SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Fiscal Years Ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
149,343
|
|
|
$
|
14,703
|
|
|
$
|
50,718
|
|
Adjustments to reconcile net income to cash from operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
96,911
|
|
|
99,251
|
|
|
70,379
|
|
Stock-based compensation expense
|
|
13,890
|
|
|
26,648
|
|
|
5,616
|
|
Loss on sale of fixed assets, net
|
|
1,437
|
|
|
141
|
|
|
420
|
|
(Gain)/loss on disposal of Diamond of California
|
|
(3,069
|
)
|
|
32,645
|
|
|
—
|
|
Gain on sale of route businesses
|
|
(2,255
|
)
|
|
(1,341
|
)
|
|
(1,913
|
)
|
Loss on early extinguishment of debt
|
|
—
|
|
|
4,749
|
|
|
—
|
|
Impairment charges
|
|
114,783
|
|
|
4,466
|
|
|
11,997
|
|
Derecognition of cumulative translation adjustment
|
|
—
|
|
|
—
|
|
|
737
|
|
Deferred income taxes
|
|
(153,963
|
)
|
|
24,811
|
|
|
2,433
|
|
Provision for doubtful accounts
|
|
1,733
|
|
|
472
|
|
|
1,104
|
|
Changes in operating assets and liabilities, excluding business acquisitions, and foreign currency translation adjustments:
|
|
|
|
|
|
|
Accounts receivable
|
|
(6,487
|
)
|
|
(34,047
|
)
|
|
(6,349
|
)
|
Inventory
|
|
(15,663
|
)
|
|
2,036
|
|
|
5,242
|
|
Other current assets
|
|
(941
|
)
|
|
2,861
|
|
|
2,463
|
|
Accounts payable
|
|
9,629
|
|
|
21,762
|
|
|
(2,468
|
)
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Payable to growers
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|
—
|
|
|
41,948
|
|
|
—
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|
Other accrued liabilities
|
|
(7,378
|
)
|
|
18,312
|
|
|
6,970
|
|
Other noncurrent assets
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|
(3,596
|
)
|
|
6,531
|
|
|
709
|
|
Other noncurrent liabilities
|
|
2,485
|
|
|
1,421
|
|
|
(1,904
|
)
|
Net cash provided by operating activities
|
|
196,859
|
|
|
267,369
|
|
|
146,154
|
|
|
|
|
|
|
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Investing activities:
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|
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|
|
|
|
Purchases of fixed assets
|
|
(69,429
|
)
|
|
(73,261
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)
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(51,468
|
)
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Purchases of route businesses
|
|
(53,907
|
)
|
|
(42,206
|
)
|
|
(22,568
|
)
|
Purchases of equity method investments
|
|
(1,500
|
)
|
|
—
|
|
|
—
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|
Proceeds from sale of fixed assets and insurance recoveries
|
|
544
|
|
|
1,409
|
|
|
1,776
|
|
Proceeds from sale of route businesses
|
|
56,584
|
|
|
39,619
|
|
|
27,408
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|
Proceeds from sale of investments
|
|
1,090
|
|
|
—
|
|
|
826
|
|
Proceeds from sale of discontinued operations
|
|
119,658
|
|
|
—
|
|
|
—
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|
Business acquisitions, net of cash acquired
|
|
(2,563
|
)
|
|
(1,042,674
|
)
|
|
—
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|
Net cash provided by/(used in) investing activities
|
|
50,477
|
|
|
(1,117,113
|
)
|
|
(44,026
|
)
|
|
|
|
|
|
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Financing activities:
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|
|
|
|
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Dividends paid to stockholders and non-controlling interests
|
|
(61,966
|
)
|
|
(57,584
|
)
|
|
(45,183
|
)
|
Debt issuance costs
|
|
(2,441
|
)
|
|
(6,047
|
)
|
|
(5,065
|
)
|
Issuances of common stock
|
|
27,970
|
|
|
10,096
|
|
|
7,862
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|
Excess tax benefits from stock-based compensation
|
|
—
|
|
|
910
|
|
|
2,326
|
|
Share repurchases, including shares surrendered for tax withholding
|
|
(2,692
|
)
|
|
(10,330
|
)
|
|
(836
|
)
|
Payments on capital leases
|
|
(4,817
|
)
|
|
(2,412
|
)
|
|
—
|
|
Repayments of long-term debt
|
|
(49,000
|
)
|
|
(444,795
|
)
|
|
(7,500
|
)
|
Proceeds from issuance of long-term debt
|
|
—
|
|
|
1,130,000
|
|
|
—
|
|
Repayments of revolving credit facility
|
|
(365,500
|
)
|
|
(120,000
|
)
|
|
(50,000
|
)
|
Proceeds from revolving credit facility
|
|
193,500
|
|
|
347,000
|
|
|
—
|
|
Net cash (used in)/provided by financing activities
|
|
(264,946
|
)
|
|
846,838
|
|
|
(98,396
|
)
|
|
|
|
|
|
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Effect of exchange rate changes on cash
|
|
636
|
|
|
(1,042
|
)
|
|
—
|
|
|
|
|
|
|
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|
Net (decrease)/increase
|
|
(16,974
|
)
|
|
(3,948
|
)
|
|
3,732
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|
Cash, cash equivalents and restricted cash at beginning of fiscal year
|
|
36,123
|
|
|
40,071
|
|
|
36,339
|
|
Cash, cash equivalents and restricted cash at end of fiscal year
|
|
$
|
19,149
|
|
|
$
|
36,123
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|
|
$
|
40,071
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|
|
|
|
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|
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Non-cash investing activities:
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|
|
|
|
|
|
(Increase)/decrease in fixed asset expenditures included in accounts payable
|
|
$
|
(508
|
)
|
|
$
|
(215
|
)
|
|
$
|
712
|
|
Proceeds from the sale of discontinued operations, not yet received, less transaction costs, not yet paid
|
|
$
|
800
|
|
|
$
|
125,772
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|
|
$
|
—
|
|
|
|
|
|
|
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|
Non-cash financing activities:
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|
|
|
|
|
|
Common stock and stock-based compensation issued for business acquisitions (Note 5)
|
|
$
|
—
|
|
|
$
|
800,987
|
|
|
$
|
—
|
|
|
|
|
|
|
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|
Supplemental information:
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds of $676, $2,000 and $2,608, respectively
|
|
$
|
5,458
|
|
|
$
|
9,582
|
|
|
$
|
23,068
|
|
Cash paid for interest
|
|
$
|
36,831
|
|
|
$
|
30,894
|
|
|
$
|
11,523
|
|
See Notes to the consolidated financial statements.
SNYDER'S-LANCE, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Fiscal Years Ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
NOTE
1
. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
We are engaged in the manufacturing, distribution, marketing and sale of snack food products. These products include pretzels, sandwich crackers, kettle cooked chips, pretzel crackers, popcorn, nuts, potato chips, tortilla chips, cookies, restaurant style crackers, and other salty snacks. Our products are packaged in various single-serve, multi-pack, family-size and party-size configurations. Our Branded products are principally sold under the Snyder’s of Hanover
®
, Lance
®
, Cape Cod
®
, Snack Factory
®
Pretzel Crisps
®
, Pop Secret
®
, Emerald
®
, Kettle Brand
®
, KETTLE
®
Chips, Late July
®
, Metcalfe’s skinny
®
, Tom’s
®
, Archway
®
, Jays
®
, Stella D’oro
®
, Eatsmart Snacks
TM
, Krunchers!
®
and O-Ke-Doke
®
and other brand names.
We also sell Partner brand products, which consist of third-party branded products that we sell to the independent business owners ("IBO") through our national direct-store-delivery distribution network ("DSD network"), in order to broaden the portfolio of product offerings for the IBOs. In addition, we contract with other branded food manufacturers to produce their products and periodically sell certain semi-finished goods to other manufacturers.
We distribute snack food products throughout the United States ("US") using the DSD network. The DSD network is made up of over
3,200
routes that are primarily owned and operated by IBOs. We also ship products directly to third-party distributors in areas where the DSD network does not operate. Through our direct distribution network, we distribute products directly to retail customers or to third-party distributors using freight carriers or our own transportation fleet.
Through the DSD network, we sell our Branded and Partner brand products to IBOs that distribute to grocery/mass merchandisers, club stores, discount stores, convenience stores, food service establishments and various other retail customers, including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers. In addition, we sell our Branded products directly to retail customers and third-party distributors. In the United Kingdom ("U.K.") and certain other countries within Europe, we sell our salty snack products through our sales personnel and through third-party distributors to national grocery, co-op and impulse store chains.
Our corporate headquarters is located in Charlotte, North Carolina. We have additional administrative offices in Hanover, Pennsylvania supporting the DSD network and in Norwich, England supporting our European operations. Our manufacturing operations are located in Charlotte, North Carolina; Hanover, Pennsylvania; Franklin, Wisconsin; Goodyear, Arizona; Columbus, Georgia; Jeffersonville, Indiana; Hyannis, Massachusetts; Ashland, Ohio; Salem, Oregon; Beloit, Wisconsin; Norwich, England; Wednesbury, England and Van Buren, Indiana. Additionally, our research and development centers are located in Hanover, Pennsylvania and Salem, Oregon.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Snyder’s-Lance, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation. We have elected to separately disclose other operating (income)/expense, net and other (income)/expense, net. In addition, we have included the caption operating income on our Consolidated Statements of Income. The items included in other operating (income)/expense, net include: gains or losses on sale of property, plant and equipment; gains or losses on sale of route businesses; and royalty income. The items included in other (income)/expense, net include: foreign exchange gains or losses and equity income or losses from nonconsolidated entities. These reclassifications had no effect on previously reported results of operations or retained earnings.
The Company's fiscal year ends on the Saturday closest to December 31 and, as a result, a 53rd week is added every fifth or sixth year. The Company's
2017
,
2016
and
2015
fiscal years each contained
52
weeks and ended on
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively.
Discontinued Operations Presentation
In order to be reported within discontinued operations, our disposal of a component or group of components must represent a strategic shift that will have a major effect on our operations and financial results. We aggregate the results of operations for discontinued operations into a single line item in the income statement. General corporate overhead is not allocated to discontinued operations.
As discussed in Note
4
, amounts included in the Consolidated Statements of Income for prior periods have been reclassified to separate amounts related to discontinued operations from continuing operations. Accordingly, unless otherwise stated, amounts disclosed within the notes to the consolidated financial statements exclude amounts related to discontinued operations. The Consolidated Statements of Cash Flows were not adjusted for presentation of discontinued operations, but certain items are disclosed in Note
4
to the consolidated financial statements.
Business Combinations
We account for business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the US ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods reported. Examples include sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
Non-controlling Interests
We own
80%
of Late July Snacks, LLC (“Late July”) and consolidate its balance sheet and operating results into our consolidated financial statements. The associated non-controlling interest is classified as equity, with the consolidated net income adjusted to exclude the net income or loss attributable to the non-controlling interest.
Revenue Recognition
We recognize revenue when title and risk of loss passes to our customers. Allowances for sales returns, stale products, promotions and discounts are recorded as reductions of revenue in the consolidated financial statements. The timing of revenue recognition varies based on the types of products sold and the distribution method.
Revenue for products sold to IBOs in the DSD network is recognized when the IBO purchases the inventory from our warehouses or the products are shipped to the stockroom. Revenue for products sold to retail customers through routes operated by company associates is recognized when the product is delivered to the customer.
Revenue for products shipped directly to customers from our warehouses is recognized based on the shipping terms listed on the shipping documentation. Products shipped with terms FOB shipping point are recognized as revenue at the time the product leaves our warehouses. Products shipped with terms FOB destination are recognized as revenue based on the anticipated receipt date by the customer.
We allow certain customers to return products under agreed upon circumstances. We record a returns allowance for damaged products and other products not sold by the expiration date on the product label. This allowance is estimated based on a percentage of historical sales returns and current market information.
We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction to the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. Rebates are offered to retail customers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate is recorded as a reduction to revenue at the time of the sale and a corresponding accrued liability is recorded. The accrued liability is monitored throughout the time period covered by the promotion, and is based on historical information and the progress of the customer against the target amount. We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities. These promotions are estimated and recorded as a reduction of revenue at the time the associated sale. The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.
Shelf space allowances are capitalized and amortized over the lesser of twelve months or the life of the agreement and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities recorded in the Consolidated Balance Sheets was
$43.8 million
and
$39.8 million
as of
December 30, 2017
and
December 31, 2016
, respectively.
Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable. We record a general reserve based on analysis of historical data and aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions.
Fair Value
We have classified assets and liabilities required to be measured at fair value into the fair value hierarchy as set forth below:
|
|
|
|
Level 1
|
-
|
Quoted prices in active markets for identical assets and liabilities.
|
Level 2
|
-
|
Observable inputs other than quoted prices for identical assets and liabilities.
|
Level 3
|
-
|
Unobservable inputs for which there is little or no market data available, which requires us to develop our own assumptions.
|
See Note
14
for more information on fair value measurements.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents cash and cash equivalents which can only be used for retention of certain employees.
Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in first-out (FIFO) method.
Fixed Assets
Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of long-term depreciable assets. Leasehold improvements are depreciated over the estimated life of the improvement or the life of the lease, whichever is shorter. Estimated lives are based on historical experience, maintenance practices, technological changes and future business plans. The following table summarizes the majority of our estimated useful lives of long-term depreciable assets:
|
|
|
|
Useful Life
|
Buildings and building improvements
|
10-45 years
|
Land improvements
|
10-20 years
|
Machinery, equipment and computer systems
|
3-20 years
|
Furniture and fixtures
|
3-12 years
|
Trucks, trailers and automobiles
|
3-10 years
|
Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future net cash flows expected to be generated by the asset or asset group. If such assets or asset groups are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets or asset groups exceeds the fair value of the assets or asset groups. Assets held for sale are reported at the lower of the carrying amount or fair value less cost to sell.
Route Intangible Purchase and Sale Transactions
We purchase and sell routes as a part of the DSD network. Routes subject to purchase and sale transactions represent integrated sets of inputs, activities and processes that are capable of being conducted and managed by IBOs for the purpose of providing a return directly to the IBOs. However, they do not meet the definition of a business for accounting purposes in accordance with Accounting Standards Update ("ASU") 2017-01,
Clarifying the Definition of a Business
which we adopted in the fourth quarter of 2017 as discussed in Note
3
. Upon acquisition of a route, we allocate the purchase price to an indefinite-lived route intangible, representing our perpetual and exclusive distribution right in the route. We recognize a gain or a loss on the sale of a route upon completion of the sales transaction and signing of the relevant documents. Gain or loss on the sale is determined by comparing the basis of the route sold, which will be comprised primarily of the associated indefinite-lived intangible, to the proceeds received from the IBO.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach.
We are required to evaluate and determine our reporting units for purposes of performing the annual impairment analysis of goodwill. Our
2017
and 2016 analyses identified two reporting units, North America and Europe. The annual impairment analysis of goodwill and other indefinite-lived intangible assets also requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and our weighted average cost of capital. These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.
Goodwill determined at the time of an acquisition represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation, assembled workforce, acquisition synergies and the expected future cash flows of the business.
Our trademarks are valued using the relief-from-royalty method under the income approach, which requires us to estimate a royalty rate, identify relevant projected revenue, and select an appropriate discount rate. Our route intangible assets are valued by comparing the current fair market value for the route assets to the associated book value. The fair market value is computed using the route sales average for each route or group of routes multiplied by the market multiple for the area in which the route is located. Other intangible assets, primarily customer and contractual relationships and patents, are tested for impairment if events or changes in circumstances indicate that it is more likely than not that fair value is less than book value.
Amortizable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the period over which economic benefits are expected to be provided.
Equity Method Investments
Investments where we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our Consolidated
Balance Sheets. Under this method of accounting, our share of the net earnings or losses of the investee is included in other income, net on our Consolidated Statements of Income. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. Our equity method investments totaled
$11.7 million
and
$8.4 million
as of
December 30, 2017
and
December 31, 2016
, respectively.
Income Taxes
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. We recognize the effect of income tax positions only if these positions are more likely than not of being sustained. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage. Deferred tax assets and liabilities, along with related valuation allowances, are netted by tax jurisdiction and classified as noncurrent on the balance sheet.
US Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act made numerous changes to many aspects of U.S. corporate income taxation by, among other things, lowering the US corporate income tax rate from
35%
to
21%
, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earning of foreign subsidiaries. As a result of the Tax Act, the Company revalued its net deferred tax liabilities to reflect the tax rate expected to apply in the years in which the temporary differences are expected to reverse. This resulted in an approximate
$123.2 million
tax benefit. The Tax Act provides a dividends received deduction for any future dividends from non-U.S. subsidiaries to their U.S. parent company. The Tax Act also imposes a one-time deemed repatriation of accumulated post-1986 foreign earnings which have not been previously taxed. The Company recorded a provisional estimate for this transition tax of approximately
$7.5 million
. Through the third quarter of 2017 the Company had recorded taxes of approximately
$46.7 million
on the amount of basis difference in foreign subsidiaries which is not indefinitely reinvested. In the fourth quarter of 2017 the Company has recorded a benefit to reflect the reduced rate at which any remaining basis difference will be taxed.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have recognized a net tax benefit of
$162.4 million
for the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 30, 2017. We are in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We expect to complete our analysis within the measurement period in accordance with SAB 118. See Note 13, Income Taxes, for further details on the impact of the Tax Act.
Employee and Non-Employee Stock-Based Compensation Arrangements
We account for stock option awards based on the fair value-method using the Black-Scholes model.
Compensation expense for stock options is recognized using straight-line attribution over the vesting period, which is usually
three years
, and is adjusted for a forfeiture rate based on historical and estimated future experience.
Compensation expense for restricted shares and restricted units is recognized over the vesting period, which is generally three years, based on the closing stock price on the grant date. Restricted shares receive or accrue the same dividend as common shares outstanding. Non-employee restricted units receive or accrue a non-forfeitable dividend equivalent that is added to the number of units available to vest and is equal to the dividends paid on common shares outstanding.
The fair value of market condition, performance-based restricted units granted to our employees is estimated on the date of grant using a Monte Carlo valuation model, which requires the input of subjective assumptions. The risk free interest rate is based on rates of US Treasury issues with a remaining life equal to the expected life of the performance-based restricted units. The time to maturity reflects the remaining performance period at the grant date. The expected volatility is based on the historical volatility of our common stock over the expected life as we believe this is a reasonable estimate of future volatility.
