Boulder acquisition was $1,001,419, which included the repayment of debt. The following table summarizes the preliminary allocation of the total cost of the acquisition to the assets acquired and liabilities assumed:
|
| | | |
Assets acquired: | |
Cash | $ | 16,054 |
|
Accounts receivable | 42,088 |
|
Inventories | 66,893 |
|
Other current assets | 12,043 |
|
Deferred tax asset | 24,949 |
|
Property and equipment | 59,405 |
|
Tradenames | 539,600 |
|
Distributor relationships | 40,600 |
|
Customer relationships | 11,400 |
|
Other assets | 11,798 |
|
Goodwill | 450,366 |
|
Fair value of assets acquired | 1,275,196 |
|
Liabilities assumed | |
Accounts payable | 16,022 |
|
Accrued liabilities | 41,094 |
|
Capital lease obligations | 7,486 |
|
Long term deferred tax liability | 204,024 |
|
Other long-term liabilities | 4,282 |
|
Non-controlling interest | 869 |
|
Total cost of acquisition | $ | 1,001,419 |
|
Based upon the preliminary allocation, the value assigned to intangible assets and goodwill totaled $1,042.0 million. The goodwill was generated primarily as a result of expected synergies to be achieved because of the Boulder acquisition. Distributor relationships and customer relationships are being amortized on an accelerated basis over 30 and 10 years, respectively. These useful lives are based on an attrition rate based on industry experience, which management believes is appropriate in the Company's circumstances. The Company has also assigned $539.6 million to the value of the tradenames acquired, which is not subject to amortization but
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
is reviewed annually for impairment. Goodwill, which is also not subject to amortization, totaled $450.4 million (tax deductible goodwill of $21.7 million resulted from the Boulder acquisition). The Boulder acquisition is reported in the Company's newly formed Boulder Brands operating segment.
During the six months ended June 26, 2016, the Boulder acquisition resulted in an additional $223.5 million of net sales and a net loss of $9.2 million, related to Boulder operations from January 15, 2016 to June 26, 2016, which included a $10.4 million charge related to the fair value step-up of inventories acquired and sold during the period, $16.7 million of restructuring costs, primarily severance and $6.8 million of acquisition costs described below.
In accordance with the requirements of the acquisition method of accounting for acquisitions, inventories obtained in the Boulder acquisition were required to be valued at fair value (net realizable value, which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity), which is $10.4 million higher than historical manufacturing costs. Cost of products sold for the six months ended June 26, 2016 includes pre-tax charges of $10.4 million related to the inventory acquired, which were subsequently sold.
The Boulder acquisition was financed through borrowings of $550.0 million in incremental term loans (the "Tranche I Term Loans") due 2023, $350.0 million of 5.875% Senior Notes (the "5.875% Senior Notes) due 2024, $118.3 million of cash on hand, prior to transaction costs of $6.8 million and $1.7 million in the three months ended June 26, 2016 and fiscal year ended December 27, 2015, respectively, and debt acquisition costs of $24.0 million and $0.4 million in the three months ended June 26, 2016 and fiscal year ended December 27, 2015, respectively. The debt acquisition costs, which included original issue discount are being amortized over the life of the associated debt using the effective interest method and are recorded in Long-Term debt on the Consolidated Balance Sheet. For more information, see Note 10 to the Consolidated Financial Statements, Debt and Interest Expense. Included in the acquisition costs of $6.8 million for the six months ended June 26, 2016 are $6.1 million of merger, acquisition and advisory fees and $0.7 million of other costs. The $1.7 million of transaction costs incurred in fiscal 2015 primarily relate to legal, accounting and other professional fees. The transaction costs are recorded in Other expense (income), net in the Consolidated Statements of Operations.
Pro forma Information
The following unaudited pro forma summary presents the Company's consolidated results of operations as if Boulder had been acquired on December 29, 2014. These amounts adjusted Boulder's historical results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to plant assets and intangible assets had been applied from December 29, 2014, together with the consequential tax effects. These adjustments also reflect the additional interest expense incurred on the debt to finance the purchase. The six months ended June 26, 2016 pro forma earnings were adjusted to exclude the acquisition related and restructuring costs incurred and the nonrecurring expense related to the fair value inventory step-up adjustment. The six months ended June 28, 2015 pro forma earnings were adjusted to include these charges. The pro forma financial information presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and borrowings undertaken to finance the acquisition had taken place at the beginning of 2015.
Amounts in millions:
|
| | | | | | |
| Six months ended June 26, 2016 (unaudited) | Six months ended June 28, 2015 (unaudited) |
Net sales | $ | 1,528.2 |
| $ | 1,543.7 |
|
Net earnings | $ | 96.2 |
| $ | 52.5 |
|
Boulder Brands Restructuring
As a result of the Boulder acquisition, the Company expects to incur approximately $18.0 million of restructuring charges in 2016, primarily related to employee termination and retention benefits. Charges of $6.1 million and $16.7 million were incurred during the three and six months ended June 26, 2016, respectively and were recorded in Administrative expenses in the Consolidated Statements of Operations.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
The following table summarizes total restructuring charges accrued as of June 26, 2016. These amounts are recorded in our Consolidated Balance Sheet in Accrued Liabilities.
|
| | | | | | | | | | | | | | | | |
| | Balance | | | | | | Balance |
Description | | December 27, 2015 | | Expense | | Payments | | June 26, 2016 |
Accrued restructuring charges | | $ | — |
| | $ | 16,686 |
| | $ | (7,228 | ) | | $ | 9,458 |
|
4. Fair Value Measurements
The authoritative guidance for financial assets and liabilities discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| |
Level 1: | Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| |
Level 2: | Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| |
Level 3: | Unobservable inputs that reflect the Company’s assumptions. |
The Company’s financial assets and liabilities subject to recurring fair value measurements and the required disclosures are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of June 26, 2016 | | Fair Value Measurements Using Fair Value Hierarchy | | | Fair Value as of December 27, 2015 | | Fair Value Measurements Using Fair Value Hierarchy |
| Level 1 | | Level 2 | | Level 3 | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | | | | | | | |
Foreign currency derivatives | $ | 45 |
| | $ | — |
| | $ | 45 |
| | $ | — |
| | | $ | 471 |
| | $ | — |
| | $ | 471 |
| | $ | — |
|
Total assets at fair value | $ | 45 |
| | $ | — |
| | $ | 45 |
| | $ | — |
| | | $ | 471 |
| | $ | — |
| | $ | 471 |
|
| $ | — |
|
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Interest rate derivatives | $ | 33,959 |
| | $ | — |
| | $ | 33,959 |
| | $ | — |
| | | $ | 18,868 |
| | $ | — |
| | $ | 18,868 |
| | $ | — |
|
Commodity derivatives | 2,512 |
| | — |
| | 2,512 |
| | — |
| | | 10,013 |
| | — |
| | 10,013 |
| | — |
|
Total liabilities at fair value | $ | 36,471 |
| | $ | — |
| | $ | 36,471 |
| | $ | — |
| | | $ | 28,881 |
| | $ | — |
| | $ | 28,881 |
| | $ | — |
|
The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk.
The valuations of these instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate, commodity, and foreign exchange forward curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of the authoritative guidance for fair value disclosure, the Company incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds,
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
mutual puts and guarantees. The Company had no fair value measurements based upon significant unobservable inputs (Level 3) as of June 26, 2016 or December 27, 2015.
In addition to the instruments named above, the Company also makes fair value measurements in connection with its annual goodwill and trade name impairment testing. These measurements fall into Level 3 of the fair value hierarchy.
5. Other Expense (Income), net
Other Expense (Income), net
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Other expense (income), net consists of: | | | | | | | |
Amortization of intangibles/other assets | $ | 4,309 |
| | $ | 3,399 |
| | $ | 8,356 |
| | $ | 6,761 |
|
Foreign exchange (gains) losses | (499 | ) | | (701 | ) | | (1,283 | ) | | 1,578 |
|
Boulder acquisition costs (Note 3) | — |
| | — |
| | 6,781 |
| | — |
|
Royalty income and other | (241 | ) | | (356 | ) | | (970 | ) | | (596 | ) |
Total other expense (income), net | $ | 3,569 |
| | $ | 2,342 |
| | $ | 12,884 |
| | $ | 7,743 |
|
Foreign exchange (gains) losses. These represent foreign exchange (gains) losses from intra-entity loans resulting from the Company's November 2014 Garden Protein acquisition that are anticipated to be settled in the foreseeable future.
6. Equity-Based Compensation Expense and Earnings Per Share
Equity-based Compensation
The Company currently grants equity awards under the Amended and Restated 2013 Omnibus Incentive Plan (the “Incentive Plan”). Equity-based compensation expense recognized during the period is based on the value of the portion of equity-based payment awards that is ultimately expected to vest during the period. As equity-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The authoritative guidance for equity-based compensation requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Expense Information
The following table summarizes equity-based compensation expense which was allocated as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Cost of products sold | | $ | 211 |
| | $ | 578 |
| | $ | 904 |
| | $ | 1,871 |
|
Marketing and selling expenses | | 1,377 |
| | 1,480 |
| | 2,557 |
| | 1,994 |
|
Administrative (income) expenses | (1) | (521 | ) | | 2,412 |
| | 1,413 |
| | 3,956 |
|
Research and development expenses | | 155 |
| | 123 |
| | 257 |
| | 241 |
|
Pre-tax equity-based compensation expense | | 1,222 |
| | 4,593 |
| | 5,131 |
| | 8,062 |
|
Income tax benefit | | (416 | ) | | (1,695 | ) | | (1,893 | ) | | (2,967 | ) |
Net equity-based compensation expense | | $ | 806 |
| | $ | 2,898 |
| | $ | 3,238 |
| | $ | 5,095 |
|
(1) The departure of the Company's previous Chief Executive Officer ("CEO") in the second quarter of 2016 resulted in income being recognized due to the forfeiture of unvested awards.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Amended and Restated 2013 Omnibus Incentive Plan
The Incentive Plan provides for the issuance of up to 11,300,000 shares of the Company's common stock under (1) equity awards granted as a result of the conversion of unvested performance interest units ("PIU's") into restricted common stock of the Company, (2) stock options and other equity awards granted in connection with the completion of the IPO, and (3) awards granted by the Company under the Incentive Plan following the completion of the IPO. Awards granted subsequent to the IPO include nonqualified stock options, non-vested shares and restricted stock units ("RSU's"), the majority of which vest in full three years from the date of grant. The Company also granted non-vested performance shares ("PS's") and grants performance share units ("PSU's"), both of which vest based on achievement of relative total shareholder return performance goals over a three-year performance period.
During the second quarter of 2016, as part of our ongoing equity compensation program and in connection with the hiring of our new Chief Executive Officer:
| |
• | We granted 633,709 nonqualified stock options with grant date fair values ranging from $8.97 to $9.44 and exercise prices ranging from $42.08 to $45.28 using the BlackScholes pricing method to value the awards. |
| |
• | We granted 223,204 PSU's and PS's with grant date fair values ranging from $44.32 to $53.07 using the Monte Carlo simulation model to value the awards. |
| |
• | We granted 313,795 RSU's with grant date fair values ranging from $42.08 to $45.28, which was the closing price of our stock on the date of grant. |
Earnings Per Share
Basic earnings per common share is computed by dividing net earnings or loss for common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net earnings by weighted-average common shares outstanding during the period plus dilutive potential common shares, which are determined as follows:
|
| | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Weighted-average common shares | 116,657,004 |
| | 116,030,571 |
| | 116,387,240 |
| | 115,968,301 |
|
Effect of dilutive securities: | 1,108,926 |
|
| 1,250,001 |
|
| 1,302,162 |
|
| 1,190,188 |
|
Dilutive potential common shares | 117,765,930 |
| | 117,280,572 |
| | 117,689,402 |
|
| 117,158,489 |
|
Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. For the three and six months ended June 26, 2016, conversion of securities totaling 748,900 and 562,674, respectively, into common share equivalents were excluded from this calculation as their effect would have been anti-dilutive. For the three and six months ended June 28, 2015, conversion of securities totaling 526,648 and 265,264, respectively, into common share equivalents were excluded from this calculation as their effect would have been anti-dilutive.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
7. Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss consist of the following:
|
| | | | | | | | | | | | | | | |
| Currency translation adjustments | | Gains (Losses) on cash flow hedges | | Change in pensions | | Total |
Balance at December 27, 2015 | $ | (6,418 | ) | | $ | (9,232 | ) | | $ | (43,738 | ) | | $ | (59,388 | ) |
Other comprehensive loss before reclassification | 5,566 |
| | (11,727 | ) | | — |
| | (6,161 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
| | 2,229 |
| | 383 |
| | 2,612 |
|
Net current period other comprehensive (loss) income | 5,566 |
| | (9,498 | ) | | 383 |
| | (3,549 | ) |
Balance at June 26, 2016 | $ | (852 | ) | | $ | (18,730 | ) | | $ | (43,355 | ) | | $ | (62,937 | ) |
|
| | | | | | | | | | | | | | | |
| Currency translation adjustments | | Gains (Losses) on cash flow hedges | | Change in pensions | | Total |
Balance at December 28, 2014 | $ | (2,054 | ) | | $ | 4,124 |
| | $ | (39,804 | ) | | $ | (37,734 | ) |
Other comprehensive loss before reclassification | (1,181 | ) | | (6,306 | ) | | — |
| | (7,487 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
| | 5 |
| | 321 |
| | 326 |
|
Net current period other comprehensive (loss) income | (1,181 | ) | | (6,301 | ) | | 321 |
| | (7,161 | ) |
Balance at June 28, 2015 | $ | (3,235 | ) | | $ | (2,177 | ) | | $ | (39,483 | ) | | $ | (44,895 | ) |
The following table presents amounts reclassified out of Accumulated Other Comprehensive Loss ("AOCL") and into Net earnings for the three and six months ended June 26, 2016 and June 28, 2015, respectively.
|
| | | | | | | | | | | | | | | | | | |
Gain/(Loss) | | Amounts Reclassified from AOCL | | |
| | Three months ended | | Six months ended | | |
Details about Accumulated Other Comprehensive Loss Components | | June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 | | Reclassified from AOCL to: |
Gains and losses on financial instrument contracts | | | | | | | | | | |
Interest rate contracts | | $ | (2,206 | ) | | $ | (1,011 | ) | | $ | (3,671 | ) | | $ | (1,403 | ) | | Interest expense |
Foreign exchange contracts | | (24 | ) | | 609 |
| | 55 |
| | 1,312 |
| | Cost of products sold |
Total pre-tax | | (2,230 | ) | | (402 | ) | | (3,616 | ) | | (91 | ) | | |
Tax benefit (expense) | | 838 |
| | 313 |
| | 1,387 |
| | 86 |
| | Provision for income taxes |
Net of tax | | (1,392 | ) | | (89 | ) | | (2,229 | ) | | (5 | ) | | |
| | | | | | | | | | |
Pension actuarial assumption adjustments | | | | | | | | | | |
Amortization of actuarial loss | | (309 | ) | | (244 | ) | | (617 | ) | | (519 | ) | (a) | Cost of products sold |
Tax benefit | | 117 |
| | 93 |
| | 234 |
| | 198 |
| | Provision for income taxes |
Net of tax | | (192 | ) | | (151 | ) | | (383 | ) | | (321 | ) | | |
Net reclassifications into net earnings | | $ | (1,584 | ) | | $ | (240 | ) | | $ | (2,612 | ) | | $ | (326 | ) | | |
(a) This is included in the computation of net periodic pension cost (see Note 11 for additional details).
8. Balance Sheet Information
Accounts Receivable. Customer accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for cash discounts, returns and bad debts is the Company's best estimate of these amounts. The Company determines the allowance based on historical discounts taken and write-off experience. The Company reviews its allowance for doubtful accounts quarterly. Account balances are charged off against the allowance when the Company concludes it is probable the receivable will not be
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
recovered. The Company does not have any off-balance sheet credit exposure related to its customers. Accounts receivable are as follows:
|
| | | | | | | |
| June 26, 2016 | | December 27, 2015 |
Customers | $ | 271,950 |
| | $ | 219,352 |
|
Allowances for cash discounts, bad debts and returns | (11,359 | ) | | (7,902 | ) |
Subtotal | 260,591 |
| | 211,450 |
|
Other receivables | 9,609 |
| | 8,286 |
|
Total | $ | 270,200 |
| | $ | 219,736 |
|
Inventories. Inventories are as follows:
|
| | | | | | | |
| June 26, 2016 | | December 27, 2015 |
Raw materials | $ | 101,990 |
| | $ | 57,145 |
|
Work in progress (1) | 34,179 |
| | 61,527 |
|
Finished product | 305,071 |
| | 284,429 |
|
Total | $ | 441,240 |
| | $ | 403,101 |
|
(1) Included in work in progress is primarily agricultural inventory.
The Company has various purchase commitments for raw materials and certain finished products within the ordinary course of business. Such commitments are not at prices in excess of current market prices.
Other Current Assets. Other Current Assets are as follows:
|
| | | | | | | |
| June 26, 2016 | | December 27, 2015 |
Prepaid expenses and other | $ | 11,403 |
| | $ | 8,166 |
|
Prepaid income taxes | 5,731 |
| | 5,511 |
|
Total | $ | 17,134 |
| | $ | 13,677 |
|
Plant Assets. Plant assets are as follows:
|
| | | | | | | |
| June 26, 2016 | | December 27, 2015 |
Land | $ | 15,771 |
| | $ | 14,948 |
|
Buildings | 268,415 |
| | 246,988 |
|
Machinery and equipment | 784,641 |
| | 716,314 |
|
Projects in progress | 82,749 |
| | 61,153 |
|
Subtotal | 1,151,576 |
| | 1,039,403 |
|
Accumulated depreciation | (450,605 | ) | | (408,294 | ) |
Total | $ | 700,971 |
| | $ | 631,109 |
|
Depreciation was $22,446 and $43,316 during the three and six months ended June 26, 2016, respectively. Depreciation was $18,891 and $36,396 during the three and six months ended June 28, 2015, respectively. As of June 26, 2016 and December 27, 2015, Machinery and equipment included assets under capital lease with a book value of $21,460 and $16,372 (net of accumulated depreciation of $12,093 and $11,018), respectively.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Accrued Liabilities. Accrued liabilities are as follows:
|
| | | | | | | |
| June 26, 2016 |
| December 27, 2015 |
Employee compensation and benefits | $ | 53,009 |
| | $ | 55,416 |
|
Interest payable | 23,795 |
| | 12,127 |
|
Consumer coupons | 5,711 |
| | 2,035 |
|
Accrued restructuring charges (see note 3) | 9,458 |
| | — |
|
Accrued financial instrument contracts (see note 12) | 10,933 |
| | 5,957 |
|
Accrued broker commissions | 7,519 |
| | 4,651 |
|
Other | 33,731 |
| | 20,324 |
|
Total | $ | 144,156 |
| | $ | 100,510 |
|
Other Long-Term Liabilities. Other long-term liabilities are as follows:
|
| | | | | | | |
| June 26, 2016 | | December 27, 2015 |
Employee compensation and benefits | $ | 12,674 |
| | $ | 9,806 |
|
Long-term rent liability and deferred rent allowances | 7,108 |
| | 7,774 |
|
Liability for uncertain tax positions | 11,435 |
| | 7,712 |
|
Accrued financial instrument contracts (see note 12) | 27,297 |
| | 22,924 |
|
Other | 5,845 |
| | 6,290 |
|
Total | $ | 64,359 |
| | $ | 54,506 |
|
9. Goodwill, Tradenames and Other Assets
Goodwill
Goodwill by segment is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Birds Eye Frozen | | Duncan Hines Grocery | | Boulder Brands | | Specialty Foods | | Total |
Balance, December 27, 2015 | $ | 603,432 |
| | $ | 936,615 |
| | $ | — |
| | $ | 173,961 |
| | $ | 1,714,008 |
|
Boulder acquisition (Note 3) | — |
| | — |
| | 450,366 |
| | — |
| | 450,366 |
|
Foreign currency adjustment | 1,452 |
| | — |
| | 3,973 |
| | — |
| | 5,425 |
|
Balance, June 26, 2016 | $ | 604,884 |
|
| $ | 936,615 |
| | $ | 454,339 |
| | $ | 173,961 |
| | $ | 2,169,799 |
|
| | | | | | | | | |
The authoritative guidance for business combinations requires that all business combinations be accounted for at fair value under the acquisition method of accounting. The authoritative guidance for goodwill provides that goodwill will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. The Company completed its annual testing in the third quarter of 2015, which indicated no impairment.
Tradenames
Tradenames by segment are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Birds Eye Frozen | | Duncan Hines Grocery | | Boulder | | Specialty Foods | | Total |
Balance, December 27, 2015 | $ | 846,336 |
| | $ | 1,118,712 |
| | $ | — |
| | $ | 36,000 |
| | $ | 2,001,048 |
|
Boulder acquisition (Note 3) | — |
| | — |
| | 539,600 |
| | — |
| | 539,600 |
|
Foreign currency adjustment | 290 |
| | — |
| | — |
| | — |
| | 290 |
|
Balance, June 26, 2016 | $ | 846,626 |
|
| $ | 1,118,712 |
|
| $ | 539,600 |
|
| $ | 36,000 |
| | $ | 2,540,938 |
|
| | | | | | | | | |
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
The authoritative guidance for indefinite-lived assets provides that indefinite-lived assets will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. The Company completed its annual testing in the third quarter of 2015, which indicated no impairment.
