PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Balance Sheets
(dollars in thousands, except for share data)
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
316,362
|
|
|
$
|
224,253
|
|
Receivables, net
|
92,398
|
|
|
80,103
|
|
Inventories
|
75,400
|
|
|
83,482
|
|
Prepaid expenses and other current assets
|
6,515
|
|
|
4,492
|
|
Total current assets
|
490,675
|
|
|
392,330
|
|
|
|
|
|
Restricted cash
|
781
|
|
|
473
|
|
Property, plant and equipment, net
|
126,282
|
|
|
115,160
|
|
Deferred income taxes
|
1,696
|
|
|
3,907
|
|
Deferred debt issuance costs, net
|
104
|
|
|
196
|
|
Other assets
|
517
|
|
|
480
|
|
Total assets
|
$
|
620,055
|
|
|
$
|
512,546
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
’
EQUITY (DEFICIT)
|
|
|
|
Current liabilities:
|
|
|
|
Current maturities of long-term debt
|
$
|
3,960
|
|
|
$
|
3,960
|
|
Accounts payable
|
35,478
|
|
|
31,428
|
|
Other current liabilities
|
72,394
|
|
|
70,459
|
|
Total current liabilities
|
111,832
|
|
|
105,847
|
|
|
|
|
|
Long-term debt
|
380,167
|
|
|
383,137
|
|
Deferred income taxes
|
4,117
|
|
|
3,268
|
|
Other long-term liabilities
|
14,291
|
|
|
11,013
|
|
Total liabilities
|
510,407
|
|
|
503,265
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
Stockholders
’
equity (deficit):
|
|
|
|
Preferred stock; $0.01 par value; 150,000,000 shares authorized; none issued or outstanding at September 30, 2016 and December 31, 2015
|
—
|
|
|
—
|
|
Common stock, voting; $0.01 par value; 1,500,000,000 shares authorized; 196,515,280 and 196,216,596 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
|
1,965
|
|
|
1,962
|
|
Additional paid-in capital
|
69,752
|
|
|
64,899
|
|
Retained earnings (accumulated deficit)
|
37,890
|
|
|
(57,549
|
)
|
Accumulated other comprehensive income (loss)
|
41
|
|
|
(31
|
)
|
Total stockholders
’
equity
|
109,648
|
|
|
9,281
|
|
Total liabilities and stockholders
’
equity
|
$
|
620,055
|
|
|
$
|
512,546
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Statements of Income
(dollars in thousands, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales
|
$
|
287,996
|
|
|
$
|
259,437
|
|
|
$
|
854,682
|
|
|
$
|
762,209
|
|
Cost of sales
|
154,787
|
|
|
151,152
|
|
|
470,938
|
|
|
454,595
|
|
Gross profit
|
133,209
|
|
|
108,285
|
|
|
383,744
|
|
|
307,614
|
|
Selling, general and administrative expenses
|
65,493
|
|
|
58,664
|
|
|
190,849
|
|
|
165,723
|
|
Provision for legal settlement
|
32,000
|
|
|
—
|
|
|
32,000
|
|
|
—
|
|
Operating income
|
35,716
|
|
|
49,621
|
|
|
160,895
|
|
|
141,891
|
|
Interest expense, net
|
3,629
|
|
|
3,722
|
|
|
10,872
|
|
|
11,097
|
|
Income before income taxes
|
32,087
|
|
|
45,899
|
|
|
150,023
|
|
|
130,794
|
|
Provision for income taxes
|
10,605
|
|
|
18,833
|
|
|
54,584
|
|
|
51,044
|
|
Net income
|
$
|
21,482
|
|
|
$
|
27,066
|
|
|
$
|
95,439
|
|
|
$
|
79,750
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
$
|
0.49
|
|
|
$
|
0.41
|
|
Diluted net income per common share
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
$
|
0.48
|
|
|
$
|
0.40
|
|
Basic weighted average shares
|
196,445,684
|
|
|
196,062,348
|
|
|
196,311,529
|
|
|
195,852,404
|
|
Diluted weighted average shares
|
199,452,308
|
|
|
198,254,808
|
|
|
199,290,017
|
|
|
198,028,543
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
|
$
|
21,482
|
|
|
$
|
27,066
|
|
|
$
|
95,439
|
|
|
$
|
79,750
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
6
|
|
|
—
|
|
|
72
|
|
|
—
|
|
Other comprehensive income (loss), before tax
|
|
6
|
|
|
—
|
|
|
72
|
|
|
—
|
|
Income tax expense on other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
|
6
|
|
|
—
|
|
|
72
|
|
|
—
|
|
Comprehensive income
|
|
$
|
21,488
|
|
|
$
|
27,066
|
|
|
$
|
95,511
|
|
|
$
|
79,750
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
(dollars in thousands, except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
Common stock
|
|
Additional paid-in capital
|
|
(Accumulated deficit) retained earnings
|
|
Accumulated other comprehensive (loss)
|
|
Total
|
Balance at December 31, 2015
|
196,216,596
|
|
|
$
|
1,962
|
|
|
$
|
64,899
|
|
|
$
|
(57,549
|
)
|
|
$
|
(31
|
)
|
|
$
|
9,281
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72
|
|
|
72
|
|
Issuance of restricted stock awards
|
31,871
|
|
|
—
|
|
|
814
|
|
|
—
|
|
|
—
|
|
|
814
|
|
Exercise of stock options
|
266,813
|
|
|
3
|
|
|
1,802
|
|
|
—
|
|
|
—
|
|
|
1,805
|
|
Tax benefit from exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
2,237
|
|
|
—
|
|
|
—
|
|
|
2,237
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
95,439
|
|
|
—
|
|
|
95,439
|
|
Balance at September 30, 2016
|
196,515,280
|
|
|
$
|
1,965
|
|
|
$
|
69,752
|
|
|
$
|
37,890
|
|
|
$
|
41
|
|
|
$
|
109,648
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
95,439
|
|
|
$
|
79,750
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
6,766
|
|
|
5,981
|
|
Amortization of debt issuance costs
|
91
|
|
|
91
|
|
Stock-based compensation
|
3,051
|
|
|
2,935
|
|
Deferred compensation
|
—
|
|
|
19
|
|
(Gain) loss on disposal of fixed assets
|
(2
|
)
|
|
69
|
|
Deferred income taxes
|
3,061
|
|
|
(1,790
|
)
|
Tax benefit from exercise of stock options
|
—
|
|
|
(1,551
|
)
|
Provision for legal settlement
|
32,000
|
|
|
—
|
|
Payment of class action legal settlement
|
(32,000
|
)
|
|
—
|
|
Effect of changes in operating assets and liabilities:
|
|
|
|
Receivables
|
(12,282
|
)
|
|
2,178
|
|
Inventories
|
8,257
|
|
|
(8,282
|
)
|
Prepaid expenses and other assets
|
(2,066
|
)
|
|
(3
|
)
|
Accounts payable
|
4,055
|
|
|
4,387
|
|
Other liabilities
|
5,158
|
|
|
10,263
|
|
Net cash provided by operating activities
|
111,528
|
|
|
94,047
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures
|
(17,901
|
)
|
|
(5,374
|
)
|
Restricted cash
|
(308
|
)
|
|
—
|
|
Proceeds from the sale of fixed assets
|
15
|
|
|
—
|
|
Net cash used in investing activities
|
(18,194
|
)
|
|
(5,374
|
)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Principal payments on long-term debt
|
(2,970
|
)
|
|
(2,970
|
)
|
Proceeds from exercise of stock options
|
1,805
|
|
|
1,910
|
|
Tax benefit from exercise of stock options
|
—
|
|
|
1,551
|
|
Net cash (used in) provided by financing activities
|
(1,165
|
)
|
|
491
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(60
|
)
|
|
—
|
|
Net increase in cash and cash equivalents
|
92,109
|
|
|
89,164
|
|
Cash and cash equivalents at beginning of period
|
224,253
|
|
|
95,788
|
|
Cash and cash equivalents at end of period
|
$
|
316,362
|
|
|
$
|
184,952
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – The Company
Blue Buffalo Pet Products, Inc. (“BBPP
”
) and together with its subsidiaries (the “Company,” “we,” “us,” “its,” and “our”) was incorporated in the state of Delaware in July 2012 and conducts its business exclusively through its wholly-owned operating subsidiary, Blue Buffalo Company, Ltd. (“Blue”) (formerly The Blue Buffalo Company, LLC) and its subsidiaries. Blue was formed in August 2002, and is the parent company of
five
wholly-owned subsidiaries: Great Plains Leasing, LLC, Heartland Pet Food Manufacturing Holding, LLC, Sierra Pet Products, LLC, Blue Buffalo Pet Products Canada, Ltd., and Blue Buffalo Japan Kabushiki Kaisha. Additionally, Blue Buffalo Import Mexico, S. de R.L. de C.V. and Blue Buffalo Mexico, S. de R.L. de C.V. are indirect wholly-owned subsidiaries of BBPP. BBPP and its subsidiaries develop, produce, market, and sell pet food under the BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom, and BLUE Natural Veterinary Diet lines. Our products are produced domestically at our Heartland facility and through contract manufacturers for distribution to retailers in specialty channels throughout the United States of America, Canada, Japan, and Mexico.