Compensation expense for performance-based restricted units is recognized using straight-line attribution over the performance period, which is approximately three years, and is adjusted for a forfeiture rate based on historical and estimated future experience. Performance-based restricted units receive or accrue a forfeitable dividend equivalent that is added to the number of units available to vest and is equal to the dividends paid on common shares outstanding.
Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits. Our portion of employee medical claims is limited to
$0.4 million
per participant annually by stop-loss insurance coverage. The accrual for incurred but not reported medical insurance claims was
$4.2 million
and
$3.9 million
in
2017
and
2016
, respectively.
We maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the deductibles which are currently
$0.8 million
per individual loss for workers' compensation,
$0.5 million
for auto liability per accident and
$0.3 million
for auto physical damage per accident. In addition, certain general and product liability claims are self-funded for individual losses up to the
$0.8 million
insurance deductible. Claims in excess of the deductible are fully insured up to
$100 million
per occurrence and in the aggregate. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions, including compensation trends, healthcare cost trends and discount rates. In
2017
, we used a discount rate of
2.0%
, the same rate used in
2016
, based on treasury rates over the estimated future payout period.
We also use historical information for claims frequency and severity in order to establish loss development factors. As of
December 30, 2017
and
December 31, 2016
, we had accrued liabilities related to the retained risks of
$18.4 million
and
$17.3 million
, respectively, included in the accruals for casualty insurance claims in our Consolidated Balance Sheets. The liabilities related to our casualty insurance claims were partially offset by estimated reimbursements for amounts in excess of our deductibles associated with these claims of
$4.9 million
and
$4.6 million
for 2017 and 2016, respectively, which are included in other noncurrent assets in our Consolidated Balance Sheets.
Derivative Financial Instruments
We are exposed to certain interest rate risks as part of our ongoing business operations and may use derivative financial instruments, where appropriate, to manage these risks. If we elect to do so, and if the instrument meets certain criteria, management designates its derivatives as cash flow hedges. For designated cash flow hedges, the effective portion of the change in fair value is included in accumulated other comprehensive income, net of related tax effects, with the corresponding asset or liability recorded in the
Consolidated Balance Sheets. The ineffective portion of the gain or loss, if any, is immediately recognized in the same caption where the hedged items are recognized in the Consolidated Statements of Income. We do not use derivatives for speculative purposes.
Earnings Per Share
Basic earnings per share from continuing and discontinued operations is computed by dividing income from continuing and discontinued operations attributable to Snyder's-Lance, respectively, by the weighted average number of common shares outstanding during each period.
Diluted earnings per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. In the calculation of diluted earnings per share, the denominator includes the number of additional common shares that would have been outstanding if our outstanding dilutive stock options had been exercised pursuant to the treasury stock method, or if our outstanding dilutive restricted units or performance-based restricted units had vested and converted to common stock. Anti-dilutive shares are excluded from the dilutive earnings calculation. No adjustment to reported net income is required when computing diluted earnings per share.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and are treated as a separate class of securities in calculating earnings per share pursuant to the two-class method. We have granted and expect to continue to grant restricted shares with non-forfeitable rights to dividends and restricted units with non-forfeitable rights to dividend equivalents. We include these awards in our calculation of basic and diluted earnings per share using the two-class method when we have undistributed income after considering the effect of dividends declared during the period.
Advertising Costs
Advertising costs (except production costs) are expensed as incurred. Advertising production costs are expensed in the period that the advertisement first takes place or when a decision has been made to not use the advertisement. Advertising costs included in selling, general and administrative expenses on the Consolidated Statements of Income were
$59.8 million
,
$54.7 million
and
$31.8 million
during
2017
,
2016
and
2015
, respectively.
Research and Development
We conduct research and development for the purpose of developing innovative, high-quality products that exceed consumer expectations. Our efforts include the use of professional product developers such as microbiologists, food scientists and culinary experts who all work in collaboration with innovation, marketing, manufacturing and sales leaders to develop products to meet changing consumer demands as well as formulate new products. In addition to developing new products, the research and development staff routinely reformulates and improves existing products based on advances in ingredients and technology, and conducts value engineering to maintain competitive price points. Our research and development costs were approximately
$6.2 million
,
$10.0 million
and
$6.2 million
in
2017
,
2016
and
2015
, respectively, and are included in cost of sales in the Consolidated Statements of Income.
Shipping and Handling Costs
We do not bill customers separately for shipping and handling of product. These costs are included as part of selling, general and administrative expenses on the Consolidated Statements of Income. Shipping and handling costs were
$179.9 million
,
$152.4 million
and
$112.6 million
during
2017
,
2016
and
2015
, respectively.
Loss Contingencies
Various legal actions, claims, and other contingencies arise in the normal course of our business. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and reasonably estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known. Legal costs are expensed as incurred.
Foreign Currency Translation
The functional currency of our foreign operations is the applicable local currency, the British pound and Euro. The functional currency is translated into US dollars for balance sheet accounts using currency exchange rates in effect as of the balance sheet date, and for revenue and expense accounts using an average exchange rate in effect during the applicable period.
NOTE
2
. MERGER AGREEMENT WITH CAMPBELL SOUP COMPANY
On December 18, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to be acquired by the Campbell Soup Company ("Campbell"). At the time of the merger, each of our shares of $0.83-1/3 par value common stock will be converted into the right to receive
$50.00
. The approximate final purchase price is expected to be
$4.9 billion
and represents a total enterprise value, including debt, of approximately
$6.0 billion
.
The obligations of the parties to consummate the transaction under the Merger Agreement are subject to customary closing conditions. Among those conditions, we are required to call and hold a special shareholder meeting and it is required that our Board of Directors recommend that our shareholders approve the Merger Agreement. Our Board of Directors has made such recommendation in the definitive proxy statement filed with the SEC on February 20, 2018 in advance of the shareholder meeting to be held on March 23, 2018. In connection with the Merger Agreement, certain trusts affiliated with Patricia A. Warehime, a member of our Board, and members of her immediate family, each such trust being a shareholder of the Company (collectively, the “Warehime Holders”), entered into a voting agreement with Campbell, pursuant to which the Warehime Holders agreed, among other things, to vote the shares of Company common stock over which they have voting power in favor of the approval of the merger agreement and the transactions contemplated thereby, including the merger. As of February 16, 2018, the record date for the special meeting, the Warehime Holders owned
12,851,757
shares, or approximately
13.1%
of the shares of Company common stock outstanding and entitled to vote at the special meeting. The transactions contemplated by the Merger Agreement are subject to the satisfaction or waiver of certain customary conditions, including the approval of the Merger Agreement by our shareholders, expiration (or earlier termination) of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which was satisfied on February 2, 2018 when the waiting period was terminated, the absence of any legal prohibitions, the accuracy of the representations and warranties of the parties, and compliance by the parties with their respective obligations under the Merger Agreement. Assuming all conditions are met, we expect this transaction will close late in the first quarter of 2018.
Under certain circumstances defined within the Merger Agreement, in the event that we terminate the Merger Agreement, we would be required to pay a termination fee in the amount of
$149.0 million
. In the event that Campbell terminates the agreement, subject to certain limitation set forth in the Merger Agreement, they would be required to pay a termination fee of
$198.6 million
.
Four putative class action lawsuits related to the proposed Merger were filed by purported shareholders of the Company. These lawsuits (together, the “Actions”) captioned
Shaev v. Snyder’s-Lance, Inc., et al.
(Case No.3:18-cv-00039) (the “
Shaev
Action”),
Sciabacucchi v. Snyder’s-Lance, Inc., et al.
(Case No. 3:18-cv-00049-RJCDCK) (the “
Sciabacucchi
Action”),
Kendall v. Snyder’s-Lance, Inc., et al.
(Case No. 3:18-cv-00051) (the “
Kendall
Action”), and
Daniel v. Snyder’s-Lance, Inc., et al.
(Case No. 3:18-cv-00058) (the “
Daniel
Action”) were filed in the United States District Court for the Western District of North Carolina on January 25, 2018, January 29, 2018, January 30, 2018, and January 31, 2018, respectively. The Actions name as defendants the Company and the members of the Company’s Board, and allege that the defendants filed a materially incomplete and misleading proxy statement on Schedule 14A in violation of Sections 14(a) and 20(a) of the Exchange Act of 1934, as amended (the “Exchange Act”) and SEC Rule 14a-9. Additionally, the
Sciabacucchi
Action names Campbell as a defendant, and alleges that Campbell violated Section 20(a) of the Exchange Act. The
Kendall
Action seeks to enjoin the shareholder vote on the proposed merger, and the
Shaev
,
Sciabacucchi
, and
Daniel
Actions seek to enjoin the defendants from proceeding with or consummating the proposed merger or, in the event the merger is consummated, request that the Court issue an order rescinding the merger and/or awarding rescissory damages. Additionally, the
Shaev
and
Kendall
Actions seek that the Court direct defendants to account for alleged damages, and all the Actions seek attorneys’ and expert fees and expenses. The Company believes these Actions are without merit.
In the fourth quarter of 2017, we incurred
$2.1 million
of professional fees associated with this transaction. During the first quarter of 2018 through the time of closing, we expect to incur approximately
$50 million
to
$60 million
of additional expenses for additional professional fees and costs related to the merger. Under the terms of the change in control provisions of our incentive compensation awards and the terms of the Merger Agreement, all time-based, unvested equity awards will vest immediately and all performance-based awards will vest pro-rata at the higher of actual or target attainment. This will result in approximately
$20 million
to
$25 million
of additional expense recorded at the time of close due to this acceleration.
NOTE
3
. NEW ACCOUNTING STANDARDS
Recently Adopted
On January 5, 2017 the Financial Accounting Standards Board (“FASB”) issued ASU 2017-01, Clarifying the Definition of a Business. This accounting standard clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the assets are not considered a business for the purpose of allocating the purchase price. If it is not met, the entity then evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. Under the new guidance, the purchase or sale of a route will no longer be considered the purchase or sale of a business for accounting purposes due to the fact that the perpetual and exclusive distribution rights (a route) represent substantially all of the fair value of any given acquisition from or disposition to an IBO. There has been no change to our relationships or interactions with the IBOs. However, under the new guidance, we will no longer allocate any of the purchase price to goodwill upon acquisition of a route and we will no longer
perform a relative fair value allocation of goodwill upon divestitures. We have adopted this accounting standard prospectively at the beginning of the fourth quarter of 2017. Although we will no longer have goodwill allocated on future route acquisitions or divestitures, we will continue to record gains and losses associated with the sale of routes. The impact from adopting the standard is disclosed in Note 11, Goodwill and Other Intangible Assets, and is not material to our consolidated financial statements.
On November 17, 2016, the FASB issued ASU No. 2016-18, Restricted Cash. This accounting standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. We early adopted this guidance in the first quarter of 2017 and the adoption resulted in reclassifications of
$0.3 million
cash inflows from investing activities to operating activities for each of the twelve months ended December 30, 2017 and December 31, 2016 and no reclassifications for the twelve months ended January 2, 2016.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
Cash and cash equivalents
|
|
$
|
18,703
|
|
|
$
|
35,409
|
|
|
$
|
39,105
|
|
Restricted cash
|
|
446
|
|
|
714
|
|
|
966
|
|
Total cash, cash equivalents and restricted cash shown in the Consolidated Statement of Cash Flows
|
|
$
|
19,149
|
|
|
$
|
36,123
|
|
|
$
|
40,071
|
|
On August 26, 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This accounting standard is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We adopted this guidance in the first quarter of 2017 and the impact on our Consolidated Statements of Cash Flows was a reclassification of
$6.2 million
cash outflows from operating activities to repayments of long-term debt within financing activities for the twelve months ended
December 31, 2016
.
The table below summarizes the impact on the Statement of Cash Flows for the twelve months of 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Previous Classification
|
|
Impact
|
|
Current Classification
|
Operating activities:
|
|
|
|
|
|
|
Gain on write-off of debt premium
|
|
$
|
(1,341
|
)
|
|
$
|
1,341
|
|
|
$
|
—
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
4,749
|
|
|
4,749
|
|
Other noncurrent liabilities
|
|
1,341
|
|
|
80
|
|
|
1,421
|
|
Net cash provided by operating activities
|
|
261,199
|
|
|
6,170
|
|
|
267,369
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
(438,625
|
)
|
|
(6,170
|
)
|
|
(444,795
|
)
|
Net cash provided by financing activities
|
|
$
|
853,008
|
|
|
$
|
(6,170
|
)
|
|
$
|
846,838
|
|
On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The updated guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. We adopted the accounting standard in the first quarter of 2017 and the impact to our consolidated financial statements are as follows:
|
|
•
|
Excess tax benefits for share-based payments were previously recognized through income tax receivable and equity, and presented as a financing cash flow. As a result of adopting this accounting standard, excess tax benefits for share-based payments are recognized as an adjustment to income tax expense and reflected in operating cash flows. We elected to adopt this provision of the accounting standard prospectively which resulted in income tax benefit of
$6.9 million
for the year ended
December 30, 2017
.
|
|
|
•
|
The guidance allows the employer to withhold up to the maximum statutory tax rates in the applicable jurisdictions without triggering liability accounting. Our accounting treatment of outstanding equity awards was not impacted by our adoption of this provision of the accounting standard.
|
|
|
•
|
The guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. We did not make this election, and continue to account for forfeitures on an estimated basis.
|
On January 26, 2017 the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This accounting standard simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Instead, entities should perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of carrying amount over the fair value of the respective reporting unit. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption of the ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this standard in the second quarter of 2017 and applied its guidance in our goodwill impairment testing procedures performed during the third and fourth quarters of 2017, as discussed further in Note 11.
Not Yet Adopted
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides for a single five-step model to be applied to all revenue from contracts with customers. The guidance also requires improved disclosures to help users of the financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU No. 2014-09 by one year, to December 15, 2017 for interim and annual reporting periods beginning after that date.
We have completed our review of customer contracts and do not expect a material impact to our balance sheet. The immaterial impact of adopting ASU No. 2014-09 primarily relates to the following:
|
|
•
|
Coupon liabilities will commence when control of the goods are transferred to the customer rather than when the coupon is distributed, which will accelerate the recognition of coupon expense under the new standard.
|
|
|
•
|
Contract manufacturing arrangements are recognized as revenue when product is delivered to the customer. If any of our contracts create an asset without an alternative use and an enforceable right to payment, then we would recognize revenue at the time of production rather than shipment under the new standard. The right to payment is enforceable under certain contracts.
|
We have adopted ASC Topic 606, Revenue from Contracts with Customers, on December 31, 2017, the first day of our fiscal 2018. We applied the modified retrospective approach and the impact of adoption was not material.
On October 24, 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. This accounting standard is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The updated guidance indicates that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset has been sold to an outside party. The updated guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, and early adoption is permitted. The amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of the adoption. We
have adopted ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, on December 31, 2017, the first day of our fiscal 2018. There was no impact of adoption to the financial statements.
On May 10, 2017 the FASB issued ASU No. 2017-09, Scope of Modification Accounting. This accounting standard provides clarity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. According to this accounting standard, an entity should account for the effects of a modification unless the fair value, vesting conditions, and classification of the modified award are the same as the original award. The updated guidance is effective for annual reporting periods, and interim reporting periods within those annual reporting periods, beginning after December 15, 2017. We have adopted ASU No. 2017-09, Scope of Modification Accounting, on December 31, 2017, the first day of our fiscal 2018. There was no impact of adoption to the financial statements.
On August 28, 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The objective of this accounting standard is to better align hedge accounting with an organization’s risk management activities in the financial statements. For our cash flow hedges of variable interest rate risk, the new guidance will allow the variability in cash flows attributable to the contractually specified interest rate to be designated as the hedged risk. The new guidance also requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported, thus eliminating the separate presentation of hedge ineffectiveness. The updated guidance is effective for annual reporting periods, and interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this standard in the first quarter of 2019 and do not expect a material impact to the financial statements upon adoption.
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases. This ASU requires us to recognize a lease liability for the obligation to make lease payments, measured at the present value on a discounted basis, and a right-of-use (“ROU”) asset for the right to use the underlying asset for the duration of the lease term, measured at the lease liability amount adjusted for lease prepayments, lease incentives received and initial direct costs. The lease liability and ROU asset are recognized in the balance sheet at the commencement of the lease. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight line expense while finance leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2018, and requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the financial statements. Early application of the ASU is permitted. We are in the process of evaluating lease accounting software and developing an inventory of our lease arrangements in order to determine the impact this accounting standard will have on our financial statements. Based on our assessment to date, we expect this guidance will have a material impact on our balance sheet due to the amount of our lease commitments, but we are unable to quantify the impact at this time.
Other amendments to GAAP in the US that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
NOTE
4
. DISCONTINUED OPERATIONS
Sale of Diamond of California
On November 28, 2016, we entered into a definitive agreement to sell our culinary nuts business (comprised primarily of the Diamond of California
®
brand and the Stockton, CA facility; collectively "Diamond of California"). The sale of Diamond of California represented a strategic shift in our business and aligns with the Company's strategy to focus more resources on the growth opportunities for our snack food brands. On
December 31, 2016
, we completed the sale for estimated net proceeds of
$128.6 million
, consisting of
$118.6 million
of cash and
$10 million
in a promissory note. As of December 31, 2016, we had a receivable due from the purchaser recorded in receivable from sale of Diamond of California on our Consolidated Balance Sheet. We received the cash proceeds from the sale of Diamond of California on January 3, 2017. During 2017, we finalized the calculation of working capital in accordance with the sale agreement which had an immaterial impact to discontinued operations. Also during 2017, we adjusted our walnut price liability to reflect the final prices contained within the California Department of Food and Agriculture Walnut/Raisin/Prune Report State Summary - 2016 Crop Year. In addition, in 2017, we identified and recorded a pretax out-of-period correction of
$2.6 million
(
$1.7 million
after tax) to reduce the walnut price liability which related to an error recorded in the fourth quarter of 2016. We concluded that the correction of the error was not material to these or our previously issued financial statements.
The promissory note is due on
June 30, 2025
. Interest on the principal balance in this promissory note accrues at a rate per annum equal to the 30-day LIBOR rate, plus
3.00%
, provided that in no event shall the applicable rate exceed
6.00%
per annum. The note is recorded within other noncurrent assets on our Consolidated Balance Sheets.
As a result of the sale of Diamond of California, revenues and expenses that no longer continued after the sale of Diamond of California, and where we had no substantial continuing involvement, were reclassified to discontinued operations in the Consolidated Statements of Income.
