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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 2, 2016

OR

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from      to     

Commission File No. 001-37826

ADVANCEPIERRE FOODS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

(800) 969-2747

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o  No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share  – 76,947,707 shares as of August 3, 2016

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ADVANCEPIERRE FOODS HOLDINGS, INC.

INDEX TO FORM 10-Q

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PART I — FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

AdvancePierre Foods Holdings, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income  (Unaudited)

(In thousands, except share and per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

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AdvancePierre Foods Holdings, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share and per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

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AdvancePierre Foods Holdings, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

(In thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

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AdvancePierre Foods Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share data)

(Unaudited)

1. BASIS OF PRESENTATION

Overview.  As used in these notes to the unaudited Condensed Consolidated Financial Statements, unless otherwise noted or the context otherwise requires, (1) references to the “Company,” “we,” “our,” or “us” are to AdvancePierre Foods Holdings, Inc. and its consolidated subsidiaries, and (2) references to “AdvancePierre” are to AdvancePierre Foods Holdings, Inc. exclusive of its subsidiaries.

We operate on a 52-week or 53-week fiscal year ending on the Saturday closest to December 31. References to “fiscal 2015” are to the 52-week period ended January 2, 2016 and ‘fiscal 2016” are to the 52-week period ended December 31, 2016. The fiscal quarter ended July 2, 2016 (or “2nd Quarter 2016”) and the fiscal quarter ended July 4, 2015 (or “2nd Quarter 2015”) each consist of 13 weeks. The fiscal year to date period ended July 2, 2016 and the fiscal year to date period ended July 4, 2015 each consists of 26 weeks.

The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for each of the three years ended January 2, 2016 and notes thereto included in our Prospectus that was filed with the Securities and Exchange Commission (“SEC”) on July18th, 2016 (the “Fiscal 2015 Audited Financial Statements”). The Condensed Consolidated Balance Sheet as of January 2, 2016 was derived from the Fiscal 2015 Audited Financial Statements but does not include all of the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited Condensed Consolidated Financial Statements included herein contain all required adjustments, consisting of normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of the results for the entire year.

Description of Business.  We are a leading national producer and distributor of value-added, convenient, ready-to-eat sandwiches, sandwich components and other entrées and snacks. We sell value-added products to the foodservice, retail, convenience and industrial channels, which correspond to our reportable segments. We market and distribute a broad line of products in multiple product categories including ready-to-eat sandwiches, such as breakfast sandwiches, peanut butter and jelly (“PB&J”) sandwiches and hamburgers; sandwich components, such as fully-cooked hamburger and chicken patties and Philly steaks; and other entrées and snacks, such as country fried steak, stuffed entrées, chicken tenders and cinnamon dough bites.

OCM Principal Opportunities Fund IV L.P. (“OCM”) is the Company’s majority shareholder. AdvancePierre Foods, Inc. (“APF”) is a wholly-owned indirect subsidiary of the Company.

Stock Split and Initial Public Offering. On June 16, 2016, we declared a 49.313-for-one stock split of our common stock with an effective date of June 21, 2016. The par value of the common stock was not adjusted as a result of the stock split. All share and per share amounts included in the Condensed Consolidated Financial Statements and accompanying notes have been retroactivity adjusted to reflect the stock split. Fractional shares resulting from such stock split were rounded up to the nearest whole share. On July 20, 2016, we completed an initial public offering (“IPO”) of 21,390,000 shares of our common stock (See Note 21).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.  The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of AdvancePierre Foods Holdings, Inc. and its subsidiaries. All intercompany transactions have been eliminated.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

Use of Estimates.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates include estimates of fair values for inventory, goodwill, other intangible assets and other long-lived assets, in addition to accounting estimates of sales discounts and promotional allowances, sales-in-transit, self-insurance reserves, fair value of restricted shares and useful lives assigned to intangible assets, property, plant and equipment. Actual results could differ from those estimates.

New Accounting Pronouncements.

Pronouncements adopted by the Company.

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The new guidance changed the presentation of debt issuance costs in financial statements. Under the ASU, an entity is now required to present such costs in the balance sheet as a direct deduction from the related debt rather than as an asset. Amortization of the debt issuance costs continues to be reported as interest expense. The updated guidance was effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period.  We adopted the guidance in the first quarter of 2016.  The impact resulted in reductions of long-term assets and long-term debt of $12,131 and $11,557 as of July 2, 2016 and January 2, 2016, respectively.