In July 2012, Blue formed Heartland Pet Food Manufacturing, Inc. (“Heartland”) for the purpose of commencing internal manufacturing operations to eventually supplement its contract manufacturers. Manufacturing operations commenced at our Heartland facility in Joplin, Missouri in September 2014. In April 2016, Blue formed Heartland Pet Food Manufacturing Holding, LLC for the purpose of consolidating all manufacturing entities under one holding company. In April 2016, Heartland Pet Food Manufacturing Indiana, LLC was formed for our planned internal manufacturing operations in Indiana.
Initial Public Offering
On July 27, 2015, BBPP completed the initial public offering (“IPO”) of shares of its common stock. Existing stockholders of BBPP sold
38,906,286
shares of common stock in the IPO at an initial offering price of
$20.00
per share, including
5,074,732
shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares. In addition, BBPP issued
30,682
shares of common stock to approximately
1,700
non-management employees at
no
cost to them.
Secondary Public Offerings
On July 5, 2016, BBPP completed a secondary public offering (“SPO”) of shares of its common stock. Certain existing stockholders of BBPP sold
17,250,000
shares of common stock at a SPO price of
$22.00
per share, including
2,250,000
shares of common stock pursuant to the full exercise of the underwriters' option to purchase additional shares.
On September 16, 2016, BBPP completed an additional SPO of shares of its common stock. Certain existing stockholders of BBPP sold
14,300,000
shares of common stock at a SPO price of
$25.62
per share.
Note 2 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of BBPP and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair statement of the results for interim periods. Results of
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
operations for interim periods may not be representative of results to be expected for a full year. Certain prior year amounts have been reclassified to conform to the current period presentation.
On July 7, 2015, BBPP effected a
4.2
-for-1 stock split of all outstanding shares of BBPP’s common stock. All share, option, and per share information presented in the accompanying unaudited condensed consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis for all periods presented and all share information is rounded down to the nearest whole share after reflecting the stock split.
Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and related notes for the year ended
December 31, 2015
, included in BBPP’s Annual Report on Form 10-K, filed with the SEC pursuant to Rule 424(b) of the Securities Act, on March 10, 2016.
Accounting Standards Adopted in 2016
In March 2016, the FASB Issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.
The Company elected to early adopt ASU 2016-09 in the third quarter of Fiscal 2016 which requires the Company to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. Under ASU 2016-09, all excess tax benefits and deficiencies related to employee share-based compensation will be recognized within the provision for income taxes rather than additional paid-in capital under the prior guidance. The adoption of ASU 2016-09 resulted in the recognition of excess tax benefits in our provision for income taxes of
$1.4 million
for the nine months ended
September 30, 2016. Upon early adopting ASU 2016-09, the Company elected to change its accounting policy to record forfeitures as they occur rather than based on an estimate. This change was applied on a modified retrospective basis and the cumulative-effect adjustment was not recorded to retained earnings as of January 1, 2016 as the amount was immaterial.
Additionally, under the guidance of ASU 2016-09, the Company is required to present excess tax benefits as an operating activity in the same manner as other cash flows related to income taxes on the statement of cash flows rather than as a financing activity. The Company elected not to adjust prior year cash presentations as the impact was not material.
In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update).” The new standard is intended to address the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements which was previously not addressed in ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The Company adopted this standard on January 1, 2016. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Accounting Standards to be Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which clarifies the principles for recognizing revenue. The guidance is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance requires improved disclosures as well as additional disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. In 2015, the FASB issued a deferral of the effective date of the standard to the first quarter of 2018, with early adoption in Fiscal 2017 permitted. In 2016, FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for intellectual property licenses. Upon becoming effective, the Company will apply the amendments in the updated standard either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is currently evaluating the impact of adopting this standard on its consolidated results of operations, financial condition and cash flows, and have not yet selected a transition approach.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability of organizations by requiring lease assets and lease liabilities to be recognized on the balance sheet and disclosing key information about lease arrangements. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. The standard is effective for the Company beginning January 1, 2019, with early application permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
Note 3 – Receivables
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30,
2016
|
|
December 31,
2015
|
Trade receivables, net
|
$
|
84,148
|
|
|
$
|
66,648
|
|
Other receivables
|
8,250
|
|
|
13,455
|
|
Total
|
$
|
92,398
|
|
|
$
|
80,103
|
|
Other receivables consist primarily of reimbursable amounts due from co-manufacturers for packaging of
$3.3 million
and
$3.5 million
and income tax receivables of
$4.9 million
and
$9.5 million
at
September 30, 2016
and
December 31, 2015
, respectively.
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Note 4 – Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30,
2016
|
|
December 31,
2015
|
Finished goods
|
$
|
69,746
|
|
|
$
|
76,987
|
|
Work in process
|
354
|
|
|
352
|
|
Raw materials
|
2,558
|
|
|
2,583
|
|
Packaging and supplies
|
2,742
|
|
|
3,560
|
|
Total
|
$
|
75,400
|
|
|
$
|
83,482
|
|
Note 5 – Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30,
2016
|
|
December 31,
2015
|
Buildings
|
$
|
59,314
|
|
|
$
|
59,315
|
|
Machinery and equipment
|
49,058
|
|
|
47,234
|
|
Computer software
|
13,087
|
|
|
11,641
|
|
Computer equipment
|
4,523
|
|
|
4,055
|
|
Furniture and fixtures
|
1,743
|
|
|
1,585
|
|
Leasehold improvements
|
1,477
|
|
|
1,413
|
|
Land improvements
|
493
|
|
|
493
|
|
Land
|
366
|
|
|
346
|
|
Buildings improvements
|
184
|
|
|
86
|
|
Construction in progress
|
17,443
|
|
|
3,673
|
|
|
147,688
|
|
|
129,841
|
|
Accumulated depreciation and amortization
|
(21,406)
|
|
|
(14,681)
|
|
Total
|
$
|
126,282
|
|
|
$
|
115,160
|
|
Depreciation and amortization expense was approximately
$2.3 million
and
$2.1 million
for the
three months ended September 30,
2016
and
2015
, respectively, and approximately
$6.8 million
and
$6.0 million
for the
nine months ended September 30,
2016
and
2015
, respectively.