Other Assets
|
| | | | | | | | | | | | | | |
| June 26, 2016 |
| Weighted Avg Life | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Amortizable intangibles | | | | | | | |
Recipes | 10 |
| | $ | 60,094 |
| | $ | (50,082 | ) | | $ | 10,012 |
|
Customer relationships - Distributors | 34 |
| | 182,735 |
| | (50,493 | ) | | 132,242 |
|
Customer relationships - Food Service | 10 |
| | 11,400 |
| | (1,018 | ) | | 10,382 |
|
Customer relationships - Private Label | 7 |
| | 1,290 |
| | (526 | ) | | 764 |
|
License | 7 |
| | 6,175 |
| | (5,987 | ) | | 188 |
|
Total amortizable intangibles | | | $ | 261,694 |
| | $ | (108,106 | ) | | $ | 153,588 |
|
Financial instruments (see Note 12) | | | 1,565 |
| | — |
| | 1,565 |
|
Other (1) | | | 30,024 |
| | (4,571 | ) | | 25,453 |
|
Total other assets, net | | | | | | | $ | 180,606 |
|
| Amortizable intangibles by segment | | |
| Birds Eye Frozen | | | | $ | 57,211 |
|
| Duncan Hines Grocery | | | | 42,941 |
|
| Boulder Brands | | | | 49,773 |
|
| Specialty Foods | | | | 3,663 |
|
| | | | | | | $ | 153,588 |
|
|
| | | | | | | | | | | | | | |
| December 27, 2015 |
| Weighted Avg Life | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Amortizable intangibles | | | | | | | |
Recipes | 10 |
| | $ | 60,094 |
| | $ | (47,077 | ) | | $ | 13,017 |
|
Customer relationships - Distributors | 35 |
| | 142,129 |
| | (46,507 | ) | | 95,622 |
|
Customer relationships - Private Label | 7 |
| | 1,290 |
| | (399 | ) | | 891 |
|
License | 7 |
| | 6,175 |
| | (5,800 | ) | | 375 |
|
Total amortizable intangibles | | | $ | 209,688 |
| | $ | (99,783 | ) | | $ | 109,905 |
|
Other (2) | | | 14,779 |
| | (4,320 | ) | | 10,459 |
|
Total other assets, net | | | | | | | $ | 120,364 |
|
| Amortizable intangibles by segment | | |
| Birds Eye Frozen | | | | $ | 60,510 |
|
| Duncan Hines Grocery | | | | 45,503 |
|
| Specialty Foods | | | | 3,892 |
|
| | | | | | | $ | 109,905 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
(1) As of June 26, 2016, Other primarily consists of cost basis investments in companies in the natural and organic food and beverage industries acquired through the Boulder acquisition as well as security deposits, supplemental savings plan investments and debt acquisition costs associated with the Company's revolver.
(2) As of December 27, 2015, Other primarily consists of security deposits and supplemental savings plan investments.
Amortization of intangible assets was $4,309 and $8,356 for the three and six months ended June 26, 2016, respectively. Amortization of intangible assets was $3,399 and $6,761 for the three and six months ended June 28, 2015, respectively. Estimated amortization expense for each of the next five years and thereafter is as follows: remainder of 2016 - $8,800; 2017 - $11,800; 2018 - $9,600; 2019 - $8,900; 2020 - $8,200 and thereafter - $106,400.
10. Debt and Interest Expense
|
| | | | | | | |
| June 26, 2016 | | December 27, 2015 |
Short-term borrowings |
| |
|
- Notes payable | $ | 1,758 |
| | $ | 2,225 |
|
Total short-term borrowings | $ | 1,758 |
| | $ | 2,225 |
|
Long-term debt | | | |
- Amended Credit Agreement - Tranche G Term Loans due 2020 | 1,409,625 |
| | 1,409,625 |
|
- Amended Credit Agreement - Tranche H Term Loans due 2020 | 511,875 |
| | 514,500 |
|
- Amended Credit Agreement - Tranche I Term Loans due 2023 | 548,625 |
| | — |
|
- 4.875% Senior Notes due 2021 | 350,000 |
| | 350,000 |
|
- 5.875% Senior Notes due 2024 | 350,000 |
| | — |
|
- 3.0% Note payable to Gilster Mary Lee Corporation | 7,012 |
| | 8,878 |
|
- Unamortized discount on long term debt and deferred financing costs | (45,869 | ) | | (26,267 | ) |
- Capital lease obligations | 25,502 |
| | 15,123 |
|
| 3,156,770 |
| | 2,271,859 |
|
Less: current portion of long-term obligations | 21,754 |
| | 14,847 |
|
Total long-term debt | $ | 3,135,016 |
| | $ | 2,257,012 |
|
|
| | | | | | | | | | | | | | | |
Interest expense | Three months ended | | Six months ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Interest expense | $ | 30,871 |
| | $ | 19,635 |
| | $ | 58,800 |
| | $ | 39,282 |
|
Amortization of debt acquisition costs and original issue discounts | 2,411 |
| | 1,541 |
| | 4,657 |
| | 3,130 |
|
Interest rate swap losses (Note 12) | 2,206 |
| | 1,011 |
| | 3,671 |
| | 1,403 |
|
Total interest expense | $ | 35,488 |
| | $ | 22,187 |
| | $ | 67,128 |
| | $ | 43,815 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Amended Credit Agreement
To partially fund the Boulder acquisition, on January 15, 2016 as described in Note 3, Pinnacle Foods Finance LLC ("Pinnacle Foods Finance") entered into an amendment to the Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) which provided for a seven year incremental term loan of $550.0 million (the “Tranche I Term Loans”). Other than with respect to interest rate, maturity and certain pricing protections, the Tranche I Term Loans have substantially the same terms as Pinnacle Foods Finance's Tranche G and H Term Loans. Refer to Note 10 in our Form 10-K filed with the Securities and Exchange Commission on February 25, 2016 for details. In connection with the Tranche I Term Loans, Pinnacle Foods Finance incurred $2.7 million of original issue discount and deferred financing fees of $10.5 million.
The Tranche I Term Loans bear interest at a floating rate and are maintained as base rate loans or as eurocurrency rate loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as described in the Amended Credit Agreement. The base rate is defined as the highest of (i) the administrative agent's prime rate, (ii) the federal funds effective rate plus 1/2 of 1% and (iii) the eurocurrency rate that would be payable on such day for a eurocurrency rate loan with a one-month interest period plus 1%. Eurocurrency rate loans bear interest at the adjusted eurocurrency rate plus the applicable eurocurrency rate margin, as described in the Amended Credit Agreement. The eurocurrency rate is determined by reference to the British Bankers Association "BBA" LIBOR rate for the interest period relevant to such borrowing. With respect to Tranche I Term Loans , the eurocurrency rate shall be no less than 0.75% per annum and the base rate shall be no less than 1.75% per annum. The interest rate margin for Tranche I Term Loans under the Amended Credit Agreement is 2.00%, in the case of the base rate loans and 3.00%, in the case of Eurocurrency rate loans.
As a result of the Boulder acquisition, Pinnacle Foods Finance's total net leverage ratio increased above 4.25:1.0, which resulted in a 25 basis point interest rate step-up on existing Term Loans G and H, under the Amended Credit Agreement immediately subsequent to the quarterly certification to the Administrative Agent which occurred after filing the first quarter 10-Q report on April 28, 2016. The higher rate will remain in effect as long as the total net leverage ratio remains greater than 4.25:1.0. As of June 26, 2016, the total net leverage ratio was 4.64:1.0.
Senior Notes
To partially fund the Boulder acquisition, on January 15, 2016, as described in Note 3, Pinnacle Foods Finance issued $350.0 million aggregate principal amount of 5.875% Senior Notes (the "5.875% Senior Notes") due January 15, 2024.
The Company's 4.875% Senior Notes due 2021 (the "4.875% Senior Notes") and 5.875% Senior Notes (together the "Senior Notes") are general senior unsecured obligations of Pinnacle Foods Finance, effectively subordinated to all existing and future senior secured indebtedness of Pinnacle Foods Finance to the extent of the value of the assets securing that indebtedness and guaranteed on a full, unconditional, joint and several basis by Pinnacle Foods Finance’s wholly-owned domestic subsidiaries that guarantee other indebtedness of Pinnacle Foods Finance and by the Company. See Note 17 for Guarantor and Nonguarantor Financial Statements.
Pinnacle Foods Finance may redeem some or all of the 5.875% Senior Notes at any time prior to January 15, 2019 at a price equal to 100% of the principal amount of the 5.875% Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” is defined as the greater of (1) 1.0% of the principal amount of such 5.875% Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 5.875% Senior Notes at January 15, 2019, plus (ii) all required interest payments due on such 5.875% Senior Notes through January 15, 2019 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the treasury rate plus 50 basis points over (b) the principal amount of such 5.875% Senior Notes.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Finance may redeem the 5.875% Senior Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on January 15th of each of the years indicated below:
|
| |
Year | Percentage |
2019 | 104.406% |
2020 | 102.938% |
2021 | 101.469% |
2022 and thereafter | 100.000% |
In addition, at any time prior to January 15, 2019, Pinnacle Foods Finance may redeem up to 35% of the aggregate principal amount of the 5.875% Senior Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a premium equal to 5.875%, plus accrued and unpaid interest, if any, to the redemption date, subject to the right of holders of the 5.875% Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by Pinnacle Foods Finance from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of the 5.875% Senior Notes originally issued under the indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 120 days of the date of closing of each such equity offering.
Debt Acquisition Costs and Original Issue Discounts
As discussed in Note 2 of the Consolidated Financial Statements and in accordance with ASU No. 2015-03, the Company now presents debt acquisition costs in the balance sheet as a direct deduction from the related debt liability, rather than as an asset.
As part of the Boulder acquisition, debt acquisition costs of $21.3 million and $0.4 million were incurred during the three months ended March 27, 2016 and the fiscal year ended December 27, 2015, respectively, and original issue discounts of $2.7 million were incurred during the three months ended March 27, 2016. There were no debt acquisition costs or original issue discounts incurred subsequent to March 27, 2016.
All debt acquisition costs and original issue discounts are amortized into interest expense over the life of the related debt using the effective interest method. Amortization of these costs were $2.3 million and $4.4 million during the three and six months ended June 26, 2016, respectively. Amortization of these costs were $1.5 million and $2.9 million during the three and six months ended June 28, 2015, respectively.
The following summarizes debt acquisition cost and original issue discount activity during the six months ended June 26, 2016:
|
| | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net |
Balance, December 27, 2015 | $ | 58,036 |
| | $ | (31,769 | ) | | $ | 26,267 |
|
2016 - Additions | 24,009 |
| | — |
| | 24,009 |
|
2016 - Amortization | — |
| | (4,407 | ) | | (4,407 | ) |
Balance, June 26, 2016 | $ | 82,045 |
| | $ | (36,176 | ) | | $ | 45,869 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Estimated fair value
The estimated fair value of the Company’s long-term debt, including the current portion, as of June 26, 2016, is as follows:
|
| | | | | | | | |
| | June 26, 2016 |
Issue | | Face Value | | Fair Value |
Amended Credit Agreement - Tranche G Term Loans | | $ | 1,409,625 |
| | $ | 1,409,625 |
|
Amended Credit Agreement - Tranche H Term Loans | | 511,875 |
| | 511,875 |
|
Amended Credit Agreement - Tranche I Term Loans | | 548,625 |
| | 550,710 |
|
3.0% Note payable to Gilster Mary Lee Corporation | | 7,012 |
| | 7,012 |
|
4.875% Senior Notes | | 350,000 |
| | 353,938 |
|
5.875% Senior Notes | | 350,000 |
| | 364,875 |
|
| | $ | 3,177,137 |
| | $ | 3,198,035 |
|
The estimated fair value of the Company’s long-term debt, including the current portion, as of December 27, 2015, is as follows:
|
| | | | | | | | |
| | December 27, 2015 |
Issue | | Face Value | | Fair Value |
Amended Credit Agreement - Tranche G Term Loans | | $ | 1,409,625 |
| | $ | 1,384,957 |
|
Amended Credit Agreement - Tranche H Term Loans | | 514,500 |
| | 505,496 |
|
3.0% Note payable to Gilster Mary Lee Corporation
| | 8,878 |
| | 8,878 |
|
4.875% Senior Notes | | 350,000 |
| | 337,750 |
|
| | $ | 2,283,003 |
| | $ | 2,237,081 |
|
The estimated fair values of the Company's long-term debt are classified as Level 2 in the fair value hierarchy. The fair value is based on the quoted market price for such notes and loans and borrowing rates currently available to the Company for notes and loans with similar terms and maturities.
11. Pension and Retirement Plans
The Company accounts for pension and retirement plans in accordance with the authoritative guidance for retirement benefit compensation. This guidance requires recognition of the funded status of a benefit plan in the statement of financial position. The guidance also requires recognition in accumulated other comprehensive earnings of certain gains and losses that arise during the period but are deferred under pension accounting rules.
The Company maintains a defined benefit plan, the Pinnacle Foods Group LLC Pension Plan (the "Plan"), which is frozen for future benefit accruals. The Company also has three 401(k) plans, three non-qualified supplemental savings plans and the Company participates in a multi-employer defined benefit plan.
Pinnacle Foods Group LLC Pension Plan
The Plan covers eligible employees and provides benefits generally based on years of service and employees’ compensation. The Plan is frozen for future benefits and is funded in conformity with the funding requirements of applicable government regulations. The Plan assets consist principally of cash equivalents, equity and fixed income common collective trusts. The Plan assets do not include any of the Company’s equity or debt securities.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
The following represents the components of net periodic (benefit) cost:
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
Pension Benefits | June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Interest cost | $ | 2,628 |
| | $ | 2,361 |
| | $ | 5,256 |
| | 5,189 |
|
Expected return on assets | (2,838 | ) | | (3,225 | ) | | (5,675 | ) | | (6,616 | ) |
Amortization of: | | | | |
|
|
|
Actuarial loss | 309 |
| | 206 |
| | 617 |
| | 475 |
|
Net periodic cost (benefit) | $ | 99 |
| | $ | (658 | ) | | $ | 198 |
| | $ | (952 | ) |
Cash Flows
Contributions. In fiscal 2016, the Company does not expect to make any significant contributions to the Plan. The Company made contributions to the Plan totaling $3.1 million in fiscal 2015, of which $0.0 million and $1.7 million was made in the three and six months ended June 28, 2015.
Multi-employer Plans
The Company contributes to the United Food and Commercial Workers International Union Industry Pension Fund (EIN 51-6055922) (the "UFCW Plan") under the terms of the collective-bargaining agreement with its Fort Madison employees.
For the three and six months ended June 26, 2016, contributions to the UFCW Plan were $183 and $364. For the three and six months ended June 28, 2015, contributions to the UFCW Plan were $191 and $384, respectively. The contributions to this UFCW Plan are paid monthly based upon the number of employees. They represent less than 5% of the total contributions received by this UFCW Plan using available information during the most recent plan year.
The risks of participating in multi-employer plans are different from single-employer plans in the following aspects: (a) assets contributed to a multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stops contributing to the multi-employer plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (c) if the Company chooses to stop participating in the plan, the Company may be required to pay a withdrawal liability based on the underfunded status of the plan.
The UFCW Plan received a Pension Protection Act “green” zone status for the plan year ending June 30, 2015. The zone status is based on information the Company received from the UFCW Plan and is certified by the UFCW Plan's actuary. Among other factors, plans in the "green" zone are at least 80 percent funded. The UFCW Plan did not utilize any extended amortization provisions that affect its placement in the "green" zone. The UFCW Plan has never been required to implement a funding improvement plan nor is one pending at this time.
12. Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
The Company manages interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including the Company’s revolving credit facility. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, or hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.
Certain parts of the Company’s foreign operations in Canada expose the Company to fluctuations in foreign exchange rates. The Company’s goal is to reduce its exposure to such foreign exchange risks on its foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency. The Company does not enter into these transactions for non-hedging purposes.
The Company purchases raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. The Company generally enters into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. Forward derivative contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing processes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three and six months ended June 26, 2016 and June 28, 2015, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
As of June 26, 2016, the Company had the following interest rate swaps that were designated as cash flow hedges of interest rate risk:
|
| | | | | | | | | | | | | | |
Product | | Number of Instruments | | Current Notional Amount | | Fixed Rate Range | | Index | | Trade Dates | | Maturity Dates |
Interest Rate Swaps | | 10 | | $ | 1,316,300 |
| | 1.45% - 2.97% | | USD-LIBOR-BBA | | Apr 2013 - Oct 2013 | | Nov 2016 - Apr 2020 |
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCL in the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in AOCL related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $10,108 will be reclassified as an increase to Interest expense.
Cash Flow Hedges of Foreign Exchange Risk
The Company’s operations in Canada expose the Company to changes in the U.S. Dollar – Canadian Dollar ("USD-CAD") foreign exchange rate. From time to time, the Company’s Canadian subsidiary purchases inventory denominated in U.S. Dollars ("USD"), a currency other than its functional currency. The subsidiary sells that inventory in Canadian dollars ("CAD"). The subsidiary uses currency forward and collar agreements to manage its exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of CAD currency in exchange for receiving USD if exchange rates rise above an agreed upon rate and purchase of USD currency in exchange for paying CAD currency if exchange rates fall below an agreed upon rate at specified dates.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
As of June 26, 2016, the Company had the following foreign currency exchange contracts (in aggregate) that were designated as cash flow hedges of foreign exchange risk:
|
| | | | | | | | | | | | | | | | |
Product | | Number of Instruments | | Notional Sold in Aggregate in CAD | | Notional Purchased in Aggregate in USD | | USD to CAD Exchange Rates | | Trade Date | | Maturity Dates |
CAD $ Contracts | | 12 | | $ | 15,000 |
| | $ | 11,595 |
| | 1.281 - 1.313 | | Oct 2015 - April 2016 | | July 2016 - Dec 2016 |
The effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges of foreign exchange risk is recorded in AOCL in the Consolidated Balance Sheets and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portions of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, are recognized directly in Cost of products sold in the Consolidated Statements of Operations.
Non-designated Hedges of Commodity Risk
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet the authoritative guidance for hedge accounting. From time to time, the Company enters into commodity forward contracts to fix the price of diesel fuel, heating oil, natural gas and soybean oil purchases and other commodities at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.
As of June 26, 2016, the Company had the following derivative instruments that were not designated in qualifying hedging relationships:
|
| | | | | | | | | | |
Commodity Contracts | | Number of Instruments | | Notional Purchased in Aggregate | | Price/Index | | Trade Dates | | Maturity Dates |
Diesel Fuel Contracts | | 1 | | 7,025,182 Gallons | | $3.68 - $3.80 per Gallon | | Nov 2014 | | Dec 2016 |
Heating Oil Contracts | | 5 | | 8,709,974 Gallons | | $1.25 - $1.82 per Gallon | | Jan 2015 - Feb 2016 | | Dec 2016 - Dec 2017 |
Natural Gas Contracts | | 2 | | 798,000 MMBTU's | | 2.41 - 2.81 per MMBTU | | Oct 2015 - March 2016 | | Aug 2016 - Dec 2016 |
Soybean Oil Contracts | | 3 | | 32,347,655 Pounds | | $0.31 - $0.35 per Pound | | Dec 2014 - July 2015 | | July 2016 - Dec 2016 |
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the Consolidated Balance Sheets as of June 26, 2016 and December 27, 2015.
|
| | | | | | | | | | | | |
| | Tabular Disclosure of Fair Values of Derivative Instruments |
| | Asset Derivatives | | Liability Derivatives |
| | Balance Sheet Location | | Fair Value as of June 26, 2016 | | Balance Sheet Location | | Fair Value as of June 26, 2016 |
Derivatives designated as hedging instruments | | | | | | | | |
Interest Rate Contracts | | | |
|
| | Accrued liabilities | | $ | 6,662 |
|
| | | | | | Other long-term liabilities | | 27,297 |
|
Foreign Exchange Contracts | | Other current assets | | $ | 45 |
| | | |
|
|
Total derivatives designated as hedging instruments | | | | $ | 45 |
| | | | $ | 33,959 |
|
Derivatives not designated as hedging instruments | | | | | | | | |
Commodity Contracts | | Other current assets | | $ | 194 |
| | Accrued liabilities | | $ | 4,271 |
|
| | Other assets, net | | 1,565 |
| | | |
|
|
Total derivatives not designated as hedging instruments | | | | $ | 1,759 |
| | | | $ | 4,271 |
|
| | | | | | | | |
| | Balance Sheet Location | | Fair Value as of December 27, 2015 | | Balance Sheet Location | | Fair Value as of December 27, 2015 |
Derivatives designated as hedging instruments | | | | | | | | |
Interest Rate Contracts | | | |
|
| | Accrued liabilities | | $ | 3,921 |
|
| | | | | | Other long-term liabilities | | 14,947 |
|
Foreign Exchange Contracts | | Other current assets | | $ | 471 |
| | | |
|
|
Total derivatives designated as hedging instruments | | | | $ | 471 |
| | | | $ | 18,868 |
|
Derivatives not designated as hedging instruments | | | | | | | | |
Commodity Contracts | | | |
|
| | Accrued liabilities | | $ | 2,036 |
|
| | | | | | Other long-term liabilities | | 7,977 |
|
Total derivatives not designated as hedging instruments | | | | $ | — |
| | | | $ | 10,013 |
|
The Company has elected not to offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheets as of June 26, 2016 and December 27, 2015 would be adjusted as detailed in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | June 26, 2016 | | December 27, 2015 |
Derivative Instrument | | Gross Amounts Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements | | Net Amount | | Gross Amounts Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements | | Net Amount |
Total asset derivatives | | $ | 1,804 |
| | (1,804 | ) | | $ | — |
| | $ | 471 |
| | (471 | ) | | $ | — |
|
| | | | | | | | | | | | |
Total liability derivatives | | $ | 38,230 |
| | (1,804 | ) | | $ | 36,426 |
| | $ | 28,881 |
| | (471 | ) | | $ | 28,410 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
The table below presents the effect of the Company’s derivative financial instruments in the Consolidated Statements of Operations and AOCL for the three and six months ended June 26, 2016 and June 28, 2015.