Pronouncements under consideration by the Company.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.”  The new guidance simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. The updated guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted for all entities in any interim or annual period.  An entity that elects early adoption must adopt all of the amendments in the same period.  We are in the process of evaluating this guidance.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).”  The new guidance will require lessees to recognize the assets and liabilities that arise from leases in the balance sheet, including operating leases.  The updated guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods.  Early adoption is permitted.  We are in the process of evaluating this guidance.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The ASU will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method (RIM). The updated guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. We are in the process of evaluating this guidance.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.”  ASU No. 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. During 2016, the FASB issued additional ASUs to clarify certain aspects of ASU No. 2014-09. We are currently assessing the impact that adopting the new revenue guidance will have on our consolidated financial statements and footnote disclosures. ASU No. 2014-09, as amended, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

3.     ACQUISITIONS

On January 30, 2015, we acquired the wholesale business and production assets of Landshire, Inc. (“Landshire”), a manufacturer and marketer of sandwich products, and on April 24, 2015, we acquired the business and production assets of Better Bakery, LLC (“Better Bakery”), a producer of high quality, premium stuffed sandwiches and other licensed products. The acquisitions bring a new set of premium products to our portfolio that complement and increase our existing product offerings, and also provide us with additional capacity for increased sandwich and bakery production.  The seller of Landshire entered into an agreement with us for an ongoing supply of product whereby the seller can earn additional acquisition consideration upon meeting certain volume thresholds.

The consideration for the acquisition of Better Bakery was satisfied with cash. The consideration for the acquisition of Landshire was satisfied with cash and earn out payments to be paid over a period of three years based on volume performance.  We expect to make all additional consideration payments included in the acquisition agreement and therefore, have valued the liability as the net present value of the payment stream. The following provides a summary of the purchase consideration for each acquisition:

In connection with these acquisitions, we performed valuations of the acquired assets and assumed liabilities.  Intangible assets identified in the valuation included customer relationships, trade name and trademarks, and non-competition agreements.  Certain fair values were derived using Level 3 inputs, as defined by the FASB’s Accounting Standard Codification (“ASC”) 820, “Fair Value Measurements” including the use of pricing models, discounted cash flow methodologies, and similar techniques. The fair value of certain instruments required significant management judgment and/or estimations.  Unobservable inputs were developed based on the best information available, which in some instances included our own data.

The acquisitions were recorded in accordance with ASC 805, “Business Combinations”.  The net purchase prices were allocated to assets acquired and liabilities assumed based on estimated fair values as of the date of the acquisitions and were as follows:

The assumed liability for Better Bakery of $7,228, that is included in the table above, relates primarily to an onerous broker contract, the amount of which was determined by reference to prevailing market brokerage rates applicable to our business along with projected future sales under the contract.  The goodwill arising from the acquisitions is deductible for tax purposes and consists largely of the synergies and economies of scale expected from combining and integrating the acquired businesses into our business, as well as the assembled workforce. Other expense, net for 2nd Quarter 2015 and the fiscal year to date period ended July 4, 2015 include $59 and $420, respectively of acquisition-related legal and professional fees for Landshire. For Better Bakery, such amounts were $44 and $250, respectively.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

Presented below are pro forma results for 2nd Quarter 2015 and the year to date period ended July 4, 2015 as if the acquisitions had occurred prior to January 4, 2015:

For both 2nd Quarter 2015 and the year to date period ended July 4, 2015, our consolidated net sales and net income includes $2,297 and $293, respectively, for Better Bakery from the acquisition date of April 24, 2015 to July 4, 2015. For the year to date period ended July 4, 2015, our consolidated net sales and net income includes $18,799 and $3,503, respectively, for Landshire from the acquisition date of January 30, 2015 to July 4, 2015.