In August of 2016, Heartland and the City of Joplin, Missouri, or Joplin, entered into agreements by which Joplin agreed to issue up to an aggregate principal amount of approximately
$83.3 million
of industrial revenue bonds to purchase the land on which the current Heartland facility resides and the land on which the expansion of the Heartland facility will reside, and the associated buildings, structures, and fixtures, including the additional manufacturing equipment which will be included in the expansion of the Heartland facility (collectively, the “Property”). Heartland agreed to purchase such industrial revenue bonds and which Property was then agreed to be leased back to Heartland. As Heartland will become the owner of the Property at the end of the lease term, the lease meets the requirements of a capital lease and the equipment and land are recorded as property, plant and equipment our balance sheet. The Company has the right and intends to set-off any obligation to make payments under the lease agreement with the amounts due under the industrial revenue bonds. As of
September 30, 2016
, Joplin had issued and Heartland had purchased approximately
$0.1 million
of industrial revenue bonds and Joplin had purchased from, and leased back to, Heartland the land for a corresponding amount.
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Note 6 – Long-term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Term loan
|
$
|
384,127
|
|
|
$
|
387,097
|
|
Less current maturities
|
(3,960
|
)
|
|
(3,960
|
)
|
Total long-term debt
|
$
|
380,167
|
|
|
$
|
383,137
|
|
At
September 30, 2016
, we had
$384.1 million
of term loan borrowings (fair value of
$385.6 million
) at an effective interest rate of
3.63%
and
no
outstanding borrowings under the revolving credit facility. At
December 31, 2015
, the Company had
$387.1 million
of term loan borrowings (fair value of
$385.2 million
) at an effective interest rate of
3.87%
and
no
outstanding borrowings under the revolving credit facility. Principal payments on the term loan borrowings are due and payable in quarterly installments of approximately
$1.0 million
with the then expected remaining balance of
$373.2 million
due on August 8, 2019.
During each of the three-month periods ended
September 30, 2016
and 2015, the Company recorded amortization expense for deferred debt issuance costs of approximately
$30,000
. During each of the nine-month periods ended
September 30, 2016
and
September 30, 2015
, the Company recorded amortization expense for deferred debt issuance costs of approximately
$91,000
.
The Company’s term loan and revolving credit facility (the “Amended Facility”) contains and defines financial covenants, including a secured leverage ratio (defined as, with certain adjustments, the ratio of (i) the Company’s indebtedness less unrestricted cash and cash equivalents up to
$40.0 million
to (ii) consolidated net income before interest, taxes, depreciation and amortization) for the most recently ended 4 quarters not to exceed
3.75
:1.00. The Amended Facility also sets forth mandatory and optional prepayment conditions, including an annual excess cash flow requirement, as defined, that may result in our use of cash to reduce our debt obligations. For the year ended
December 31, 2015
, the Company was not required to make an excess cash flow payment. As of
September 30, 2016
, the Company believes it was in compliance with its financial debt covenants.
Note 7 – Fair Value Measurements
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, other current liabilities, and debt, none of which are measured at fair value on a recurring basis. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their fair value due to the short-term nature of these financial instruments. The Company’s long-term financial liabilities consist of the long-term debt. Long-term debt is recorded on the unaudited condensed consolidated balance sheets at issuance price and adjusted for any applicable unamortized discounts or premiums.
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The Company accounts for its fair value measurements in accordance with accounting guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:
Level 1
- Quoted prices in active markets for identical assets or liabilities
Level 2
- Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3
- Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
At
September 30, 2016
and
December 31, 2015
, the Company had approximately
$285.7 million
and
$195.4 million
, respectively, of cash invested in money market deposit accounts which were included in cash and cash equivalents on the accompanying unaudited condensed consolidated balance sheets (Level 1).
The Company reports transfers in and out of Levels 1, 2 and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. There were
no
transfers in or out of Level 1, 2, or 3 during the
nine months ended September 30, 2016
and the year ended
December 31, 2015
.
Assets that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets. For these assets, the Company does not periodically adjust carrying value to fair value, except in the event of impairment. When the Company determines that an impairment has occurred, the carrying value is reduced to fair value and the difference is recorded as an impairment loss in our consolidated statements of income.
As of
September 30, 2016
, the carrying value of the Company’s outstanding borrowings under the Amended Facility was approximately
$384.1 million
as compared to a fair value of
$385.6 million
(Level 2). As of
December 31, 2015
, the carrying value of the Company’s outstanding borrowings under the Amended Facility was approximately
$387.1 million
as compared to a fair value of
$385.2 million
(Level 2). The estimated fair value of the Company’s debt was based primarily on reported market values, recently completed market transactions and estimates based upon interest rates, maturities and credit risk.
Note 8 – Stock-Based Compensation
Incentive Plans
Under the Company’s 2012 Blue Buffalo Pet Products, Inc. Stock Purchase and Option Plan (the “Plan”), the Board of Directors is authorized to award stock options (ISOs and non-qualified), stock appreciation rights (SARs), restricted stock, performance units, performance-based stock awards, dividend equivalent rights and other stock-based grants. Participation in the Plan is limited to key employees, officers and directors.
On March 4, 2013, the Plan was amended to increase the maximum number of shares of stock available under the Plan by
210,000
shares to
14,242,061
shares (the “Amended Plan”). As of
September 30, 2016
, there were
5,230,642
shares of common stock reserved under the Amended Plan. As of
September 30, 2016
, the maximum number of shares available for grant under the Amended Plan was
89,035
.
In July 2015, the Board of Directors adopted and our shareholders approved the Company’s 2015 Omnibus Incentive Plan (“2015 Plan”). The 2015 Plan provides that the total number of shares of common stock that
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
may be issued under our 2015 Plan is
8,400,000
. The 2015 Plan provides for the grant of stock options (ISOs and non-qualified), SARs, restricted stock awards (RSAs), restricted stock units (RSUs), performance units, performance-based stock awards, dividend equivalent rights and other stock-based incentive awards. As of
September 30, 2016
, the maximum number of shares available for grant under the 2015 Plan was
7,843,075
.
Stock Options
The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. Stock options granted under the 2012 plan are subject to pro-rata vesting and grants under the 2015 Plan are subject to cliff vesting. The fair value of stock options is expensed on a straight-line basis over the vesting period.
Prior to the Company’s initial public offering, the Company used a third party valuation specialist to assist it in the estimation of the fair value of its common stock. The Company believed these valuations to be appropriate; however, the valuation of the equity of any private company involves various estimates and assumptions that may differ from actual values. Effective with our initial public offering, the Company bases its common stock value on quoted market prices. The expected volatility assumption is based on the combination of the Company's historical volatility and selected companies from its peer group. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. The weighted-average expected term is determined with reference to historical exercise and post-vesting cancellation experience, and the vesting period and contractual term of the awards.