For
2017
and
2016
, income statement amounts associated with discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Net revenue
|
|
$
|
—
|
|
|
$
|
204,443
|
|
Cost of sales
|
|
—
|
|
|
156,008
|
|
Gross profit
|
|
—
|
|
|
48,435
|
|
Selling, general and administrative
|
|
—
|
|
|
33,638
|
|
(Gain) loss on sale of Diamond of California
|
|
(3,069
|
)
|
|
32,645
|
|
Income (loss) from discontinued operations before income taxes
|
|
3,069
|
|
|
(17,848
|
)
|
Income tax expense
|
|
1,133
|
|
|
9,252
|
|
Income (loss) from discontinued operations, net of income tax
|
|
$
|
1,936
|
|
|
$
|
(27,100
|
)
|
The discontinued operations pretax income activity for 2017 generated income tax expense of
$1.1 million
, for an effective tax rate of
36.9%
. The discontinued operations pretax loss activity for 2016 generated income tax expense of
$9.2 million
, for an effective tax rate of
(51.8)%
. The tax expense for 2016 is generated by the sale of Diamond of California, which included sale of goodwill which had no tax basis and for which no deferred tax liability was recorded.
During
2016
, we recorded a pretax loss in discontinued operations of approximately
$32.6 million
on the sale of Diamond of California, which was calculated as follows:
|
|
|
|
|
|
(in thousands)
|
|
Total
|
Net proceeds
|
|
$
|
128,577
|
|
|
|
|
Less carrying value of net assets transferred:
|
|
|
Transaction related expenses
|
|
2,805
|
|
Net working capital
|
|
31,874
|
|
Pension liability and other long-term assets and liabilities, net
|
|
(11,071
|
)
|
Fixed assets, net
|
|
19,695
|
|
Goodwill
(1)
|
|
48,845
|
|
Other intangible assets, net
|
|
69,074
|
|
Loss on sale of Diamond of California
|
|
$
|
(32,645
|
)
|
(1)
The component of goodwill included in the carrying amount of net assets transferred was based on the fair value of Diamond of California relative to the fair value of the remaining business within its reporting unit in accordance with FASB ASC 350,
Intangibles - Goodwill and Other.
The following table provides depreciation, amortization, capital expenditures, sale proceeds, and significant operating non-cash items of discontinued operations for
2017
and
2016
.
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
Cash flows from discontinued operating activities
|
|
|
|
Depreciation and amortization
|
$
|
—
|
|
|
$
|
4,467
|
|
Stock-based compensation expense
|
—
|
|
|
2,101
|
|
(Gain)/loss on sale of Diamond of California
|
(3,069
|
)
|
|
32,645
|
|
Payable to growers
(1)
|
—
|
|
|
41,948
|
|
|
|
|
|
Cash flows from discontinued investing activities
|
|
|
|
Capital expenditures
|
$
|
—
|
|
|
$
|
514
|
|
Proceeds from sale of discontinued operations
|
119,658
|
|
|
—
|
|
|
|
|
|
Non-cash discontinued investing activities
|
|
|
|
Proceeds from the sale of discontinued operations, not yet received, less transaction costs, not yet paid
|
$
|
800
|
|
|
$
|
125,772
|
|
(1)
The operating cash inflow generated by the increase in payable to growers from
$38.3 million
acquired on February 29, 2016 to
$80.3 million
sold in the disposition of Diamond of California on December 31, 2016.
As a result of the sale of Diamond of California, we had a significant amount of stock-based compensation awards that accelerated vesting at the sale date due to change in control provisions. We recognized
$1.3 million
in stock-based compensation expense from awards that vested due to acceleration clauses within employment agreements with employees who were terminated as part of the sale.
In connection with the sale of Diamond of California, we entered into a Supply Agreement ("Walnut Supply Agreement") to procure walnuts from the purchaser for an initial term of
five years
subsequent to the sale transaction, which will be used in the manufacture of Emerald
®
branded products. Under this agreement, the purchaser has the right to match third party offers for sale of such walnuts to us.
Additionally, we entered into a Transition Services Agreement ("Stockton TSA") and a Facility Use Agreement ("Stockton FUA"), both effective immediately subsequent to the sale transaction, to facilitate the orderly transfer of Emerald
®
and Pop Secret
®
business operations to Company-owned facilities. The Stockton TSA stipulated certain finance, accounting, sales, marketing, human resources, information technology, supply chain, manufacturing, and other general services to be provided between us and the purchaser, during an initial term of
120
days, with extension provisions if necessitated. The Stockton FUA had an initial term of
six months
, with extension provisions if necessitated, and provided us with the right to access Diamond of California's Stockton, CA manufacturing facility, for the purpose of manufacturing certain Emerald
®
branded products. Permitted uses under this agreement include use of certain equipment and storage of inventories related to the Emerald
®
production process. Services under the Stockton TSA and the Stockton FUA are completed at this time. We also entered into a contract manufacturing agreement with the purchaser to manufacture certain products for us throughout
2017
. At this time, the contract manufacturing agreement has ended.
NOTE
5
. BUSINESS ACQUISITIONS
2017 Acquisitions
Acquisition of Cornpoppers Limited
On September 25, 2017, we acquired Cornpoppers Limited ("Cornpoppers") for approximately
$2.6 million
, of which
$2.1 million
has been allocated to goodwill. Cornpoppers is a U.K. popcorn manufacturer supplying branded and private label popcorn products to retailers and wholesalers.
Acquisition of Natural Food Works Group, LLC
On February 17, 2017, we made a
$1.5 million
investment for approximately
23%
of the ownership in Natural Food Works Group, LLC, an experienced food manufacturer specializing in natural and organic products. We are accounting for this investment under the equity method.
2016 Acquisitions
Acquisition of Diamond Foods
On February 29, 2016, we acquired Diamond Foods, Inc. ("Diamond Foods") for
$1,857.2 million
in a cash and stock transaction, including our repayment of
$651.0 million
of Diamond Foods’ indebtedness, accrued interest and related fees. Diamond Foods, a leading snack food company that possessed
five
brands, including: Kettle Brand
®
potato chips; KETTLE
®
Chips; Pop Secret
®
popcorn; Emerald
®
snack nuts; and Diamond of California
®
culinary nuts. As a result of the acquisition, Diamond Foods became our wholly-owned subsidiary. We also obtained
26%
of the outstanding shares of Metcalfe's Skinny Limited ("Metcalfe"), owner of Metcalfe's skinny
®
, a premium ready-to-eat ("RTE") popcorn brand in the U.K., which is described below.
At the effective time of the acquisition of Diamond Foods, each share of Diamond Foods common stock that was issued and outstanding immediately prior to the effective time (other than (i) treasury shares held by Diamond Foods, (ii) shares owned by Snyder’s-Lance or any of our subsidiaries and (iii) shares that were owned by stockholders who had perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law) were cancelled and converted into the right to receive
$12.50
in cash and
0.775
shares of Snyder’s-Lance common stock, par value $0.83-1/3 per share. Additionally, at the effective time of the acquisition of Diamond Foods, all of its outstanding stock-based compensation awards, then comprised of restricted shares, restricted units, performance-based restricted units, and stock options, converted to replacement Snyder's-Lance awards or were settled with merger consideration. The fair value of the replacement awards, whether vested or unvested, was included in the purchase price to the extent that pre-acquisition services had been rendered. The purchase price also included the fair value of accelerated vesting for awards that vested at the acquisition date due to change in control provisions. The remainder of the fair value of the unvested outstanding replacement awards is being recognized as compensation expense over the applicable future vesting period in the periods following the acquisition date.
The following is a summary of consideration transferred in the acquisition of Diamond Foods:
|
|
|
|
|
|
|
|
|
|
|
|
Conversion Calculation
|
|
Fair Value
(in thousands)
|
Diamond Foods common shares outstanding as of February 29, 2016
|
|
31,062,164
|
|
|
|
Multiplied by 0.775 per the Merger Agreement
|
|
0.775
|
|
|
|
Total Snyder's-Lance common shares issued to Diamond Foods stockholders
|
|
24,071,839
|
|
|
|
Multiplied by Snyder's-Lance closing stock price as of February 26, 2016
|
|
$
|
32.34
|
|
|
|
Total stock consideration for outstanding common shares
|
|
|
|
$
|
778,483
|
|
Cash consideration of $12.50 per Diamond Foods common share outstanding as of February 29, 2016, including cash paid in lieu of fractional converted shares
|
|
|
|
388,318
|
|
Total cash and stock consideration to stockholders
|
|
|
|
$
|
1,166,801
|
|
Fair value of replacement cash awards and stock-based awards attributable to pre-acquisition service, including awards that accelerated vesting at acquisition date due to change in control provisions
(1)
|
|
|
|
28,211
|
|
Repayment of Diamond Foods’ outstanding debt due to change in control provisions
(2)
|
|
|
|
651,044
|
|
Liability for value of Dissenters' merger consideration
(3)
|
|
|
|
12,418
|
|
Total fair value of consideration transferred
|
|
|
|
$
|
1,858,474
|
|
Effective settlement of accounts payable owed by us to Diamond Foods at acquisition date
|
|
|
|
(1,295
|
)
|
Total purchase consideration
|
|
|
|
$
|
1,857,179
|
|
(1)
The fair value of the Snyder's-Lance replacement cash awards, settled common stock, restricted share awards, restricted unit awards and stock options was calculated as of February 29, 2016 using conversion terms outlined in the Merger Agreement. The closing stock price on February 26, 2016, the last trading day before closing, was used in the fair valuation of settled common stock, restricted share awards and restricted unit awards. The fair value of the stock options was estimated using the Black-Scholes valuation model utilizing the assumptions noted below:
|
|
|
Assumptions used for the valuation of replacement Snyder's-Lance stock options:
|
|
Stock price as of February 26, 2016
|
$32.34
|
Post-conversion exercise price
|
$11.75 - $80.24
|
Average expected volatility
|
31.18%
|
Expected dividend yield
|
1.98%
|
Weighted average risk-free interest rate
|
0.33%
|
Weighted average expected life
|
0.3 years
|
Black-Scholes weighted average value per option
|
$15.22
|
The expected volatility of the Snyder’s-Lance stock price was based on average historical volatility, which was based on observations and a duration consistent with the expected life assumption. The weighted average expected life of the option was calculated using the simplified method by using the vesting term of the option and the option expiration date. The risk-free interest rate was based on US treasury securities with maturities equal to the expected life of the option.
(2)
Repayment of Diamond Foods’ outstanding debt was required as part of the consideration to be transferred due to change in control provisions that were triggered upon acquisition. The repayment amount was calculated as of February 29, 2016 by taking Diamond Foods’ outstanding long-term debt and current portion of long-term debt of
$633.2 million
and adding accrued interest of
$9.0 million
and a prepayment penalty of
$8.8 million
.
(3)
Estimate of merger consideration unpaid and owed to certain Diamond Foods stockholders as of the acquisition date that would have otherwise received
$12.50
in cash and
0.775
shares of Snyder’s-Lance common stock for each share of Diamond Foods common stock held, which was paid during 2016.
The acquisition was accounted for as a business combination. Management has used its best estimate in the allocation of the purchase price to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities. The following table summarizes the allocation of assets acquired and liabilities assumed as part of the acquisition:
|
|
|
|
|
|
(in thousands)
|
|
Purchase Price Allocation
|
Cash and cash equivalents
|
|
$
|
22,340
|
|
Accounts receivable
|
|
78,991
|
|
Inventories
|
|
156,712
|
|
Prepaid expenses and other current assets
|
|
13,575
|
|
Fixed assets
|
|
128,210
|
|
Goodwill
|
|
831,228
|
|
Other intangible assets
|
|
950,294
|
|
Equity investments
|
|
12,595
|
|
Other long term assets
|
|
973
|
|
Total assets acquired
|
|
2,194,918
|
|
|
|
|
Accounts payable, and other current liabilities, including payable to growers
|
|
121,635
|
|
Deferred income tax liability, net
|
|
194,413
|
|
Other long term liabilities
|
|
21,691
|
|
Total liabilities assumed
|
|
337,739
|
|
|
|
|
Net assets acquired
(1)
|
|
$
|
1,857,179
|
|
(1)
Net assets acquired include the effective settlement of
$1.3 million
in accounts payable owed by us to Diamond Foods at the time of the acquisition.
As of December 31, 2016, the purchase price allocation was considered complete. Of the estimated
$950.3 million
of acquired intangible assets,
$355.3 million
were assigned to customer relationships and is being amortized over
20
years. The remaining value of acquired intangible assets of
$595.0 million
was assigned to trademarks, which are not subject to amortization because they have indefinite lives. The increase in the carrying value of assets to fair value as a result of purchase price adjustments is not deductible for income tax purposes.
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation, assembled workforce, acquisition synergies and the expected future cash flows of Diamond Foods' business.
We recorded a net deferred tax liability of
$194.4 million
related to the acquisition of Diamond Foods. We recorded deferred tax liabilities of
$384.6 million
relating primarily to basis differences in identified intangible assets acquired, which includes
$49.2 million
related to un-repatriated foreign earnings, based on management’s assessment of the amount of earnings not considered to be indefinitely reinvested. We recorded a deferred tax asset of
$190.2 million
, of which
$143.7 million
was recorded for federal and state net operating loss carryforwards, and a further
$9.4 million
for other federal and state tax credit carryforwards. In addition, a valuation allowance of
$10.7 million
has been recorded, based on management’s assessment of the ability to utilize these deferred tax assets.
Transaction and integration related expenses associated with the acquisition of Diamond Foods were approximately
$3.0 million
,
$66.3 million
and
$7.7 million
for
2017
,
2016
and
2015
, respectively, and are included in a separate line in the Consolidated Statements of Income. The costs incurred in 2017 included legal and other professional fees and idle facility lease costs. Transaction and integration expenses in continuing operations for 2016, include
$17.5 million
of severance and retention benefits, and
$16.4 million
of accelerated stock-based compensation, which was recognized due to the change in control and severance agreements for the Diamond Foods executive team. The remaining costs were primarily investment banking fees, as well as other professional and legal fees associated with completion of the acquisition, and subsequent integration of Diamond Foods.
Diamond Foods' results were included in our Consolidated Statements of Income from February 29, 2016. We recognized incremental Diamond Foods net revenue of
$443.5 million
in 2016. A portion of Diamond Foods revenue was eliminated in consolidation because it was sold to other Snyder's-Lance subsidiaries for distribution through the DSD network. As a result of progress we have made integrating Diamond Foods, it is impracticable to disclose separately Diamond Foods' contributions to income before income taxes in 2016.
The following unaudited pro forma consolidated financial information has been prepared, as if the acquisition of Diamond Foods had taken place at the beginning of 2015. These unaudited pro forma results include estimates and assumptions regarding increased amortization of intangible assets related to the acquisition, reduced interest expense related to lower interest rates associated with the new combined debt, and the related income tax effects. Pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future for various reasons, including the potential impact of revenue and cost synergies on the business.
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2016
|
|
2015
|
Net revenue
(1)
|
|
$
|
2,443,284
|
|
|
$
|
2,469,732
|
|
Net income attributable to Snyder's-Lance, Inc.
(1)
|
|
$
|
64,027
|
|
|
$
|
75,498
|
|
(1)
The unaudited pro forma consolidated financial information does not reflect the sale of Diamond of California.
The unaudited pro forma consolidated financial information for 2016 and 2015 included increased amortization expense of
$2.1 million
and
$10.0 million
, respectively, as a result of acquired intangible assets. In addition, the unaudited pro forma consolidated financial information for 2016 and 2015 included reduced interest expense related to debt of
$1.3 million
and
$13.0 million
, respectively. This reduction is due to the lower interest rates associated with our new combined debt, as more fully described in Note
12
.
We also included a reduction in cost of goods sold of
$15.9 million
in the unaudited pro forma consolidated financial information for 2016, related to the elimination of the inventory step-up recorded during the year in connection with the Diamond Foods acquisition. We included additional cost of goods sold in the unaudited pro forma financial information for 2015 of
$15.6 million
. The net incremental expense represents the financial impact of the inventory step-up recorded in connection with the Diamond Foods acquisition.
For 2016, we included a reduction in non-recurring transaction-related expenses of
$50.2 million
, which were directly related to the Diamond Foods acquisition. These transaction-related expenses, and additional transaction-related expenses incurred prior to the end of 2015, were included as additional expenses of
$60.4 million
in the unaudited pro forma consolidated financial information for the first quarter of 2015.
Acquisition of Metcalfe's Skinny Limited
In January 2016, Diamond Foods obtained
26%
of the outstanding shares of Metcalfe, which we acquired in the Diamond Foods’ transaction. On September 1, 2016, we completed the acquisition of Metcalfe by acquiring the remaining
74%
interest for approximately
$9.7 million
. Metcalfe is the owner of Metcalfe's skinny
®
, a premium RTE popcorn brand in the U.K., in addition to a growing range of corn and rice cake products.
Because of our purchase of the remaining
74%
interest in Metcalfe, the equity of the entire entity was increased to fair value, which resulted in the revaluation of our prior
26%
interest. However, as this
26%
interest was recorded at fair value in the Diamond Foods opening balance sheet on February 29, 2016, the revaluation did not result in a significant gain or loss. The fair value of
100%
of Metcalfe was determined to be
$13.2 million
, of which
$1.5 million
was preliminarily allocated to current assets,
$7.2 million
to goodwill,
$8.8 million
to other intangible assets and
$4.3 million
to total liabilities. Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. Prior to our acquisition of the remaining
74%
of Metcalfe, our share of income for the period subsequent to February 29, 2016, was not material and was included in other income, net, in the Consolidated Statements of Income. Subsequent to our acquisition of the remaining
74%
of Metcalfe on September 1, 2016, Metcalfe's results were consolidated into our Consolidated Statements of Income. Net revenue and net income from Metcalfe for the period subsequent to acquisition of the remaining
74%
was not material.
NOTE
6
. PERFORMANCE TRANSFORMATION PLAN
As announced on April 17, 2017, our Board of Directors and senior management team have been conducting a comprehensive review of our Company’s operations with the goal of significantly improving our financial performance to deliver greater value to shareholders. As a result of this review, we have initiated a Performance Transformation Plan (the "Transformation Plan") focused on six key areas:
|
|
•
|
SG&A Expense Efficiency.
Reduce direct spending and accelerate zero-based budgeting to improve indirect costs.
|
|
|
•
|
Manufacturing and Supply Chain Productivity.
Reduce manufacturing and distribution network complexity and improve productivity.
|
|
|
•
|
Product and Portfolio Optimization.
Reduce business complexity through stock keeping unit ("SKU") rationalization and ongoing portfolio maintenance.
|
|
|
•
|
Price Realization.