Tabular Disclosure of the Effect of Derivative Instruments
|
| | | | | | | | | | | | | | | | |
Gain/(Loss) | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Recognized in AOCL on Derivative (Effective Portion) | | Effective portion reclassified from AOCL to: | | Reclassified from AOCL into Earnings (Effective Portion) | | Ineffective portion recognized in Earnings in: | | Recognized in Earnings (Ineffective Portion) |
Interest Rate Contracts | | $ | (8,067 | ) | | Interest expense | | $ | (2,206 | ) | | Interest expense | |
|
|
Foreign Exchange Contracts | | 71 |
| | Cost of products sold | | (24 | ) | | Cost of products sold | | — |
|
Three months ended June 26, 2016 | | $ | (7,996 | ) | | | | $ | (2,230 | ) | | | | $ | — |
|
| | | | | | | | | | |
Interest Rate Contracts | | $ | (18,761 | ) | | Interest expense | | $ | (3,671 | ) | | Interest expense | |
|
|
Foreign Exchange Contracts | | (356 | ) | | Cost of products sold | | 55 |
| | Cost of products sold | | (8 | ) |
Six months ended June 26, 2016 | | $ | (19,117 | ) | | | | $ | (3,616 | ) | | | | $ | (8 | ) |
| | | | | | | | | | |
Interest Rate Contracts | | $ | 2,564 |
| | Interest expense | | $ | (1,011 | ) | | Interest expense | | $ | — |
|
Foreign Exchange Contracts | | (310 | ) | | Cost of products sold | | 609 |
| | Cost of products sold | | (14 | ) |
Three months ended June 28, 2015 | | $ | 2,254 |
| | | | $ | (402 | ) | | | | $ | (14 | ) |
| | | | | | | | | | |
Interest Rate Contracts | | $ | (11,567 | ) | | Interest expense | | $ | (1,403 | ) | | Interest expense | | $ | — |
|
Foreign Exchange Contracts | | 1,205 |
| | Cost of products sold | | 1,312 |
| | Cost of products sold | | (15 | ) |
Six months ended June 28, 2015 | | $ | (10,362 | ) | | | | $ | (91 | ) | | | | $ | (15 | ) |
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | Recognized in Earnings in: | | Recognized in Earnings | | | | |
Commodity Contracts | | | | Cost of products sold | | $ | 1,165 |
| | | | |
Three months ended June 26, 2016 | | | | $ | 1,165 |
| | | | |
| | | | | | | | | | |
Commodity Contracts | | | | Cost of products sold | | $ | 1,848 |
| | | | |
Six months ended June 26, 2016 | | | | $ | 1,848 |
| | | | |
| | | | | | | | | | |
Commodity Contracts | | | | Cost of products sold | | $ | 1,934 |
| | | | |
Three months ended June 28, 2015 | | | | $ | 1,934 |
| | | | |
| | | | | | | | | | |
Commodity Contracts | | | | Cost of products sold | | $ | (73 | ) | | | | |
Six months ended June 28, 2015 | | | | $ | (73 | ) | | | | |
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Credit risk-related contingent features
The Company has agreements with certain counterparties that contain a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of June 26, 2016, the Company has not posted any collateral related to these agreements. If the Company had breached this provision at June 26, 2016, it could have been required to settle its obligations under the agreements at their termination value, which differs from the recorded fair value. The table below summarizes the aggregate fair values of those derivatives that contain credit risk-related contingent features as of June 26, 2016 and December 27, 2015.
June 26, 2016
|
| | | | | | | | | | | | | | | | | | |
Asset/(Liability) | | | | | | | | | | |
Counterparty | | Contract Type | | Termination Value | | Performance Risk Adjustment | | Accrued Interest | | Fair Value (excluding interest) |
Barclays | | Interest Rate Contracts | | $ | (17,712 | ) | | $ | 986 |
| | $ | (517 | ) | | $ | (16,209 | ) |
| | Foreign Exchange Contracts | | 93 |
| | — |
| | — |
| | 93 |
|
| | Commodity Contracts | | (2,703 | ) | | 21 |
| | — |
| | (2,682 | ) |
Bank of America | | Interest Rate Contracts | | (14,665 | ) | | 1,116 |
| | — |
| | (13,549 | ) |
| | Foreign Exchange Contracts | | (49 | ) | | 1 |
| | — |
| | (48 | ) |
| | Commodity Contracts | | 146 |
| | 1 |
| | — |
| | 147 |
|
Credit Suisse | | Interest Rate Contracts | | (3,103 | ) | | 40 |
| | (531 | ) | | (2,533 | ) |
Macquarie | | Interest Rate Contracts | | (1,976 | ) | | 13 |
| | (294 | ) | | (1,669 | ) |
| | Commodity Contracts | | 22 |
| | 2 |
| | — |
| | 24 |
|
Total | | | | $ | (39,948 | ) | | $ | 2,179 |
| | $ | (1,342 | ) | | $ | (36,426 | ) |
December 27, 2015
|
| | | | | | | | | | | | | | | | | | |
Asset/(Liability) | | | | | | | | | | |
Counterparty | | Contract Type | | Termination Value | | Performance Risk Adjustment | | Accrued Interest | | Fair Value (excluding interest) |
Barclays | | Interest Rate Contracts | | $ | (9,616 | ) | | $ | 773 |
| | $ | (260 | ) | | $ | (8,583 | ) |
| | Commodity Contracts | | (7,035 | ) | | 116 |
| | — |
| | (6,919 | ) |
Bank of America | | Interest Rate Contracts | | (5,879 | ) | | 790 |
| | — |
| | (5,089 | ) |
| | Foreign Exchange Contracts | | 470 |
| | 1 |
| | — |
| | 471 |
|
| | Commodity Contracts | | (1,737 | ) | | 29 |
| | — |
| | (1,709 | ) |
Credit Suisse | | Interest Rate Contracts | | (2,627 | ) | | 53 |
| | (260 | ) | | (2,314 | ) |
Macquarie | | Interest Rate Contracts | | (3,137 | ) | | 47 |
| | (209 | ) | | (2,882 | ) |
| | Commodity Contracts | | (1,408 | ) | | 23 |
| | — |
| | (1,386 | ) |
Total | | | | $ | (30,970 | ) | | $ | 1,831 |
| | $ | (728 | ) | | $ | (28,410 | ) |
13. Commitments and Contingencies
General
From time to time, the Company and its subsidiaries are parties to, or targets of, lawsuits, claims, investigations, and proceedings, which are being handled and defended in the ordinary course of business. Although the outcome of such items cannot be determined with certainty, the Company’s general counsel and management are of the opinion that the final outcome of these matters will not have a material effect on the Company’s financial condition, results of operations or cash flows.
No single item individually is, nor are all of them in the aggregate, material.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
14. Segments
The Company is a leading manufacturer, marketer and distributor of high quality, branded food products in North America. Subsequent to the Boulder acquisition, the Company manages the business in four operating segments: Birds Eye Frozen, Duncan Hines Grocery, Boulder Brands and Specialty Foods.
The Birds Eye Frozen segment is comprised of our Leadership Brands in the retail frozen vegetables (Birds Eye), frozen complete bagged meals (Birds Eye Voila!), plant-based protein frozen products (gardein) and frozen prepared seafood (Van de Kamp’s and Mrs. Paul’s) categories, as well as our Foundation Brands in the full-calorie single-serve frozen dinners and entrées (Hungry-Man), frozen pancakes / waffles / French Toast (Aunt Jemima), frozen and refrigerated bagels (Lender’s) and frozen pizza for one (Celeste) categories.
The Duncan Hines Grocery segment is comprised of our Leadership Brands in the baking mixes and frostings (Duncan Hines), shelf-stable pickles (Vlasic), liquid and dry-mix salad dressings (Wish-Bone and Western), and table syrups (Mrs. Butterworth’s and Log Cabin) categories, and our Foundation Brands in the canned meat (Armour, Nalley and Brooks), pie and pastry fillings (Duncan Hines Comstock and Wilderness), and barbecue sauces (Open Pit) categories as well as Canadian operations, excluding Garden Protein.
The Company refers to the sum of the Birds Eye Frozen segment and the Duncan Hines Grocery segment as the North America Retail business.
The Boulder Brands segment is comprised of health and wellness brands including gluten-free products (Udi's and Glutino), natural frozen meal offerings (EVOL), refrigerated and shelf-stable spreads (Smart Balance), and plant-based refrigerated and shelf-stable spreads (Earth Balance).
The Specialty Foods segment consists of snack products (Tim's Cascade and Snyder of Berlin), foodservice and private label business.
As the Company continues to integrate the Boulder Brands segment into its operations and financial reporting systems, the Company’s management expects to reevaluate its internal reporting, which may require reporting of its results in different reportable segments in future periods.
Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets. Unallocated corporate expenses consist of corporate overhead such as executive management, finance and legal functions.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
SEGMENT INFORMATION | June 26, 2016 | | June 28, 2015 | | June 26, 2016 |
| June 28, 2015 |
Net sales | | | | | | | |
Birds Eye Frozen | $ | 285,155 |
| | $ | 268,859 |
| | $ | 615,166 |
| | $ | 586,749 |
|
Duncan Hines Grocery | 270,471 |
| | 277,994 |
| | 513,656 |
| | 539,192 |
|
Boulder Brands | 122,607 |
| | — |
| | 223,455 |
| | — |
|
Specialty Foods | 78,148 |
| | 84,893 |
| | 158,359 |
| | 171,086 |
|
Total | $ | 756,381 |
| | $ | 631,746 |
| | $ | 1,510,636 |
| | $ | 1,297,027 |
|
Earnings before interest and taxes | | | | | | | |
Birds Eye Frozen | $ | 46,794 |
| | $ | 37,978 |
| | $ | 102,035 |
| | $ | 81,255 |
|
Duncan Hines Grocery | 52,255 |
| | 51,041 |
| | 94,860 |
| | 94,248 |
|
Boulder Brands (1) | 7,028 |
| | — |
| | (4,198 | ) | | — |
|
Specialty Foods | 6,333 |
| | 7,599 |
| | 13,253 |
| | 15,299 |
|
Unallocated corporate expenses (2) | (4,624 | ) | | (6,803 | ) | | (17,883 | ) | | (12,518 | ) |
Total | $ | 107,786 |
| | $ | 89,815 |
| | $ | 188,067 |
| | $ | 178,284 |
|
Depreciation and amortization | | | | | | | |
Birds Eye Frozen | $ | 10,857 |
| | $ | 10,747 |
| | $ | 22,042 |
| | $ | 21,415 |
|
Duncan Hines Grocery | 7,781 |
| | 8,081 |
| | 15,162 |
| | 15,081 |
|
Boulder Brands | 4,688 |
| | — |
| | 7,692 |
| | — |
|
Specialty Foods | 3,429 |
| | 3,461 |
| | 6,776 |
| | 6,661 |
|
Total | $ | 26,755 |
| | $ | 22,289 |
| | $ | 51,672 |
| | $ | 43,157 |
|
Capital expenditures | | | | | | | |
Birds Eye Frozen | $ | 16,811 |
| | $ | 13,212 |
| | $ | 36,443 |
| | $ | 17,752 |
|
Duncan Hines Grocery | 10,551 |
| | 6,889 |
| | 21,820 |
| | 25,811 |
|
Boulder Brands | 1,457 |
| | — |
| | 2,493 |
| | — |
|
Specialty Foods | 2,023 |
| | 1,043 |
| | 4,017 |
| | 4,605 |
|
Total | $ | 30,842 |
| | $ | 21,144 |
| | $ | 64,773 |
| | $ | 48,168 |
|
| | | | | | | |
NET SALES BY PRODUCT TYPE | | | | | | | |
Net sales | | | | | | | |
Frozen | $ | 381,171 |
| | $ | 305,335 |
| | $ | 796,317 |
| | $ | 664,474 |
|
Shelf stable meals and meal enhancers | 261,933 |
| | 233,951 |
| | 500,175 |
| | 442,925 |
|
Desserts | 75,980 |
| | 65,279 |
| | 144,764 |
| | 137,133 |
|
Snacks | 37,297 |
| | 27,181 |
| | 69,380 |
| | 52,495 |
|
Total | $ | 756,381 |
| | $ | 631,746 |
| | $ | 1,510,636 |
| | $ | 1,297,027 |
|
| | | | | | | |
GEOGRAPHIC INFORMATION | | | | | | | |
Net sales | | | | | | | |
United States | $ | 741,576 |
| | $ | 626,468 |
| | $ | 1,486,639 |
| | $ | 1,287,635 |
|
Canada | 41,005 |
| | 31,067 |
| | 77,114 |
| | 60,565 |
|
United Kingdom | 3,217 |
| | — |
| | 5,689 |
| | — |
|
Intercompany | (29,417 | ) | | (25,789 | ) | | (58,806 | ) | | (51,173 | ) |
Total | $ | 756,381 |
| | $ | 631,746 |
| | $ | 1,510,636 |
| | $ | 1,297,027 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
| |
(1) | Includes $10.4 million of charges related to the fair value step-up of inventories acquired and $16.7 million of restructuring costs in the six months ended June 26, 2016. |
| |
(2) | Includes $6.8 million of acquisition costs in the six months ended June 26, 2016. |
|
| | | | | | | |
SEGMENT INFORMATION | June 26, 2016 | | December 27, 2015 |
Total assets | | | |
Birds Eye Frozen | $ | 2,204,408 |
| | $ | 2,263,159 |
|
Duncan Hines Grocery | 2,629,048 |
| | 2,664,966 |
|
Boulder Brands | 1,271,670 |
| | — |
|
Specialty Foods | 340,645 |
| | 351,499 |
|
Corporate | 77,081 |
| | 44,539 |
|
Total | $ | 6,522,852 |
| | $ | 5,324,163 |
|
GEOGRAPHIC INFORMATION | | | |
Plant assets | | | |
United States | $ | 664,754 |
| | $ | 615,123 |
|
Canada | 32,322 |
| | 15,986 |
|
United Kingdom | 3,895 |
| | — |
|
Total | $ | 700,971 |
| | $ | 631,109 |
|
15. Provision for Income Taxes
The provision for income taxes and related effective tax rates for the three and six months ended June 26, 2016 and June 28, 2015, respectively, were as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
Provision for Income Taxes | June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Current | $ | 20,066 |
| | $ | 9,337 |
| | $ | 31,396 |
| | $ | 16,296 |
|
Deferred | 6,476 |
| | 14,624 |
| | 19,027 |
| | 33,123 |
|
Total | $ | 26,542 |
| | $ | 23,961 |
| | $ | 50,423 |
| | $ | 49,419 |
|
| | | | | | | |
Effective tax rate | 36.7 | % | | 35.4 | % | | 41.7 | % | | 36.7 | % |
Income taxes are accounted for in accordance with the authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between their financial statement basis and tax basis, using enacted tax rates in effect for the year in which the differences are expected to reverse.
In connection with our acquisition of Boulder, our effective income tax rate for the six months ended June 26, 2016 was increased by approximately 5.0% due to the tax effect of certain non-deductible acquisition costs and compensation payments, a charge for an increase in our non-current state deferred income tax liability balance and a charge related to the tax effect of foreign operations, principally attributable to a valuation allowance on our foreign tax credit carryforward. Our income tax rate for the six months ended June 26, 2016 and June 28, 2015 also reflects the benefit of the domestic production activities deduction and tax credits. For the six months ended June 28, 2015, it was also reduced by the effect of enacted state tax legislation.
For the three months ended June 26, 2016, our rate was impacted by the effect of certain non-deductible acquisition and compensation expenditures incurred in connection with our acquisition of Boulder. It also reflects the benefit of the domestic production activities deduction and tax credits. For the three months ended June 28, 2015, it was reduced by the effect of the domestic production activities deduction, tax credits and by enacted state tax legislation.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
The Company regularly evaluates its deferred tax assets for future realization. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Company's tax provision in the period of change and as noted above, for the six months ended June 26, 2016, a valuation allowance was recorded on our foreign tax credit carryforward in connection with our acquisition of Boulder Brands. There was no significant movement in our valuation allowances on state attribute carryforwards during the three and six months ended June 26, 2016 and for the three and six months ended June 28, 2015.
The Company is a loss corporation as defined by Internal Revenue Code (“the Code”) Section 382. Section 382 places an annual limitation on our ability to use our federal net operating loss (“NOL”) carryovers and other attributes to reduce future taxable income. As of June 26, 2016, we have federal NOL carryovers of $439.4 million subject to an annual limitation of $17.1 million. As a result, $237.2 million of the carryovers exceed the estimated available Section 382 limitation. The Company has reduced its deferred tax assets for this limitation.
On January 15, 2016 we acquired Boulder which is a loss corporation. As of the acquisition date, Boulder had approximately $46.0 million of federal NOL carryovers subject to the Section 382 provisions. The annual limitation is approximately $26.5 million subject to increase for recognized built in gains during the recognition period. Based on our analysis, we anticipate we will be able to utilize the acquired NOL balance in our 2016 tax year without limitation.
In connection with our acquisition of Boulder we also recorded, in purchase accounting, reserves for uncertain positions of approximately $5.4 million for a matter related to their foreign operations.
16. Recently Issued Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, "Improvements to Employee Share-Based Payment Accounting". The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance will be effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. The amendments related to the timing of when excess tax benefits are recognized are to be applied using a modified retrospective approach. The amendments related to the presentation of employee taxes paid on the statement of cash flows are to be applied retrospectively. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. The Company is in the process of evaluating this guidance.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The FASB is amending the FASB Accounting Standards Codification ("ASC") and creating Topic 842, Leases, which will supersede Topic 840, Leases. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Under the new guidance, lessees will be required to recognize the assets and liabilities arising from leases on the balance sheet. The updated guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. In transition to the new guidance, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is in the process of evaluating this guidance.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments will require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The updated guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted, and the amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company is in the process of evaluating this guidance.
In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”. The new guidance eliminates the requirement to retrospectively account for adjustments to provisional amounts recognized in a business combination. Under the ASU, the adjustments to the provisional amounts will be recognized in the reporting period in which the
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
adjustment amounts are determined. The updated guidance will be effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted, and the ASU should be applied prospectively. The Company has implemented this guidance in 2016 without material effect on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory", which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The ASU will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method (RIM). The updated guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating this guidance.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs". The new guidance changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The Company implemented this guidance in 2016. Refer to Note 2 for information.
In April 2015, the FASB issued ASU No. 2015-04, “Compensation-Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets". The new guidance gives an employer whose fiscal year-end does not coincide with a calendar month-end (e.g., an entity that has a 52- or 53-week fiscal year, as the Company does) the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month- end that is closest to its fiscal year-end. The updated guidance will be effective for annual reporting periods beginning after December 31, 2015, including interim periods within that reporting period. Early application is permitted, and the ASU should be applied prospectively. The Company implemented this guidance in 2015 without material effect on the consolidated financial statements.