The following are the weighted-average assumptions used for grants issued during the nine month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Volatility
|
32.58
|
%
|
|
23.85
|
%
|
Risk-free interest rate
|
1.23
|
%
|
|
1.88
|
%
|
Expected term (years)
|
5
|
|
|
6.5
|
|
Dividend yield
|
—
|
|
|
—
|
|
Grant-date fair value
|
$
|
7.81
|
|
|
$
|
5.74
|
|
The following table summarizes stock option activity during the year and also presents stock options outstanding and exercisable as of
September 30, 2016
(dollars in millions, except for per share data):
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Exercise Price Per Share
|
Options outstanding at December 31, 2015
|
4,366,297
|
|
|
$
|
6.24
|
|
Granted
|
396,688
|
|
|
$
|
25.47
|
|
Exercised
|
(266,813
|
)
|
|
$
|
6.54
|
|
Forfeited
|
(69,417
|
)
|
|
$
|
13.59
|
|
Expired
|
(11,566
|
)
|
|
$
|
6.97
|
|
Options outstanding at September 30, 2016
|
4,415,189
|
|
|
$
|
7.83
|
|
Options exercisable at September 30, 2016
|
2,102,214
|
|
|
$
|
5.80
|
|
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
During the
three and nine months ended September 30, 2016
, the Company granted
20,166
and
130,208
ISO and
834
and
266,480
non-qualified stock option grants, respectively.
Restricted Stock
The following table summarizes RSA and RSU activity for the
nine months ended September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSAs
|
|
RSUs
|
|
Number of
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Number of
Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at December 31, 2015
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
31,871
|
|
|
$
|
25.57
|
|
|
87,203
|
|
|
$
|
25.48
|
|
Vested
|
(31,871
|
)
|
|
$
|
25.57
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
|
(1,635
|
)
|
|
$
|
25.57
|
|
Outstanding at September 30, 2016
|
—
|
|
|
$
|
—
|
|
|
85,568
|
|
|
$
|
25.48
|
|
During the
three and nine months ended September 30, 2016
, members of the Company's Board of Directors received a fully-vested grant of
31,871
RSAs with a three-year holding restriction under the 2015 Plan. The total fair value of these restricted stock awards on the date of grant was
$0.8 million
, of which the full amount was recognized as a component of stock-based compensation expense during the
three and nine months ended September 30, 2016
.
During the
three and nine months ended September 30, 2016
, the Company granted
4,210
and
87,203
RSUs, respectively under the 2015 Plan to its employees. The stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company's common stock on the date of grant. RSUs have a three-year cliff vesting term. The total fair value of these restricted stock units on the date of grant was
$2.2 million
, which will be recognized as a component of stock-based compensation expense and amortized on a straight-line basis over the three-year vesting term.
Stock-based Compensation Expense
Stock-based compensation costs charged to operations (as a component of selling, general, and administrative expenses) during the
three months ended September 30, 2016
and
2015
was approximately
$1.0 million
and
$2.0 million
, respectively. Stock-based compensation costs charged to operations (as a component of selling, general, and administrative expenses) during the
nine months ended September 30, 2016
and
2015
was approximately
$3.1 million
and
$2.9 million
, respectively.
In accordance with the early adoption of ASU 2016-09, the Company recorded
$1.4 million
of excess tax benefits from the exercise of stock options to our provision for income taxes during the
three and nine months ended September 30, 2016
. Under the previous guidance, the Company recorded
$1.6 million
of excess tax benefits from the exercise of stock options to additional paid-in capital during the
three and nine months ended September 30, 2015
.
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Unrecognized stock-based compensation related to outstanding unvested stock options is expected to be recognized in the Company’s statements of income as follows (by fiscal year):
|
|
|
|
|
(dollars in thousands)
|
|
2016 (period from October 1, to December 31, 2016)
|
$
|
918
|
|
2017
|
3,582
|
|
2018
|
2,037
|
|
2019
|
553
|
|
2020
|
56
|
|
Total
|
$
|
7,146
|
|
Note 9 – Earnings Per Share
The details of the computation of basic and diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(dollars in thousands, except for per share data)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
$
|
21,482
|
|
|
$
|
27,066
|
|
|
$
|
95,439
|
|
|
$
|
79,750
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares outstanding
|
196,445,684
|
|
|
196,062,348
|
|
|
196,311,529
|
|
|
195,852,404
|
|
Dilutive effect of stock options and RSUs
|
3,006,624
|
|
|
2,192,460
|
|
|
2,978,488
|
|
|
2,176,139
|
|
Diluted weighted average number of shares outstanding
|
199,452,308
|
|
|
198,254,808
|
|
|
199,290,017
|
|
|
198,028,543
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
$
|
0.49
|
|
|
$
|
0.41
|
|
Diluted net income per common share
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
$
|
0.48
|
|
|
$
|
0.40
|
|
Anti-dilutive shares excluded from diluted earnings per share computation
|
385,861
|
|
|
86,733
|
|
|
407,845
|
|
|
29,229
|
|
Note 10 – Related Parties
Invus Partners LLC which, as of
September 30, 2016
, beneficially owned
44.5%
of the Company's outstanding common stock, holds
$19.8 million
of the Company’s outstanding debt under the Amended Facility. Several of the members of the Company's Board of Directors (“BOD”) are members of Invus Partners LLC, as well as managing directors and officers of the general partner of Invus Partners LLC.
In addition, Kunkemueller Enterprises LP, which is owned in part by the wife of one of the members of our BOD, holds
$1.4 million
of our debt under the Amended Facility.
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Note 11 – Legal Proceedings
In the normal course of business, we are subject to proceedings, lawsuits and other claims and assessments, which typically include consumer complaints and post-termination employment claims. We have assessed such contingent liabilities and believe that other than the litigations described below the potential of these liabilities is not expected to have a material, if any, effect on our financial position, our results of operations or our cash flows.
Nestlé Purina and Related Litigations
On May 6, 2014, Nestlé Purina Petcare Company (“Nestlé Purina”) filed a lawsuit against us in the United States District Court for the Eastern District of Missouri, which alleged that we had engaged in false advertising, commercial disparagement, unfair competition, and unjust enrichment (the “Nestlé Purina litigation”). Nestlé Purina asserted that, contrary to our advertising and labeling claims, certain BLUE products contained chicken or poultry by-product meals, artificial preservatives and/or corn and that certain products in the BLUE grain-free lines contained grains. Nestlé Purina also alleged that we made false claims that our products (including LifeSource Bits) provide superior nutrition and health benefits compared to our competitors’ products. In addition, Nestlé Purina contended that we were unjustly enriched as consumers have paid a premium for BLUE products in reliance on these alleged false and misleading statements, at the expense of our competitors. Nestlé Purina sought an injunction prohibiting us from making these alleged false and misleading statements, as well as treble damages, restitution and disgorgement of our profits, among other things. In addition, Nestlé Purina issued press releases and made other public announcements, including advertising and promotional communications through emails and internet and social media websites that made claims similar to those contained in their lawsuit. Nestlé Purina sought a declaratory judgment that these statements were true and did not constitute defamation. On February 29, 2016, Nestlé Purina filed a third amended complaint adding BLUE's wholly-owned subsidiary Great Plains Leasing LLC, new causes of action under Connecticut and Missouri state law, and updating Nestlé Purina’s factual allegations.
In the course of pretrial discovery in the consolidated Nestlé Purina lawsuit, beginning in September 2014 documents and information were revealed that indicate that a facility owned by a major supplier of ingredients to the pet food industry, including Blue Buffalo, for a period of time, had mislabeled as “chicken meal” or “turkey meal” ingredients that contained other poultry-based ingredients that were inappropriate for inclusion in “chicken meal” or “turkey meal” under industry standards, and it appeared that this mislabeling was deliberate. This conduct was undertaken by the supplier without our knowledge, and we have since ceased purchasing ingredients from this facility. This supplier was one of our primary sources of chicken meal and turkey meal. As a result of the supplier’s conduct, our advertising claims of “no chicken or poultry by-product meals” were inaccurate as to products containing the mislabeled ingredients. Therefore, we were exposed to false advertising liability to Nestlé Purina and are similarly exposed to such liability to others to the extent a claimant can prove they were injured by our actions. Such liability may be material. We brought third-party indemnity and damages claims, with respect to the Nestlé Purina lawsuit, against the supplier that mislabeled the ingredients, as well as a broker involved in those transactions for such mislabeled ingredients. The trial court narrowed certain of our third party claims in response to motions to dismiss filed by the third parties but allowed numerous claims to proceed. In addition, we maintain insurance coverage for some of the Nestlé Purina claims. However, we may not be able to fully recover from such supplier, broker or from our insurance the full amount of any damages we might incur in these matters.
