10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017 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 number:

001 - 37510

BLUE BUFFALO PET PRODUCTS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	46-0552933
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)

11 River Road

Wilton, Connecticut 06897

(Address of Principal Executive Offices, Including Zip Code)

(203) 762-9751

(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x	Accelerated Filer o
Non-Accelerated Filer o (Do not check if a smaller reporting company)	Smaller Reporting Company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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

Common Stock	Outstanding Shares at November 3, 2017
Common stock, par value $0.01 per share	195,263,113

Blue Buffalo Pet Products, Inc.

Index

Part I. Financial Information		Page
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	1
	Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016	2
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016	3
	Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2017	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
Part II. Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends and other information, may be forward-looking statements. Words such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “will,” “seek,” “foreseeable” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Risk Factors” in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2017, as such risk factors may be updated from time to time in our periodic filings with the SEC, and which are accessible on the SEC’s website at www.sec.gov, including the following:

• We may not be able to successfully implement our growth strategy on a timely basis or at all;

• The growth of our business depends on our ability to accurately predict consumer trends and demand and successfully introduce new products and product line extensions and improve existing products;

• Any damage to our reputation or our brand could have a material adverse effect on our business, financial condition, and results of operations;

• Our growth and business are dependent on trends that may change or not continue, and our historical growth may not be indicative of our future growth;

• There may be decreased spending on pets in a challenging economic climate;

• Our business depends, in part, on the sufficiency and effectiveness of our marketing and trade promotion programs;

• If we are unable to maintain or increase prices, our margins may decrease;

• We are dependent on a relatively limited number of customers for a significant portion of our sales; and

• We rely upon a limited number of contract manufacturers to provide a significant portion of our supply of products.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

We use the terms "we," "us" and the "Company" in this Quarterly Report on Form 10-Q to refer to Blue

Buffalo Pet Products, Inc. and its subsidiaries. We use the term "Wholesome Natural" in this Quarterly Report on Form 10-Q to refer to the pet food market consisting of brands that achieve their nutritional targets using only natural ingredients (as defined by the Association of American Feed Control Officials), which may include added vitamins, minerals and other trace nutrients. All Wholesome Natural dry foods have whole meats and/or meat meals, with the type of animal protein clearly identified, as their principal ingredients. Wholesome Natural products (dry foods, wet foods and treats) do not include chicken or poultry by-product meals, which we believe pet parents do not desire. Wholesome Natural products also do not rely on grain proteins, such as corn gluten meal, wheat gluten and soybean meal, as principal sources of protein, as grain proteins have a narrower array of amino acids compared to animal proteins. In addition, these products also do not use corn, wheat, soy or fractionated grains, such as brewer’s rice, as sources of starch. For more information regarding our definitions of market segments, see the description set forth under the "Terms Used in This Annual Report on Form 10-K" and "Item 1. Business" sections of our Annual Report on Form 10-K.

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, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	308,382		$	292,656
Receivables, net	150,545			115,446
Inventories	77,862			70,941
Prepaid expenses and other current assets	7,712			6,130
Total current assets	544,501			485,173
Restricted cash	781			781
Property, plant and equipment, net	242,702			162,232
Deferred income taxes	52			1,311
Other assets	1,056			853
Total assets	$	789,092		$	650,350
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	4,000		$	3,960
Accounts payable	56,473			35,238
Other current liabilities	68,436			59,629
Total current liabilities	128,909			98,827
Long-term debt	390,776			379,177
Deferred income taxes	13,687			12,660
Other long-term liabilities	12,465			13,348
Total liabilities	545,837			504,012
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 150,000,000 shares authorized; none issued or outstanding at September 30, 2017 and December 31, 2016	—			—
Common stock, voting; $0.01 par value; 1,500,000,000 shares authorized; 197,344,697 and 196,524,010 shares issued at September 30, 2017 and December 31, 2016, respectively	1,973			1,965
Additional paid-in capital	78,915			71,420
Retained earnings	212,601			72,692
Accumulated other comprehensive (loss) income	(234		)	261
Treasury stock, at cost; 2,092,774 and no shares at September 30, 2017 and December 31, 2016, respectively	(50,000		)	—
Total stockholders’ equity	243,255			146,338
Total liabilities and stockholders’ equity	$	789,092		$	650,350