In May 2014, the FASB issued revised guidance on the recognition of revenue from contracts with customers. The guidance is designed to create greater comparability for financial statement users across industries and jurisdictions. The guidance also requires enhanced disclosures. The guidance was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In April 2015, the FASB delayed the effective date of the new revenue guidance by one year. The updated guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Entities will be permitted to adopt the new revenue standard early, but not before the original effective date. The guidance permits the use of either a full retrospective or modified retrospective transition method. The Company is currently evaluating the impact that the new guidance will have on the consolidated financial statements, as well as which transition method it will use.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
17. Guarantor and Nonguarantor Statements
The Senior Notes are general senior unsecured obligations of Pinnacle Foods Finance, effectively subordinated in right of payment to all existing and future senior secured indebtedness of Pinnacle Foods Finance and guaranteed on a full, unconditional, joint and several basis by the Company and Pinnacle Foods Finance's 100% owned domestic subsidiaries that guarantee other indebtedness of the Pinnacle Foods Finance. The indenture governing the Senior Notes contains customary exceptions under which a guarantee of a guarantor subsidiary will terminate, including (1) the sale, exchange or transfer (by merger or otherwise) of the capital stock or all or substantially all of the assets of such guarantor subsidiary, (2) the release or discharge of the guarantee by such guarantor subsidiary of the Amended Credit Agreement or other guarantee that resulted in the creation of the guarantee, (3) the designation of such guarantor subsidiary as an “unrestricted subsidiary” in accordance with the indentures governing the Senior Notes and (4) upon the legal defeasance or covenant defeasance or discharge of the indentures governing the Senior Notes.
The following condensed consolidating financial information presents:
| |
(1) | (a) Condensed consolidating balance sheets as of June 26, 2016 and December 27, 2015. |
(b) The related condensed consolidating statements of operations and comprehensive earnings for the Company, Pinnacle Foods Finance, all guarantor subsidiaries and the non-guarantor subsidiaries for the following:
i. Three and six months ended June 26, 2016; and
ii. Three and six months ended June 28, 2015.
(c) The related condensed consolidating statements of cash flows for the Company, Pinnacle Foods Finance, all guarantor subsidiaries and the non-guarantor subsidiaries for the following:
i. Six months ended ended June 26, 2016; and
ii. Six months ended ended June 28, 2015.
| |
(2) | Elimination entries necessary to consolidate the Company, Pinnacle Foods Finance with its guarantor subsidiaries and non-guarantor subsidiaries. |
Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions and include a reclassification entry of net non-current deferred tax assets to non-current deferred tax liabilities.
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Inc. Condensed Consolidating Balance Sheet June 26, 2016 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations and Reclassifications | | Consolidated Total |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | — |
| | $ | 122,433 |
| | $ | 6,911 |
| | $ | — |
| | $ | 129,344 |
|
Accounts receivable, net | — |
| | — |
| | 258,122 |
| | 12,078 |
| | — |
| | 270,200 |
|
Intercompany accounts receivable | 92,756 |
| | — |
| | 791,709 |
| | 1,610 |
| | (886,075 | ) | | — |
|
Inventories, net | — |
| | — |
| | 425,019 |
| | 16,221 |
| | — |
| | 441,240 |
|
Other current assets | — |
| | 239 |
| | 15,838 |
| | 1,057 |
| | — |
| | 17,134 |
|
Deferred tax assets | — |
| | 1,670 |
| | 69,717 |
| | 1,233 |
| | — |
| | 72,620 |
|
Total current assets | 92,756 |
| | 1,909 |
| | 1,682,838 |
| | 39,110 |
| | (886,075 | ) | | 930,538 |
|
Plant assets, net | — |
| | — |
| | 664,754 |
| | 36,217 |
| | — |
| | 700,971 |
|
Investment in subsidiaries | 1,777,372 |
| | 2,476,347 |
| | 39,627 |
| | — |
| | (4,293,346 | ) | | — |
|
Intercompany note receivable | — |
| | 2,996,357 |
| | 44,914 |
| | 9,802 |
| | (3,051,073 | ) | | — |
|
Tradenames | — |
| | — |
| | 2,536,400 |
| | 4,538 |
| | — |
| | 2,540,938 |
|
Other assets, net | — |
| | 2,492 |
| | 166,423 |
| | 11,691 |
| | — |
| | 180,606 |
|
Deferred tax assets | — |
| | 343,347 |
| | — |
| | — |
| | (343,347 | ) | | — |
|
Goodwill | — |
| | — |
| | 2,115,319 |
| | 54,480 |
| | — |
| | 2,169,799 |
|
Total assets | $ | 1,870,128 |
| | $ | 5,820,452 |
| | $ | 7,250,275 |
| | $ | 155,838 |
| | $ | (8,573,841 | ) | | $ | 6,522,852 |
|
Current liabilities: | | | | | | | | | | | |
Short-term borrowings | $ | — |
| | $ | — |
| | $ | 1,758 |
| | $ | — |
| | $ | — |
| | $ | 1,758 |
|
Current portion of long-term obligations | — |
| | 10,750 |
| | 10,989 |
| | 15 |
| | — |
| | 21,754 |
|
Accounts payable | — |
| | — |
| | 209,180 |
| | 9,064 |
| | — |
| | 218,244 |
|
Intercompany accounts payable | — |
| | 857,303 |
| | 1,610 |
| | 27,210 |
| | (886,123 | ) | | — |
|
Accrued trade marketing expense | — |
| | — |
| | 38,931 |
| | 2,519 |
| | — |
| | 41,450 |
|
Accrued liabilities | 244 |
| | 34,052 |
| | 106,370 |
| | 3,490 |
| | — |
| | 144,156 |
|
Dividends payable | 30,998 |
| | — |
| | — |
| | — |
| | — |
| | 30,998 |
|
Total current liabilities | 31,242 |
| | 902,105 |
| | 368,838 |
| | 42,298 |
| | (886,123 | ) | | 458,360 |
|
Long-term debt | — |
| | 3,113,678 |
| | 21,029 |
| | 309 |
| | — |
| | 3,135,016 |
|
Intercompany note payable | — |
| | — |
| | 2,986,057 |
| | 64,968 |
| | (3,051,025 | ) | | — |
|
Pension and other postretirement benefits | — |
| | — |
| | 62,903 |
| | — |
| | — |
| | 62,903 |
|
Other long-term liabilities | — |
| | 27,297 |
| | 33,687 |
| | 3,375 |
| | — |
| | 64,359 |
|
Deferred tax liabilities | — |
| | — |
| | 1,301,414 |
| | 4,392 |
| | (343,347 | ) | | 962,459 |
|
Total liabilities | 31,242 |
| | 4,043,080 |
| | 4,773,928 |
| | 115,342 |
| | (4,280,495 | ) | | 4,683,097 |
|
Commitments and contingencies (Note 13) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Shareholders' equity: | | | | | | | | | | | |
Pinnacle common stock | 1,186 |
| | — |
| | — |
| | — |
| | — |
| | 1,186 |
|
Additional paid-in-capital | 1,404,567 |
| | 1,405,753 |
| | 1,313,141 |
| | 33,008 |
| | (2,751,902 | ) | | 1,404,567 |
|
Retained earnings | 528,180 |
| | 434,556 |
| | 1,199,791 |
| | 13,242 |
| | (1,647,589 | ) | | 528,180 |
|
Accumulated other comprehensive loss | (62,937 | ) | | (62,937 | ) | | (36,585 | ) | | (6,623 | ) | | 106,145 |
| | (62,937 | ) |
Capital stock in treasury, at cost | (32,110 | ) | | — |
| | — |
| | — |
| | — |
| | (32,110 | ) |
Total Pinnacle Foods Inc. and Subsidiaries stockholders' equity | 1,838,886 |
| | 1,777,372 |
| | 2,476,347 |
| | 39,627 |
| | (4,293,346 | ) | | 1,838,886 |
|
Non-controlling interest | — |
| | — |
| | — |
| | 869 |
| | — |
| | 869 |
|
Total Equity | 1,838,886 |
|
| 1,777,372 |
|
| 2,476,347 |
|
| 40,496 |
|
| (4,293,346 | ) |
| 1,839,755 |
|
Total liabilities and equity | $ | 1,870,128 |
| | $ | 5,820,452 |
| | $ | 7,250,275 |
| | $ | 155,838 |
| | $ | (8,573,841 | ) | | $ | 6,522,852 |
|
| | | | | | | | | | | |
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Inc. Condensed Consolidating Balance Sheet December 27, 2015 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations and Reclassifications | | Consolidated Total |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | — |
| | $ | 177,669 |
| | $ | 2,880 |
| | $ | — |
| | $ | 180,549 |
|
Accounts receivable, net | — |
| | — |
| | 214,690 |
| | 5,046 |
| | — |
| | 219,736 |
|
Intercompany accounts receivable | 92,475 |
| | — |
| | 725,074 |
| | — |
| | (817,549 | ) | | — |
|
Inventories, net | — |
| | — |
| | 392,404 |
| | 10,697 |
| | — |
| | 403,101 |
|
Other current assets | — |
| | 470 |
| | 11,860 |
| | 1,347 |
| | — |
| | 13,677 |
|
Deferred tax assets | — |
| | 1,670 |
| | 38,516 |
| | 385 |
| | — |
| | 40,571 |
|
Total current assets | 92,475 |
| | 2,140 |
| | 1,560,213 |
| | 20,355 |
| | (817,549 | ) | | 857,634 |
|
Plant assets, net | — |
| | — |
| | 615,123 |
| | 15,986 |
| | — |
| | 631,109 |
|
Investment in subsidiaries | 1,744,015 |
| | 2,428,472 |
| | 26,433 |
| | — |
| | (4,198,920 | ) | | — |
|
Intercompany note receivable | — |
| | 2,084,130 |
| | 8,398 |
| | 9,800 |
| | (2,102,328 | ) | | — |
|
Tradenames | — |
| | — |
| | 1,996,800 |
| | 4,248 |
| | — |
| | 2,001,048 |
|
Other assets, net | — |
| | 935 |
| | 118,621 |
| | 808 |
| | — |
| | 120,364 |
|
Deferred tax assets | — |
| | 332,372 |
| | — |
| | — |
| | (332,372 | ) | | — |
|
Goodwill | — |
| | — |
| | 1,692,715 |
| | 21,293 |
| | — |
| | 1,714,008 |
|
Total assets | $ | 1,836,490 |
| | $ | 4,848,049 |
| | $ | 6,018,303 |
| | $ | 72,490 |
| | $ | (7,451,169 | ) | | $ | 5,324,163 |
|
Current liabilities: | | | | | | | | | | | |
Short-term borrowings | $ | — |
| | $ | — |
| | $ | 2,225 |
| | $ | — |
| | $ | — |
| | $ | 2,225 |
|
Current portion of long-term obligations | — |
| | 5,250 |
| | 9,515 |
| | 82 |
| | — |
| | 14,847 |
|
Accounts payable | — |
| | — |
| | 206,082 |
| | 4,957 |
| | — |
| | 211,039 |
|
Intercompany accounts payable | — |
| | 815,100 |
| | — |
| | 2,449 |
| | (817,549 | ) | | — |
|
Accrued trade marketing expense | — |
| | — |
| | 44,096 |
| | 2,132 |
| | — |
| | 46,228 |
|
Accrued liabilities | 163 |
| | 18,152 |
| | 79,468 |
| | 2,727 |
| | — |
| | 100,510 |
|
Dividends payable | 30,798 |
| | — |
| | — |
| | — |
| | — |
| | 30,798 |
|
Total current liabilities | 30,961 |
| | 838,502 |
| | 341,386 |
| | 12,347 |
| | (817,549 | ) | | 405,647 |
|
Long-term debt | — |
| | 2,242,608 |
| | 14,055 |
| | 349 |
| | — |
| | 2,257,012 |
|
Intercompany note payable | — |
| | — |
| | 2,075,113 |
| | 27,215 |
| | (2,102,328 | ) | | — |
|
Pension and other postretirement benefits | — |
| | — |
| | 63,454 |
| | — |
| | — |
| | 63,454 |
|
Other long-term liabilities | — |
| | 22,924 |
| | 28,195 |
| | 3,387 |
| | — |
| | 54,506 |
|
Deferred tax liabilities | — |
| | — |
| | 1,067,628 |
| | 2,759 |
| | (332,372 | ) | | 738,015 |
|
Total liabilities | 30,961 |
| | 3,104,034 |
| | 3,589,831 |
| | 46,057 |
| | (3,252,249 | ) | | 3,518,634 |
|
Commitments and contingencies (Note 13) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Shareholders' equity: | | | | | | | | | | | |
Pinnacle common stock | 1,176 |
| | — |
| | — |
| | — |
| | — |
| | 1,176 |
|
Additional paid-in-capital | 1,378,521 |
| | 1,379,697 |
| | 1,301,642 |
| | 20,476 |
| | (2,701,815 | ) | | 1,378,521 |
|
Retained earnings | 517,330 |
| | 423,706 |
| | 1,169,032 |
| | 14,212 |
| | (1,606,950 | ) | | 517,330 |
|
Accumulated other comprehensive loss | (59,388 | ) | | (59,388 | ) | | (42,202 | ) | | (8,255 | ) | | 109,845 |
| | (59,388 | ) |
Capital stock in treasury, at cost | (32,110 | ) | | — |
| | — |
| | — |
| | — |
| | (32,110 | ) |
Total Shareholders' equity | 1,805,529 |
| | 1,744,015 |
| | 2,428,472 |
| | 26,433 |
| | (4,198,920 | ) | | 1,805,529 |
|
Total liabilities and shareholders' equity | $ | 1,836,490 |
| | $ | 4,848,049 |
| | $ | 6,018,303 |
| | $ | 72,490 |
| | $ | (7,451,169 | ) | | $ | 5,324,163 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Inc. Condensed Consolidating Statement of Operations and Comprehensive Earnings For the three months ended June 26, 2016 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net sales | $ | — |
| | $ | — |
| | $ | 741,576 |
| | $ | 44,222 |
| | $ | (29,417 | ) | | $ | 756,381 |
|
Cost of products sold | — |
| | — |
| | 525,536 |
| | 38,072 |
| | (28,419 | ) | | 535,189 |
|
Gross profit | — |
| | — |
| | 216,040 |
| | 6,150 |
| | (998 | ) | | 221,192 |
|
| | | | | | | | | | | |
Marketing and selling expenses | — |
| | — |
| | 59,356 |
| | 1,680 |
| | — |
| | 61,036 |
|
Administrative expenses | — |
| | — |
| | 41,281 |
| | 2,422 |
| | — |
| | 43,703 |
|
Research and development expenses | — |
| | — |
| | 4,967 |
| | 131 |
| | — |
| | 5,098 |
|
Intercompany royalties | — |
| | — |
| | (48 | ) | | 155 |
| | (107 | ) | | — |
|
Intercompany management fees | — |
| | — |
| | — |
| | 643 |
| | (643 | ) | | — |
|
Intercompany technical service fees | — |
| | — |
| | — |
| | 248 |
| | (248 | ) | | — |
|
Other expense (income), net | — |
| | (499 | ) | | 3,967 |
| | 101 |
| | — |
| | 3,569 |
|
Equity in (earnings) loss of investees | (45,784 | ) | | (52,539 | ) | | (683 | ) | | — |
| | 99,006 |
| | — |
|
| (45,784 | ) | | (53,038 | ) | | 108,840 |
| | 5,380 |
| | 98,008 |
| | 113,406 |
|
Earnings before interest and taxes | 45,784 |
| | 53,038 |
| | 107,200 |
| | 770 |
| | (99,006 | ) | | 107,786 |
|
Intercompany interest (income) expense | — |
| | (23,434 | ) | | 23,650 |
| | (216 | ) | | — |
| | — |
|
Interest expense | — |
| | 34,987 |
| | 491 |
| | 10 |
| | — |
| | 35,488 |
|
Interest income | — |
| | — |
| | 13 |
| | 14 |
| | — |
| | 27 |
|
Earnings before income taxes | 45,784 |
| | 41,485 |
| | 83,072 |
| | 990 |
| | (99,006 | ) | | 72,325 |
|
Provision (benefit) for income taxes | — |
| | (4,299 | ) | | 30,533 |
| | 308 |
| | — |
| | 26,542 |
|
Net earnings | 45,784 |
| | 45,784 |
| | 52,539 |
| | 682 |
| | (99,006 | ) | | 45,783 |
|
Less: Net loss attributable to non-controlling interest | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Net earnings attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders | $ | 45,784 |
|
| $ | 45,784 |
|
| $ | 52,539 |
|
| $ | 683 |
|
| $ | (99,006 | ) |
| $ | 45,784 |
|
| | | | | | | | | | | |
Total comprehensive earnings | 42,611 |
| | 42,611 |
| | 52,952 |
| | 903 |
| | (96,467 | ) | | 42,610 |
|
Less: Comprehensive loss attributable to non-controlling interest | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Comprehensive earnings attributable to Pinnacle Foods, Inc. and Subsidiaries | $ | 42,611 |
|
| $ | 42,611 |
|
| $ | 52,952 |
|
| $ | 904 |
|
| $ | (96,467 | ) |
| $ | 42,611 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Inc. Condensed Consolidating Statement of Operations and Comprehensive Earnings For the three months ended June 28, 2015 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net sales | $ | — |
| | $ | — |
| | $ | 626,468 |
| | $ | 31,067 |
| | $ | (25,789 | ) | | $ | 631,746 |
|
Cost of products sold | — |
| | 14 |
| | 461,850 |
| | 26,304 |
| | (25,531 | ) | | 462,637 |
|
Gross profit | — |
| | (14 | ) | | 164,618 |
| | 4,763 |
| | (258 | ) | | 169,109 |
|
| | | | | | | | | | | |
Marketing and selling expenses | — |
| | — |
| | 43,320 |
| | 2,378 |
| | — |
| | 45,698 |
|
Administrative expenses | — |
| | (129 | ) | | 26,308 |
| | 1,486 |
| | — |
| | 27,665 |
|
Research and development expenses | — |
| | — |
| | 3,449 |
| | 140 |
| | — |
| | 3,589 |
|
Intercompany royalties | — |
| | — |
| | — |
| | 8 |
| | (8 | ) | | — |
|
Intercompany technical service fees | — |
| | — |
| | — |
| | 250 |
| | (250 | ) | | — |
|
Other expense (income), net | — |
| | (522 | ) | | 2,830 |
| | 34 |
| | — |
| | 2,342 |
|
Equity in (earnings) loss of investees | (43,679 | ) | | (46,246 | ) | | (266 | ) | | — |
| | 90,191 |
| | — |
|
| (43,679 | ) | | (46,897 | ) | | 75,641 |
| | 4,296 |
| | 89,933 |
| | 79,294 |
|
Earnings before interest and taxes | 43,679 |
| | 46,883 |
| | 88,977 |
| | 467 |
| | (90,191 | ) | | 89,815 |
|
Intercompany interest (income) expense | — |
| | (17,181 | ) | | 16,908 |
| | 273 |
| | — |
| | — |
|
Interest expense | — |
| | 21,808 |
| | 367 |
| | 12 |
| | — |
| | 22,187 |
|
Interest income | — |
| | — |
| | 2 |
| | 10 |
| | — |
| | 12 |
|
Earnings before income taxes | 43,679 |
| | 42,256 |
| | 71,704 |
| | 192 |
| | (90,191 | ) | | 67,640 |
|
Provision (benefit) for income taxes | — |
| | (1,423 | ) | | 25,458 |
| | (74 | ) | | — |
| | 23,961 |
|
Net earnings | $ | 43,679 |
| | $ | 43,679 |
| | $ | 46,246 |
| | $ | 266 |
| | $ | (90,191 | ) | | $ | 43,679 |
|
| | | | | | | | | | | |
Total comprehensive earnings (loss) | $ | 45,715 |
| | $ | 45,715 |
| | $ | 46,100 |
| | $ | (31 | ) | | $ | (91,784 | ) | | $ | 45,715 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Inc. Condensed Consolidating Statement of Operations and Comprehensive Earnings For the six months ended June 26, 2016 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net sales | $ | — |
| | $ | — |
| | $ | 1,486,639 |
| | $ | 82,803 |
| | $ | (58,806 | ) | | $ | 1,510,636 |
|
Cost of products sold | — |
| | — |
| | 1,073,951 |
| | 73,981 |
| | (57,055 | ) | | 1,090,877 |
|
Gross profit | — |
| | — |
| | 412,688 |
| | 8,822 |
| | (1,751 | ) | | 419,759 |
|
| | | | | | | | | | | |
Marketing and selling expenses | — |
| | — |
| | 116,893 |
| | 3,041 |
| | — |
| | 119,934 |
|
Administrative expenses | — |
| | — |
| | 85,073 |
| | 4,518 |
| | — |
| | 89,591 |
|
Research and development expenses | — |
| | — |
| | 8,903 |
| | 380 |
| | — |
| | 9,283 |
|
Intercompany royalties | — |
| | — |
| | (304 | ) | | 483 |
| | (179 | ) | | — |
|
Intercompany management fees | — |
| | — |
| | — |
| | 1,074 |
| | (1,074 | ) | | — |
|
Intercompany technical service fees | — |
| | — |
| | — |
| | 498 |
| | (498 | ) | | — |
|
Other expense (income), net | — |
| | (1,283 | ) | | 14,035 |
| | 132 |
| | — |
| | 12,884 |
|
Equity in (earnings) loss of investees | (70,620 | ) | | (78,657 | ) | | 1,665 |
| | — |
| | 147,612 |
| | — |
|
| (70,620 | ) | | (79,940 | ) | | 226,265 |
| | 10,126 |
| | 145,861 |
| | 231,692 |
|
Earnings before interest and taxes | 70,620 |
| | 79,940 |
| | 186,423 |
| | (1,304 | ) | | (147,612 | ) | | 188,067 |
|
Intercompany interest (income) expense | — |
| | (51,692 | ) | | 51,582 |
| | 110 |
| | — |
| | — |
|
Interest expense | — |
| | 66,127 |
| | 979 |
| | 22 |
| | — |
| | 67,128 |
|
Interest income | — |
| | — |
| | 71 |
| | 33 |
| | — |
| | 104 |
|
Earnings (loss) before income taxes | 70,620 |
| | 65,505 |
| | 133,933 |
| | (1,403 | ) | | (147,612 | ) | | 121,043 |
|
Provision (benefit) for income taxes | — |
| | (5,115 | ) | | 55,276 |
| | 262 |
| | — |
| | 50,423 |
|
Net earnings (loss) | 70,620 |
| | 70,620 |
| | 78,657 |
| | (1,665 | ) | | (147,612 | ) | | 70,620 |
|
Less: Net earnings attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net earnings (loss) attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders | $ | 70,620 |
|
| $ | 70,620 |
|
| $ | 78,657 |
|
| $ | (1,665 | ) |
| $ | (147,612 | ) |
| $ | 70,620 |
|
| | | | | | | | | | | |
Total comprehensive earnings | 67,071 |
| | 67,071 |
| | 84,338 |
| | 3,634 |
| | (155,043 | ) | | 67,071 |
|
Less: Comprehensive earnings attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Comprehensive earnings attributable to Pinnacle Foods, Inc. and Subsidiaries | $ | 67,071 |
|
| $ | 67,071 |
|
| $ | 84,338 |
|
| $ | 3,634 |
|
| $ | (155,043 | ) |
| $ | 67,071 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Inc. Condensed Consolidating Statement of Operations and Comprehensive Earnings For the six months ended June 28, 2015 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net sales | $ | — |
| | $ | — |
| | $ | 1,287,635 |
| | $ | 60,565 |
| | $ | (51,173 | ) | | $ | 1,297,027 |
|
Cost of products sold | — |
| | 16 |
| | 957,236 |
| | 49,609 |
| | (50,660 | ) | | 956,201 |
|
Gross profit | — |