Improve trade spend productivity and effectiveness and optimize brand assortment.
|
|
|
•
|
Marketing Investment Optimization.
Reset working/non-working ratios and increase investment in our core branded portfolio.
|
|
|
•
|
Channel Execution Excellence.
Elevate the performance of the existing IBO and DSD network.
|
As part of the plan, on June 26, 2017, our Board of Directors approved the closure of our manufacturing facility in Perry, Florida and an incremental reduction in workforce across the organization which continued into the third and fourth quarters of
2017
. To date, we have eliminated approximately
300
jobs. The production of products previously manufactured in the Perry facility has been relocated to facilities with available capacity. A liability of
$1.2 million
is included in accrued compensation on the Condensed Consolidated Balance Sheet as of
December 30, 2017
.
During the year ended
December 30, 2017
, changes to the balance related to the Transformation Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Severance and Related Costs
(1)
|
|
Asset Impairments
|
|
Professional Fees
|
|
Other
(2)
|
|
Total
|
Liability balance, December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
|
9,011
|
|
|
8,859
|
|
|
7,278
|
|
|
4,454
|
|
|
29,602
|
|
Cash spent
|
|
(7,420
|
)
|
|
—
|
|
|
(7,278
|
)
|
|
(309
|
)
|
|
(15,007
|
)
|
Non-cash settlements/adjustments
|
|
(440
|
)
|
|
(8,859
|
)
|
|
—
|
|
|
(4,145
|
)
|
|
(13,444
|
)
|
Liability balance, December 30, 2017
|
|
$
|
1,151
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,151
|
|
(1)
This represents only the accrued severance and related costs for the Transformation Plan. This does not include all severance accrued as of
December 31, 2016
or
December 30, 2017
.
(2)
This primarily represents
write off of certain materials and packaging associated with our elimination of certain SKU items.
The following table summarizes recognized charges related to the Transformation Plan in
2017
:
|
|
|
|
|
|
(in thousands)
|
|
Year ended
|
|
December 30, 2017
|
Cost of sales
|
|
$
|
7,223
|
|
Selling, general, and administrative
|
|
13,520
|
|
Impairment charges
|
|
8,859
|
|
Total
|
|
$
|
29,602
|
|
The full scope of the Transformation Plan and specific actions to be taken continue to be developed by senior management and our Board of Directors. These plans will evolve over the course of the Transformation Plan. At this point in time, we cannot reasonably estimate the future expenses and cash payments, nor their timing other than those outlined above. The Transformation Plan is targeting completion in 2020. We are anticipating that the Transformation Plan will result in
14%
operating profit margin (on an adjusted basis) and an incremental operating income of
$175 million
improvement to our operating income by 2020. These targets are based on our adjusted results, as approved by our Board of Directors and may not align with our GAAP results. As of December 30, 2017, we have achieved incremental operating income and are on pace with where we expected to be at this point in time.
NOTE 7. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share using the two-class method, for income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
2016
|
|
2015
|
Basic EPS:
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
146,556
|
|
|
$
|
41,985
|
|
|
$
|
50,685
|
|
Less: Income from continuing operations allocated to participating securities
|
|
472
|
|
|
—
|
|
|
137
|
|
Income from continuing operations allocated to common shares
|
|
$
|
146,084
|
|
|
$
|
41,985
|
|
|
$
|
50,548
|
|
Weighted average shares outstanding – Basic
|
|
96,594
|
|
|
91,873
|
|
|
70,487
|
|
Earnings per share – Basic
|
|
$
|
1.51
|
|
|
$
|
0.46
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
Weighted average shares outstanding – Basic
|
|
96,594
|
|
|
91,873
|
|
|
70,487
|
|
Effect of dilutive stock options, restricted units and performance-based restricted units on shares outstanding
|
|
873
|
|
|
1,018
|
|
|
655
|
|
Weighted average shares outstanding – Diluted
|
|
97,467
|
|
|
92,891
|
|
|
71,142
|
|
Earnings per share – Diluted
|
|
$
|
1.50
|
|
|
$
|
0.45
|
|
|
$
|
0.71
|
|
There were approximately
2.0 million
and
1.3 million
stock options and restricted units excluded from the calculation of diluted earnings per share for
2017
and 2016, respectively, because their effects were anti-dilutive. There were
no
anti-dilutive shares in
2015
.
NOTE
8
. STOCK-BASED COMPENSATION
Total stock-based incentive expense recorded in the Consolidated Statements of Income was
$13.9 million
,
$24.5 million
and
$5.6 million
for
2017
,
2016
and
2015
, respectively. In addition, we recorded
$0.3 million
,
$3.8 million
and
$1.1 million
in incentive compensation expense for performance-based cash incentives in
2017
,
2016
and
2015
, respectively.
On April 11, 2017, Carl E. Lee, Jr. retired from his positions as President and Chief Executive Officer and a member of the Board of Directors of our Company, as well as from his positions as an officer and/or director of each of our subsidiaries. As part of Mr. Lee's retirement agreement, certain of his stock based compensation awards were modified, which resulted in the recognition of an additional
$3.4 million
of stock-based compensation expense during 2017, which is included in the amounts above.
Key Employee Incentive Plans
On May 4, 2016, at the Annual Meeting of Stockholders, the 2016 Key Employee Incentive Plan (the “Plan”) was approved. The Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights (SARs), restricted stock and performance equity awards, and expires in
May 2022
. The Plan also authorizes other awards denominated in monetary units or shares of common stock payable in cash or shares of common stock. The Plan provides for up to
4.0 million
of securities available for future issuance, of which only
0.7 million
can be used for restricted stock or performance share awards. Including shares carried over from the 2012 Key Employee Incentive Plan, as of
December 30, 2017
, there were approximately
0.7 million
of restricted shares and
1.8 million
of other securities available for future issuance under the 2016 Plan.
Long-term Incentive Plans
Under our long-term incentive plan, approximately
150
key employees are granted performance-based cash awards, performance-based restricted units, stock options and restricted shares. The amount of awards issued to employees is approved by the Board of Directors.
Diamond Foods Replacement Awards
The acquisition of Diamond Foods, as discussed further in Note
5
, resulted in a significant amount of prior Diamond Foods stock-based compensation awards converting to replacement Snyder's-Lance awards. Many of these awards vested at the acquisition date due to change in control provisions. In addition, included in 2016 transaction and integration related expenses on the Consolidated Statements of Income, we recognized
$15.4 million
in stock-based compensation expense and
$1.0 million
in cash compensation expense from replacement awards that vested due to acceleration clauses within employment agreements for former Diamond Foods personnel.
As of
December 30, 2017
, the replacement Snyder's-Lance stock-based awards that remained outstanding were as follows:
|
|
•
|
54,663
restricted units with unrecognized compensation expense of
$1.6 million
and vesting dates ranging from January 7, 2018 to January 18, 2020.
|
|
|
•
|
472,500
stock options that are fully vested and have exercise prices that range from
$11.75
to
$65.71
. The total intrinsic value of these options was
$16.9 million
as of
December 30, 2017
.
|
Enterprise Incentive Plan
As a part of the Transformation Plan, we initiated an enterprise-wide performance plan aimed at incentivizing our employees to achieve the targets described in Note 6. Performance-based awards were made under this plan for the period commencing as of
August 31, 2017
and ending at the end of the
2020
fiscal year. These awards vest in the first quarter of
2021
and
2022
. Approximately
150
key employees were granted a total of
1,630,588
performance-based stock options and
250,169
performance-based restricted share awards. These awards are included within the amounts granted within the Employee Stock Options and Employee Restricted Shares tables below, respectively. The awards vest at the end of the performance period, based on the Company's actual performance against pre-established operating profit margin and operating income targets. In order to receive the shares, the recipient must be employed by the Company on the vesting date. The number of stock options and shares of common stock to be awarded is based on the achievement of targeted performance and may range from
0
percent to
200
percent of the targeted amount. We reassess at each reporting date whether achievement of each of the performance conditions is probable, as well as estimate forfeitures, and adjust compensation expense recognized as appropriate. At
December 30, 2017
, we assessed the operating profit margin and operating income to be probably of achievement. For all salaried employees not subject to the equity grant and employed with the company on
August 31, 2017
, awards will be made in cash at the end of the performance period and paid in full in the first quarter of
2021
.
Employee Stock Options
Employee stock options vest in periods ranging up to
five years
after the grant date with the majority vesting over
three years
. The exercise price, which equals the fair market value of our common stock at the date of grant, ranges from
$2.88
to
$65.71
per share for the outstanding options as of
December 30, 2017
.
We account for option awards based on the fair value-method using the Black-Scholes model. The following assumptions were used to determine the weighted average fair value of options granted during
2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Assumptions used in Black-Scholes pricing model:
|
|
|
|
|
|
Expected dividend yield
|
1.73
|
%
|
|
2.07
|
%
|
|
2.06
|
%
|
Risk-free interest rate
|
1.62
|
%
|
|
1.19
|
%
|
|
1.44
|
%
|
Weighted average expected life
|
4.5 years
|
|
|
4.8 years
|
|
|
4.5 years
|
|
Expected volatility
|
19.75
|
%
|
|
20.43
|
%
|
|
22.57
|
%
|
Weighted average fair value per share of options granted
|
$
|
6.19
|
|
|
$
|
4.47
|
|
|
$
|
5.03
|
|
The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price at the date of grant. The risk free interest rate is based on rates of US Treasury issues with a remaining life equal to the expected life of the option. For
2017
,
2016
and
2015
grants, the expected life of the option is calculated using historical exercise patterns to estimate expected term. The expected volatility is based on the historical volatility of our common stock over the expected life as we believe this is a reasonable estimate of future volatility.
The changes in options outstanding for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Outstanding Weighted Average Exercise Price
|
|
Weighted average contractual term
(in years)
|
|
Aggregate intrinsic value
(in millions)
|
Outstanding at January 3, 2015
|
|
2,486,282
|
|
|
$
|
17.33
|
|
|
6.9
|
|
$
|
31.4
|
|
Granted
|
|
384,453
|
|
|
31.02
|
|
|
|
|
|
Exercised
|
|
(496,828
|
)
|
|
15.82
|
|
|
|
|
|
Expired/forfeited
|
|
(56,114
|
)
|
|
28.36
|
|
|
|
|
|
Outstanding at January 2, 2016
|
|
2,317,793
|
|
|
$
|
19.66
|
|
|
6.4
|
|
$
|
33.9
|
|
Granted
|
|
1,143,753
|
|
|
30.93
|
|
|
|
|
|
Assumed DMND options
|
|
1,038,575
|
|
|
20.00
|
|
|
|
|
|
Exercised
|
|
(599,868
|
)
|
|
16.83
|
|
|
|
|
|
Expired/forfeited
|
|
(183,344
|
)
|
|
44.73
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
3,716,909
|
|
|
$
|
22.44
|
|
|
6.6
|
|
$
|
59.5
|
|
Granted
|
|
2,324,307
|
|
|
36.64
|
|
|
|
|
|
Exercised
|
|
(1,355,159
|
)
|
|
22.21
|
|
|
|
|
|
Expired/forfeited
|
|
(614,419
|
)
|
|
35.53
|
|
|
|
|
|
Outstanding at December 30, 2017
|
|
4,071,638
|
|
|
$
|
28.65
|
|
|
7.9
|
|
$
|
86.5
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 2, 2016
|
|
1,283,284
|
|
|
$
|
15.38
|
|
|
5.6
|
|
$
|
24.3
|
|
Exercisable at December 31, 2016
|
|
2,290,991
|
|
|
$
|
17.36
|
|
|
5.2
|
|
$
|
48.5
|
|
Exercisable at December 30, 2017
|
|
1,501,368
|
|
|
$
|
17.03
|
|
|
5.1
|
|
$
|
49.7
|
|
As of
December 30, 2017
, there was
$13.8 million
of unrecognized compensation expense, related to outstanding stock options that will be recognized over a weighted average period of
3.2
years. Unrecognized compensation expense related to stock options was
$4.3 million
as of
December 31, 2016
and
$2.1 million
as of
January 2, 2016
. Cash received from option exercises during
2017
,
2016
and
2015
was
$28.4 million
,
$10.1 million
and
$7.9 million
, respectively. The benefit realized for the tax deductions from option exercises was
$6.9 million
,
$0.9 million
and
$2.3 million
, respectively, during
2017
,
2016
and
2015
. The increase in the tax benefit in the current year is related to the adopted of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Refer to Note 3 for more information. The total intrinsic value of stock options exercised during
2017
,
2016
and
2015
was
$26.0 million
,
$9.5 million
and
$9.0 million
, respectively. During
2017
,
520,517
stock options vested with a weighted average exercise price of
$30.46
and a weighted average vesting date fair value of
$39.69
.
Employee Restricted Shares
The changes in restricted share awards outstanding for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
were as follows:
|
|
|
|
|
|
|
|
|
Restricted Share
Awards Outstanding
|
|
Weighted Average Grant Date
Fair Value
|
Balance at January 3, 2015
|
181,767
|
|
|
$
|
25.87
|
|
Granted
|
74,874
|
|
|
31.02
|
|
Vested
|
(78,410
|
)
|
|
25.12
|
|
Forfeited
|
(11,872
|
)
|
|
28.19
|
|
Balance at January 2, 2016
|
166,359
|
|
|
$
|
28.38
|
|
Granted
|
102,477
|
|
|
30.60
|
|
Diamond Foods awards assumed
|
143,183
|
|
|
32.34
|
|
Vested
|
(220,155
|
)
|
|
30.73
|
|
Forfeited
|
(12,020
|
)
|
|
30.07
|
|
Balance at December 31, 2016
|
179,844
|
|
|
$
|
29.80
|
|
Granted
|
349,684
|
|
|
36.59
|
|
Vested
|
(123,863
|
)
|
|
30.62
|
|
Forfeited
|
(62,941
|
)
|
|
34.88
|
|
Balance at December 30, 2017
|
342,724
|
|
|
$
|
35.51
|
|
The deferred portion of these restricted shares is included in the Consolidated Balance Sheets as additional paid-in capital. As of
December 30, 2017
, there was
$11.4 million
in unrecognized compensation expense related to restricted shares that will be recognized over a weighted average period of
3.5
years. Unrecognized compensation expense related to restricted shares was
$2.9 million
as of
December 31, 2016
and
$2.5 million
as of
January 2, 2016
. To cover withholding taxes payable by employees upon the vesting of restricted shares in 2017, we repurchased
46,516
shares of common stock. To cover withholding taxes payable by employees upon the vesting of restricted shares in 2016, we repurchased
22,959
shares of common stock for the vesting of Snyder's-Lance employee incentive awards and
70,381
shares for the vesting of replacement awards converted from prior Diamond awards. During 2015, we repurchased
27,235
shares to cover withholding taxes.
Employee Performance-Based Restricted Units
During 2017 and 2016, we granted
73,133
and
81,999
performance-based restricted units, respectively. Recipients of these awards receive shares of the Company's common stock at the end of the performance period, based on the Company's actual performance against pre-established return on invested capital goals and total shareholder return goals. In order to receive the shares, the recipient must be employed by the Company on the vesting date. The performance-based restricted units represent the number of shares of common stock to be awarded based on the achievement of targeted performance and may range from
0
percent to
200
percent of the targeted amount. The fair value of the awards was determined using a Monte Carlo simulation and is being amortized over the performance period. We reassess at each reporting date whether achievement of each of the performance conditions is probable, as well as estimate forfeitures, and adjust compensation expense recognized as appropriate. At
December 30, 2017
and
December 31, 2016
, we assessed the total shareholder return target as probable of achievement. At
December 30, 2017
and
December 31, 2016
, we assessed the return on invested capital as below target and probable of achievement, respectively.
The following table provides a summary of the assumptions used in the Monte Carlo simulation:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Assumptions used in Monte Carlo simulation:
|
|
|
|
Risk-free interest rate
|
1.21
|
%
|
|
0.95
|
%
|
Time to maturity
|
2.8 years
|
|
|
2.8 years
|
|
Expected volatility
|
25.70
|
%
|
|
26.40
|
%
|
Grant date fair value of performance-based restricted units
|
$
|
38.41
|
|
|
$
|
19.41
|
|
The changes in performance-based restricted units outstanding for the years ended
December 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Grant Date
Fair Value
|
Balance at January 2, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
81,999
|
|
|
19.41
|
|
Dividend equivalents
|
1,115
|
|
|
19.41
|
|
Vested
|
(818
|
)
|
|
19.41
|
|
Forfeited
|
(6,789
|
)
|
|
19.41
|
|
Balance at December 31, 2016
|
75,507
|
|
|
$
|
19.41
|
|
Granted
|
73,133
|
|
|
38.41
|
|
Dividend equivalents
|
1,079
|
|
|
37.66
|
|
Forfeited
|
(44,086
|
)
|
|
29.99
|
|
Balance at December 30, 2017
|
105,633
|
|
|
$
|
28.16
|
|
The deferred portion of these performance-based restricted units is included in the Consolidated Balance Sheets as additional paid-in capital. As of
December 30, 2017
, there was
$2.3 million
in unamortized compensation expense related to performance-based restricted units that will be recognized over a period of
1.6
years.
Non-Employee Director Awards
In February 2014, the Snyder's-Lance, Inc. 2014 Director Stock Plan ("2014 Director Plan") was approved. The 2014 Director Plan is intended to attract and retain persons of exceptional ability to serve as directors and to further align the interests of directors and stockholders in enhancing the value of our common stock and to encourage such directors to remain with and to devote their best efforts to the Company. The Board of Directors reserved
400,000
shares of common stock for issuance under the 2014 Director Plan. This number was subject to adjustment in the event of stock dividends and splits, recapitalizations and similar transactions. As of
December 30, 2017
, there were approximately
234,000
shares available for future issuance under the Plan.
In
2017
, we awarded
12,000
shares of restricted shares to our directors, at a grant date fair value of
$35.81
and subject to certain vesting restrictions. During
2016
and
2015
, we awarded
16,000
and
20,000
restricted shares, respectively, to our directors with grant date fair values of
$30.99
and
$29.66
, respectively. Compensation cost associated with these restricted shares is recognized over the one-year vesting period, at which time the earned portion is charged against current earnings. The deferred portion of these restricted shares is included in the Consolidated Balance Sheets as additional paid-in capital.
In addition to restricted shares, we granted
28,000
restricted units in
2017
and
28,000
restricted units in
2016
to our directors with grant date fair values of
$35.81
and
$30.99
, respectively, which was based on the closing market price of the stock on the date of the grant. Awards are subject to certain vesting restrictions. Compensation cost associated with these restricted units is recognized over the one-year vesting period, at which time the earned portion is charged against current earnings. The deferred portion of these restricted units is included in the Consolidated Balance Sheets as additional paid-in capital.