On October 15, 2014, we initiated a separate lawsuit against Nestlé Purina in state court in Connecticut. Nestlé Purina subsequently removed the case to the United States District Court for the District of Connecticut, and the Connecticut District Court then granted Nestlé Purina’s motion to transfer this matter to the same court where Nestlé Purina’s lawsuit against us was pending. Our complaint in this matter alleged that Nestlé
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Purina has intentionally engaged in false advertising, unfair trade practices and unjust enrichment in the promotion and advertisement of numerous of its products. In particular, our complaint alleged that Nestlé Purina deceptively advertised that certain high-quality, wholesome ingredients were present in certain of Nestlé Purina’s most popular pet food products in greater amounts, or were more prevalent in the products in relation to other ingredients, than was actually the case. In addition, our complaint alleged that Nestlé Purina deceptively advertised certain of its products as healthy and nutritious when in fact Nestlé Purina knew that these products were unsafe and were responsible for illness and even death in many of the dogs that consumed them. And our complaint alleged that Nestlé Purina falsely claims its “Just Right” brand of dog food was personalized to match each dog’s unique nutritional needs when it consists of only a limited set of basic ingredient formulas, each of which is substantially similar to the others. Our complaint sought an injunction prohibiting Nestlé Purina from continuing these false and misleading advertisements, as well as damages and disgorgement of profits, among other things. On July 31, 2015, Nestlé Purina filed an amended answer in this case that also asserted counterclaims against us. Nestlé Purina asserted that our complaint did not state viable claims, but that if a ruling was entered against it then “in the alternative” asserted counterclaims that relate to the advertising of a variety of our products, which Nestlé Purina contended were misleading or deceptive as to the amounts of certain ingredients in those products. On August 28, 2015, we amended our complaint to include allegations that Nestlé Purina falsely claimed that its “Bright Mind” dog food was proven to promote alertness, mental sharpness, memory, trainability, attention, and interactivity in dogs age seven and older, when in fact such claims were unsubstantiated and false. In response to Nestlé Purina’s amended answer and counterclaims, we filed a motion to dismiss the counterclaims in their entirety on October 2, 2015. On June 13, 2016, the trial court dismissed all but
two
of Nestlé Purina’s counterclaims.
On November 2, 2016, we entered into a settlement agreement with Nestlé Purina pursuant to which we paid Nestlé Purina
$32.0 million
, each party dismissed all of its claims and counterclaims against the other with prejudice, and we dismissed, with prejudice, our claims against Nestlé Purina’s advertising and public relations agencies. All other terms of the settlement are confidential. We plan to continue to pursue our claims against the third party ingredient supplier and broker that sold us mislabeled ingredients, as well as against our insurance providers as further described below.
In addition, a number of related putative consumer class action lawsuits were filed in various states in the U.S. making allegations similar to Nestlé Purina’s and seeking monetary damages and injunctive relief. We also brought damages and indemnity claims against our former ingredient supplier and broker with respect to the class action lawsuits. In December 2015, we entered into a settlement agreement with the plaintiffs to resolve all of the U.S. class action lawsuits (the “Settlement”). Under the terms of the Settlement we agreed to pay
$32.0 million
into a settlement fund, and on January 8, 2016, we paid this
$32.0 million
into an escrow account pending final court approval. Attorneys’ fees awarded by the court and all costs of notice and claims administration will be paid from the settlement fund. The Settlement received final court approval on May 19, 2016, and has since been appealed to the United States Court of Appeals for the Eighth Circuit. The amount that each class member who submits a claim for reimbursement will receive will depend on the total amount of Blue Buffalo products purchased by the claimant during the class period and certain other conditions including whether the claimant has a proof of purchase. The Settlement value does not take into account any potential recovery from insurance or from our former ingredient supplier or broker, against whom we will continue to pursue our claims for indemnity and other damages.
In addition to the U.S. class actions, which are the subject of the Settlement, in February 2016, a putative class action was filed in the Ontario Superior Court of Justice in Ottawa, Ontario, seeking damages and injunctive relief based on allegations similar to those made in the U.S. class actions. We believe the claims are without merit and plan to vigorously defend ourselves.
Blue Buffalo Pet Products, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
On July 5, 2016, Travelers Property and Casualty Company of America and The Travelers Indemnity Company of Connecticut (together, “Travelers”), which provided our primary and excess commercial general liability insurance coverage from February 2007 to February 2011 (collectively, the “Travelers Policies”), filed a lawsuit against us in Superior Court for the State of Delaware. The lawsuit sought a declaratory judgment that Travelers has no obligation under the Travelers Policies (a) to provide coverage to us for attorneys’ fees and costs that we have incurred or will incur in connection with the prosecution of any of our third party claims against the ingredient supplier and broker that sold us mislabeled “chicken meal” or “turkey meal” ingredients; and (b) to indemnify us for any of the
$32.0 million
paid in the settlement of the consumer class action lawsuits. On August 1, 2016, Travelers voluntarily dismissed this action.
On July 11, 2016, we filed a lawsuit in State of Connecticut Superior Court against Travelers as well as the Hartford Fire Insurance Company, Hartford Underwriters Insurance Company, and Hartford Casualty Insurance Company (collectively, “Hartford”). Hartford has provided our primary and excess commercial general liability insurance coverage since February 2011 (collectively, the “Hartford Policies”). Our lawsuit alleges that Travelers and Hartford, among other things, (a) breached their duties under the Travelers Policies and the Hartford Policies, respectively, by failing to (i) pay all reasonable defense fees and costs in connection with the Nestlé Purina litigation, the U.S. class action lawsuits and the putative class action in Ontario; and (ii) indemnify us for the $32.0 million U.S. class action settlement; (b) breached their covenants of good faith and fair dealing owed to us and acted in bad faith; and (c) violated the Connecticut Unfair Insurance Practices Act and the Connecticut Unfair Trade Practices Act. Our lawsuit also seeks declaratory judgment that we are entitled under the Travelers Policies and Hartford Policies to (x) a full defense, including payment of all reasonable and necessary defense fees and costs, in the Nestlé Purina litigation and the putative class action in Ontario; (y) coverage for the legal fees and costs incurred in our prosecution of any of our third party claims against the ingredient supplier and broker that sold us mislabeled “chicken meal” or “turkey meal” ingredients; and (z) full indemnity against (i) the settlement in the Nestlé Purina litigation, (ii) any settlement or judgment in the putative class action in Ontario and (iii) the $32.0 million settlement in the U.S. class action lawsuits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2015 and related notes included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of our final prospectus for our secondary public offering, as filed with the SEC on September 14, 2016, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Our Business
We are the fastest growing major pet food company in the United States, selling dog and cat food made with whole meats, fruits and vegetables, and other high-quality, natural ingredients. BLUE is a billion dollar brand and is the #1 brand in the Wholesome Natural market. We develop, produce, market, and sell pet food under five product lines: BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom, and BLUE Natural Veterinary Diet lines.