| | (16 | ) | | 330,399 |
| | 10,956 |
| | (513 | ) | | 340,826 |
|
| | | | | | | | | | | |
Marketing and selling expenses | — |
| | — |
| | 86,611 |
| | 6,096 |
| | — |
| | 92,707 |
|
Administrative expenses | — |
| | 3 |
| | 52,248 |
| | 3,200 |
| | — |
| | 55,451 |
|
Research and development expenses | — |
| | — |
| | 6,390 |
| | 251 |
| | — |
| | 6,641 |
|
Intercompany royalties | — |
| | — |
| | — |
| | 14 |
| | (14 | ) | | — |
|
Intercompany technical service fees | — |
| | — |
| | — |
| | 499 |
| | (499 | ) | | — |
|
Other expense (income), net | — |
| | 1,311 |
| | 6,396 |
| | 36 |
| | — |
| | 7,743 |
|
Equity in (earnings) loss of investees | (85,215 | ) | | (91,452 | ) | | (337 | ) | | — |
| | 177,004 |
| | — |
|
| (85,215 | ) | | (90,138 | ) | | 151,308 |
| | 10,096 |
| | 176,491 |
| | 162,542 |
|
Earnings before interest and taxes | 85,215 |
| | 90,122 |
| | 179,091 |
| | 860 |
| | (177,004 | ) | | 178,284 |
|
Intercompany interest (income) expense | — |
| | (34,359 | ) | | 33,829 |
| | 530 |
| | — |
| | — |
|
Interest expense | — |
| | 42,929 |
| | 863 |
| | 23 |
| | — |
| | 43,815 |
|
Interest income | — |
| | — |
| | 147 |
| | 18 |
| | — |
| | 165 |
|
Earnings (loss) before income taxes | 85,215 |
| | 81,552 |
| | 144,546 |
| | 325 |
| | (177,004 | ) | | 134,634 |
|
Provision (benefit) for income taxes | — |
| | (3,663 | ) | | 53,094 |
| | (12 | ) | | — |
| | 49,419 |
|
Net earnings (loss) | $ | 85,215 |
| | $ | 85,215 |
| | $ | 91,452 |
| | $ | 337 |
| | $ | (177,004 | ) | | $ | 85,215 |
|
| | | | | | | | | | | |
Total comprehensive earnings (loss) | $ | 78,054 |
| | $ | 78,054 |
| | $ | 90,511 |
| | $ | (925 | ) | | $ | (167,640 | ) | | $ | 78,054 |
|
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
Pinnacle Foods Inc. Condensed Consolidating Statement of Cash Flows For the six months ended June 26, 2016 |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations and Reclassifications | | Consolidated Total |
Cash flows from operating activities | | | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | (6,369 | ) | | $ | 11,481 |
| | $ | 139,564 |
| | $ | 20,427 |
| | $ | — |
| | $ | 165,103 |
|
Cash flows from investing activities | | | | | | | | | | | |
Business acquisition activity | — |
| | — |
| | (985,365 | ) | | — |
| | — |
| | (985,365 | ) |
Intercompany accounts receivable/payable | — |
| | 7,832 |
| | 13,588 |
| | — |
| | (21,420 | ) | | — |
|
Intercompany loans | — |
| | (880,122 | ) | | — |
| | — |
| | 880,122 |
| | — |
|
Investment in Subsidiary | 44,905 |
| | 33,726 |
| | — |
| | — |
| | (78,631 | ) | | — |
|
Capital expenditures | — |
| | — |
| | (57,086 | ) | | (3,101 | ) | | — |
| | (60,187 | ) |
Net cash (used in) provided by investing activities | 44,905 |
| | (838,564 | ) | | (1,028,863 | ) | | (3,101 | ) | | 780,071 |
| | (1,045,552 | ) |
Cash flows from financing activities | | | | | | | | | | | |
Net proceeds from issuance of common stock | 15,642 |
| | — |
| | — |
| | — |
| | — |
| | 15,642 |
|
Excess tax benefits on stock-based compensation | 6,369 |
| | — |
| | — |
| | — |
| | — |
| | 6,369 |
|
Taxes paid related to net share settlement of equity awards | (1,087 | ) | | — |
| | — |
| | — |
| | — |
| | (1,087 | ) |
Dividends paid | (59,460 | ) | | — |
| | — |
| | — |
| | — |
| | (59,460 | ) |
Proceeds from notes offering | — |
| | 350,000 |
| | — |
| | — |
| | — |
| | 350,000 |
|
Proceeds from bank term loans | — |
| | 547,250 |
| | — |
| | — |
| | — |
| | 547,250 |
|
Repayments of long-term obligations | — |
| | (4,000 | ) | | (2,478 | ) | | — |
| | — |
| | (6,478 | ) |
Proceeds from short-term borrowing | — |
| | — |
| | 1,604 |
| | — |
| | — |
| | 1,604 |
|
Repayments of short-term borrowing | — |
| | — |
| | (2,060 | ) | | — |
| | — |
| | (2,060 | ) |
Intercompany accounts receivable/payable | — |
| | — |
| | (7,832 | ) | | (13,588 | ) | | 21,420 |
| | — |
|
Return of capital | — |
| | (44,905 | ) | | (33,726 | ) | | — |
| | 78,631 |
| | — |
|
Intercompany loans | — |
| | — |
| | 880,122 |
| | — |
| | (880,122 | ) | | — |
|
Repayment of capital lease obligations | — |
| | — |
| | (1,567 | ) | | (7 | ) | | — |
| | (1,574 | ) |
Debt acquisition costs | — |
| | (21,262 | ) | | — |
| | — |
| | — |
| | (21,262 | ) |
Net cash (used in) provided by financing activities | (38,536 | ) | | 827,083 |
| | 834,063 |
| | (13,595 | ) | | (780,071 | ) | | 828,944 |
|
Effect of exchange rate changes on cash | — |
| | — |
| | — |
| | 300 |
| | — |
| | 300 |
|
Net change in cash and cash equivalents | — |
| | — |
| | (55,236 | ) | | 4,031 |
| | — |
| | (51,205 | ) |
Cash and cash equivalents - beginning of period | — |
| | — |
| | 177,669 |
| | 2,880 |
| | — |
| | 180,549 |
|
Cash and cash equivalents - end of period | $ | — |
| | $ | — |
| | $ | 122,433 |
| | $ | 6,911 |
| | $ | — |
| | $ | 129,344 |
|
| | | | | | | | | | | |
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
Pinnacle Foods Inc. Condensed Consolidating Statement of Cash Flows For the six months ended June 28, 2015 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pinnacle Foods Inc. | | Pinnacle Foods Finance LLC | | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Eliminations and Reclassifications | | Consolidated Total |
Cash flows from operating activities | | | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | — |
| | $ | (6,195 | ) | | $ | 137,365 |
| | $ | (6,736 | ) | | $ | — |
| | $ | 124,434 |
|
Cash flows from investing activities | | | | | | | | | | | |
Payments for business acquisitions | — |
|
| — |
|
| 1,102 |
|
| — |
|
| — |
| | 1,102 |
|
Intercompany accounts receivable/payable | — |
| | — |
| | (19,131 | ) | | — |
| | 19,131 |
| | — |
|
Intercompany loans | — |
| | — |
| | (7,209 | ) | | — |
| | 7,209 |
| | — |
|
Investment in subsidiaries | 55,248 |
| | — |
| | — |
| | — |
| | (55,248 | ) | | — |
|
Capital expenditures | — |
| | — |
| | (47,057 | ) | | (1,111 | ) | | — |
| | (48,168 | ) |
Net cash (used in) provided by investing activities | 55,248 |
| | — |
| | (72,295 | ) | | (1,111 | ) | | (28,908 | ) | | (47,066 | ) |
Cash flows from financing activities | | | | | | | | | | | |
Proceeds from the issuance of common stock | 824 |
| | — |
| | — |
| | — |
| | — |
| | 824 |
|
Excess tax benefits on stock-based compensation | 1,076 |
|
| — |
|
| — |
|
| — |
|
| — |
| | 1,076 |
|
Taxes paid related to net share settlement of equity awards | (2,401 | ) |
| — |
|
| — |
|
| — |
|
| — |
| | (2,401 | ) |
Dividends paid | (54,747 | ) | | — |
| | — |
| | — |
| | — |
| | (54,747 | ) |
Repayments of long-term obligations | — |
| | (2,626 | ) | | (1,796 | ) | | — |
| | — |
| | (4,422 | ) |
Proceeds from short-term borrowing | — |
| | — |
| | 1,710 |
| | — |
| | — |
| | 1,710 |
|
Repayments of short-term borrowing | — |
| | — |
| | (2,312 | ) | | — |
| | — |
| | (2,312 | ) |
Intercompany accounts receivable/payable | — |
| | 8,821 |
| | — |
| | 10,310 |
| | (19,131 | ) | | — |
|
Proceeds from Intercompany loans | — |
| | — |
| | — |
| | 7,209 |
| | (7,209 | ) | | — |
|
Parent investment | — |
| | — |
| | (55,248 | ) | | — |
| | 55,248 |
| | — |
|
Repayment of capital lease obligations | — |
| | — |
| | (1,871 | ) | | — |
| | — |
| | (1,871 | ) |
Net cash (used in) provided by financing activities | (55,248 | ) | | 6,195 |
| | (59,517 | ) | | 17,519 |
| | 28,908 |
|
| (62,143 | ) |
Effect of exchange rate changes on cash | — |
| | — |
| | — |
| | (346 | ) | | — |
| | (346 | ) |
Net change in cash and cash equivalents | — |
| | — |
| | 5,553 |
| | 9,326 |
| | — |
| | 14,879 |
|
Cash and cash equivalents - beginning of period | — |
| | — |
| | 32,942 |
| | 5,535 |
| | — |
| | 38,477 |
|
Cash and cash equivalents - end of period | $ | — |
| | $ | — |
| | $ | 38,495 |
| | $ | 14,861 |
| | $ | — |
| | $ | 53,356 |
|
| | | | | | | | | | | |
PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(thousands, except share and per share amounts and where noted in millions)
18. Subsequent events
On July 26, 2016, Pinnacle Foods Finance entered into amendments to the Amended Credit Agreement for the purpose of reducing the interest rate applicable to the Tranche I Term Loans (the “Repricing”). The eurocurrency rate was amended from a minimum of 0.75% to a minimum of 0.0% and the interest rate margin was amended from 3.00% to 2.75%. All other terms and conditions of the Tranche I Term Loans remained the same. As a result of the Repricing, the Company expects to benefit from approximately $10.0 million of cash interest savings over the remaining life of the loan. In connection with the Repricing, Pinnacle Foods Finance incurred approximately $1.2 million of fees.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements.” These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than our financial statements, including the Notes thereto, and statements of historical facts included elsewhere in this Report on Form 10-Q, including statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, financing needs, plans or intentions relating to acquisitions, business trends and other information referred to under “Management's Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. When used in this report, the words “estimates,” “expects,” “contemplates”, “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this report. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth in our Form 10-K filed with the SEC on February 25, 2016 under the section entitled “Risk Factors,” the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this report and the following risks, uncertainties and factors:
| |
• | our ability to predict, identify, interpret and respond to changes in consumer preferences; |
| |
• | the loss of any of our major customers; |
| |
• | our reliance on a single source provider for the manufacturing, co-packing and distribution of many of our products; |
| |
• | fluctuations in the price and supply of food ingredients, packaging materials and freight; |
| |
• | volatility in commodity prices and our failure to mitigate the risks related to commodity price fluctuation and foreign exchange risk through the use of derivative instruments; |
| |
• | costs and timeliness of integrating future acquisitions or our failure to realize anticipated cost savings, revenue enhancements or other synergies therefrom; |
| |
• | litigation or claims regarding our intellectual property rights or termination of our material licenses; |
| |
• | our ability to drive revenue growth in our key product categories or to add products that are in faster growing and more profitable categories; |
| |
• | potential product liability claims; |
| |
• | the funding of our defined benefit pension plan; |
| |
• | changes in our collective bargaining agreements or shifts in union policy; |
| |
• | changes in the cost of compliance with laws and regulations, including environmental, worker health and workplace safety laws and regulations; |
| |
• | our failure to comply with U.S Food & Drug Administration, U.S. Department of Agriculture or Federal Trade Commission regulations and the impact of governmental budget cuts; |
| |
• | disruptions in our information technology systems; |
| |
• | future impairments of our goodwill and intangible assets; |
| |
• | difficulty in the hiring or the retention of key management personnel; and |
| |
• | changes in tax statutes, tax rates, or case laws which impact tax positions we have taken. |
You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this report apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.
| |
ITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(dollars in millions, except where noted)
You should read the following discussion of our results of operations and financial condition together with the audited consolidated financial statements appearing in our annual report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 25, 2016 and the unaudited Consolidated Financial Statements and the notes thereto included in this quarterly report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Form 10-K, and the section entitled “Special Note Regarding Forward-Looking Statements” in this report. Actual results may differ materially from those contained in any forward-looking statements.
Overview
We are a leading manufacturer, marketer and distributor of high quality, branded food products in North America. The business is comprised of four segments: Birds Eye Frozen, Duncan Hines Grocery, Boulder Brands and Specialty Foods. The Company’s United States retail frozen vegetables (Birds Eye), frozen complete bagged meals (Birds Eye Voila!), frozen seafood (Van de Kamp’s and Mrs. Paul’s), plant-based protein frozen products (gardein), full-calorie single-serve frozen dinners and entrées (Hungry-Man), frozen breakfast (Aunt Jemima), frozen and refrigerated bagels (Lender’s), and frozen pizza for one (Celeste) are reported in the Birds Eye Frozen segment. The Company’s baking mixes and frostings (Duncan Hines), shelf-stable pickles (Vlasic), liquid and dry-mix salad dressings (Wish-Bone and Western), table syrups (Mrs. Butterworth’s and Log Cabin), canned meat (Armour, Nalley and Brooks), pie and pastry fillings (Duncan Hines Comstock and Wilderness), barbecue sauces (Open Pit) and Canadian operations other than gardein are reported in the Duncan Hines Grocery segment. The Boulder Brands segment is comprised of health and wellness brands including gluten-free products (Udi's and Glutino), natural frozen meal offerings (EVOL), refrigerated and shelf-stable spreads (Smart Balance), and plant-based refrigerated and shelf-stable spreads (Earth Balance). The Specialty Foods segment consists of snack products (Tim’s Cascade and Snyder of Berlin) and the Company’s food service and private label businesses, other than Boulder Brands and gardein.
Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets. Unallocated corporate expenses consist of corporate overhead such as executive management and finance and legal functions.
Business Drivers and Measures
In operating our business and monitoring its performance, we pay attention to trends in the food manufacturing industry and a number of performance measures and operational factors. The industry experiences volatility in overall commodity prices from time to time, which has historically been managed by increasing retail prices. However, over the past several years, significant macroeconomic weakness and ongoing pressures on the consumer have resulted in shifting consumer buying patterns for grocery products. As a result, industry volumes have come under pressure, hampering the ability of the industry to pass along higher input costs.
Industry Trends
Growth in our industry is driven primarily by population growth, changes in product selling prices and changes in consumption between out-of-home and in-home eating. In the current economic environment, consumers are looking for value alternatives, which have caused an increase in the percentage of products sold on promotion and a shift from traditional retail grocery to mass merchandisers, club stores and dollar store channels. We believe we are well positioned in grocery and non-traditional channels, maintaining strong customer relationships across key retailers in each segment.
In order to maintain and grow our business, we must successfully react to, and offer products that respond to, evolving consumer needs, such as changing health trends, the focus on convenience and the growth of smaller households. Incremental growth in the industry is principally driven by product and packaging innovation.
Revenue Factors
Our net sales are driven principally by the following factors:
| |
• | Gross sales, which change as a function of changes in volume and list price; and |
| |
• | the costs that we deduct from gross sales to arrive at net sales, which consist of: |
| |
◦ | Cash discounts, returns and other allowances. |
| |
◦ | Trade marketing expenses, which include the cost of temporary price reductions (“on sale” prices), promotional displays and advertising space in store circulars. |
| |
◦ | New product introductory (slotting) expenses, which are the costs of having certain retailers stock a new product, including amounts retailers charge for updating their warehousing systems, allocating shelf space and in-store systems set-up, among other things. |
| |
◦ | Consumer coupon redemption expenses, which are costs from the redemption of coupons we circulate as part of our marketing efforts. |
Cost Factors
| |
• | Costs recorded in Cost of products sold in the consolidated statement of operations include: |
| |
• | Raw materials, such as vegetables and fruits, proteins, grains and oils, sugars, seafood and other agricultural products, among others, are available from numerous independent suppliers but are subject to price fluctuations due to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, weather conditions and insects, among others. |
| |
• | Packaging costs. Our broad array of products entails significant costs for packaging and is subject to fluctuations in the price of steel, aluminum, glass jars, plastic bottles, corrugated fiberboard, and various poly-films. |
| |
• | Conversion costs, which include all costs necessary to convert raw materials into finished product. Key components of this cost include direct labor, and plant overhead such as salaries, benefits, utilities and depreciation. |
| |
• | Freight and distribution. We use a combination of common carriers and inter-modal rail to transport our products from our manufacturing facilities to distribution centers and to deliver products to our customers from both those centers and directly from our manufacturing plants. Our freight and distribution costs are influenced by fuel costs as well as capacity within the industry. |
| |
• | Costs recorded in marketing and selling expenses in the consolidated statement of operations include: |
| |
• | Advertising and other marketing expenses. These expenses represent advertising and other consumer and trade-oriented marketing programs. |
| |
• | Brokerage commissions and other overhead expenses. |
| |
• | Costs recorded in administrative and research and development expenses in the consolidated statement of operations include: |
| |
• | Administrative expenses. These expenses consist of personnel and facility charges and also include third party professional and other services. Our lean, nimble structure and efficient internal processes have enabled us to consistently hold our overhead costs (i.e., selling, general and administrative expenses, excluding one-time items affecting comparability) to approximately 9% of net sales on an annual basis. |
| |
• | Research and Development. These expenses consist of personnel and facility charges and include expenditures on new products and the improvement and maintenance of existing products and processes. |
Working Capital
Our working capital is primarily driven by accounts receivable and inventories, which fluctuate throughout the year due to seasonality in both sales and production. See “Seasonality” below. We will continue to focus on reducing our working capital requirements while simultaneously maintaining our customer service levels and fulfilling our production requirements. We have historically relied on internally generated cash flows and temporary borrowings under our revolving credit facility to satisfy our working capital requirements.