Performance-Based Cash Incentive Plans
Performance-based cash awards vest over a
three
year performance period and are accounted for as liability awards. At
December 30, 2017
and
December 31, 2016
, the accrual for these awards was
$3.8 million
and
$6.1 million
, respectively.
Employee Stock Purchase Plan
Through December 18, 2017, we had an employee stock purchase plan under which shares of common stock are purchased on the open market with employee and employer contributions. This plan was frozen concurrent with the Company entering into Merger Agreement with Campbell Soup Company as further outlined in Note 2. The plan provided for the Company to contribute an amount equal to
10%
of the employees’ contributions. We contributed approximately
$0.2 million
to the employee stock purchase plan in
2017
,
2016
and
2015
.
NOTE 9. INVENTORIES
Inventories as of
December 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Finished goods
|
|
$
|
113,220
|
|
|
$
|
102,056
|
|
Raw materials
|
|
31,258
|
|
|
32,095
|
|
Maintenance parts, packaging and supplies
|
|
45,411
|
|
|
39,305
|
|
Total inventories, net
|
|
$
|
189,889
|
|
|
$
|
173,456
|
|
NOTE
10
. FIXED ASSETS
Fixed assets as of
December 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Land and land improvements
|
|
$
|
41,273
|
|
|
$
|
37,835
|
|
Buildings and building improvements
|
|
196,407
|
|
|
192,874
|
|
Machinery, equipment and computer systems
|
|
656,507
|
|
|
607,869
|
|
Trucks, trailers and automobiles
|
|
33,822
|
|
|
32,723
|
|
Furniture and fixtures
|
|
4,580
|
|
|
4,720
|
|
Construction in progress
|
|
17,361
|
|
|
22,098
|
|
Capital leases
(1)
|
|
2,722
|
|
|
3,303
|
|
|
|
$
|
952,672
|
|
|
$
|
901,422
|
|
Accumulated depreciation
|
|
(459,436
|
)
|
|
(399,472
|
)
|
|
|
493,236
|
|
|
501,950
|
|
Fixed assets held for sale
|
|
(799
|
)
|
|
(66
|
)
|
Fixed assets, net
|
|
$
|
492,437
|
|
|
$
|
501,884
|
|
(1)
Gross amounts of assets recorded under capital leases represent machinery and equipment as of December 30, 2017 and December 31, 2016.
Depreciation expense related to fixed assets was
$69.5 million
during
2017
,
$70.1 million
during
2016
and
$59.6 million
during
2015
. The increase in depreciation expense for 2016 as compared to 2015 was primarily due to the acquisition of Diamond Foods in early 2016 (see Note
5
for further information).
There were fixed asset impairment charges of
$10.1 million
recorded during
2017
,
$3.7 million
recorded during
2016
, and
$11.5 million
recorded during
2015
. During 2017, we closed our Perry, Florida manufacturing facility, as part of our Transformation Plan described in Note
6
, resulting in an impairment charge of
$7.2 million
. The remaining impairment is related to manufacturing assets for which we no longer have a business use. During 2016, we sold the Diamond of California business along with certain tangible assets (see Note
4
for further information). In connection with this transaction, we re-purposed the machinery and equipment not included in the sale and recorded impairment of
$2.3 million
for certain assets which we no longer have the ability to use. We also incurred impairment charges of
$1.4 million
primarily related to machinery and equipment no longer in use due to the discontinuation of manufacturing of certain products. During 2015, we made the decision to relocate the production of certain products to improve operational efficiency. As part of this decision, certain packaging equipment was replaced in order to provide additional packaging alternatives. These actions resulted in impairment charges. The fair value remaining for these fixed assets was determined using Level 3 inputs such as the salvage value on similar assets previously sold.
NOTE
11
. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for
2017
and
2016
are as follows:
|
|
|
|
|
|
(in thousands)
|
|
Carrying Amount
|
Balance as of January 2, 2016
|
|
$
|
539,119
|
|
Business acquisitions
|
|
838,243
|
|
Enterprise goodwill attributable to discontinued operations
|
|
(48,845
|
)
|
Changes in foreign currency exchange rate
|
|
(9,625
|
)
|
Goodwill reclassified to assets held for sale
|
|
(530
|
)
|
Balance as of December 31, 2016
|
|
$
|
1,318,362
|
|
Business acquisition and measurement period adjustments
|
|
2,400
|
|
Changes in foreign currency exchange rate
|
|
6,567
|
|
Goodwill reclassified from assets held for sale, net
|
|
1,378
|
|
Impairments
|
|
(46,335
|
)
|
Balance as of December 30, 2017
|
|
$
|
1,282,372
|
|
As of the date of our 2016 annual impairment analysis, the fair value of our European reporting unit was estimated to be approximately
15%
above the carrying value. The net sales and operating income of our businesses in the U.K. continued to be adversely impacted by macroeconomic challenges and changing consumer shopping behavior through the third quarter of 2017, and as a result, the actual and forecasted net revenue and operating income are below the amounts contemplated in the 2016 annual impairment analysis. Based on the declining performance levels and the relatively small difference between the fair value and carrying value of the reporting unit in the 2016 annual impairment analysis, we performed an interim impairment analysis of our European reporting unit as of September 30, 2017. The goodwill impairment analysis was performed by computing the fair value of the reporting unit and comparing it to the carrying value, including goodwill. In accordance with the applicable guidance, we tested other assets for impairment before goodwill. As described in Note
3
, New Accounting Standards, the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment, in the second quarter of 2017, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company determined the fair value of the European reporting unit using a discounted cash flow method (income approach). Significant assumptions used in the assessment included our updated long-range cash flow projections for the European business, discount rate, and tax rate. As a result of this analysis, we recognized a
$46.3 million
impairment charge related to the goodwill in our European reporting unit. We performed an annual goodwill assessment and the computed fair value is greater than the carrying value at December 30, 2017, therefore no additional impairment has been recorded. Based on the assessment, the
$51.5 million
of goodwill associated with the European reporting unit remains susceptible to future impairment charges as the fair value is less than 15% higher than the carrying value.
As described in Note
3
, New Accounting Standards, the Company adopted ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, we will no longer allocate any of the purchase price to goodwill upon acquisition of a route and we will no longer perform a relative fair value allocation of goodwill upon divestitures. As a result,
$1.5 million
of goodwill that was previously allocated to routes held for sale was reclassified to goodwill, this is partially offset against
$0.2 million
of goodwill which was reclassified to routes held for sale prior to the adoption of the standard.
Prior to 2017, there have been
no
historical impairments to goodwill.
As of
December 30, 2017
and
December 31, 2016
, acquired intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gross
Carrying
Amount
|
|
Cumulative Impairments
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
As of December 30, 2017:
|
|
|
|
|
|
|
|
|
Customer and contractual relationships
(1)
– amortized
|
|
$
|
501,987
|
|
|
$
|
—
|
|
|
$
|
(84,928
|
)
|
|
$
|
417,059
|
|
Non-compete agreement – amortized
|
|
710
|
|
|
—
|
|
|
(537
|
)
|
|
173
|
|
Reacquired rights – amortized
|
|
3,100
|
|
|
—
|
|
|
(2,488
|
)
|
|
612
|
|
Patents – amortized
|
|
8,600
|
|
|
—
|
|
|
(4,090
|
)
|
|
4,510
|
|
Developed technology – amortized
|
|
2,700
|
|
|
—
|
|
|
(640
|
)
|
|
2,060
|
|
Routes – unamortized
|
|
10,425
|
|
|
(45
|
)
|
|
—
|
|
|
10,380
|
|
Trademarks
(2)
– unamortized
|
|
931,519
|
|
|
(65,085
|
)
|
|
—
|
|
|
866,434
|
|
Balance as of December 30, 2017
|
|
$
|
1,459,041
|
|
|
$
|
(65,130
|
)
|
|
$
|
(92,683
|
)
|
|
$
|
1,301,228
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
Customer and contractual relationships – amortized
|
|
$
|
493,026
|
|
|
$
|
—
|
|
|
$
|
(58,314
|
)
|
|
$
|
434,712
|
|
Non-compete agreement – amortized
|
|
710
|
|
|
—
|
|
|
(417
|
)
|
|
293
|
|
Reacquired rights – amortized
|
|
3,100
|
|
|
—
|
|
|
(2,101
|
)
|
|
999
|
|
Patents – amortized
|
|
8,600
|
|
|
—
|
|
|
(3,308
|
)
|
|
5,292
|
|
Developed technology - amortized
|
|
2,700
|
|
|
—
|
|
|
(460
|
)
|
|
2,240
|
|
Routes – unamortized
|
|
10,869
|
|
|
(45
|
)
|
|
—
|
|
|
10,824
|
|
Trademarks – unamortized
|
|
926,140
|
|
|
(6,700
|
)
|
|
—
|
|
|
919,440
|
|
Balance as of December 31, 2016
|
|
$
|
1,445,145
|
|
|
$
|
(6,745
|
)
|
|
$
|
(64,600
|
)
|
|
$
|
1,373,800
|
|
(1)
The translation impact on customer relationships was an increase of
$9.0 million
.
(2)
The translation impact on trademarks was an increase of
$5.4 million
.
Intangible assets subject to amortization are being amortized over a weighted average useful life of
19.4 years
. The intangible assets related to customer and contractual relationships are being amortized over a weighted average useful life of
19.6 years
and will be amortized through
February 2036
. The intangible assets related to patents are being amortized over
11 years
, reacquired rights are being amortized over
8 years
, and intangible assets related to developed technology are being amortized over
15 years
. Amortization expense related to intangibles was
$27.4 million
,
$24.7 million
and
$10.7 million
during
2017
,
2016
and
2015
, respectively.
Annual amortization expense for these intangible assets will be as follows:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
2018
|
|
$
|
26,657
|
|
2019
|
|
26,305
|
|
2020
|
|
25,976
|
|
2021
|
|
25,976
|
|
2022
|
|
25,976
|
|
Thereafter
|
|
293,524
|
|
Total intangible asset amortization expense
|
|
$
|
424,414
|
|
Trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. Although not amortized, they are reviewed for impairment as conditions change or at least on an annual basis. As disclosed in previous quarters, the carrying value of the trademarks acquired in the Diamond Foods acquisition had approximated the fair value of these trademarks since the time of the acquisition. In the third quarter of 2017, the net revenue performance of certain brands and the impact on future projections were triggering events prompting us to perform interim impairment analyses over Pop Secret, Emerald, and
KETTLE
®
Chips (U.K). The net revenue declines in the third quarter and long-term projections for Pop Secret branded products are a result of category declines from shifts in consumer preferences. The net revenue declines in the current year for Emerald branded products related to our inability to meet customer demand earlier in 2017 due to delays incurred as the result of the move of production to our Charlotte, NC plant. For our KETTLE
®
branded products in the U.K., the challenges noted above for the European reporting unit also apply. The fair value of these trade names were determined using a relief from royalty method (income approach). Significant assumptions used in this assessment included our updated long-range net revenue projections, royalty rate, discount rate, and tax rate. Based on the analysis performed over our Pop Secret trademark as of September 30, 2017, we recognized a
$46.6 million
impairment charge as we believe the decline in current year net revenue is symptomatic of a declining subcategory and have updated our long-term net revenue projections accordingly. We recognized no impairment charges as a result of our interim analysis of the Emerald trademark as we do not believe that the third quarter decline in net revenue is indicative of a long-term trend and we expect to recover the short-falls following the completion of the move of production to the Charlotte, NC facility. As a result of the analysis performed over the KETTLE
®
Chips U.K. trademark, we recognized an
$11.8 million
impairment charge.
In the fourth quarter, we performed our annual analysis for each of our tradenames and we have not identified additional impairment. We have
$160.2 million
carrying value in trademarks that have a carrying value that approximates fair value. Any adverse changes in the use of these trademarks or declines in the net revenue volumes of the associated products from the projected amounts, or changes in the royalty rates or discount rates, could result in an impairment charge in the future.
As discussed in Note
6
, an initiative of our Transformation Plan is SKU rationalization to reduce complexity within the organization. If this process results in significant elimination of SKUs or a strategic shift away from investing in the brands for which the trademarks' carrying value approximates its fair value, the reduction in future cash flow may result in an impairment of these trademarks. As of December 30, 2017, no such strategic decisions have been finalized which will impact the brands with at-risk trademarks.
The impairment analysis utilized a significant number of unobservable Level 3 inputs, such as revenue and cash flow assumptions. See Note
14
, Fair Value Measurements, for a definition of Level 3 inputs. The conclusion of the initiatives under the Transformation Plan may result in additional charges being recognized in a future quarter.
The changes in the carrying amount of route intangible assets for
2017
and
2016
were as follows:
|
|
|
|
|
|
(in thousands)
|
|
Carrying Amount
|
Balance as of January 2, 2016
|
|
$
|
11,063
|
|
Impairment charges
|
|
(45
|
)
|
Routes reclassified to assets held for sale
|
|
(194
|
)
|
Balance as of December 31, 2016
|
|
$
|
10,824
|
|
Routes reclassified to assets held for sale
|
|
(444
|
)
|
Balance as of December 30, 2017
|
|
$
|
10,380
|
|
Route businesses, including route intangibles and associated goodwill, allocated to assets held for sale represent assets available for sale in their present condition and for which actions to complete a sale have been initiated. The changes in the carrying amount of route businesses held for sale for
2017
and
2016
were as follows:
|
|
|
|
|
|
(in thousands)
|
|
Carrying Amount
|
Balance as of January 2, 2016
|
|
$
|
15,590
|
|
Purchases of route businesses held for sale
|
|
42,206
|
|
Sales of route businesses held for sale
|
|
(38,278
|
)
|
Reclassifications from route intangibles and goodwill
|
|
724
|
|
Impairment of route businesses held for sale
|
|
(740
|
)
|
Balance as of December 31, 2016
|
|
$
|
19,502
|
|
Purchases of route businesses held for sale
|
|
53,907
|
|
Sales of route businesses held for sale
|
|
(54,329
|
)
|
Reclassifications from route intangibles and goodwill
|
|
605
|
|
Reclassification of Goodwill due to adoption of new accounting standard
|
|
(1,539
|
)
|
Balance as of December 30, 2017
|
|
$
|
18,146
|
|
We recorded
no
impairments for route businesses held for sale during 2017. We recorded
$0.7 million
and
$0.5 million
of impairments to our route businesses held for sale during
2016
and
2015
, respectively. The impairments were due to declines in the fair value of the route businesses in certain regions. The fair value of the route businesses was determined using Level 3 inputs such as market multiples for similar route businesses.
During
2017
, net gains on the sale of route businesses consisted of
$9.4 million
in gains and
$7.1 million
in losses. During
2016
, net gains on the sale of route businesses consisted of
$5.5 million
in gains and
$4.2 million
in losses. During
2015
, net gains on the sale of route businesses consisted of
$3.3 million
in gains and
$1.4 million
in losses. The majority of the route business purchases and sales were due to the reengineering of route businesses to accommodate new customers and additional Partner brand business obtained in the impacted markets as well as the decision to sell certain route businesses that were previously owned by us. See Note
18
for further information related to IBOs.
NOTE
12
. LONG-TERM DEBT
Debt outstanding as of
December 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Senior unsecured term loan due February 2021, interest payable based on the 1-month Eurodollar rate plus an applicable margin of 1.750% (All-in blended rate of 3.169% as of December 30, 2017, including applicable margin)
(1) (5)
|
|
$
|
457,375
|
|
|
$
|
498,875
|
|
Senior unsecured term loan due February 2026, interest payable based on the 1-month Eurodollar rate plus an applicable margin of 2.125% (All-in blended rate of 3.796% as of December 30, 2017, including applicable margin)
(2) (5)
|
|
300,000
|
|
|
300,000
|
|
Unsecured term loan due May 2024, interest payable based on the 1-month Eurodollar rate plus an applicable margin of 2.075% (All-in blended rate of 3.624% as of December 30, 2017, including applicable margin)
(3) (6)
|
|
150,000
|
|
|
150,000
|
|
Unsecured term loan due May 2019, interest payable based on the 1-month Eurodollar rate plus an applicable margin of 1.700% (All-in blended rate of 3.271% as of December 30, 2017, including applicable margin)
(4) (6)
|
|
121,875
|
|
|
129,375
|
|
Unsecured base rate revolving loan due May 2019, interest was payable at the agreement base rate plus applicable margin of 0.450% (Balance reduced amount available under the unsecured revolving credit facility.)
(6)
|
|
—
|
|
|
200,000
|
|
Unsecured revolving credit facility due May 2019, interest payable based on the 1-month Eurodollar rate plus applicable margin of 1.450% (All-in rate of 3.019% as of December 30, 2017, including applicable margin)
(6)
|
|
55,000
|
|
|
27,000
|
|
Debt issuance costs, net
|
|
(9,717
|
)
|
|
(10,291
|
)
|
Total debt, net
|
|
1,074,533
|
|
|
1,294,959
|
|
Less current portion of long-term debt
|
|
(49,000
|
)
|
|
(49,000
|
)
|
Total long-term debt, net
|
|
$
|
1,025,533
|
|
|
$
|
1,245,959
|
|
(1)
We hold an interest rate swap agreement which effectively fixes the variable rate (Eurodollar portion) to
1.271%
on
$230.0 million
of underlying notional amount from June 2017 through February 2021. See Note
15
for further details.
(2)
We hold three interest rate swap agreements, the first effectively fixing the variable rate (Eurodollar portion) to
1.337%
on
$100.0 million
of underlying notional amount from June 2017 through June 2021; the second effectively fixing the variable rate to
1.615%
on
$100.0 million
of underlying notional amount from June 2017 through June 2024; and the third effectively fixing the variable rate (Eurodollar portion) to
2.06%
on
$100.0 million
of underlying notional from June 2017 through December 2022. See Note
15
for further details.
(3)
We hold two interest rate swap agreements, the first effectively fixing the variable rate (Eurodollar portion) to
1.975%
on
$50.0 million
of underlying notional amount from present through May 2022 and the second effectively fixing the variable rate to
1.236%
on
$70.0 million
of underlying notional amount from June 2017 through June 2020. See Note
15
for further details.
(4)
We hold an interest rate swap agreement which effectively fixes the variable rate (Eurodollar portion) to
1.580%
on
$25.0 million
of underlying notional amount from present through May 2019. See Note
15
for further details.
(5)
Under the Credit Agreement as defined below.