4.             ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

Other receivables at July 2, 2016 and January 2, 2016 includes $8,703 and $9,398, respectively, for a product contamination insurance policy claim related to the recall of stuffed chicken breast products that occurred in fiscal 2015.  Such amounts were recognized based on a loss contingency model and primarily relate to a claim for net sales reductions due to product returns, marketing expenses to support post-recall sales, and administrative expenses due to professional fees and travel.  The amount recorded represents the amount expected to be collected under the policy. The full amount of the insurance claim is $16,653, of which $1,000 is subject to self-insurance retention. Also included in the amount claimed is $3,175 for business interruption, which was determined to be a gain contingency and hence was not recorded.  The table below summarizes the activity in the recall receivables, which is included in other receivables in the table above:

Of the $1,742 recorded as claim additions in the table above, $439, $31, $1,068 and $204 were recorded to cost of goods sold, distribution expenses, selling, general and administrative expenses and other expense, net, respectively.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

5.             INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market.  Cost for inventory is comprised of the purchase price of raw materials plus conversion costs.  Inventories by major classification are as follows:

6.             PROPERTY, PLANT AND EQUIPMENT

Major components of property, plant and equipment along with their respective estimated useful lives are as follows:

Net book value of internally developed software costs included in software above was $5,537 and $5,777 as of July 2, 2016 and January 2, 2016, respectively.  Depreciation of capitalized internal-use computer software costs included in depreciation expense was $791 and $780 for 2nd Quarter 2016 and 2nd Quarter 2015, respectively, and, for the year to date period ended July 2, 2016 and July 4, 2015, was $1,540 and $1,542, respectively.

Depreciation expense was $8,220 and $7,814 for 2nd Quarter 2016 and 2nd Quarter 2015, respectively, and, for the year to date period ended July 2, 2016 and July 4, 2015, was $16,278 and $15,082, respectively.

7.             GOODWILL AND OTHER INTANGIBLES

The carrying amounts of goodwill by segment are as follows:

There were no accumulated goodwill impairment losses as of July 2, 2016.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

8.             DERIVATIVE FINANCIAL INSTRUMENTS

We periodically enter into swap agreements to mitigate our exposure to fluctuations in the price of natural gas and diesel fuel, and, designate these derivatives as cash flow hedges. Such derivatives are recognized in our unaudited Condensed Consolidated Balance Sheets at fair value.

Diesel Fuel Risk.  We use independent freight carriers to deliver our products.  These carriers charge a basic rate per mile that is generally subject to a mileage surcharge for diesel fuel price increases.  From time to time, we enter into variable to fixed rate commodity swap agreements with financial counterparties to hedge our diesel fuel costs.  These hedge agreements are generally not for speculative purposes. Instead, such hedge agreements mitigate the variability in monthly cash flows attributable to changes in fuel surcharge rates that are caused by changes in U.S. No 2 Diesel Retail pricing.  These hedging instruments usually consist of a series of financially settled fixed forward contracts with varying expiration dates that generally span a period of up to twelve months from the effective dates.  The net amounts paid or received upon monthly settlement are generally recorded as adjustments to freight expense, while the effective changes in fair values are generally recorded as components of Accumulated Other Comprehensive Income or Loss (“AOCI”).  There were no diesel fuel hedge agreements in place at July 2, 2016 and January 2, 2016 and accordingly, at these dates, there were no amounts in AOCI related to the diesel fuel hedges.

Natural Gas Risk.  We utilize multiple providers of natural gas and sometimes enter into variable to fixed rate commodity swap agreements with financial counterparties to manage the fluctuations in the cost of natural gas. These hedge agreements are generally not for speculative purposes. Instead, such hedge agreements mitigate the variability in monthly cash flows attributable to natural gas price changes that are caused by changes in NYMEX pricing.  The hedging instruments generally consist of a series of financially settled fixed forward contracts with varying expiration dates that generally span a period of up to twelve months.  The net amounts paid or received upon monthly settlement are usually recorded as adjustments to utilities expense, while the effective changes in fair values are generally recorded as components of AOCI.  There were no such hedge agreements in place between January 2, 2016 and July 2, 2016, and accordingly, at these dates, there were no amounts in AOCI related to any natural gas hedges.