Our products are produced domestically through a hybrid network of owned and contracted manufacturing facilities and distributed from owned and contracted distribution centers to retailers in the specialty channels throughout the United States of America, Canada, Japan, and Mexico.
Results of Operations
The following tables present our selected statement of income data in dollars and expressed as a percentage of net sales for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
% of Net Sales
|
(dollars in thousands, except for per share amounts and percentages)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales
|
$
|
287,996
|
|
|
$
|
259,437
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
|
154,787
|
|
|
151,152
|
|
|
53.7
|
%
|
|
58.3
|
%
|
Gross profit
|
133,209
|
|
|
108,285
|
|
|
46.3
|
%
|
|
41.7
|
%
|
Selling, general, and administrative expenses
|
65,493
|
|
|
58,664
|
|
|
22.7
|
%
|
|
22.6
|
%
|
Provision for legal settlement
|
32,000
|
|
|
—
|
|
|
11.1
|
%
|
|
—
|
%
|
Operating income
|
35,716
|
|
|
49,621
|
|
|
12.4
|
%
|
|
19.1
|
%
|
Interest expense, net
|
3,629
|
|
|
3,722
|
|
|
1.3
|
%
|
|
1.4
|
%
|
Income before income taxes
|
32,087
|
|
|
45,899
|
|
|
11.1
|
%
|
|
17.7
|
%
|
Provision for income taxes
|
10,605
|
|
|
18,833
|
|
|
3.7
|
%
|
|
7.3
|
%
|
Net income
|
$
|
21,482
|
|
|
$
|
27,066
|
|
|
7.5
|
%
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
|
|
|
Diluted net income per common share
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
% of Net Sales
|
(dollars in thousands, except for per share amounts and percentages)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales
|
$
|
854,682
|
|
|
$
|
762,209
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
|
470,938
|
|
|
454,595
|
|
|
55.1
|
%
|
|
59.6
|
%
|
Gross profit
|
383,744
|
|
|
307,614
|
|
|
44.9
|
%
|
|
40.4
|
%
|
Selling, general, and administrative expenses
|
190,849
|
|
|
165,723
|
|
|
22.3
|
%
|
|
21.7
|
%
|
Provision for legal settlement
|
32,000
|
|
|
—
|
|
|
3.7
|
%
|
|
—
|
%
|
Operating income
|
160,895
|
|
|
141,891
|
|
|
18.8
|
%
|
|
18.6
|
%
|
Interest expense, net
|
10,872
|
|
|
11,097
|
|
|
1.3
|
%
|
|
1.5
|
%
|
Income before income taxes
|
150,023
|
|
|
130,794
|
|
|
17.6
|
%
|
|
17.2
|
%
|
Provision for income taxes
|
54,584
|
|
|
51,044
|
|
|
6.4
|
%
|
|
6.7
|
%
|
Net income
|
$
|
95,439
|
|
|
$
|
79,750
|
|
|
11.2
|
%
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.49
|
|
|
$
|
0.41
|
|
|
|
|
|
Diluted net income per common share
|
$
|
0.48
|
|
|
$
|
0.40
|
|
|
|
|
|
Three Months Ended September 30, 2016
Compared With
Three Months Ended September 30, 2015
Net Sales
Net sales
in
creased
$28.6 million
, or
11.0%
, to
$288.0 million
for the
three months ended September 30, 2016
, compared to
$259.4 million
for the
three months ended September 30, 2015
. Volume growth accounted for 9.4
percentage points of the increase in net sales, favorable net pricing contributed 2.1 percentage points, which was partially offset by unfavorable product mix of 0.5 percentage point.
Net sales of Dry Foods
in
creased
$24.2 million
, or
11.6%
, to
$232.4 million
for the
three months ended September 30, 2016
, compared to
$208.3 million
for the
three months ended September 30, 2015
. Volume growth accounted for 10.0 percentage points of the increase in net sales of Dry Foods, favorable net pricing contributed 1.7 percentage points, which was partially offset by unfavorable product mix of 0.1 percentage point. The strong performance of our BLUE Wilderness and BLUE Life Protection Formula lines drove the growth in net sales of Dry Foods. The increase in net pricing was primarily driven by pricing actions taken on selected items during the first quarter of Fiscal 2016.
Net sales of Wet Foods, Treats and Other Products
in
creased
$4.4 million
, or
8.6%
, to
$55.6 million
for the
three months ended September 30, 2016
, compared to
$51.2 million
for the
three months ended September 30, 2015
. Volume growth accounted for 7.0 percentage points of the increase in net sales of Wet Foods, Treats and Other Products, favorable net pricing accounted for 3.7 percentage points, which was partially offset by unfavorable product mix of 2.1 percentage points.
The strong performance of our BLUE Life Protection Formula and BLUE Wilderness lines drove the growth in net sales of Wet Foods, Treats and Other Products. The increase in net pricing was primarily driven by pricing actions taken on selected items during the first quarter of Fiscal 2016.
Gross Profit
Gross profit
in
creased
$24.9 million
, or
23.0%
, to
$133.2 million
for the
three months ended September 30, 2016
, compared to
$108.3 million
for the
three months ended September 30, 2015
, driven primarily by increased volume and supply chain efficiencies. Gross margin
in
creased to
46.3%
for the
three months ended September 30, 2016
from
41.7%
for the
three months ended September 30, 2015
, driven primarily by supply chain efficiencies including lower input costs (2.7 percentage points), higher net pricing realization (1.1 percentage point), and favorable mix (0.7 percentage points) during the
three months ended September 30, 2016
as compared to the
three months ended September 30, 2015
.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
$65.5 million
for the
three months ended September 30, 2016
, up
$6.8 million
, or
11.6%
, from
$58.7 million
for the
three months ended September 30, 2015
. The increase reflects:
|
|
•
|
$10.7 million of incremental expense related to our ongoing investments in advertising and marketing ($6.8 million) consistent with our strategy to invest in our brand and product lines and investments made in strategic initiatives ($3.9 million); partially offset by
|
|
|
•
|
$5.1 million decrease in expense related to public offerings.
|
Provision for Legal Settlement
Provision for legal settlement for the
three months ended September 30, 2016
was $32.0 million due to the settlement agreement entered into on November 2, 2016 related to the Nestlé Purina lawsuit as disclosed in Note 11 to our unaudited condensed consolidated financial statements.
Interest Expense, Net
Interest expense, net
de
creased
$0.1 million
, or
2.5%
, to
$3.6 million
for the
three months ended September 30, 2016
, compared to
$3.7 million
for the
three months ended September 30, 2015
. This decrease was due to increased interest income driven by higher quarter-over-quarter average cash on hand. Our effective interest rate quarter-over-quarter was
3.90%
for both the
three months ended September 30, 2016
and 2015.
Provision for Income Taxes
Provision for income taxes
de
creased
$8.2 million
, or
43.7%
, to
$10.6 million
for the
three months ended September 30, 2016
, compared to
$18.8 million
for the
three months ended September 30, 2015
. Our effective tax rate was
33.1%
for the
three months ended September 30, 2016
as compared to
41.0%
for the
three months ended September 30, 2015
. The decrease in our effective tax rate was primarily driven by the non-deductible permanent differences related to the close of our initial public offering during the
three months ended September 30, 2015
and the tax benefit received due to the effects of stock options exercised under the guidance of ASU 2016-09 during the
three months ended September 30, 2016
.
Net Income
As a result of the factors above, net income
de
creased
$5.6 million
, or
20.6%
, to
$21.5 million
for the
three months ended September 30, 2016
, compared to
$27.1 million
for the
three months ended September 30, 2015
.