Other Factors
Other factors that have influenced our results of operations and may do so in the future include:
| |
• | Interest Expense. Our IPO and debt refinancings have improved our debt profile and significantly reduced our leverage. However, as a result of our previous acquisitions and the recent Boulder transaction, we still have significant indebtedness. Although we expect to continue to reduce our leverage over time, we expect interest expense to continue to be a significant component of our expenses. |
| |
• | Cash Taxes. We had significant tax-deductible intangible asset amortization and federal and state NOLs, which resulted in minimal federal and state cash taxes through 2015. Continued amortization and utilization of our remaining NOLs will generate modest annual cash savings for 2016 and thereafter. |
| |
• | Acquisitions and Consolidations. We believe we have the expertise to identify and integrate value-enhancing acquisitions to grow our business and we have done so successfully in the past. On November 14, 2014, we acquired Garden Protein for $156.5 million, the rapidly growing manufacturer of the plant-based protein brand gardein. On August 20, 2015 we acquired a manufacturing facility in Hagerstown, Maryland for approximately $8.0 million. The site will be used to expand production capabilities for the gardein brand and provide an East coast footprint to supplement the existing Richmond, British Columbia manufacturing location. We expect to invest approximately $30.0 million for the gardein capacity expansion in 2016. We also expect to incur approximately $7.0 million of additional charges to integrate the location in 2016, of which $1.4 million was incurred in the first half of 2016. As previously mentioned, on January 15, 2016, the Company acquired Boulder Brands for a cost of $1,004.4 million (which included $16.1 million of cash acquired), which included the repayment of debt. Total acquisition and financing costs of $32.9 million have been incurred, of which $2.1 million was incurred in the fourth quarter of 2015, with the remainder in the first quarter of 2016. Included in this total is $24.4 million of debt acquisition costs, including original issue discount. During 2016, we expect one-time costs associated with the integration of Boulder to approximate $30.0 million, of which $22.4 million was incurred in the first half of 2016. |
Seasonality
Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including frozen vegetables and frozen complete bagged meals, tend to be marginally higher during the winter months. Seafood sales peak during Lent, in advance of the Easter holiday. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines products, Birds Eye vegetables and our pie and pastry fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. Since many of the raw materials we process under the Birds Eye, Vlasic, Duncan Hines Comstock and Wilderness brands are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. We also increase our Duncan Hines inventories in advance of the peak fall selling season. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months. Typically, we are a seasonal net user of cash in the third quarter of the calendar year.
Inflation
To the extent possible, we strive to offset the effects of inflation with cost reduction and productivity programs.We expect to spend approximately $2.3 billion annually on Cost of products sold, therefore each 1% change in our weighted average cost of inputs would increase our Cost of products sold by approximately $23 million. If we experience significant inflation, price increases may be necessary in order to preserve our margins and returns. However, over the past several years, significant macroeconomic weakness and ongoing pressures on the consumer have resulted in shifting consumer buying patterns for grocery products. As a result, industry volumes have come under pressure, hampering our ability to pass along higher input costs. Severe increases in inflation could have an adverse impact on our business, financial condition and results of operations.
Results of Operations:
Consolidated Statements of Operations
The following tables set forth our statement of operations data expressed in dollars and as a percentage of net sales.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Net sales | $ | 756.4 |
| | 100.0 | % | | $ | 631.7 |
| | 100.0 | % | | $ | 1,510.6 |
|
| 100.0 | % |
| $ | 1,297.0 |
|
| 100.0 | % |
Cost of products sold | 535.2 |
| | 70.8 | % | | 462.6 |
| | 73.2 | % | | 1,090.9 |
|
| 72.2 | % |
| 956.2 |
|
| 73.7 | % |
Gross profit | 221.2 |
| | 29.2 | % | | 169.1 |
| | 26.8 | % | | 419.8 |
|
| 27.8 | % |
| 340.8 |
|
| 26.3 | % |
| | |
| | | |
| | | | | | | | |
Marketing and selling expenses | $ | 61.0 |
| | 8.1 | % | | $ | 45.7 |
| | 7.2 | % | | $ | 119.9 |
|
| 7.9 | % |
| $ | 92.7 |
|
| 7.1 | % |
Administrative expenses | 43.7 |
| | 5.8 | % | | 27.7 |
| | 4.4 | % | | 89.6 |
|
| 5.9 | % |
| 55.5 |
|
| 4.3 | % |
Research and development expenses | 5.1 |
| | 0.7 | % | | 3.6 |
| | 0.6 | % | | 9.3 |
|
| 0.6 | % |
| 6.6 |
|
| 0.5 | % |
Other expense (income), net | 3.6 |
| | 0.5 | % | | 2.3 |
| | 0.4 | % | | 12.9 |
|
| 0.9 | % |
| 7.7 |
|
| 0.6 | % |
| $ | 113.4 |
| | 15.0 | % | | $ | 79.3 |
| | 12.6 | % | | $ | 231.7 |
|
| 15.3 | % |
| $ | 162.5 |
|
| 12.5 | % |
Earnings before interest and taxes | $ | 107.8 |
| | 14.3 | % | | $ | 89.8 |
| | 14.2 | % | | $ | 188.1 |
|
| 12.5 | % |
| $ | 178.3 |
|
| 13.7 | % |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Net sales | | | | | | | |
Birds Eye Frozen | $ | 285.2 |
| | $ | 268.9 |
| | $ | 615.2 |
| | $ | 586.7 |
|
Duncan Hines Grocery | 270.5 |
| | 278.0 |
| | 513.7 |
| | 539.2 |
|
North America Retail | 555.6 |
| | 546.9 |
| | 1,128.8 |
| | 1,125.9 |
|
| | | | | | | |
Boulder Brands | 122.6 |
| | — |
| | 223.5 |
| | — |
|
Specialty Foods | 78.1 |
| | 84.9 |
| | 158.4 |
| | 171.1 |
|
Total | $ | 756.4 |
| | $ | 631.7 |
| | $ | 1,510.6 |
| | $ | 1,297.0 |
|
| | | | | | | |
Earnings (loss) before interest and taxes | | | | | | | |
Birds Eye Frozen | $ | 46.8 |
| | $ | 38.0 |
| | $ | 102.0 |
| | $ | 81.3 |
|
Duncan Hines Grocery | 52.3 |
| | 51.0 |
| | 94.9 |
| | 94.2 |
|
Boulder Brands | 7.0 |
| | — |
| | (4.2 | ) | | — |
|
Specialty Foods | 6.3 |
| | 7.6 |
| | 13.3 |
| | 15.3 |
|
Unallocated corporate expense | (4.6 | ) | | (6.8 | ) | | (17.9 | ) | | (12.5 | ) |
Total | $ | 107.8 |
| | $ | 89.8 |
| | $ | 188.1 |
| | $ | 178.3 |
|
| | | | | | | |
Depreciation and amortization | | | | | | | |
Birds Eye Frozen | $ | 10.9 |
| | $ | 10.7 |
| | $ | 22.0 |
| | $ | 21.4 |
|
Duncan Hines Grocery | 7.8 |
| | 8.1 |
| | 15.2 |
| | 15.1 |
|
Boulder Brands | 4.7 |
| | — |
| | 7.7 |
| | — |
|
Specialty Foods | 3.4 |
| | 3.5 |
| | 6.8 |
| | 6.7 |
|
Total | $ | 26.8 |
| | $ | 22.3 |
| | $ | 51.7 |
| | $ | 43.2 |
|
Adjustments to Earnings before Interest and Taxes used in the calculation of Adjusted EBITDA as described below in the "Covenant Compliance" section, by Segment, are as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Adjustments to Earnings before interest and taxes | | | | | | | |
Birds Eye Frozen | $ | (1.4 | ) | | $ | (1.5 | ) | | $ | (3.3 | ) | | $ | 2.0 |
|
Duncan Hines Grocery | (1.6 | ) | | (1.0 | ) | | (3.2 | ) | | 2.4 |
|
Boulder Brands | 10.2 |
| | — |
| | 33.6 |
| | — |
|
Specialty Foods | (0.2 | ) | | (0.3 | ) | | (0.4 | ) | | (0.2 | ) |
Unallocated corporate expense | — |
| | — |
| | 6.8 |
| | — |
|
| | | | | | | |
Three months ended June 26, 2016 compared to the three months ended June 28, 2015
Net sales
Net sales for the three months ended June 26, 2016 increased $124.6 million, or 19.7%, versus year-ago to $756.4 million, reflecting a 19.4% increase from the benefit of the Boulder acquisition and higher net price realization of 1.3%, partially offset by a 0.9% decrease from volume/mix and unfavorable foreign currency translation of 0.1%.
Net sales in our North America Retail business for the three months ended June 26, 2016 increased $8.8 million, or 1.6%, versus year-ago to $555.6 million, reflecting a 1.4% increase from higher net price realization and a 0.3% increase due to volume/mix, partially offset by unfavorable foreign currency translation of 0.1%. Our North American Retail business continued to outpace the performance of our composite categories, with market share growth of 0.7 percentage points in the quarter.
Birds Eye Frozen Segment:
Net sales in the three months ended June 26, 2016 increased $16.3 million, or 6.1%, versus year-ago to $285.2 million, reflecting a 3.6% increase from volume/mix and higher net price realization of 2.5%, despite higher new product introductory expenses. During the period we realized continued strong sales from the Birds Eye franchise and our gardein plant-based protein products. Recent innovation and strength of existing products continue to fuel the growth of the Birds Eye franchise. Also positively impacting net sales for the period were higher sales of Hungry-Man products.
Duncan Hines Grocery Segment:
Net sales in the three months ended June 26, 2016 were $270.5 million, a decline of $7.5 million, or 2.7% versus year-ago, reflecting a 2.9% decrease from volume/mix and unfavorable foreign currency translation of 0.3%, partially offset by higher net price realization of 0.5%. The period benefited from higher sales of our Armour canned meats. This increase was more than offset by lower net sales of our Wish-Bone products, pressured by ongoing category weakness and new product introductory expenses related to our Wish-Bone EVOO and Wish-Bone Ristorante Italiano product lines. Also impacting the period was a decline in our Canadian business, primarily due to lower volumes and the unfavorable impact from foreign exchange.
Boulder Brands Segment:
Net sales in the three months ended June 26, 2016 were $122.6 million. Retail consumption since the acquisition has advanced for the Glutino, Udi's, Earth Balance and EVOL brands, offset by a moderating decline for Smart Balance.
Specialty Foods Segment:
Net sales in the three months ended June 26, 2016 were $78.1 million, a decline of $6.7 million, or 7.9% versus year-ago, reflecting an 8.2% decrease from volume/mix, offset partially by higher net pricing of 0.3%. This decrease was primarily driven by lower sales of private label canned meat.
Gross profit
Gross profit for the three months ended June 26, 2016 was $221.2 million, or 29.2% of net sales, compared to $169.1 million, or 26.8% of net sales, in the comparable prior year period. Impacting gross profit in the second quarter of 2016 were lower expenses related to acquisition integrations and lower mark to market gains on financial instruments. Excluding these and other items affecting comparability, Adjusted gross profit advanced 31.4% and Adjusted gross profit percentage increased approximately 260 basis points to 28.9%, primarily reflecting strong productivity, favorable product mix, including the benefit of Boulder, and higher net price realization. Partially offsetting these positive drivers were modest inflation and higher depreciation expense.
The following table outlines the factors resulting in the year on year change in gross profit and gross margin percentage in the three months ended June 26, 2016.
|
| | | | | | |
| $ (in millions) | | % Net sales |
Productivity | $ | 17.0 |
| | 2.1 | % |
Favorable product mix (including Boulder) | 8.7 |
| | 0.9 |
|
Higher net price realization, net of slotting | 7.4 |
| | 0.7 |
|
Inflation | (6.0 | ) | | (0.8 | ) |
Higher depreciation expense | (0.6 | ) | | (0.1 | ) |
Lower mark to market gains on financial instruments | (0.9 | ) | | (0.1 | ) |
Other (a) | (3.1 | ) | | (0.2 | ) |
Subtotal | $ | 22.5 |
| | 2.5 | % |
Higher sales volume (including Boulder Brands) | 29.6 |
| | |
Total | $ | 52.1 |
| | |
(a) Consists primarily of higher finished product and packaging obsolescence and the unfavorable impact of currency.
Marketing and selling expenses
Marketing and selling expenses increased 33.6% to $61.0 million, or 8.1% of net sales, for the three months ended June 26, 2016, compared to $45.7 million, or 7.2% of net sales for the prior year period. The increase primarily reflected a double digit increase in marketing investment on the base business and the inclusion of Boulder.
Administrative expenses
Administrative expenses were $43.7 million, or 5.8% of net sales, for the three months ended June 26, 2016, compared to $27.7 million, or 4.4% of net sales, for the comparable prior year period. The increase was primarily driven by the addition of Boulder, which included $6.1 million of restructuring costs in the current quarter.
Research and development expenses
Research and development expenses were $5.1 million, or 0.7% of net sales, for the three months ended June 26, 2016 compared to $3.6 million, or 0.6% of net sales, for the prior year period primarily reflecting higher expenses as a result of the Boulder acquisition.
Other income and expense
|
| | | | | | | |
| Three months ended |
| June 26, 2016 | | June 28, 2015 |
Other expense (income), net consists of: | | | |
Amortization of intangibles/other assets | $ | 4.3 |
| | $ | 3.4 |
|
Foreign exchange gains | (0.5 | ) | | (0.7 | ) |
Royalty income and other | (0.2 | ) | | (0.4 | ) |
Total other expense (income), net | $ | 3.6 |
| | $ | 2.3 |
|
Foreign exchange gains. Represents foreign exchange gains from intra-entity loans resulting from the November 2014 Garden Protein acquisition that are anticipated to be settled in the foreseeable future.
Earnings before interest and taxes
Earnings before interest and taxes increased $18.0 million, or 20.0%, to $107.8 million. Items affecting comparability in the three months ended June 26, 2016 and June 28, 2015, were $7.0 million of charges and $2.8 million of credits, respectively. The variance in these items primarily resulted from higher restructuring and integration costs resulting from the Boulder acquisition and lower unrealized mark to market gains on financial instruments. Excluding items affecting comparability, Adjusted earnings before interest and taxes increased $27.8 million, or 31.9%, reflecting the growth in gross profit, partially offset by higher marketing and selling driven by a double digit increase in marketing investment, and higher administrative expenses primarily due to the inclusion of Boulder Brands.
Birds Eye Frozen Segment:
Earnings before interest and taxes for the three months ended June 26, 2016 increased 23.2%, or $8.8 million, versus year-ago to $46.8 million for the three months ended June 26, 2016. Excluding items affecting comparability, Adjusted earnings before interest and taxes advanced 24.5% to $45.4 million, reflecting the benefits of net sales growth and productivity savings, partially offset by very modest input cost inflation and increased investment in consumer marketing.
Duncan Hines Grocery Segment:
Earnings before interest and taxes for the three months ended June 26, 2016 were $52.3 million, an increase of 2.4%, or $1.2 million, as compared to the year-ago period. Excluding items affecting comparability, Adjusted earnings before interest and taxes advanced 1.2% to $50.7 million, reflecting productivity savings partially offset by lower volumes and modest input cost inflation.
Boulder Brands Segment:
Earnings before interest and taxes for the three months ended June 26, 2016 were $7.0 million, reflecting significant restructuring expenses. Excluding items affecting comparability, Adjusted earnings before interest and taxes for the Boulder Brands segment totaled $17.2 million.
Specialty Foods Segment:
Earnings before interest and taxes for the three months ended June 26, 2016 were $6.3 million, a decline of 16.7%, or $1.3 million, as compared to the year-ago period. Excluding items affecting comparability, Adjusted earnings before interest and taxes decreased 15.7%, to $6.1 million, largely reflecting the decline in net sales.
Unallocated corporate expense:
Unallocated corporate expense for the three months ended June 26, 2016 was $4.6 million, a decline of $2.2 million, as compared to the year-ago period. The decline primarily reflected lower equity based compensation expense driven by the change in CEO.
Interest expense, net
Net interest expense increased 59.9%, or $13.3 million, to $35.5 million in the three months ended June 26, 2016, compared to $22.2 million in the three months ended June 28, 2015. The increase was largely driven by additional debt issued to finance the Boulder acquisition and, to a lesser extent, the impact of higher interest expense for floating rate debt. Also impacting the comparison were higher interest rate swap losses described below.
We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements, excluding the AOCL portion, are recorded as an adjustment to interest expense. Included in net interest expense was $2.2 million and $1.0 million for the second quarters of 2016 and 2015, respectively, recorded from losses on interest rate swap agreements.
Provision for income taxes
The effective tax rate was 36.7% for the three months ended June 26, 2016 compared to 35.4% for the three months ended June 28, 2015.
Our effective rate for the three months ended June 26, 2016 increased by 1.4% compared to the three months ended June 28, 2015 due to certain non-deductible acquisition and compensation expenditures incurred in connection with our acquisition of Boulder. This increase was partially offset by an incremental benefit of 0.8% from our domestic production activities deduction as compared to the three months ended June 28, 2015. Our effective rate for the three months ended June 28, 2015 also included a benefit of 0.8% for enacted state law changes.
The Company is a loss corporation as defined by Section 382 of the Code. Section 382 places an annual limitation on our ability to use our NOL carryovers and other attributes to reduce future taxable income. As of June 26, 2016, we have federal NOL carryovers of $439.4 million subject to an annual limitation of $17.1 million. As a result, $237.2 million of the carryovers exceed the estimated available Section 382 limitation. The Company has reduced its deferred tax assets for this limitation.
We have significant tax-deductible intangible asset amortization and federal and state NOLs, which resulted in minimal federal and state cash taxes through 2015. We expect continued amortization and utilization of our NOLs will generate modest annual cash tax savings in 2016 and thereafter.
Six months ended June 26, 2016 compared to the six months ended June 28, 2015
Net sales
Net sales for the six months ended June 26, 2016 increased $213.6 million, or 16.5%, versus year-ago to $1.51 billion, reflecting a 17.2% increase from the benefit of the Boulder acquisition and higher net price realization of 0.8% partially offset by a 1.3% decrease from volume/mix. The period also was impacted by unfavorable foreign currency translation of 0.2%.
Net sales in our North American retail business for the six months ended June 26, 2016 increased 0.3% versus year-ago to $1.13 billion, reflecting higher net price realization of 0.8%, offset by a 0.4% decrease from volume/mix. Also impacting the comparison was unfavorable foreign currency translation of 0.1%. We continued to outpace the performance of our composite categories, with market share growth in the six months of 0.8 percentage points.
Birds Eye Frozen Segment:
Net sales in the six months ended June 26, 2016 increased 4.8% versus year-ago to $615.2 million, reflecting a 3.5% increase from volume/mix and higher net price realization of 1.4%. Also impacting the comparison was unfavorable foreign currency translation of 0.1%. During the period we realized continued strong sales from the Birds Eye franchise, our gardein plant-based protein products and our Hungry-Man frozen entrées. Products launched in 2015 such as Birds Eye Steamfresh Flavor Full, BirdsEye Protein Blends and Birds Eye Disney-themed side dishes for kids, fueled the growth of Birds Eye vegetables, while distribution gains and the expansion of Family Size offerings and premium tier varieties drove the growth of Birds Eye Voila!. Partially offsetting these positive drivers were lower sales of our Seafood business, driven by category weakness, and lower sales of our Aunt-Jemima products.
Duncan Hines Grocery Segment:
Net sales in the six months ended June 26, 2016 were $513.7 million, a decline of 4.7%, reflecting higher net price realization of 0.2% more than offset by a 4.6% decrease from volume/mix and unfavorable foreign currency translation of 0.3%. Impacting the period were lower sales of our Duncan Hines baking products due to category weakness, lower sales of Wish-Bone products, reflecting a highly competitive category environment and new product introductory expenses from the launch of our two new product lines, Wish-Bone EVOO and Wish-Bone Ristorante Italiano dressing. Also impacting the period was lower net sales from our Canadian operations, including the unfavorable impact from foreign exchange.
Boulder Brands Segment:
Net sales in the six months ended June 26, 2016 were $223.5 million, representing the January 15, 2016 to June 26, 2016 time period in which Boulder Brands was consolidated.
Specialty Foods Segment:
Net sales in the six months ended June 26, 2016 decreased 7.4% versus year-ago to $158.4 million, reflecting a 7.2% decline from volume/mix and lower net pricing of 0.2%. This decline was primarily driven by decreased sales of private label canned meat.
Gross profit
Gross profit for the six months ended June 26, 2016 was $419.8 million, or 27.8% of net sales, compared to $340.8 million, or 26.3% of net sales, in the comparable prior year period. Impacting gross profit in the six months ended June 26, 2016 were expenses related to the write-up to fair market value of inventories acquired as a result of the Boulder acquisition and higher mark to market gains on financial instruments. Excluding these and other items affecting comparability, Adjusted gross profit advanced 24.3% and gross profit percentage increased 180 basis points to 28.1%. The increased margin largely reflected strong productivity, favorable product mix and the benefits of higher net price realization partially offset by the impacts of input cost inflation, higher depreciation and other items.