In connection with certain hedge agreements related to diesel fuel and natural gas that we entered into during fiscal 2014 and that remained in effect at July 4, 2015, we recorded the following amounts in 2nd Quarter 2015 and in the year to date period ended July 4, 2015:

Within the unaudited Condensed Consolidated Statements of Operations, the amounts in the table that relate to the diesel fuel swap are included in distribution expenses, whereas the amounts that relate to the natural gas swap are included in cost of goods sold.  The related tax impact of such amounts were determined to be immaterial.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

9.             FINANCING ARRANGEMENTS

On June 2, 2016, we entered into a new first lien term loan in the aggregate amount of $1,300,000, which matures on June 2, 2023 (the “2016 First Lien Term Loan”). On the same date, we also entered into an amendment to our revolving credit facility (referred to as our asset based facility or ABL Facility), which extended its maturity date to June 2, 2021. We refer to the 2016 First Lien Term Loan together with the ABL Facility as our credit facilities. The net proceeds from the 2016 First Lien Term Loan of $1,293,500 (which is net of original issue discount of $6,500), were used to repay our 2012 First Lien Term Loan, our 2012 Second Lien Term Loan (collectively, the “ Prior Term Loans”), pay related accrued interest of $11,990, pay a prepayment penalty of $3,735 and loan origination fees of $15,449.  We retained proceeds of $3,619 for working capital and other purposes.

Debt at July 2, 2016 and January 2, 2016 consisted of the following:

The original issue amount, in aggregate, for the Prior Term Loans was $1,300,000 ($925,000 and $375,000 for the 2012 First Lien Term Loan and the 2012 Second Lien Term Loan, respectively).  The financing of the 2016 First Lien Term Loan and the repayment of the Prior Term Loans were accounted for pursuant to ASC 470-50, Debt - Modification and Extinguishments (ASC 470-50).  Accordingly, we recognized $825 and $1,336 in interest expense related to the write off of the original issue discount and a portion of the unamortized deferred financing fees, respectively, that were associated with the Prior Term Loans. Fees paid of $15,449 were assessed under ASC 470-50, to be expensed or capitalized and amortized over the lives of the new loans. Of the new fees incurred, $11,896 were expensed and $3,553 were capitalized. Fees expensed are recognized in “Other debt issuance costs” in our unaudited Condensed Consolidated Statements of Operations and Comprehensive Income. Fees capitalized of $2,896 related to the 2016 First Lien Term Loan are recognized in “Long-term debt, net of current maturities” and $657 related to the ABL Facility are recognized in “Other assets” in our unaudited Condensed Consolidated Balance Sheets.  After considering the impact of the amortization of original issue discount and deferred financing fees, the effective interest rate for the 2016 First Lien Term Loan was approximately 5.03% at the issue date.

The 2016 First Lien Term Loan is collateralized by a first-priority security interest in substantially all of our assets except for accounts receivable, inventory and cash and cash equivalents that serve as first-priority collateral for the ABL Facility, on which the 2016 First Lien Term Loan maintains a second-priority interest.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

Interest on borrowings under the 2016 First Lien Term Loan varies based on either LIBOR or a bank base rate, plus a margin. Between June 2, 2016 and the date of delivery of the compliance certificate related to the financial statements for 2nd Quarter 2016, interest varies based on either LIBOR plus 3.75% or a bank base rate plus 2.75%, subject to a minimum LIBOR rate of 1.00%, in the case of the LIBOR option. Thereafter, interest varies based on either LIBOR or a bank base rate, plus a margin as set forth in the following table:

Interest based on the bank base rate is subject to the prime rate plus a margin. The agreement governing the 2016 First Lien Term Loan stipulates mandatory quarterly principal repayments of $3,250 between September 30, 2016 and the maturity date, at which point, it stipulates a balloon payment of $1,212,250.

Similar to the Prior Term Loans, the agreement governing the 2016 First Lien Term Loan includes certain non-financial covenants, which include limitations on our ability to incur additional indebtedness, issue preferred stock, pay dividends, make distributions on our capital stock, repurchase our capital stock, make certain investments, create liens on our assets, enter into transactions with affiliates, transfer and sell assets, merge, consolidate or sell all or substantially all of our assets.  Such covenants also create restrictions on dividends and certain payments by our restricted subsidiaries. At July 2, 2016, we were in compliance with all such covenants. Financial maintenance covenants are also included in the agreement but these only apply under certain conditions. The 2016 First Lien Term Loan also requires mandatory annual prepayment of Excess Cash Flow (as defined in the Credit Agreement governing the 2016 First Lien Term Loan).