Nine Months Ended September 30, 2016
Compared With
Nine Months Ended September 30, 2015
Net Sales
Net sales
in
creased
$92.5 million
, or
12.1%
, to
$854.7 million
for the
nine months ended September 30, 2016
, compared to
$762.2 million
for the
nine months ended September 30, 2015
. Volume growth accounted for 9.3
percentage points of the increase in net sales, favorable net pricing contributed 1.6 percentage points, and favorable product mix contributed 1.2 percentage points of growth.
Net sales of Dry Foods
in
creased
$71.6 million
, or
11.6%
, to
$690.8 million
for the
nine months ended September 30, 2016
, compared to
$619.2 million
for the
nine months ended September 30, 2015
. Volume growth accounted for 9.5 percentage points of the increase in net sales of Dry Foods, favorable net pricing contributed 1.2 percentage points, and favorable product mix contributed 0.9 percentage point of growth. The strong performance of our BLUE Wilderness, BLUE Life Protection Formula, and BLUE Freedom lines drove the growth in net sales of Dry Foods. The increase in net pricing was primarily driven by pricing actions taken on selected items during the first quarter of Fiscal 2016.
Net sales of Wet Foods, Treats and Other Products
in
creased
$20.9 million
, or
14.6%
, to
$163.9 million
for the
nine months ended September 30, 2016
, compared to
$143.0 million
for the
nine months ended September 30, 2015
. Volume growth accounted for 8.5 percentage points of the increase in net sales of Wet Foods, Treats and Other Products, favorable net pricing contributed 3.2 percentage points, and favorable product mix contributed 2.9 percentage points of growth.
The strong performance of our BLUE Wilderness and BLUE Life Protection Formula lines drove the growth in net sales of Wet Foods, Treats and Other Products. The increase in net pricing was primarily driven by pricing actions taken on selected items during the first quarter of Fiscal 2016.
Gross Profit
Gross profit
in
creased
$76.1 million
, or
24.7%
, to
$383.7 million
for the
nine months ended September 30, 2016
, compared to
$307.6 million
for the
nine months ended September 30, 2015
, driven primarily by increased volume and supply chain efficiencies. Gross margin
in
creased to
44.9%
for the
nine months ended September 30, 2016
from
40.4%
for the
nine months ended September 30, 2015
, driven primarily by supply chain efficiencies including lower input costs and the ramp-up of Heartland (2.4 percentage points), favorable mix (1.3 percentage points), and higher net pricing realization (0.8 percentage point) during the
nine months ended September 30, 2016
as compared to the
nine months ended September 30, 2015
.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
$190.8 million
for the
nine months ended September 30, 2016
, up
$25.1 million
, or
15.2%
, from
$165.7 million
for the
nine months ended September 30, 2015
. The increase primarily reflects:
|
|
•
|
$22.2 million of incremental expense related to strategic initiatives ($12.2 million) and our ongoing investments in advertising and marketing ($10.0 million) consistent with our strategy to invest in our brand and product lines; partially offset by
|
|
|
•
|
$6.4 million decrease in expense related to public offerings.
|
Provision for Legal Settlement
Provision for legal settlement for the
nine months ended September 30, 2016
was $32.0 million due to the settlement agreement entered into on November 2, 2016 related to the Nestlé Purina lawsuit as disclosed in Note 11 to our unaudited condensed consolidated financial statements.
Interest Expense, Net
Interest expense, net
de
creased
$0.2 million
, or
2.0%
, to
$10.9 million
for the
nine months ended September 30, 2016
, compared to
$11.1 million
for the
nine months ended September 30, 2015
. This decrease was due to increased interest income driven by higher quarter-over-quarter average cash on hand. Our effective interest rate was
3.63%
over the
nine months ended September 30, 2016
as compared to
3.62%
for the
nine months ended September 30, 2015
.
Provision for Income Taxes
Provision for income taxes
in
creased
$3.5 million
, or
6.9%
, to
$54.6 million
for the
nine months ended September 30, 2016
, compared to
$51.0 million
for the
nine months ended September 30, 2015
. Our effective tax rate was
36.4%
for the
nine months ended September 30, 2016
as compared to
39.0%
for the
nine months ended September 30, 2015
. The decrease in our effective tax rate was primarily driven by the non-deductible permanent differences related to the close of our initial public offering during the
nine months ended September 30, 2015
and the tax benefit received due to the effects of stock options exercised under the guidance of ASU 2016-09.
Net Income
As a result of the factors above, net income
in
creased
$15.7 million
, or
19.7%
, to
$95.4 million
for the
nine months ended September 30, 2016
, compared to
$79.8 million
for the
nine months ended September 30, 2015
.
Financial Condition, Liquidity, and Capital Resources
Overview
Historically, our primary source of liquidity has been cash flow from operations. In addition, we also have a $40.0 million revolving credit facility to provide us with an additional source of liquidity but have not had to draw on our revolving credit facility. As of
September 30, 2016
, our cash and cash equivalents were
$316.4 million
compared to cash and cash equivalents as of
December 31, 2015
of
$224.3 million
. On August 8, 2012, we entered into a $350.0 million term loan facility and obtained an additional $50.0 million of term loans on December 6, 2012 through an incremental term loan facility. The aggregate gross proceeds of $400.0 million were used to pay dividends to our stockholders. As of
September 30, 2016
, we had outstanding indebtedness of
$384.1 million
under the term loan facilities. Pursuant to the terms of the term loan facilities, we are required to make quarterly payments of approximately $1.0 million, with the remaining balance of $373.2 million due on August 8, 2019, the maturity date of the term loan facilities.
Our primary cash needs are for capital expenditures and working capital. Capital expenditures typically vary depending on the timing of infrastructure-related investments. We plan to make capital expenditures of approximately
$50.0 million
to
$60.0 million
in fiscal 2016, which we expect to fund from cash on hand and operating cash flow. We expect the majority of expenditures in fiscal 2016 will be used to fund our three-year,
$200.0 million
program to expand our internal manufacturing capabilities.
Our primary working capital requirements are for product and product-related costs, the payment of payroll, rent and distribution costs, advertising and marketing expenditures and the costs related to the development and commercialization of new products. Fluctuations in working capital are primarily driven by the timing of new product launches. As of
September 30, 2016
, we had working capital of
$378.8 million
, compared to
$286.5 million
as of
December 31, 2015
.
We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing and financing needs for the foreseeable future. If necessary, we can borrow funds under our revolving credit facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. Our ability to meet our operating, investing and financing needs depend to a significant extent on our future financial performance, which will
be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, described in the “Risk Factors” section of our final prospectus for our secondary public offering, as filed with the SEC on September 14, 2016. In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be our ability to provide attractive products to our customers and consumers, increase prices to offset higher commodity costs, manage production and our supply chain and improve our productivity. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. We may need to refinance all or a portion of the principal amounts outstanding under our term loan facilities on or before August 8, 2019. We expect to continually assess our performance, the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures.
Cash Flows
Operating Activities
Net cash
provided by
operating activities was
$111.5 million
for the
nine months ended September 30, 2016
, compared to
$94.0 million
for the
nine months ended September 30, 2015
. The
in
crease in net cash provided by operating activities was primarily driven by an increase in net income.
Investing Activities
Net cash
used in
investing activities was
$18.2 million
for the
nine months ended September 30, 2016
, compared to
$5.4 million
for
nine months ended September 30, 2015
. The increase in net cash used in investing activities were primarily the result of capital expenditures for investments made in our three-year program to expand our internal manufacturing capabilities.