(6)
Under the Amended and Restated Credit Agreement as defined below.
Annual maturities of long-term debt as of
December 30, 2017
are as follows:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
2018
|
|
$
|
49,000
|
|
2019
|
|
233,375
|
|
2020
|
|
71,500
|
|
2021
|
|
407,875
|
|
2022
|
|
90,000
|
|
Thereafter
|
|
232,500
|
|
Total long-term debt maturities
|
|
$
|
1,084,250
|
|
In conjunction with our acquisition of Diamond Foods, we entered into a senior unsecured credit agreement as amended with the lenders party (the “Term Lenders”) and Bank of America, N.A., as administrative agent (the "Credit Agreement"). Under the Credit Agreement, the Term Lenders provided (i) senior unsecured term loans in an original aggregate principal amount of
$830.0 million
maturing
five
years after the funding date (the “Senior Five Year Term Loans”) and (ii) senior unsecured term loans in an original aggregate principal amount of
$300.0 million
maturing
ten
years after the funding date (the “Senior Ten Year Term Loans”). The
$1.13 billion
in proceeds from the Credit Agreement were used to finance, in part, the cash component of the acquisition consideration, to repay indebtedness of Diamond Foods and us, and to pay certain fees and expenses incurred in connection with the Diamond Foods acquisition.
Loans outstanding under the Credit Agreement bear interest, at our option, either at (i) a Eurodollar rate plus an applicable margin specified in the Credit Agreement or (ii) a base rate plus an applicable margin specified in the Credit Agreement. The applicable margin added to the Eurodollar rate or base rate, as the case may be, is subject to adjustment after the end of each fiscal quarter based on changes in the Company’s adjusted total net debt-to-EBITDA ratio.
Under the Credit Agreement, the outstanding principal amount of the Senior Five Year Term Loans is payable in equal quarterly installments of
$10.4 million
on the last business day of each quarter. These payments began in the second quarter of 2016 and continue through December 2020. The remaining unamortized balance is payable in February 2021. The outstanding principal amount of the Senior Ten Year Term Loans is payable in quarterly principal installments of
$15.0 million
beginning in the second quarter of 2021 and continuing through December 2025. The remaining unamortized balance is payable in February 2026. The Credit Agreement also contains optional prepayment provisions.
As a result of the Credit Agreement, we entered into certain amendments to our existing credit agreement (the "Amended and Restated Credit Agreement"). Our Amended and Restated Credit Agreement contains a revolving credit facility which allows us to make revolving credit borrowings of up to
$375.0 million
through May 2019. As of
December 30, 2017
, and
December 31, 2016
, we had available
$320.0 million
and
$148.0 million
, respectively, of unused borrowings. Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the revolving credit agreement by up to
$200.0 million
for the remaining life of the facility. Revolving credit borrowings incur interest based on a Eurodollar or base rate plus an applicable margin of between
0.795%
and
1.450%
. The applicable margin is determined by certain financial ratios and was
1.450%
as of
December 30, 2017
. The revolving credit facility also requires us to pay a facility fee ranging from
0.08%
to
0.25%
on the entire
$375.0 million
based on certain financial ratios. The facility fee rate was
0.250%
on
December 30, 2017
.
Loans outstanding under the Amended and Restated Credit Agreement bear interest, at our option, either at (i) a Eurodollar rate plus an applicable margin specified in the Amended and Restated Credit Agreement or (ii) a base rate plus an applicable margin specified in the Amended and Restated Credit Agreement. The applicable margin added to a Eurodollar rate or base rate, as the case may be, is subject to adjustment after the end of each fiscal quarter based on changes in our adjusted total net debt-to-EBITDA ratio.
Under the Amended and Restated Credit Agreement, the outstanding principal amount of the unsecured five year term loans is payable in equal quarterly installments of
$1.9 million
on the last business day of each quarter. These payments began in the second quarter of 2014 and continue through March 2019. The remaining unamortized balance is payable in May 2019. The outstanding principal amount of the unsecured ten year term loans is payable in quarterly principal installments of
$7.5 million
beginning in the third quarter of 2019 and continuing through March 2024. The remaining unamortized balance is payable in May 2024. The Amended and Restated Credit Agreement also contains optional prepayment provisions.
In February 2016, using available borrowings from the revolving credit facility of our Amended and Restated Credit Agreement and cash on hand, we repaid our
$100.0 million
private placement senior notes which were due in June 2017. The total repayment was approximately
$106 million
, and resulted in a loss on early extinguishment of approximately
$4.7 million
. The loss on early extinguishment of debt was calculated as follows:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Repayment of private placement senior notes
|
|
$
|
100,000
|
|
Penalty on early extinguishment
|
|
6,170
|
|
Book value of private placement debt, including unamortized fair value adjustment
|
|
(101,421
|
)
|
Loss on early extinguishment of debt
|
|
$
|
4,749
|
|
On February 27, 2017, we entered into an amendment to the Credit Agreement with the term lenders party to the Credit Agreement and Bank of America, N.A.,
which amended the definition of EBIT in the Credit Agreement to be EBITDA minus, to the extent included in determining EBITDA, depreciation and amortization of the Company and its subsidiaries for the computation period.
Our obligations under the Amended and Restated Credit Agreement are guaranteed by all of our existing and future direct and indirect wholly-owned domestic subsidiaries other than any such subsidiaries that, taken together, do not represent more than 10% of the total domestic assets or domestic revenues of the Company and its wholly-owned domestic subsidiaries. The Amended and Restated Credit Agreement contains customary representations, warranties and covenants. The financial covenants pursuant to the Amended and Restated Credit Agreement included a maximum total debt to EBITDA ratio, as defined in the Amended and Restated Credit Agreement ("Original EBITDA Covenant Ratio"). On May 8, 2017, we amended our Amended and Restated Credit Agreement to extend the maximum total debt to EBITDA ratio covenant ("May 2017 Amended EBITDA Covenant Ratio"). Such EBITDA ratios were as follows:
|
|
|
|
|
|
|
|
|
|
Original EBITDA Covenant Ratio
|
|
May 2017 Amended EBITDA Covenant Ratio
|
Second and Third Quarters 2016
|
|
4.75
|
|
|
N/A
|
|
Fourth Quarter 2016 and First Quarter 2017
|
|
4.25
|
|
|
N/A
|
|
Second Quarter 2017
|
|
4.00
|
|
|
4.25
|
|
Third Quarter 2017
|
|
3.75
|
|
|
4.25
|
|
Fourth Quarter 2017 and First Quarter 2018
|
|
3.50
|
|
|
4.25
|
|
Second Quarter 2018
|
|
3.50
|
|
|
4.00
|
|
Third Quarter 2018
|
|
3.50
|
|
|
3.75
|
|
Fourth Quarter 2018 and Thereafter to Maturity
|
|
3.50
|
|
|
3.50
|
|
In addition to the EBITDA ratio, the financial covenants also include a minimum interest coverage ratio of
2.50
to 1.00.
In addition, our Amended Credit Agreement provides for adjusted EBITDA to include up to
$20.0 million
, during the lifetime of the Amended Credit Agreement, of non-recurring costs and expenses paid in cash, as defined. We paid approximately
$2.4 million
in Consent and Administrative fees associated with the amendment but there were no revisions to the Amended Credit Agreement that will impact the effective interest rate as originally provided. The
$2.4 million
in fees were capitalized as debt issuance costs. Total debt issuance costs associated with the Credit Agreement of approximately
$11.0 million
were capitalized in late 2015 and the first quarter of 2016. Total debt issuance costs associated with the Amended and Restated Credit Agreement were deferred in fiscal 2014. All such capitalized debt issuance costs are being amortized over the life of the applicable loans.
Other covenants include, but are not limited to, limitations on: (i) liens, (ii) dispositions of assets, (iii) mergers and consolidations, (iv) loans and investments, (v) subsidiary indebtedness, (vi) transactions with affiliates and (vii) certain dividends and distributions. The Amended and Restated Credit Agreement contains customary events of default, including a cross default provision and change of control provisions. If an event of default occurs and is continuing, we may be required to repay all amounts outstanding under the Amended and Restated Credit Agreement.
As of
December 30, 2017
, we were in compliance with all debt covenants across both credit agreements.
Including the effect of interest rate swap agreements, the weighted average interest rate was
3.41%
,
2.95%
and
3.14%
, respectively, as of
December 30, 2017
,
December 31, 2016
, and
January 2, 2016
. See Note
15
for further information on our interest rate swap agreements.
Total interest expense under all credit agreements for
2017
,
2016
and
2015
was
$39.3 million
,
$32.9 million
, and
$11.1 million
, respectively. Included in total interest expense is debt issuance cost amortization expense of
$2.9 million
,
$2.1 million
, and
$0.5 million
for
2017
,
2016
, and
2015
, respectively.
NOTE
13
. INCOME TAXES
On December 22, 2017, the Tax Act was signed into law. The Tax Act made numerous changes to many aspects of U.S. corporate income taxation by, among other things, lowering the corporate income tax rate from
35%
to
21%
, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earning of foreign subsidiaries. As a result of the Tax Act, the Company revalued its net deferred tax liabilities to reflect the tax rate expected to apply in the years in which the temporary differences are expected to reverse. This resulted in an approximate
$123.2 million
tax benefit.
The Tax Act provides a full dividends received deduction for any future dividends from non-U.S. subsidiaries to their U.S. parent company. The Tax Act also imposes a one-time deemed repatriation of accumulated post-1986 foreign earnings which have not been previously taxed. The Company recorded a provisional estimate for this transition tax of approximately
$7.5 million
. Through the third quarter of 2017 the Company had recorded taxes of approximately
$46.7 million
on the amount of basis difference in foreign subsidiaries which is not indefinitely reinvested. In the fourth quarter of 2017, the Company has recorded a benefit to reflect the reduced rate at which any remaining basis difference will be taxed.
The SEC staff issued SAB 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have recognized a net tax benefit of
$162.4 million
for the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 30, 2017. We are in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We expect to complete our analysis within the measurement period in accordance with SAB 118.
Relevant to the current consolidated financial statements is the Company's selection of an accounting policy with respect to the new Global Intangible Low-Tax Income ("GILTI"). The Company will elect to treat the GILTI as a period cost, therefore no deferred tax effects have been recorded.
Income tax (benefit)/expense from continuing operations for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
7,014
|
|
|
$
|
920
|
|
|
$
|
22,479
|
|
State and other
|
|
1,726
|
|
|
4,387
|
|
|
3,842
|
|
Foreign
|
|
211
|
|
|
—
|
|
|
131
|
|
|
|
$
|
8,951
|
|
|
$
|
5,307
|
|
|
$
|
26,452
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
$
|
(153,957
|
)
|
|
$
|
23,413
|
|
|
$
|
3,109
|
|
State and other
|
|
1,562
|
|
|
(370
|
)
|
|
(676
|
)
|
Foreign
|
|
(2,700
|
)
|
|
(3,030
|
)
|
|
—
|
|
|
|
$
|
(155,095
|
)
|
|
$
|
20,013
|
|
|
$
|
2,433
|
|
Income tax (benefit)/expense
|
|
$
|
(146,144
|
)
|
|
$
|
25,320
|
|
|
$
|
28,885
|
|
The foreign provision for income taxes is based on a foreign pre-tax loss of
$61.3 million
in 2017,
$35.0 million
in 2016 and foreign pre-tax earnings of
$0.4 million
in 2015. All accumulated earnings and profits of foreign subsidiaries are deemed to have been remitted as part of the one-time transition tax. Future earnings of our foreign subsidiaries will be considered to be indefinitely reinvested.
Reconciliations of the federal income tax rate to our effective income tax rate for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Statutory income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes, net of federal income tax benefit
|
173.7
|
%
|
|
3.9
|
%
|
|
2.6
|
%
|
Net favorable foreign income taxes as a result of tax adjustments and tax rate differences
|
162.3
|
%
|
|
(3.7
|
)%
|
|
—
|
%
|
Effect of US rate change in year of enactment
|
(12,852.9
|
)%
|
|
—
|
%
|
|
—
|
%
|
Effect of U.K. rate change in year of enactment
|
—
|
%
|
|
(1.9
|
)%
|
|
—
|
%
|
Non-deductible goodwill on sale of route businesses
|
3.2
|
%
|
|
0.1
|
%
|
|
0.4
|
%
|
Deduction for inventory contributions
|
(100.5
|
)%
|
|
(0.5
|
)%
|
|
(0.3
|
)%
|
Meals and entertainment
|
20.3
|
%
|
|
0.7
|
%
|
|
0.5
|
%
|
IRC 199 deduction
|
—
|
%
|
|
—
|
%
|
|
(2.6
|
)%
|
Change in uncertain tax positions
|
(48.6
|
)%
|
|
0.8
|
%
|
|
(1.5
|
)%
|
Non-deductible transaction costs
|
59.8
|
%
|
|
4.7
|
%
|
|
2.0
|
%
|
Excess tax benefits for share-based payments
|
(548.0
|
)%
|
|
—
|
%
|
|
—
|
%
|
Goodwill impairment
|
1,275.0
|
%
|
|
—
|
%
|
|
—
|
%
|
Executive compensation
|
239.8
|
%
|
|
—
|
%
|
|
—
|
%
|
Miscellaneous items, net
|
13.4
|
%
|
|
(1.4
|
)%
|
|
0.2
|
%
|
Effective income tax rate
|
(11,567.5
|
)%
|
|
37.7
|
%
|
|
36.3
|
%
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 30, 2017
and
December 31, 2016
, are presented below:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
Reserves for employee compensation, deductible when paid for income tax purposes, accrued for financial reporting purposes
|
|
$
|
11,762
|
|
|
$
|
28,560
|
|
Reserves for insurance claims, deductible when paid for income tax purposes, accrued for financial reporting purposes
|
|
3,421
|
|
|
4,850
|
|
Other reserves, deductible when paid for income tax purposes, accrued for financial reporting purposes
|
|
10,858
|
|
|
14,947
|
|
Basis difference in fixed rate debt
|
|
—
|
|
|
187
|
|
Inventories, principally due to additional costs capitalized for income tax purposes
|
|
3,587
|
|
|
4,790
|
|
Federal NOLs and tax credit carryforwards
|
|
42,443
|
|
|
83,157
|
|
Net state operating loss and tax credit carryforwards
|
|
30,439
|
|
|
24,123
|
|
Total gross deferred tax assets
|
|
$
|
102,510
|
|
|
$
|
160,614
|
|
Less valuation allowance
|
|
(14,170
|
)
|
|
(11,283
|
)
|
Net deferred tax assets
|
|
$
|
88,340
|
|
|
$
|
149,331
|
|
Deferred tax liabilities:
|
|
|
|
|
Fixed assets, principally due to differences in depreciation, net of impairment reserves
|
|
$
|
(38,439
|
)
|
|
$
|
(56,851
|
)
|
Intangible assets, principally due to differences in amortization and acquisition basis differences
|
|
(264,472
|
)
|
|
(405,060
|
)
|
Employee compensation, principally due to change in method of accounting
|
|
—
|
|
|
(1,278
|
)
|
Unrealized gains, taxable when realized for income tax purposes, included in other comprehensive income
|
|
(3,405
|
)
|
|
(4,040
|
)
|
Basis difference in noncurrent investments
|
|
(6,371
|
)
|
|
(8,298
|
)
|
Unremitted foreign earnings
|
|
—
|
|
|
(42,211
|
)
|
Prepaid expenses and other costs deductible for tax, amortized for financial reporting purposes
|
|
(2,659
|
)
|
|
(4,417
|
)
|
Total gross deferred tax liabilities
|
|
$
|
(315,346
|
)
|
|
$
|
(522,155
|
)
|
|
|
|
|
|
Deferred income taxes, net
|
|
$
|
(227,006
|
)
|
|
$
|
(372,824
|
)
|
Included in the deferred income taxes, net above are
$7.9 million
and
$5.4 million
of deferred tax assets, which are included in Other noncurrent assets on the consolidated balance sheets as of December 30, 2017 and December 31, 2016, respectively.
As of December 30, 2017, we have approximately
$20.2 million
of state tax loss carryforwards available to offset future taxable income. Most of these loss carryforwards expire at various times between 2018 and 2036. Based on projected income levels and our future state tax profile, we believe it is more likely than not that several of these loss carryforwards will not be utilized prior to their expiration. Therefore, a valuation allowance of approximately
$4.6 million
has been established to account for the expected realizable value of the state loss carryforwards.
As of December 30, 2017, we have approximately
$11.1 million
of state tax credits available to offset future tax liabilities. Most of these credits expire at the end of 2023. Based on projected income levels and our future state tax profile, we believe it is more likely than not that most of these credits will not be utilized prior to their expiration. Therefore, a valuation allowance of approximately
$9.6 million
has been established to account for the expected realizable valuation of the state tax credits.
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. The effective income tax rate is lower than the federal statutory rate primarily due to the Tax Act which was signed into law on December 22, 2017. The effect of state and local taxes on the 2017 and 2016 effective tax rate includes the impact of a revaluation of deferred tax assets and liabilities due to enacted changes in the statutory rates in various state jurisdictions.
We have recorded gross unrecognized tax benefits, as of December 30, 2017, totaling
$4.8 million
and related interest and penalties of
$0.7 million
in other noncurrent liabilities on the Consolidated Balance Sheets. Approximately
$4.7 million
would affect the effective tax rate if subsequently recognized. This amount includes
$0.6 million
and
$0.1 million
of interest and penalties, respectively. We expect certain income tax audits will be settled, positions will be resolved through administrative procedures or statutes of limitations will expire for various tax authorities during the next twelve months, resulting in a potential
$0.8 million
reduction of the unrecognized tax benefit. We classify interest and penalties associated with income tax positions within income tax expense.