Prior to its pay-off, the agreement governing the 2012 First Lien Term Loan required a mandatory prepayment of amounts equal to Excess Cash Flow (as defined in the Credit Agreement governing the 2012 First Lien Term Loan). For the fiscal year ended January 2, 2016, a mandatory prepayment related to Excess Cash Flow of approximately $13,407 was determined. This payment was made in the second quarter of 2016. However, certain debt holders exercised their option to reject the prepayment and $2,815 of the payment was returned to us.

The maximum borrowing limit on the ABL Facility is $175,000 and such maximum borrowing base limit is further subject to a borrowing base limitation that is derived from applying defined calculations to inventory and accounts receivable balances.  The agreement governing the ABL Facility continues to include certain non-financial covenants as well as certain financial maintenance covenants that only go into effect under certain conditions. At July 2, 2016 and January 2, 2016, availability under the ABL Facility were derived as follows:

At July 2, 2016, the interest rate for borrowings on the ABL Facility was 4.00% (base rate 3.50% plus 0.50% margin) and, for the term loans, the interest rate was 4.75%.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

Future maturities of total debt excluding capital leases, were as follows as of July 2, 2016:

Future maturities of the 2016 First Lien Term Loan that are included in the table above are based on the contractual maturity schedule. However, on July 21, 2016, we voluntarily repaid $205,000 of the 2016 First Lien Term Loan using proceeds from the sale of our common stock in the IPO that is more fully discussed in Note 21. We applied the repayment to the scheduled payments that would have fallen due between September 30, 2016 and June 2, 2023, and also, to a portion of the balloon payment due June 2, 2023. As a result, as of July 21, 2016, the only required future payment under the 2016 First Lien Term Loan is an amended balloon payment of $1,095,000 which is due June 2, 2023.

10.          INCOME TAXES

A summary of our income tax (benefit) provision and related effective tax rates follows:

Income taxes are accounted for in accordance with authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between their financial statement basis and their tax basis, using enacted rates in effect for the year in which the differences are expected to reverse. We have favorable tax attributes, such as significant tax-deductible depreciation and amortization and U.S. federal and state net operating losses which result in minimal cash paid for income taxes.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  We consider the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment.  At each reporting date, we consider new evidence, both negative and positive that impacts the assessment of the realization of deferred tax assets. We historically maintained a full valuation allowance against our deferred tax assets because the existing negative evidence outweighed the positive evidence such that it was not more likely than not that the deferred tax assets were realizable.  Principal among the negative evidence has been the sustained history of cumulative tax losses, in part related to fluctuations in commodity costs and our high degree of financial leverage.  While we reported pre-tax income in fiscal year 2015, because the Company reported significant pre-tax losses in previous historical periods, we continued to maintain a full valuation allowance through the first quarter of fiscal year 2016.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

In the second quarter of fiscal year 2016, we continued the trend of realizing pre-tax income that began in the first quarter of fiscal year 2015.  As of July 2, 2016, our cumulative income in the recent past became positive.  In addition, our forecasts for the remainder of fiscal year 2016 and for fiscal year 2017 indicate continued pre-tax income.  Additionally, we were able to refinance our debt during the second quarter on more favorable terms which will result in significant annual savings.  The Company also considered forecasts of future taxable income and evaluated the utilization of tax attributes prior to their expiration.  After considering these factors, we determined that the positive evidence outweighed the negative evidence in the second quarter and concluded that it was more likely than not that our deferred tax assets were realizable.  As a result, we released $56,496 of valuation allowance on a discrete basis during the second quarter of fiscal year 2016. The tax benefit associated with the remaining valuation allowance, along with a similar amount of tax expense connected to the reduction in the NOL deferred tax asset, would be released to income as profits are earned during the remainder of the year.

Presented in the table below is the activity in the valuation allowance:

Our effective tax rates for 2nd Quarter 2016, 2nd Quarter 2015 and for the year to date periods ended July 2, 2016 and July 4, 2015 are different from the expected federal rate of 35% in part due to the utilization of deferred tax assets and the release of valuation allowances.

Net deferred tax assets and federal income tax expense in future years can be significantly affected by changes in enacted tax laws and rates or by unexpected adverse events that could impact our conclusions regarding the ultimate realizability of deferred tax assets.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  As of July 2, 2016, our federal and state tax returns for fiscal 2011 through fiscal 2015 remain open under the relevant statutes.