Financing Activities
Net cash
used in
financing activities was
$1.2 million
for the
nine months ended September 30, 2016
, compared to net cash provided financing activities of
$0.5 million
for the
nine months ended September 30, 2015
. The
in
crease in net cash used in financing activities was primarily due to the effects of the early adoption of ASU 2016-09 to recognize excess tax benefits from the exercise of stock options within operating activities only. This early adoption was applied prospectively to the statement of cash flows.
Description of Indebtedness
As of
September 30, 2016
, our senior secured credit facilities consisted of
$384.1 million
of outstanding term loans maturing on August 8, 2019 and an undrawn $40.0 million revolving credit facility (which includes borrowing capacity available for letters of credit and for short-term borrowings) maturing on August 8, 2017. Blue, a wholly owned subsidiary of BBPP, is the borrower under our senior secured credit facilities. As of
September 30, 2016
, the interest rate on the term loan facilities was
3.75%
.
All obligations under our senior secured credit facilities are unconditionally guaranteed by Blue Pet Products, Inc., a wholly-owned subsidiary of BBPP and the direct parent of the borrower, and, subject to certain exceptions, each of our material current and future U.S. wholly-owned restricted subsidiaries. All obligations under our senior secured credit facilities, and the guarantees of those obligations, are secured by substantially all of the following assets of the borrower and each guarantor, subject to certain exceptions:
|
|
•
|
a pledge of 100% of the capital stock of the borrower and 100% of the equity interests directly held by the borrower and each guarantor in any wholly-owned material subsidiary of the borrower or any guarantor (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, will not include more than 65% of the voting stock of such non-U.S. subsidiary), subject to certain exceptions; and
|
|
|
•
|
a security interest in, and mortgages on, substantially all tangible and intangible assets of the borrower
|
and each guarantor, subject to certain exceptions.
Our senior secured credit facilities contain a number of covenants that, among other things, restrict the ability of the borrower and its restricted subsidiaries to (subject to certain exceptions): incur additional indebtedness or issue preferred stock; create liens on assets; enter into sale and leaseback transactions; engage in mergers or consolidations; sell assets; pay dividends and distributions or repurchase our capital stock; make investments, loans or advances; repay subordinated indebtedness; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing its subordinated indebtedness; and change its lines of business. The credit agreement covenants also restrict the ability of Blue Pet Products, Inc. to engage in certain mergers or consolidations. The credit agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the credit agreement includes maintenance covenants that require compliance with certain secured leverage ratios. The availability of certain baskets and the ability to enter into certain transactions (including the ability of the borrower to pay dividends to the parent guarantor) may also be subject to compliance with such secured leverage ratios. The Company believes it was in compliance with its financial debt covenants in the credit agreement as of
September 30, 2016
.
Pricing Options
Borrowings under the term loan facilities bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Citibank, N.A., (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% and (d) a floor of 2.00% or (2) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, provided that LIBOR is not lower than 1.00%. The applicable margin for borrowings under the term loan facilities is
2.75%
with respect to LIBOR borrowings and
1.75%
with respect to base-rate borrowings. As of
September 30, 2016
, the interest rate applicable to borrowings under the term loan facilities was
3.75%
.
Borrowings under the revolving credit facility bear interest at a rate per annum equal to an applicable margin based upon a leverage-based pricing grid, plus, at our option, either (i) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Citibank, N.A., (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (ii) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margin for borrowings under the revolving credit facility is
3.25%
with respect to LIBOR borrowings and
2.25%
with respect to base-rate borrowings. As of
September 30, 2016
, the interest rate on the revolving credit facility was
4.25%
.
Interest Expense
Interest on borrowings under our senior secured credit facilities is payable (1) on the last day of any interest period with respect to LIBOR borrowing with an applicable interest period of three months or less, (2) every three months with respect to LIBOR borrowings with an interest period of greater than three months or (3) on the last business day of each March, June, September and December with respect to base rate borrowings. In addition, we are required to pay a commitment fee on any unutilized commitments under the revolving credit facility. The initial commitment fee rate is 0.50% per annum and varies based upon a leverage-based pricing grid. We are also required to pay customary letter of credit fees.
Recent Accounting Pronouncements
Refer to Note 2 - "Basis of Presentation" of the unaudited condensed consolidated financial statements.
Off-Balance Sheet Arrangements
During 2013, Heartland Pet Foods Manufacturing Inc., our wholly-owned subsidiary, or Heartland, and Jasper County, Missouri, or Jasper, entered into an agreement pursuant to which Jasper agreed to issue up to an aggregate principal amount of $55 million of industrial revenue bonds to purchase manufacturing equipment from Heartland, which will then be leased back to Heartland. As Heartland will become the owner of the equipment at the end of the lease term, the lease meets the requirements of a capital lease and the equipment is recorded as property, plant, and equipment on our balance sheet. The Company has the right and intends to set-off any obligation to make payments under the lease agreements with the proceeds due from the industrial revenue bonds. As of both
September 30, 2016
and December 31, 2015, Jasper had issued, and Heartland had purchased, $55 million of industrial revenue bonds and Jasper had purchased from, and leased back to, Heartland certain manufacturing equipment for a corresponding amount.
In August of 2016, Heartland and the City of Joplin, Missouri, or Joplin, entered into agreements by which Joplin agreed to issue up to an aggregate principal amount of approximately
$83.3 million
of industrial revenue bonds to purchase the land on which the current Heartland facility resides and the land on which the expansion of the Heartland facility will reside, and the associated buildings, structures, and fixtures, including the additional manufacturing equipment which will be included in the expansion of the Heartland facility (collectively, the “Property”). Heartland agreed to purchase such industrial revenue bonds and which Property was then agreed to be leased back to Heartland. As Heartland will become the owner of the Property at the end of the lease term, the lease meets the requirements of a capital lease and the equipment and land are recorded as property, plant and equipment our balance sheet. The Company has the right and intends to set-off any obligation to make payments under the lease agreement with the amounts due under the industrial revenue bonds. As of
September 30, 2016
, Joplin had issued and Heartland had purchased approximately
$0.1 million
of industrial revenue bonds and Joplin had purchased from, and leased back to, Heartland the land for a corresponding amount.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies and a description of accounting policies that are considered critical including revenue recognition, stock-based compensation, income taxes and inventories may be found in our audited consolidated financial statements and related notes for the year ended December 31, 2015
included in our Annual Report on Form 10-K. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates and commodity price fluctuations. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes.
Interest Rate Risk
We are exposed to changes in interest rates because the indebtedness incurred under our senior secured credit facilities is variable rate debt. Interest rate changes generally do not affect the market value of our senior secured credit facilities but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of
September 30, 2016
, we had variable rate debt of approximately
$384.1 million
under our senior secured credit facilities. An increase of 1% would have increased our interest expense for the
three and nine months ended September 30, 2016
by approximately
$1.0 million
and
$3.0 million
, respectively.
Commodity Price Risk
We use raw materials that are subject to price volatility caused by supply conditions, weather, political and economic variables and other unpredictable factors. We purchase some of our raw materials in the open market. We manage our raw material exposures by entering into contracts for our dry food ingredients and through ongoing productivity initiatives. In 2016, under our Commodity Price Risk Management Policy, we expect to contract approximately 90% of our ingredients for our forward twelve-month needs, as well as enter into fixed price and/or fixed quantity contracts for a pre-determined amount of our ingredients to reduce short term price volatility in certain commodities. Although we do not currently engage in hedging activities, we expect to adopt certain hedging strategies in the future consistent with our Commodity Price Risk Management Policy. If commodity price changes result in unexpected increases in raw materials, we may not be able to increase our prices to offset these increased costs without suffering reduced volume, net sales and operating results.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the
third
quarter of Fiscal
2016
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.