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,
	2017			2016			2017			2016
Net sales	$	340,845		$	287,996		$	937,627		$	854,682
Cost of sales	180,028			154,787			500,398			470,938
Gross profit	160,817			133,209			437,229			383,744
Selling, general and administrative expenses	75,188			65,493			210,799			190,849
Provision for legal settlement	—			32,000			—			32,000
Operating income	85,629			35,716			226,430			160,895
Interest expense	2,667			3,766			8,979			11,233
Interest income	(488		)	(137		)	(787		)	(361		)
Other non-operating (income) expense, net	(52		)	—			32			—
Income before income taxes	83,502			32,087			218,206			150,023
Provision for income taxes	30,365			10,605			78,297			54,584
Net income	$	53,137		$	21,482		$	139,909		$	95,439
Basic net income per common share	$	0.27		$	0.11		$	0.71		$	0.49
Diluted net income per common share	$	0.27		$	0.11		$	0.70		$	0.48
Basic weighted average shares	196,121,691			196,445,684			196,577,436			196,311,529
Diluted weighted average shares	198,659,459			199,452,308			199,258,760			199,290,017

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,
	2017			2016		2017			2016
Net income	$	53,137		$	21,482	$	139,909		$	95,439
Other comprehensive income (loss):
Foreign currency translation adjustment	(29		)	6		(495		)	72
Other comprehensive income (loss), before tax	(29		)	6		(495		)	72
Income tax expense on other comprehensive income (loss)	—			—		—			—
Other comprehensive income (loss), net of tax	(29		)	6		(495		)	72
Comprehensive income	$	53,108		$	21,488	$	139,414		$	95,511

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

(dollars in thousands, except for share amounts)

	Common Stock			Additional paid-in capital		Retained earnings		Accumulated other comprehensive (loss) income			Treasury Stock
	Shares	Amount									Shares	Amount			Total
Balance at December 31, 2016	196,524,010	$	1,965	$	71,420	$	72,692	$	261		—	—			$	146,338
Other comprehensive income (loss)	—	—		—		—		(495		)	—	—			(495		)
Issuance of restricted stock awards	35,430	—		815		—		—			—	—			815
Exercise of stock options	785,257	8		4,519		—		—			—	—			4,527
Repurchases of common stock	—	—		—		—		—			2,092,774	(50,000		)	(50,000		)
Stock-based compensation expense	—	—		2,161		—		—			—	—			2,161
Net income	—	—		—		139,909		—			—	—			139,909
Balance at September 30, 2017	197,344,697	$	1,973	$	78,915	$	212,601	$	(234	)	2,092,774	$	(50,000	)	$	243,255

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,
	2017			2016
Cash flows from operating activities:
Net income	$	139,909		$	95,439
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,767			6,766
Amortization of debt issuance costs	247			91
Stock-based compensation	2,976			3,051
(Gain) loss on disposal of fixed assets	562			(2		)
Deferred income taxes	2,286			3,061
Provision for legal settlement	—			32,000
Payment of legal settlement	—			(32,000		)
Effect of changes in operating assets and liabilities:
Receivables	(35,324		)	(12,282		)
Inventories	(6,850		)	8,257
Prepaid expenses and other assets	(1,849		)	(2,066		)
Accounts payable	20,812			4,055
Other liabilities	(9,292		)	5,158
Net cash provided by operating activities	121,244			111,528
Cash flows from investing activities:
Capital expenditures	(71,665		)	(17,901		)
Restricted cash	—			(308		)
Proceeds from the sale of fixed assets	—			15
Net cash used in investing activities	(71,665		)	(18,194		)
Cash flows from financing activities:
Proceeds from borrowings of new debt	400,000			—
Repayment of long-term debt	(382,147		)	—
Payments related to long-term refinancing	(4,382		)	—
Principal payments on long-term debt	(1,990		)	(2,970		)
Repurchases of common stock	(50,000		)	—
Proceeds from exercise of stock options	4,527			1,805
Net cash used in financing activities	(33,992		)	(1,165		)
Effect of exchange rate changes on cash and cash equivalents	139			(60		)
Net increase in cash and cash equivalents	15,726			92,109
Cash and cash equivalents at beginning of period	292,656			224,253
Cash and cash equivalents at end of period	$	308,382		$	316,362
Supplemental schedule of non-cash investing activities:
Accruals related to property, plant and equipment	17,125			—