We believe that substantially all tax positions taken and expected to be taken and reflected in the accompanying unaudited Condensed Consolidated Financial Statements are more likely than not to be sustained, based upon their technical merits, upon examination.  As a result, no material amounts were recorded to reverse the impact of tax benefits as of July 2, 2016 and July 4, 2015.

11.          STOCKHOLDERS’ EQUITY

Concurrent with the restricted stock grants discussed in Note 15, employees and other recipients made elections under section 83(b) of the Internal Revenue Code (the “83(b) elections”), which triggered instant recognition of compensation for federal income tax purposes.  To assist the recipients with the tax liability arising from the 83(b) elections, we provided loans to these employees, evidenced by promissory notes (the “Stockholder Notes”), for amounts that approximate each recipient’s tax liability under the 83(b) elections.  The Stockholder Notes are secured by the shares issued to the respective recipients under our 2009 Omnibus Equity Incentive Plan (the “Equity Incentive Plan”) or any other equity incentive plan.  In addition, the Stockholder Notes have recourse in the event of default by the recipient.  Interest is charged on the outstanding balances at the mid-term applicable federal rate in effect at the issue date.  As of July 2, 2016 and January 2, 2016, the interest rates on the Stockholder Notes ranged between 0.95% and 2.04%.  Balances outstanding at July 2, 2016 and January 2, 2016 (which represents principal and related accrued interest) were $895 and $3,884, respectively, and are presented in the unaudited Condensed Consolidated Balance Sheets as deductions from stockholders’ equity.  Interest on such Stockholder Notes, which are included in related party interest in our unaudited Condensed Consolidated Statements of Operations, were nominal for the periods presented.

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AdvancePierre Foods Holdings, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(In thousands except share and per share data)

(Unaudited)

12.          LEASED PROPERTIES

Our leased properties are fully discussed in the Fiscal 2015 Audited Financial Statements included in our prospectus that was filed on July 18th, 2016 and there have been no significant changes since the release of those statements.

13.          OTHER LONG-TERM LIABILITIES

As discussed in Note 3, we acquired Landshire and Better Bakery during Fiscal 2015. A component of the purchase price for Landshire related to contingent consideration for earn out payments based on achieving minimum annual volume targets. At July 2, 2016 and January 2, 2016, respectively, the fair value of the liability for the earn out payments was $13,101 and $19,628 respectively, of which $6,624 and $9,956, respectively, were included in other accrued liabilities; the remainder of these amounts were included in other long-term liabilities. 

As part of the acquisition of Better Bakery, we assumed an onerous broker contract. At July 2, 2016 and January 2, 2016, the liability for this contract was $6,845 and $6,821, respectively. Of the balance at July 2, 2016, $2,693 is included in other accrued liabilities and $4,152 is included in other long-term liabilities.  At January 2, 2016, the entire amount was included in other long-term liabilities.  During the year to date period ended July 2, 2016, payments made with respect to the earn out agreement and the onerous broker contract were $6,667 and $664, respectively.

14.          RESTRUCTURING AND OTHER EXPENSE, NET

Over the past three or more years, we have initiated a number of restructuring programs to integrate acquired businesses, improve the efficiency of our manufacturing and distribution network, and consolidate and reorganize our management and support teams.

In connection with the acquisition of Landshire in 1st Quarter 2015 and Better Bakery in 2nd Quarter 2015, we incurred $625 and $849 of integration costs in 2nd Quarter 2015 and the year to date period ended July 4, 2015, respectively.  Of these amounts, $262 and $362 for 2nd Quarter 2015 were included in gross profit and operating income, respectively, and $269 and $579 for the year to date period ended July 4, 2015 were included in gross profit and operating income, respectively.  These amounts represented costs for travel and meals, professional fees, facility closing costs and related severance.  Also, during the 2nd Quarter 2015 and the year to date period ended July 4, 2015, we incurred $304 in expenses (included in gross profit) to reconfigure production lines at our Portland, Maine manufacturing facility.

In addition, during fiscal 2013, we undertook various initiatives intended to improve our commercial effectiveness and reduce our operating costs, the execution of which continued into fiscal 2014, 2015 and 2016.  These initiatives included:

·      The consolidation of our business unit leadership and shared services teams in our Cincinnati, Ohio area facilities and the closure of an administrative office in Edmond, Oklahoma;

·      The reorganization of our senior leadership team; and