The following table outlines the factors resulting in the year on year change in gross profit and gross margin percentage in the six months ended June 26, 2016.
|
| | | | | | |
| $ (in millions) | | % Net sales |
Productivity | $ | 31.0 |
| | 2.0 | % |
Favorable product mix (Including Boulder) | 13.7 |
| | 0.8 |
|
Higher net price realization, net of slotting | 8.2 |
| | 0.4 |
|
Higher mark-to-market gains on financial instruments | 2.9 |
| | 0.2 |
|
Inflation | (14.0 | ) | | (0.9 | ) |
Effects of adjustments related to the application of purchase accounting (a)
| (10.4 | ) | | (0.7 | ) |
Higher depreciation expense (b) | (2.2 | ) | | (0.1 | ) |
Other (c) | (3.0 | ) | | (0.2 | ) |
Subtotal | $ | 26.2 |
| | 1.5 | % |
Higher sales volume | 52.7 |
| | |
Total | $ | 78.9 |
| | |
(a) Represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder acquisition.
(b) The increase primarily relates to the insourcing of the manufacturing of Wish-Bone into our St. Elmo, Illinois location.
(c) Consist primarily of higher finished product and packaging obsolescence and the unfavorable impact of currency.
Marketing and selling expenses
Marketing and selling expenses were $119.9 million, or 7.9% of net sales, for the six months ended June 26, 2016, compared to $92.7 million, or 7.1% of net sales, for the comparable prior year period. The increase primarily reflected the impact of the Boulder acquisition and an increase in marketing investment, including new product introductions.
Administrative expenses
Administrative expenses were $89.6 million, or 5.9% of net sales, for the six months ended June 26, 2016, compared to $55.5 million, or 4.3% of net sales, for the comparable prior year period. The increase was primarily driven by the addition of Boulder, which included $16.7 million of restructuring costs in the current period.
Research and development expenses:
Research and development expenses were $9.3 million, or 0.6% of net sales, for the six months ended June 26, 2016 compared to $6.6 million, or 0.5% of net sales, for the comparable prior year period. The increase primarily reflected higher expenses as a result of the Boulder acquisition and innovation related expenses.
Other income and expense
|
| | | | | | | |
| Six months ended |
| June 26, 2016 | | June 28, 2015 |
Other expense (income), net consists of: | | | |
Amortization of intangibles/other assets | $ | 8.4 |
| | $ | 6.8 |
|
Foreign exchange losses | (1.3 | ) | | 1.6 |
|
Boulder acquisition costs | 6.8 |
| | — |
|
Royalty income and other | (1.0 | ) | | (0.6 | ) |
Total other expense (income), net | $ | 12.9 |
| | $ | 7.7 |
|
Foreign exchange losses. Represents foreign exchange losses from intra-entity loans resulting from the Garden Protein acquisition that are anticipated to be settled in the foreseeable future.
Earnings before interest and taxes
Earnings before interest and taxes for the six months ended June 26, 2016 increased $9.8 million, or 5.5%, versus year-ago to $188.1 million. Items affecting comparability in the six months ended June 26, 2016 and June 28, 2015 were $33.5 million and $4.2 million of charges, respectively. The variance in these items was largely driven by acquisition related expenses in the current period. Excluding these items, Adjusted earnings before interest and taxes increased $39.1 million, or 21.4%, primarily resulting from increased gross profit, partially offset by higher marketing and selling and administrative expenses due to the consolidation of the Boulder acquisition.
Birds Eye Frozen Segment:
Earnings before interest and taxes for the six months ended June 26, 2016 were $102.0 million, an increase of $20.8 million, or 25.6%, as compared to the year-ago period. Excluding items affecting comparability, Adjusted earnings before interest and taxes increased $15.5 million, or 18.7%, largely reflecting increased gross profit driven by the benefit of net sales growth and productivity savings, partially offset by input cost inflation.
Duncan Hines Grocery Segment:
Earnings before interest and taxes for the six months ended June 26, 2016 were $94.9 million, an increase of $0.6 million, or 0.6%, as compared to the year-ago period. Excluding items affecting comparability, Adjusted earnings before interest and taxes declined $4.9 million, or 5.1%, largely reflecting lower volume, higher new product introductory expenses, higher depreciation expenses and input cost inflation, partially offset by productivity savings.
Boulder Brands Segment:
Loss before interest and taxes was $4.2 million, reflecting significant acquisition related expenses. Excluding items affecting comparability, Adjusted earnings before interest and taxes for the Boulder Brands segment totaled $29.4 million.
Specialty Foods Segment:
Earnings before interest and taxes for the six months ended June 26, 2016 were $13.3 million, a decline of $2.0 million, or 13.4%, versus year-ago. Excluding items affecting comparability, Adjusted earnings before interest and taxes decreased $2.3 million or 15.2%, largely reflecting the decline in net sales and unfavorable product mix.
Unallocated corporate expense:
Unallocated corporate expense for the six months ended June 26, 2016 was $17.9 million, as compared to $12.5 million in the year ago period. The increase primarily reflected the impact of the Boulder acquisition costs and lower equity based compensation expense driven by the change in CEO.
Interest expense, net
Net interest expense increased 53.5%, or $23.4 million, to $67.0 million in the six months ended June 26, 2016 from $43.7 million in the nine months ended June 28, 2015. The increase was largely driven by additional debt issued to finance the Boulder acquisition and, to a lesser extent, the impact of higher interest expense for floating rate debt. Also impacting the comparison were higher interest rate swap losses described below.
We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements, excluding the AOCL portion, are recorded as an adjustment to interest expense. Included in net interest expense was $3.7 million and $1.4 million for the first six months of 2016 and 2015, respectively, recorded from losses on interest rate swap agreements.
Provision for income taxes
The effective tax rate was 41.7% for the six months ended June 26, 2016 compared to 36.7% for the six months ended June 28, 2015.
In connection with our acquisition of Boulder Brands, Inc., our effective income tax rate for the six months ended June 26, 2016 was increased by approximately 5.0% due to the tax effect of certain non-deductible acquisition costs and compensation payments, a charge for an increase in our non-current state deferred income tax liability balance and a charge related to the tax effect of foreign operations, principally attributable to a valuation allowance on our foreign tax credit carryforward. Our income tax rate for the six months ended June 26, 2016 and June 28, 2015 also reflects the benefit of the domestic production activities deduction and tax credits. For the six months ended June 28, 2015, it was also reduced by the effect of enacted state tax legislation.
The Company is a loss corporation as defined by Section 382 of the Code. Section 382 places an annual limitation on our ability to use our NOL carryovers and other attributes to reduce future taxable income. As of June 26, 2016, we have NOL carryovers of $439.4 million subject to an annual limitation of $17.1 million. As a result, $237.2 million of the carryovers exceed the estimated available Section 382 limitation. The Company has reduced its deferred tax assets for this limitation.
On January 15, 2016 we acquired Boulder which is a loss corporation. As of the acquisition date, Boulder had approximately $46.0 million of federal NOL carryovers subject to the Section 382 provisions. The annual limitation is approximately $26.5 million subject to increase for recognized built in gains during the recognition period. Based on our analysis, we anticipate we will be able to utilize the acquired NOL balance in our 2016 tax year without limitation.
We have significant tax-deductible intangible asset amortization and federal and state NOLs, which resulted in minimal federal and state cash taxes through 2015. We expect continued amortization and utilization of our NOLs will generate modest annual cash tax savings in 2016 and thereafter.
Liquidity and Capital Resources
Historical
Our cash flows are seasonal. Typically we are a net user of cash in the third quarter of the calendar year (i.e., the quarter ending in September) and a net generator of cash over the balance of the year.
Our principal liquidity requirements have been, and we expect will be, for working capital and general corporate purposes, including capital expenditures, debt service and our quarterly dividend program. Currently, the quarterly payment is $0.255 per share, or approximately $30 million per quarter. Capital expenditures are expected to be approximately $115 to $125 million in 2016, including Boulder. We have historically satisfied our liquidity requirements with internally generated cash flows and availability under our revolving credit facility. We expect that our ability to generate cash from our operations and ability to borrow from our credit facilities should be sufficient to support working capital needs, planned growth, capital expenditures, debt service and dividends for the next 12 months and for the foreseeable future. We have cash in foreign accounts, primarily related to the operations of our Canadian businesses. Tax liabilities related to bringing these funds back into the United States would not be significant and have been accrued.
Statements of cash flows for the six months ended June 26, 2016 compared to the six months ended June 28, 2015
For the six months ended June 26, 2016, net cash flow decreased $51.2 million compared to an increase in net cash flow of $14.9 million for the six months ended June 28, 2015.
Net cash provided by operating activities was $165.1 million for the six months ended June 26, 2016, and was the result of net earnings, excluding non-cash charges and credits, of $135.6 million and a decrease in working capital of $29.5 million. The decrease in working capital was primarily the result of a $28.4 million decrease in inventories resulting from the sell-down of the seasonal build from December 2015, an $8.5 million decrease in other current assets primarily from lower prepaid tax balances,
a $3.0 million increase in accrued liabilities, primarily attributable to higher interest and restructuring accruals and a $2.1 million increase in accounts payable resulting from seasonality and timing of disbursements. These were partially offset by a $7.6 million increase in accounts receivable primarily due to an increase in days sales outstanding and a $4.9 million decrease in accrued trade marketing driven by the seasonality of our marketing programs.
Net cash provided by operating activities was $124.4 million for the six months ended June 28, 2015, and was the result of net earnings, excluding non-cash charges and credits, of $166.4 million and an increase in working capital of $41.9 million. The increase in working capital was primarily the result of a $5.8 million decrease in accrued liabilities, primarily attributable to payment of the 2014 annual bonus, a $15.0 million decrease in accounts payable resulting from seasonal timing, a $9.7 million increase in inventories resulting from agricultural seasonal build that is expected to normalize by year end, a $4.7 million decrease in accrued trade marketing expense and a $4.5 million increase in accounts receivable driven by the timing of sales. The aging profile of accounts receivable has not changed significantly from December 2014. All other working capital accounts generated a net $2.3 million cash inflow.
Net cash used in investing activities was $1,045.6 million, for the six months ended June 26, 2016 and included $985.4 million for the acquisition of Boulder as well as $60.2 million for capital expenditures.
Net cash used in investing activities was $47.1 million, for the six months ended June 28, 2015 and included $48.2 million capital expenditures as well as $1.1 million of cash inflows from a Garden Protein acquisition post closing working capital adjustment. Capital expenditures during the first six months of 2015 included approximately $8.4 million of costs related to acquisition integration projects.
Net cash provided by financing activities for the six months ended June 26, 2016 was $828.9 million and consisted of $547.3 million of net proceeds from our new Tranche I Term Loans, $350.0 million from our notes offering and $20.9 million of net cash inflows related to our equity based compensation plans which were partially offset by $59.5 million of dividends paid, $21.3 million of debt acquisition costs, $6.5 million of debt repayments, $2.0 million of net cash outflows for capital leases and notes payable activity.
Net cash used by financing activities for the six months ended June 28, 2015 was $62.1 million and consisted of $54.7 million of dividends paid, $6.9 million of debt repayments and $0.5 million of net cash outflows related to our equity based compensation plans.
Debt
For more information on our debt, see Note 10 of the Consolidated Financial Statements "Debt and Interest Expense".
On July 26, Pinnacle Foods Finance completed the Repricing. See Note 18 of the Consolidated Financial Statements “Subsequent Events”.
Covenant Compliance
The following is a discussion of the financial covenants contained in our debt agreements.
Amended Credit Agreement
Our Amended Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
| |
• | incur additional indebtedness and make guarantees; |
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• | engage in mergers or consolidations; |
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• | pay dividends and distributions or repurchase our capital stock; |
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• | make investments, loans and advances, including acquisitions; and |
| |
• | engage in certain transactions with affiliates. |
The Amended Credit Agreement also contains certain customary affirmative covenants and events of default.
5.875% Senior Notes and 4.875% Senior Notes
In April 2013, we issued the 4.875% Senior Notes. In January 2016, we issued the 5.875% Senior Notes. We refer to the 4.875% Notes and the 5.875% Notes as the "Senior Notes". The Senior Notes are general senior unsecured obligations, effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing that indebtedness, and guaranteed on a full, unconditional, joint and several basis by the Company and Pinnacle Foods Finance's wholly-owned domestic subsidiaries that guarantee our other indebtedness.
The indentures governing the Senior Notes limits our (and our restricted subsidiaries’) ability to, subject to certain exceptions:
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• | incur additional debt or issue certain preferred shares; |
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• | pay dividends on or make other distributions in respect of our capital stock or make other restricted payments; |
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• | make certain investments; |
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• | create liens on certain assets to secure debt; |
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• | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
| |
• | enter into certain transactions with our affiliates; and |
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• | designate our subsidiaries as unrestricted subsidiaries. |
Subject to certain exceptions, the indenture governing the Senior Notes permits us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.
Non-GAAP Financial Measures
Pinnacle uses the following non-GAAP financial measures as defined by the Securities and Exchange Commission in its financial communications. These non-GAAP financial measures should be considered as supplements to the GAAP reported measures, should not be considered replacements for, or superior to, the GAAP measures and may not be comparable to similarly named measures used by other companies.
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• | Adjusted gross profit as a % of sales |
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• | Adjusted Earnings before Interest and Taxes (Adjusted EBIT) |
Adjusted gross profit
Pinnacle defines Adjusted gross profit as gross profit before accelerated depreciation related to restructuring activities, certain non-cash items, acquisition, merger and other restructuring charges and other adjustments. The Company believes that the presentation of Adjusted gross profit is useful to investors in the evaluation of the operating performance of companies in similar industries. The Company believes this measure is useful to investors because it increases transparency and assists investors in understanding the underlying performance of the Company and in the analysis of ongoing operating trends. In addition, Adjusted gross profit is one of the components used to evaluate the performance of Company’s management. Such targets include, but are not limited to, measurement of sales efficiency, productivity measures and recognition of acquisition synergies.
Adjusted EBITDA
Pinnacle defines Adjusted EBITDA as earnings before interest expense, taxes, depreciation and amortization (“EBITDA”), further adjusted to exclude certain non-cash items, non-recurring items and certain other adjustment items permitted in calculating Covenant Compliance EBITDA under the Senior Secured Credit Facility and the indentures governing the Senior Notes. Adjusted EBITDA does not include adjustments for equity-based compensation and certain other adjustments related to acquisitions, both of which are permitted in calculating Covenant Compliance EBITDA.
Management uses Adjusted EBITDA as a key metric in the evaluation of underlying Company performance, in making financial, operating and planning decisions and, in part, in the determination of cash bonuses for its executive officers and employees. The Company believes this measure is useful to investors because it increases transparency and assists investors in understanding the underlying performance of the Company and in the analysis of ongoing operating trends. Additionally, Pinnacle believes the
presentation of Adjusted EBITDA provides investors with useful information, as it is an important component in measuring covenant compliance in accordance with the financial covenants and determining our ability to service debt and meet any payment obligations. In addition, Pinnacle believes that Adjusted EBITDA is frequently used by analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA measure when reporting their results. The Company has historically reported Adjusted EBITDA to analysts and investors and believes that its continued inclusion provides consistency in financial reporting and enables analysts and investors to perform meaningful comparisons of past, present and future operating results.
Adjusted EBITDA should not be considered as an alternative to operating or net earnings (loss), determined in accordance with GAAP, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, determined in accordance with GAAP, as an indicator of cash flows, or as a measure of liquidity.
Adjusted Earnings before Interest and Taxes (Adjusted EBIT)
Adjusted earnings before interest and taxes is provided because Pinnacle believes it is useful information in understanding our EBIT results by improving the comparability of year-to-year results. Additionally, Adjusted EBIT provides transparent and useful information to management, investors, analysts and other parties in evaluating and assessing the Company and its segments, primary operating results from period to period after removing the impact of unusual, non-operational or restructuring-related activities that affect comparability. Adjusted EBIT is one of the measures management uses for planning and budgeting, monitoring and evaluating financial and operating results and in the analysis of ongoing operating trends.
Covenant Compliance EBITDA
Covenant Compliance EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization, further adjusted to exclude non-cash items, extraordinary, unusual or non-recurring items and other adjustment items permitted in calculating Covenant Compliance EBITDA under the Amended Credit Agreement and the indenture governing the Senior Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Covenant Compliance EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financial covenants.
EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA do not represent net earnings or (loss) or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definitions of Adjusted EBITDA in the Senior Secured Credit Facility and the indentures allow Pinnacle to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net earnings or loss. However, these are expenses that may recur, vary greatly and are difficult to predict. While EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.
Pursuant to the terms of the Amended Credit Agreement, Pinnacle Foods Finance is required to maintain a ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA of no greater than 5.75 to 1.00. Net First Lien Secured Debt is defined as Pinnacle Foods Finance's aggregate consolidated secured indebtedness secured on a first lien basis, less the aggregate amount of all unrestricted cash and cash equivalents.
In addition, under the Amended Credit Agreement and the indenture governing the Senior Notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio (which is currently the same as the ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA described above), in the case of the Amended Credit Agreement, or to the ratio of Covenant Compliance EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters, in the case of the Senior Notes. We believe that these covenants are material terms of these agreements and that information about the covenants is material to an investor's understanding our financial performance. As of June 26, 2016, we were in compliance with all covenants and other obligations under the Amended Credit Agreement and the indentures governing the Senior Notes.
Our ability to meet the covenants specified above in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under, or an inability to undertake certain activities in compliance with, the Amended Credit Agreement and the indentures governing the Senior Notes, at which time the lenders could elect to declare all amounts outstanding under the Amended Credit Agreement to be immediately due and payable. Any such acceleration would also result in a default under the indentures governing the Senior Notes.
The following table provides a reconciliation from our net earnings to EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA for the three and six months ended June 26, 2016 and June 28, 2015, and the fiscal year ended December 27, 2015.
The terms and related calculations are defined in the Amended Credit Agreement and the indentures governing the Senior Notes.