We have open years for income tax audit purposes in our major taxing jurisdictions according to statutes as follows:
|
|
|
|
Jurisdiction
|
|
Open Years
|
US federal
|
|
2014 and forward
|
California
|
|
2011 and forward
|
North Carolina
|
|
2014 and forward
|
New York
|
|
2014 and forward
|
Illinois
|
|
2014 and forward
|
United Kingdom
|
|
2016 and forward
|
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Balance at January 2, 2016
|
|
$
|
2,735
|
|
Additions for tax positions taken during the current period
|
|
653
|
|
Additions for tax positions taken during a prior period
|
|
873
|
|
Additions for positions resulting from business combination
|
|
2,425
|
|
Reductions resulting from a lapse of the statute of limitations
|
|
(852
|
)
|
Balance at December 31, 2016
|
|
$
|
5,834
|
|
Additions for tax positions taken during the current period
|
|
400
|
|
Additions for tax positions taken during a prior period
|
|
248
|
|
Reductions resulting from a lapse of the statute of limitations
|
|
(1,650
|
)
|
Balance at December 30, 2017
|
|
$
|
4,832
|
|
NOTE
14
. FAIR VALUE MEASUREMENTS
The following table summarizes information regarding financial assets and financial liabilities that are measured at fair value at
December 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Book Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Balance as of December 30, 2017
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,703
|
|
|
$
|
18,703
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash
|
|
446
|
|
|
446
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
13,136
|
|
|
—
|
|
|
13,136
|
|
|
—
|
|
Assets held for fully funded deferred compensation plan
|
|
5,898
|
|
|
5,898
|
|
|
—
|
|
|
—
|
|
Total assets
|
|
$
|
38,183
|
|
|
$
|
25,047
|
|
|
$
|
13,136
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation plan obligations
|
|
$
|
5,898
|
|
|
$
|
5,898
|
|
|
$
|
—
|
|
|
$
|
—
|
|
IBNR - Casualty
|
|
7,329
|
|
|
—
|
|
|
7,329
|
|
|
—
|
|
IBNR - Medical
|
|
4,238
|
|
|
—
|
|
|
4,238
|
|
|
—
|
|
Total liabilities
|
|
$
|
17,465
|
|
|
$
|
5,898
|
|
|
$
|
11,567
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,409
|
|
|
$
|
35,409
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash
|
|
714
|
|
|
714
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
10,748
|
|
|
—
|
|
|
10,748
|
|
|
—
|
|
Assets held for fully funded deferred compensation plan
|
|
5,192
|
|
|
5,192
|
|
|
—
|
|
|
—
|
|
Total assets
|
|
$
|
52,063
|
|
|
$
|
41,315
|
|
|
$
|
10,748
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
392
|
|
|
$
|
—
|
|
|
$
|
392
|
|
|
$
|
—
|
|
Deferred compensation plan obligations
|
|
5,192
|
|
|
5,192
|
|
|
—
|
|
|
—
|
|
IBNR - Casualty
|
|
7,555
|
|
|
—
|
|
|
7,555
|
|
|
—
|
|
IBNR - Medical
|
|
3,855
|
|
|
—
|
|
|
3,855
|
|
|
—
|
|
Total liabilities
|
|
$
|
16,994
|
|
|
$
|
5,192
|
|
|
$
|
11,802
|
|
|
$
|
—
|
|
There were no changes among the levels of our fair value instruments during
2017
.
The fair value of outstanding debt, including current maturities, was approximately
$1,084 million
and
$1,305 million
as of
December 30, 2017
and
December 31, 2016
, respectively. These Level 2 fair value estimates were based on similar debt with the same maturities, company credit rating and interest rates. We own
51%
of the outstanding shares of Yellow Chips Holding B.V. (“Yellow Chips”), which produces vegetable chips and organic potato chips primarily for the Dutch and other European markets. The investment is accounted for under the equity method, as the other owners have substantive participating rights that provide them with significant influence greater than ours over the financial performance of Yellow Chips. We own approximately
23%
of Natural Food Works Group, LLC, an experienced food manufacturer specializing in natural and organic products. The fair value of equity method investments measured on a non-recurring basis are classified as a Level 3 fair value measurement.
During
2017
,
2016
and
2015
due to impairments, the fair values of certain fixed assets and route intangibles were measured using Level 3 inputs as disclosed in Note
10
and Note
11
to the consolidated financial statements. In addition, our annually required goodwill and indefinite-lived intangible impairment tests, as well as the initial valuation of intangible assets included in business acquisitions, are performed using financial models that include Level 3 inputs.
NOTE
15
. DERIVATIVE INSTRUMENTS
The fair value of the derivative instrument assets and liabilities in the Consolidated Balance Sheets using Level 2 inputs as of
December 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance Sheet Location
|
|
2017
|
|
2016
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other noncurrent assets
|
|
$
|
13,136
|
|
|
$
|
10,748
|
|
Interest rate swaps
|
|
Other noncurrent liabilities
|
|
—
|
|
|
(392
|
)
|
Total fair value of derivative instruments
|
|
|
|
$
|
13,136
|
|
|
$
|
10,356
|
|
Interest Rate Swaps
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and US base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desired proportion of fixed to variable-rate debt. These swaps are accounted for as cash flow hedges. The fair value of interest rate swaps was determined utilizing a market approach model using the notional amount of the interest rate swaps and the observable inputs of time to maturity and interest rates. The notional amount of the interest rate swaps designated as hedging instruments as of
December 30, 2017
and
December 31, 2016
was
$675.0 million
and
$575.0 million
, respectively.
In November 2016, we entered into four interest rate swap agreements to manage the exposure to changing interest rates on long-term debt. We entered into two of the agreements in order to fix a portion of our term loan due in February 2026. The first, with a notional amount of
$100 million
at an interest rate of
1.62%
, plus applicable margins, is effective for the interest periods from June 2017 through June 2024. A second agreement, with a notional amount of
$100 million
at an interest rate of
1.34%
, plus applicable margins, is effective for the interest periods from June 2017 through June 2021. We entered into a third agreement with a notional amount of
$230 million
in order to fix a portion of our term loan due in February 2021 at an interest rate of
1.27%
, plus applicable margins, which is effective for the interest periods from June 2017 through February 2021. A fourth agreement, with a notional amount of
$70 million
was entered to fix a portion of our term loan due in May 2024 at an interest rate of
1.24%
, plus applicable margins, and is effective for the interest periods from June 2017 through June 2020.
In February 2015, we also entered into two interest rate swap agreements to manage the exposure to changing interest rates on long-term debt. We entered into an agreement with a notional amount of
$25.0 million
in order to fix a portion of our term loan due in May 2019 at an interest rate of
1.58%
, plus applicable margins, effective for the interest periods from May 2015 through May 2019. A second agreement with a notional amount of
$50.0 million
was entered into in order to fix a portion of our term loan due in May 2024 at an interest rate of
1.98%
, plus applicable margins, effective for the interest periods from May 2015 through May 2022.
On February 23, 2017 we entered into an additional interest rate swap agreement to fix the variable rate on a portion of our
$300 million
term loans due February 2026. The new swap effectively fixes the variable rate to
2.06%
on
$100.0 million
of underlying notional from June 2017 through December 2022.
Changes in Other Comprehensive Income (Loss)
The changes in unrealized gains and losses, net of income tax, included in other comprehensive income was due to fluctuations in interest rates and foreign exchange rates for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Gain/(loss) on interest rate swaps, net of income tax (expense)/benefit of $(1,224), ($4,447), and $247, respectively
|
|
$
|
1,557
|
|
|
$
|
6,953
|
|
|
$
|
(360
|
)
|
Total change in unrealized gains/(losses) from derivative instruments, net of income tax (effective portion)
|
|
$
|
1,557
|
|
|
$
|
6,953
|
|
|
$
|
(360
|
)
|
Based on current valuations, the amount expected to be reclassified from Other Comprehensive into earnings within the next 12 months is a gain of
$1.7 million
.
NOTE 16. POSTRETIREMENT BENEFIT PLANS
All Snyder’s-Lance, Inc. US employees are eligible to participate in a defined contribution retirement plan. This 401(k) plan provides participants with matching contributions equal to
100%
of the first
4%
of qualified wages and
50%
of the next
1%
of qualified wages. In addition, our U.K. employees are entitled to participate in a defined contribution retirement plan. During
2017
,
2016
and
2015
, total expenses associated with these retirement plans were
$14.4 million
,
$12.8 million
and
$11.3 million
, respectively.
NOTE
17
. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
We have entered into contractual agreements providing benefits to certain key employees in the event of termination without cause or other circumstances. Commitments under these agreements were
$17.5 million
and
$8.5 million
at
December 30, 2017
and
December 31, 2016
, respectively. Our long-term incentive plans have change in control provisions which would result in
$17.9 million
of additional compensation expense in the event of a change in control on
December 30, 2017
,
$1.2 million
of which relates to Diamond Foods replacement awards.
We lease certain facilities and equipment under contracts classified as operating leases. We sublease two facilities acquired in the Diamond Foods acquisition. Total rental expense was
$42.7 million
in
2017
,
$37.6 million
in
2016
and
$27.2 million
in
2015
.
Future minimum lease commitments for operating leases at
December 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Lease Payments
|
Less Sublease Income
|
Net
|
2018
|
|
$
|
22,374
|
|
$
|
1,343
|
|
$
|
21,031
|
|
2019
|
|
18,187
|
|
1,322
|
|
16,865
|
|
2020
|
|
15,239
|
|
1,156
|
|
14,083
|
|
2021
|
|
10,699
|
|
196
|
|
10,503
|
|
2022
|
|
7,225
|
|
—
|
|
7,225
|
|
Thereafter
|
|
32,930
|
|
—
|
|
32,930
|
|
Total operating lease commitments
|
|
$
|
106,654
|
|
$
|
4,017
|
|
$
|
102,637
|
|
Future minimum lease commitments for our capital lease at
December 30, 2017
are as follows:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
2018
|
|
$
|
671
|
|
2019
|
|
244
|
|
Total capital lease commitments
|
|
915
|
|
Less amount representing interest
|
|
(13
|
)
|
Present value of capital lease obligations
|
|
$
|
902
|
|
In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into forward purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels. Purchase commitments for certain ingredients, packaging materials and energy totaled
$226.3 million
and
$157.2 million
as of
December 30, 2017
and
December 31, 2016
. The increase in purchase commitments was primarily due to timing of raw material purchase contracts for the upcoming year. In addition to these commitments, we have contracts for certain ingredients and packaging materials where we have secured a fixed price but do not have a minimum purchase quantity. We generally contract from approximately
three months
to
twelve months
in advance for certain major ingredients and packaging. We also have a licensing contract which totaled
$9.6 million
as of
December 30, 2017
, and continues through 2020.
We have contracts to receive services from syndicated market data providers through 2023. Our commitment for these services ranges from
$4.6 million
to
$5.3 million
each year throughout the life of the contracts.
We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was
$9.0 million
as of
December 30, 2017
. The total amount of letters of credit as of
December 31, 2016
was
$12.6 million
.
Guarantees
We currently provide a partial guarantee for loans made to IBOs by certain third-party financial institutions for the purchase of route businesses. The outstanding aggregate balance on these loans was approximately
$177.2 million
as of
December 30, 2017
compared to approximately
$154.1 million
as of
December 31, 2016
. The
$23.1 million
increase in the outstanding loans was primarily due to new IBO loans as a result of zone restructuring and sale of additional routes. The annual maximum amount of future payments we could be required to make under the guarantees equates to
25%
of the outstanding loan balance on the first day of each calendar year plus
25%
of the amount of any new loans issued during such calendar year. These loans are collateralized by the route businesses for which the loans are made. Accordingly, we have the ability to recover substantially all of the outstanding loan value upon default, and our liability associated with this guarantee is not material.
Legal Matters
Merger Agreement Legal Proceedings
Four putative class action lawsuits related to the proposed Merger were filed by purported shareholders of the Company. These Actions captioned
Shaev v. Snyder’s-Lance, Inc., et al.
(Case No.3:18-cv-00039),
Sciabacucchi v. Snyder’s-Lance, Inc., et al.
(Case No. 3:18-cv-00049-RJCDCK),
Kendall v. Snyder’s-Lance, Inc., et al.
(Case No. 3:18-cv-00051), and
Daniel v. Snyder’s-Lance, Inc., et al.
(Case No. 3:18-cv-00058) were filed in the United States District Court for the Western District of North Carolina on January 25, 2018, January 29, 2018, January 30, 2018, and January 31, 2018, respectively. The Actions name as defendants the Company and the members of the Company’s Board, and allege that the defendants filed a materially incomplete and misleading proxy statement on Schedule 14A in violation of Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. Additionally, the
Sciabacucchi
Action names Campbell as a defendant, and alleges that Campbell violated Section 20(a) of the Exchange Act. The
Kendall
Action seeks to enjoin the shareholder vote on the proposed merger, and the
Shaev
,
Sciabacucchi
, and
Daniel
Actions seek to enjoin the defendants from proceeding with or consummating the proposed merger or, in the event the merger is consummated, request that the Court issue an order rescinding the merger and/or awarding rescissory damages. Additionally, the
Shaev
and
Kendall
Actions seek that the Court direct defendants to account for alleged damages, and all the Actions seek attorneys’ and expert fees and expenses. The Company believes these Actions are without merit.
IBO Litigation
Antonio Oliveira et. al. v. S-L Distribution Company, Inc. et. al.
On June 13, 2016, the plaintiffs filed a lawsuit in the United States District Court for the Middle District of Pennsylvania against S-L Distribution Company, Inc. (subsequently converted to S-L Distribution Company, LLC and referred to hereinafter as "SLD") and S-L Routes, LLC seeking damages for alleged violations of the Massachusetts Wage Act and unjust enrichment. Plaintiffs are former and current IBOs in Massachusetts that have alleged they were misclassified as independent contractors instead of employees. On September 14, 2016, a Stipulation of Dismissal was entered with the court whereby the pending action was dismissed and the parties agreed to arbitration. On September 6, 2017, mediation was held, but the parties were unable to resolve this matter. Arbitration is anticipated to be held in mid-2018 absent the parties reaching an amicable resolution in the interim. We believe we have strong defenses to all the claims that have been asserted against us. At this time, we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.
Jonathan Scheurer LLC v. S-L Distribution Company, LLC
On December 8, 2016, plaintiff served a putative class action on behalf of all similarly situated IBOs in New Jersey against our distribution subsidiary, SLD. Plaintiff is a former IBO whose distributor agreement was terminated pursuant to the buyback and re-engineering of routes in New Jersey in 2011, resulting from the merger of Snyder’s of Hanover, Inc. and Lance, Inc. The lawsuit seeks statewide class certification on behalf of a class comprised of IBOs in New Jersey for alleged violations of the New Jersey Franchise Practices Act relative to various terminations of the distributor agreement. Discovery is ongoing and a status conference was held on February 27, 2018. We believe we have strong defenses to all the claims that have been asserted against us. At this time, no demand has been made, and we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.
Macedonia Distributing Inc. v. S-L Distribution Company, LLC
On July 21, 2017, plaintiff filed a putative class action in the United States District Court for the Central District of California on behalf of all similarly situated IBOs in California against SLD. Plaintiff is a former IBO whose distributor agreement was terminated pursuant to the buyback and re-engineering of routes in California in 2017. The lawsuit seeks statewide class certification on behalf of a class comprised of IBOs in California for alleged violations of the California Franchise Relations Act and California’s Unfair Competition Law relative to various terminations of the distributor agreement. SLD has filed a Motion to Transfer and a Motion to Dismiss. The court has continued ruling on the motions while the parties complete limited discovery on whether a franchise existed under applicable law. After briefing by the parties, a hearing will be conducted on June 4, 2018. We believe we have strong defenses to all the claims that have been asserted against us. At this time, no demand has been made, and we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.
California Labor Code Matters
Sparks v. Diamond Foods, Inc.
On November 25, 2015, former employee, Patricia Sparks, filed a putative class action lawsuit in San Francisco Superior Court against Diamond Foods alleging Diamond Food’s violation of the California Labor Code by failing to include on wage statements the start date of the pay period and the name and address of the employer entity. Plaintiff amended her complaint on January 4, 2016 to add a claim for penalties under California’s Private Attorneys General Act based on the same alleged underlying violations. Diamond Food's timely answered the First Amended Complaint on March 7, 2016. The parties attended the initial case management conference on May 2, 2016 and a further case management conference occurred on August 1, 2016. On September 19, 2016, the parties to this litigation reached a tentative settlement pursuant to which we have agreed to pay
$0.7 million
on a class wide basis. We signed a memorandum of understanding reflecting this preliminary settlement amount. The parties submitted a settlement agreement to the court and the court granted preliminary approval of the settlement on February 24, 2017. On July 5, 2017, the parties appeared before the court on Plaintiff’s Motion for Final Approval of the Settlement. At the hearing, the judge requested supplemental briefing from the Plaintiff, which Plaintiff filed on July 14, 2017. On July 19, 2017, the court entered an order granting Final Approval of the Settlement, Attorneys’ Fees, and Costs. The judge granted final approval of the maximum settlement amount of
$0.7 million
, which was paid on October 17, 2017 pursuant to the terms of the settlement agreement.
Bensman v. Diamond Foods, LLC et. al.
On April 4, 2017, Diamond Foods, LLC employee, Della Bensman, filed a putative class action lawsuit in San Joaquin Superior Court against Diamond Foods, LLC and Snyder’s-Lance, Inc. alleging the companies’ violations of the California Labor Code. Plaintiff alleges the companies failed to provide third rest breaks when Plaintiff or other employees worked a shift over ten hours and failed to provide accurate itemized wage statements for employees in periods in which they worked more than ten hours and did not received a third rest break. Plaintiff’s Complaint also includes a claim for penalties under California’s Private Attorneys General Act and an unfair business practices claim pursuant to the California Business and Professions Code based on the same underlying violations. On June 16, 2017, we filed a Demurrer seeking dismissal of Plaintiff’s claim regarding our failure to provide accurate wage statements. On January 2, 2018, the parties filed a joint stipulation to stay the case through March 1, 2018 and continue the hearing on the Demurrer. On February 2, 2018, the parties engaged in mediation. Although this action was not resolved at mediation, settlement discussions are ongoing. The Demurrer hearing is currently scheduled for March 21, 2018.
Food Labeling Litigation
Swearingen et. al. v. Late July Snacks, LLC
A putative class action suit was filed against Late July on September 18, 2013, and is pending in the District Court for the Northern District of California. The action accuses Late July of violating federal and state law by using the term “evaporated cane juice” (“ECJ”) in the ingredients list on its products’ labels. The plaintiffs’ complaint alleges ECJ is not the common and usual name for the ingredient at issue and is misleading. The complaint attempts to state claims for violation of California’s Unfair Competition Law, California’s False Advertising Law, California’s Consumers Legal Remedies Act, and unjust enrichment. Late July filed a motion to dismiss the complaint on November 27, 2013, based on the primary jurisdiction doctrine, lack of standing, and failure to state a claim. On May 22, 2014, the court stayed the action, applying the doctrine of primary jurisdiction, due to the FDA’s ongoing consideration of the issue of using the term ECJ on food labels. On May 26, 2016, the FDA issued its guidance for industry on the topic. As a result, the stay was lifted on July 22, 2016. On August 31, 2016, Plaintiffs filed an amended complaint that, among other things, relies on the FDA’s recently issued guidance. Late July filed a motion to dismiss the Amended Complaint, and hearing on that motion was held on February 16, 2017. On May 5, 2017, the Court entered an Order granting in part and denying in part Late July’s Motion to Dismiss. The Court dismissed the class allegations and the claim for injunctive relief, but allowed the two individual plaintiffs’ claims for damages to proceed. The Order did allow Plaintiffs leave to amend their complaint, and on June 2, 2017, Plaintiffs filed their Second Amended Complaint. In response, Late July filed a Motion to Dismiss on June 30, 2017. On October 16, 2017, the Court entered an Order granting in part and denying in part Late July’s Motion to Dismiss, once again dismissing Plaintiffs claim for injunctive relief. At this time, we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.