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| | | | | | | | | | | | | | | | | | | |
(thousands of dollars) | Three months ended | | Six months ended | | Fiscal Year Ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 | | December 27, 2015 |
Net earnings | $ | 45,783 |
| | $ | 43,679 |
| | $ | 70,620 |
| | $ | 85,215 |
| | $ | 212,508 |
|
Interest expense, net | 35,461 |
| | 22,175 |
| | 67,024 |
| | 43,650 |
| | 88,315 |
|
Income tax expense | 26,542 |
| | 23,961 |
| | 50,423 |
| | 49,419 |
| | 123,879 |
|
Depreciation and amortization expense | 26,754 |
| | 22,290 |
| | 51,672 |
| | 43,157 |
| | 89,660 |
|
EBITDA | $ | 134,540 |
| | $ | 112,105 |
| | $ | 239,739 |
| | $ | 221,441 |
| | $ | 514,362 |
|
Non-cash items (a) | (4,100 | ) | | (5,200 | ) | | 1,606 |
| | (1,465 | ) | | 4,315 |
|
Acquisition, merger and other restructuring charges (b) | 11,108 |
| | 2,388 |
| | 31,887 |
| | 5,657 |
| | 12,926 |
|
Adjusted EBITDA | $ | 141,548 |
| | $ | 109,293 |
| | $ | 273,232 |
| | $ | 225,633 |
| | $ | 531,603 |
|
Wish-Bone, Garden Protein and Boulder acquisition adjustments (1) | (2,168 | ) | | 8,859 |
| | 28,055 |
| | 17,723 |
| | 60,533 |
|
Non-cash equity-based compensation charges (2) | 1,222 |
| | 4,593 |
| | 5,131 |
| | 6,495 |
| | 13,555 |
|
Covenant Compliance EBITDA | $ | 140,602 |
| | $ | 122,745 |
| | $ | 306,418 |
| | $ | 249,851 |
| | $ | 605,691 |
|
Last twelve months Covenant Compliance EBITDA |
|
| |
|
| | $ | 662,258 |
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|
| | |
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(1) | For the three and six months ended June 26, 2016 and fiscal 2015, represents proforma additional EBITDA from Boulder for the period prior to the acquisition and net cost savings projected to be realized from acquisition synergies from the Boulder, Garden Protein and Wish-Bone acquisitions, calculated consistent with the definition of Covenant Compliance EBITDA. For the three and six months ended June 28, 2015, represents the net cost savings projected to be realized from acquisition synergies from both the Garden Protein and Wish-Bone acquisitions, calculated consistent with the definition of Covenant Compliance EBITDA. |
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(2) | Represents non-cash compensation charges related to the granting of equity awards that occur in the normal course of business. Awards that were issued as a result of the termination of the Hillshire merger agreement are being treated as an adjustment in the determination of Adjusted EBITDA. See Non-cash items below for details. |
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(a) | Non-cash items are comprised of the following: |
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| | | | | | | | | | | | | | | | | | | |
(thousands of dollars) | Three months ended | | Six months ended | | Fiscal Year Ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 | | December 27, 2015 |
Unrealized gains resulting from hedging activities (1) | $ | (3,601 | ) | | $ | (4,500 | ) | | $ | (7,493 | ) | | $ | (4,610 | ) | | $ | (1,983 | ) |
Effects of adjustments related to the application of purchase accounting (2) | — |
| | — |
| | 10,382 |
| | — |
| | — |
|
Non-cash compensation charges (3) | — |
| | — |
| | — |
| | 1,567 |
| | 1,567 |
|
Foreign exchange (gains) losses (4) | (499 | ) | | (700 | ) | | (1,283 | ) | | 1,578 |
| | 4,731 |
|
Total non-cash items | $ | (4,100 | ) | | $ | (5,200 | ) | | $ | 1,606 |
| | $ | (1,465 | ) | | $ | 4,315 |
|
_________________
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(1) | Represents non-cash gains resulting from mark-to-market adjustments of obligations under derivative contracts. |
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(2) | For the six months ended June 26, 2016, represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder acquisition. |
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(3) | For the six months ended June 28, 2015, represents non-cash employee incentives and retention charges resulting from the termination of the Hillshire merger agreement. |
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(4) | Represents foreign exchange (gains) losses resulting from intra-entity loans that are anticipated to be settled in the foreseeable future. |
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(b) | Acquisition, merger and other restructuring charges are comprised of the following: |
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| | | | | | | | | | | | | | | | | | | |
(thousands of dollars) | Three months ended | | Six months ended | | Fiscal Year Ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 | | December 27, 2015 |
Expenses in connection with an acquisition or other non-recurring merger costs (1) | $ | — |
| | $ | 362 |
| | $ | 6,781 |
|
| $ | 1,128 |
| | $ | 2,735 |
|
Restructuring charges, integration costs and other business optimization expenses (2) | 11,108 |
| | 2,026 |
| | 25,106 |
|
| 4,529 |
| | 9,504 |
|
Employee severance (3) | — |
| | — |
| | — |
|
| — |
| | 687 |
|
Total acquisition, merger and other restructuring charges | $ | 11,108 |
| | $ | 2,388 |
| | $ | 31,887 |
| | $ | 5,657 |
| | $ | 12,926 |
|
_________________
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(1) | For the six months ended June 26, 2016, represents Boulder acquisition costs. For the three and six months ended June 28, 2015, represents expenses related to the secondary offerings of common stock. For fiscal 2015, represents Boulder acquisition costs and expenses related to the secondary offerings of common stock. |
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(2) | For the three and six months ended June 26, 2016, primarily represents restructuring charges and integration costs of the Boulder and Garden Protein acquisitions. For the three and six months June 28, 2015 and fiscal 2015, primarily represents integration costs of the Garden Protein and Wish-Bone acquisitions. |
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(3) | Represents severance costs not related to business acquisitions paid, or to be paid, to terminated employees. |
_________________
Our covenant requirements and actual ratios for the twelve months ended June 26, 2016 are as follows:
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| | |
| Covenant Requirement | Actual Ratio |
Amended Credit Agreement | | |
Net First Lien Leverage Ratio (1) | 5.75 to 1.00 | 3.57 |
Total Leverage Ratio (2) | Not applicable | 4.64 |
Senior Notes (3) | | |
Minimum Covenant Compliance EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions (4) | 2.00 to 1.00 | 6.30 |
_________________
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(1) | Pursuant to the terms of the Amended Credit Agreement, Pinnacle Foods Finance is required to maintain a ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA of no greater than 5.75 to 1.00. Net First Lien Secured Debt is defined as Pinnacle Foods Finance's aggregate consolidated secured indebtedness secured on a first lien priority basis, less the aggregate amount of all unrestricted cash and cash equivalents. |
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(2) | The Total Leverage Ratio is not a financial covenant but is used to determine the applicable margin rate under the Amended Credit Agreement. As of June 26, 2016, our total net leverage ratio was greater than 4.25:1.0, which results in an additional 25 basis point margin on existing term loans under the Amended Credit Agreement. The Total Leverage Ratio is calculated by dividing consolidated total debt less the aggregate amount of all unrestricted cash and cash equivalents by Covenant Compliance EBITDA. |
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(3) | Our ability to incur additional debt and make certain restricted payments under the indentures governing the Senior Notes, subject to specified exceptions, is tied to a Covenant Compliance EBITDA to fixed charges ratio of at least 2.00 to 1.00. |
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(4) | Fixed charges is defined in the indenture governing the Senior Notes as (i) consolidated interest expense (excluding specified items) plus consolidated capitalized interest less consolidated interest income, plus (ii) cash dividends and distributions paid on preferred stock or disqualified stock. |
Pinnacle Foods Inc.
Reconciliation of Non-GAAP measures (Unaudited)
Adjusted gross profit and Adjusted gross profit as a % of sales
(thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended | | Fiscal Year Ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 | | December 27, 2015 |
Gross profit | $ | 221,192 |
| | $ | 169,109 |
| | $ | 419,759 |
| | $ | 340,826 |
| | $ | 740,506 |
|
Accelerated depreciation expense (a) | — |
| | — |
| | — |
| | — |
| | 1,131 |
|
Non-cash items (b) | (3,601 | ) | | (4,500 | ) | | 2,889 |
| | (3,656 | ) | | (1,029 | ) |
Acquisition, merger and other restructuring charges (c) | 972 |
| | 1,677 |
| | 1,608 |
| | 4,294 |
| | 9,217 |
|
Adjusted gross profit | $ | 218,563 |
| | $ | 166,286 |
| | $ | 424,256 |
| | $ | 341,464 |
| | $ | 749,825 |
|
| | | | | | | | | |
Adjusted gross profit as a % of sales | 28.9 | % |
| 26.3 | % |
| 28.1 | % |
| 26.3 | % |
| 28.2 | % |
| | | | | | | | | |
| |
(a) | Reflects accelerated depreciation related to in-sourcing of Wish-Bone production. |
| |
(b) | Non-cash items are comprised of the following: |
|
| | | | | | | | | | | | | | | | | | | |
(thousands of dollars) | Three months ended | | Six months ended | | Fiscal Year Ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 | | December 27, 2015 |
Unrealized gains resulting from hedging activities (1) | $ | (3,601 | ) | | $ | (4,500 | ) | | $ | (7,493 | ) | | $ | (4,610 | ) | | $ | (1,983 | ) |
Effects of adjustments related to the application of purchase accounting (2) | — |
| | — |
| | 10,382 |
| | — |
| | — |
|
Non-cash compensation charges (3) | — |
| |
|
| | — |
| | 954 |
| | 954 |
|
Non-cash items | $ | (3,601 | ) | | $ | (4,500 | ) | | $ | 2,889 |
| | $ | (3,656 | ) | | $ | (1,029 | ) |
| | | | | | | | | |
_________________
| |
(1) | Represents non-cash gains and losses resulting from mark-to-market obligations under derivative contracts. |
| |
(2) | For the six months ended June 26, 2016, represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder acquisition. |
| |
(3) | Represents non-cash employee incentives and retention charges resulting from the termination of the Hillshire merger agreement |
| |
(c) | Acquisition, merger and other restructuring charges are comprised of the following: |
|
| | | | | | | | | | | | | | | | | | | |
(thousands of dollars) | Three months ended | | Six months ended | | Fiscal Year Ended |
| June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 | | December 27, 2015 |
Expenses in connection with an acquisition or other non-recurring merger costs (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 130 |
| | $ | 130 |
|
Restructuring charges, integration costs and other business optimization expenses (2) | 972 |
| | 1,677 |
| | $ | 1,608 |
| | $ | 4,164 |
| | 8,625 |
|
Employee severance and recruiting (3) | — |
| | — |
| | — |
| | — |
| | 462 |
|
Total acquisition, merger and other restructuring charges | $ | 972 |
| | $ | 1,677 |
| | $ | 1,608 |
| | $ | 4,294 |
| | $ | 9,217 |
|
| | | | | | | | | |
_________________
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(1) | For the six months ended June 28, 2015 and for fiscal 2015, represents expenses incurred related to the terminated agreement with Hillshire. |
| |
(2) | For the three and six months ended June 26, 2016, primarily represents integration costs of the Garden Protein acquisition. For the six months ended June 28, 2015 and for fiscal 2015, primarily represents integration costs of the Garden Protein and Wish-Bone acquisitions. |
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(3) | Represents severance costs paid or accrued to terminated employees. |
Pinnacle Foods Inc. and Subsidiaries
Reconciliation of Non-GAAP measures (Unaudited)
Adjusted EBIT (1)
(thousands)
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Net earnings attributable to Pinnacle Foods Inc. and Subsidiaries common stockholders (as reported) | | $ | 45,784 |
| | $ | 43,679 |
| | $ | 70,620 |
| | $ | 85,215 |
|
Interest expense, net | | 35,461 |
| | 22,175 |
| | 67,024 |
| | 43,650 |
|
Provision for income taxes | | 26,542 |
| | 23,961 |
| | 50,423 |
| | 49,419 |
|
Net loss attributable to non-controlling interest | | (1 | ) | | — |
| | — |
| | — |
|
Earnings before interest and taxes (as reported) | | 107,786 |
| | 89,815 |
| | 188,067 |
| | 178,284 |
|
Non-cash items | | | | | | | | |
Unrealized (gains)/losses resulting from hedging (2) | | (3,601 | ) | | (4,500 | ) | | (7,493 | ) | | (4,610 | ) |
Purchase accounting adjustments (3) | | — |
| | — |
| | 10,382 |
| | — |
|
Non-cash compensation charges (4) | | — |
| | — |
| | — |
| | 1,567 |
|
Foreign exchange (gains)/losses (5) | | (499 | ) | | (700 | ) | | (1,283 | ) | | 1,578 |
|
Acquisition, merger and other restructuring charges | | | | | | | | |
Acquisition or other non recurring expenses (6) | | — |
| | 362 |
| | 6,781 |
| | 1,130 |
|
Restructuring and integration costs (7) | | 11,108 |
| | 2,026 |
| | 25,106 |
| | 4,527 |
|
Adjusted EBIT | | $ | 114,794 |
| | $ | 87,003 |
| | $ | 221,560 |
| | $ | 182,476 |
|
| |
(1) | Excludes Boulder, Wish-Bone and Gardein anticipated synergies which are included in calculating Covenant compliance. |
| |
(2) | Represents non-cash gains and losses resulting from mark-to-market obligations under derivative contracts. |
| |
(3) | For the six months ended June 26, 2016, represents expense related to the write-up to fair value of inventories acquired as a result of the Boulder acquisition. |
| |
(4) | For the six months ended June 28, 2015, represents non-cash employee incentives and retention charges resulting from the termination of the Hillshire merger agreement. |
| |
(5) | Represents foreign exchange (gains) losses resulting from intra-entity loans that are anticipated to be settled in the foreseeable future. |
| |
(6) | For the six months ended June 26, 2016, represents Boulder acquisition costs. For the three and six months ended June 28, 2015, represents expenses related to the secondary offerings of common stock. |
| |
(7) | For the three and six months ended June 26, 2016, primarily represents restructuring charges and integration costs of the Boulder and Garden Protein acquisitions. For the three and six months June 28, 2015, primarily represents integration costs of the Garden Protein and Wish-Bone acquisitions. |
Pinnacle Foods Inc.
Reconciliation from Reported to Adjusted Segment Amounts (unaudited)
For the three and six months ended June 26, 2016 and June 28, 2015
(thousands)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 26, | | June 28, | | June 26, | | June 28, |
| | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Earnings before interest & taxes - Reported | | | | | | | | |
Birds Eye Frozen | | $ | 46,794 |
| | $ | 37,978 |
| | $ | 102,035 |
| | $ | 81,255 |
|
Duncan Hines Grocery | | 52,255 |
| | 51,041 |
| | 94,860 |
| | 94,248 |
|
Boulder Brands | | 7,028 |
| | — |
| | (4,198 | ) | | — |
|
Specialty Foods | | 6,333 |
| | 7,599 |
| | 13,253 |
| | 15,299 |
|
Unallocated corporate expenses | | (4,624 | ) | | (6,803 | ) | | (17,883 | ) | | (12,518 | ) |
Total | | $ | 107,786 |
| | $ | 89,815 |
| | $ | 188,067 |
| | $ | 178,284 |
|
| | | | | | | | |
| | | | | | | | |
Adjustments (Non GAAP - See separate table) | | | | | | | | |
Birds Eye Frozen | | $ | (1,388 | ) | | $ | (1,518 | ) | | $ | (3,296 | ) | | $ | 1,955 |
|
Duncan Hines Grocery | | (1,584 | ) | | (979 | ) | | (3,166 | ) | | 2,390 |
|
Boulder Brands | | 10,171 |
| | — |
| | 33,617 |
| | — |
|
Specialty Foods | | (191 | ) | | (315 | ) | | (444 | ) | | (153 | ) |
Unallocated corporate expenses | | — |
| | — |
| | 6,782 |
| | — |
|
Total | | $ | 7,008 |
| | $ | (2,812 | ) | | $ | 33,493 |
| | $ | 4,192 |
|
| | | | | | | | |
| | | | | | | | |
Earnings before interest & taxes - Adjusted (Non GAAP - See separate discussion and tables) | | | | | | | | |
Birds Eye Frozen | | $ | 45,406 |
| | $ | 36,460 |
| | $ | 98,739 |
| | $ | 83,210 |
|
Duncan Hines Grocery | | 50,671 |
| | 50,062 |
| | 91,694 |
| | 96,638 |
|
Boulder Brands | | 17,199 |
| | — |
| | 29,419 |
| | — |
|
Specialty Foods | | 6,142 |
| | 7,284 |
| | 12,809 |
| | 15,146 |
|
Unallocated corporate expenses | | (4,624 | ) | | (6,803 | ) | | (11,101 | ) | | (12,518 | ) |
Total | | $ | 114,794 |
| | $ | 87,003 |
| | $ | 221,560 |
| | $ | 182,476 |
|
| | | | | | | | |
Pinnacle Foods Inc. Reconciliation from Reported to Adjusted Segment Amounts Supplemental Schedule of Adjustments Detail (unaudited) For the three and six months ended June 26, 2016 and June 28, 2015 (millions) |
| | | | | | | | | | | | | | | | |
| | Adjustments to Earnings Before Interest and Taxes |
| | Three Months Ended | | Six Months Ended |
| | June 26, 2016 | | June 28, 2015 | | June 26, 2016 | | June 28, 2015 |
Birds Eye Frozen | | | | | | | | |
Restructuring and acquisition integration charges | | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.3 |
| | $ | 2.5 |
|
Gardein acquisition related charges | | — |
| | — |
| | — |
| | 0.1 |
|
Unrealized mark-to-market (gain)/loss | | (1.6 | ) | | (1.8 | ) | | (3.7 | ) | | (1.8 | ) |
Hillshire merger termination-related employee compensation expense | | — |
| | — |
| | — |
| | 0.8 |
|
Other | | 0.1 |
| | 0.2 |
| | 0.1 |
| | 0.4 |
|
Total Birds Eye Frozen | | $ | (1.4 | ) | | $ | (1.5 | ) | | $ | (3.3 | ) | | $ | 2.0 |
|
| | | | | | | | |
Duncan Hines Grocery | | | | | | | | |
Restructuring and acquisition integration charges | | $ | — |
| | $ | 1.2 |
| | $ | (3.3 | ) | | $ | 3.6 |
|
Unrealized mark-to-market (gain)/loss | | (1.7 | ) | | (2.4 | ) | | — |
| | (2.4 | ) |
Hillshire merger termination-related employee compensation expense | | — |
| | — |
| | — |
| | 0.8 |
|
Other | | 0.1 |
| | 0.2 |
| | 0.1 |
| | 0.4 |
|
Total Duncan Hines Grocery | | $ | (1.6 | ) | | $ | (1.0 | ) | | $ | (3.2 | ) | | $ | 2.4 |
|
| | | | | | | | |
Boulder Brands | | | | | | | | |
Restructuring and acquisition integration charges | | $ | 10.2 |
| | $ | — |
| | $ | 23.2 |
| | $ | — |
|
Expense related to the write-up to fair market value of inventories acquired | | — |
| | — |
| | 10.4 |
| | — |
|
Total Boulder Brands | | $ | 10.2 |
| | $ | — |
| | $ | 33.6 |
| | $ | — |
|
| | | | | | | | |
Specialty Foods | | | | | | | | |
Unrealized mark-to-market (gain)/loss | | $ | (0.2 | ) | | $ | (0.3 | ) | | $ | (0.4 | ) | | $ | (0.3 | ) |
Hillshire merger termination-related employee compensation expense | | — |
| | — |
| | — |
| | 0.1 |
|
Total Specialty Foods | | $ | (0.2 | ) | | $ | (0.3 | ) | | $ | (0.4 | ) | | $ | (0.2 | ) |
| | | | | | | | |
Unallocated Corporate Expenses | | | | | | | | |
Boulder acquisition related charges | | $ | — |
| | $ | — |
| | 6.8 |
| | — |
|
Total Unallocated Corporate Expenses | | $ | — |
| | $ | — |
| | $ | 6.8 |
| | $ | — |
|
Contractual Commitments
Our contractual commitments consist mainly of payments related to long-term debt and related interest, operating and capital lease payments, certain take-or-pay arrangements entered into as part of the normal course of business and pension obligations. Refer to the “Contractual Commitments” section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K filed with the SEC on February 25, 2016, as well as the same section in our Form 10-Q filed with the SEC on April 28, 2016, for details on our contractual obligations and commitments.
Off-Balance Sheet Arrangements
As of June 26, 2016, we did not have any off-balance sheet obligations.
Critical Accounting Policies and Estimates
We have disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Form 10-K filed on February 25, 2016, those accounting policies that we consider to be significant in determining our results of operations and financial condition. Other than the below disclosure, there have been no material changes to those policies that we consider to be significant since the filing of the 10-K. We believe that the accounting principles utilized in preparing our unaudited consolidated financial statements conform in all material respects to GAAP.
Revenue recognition
Boulder Brands recognizes revenue upon the receipt and acceptance of product by the customer. The earnings process is complete once the customer order has been placed and approved and the product shipped has been received by the customer. For the base Pinnacle business, revenue from product sales is recognized upon shipment to the customers as terms are free on board ("FOB") shipping point, at which point title and risk of loss is transferred. As the Company continues to integrate Boulder into its operations and financial reporting systems, the Company’s management expects Boulder's revenue recognition policy to align with the base Pinnacle business.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS
Risk Management Strategy
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices. Please refer to Note 12 of the Consolidated Financial Statements "Financial Instruments" for additional details regarding our derivatives and refer to Note 10 of the Consolidated Financial Statements "Debt and Interest Expense" for additional details regarding our debt instruments. There were no significant changes in our exposures to market risk since December 27, 2015.
See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” included in our Form 10-K filed on February 25, 2016.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 26, 2016. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective at a level of reasonable assurance.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended June 26, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1: LEGAL PROCEEDINGS
No material legal proceedings are currently pending.
ITEM 1A: RISK FACTORS
Our risk factors are summarized under the “Risk Factors” section of our Form 10-K filed on February 25, 2016. There have been no material changes to our risk factors since the filing of the Form 10-K.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: MINE SAFETY DISCLOSURES
None
ITEM 5: OTHER INFORMATION
Rule 10b5-1 Plans
Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Certain members of management have and may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding, any such plans and specifically do not undertake to disclose the adoption, amendment, termination or explanation of any such plans.
ITEM 6: EXHIBITS
See the Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set forth herein.
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.
PINNACLE FOODS INC.
|
| |
By: | /s/ Craig Steeneck |
Name: | Craig Steeneck |
Title: | Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) |
Date: | July 28, 2016 |
PINNACLE FOODS INC.
Exhibit Index
|
| | | | | |
Exhibit Number | Exhibit Description | Filed Herewith | Incorporated by Reference from Form | Exhibit | Filing Date |
3.1 | Amended and Restated Certificate of Incorporation of Pinnacle Foods Inc. | | 8-K | 3.1 | 4/3/13 |
3.2 | Second Amended and Restated Bylaws of Pinnacle Foods Inc. | | 8-K | 3.1 | 2/16/2016 |
4.1 | Form of Stock Certificate for Common Stock | | S-1/A | 4.1 | 3/7/2013 |
10.1 | Amended and Restated 2013 Omnibus Incentive Plan | | DEF 14A | | 4/14/2016 |
10.2 | Form of Restricted Stock Unit Agreement (Directors) | X | | | |
10.3 | Form of Performance Share Unit Agreement under Amended and Restated 2013 Omnibus Incentive Plan | X | | | |
10.4 | Form of Nonqualified Stock Option Agreement under Amended and Restated 2013 Omnibus Incentive Plan | X | | | |
10.5 | Restricted Share Agreement (Mark Clouse) | X | | | |
10.6 | Nonqualified Stock Option Agreement (Mark Clouse) | X | | | |
10.7 | Performance Restricted Share Agreement (Mark Clouse) | X | | | |
10.8 | Restricted Stock Unit Agreement (Mark Schiller) | X | | | |
10.9 | Performance Share Unit Agreement (Mark Schiller) | X | | | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | X | | | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President and Chief Financial Officer | X | | | |
32.1** | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | | | |
32.2** | Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A) | X | | | |
101.1 | The following materials are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Earnings, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Shareholders' Equity, (vi) Notes to Consolidated Financial Statements, and (vii) document and entity information. | X | | | |
**This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.