Other
We are currently subject to various other legal proceedings and environmental matters arising in the normal course of business which are not expected to have a material effect on our condensed consolidated financial statements. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is possible and a range of such loss can be reasonably estimated, we will disclose the range of the possible loss. Significant judgment is required to determine both likelihood of there being, and the estimated amount of, a loss related to such matters. We cannot currently estimate our potential liability, damages or range of potential loss in connection with our other outstanding legal proceedings beyond amounts accrued, if any.
NOTE
18
. RELATED PARTY TRANSACTIONS
We have an
80.0%
ownership of Late July. We also have a
$6.0 million
line of credit between the Company and Late July, of which
$3.9 million
was drawn by Late July in order to repay certain obligations. The balance of
$3.9 million
remains outstanding as of
December 30, 2017
, and is eliminated in consolidation.
As part of our acquisition of Diamond Foods, we obtained
51.0%
of the outstanding shares of Yellow Chips. The investment is accounted for under the equity method, as the other owners have substantive participating rights that provide them with significant influence greater than ours over the financial performance of Yellow Chips. As of
December 30, 2017
, we have a
€2.4 million
loan receivable outstanding with Yellow Chips.
We have two facilities used to support distribution of our products in the northeastern US that are leased from an entity owned by two of our employees. One of the employees was Peter L. Michaud, a former officer of the Company. There were
$0.4 million
in lease payments made to this entity during each of the years
2017
,
2016
, and
2015
.
One of the members of our Board of Directors, Lawrence Jackson, is also a member of the Board of Directors of Information Resources, Inc. ("IRI"), which we began using as our syndicated market data provider at the end of 2015. Total payments made to IRI for these services were
$4.7 million
and
$3.5 million
in
2017
and
2016
, respectively.
ARWCO Corporation, MAW Associates, LP and Warehime Enterprises, Inc. are significantly owned or controlled by Patricia A. Warehime, a member of our Board of Directors and a beneficial owner of more than
14%
of our common stock. Among other unrelated business activities, these entities provide financing to IBOs for the purchase of route businesses. We have entered into loan service agreements with these related parties that require us to repurchase certain distribution assets in the event an IBO defaults on a loan with the related party. We are required to repurchase the route assets
30
days after default at the value as defined in the loan service agreement, which approximates fair market value. As of
December 30, 2017
, there were outstanding loans made to IBOs by the related parties of approximately
$15.6 million
, compared to
$21.5 million
as of
December 31, 2016
. Transactions with these related parties are primarily related to the collection and remittance of loan payments on notes receivable held by the affiliates. If IBOs default on loans, the related parties will purchase inventory in order to service the routes prior to our requirement to repurchase the route assets. Revenue from the sale of inventory to these related parties was approximately
$0.6 million
for 2017,
$0.5 million
for 2016, and
$0.7 million
for 2015. In addition, we are reimbursed for certain overhead and administrative services associated with the services provided to these related parties. The receivables from, payables to and administrative fees from these entities are not significant for any period presented.
One of our directors, C. Peter Carlucci, Jr., is a member of Eckert Seamans Cherin & Mellott, LLC (“Eckert”), which serves as one of our outside legal firms. Expenses incurred for services provided by Eckert were
$0.4 million
,
$0.3 million
, and
$0.7 million
for
2017
,
2016
and
2015
, respectively.
NOTE
19
. OTHER COMPREHENSIVE INCOME
Total comprehensive income attributable to us, determined as net income adjusted by total other comprehensive income, was income of
$168.6 million
, loss of
$2.5 million
and income of
$51.1 million
for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively. Total other comprehensive income presently consists of foreign currency translation adjustments and unrealized gains and losses from our derivative financial instruments accounted for as cash flow hedges.
Amounts reclassified out of accumulated other comprehensive income, net of tax, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Income Statement Location
|
|
2017
|
|
2016
|
|
2015
|
Losses on cash flow hedges reclassified out of accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Interest rate swaps, net of tax of $492, $394, and $515, respectively
|
|
Interest expense, net
|
|
$
|
(735
|
)
|
|
$
|
(625
|
)
|
|
$
|
(749
|
)
|
Total cash flow hedge reclassifications, net of tax
|
|
|
|
$
|
(735
|
)
|
|
$
|
(625
|
)
|
|
$
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments reclassified from accumulated other comprehensive income
|
|
Other income/(expense), net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,236
|
)
|
Total amounts reclassified from accumulated other comprehensive income
|
|
|
|
$
|
(735
|
)
|
|
$
|
(625
|
)
|
|
$
|
(1,985
|
)
|
During
2017
, changes to the balance in accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gains/(Losses) on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
6,323
|
|
|
$
|
(24,300
|
)
|
|
$
|
(17,977
|
)
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
822
|
|
|
18,517
|
|
|
19,339
|
|
Losses reclassified from accumulated other comprehensive income
|
|
735
|
|
|
—
|
|
|
735
|
|
Total other comprehensive income
|
|
1,557
|
|
|
18,517
|
|
|
20,074
|
|
|
|
|
|
|
|
|
Balance as of December 30, 2017
|
|
$
|
7,880
|
|
|
$
|
(5,783
|
)
|
|
$
|
2,097
|
|
During
2016
, changes to the balance in accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gains/(Losses) on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
Balance as of January 2, 2016
|
|
$
|
(630
|
)
|
|
$
|
—
|
|
|
$
|
(630
|
)
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) before reclassifications
|
|
6,328
|
|
|
(24,300
|
)
|
|
(17,972
|
)
|
Losses reclassified from accumulated other comprehensive income
|
|
625
|
|
|
—
|
|
|
625
|
|
Total other comprehensive income/(loss)
|
|
6,953
|
|
|
(24,300
|
)
|
|
(17,347
|
)
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
6,323
|
|
|
$
|
(24,300
|
)
|
|
$
|
(17,977
|
)
|
During
2015
, changes to the balance in accumulated other comprehensive income/(loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gains/(Losses) on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
Balance as of January 3, 2015
|
|
$
|
(270
|
)
|
|
$
|
(737
|
)
|
|
$
|
(1,007
|
)
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
|
(1,109
|
)
|
|
(499
|
)
|
|
(1,608
|
)
|
Losses reclassified from accumulated other comprehensive income
|
|
749
|
|
|
1,236
|
|
|
1,985
|
|
Total other comprehensive (loss)/income
|
|
(360
|
)
|
|
737
|
|
|
377
|
|
|
|
|
|
|
|
|
Balance as of January 2, 2016
|
|
$
|
(630
|
)
|
|
$
|
—
|
|
|
$
|
(630
|
)
|
NOTE 20. SEGMENT REPORTING
We are engaged in the manufacturing, distribution, marketing and sale of snack food products. We have
two
operating segments based on geographic operations that we aggregate into
one
reportable segment. We define operating segments as components of an organization for which discrete financial information is available and operating results are evaluated on a regular basis by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. Our CODM is our President and Chief Executive Officer. Characteristics of our organization which were relied upon in making the determination of
two
operating segments include the nature of the products that we sell, our organization's internal structure, and the information that is regularly reviewed by the CODM for the purpose of assessing performance and allocating resources. We aggregate our operating segments into a single reportable segment based on similarities between the operating segments’ economic characteristics, nature of products sold, production process, type of customer, methods of distribution, and regulatory environment.
Revenue by Product Category
Net revenue by product category was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Branded
|
|
|
|
|
|
|
Core brand
|
|
$
|
1,613,682
|
|
|
$
|
1,478,601
|
|
|
$
|
1,032,461
|
|
Allied brand
|
|
163,393
|
|
|
159,695
|
|
|
157,730
|
|
Total Branded
|
|
1,777,075
|
|
|
1,638,296
|
|
|
1,190,191
|
|
Partner brand
|
|
291,580
|
|
|
300,436
|
|
|
300,480
|
|
Other
|
|
158,182
|
|
|
170,495
|
|
|
165,728
|
|
Net revenue
|
|
$
|
2,226,837
|
|
|
$
|
2,109,227
|
|
|
$
|
1,656,399
|
|
Geographic Information
Revenue is attributable to the US, the Company’s country of domicile, and to international locations based on the country in which the product is produced. Net revenue by geographic location was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Location:
|
|
|
|
|
|
|
United States
|
|
$
|
2,115,227
|
|
|
$
|
2,012,147
|
|
|
$
|
1,656,399
|
|
International
|
|
111,610
|
|
|
97,080
|
|
|
—
|
|
Net revenue
|
|
$
|
2,226,837
|
|
|
$
|
2,109,227
|
|
|
$
|
1,656,399
|
|
Long-lived assets located in the US and international locations as of
December 30, 2017
and
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Location:
|
|
|
|
|
United States
|
|
$
|
466,290
|
|
|
$
|
477,450
|
|
International
|
|
26,147
|
|
|
24,434
|
|
Total
|
|
$
|
492,437
|
|
|
$
|
501,884
|
|
NOTE 21. SIGNIFICANT CUSTOMERS
Sales to our largest retail customer, Wal-Mart Stores, Inc. ("Wal-Mart"), either through IBOs or our direct distribution network, were approximately
13%
of net revenue in
2017
,
2016
, and
2015
. Our sales to Wal-Mart do not include sales of our products that may be made to Wal-Mart by third-party distributors outside the DSD network. Sales to these third-party distributors represent approximately
6%
of our net revenue and may increase sales of our products to Wal-Mart by an amount we are unable to estimate. Accounts receivable as of
December 30, 2017
and
December 31, 2016
, included receivables from Wal-Mart totaling
$23.7 million
and
$21.0 million
, respectively.
NOTE 22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of quarterly financial information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017 Quarter Ended
|
April 1
|
|
July 1
|
|
September 30
|
|
December 30
|
Net revenue
|
|
$
|
531,501
|
|
|
$
|
579,595
|
|
|
$
|
564,184
|
|
|
$
|
551,557
|
|
Cost of sales
|
|
346,735
|
|
|
369,308
|
|
|
357,993
|
|
|
352,630
|
|
Gross profit
|
|
184,766
|
|
|
210,287
|
|
|
206,191
|
|
|
198,927
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
159,463
|
|
|
179,239
|
|
|
154,811
|
|
|
150,352
|
|
Transaction and integration related expenses
|
|
1,107
|
|
|
478
|
|
|
276
|
|
|
1,141
|
|
Impairment charges
(1)
|
|
—
|
|
|
7,920
|
|
|
105,230
|
|
|
1,633
|
|
Other operating expense/(income), net
|
|
270
|
|
|
205
|
|
|
(279
|
)
|
|
(189
|
)
|
Operating income/(expense)
|
|
23,926
|
|
|
22,445
|
|
|
(53,847
|
)
|
|
45,990
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
(1,016
|
)
|
|
(218
|
)
|
|
(227
|
)
|
|
(53
|
)
|
Income/(loss) before interest and income taxes
|
|
24,942
|
|
|
22,663
|
|
|
(53,620
|
)
|
|
46,043
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
8,954
|
|
|
9,492
|
|
|
10,141
|
|
|
10,178
|
|
Income/(loss) before income taxes
|
|
15,988
|
|
|
13,171
|
|
|
(63,761
|
)
|
|
35,865
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit)
(2)(3)
|
|
4,662
|
|
|
8,270
|
|
|
(6,043
|
)
|
|
(153,033
|
)
|
Income/(loss) from continuing operations
|
|
11,326
|
|
|
4,901
|
|
|
(57,718
|
)
|
|
188,898
|
|
(Loss)/income from discontinued operations, net of income tax
|
|
—
|
|
|
(341
|
)
|
|
1,473
|
|
|
804
|
|
Net income/(loss)
|
|
11,326
|
|
|
4,560
|
|
|
(56,245
|
)
|
|
189,702
|
|
Net income attributable to non-controlling interests
|
|
164
|
|
|
590
|
|
|
18
|
|
|
79
|
|
Net income/(loss) attributable to Snyder’s-Lance, Inc.
|
|
$
|
11,162
|
|
|
$
|
3,970
|
|
|
$
|
(56,263
|
)
|
|
$
|
189,623
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
(0.60
|
)
|
|
$
|
1.94
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
0.02
|
|
|
0.01
|
|
Total basic earnings/(loss) per share
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
(0.58
|
)
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings/(loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.04
|
|
|
$
|
(0.60
|
)
|
|
$
|
1.92
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
0.02
|
|
|
0.01
|
|
Total diluted earnings/(loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.04
|
|
|
$
|
(0.58
|
)
|
|
$
|
1.93
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
Footnotes:
(1)
During the second quarter of 2017, we recognized impairment charges of
$7.9 million
. Of this,
$7.2 million
relates to the write-down of fixed assets associated with our decision to close our manufacturing facility in Perry, Florida. During the third quarter of 2017, we recognized a
$46.3 million
impairment of goodwill associated with our European reporting unit,
$46.6 million
impairment of our Pop Secret
®
trademark and
$11.8 million
impairment of our KETTLE
®
Chips U.K. trademark. During the fourth quarter of 2017, we recognized an impairment charge of
$1.6 million
associated with manufacturing assets for which we no longer had a business use.
(2)
During the third quarter of 2017, we recognized an income tax benefit which was driven by the goodwill impairment recognized, which is non-deductible for tax purposes, and the discrete tax impact of the trademark impairments recognized in the third quarter of 2017.
(3)
During the fourth quarter of 2017, we recognized an income tax benefit of
$162.4 million
for the provisional tax impacts of the Tax Act enacted in December 2017 and revaluation of our deferred income tax balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2016 Quarter Ended
|
April 2
(4)
|
|
July 2
|
|
October 1
|
|
December 31
|
Net revenue
|
|
$
|
447,869
|
|
|
$
|
561,292
|
|
|
$
|
543,903
|
|
|
$
|
556,163
|
|
Cost of sales
|
|
304,779
|
|
|
349,736
|
|
|
344,807
|
|
|
346,115
|
|
Gross profit
(1)
|
|
143,090
|
|
|
211,556
|
|
|
199,096
|
|
|
210,048
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
121,555
|
|
|
160,121
|
|
|
152,980
|
|
|
159,301
|
|
Transaction and integration related expenses
|
|
48,978
|
|
|
9,945
|
|
|
3,656
|
|
|
3,693
|
|
Impairment charges
|
|
374
|
|
|
489
|
|
|
507
|
|
|
3,096
|
|
Other operating income, net
(2)
|
|
(505
|
)
|
|
(914
|
)
|
|
(3,776
|
)
|
|
(359
|
)
|
Operating (loss)/income
|
|
(27,312
|
)
|
|
41,915
|
|
|
45,729
|
|
|
44,317
|
|
|
|
|
|
|
|
|
|
|
Other (income)/expense, net
|
|
(328
|
)
|
|
(227
|
)
|
|
305
|
|
|
414
|
|
(Loss)/income before interest and income taxes
|
|
(26,984
|
)
|
|
42,142
|
|
|
45,424
|
|
|
43,903
|
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
4,749
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest expense, net
|
|
4,729
|
|
|
9,361
|
|
|
9,215
|
|
|
9,308
|
|
(Loss)/income before income taxes
|
|
(36,462
|
)
|
|
32,781
|
|
|
36,209
|
|
|
34,595
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)/expense
|
|
(13,614
|
)
|
|
12,381
|
|
|
10,663
|
|
|
15,890
|
|
(Loss)/income from continuing operations
|
|
(22,848
|
)
|
|
20,400
|
|
|
25,546
|
|
|
18,705
|
|
(Loss)/income from discontinued operations, net of income tax
(3)
|
|
(2,546
|
)
|
|
(783
|
)
|
|
3,655
|
|
|
(27,426
|
)
|
Net (loss)/income
|
|
(25,394
|
)
|
|
19,617
|
|
|
29,201
|
|
|
(8,721
|
)
|
Net income/(loss) attributable to non-controlling interests
|
|
37
|
|
|
(64
|
)
|
|
(114
|
)
|
|
(41
|
)
|
Net (loss)/income attributable to Snyder’s-Lance, Inc.
|
|
$
|
(25,431
|
)
|
|
$
|
19,681
|
|
|
$
|
29,315
|
|
|
$
|
(8,680
|
)
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.29
|
)
|
|
$
|
0.21
|
|
|
$
|
0.26
|
|
|
$
|
0.19
|
|
Discontinued operations
|
|
(0.03
|
)
|
|
—
|
|
|
0.04
|
|
|
(0.28
|
)
|
Total basic (loss)/earnings per share
|
|
$
|
(0.32
|
)
|
|
$
|
0.21
|
|
|
$
|
0.30
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.29
|
)
|
|
$
|
0.21
|
|
|
$
|
0.26
|
|
|
$
|
0.19
|
|
Discontinued operations
|
|
(0.03
|
)
|
|
(0.01
|
)
|
|
0.04
|
|
|
(0.28
|
)
|
Total diluted (loss)/earnings per share
|
|
$
|
(0.32
|
)
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
Footnotes:
(1)
During the first quarter of 2016, our gross profit was negatively impacted by the inventory step-up of
$13.6 million
required for purchase accounting related to the Diamond Foods acquisition.
(2)
During the third quarter of 2016, we recognized an insurance settlement of
$3.8 million
related to a business interruption claim that resulted from an unexpected production outage in the fourth quarter of 2015.
(3)
During the fourth quarter of 2016, we recognized a
$32.6 million
pre-tax loss on the sale of Diamond of California.
(4)
As Diamond Foods was acquired on February 29, 2016, the first quarter revenue and expenses, with the exception of transaction and integration related expenses, are substantially less than the other three quarters.
NOTE
23
. SUBSEQUENT EVENTS
On
February 7, 2018
, our Board of Directors declared a quarterly cash dividend of
$0.16
per share payable on
March 2, 2018
to shareholders of record on
February 22, 2018
.
Refer to Note
2
for information regarding the status of the anticipated acquisition of our company by Campbell Soup Company.