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 six wholly-owned subsidiaries: Great Plains Leasing, LLC, Heartland Pet Food Manufacturing Holding, LLC, Sierra Pet Products, LLC, Blue Buffalo Pet Products Canada, Ltd., Blue Buffalo Japan Kabushiki Kaisha, and Blue Buffalo Pet Food Co., Ltd. Additionally, Blue Buffalo Import Mexico, S. de R.L. de C.V., Blue Buffalo Mexico, S. de R.L. de C.V., Heartland Pet Food Manufacturing, Inc. and Heartland Pet Food Manufacturing Indiana, LLC are indirect wholly-owned subsidiaries of BBPP. BBPP and its subsidiaries develop, produce, market, and sell pet food under the following product lines: BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom, BLUE Natural Veterinary Diet, and our recently introduced BLUE Earth's Essentials. 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, and to a limited number of grocery and mass retailers in the United States.

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 Offerings

In July 2016 and September 2016, BBPP completed two secondary offerings of shares of its common stock. Certain existing stockholders of BBPP sold 17,250,000 and 14,300,000 shares of common stock, respectively, in the July and September secondary offerings.

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

6

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 period amounts have been reclassified to conform to the current period presentation.

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, 2016, 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 1, 2017.

Accounting Standards Recently Adopted

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 Company elected to early adopt ASU 2016-15 in the second quarter of fiscal 2017. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.

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.

7

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 established an implementation team, completed an initial contract review, and is continuing to identify potential differences in its current accounting policies that would result from the implementation of the new revenue standard. Based on the assessment work to date, the Company expects to estimate and record certain variable payments, resulting from trade promotions and incentives, earlier than the historical accounting under Topic 605. The Company continues to evaluate the materiality of this impact on net revenues on an annual and interim basis and currently cannot reasonably estimate the expected financial impact of adoption on the Company’s financial statements. While significant progress has been made on the implementation of the new revenue standard, the Company’s final evaluation of the new revenue standard is ongoing and will continue throughout 2017, including making a final decision on expanded disclosures and whether the full retrospective or the modified retrospective method of adoption will be applied.

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 October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory", which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition method which is a cumulative-effective adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently in the process of evaluating the impact of this new standard on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which provides guidance on the classification of restricted cash in the statement of cash flows. ASU 2016-18 is effective after December 15, 2017, including interim periods within those

8

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-18 to have a material effect on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718)" ("ASU 2017-09") which provides clarity and expects to reduce both (1) diversity in practice and (2) cost and complexity when applying guidance in Topic 718, to a change to the terms or conditions of a share-based award. ASU 2017-09 is effective after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and the amendments to this ASU will be applied prospectively to an award modified on or after the adoption date. The Company does not expect to early adopt ASU 2017-09 and it is not expected to have a material effect on its consolidated financial statements.

Note 3 – Receivables

Receivables consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Trade receivables, net	$	140,580	$	110,873
Other receivables	9,965		4,573
Total	$	150,545	$	115,446

Other receivables consist primarily of income tax receivables of $4.9 million and $0.5 million at September 30, 2017 and December 31, 2016, respectively and reimbursable amounts due from co-manufacturers for packaging of $4.2 million and $3.8 million at September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017 and December 31, 2016 the allowance for doubtful accounts was $0.8 million and $0.4 million, respectively.

Note 4 – Inventories

Inventories consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Finished goods	$	73,368	$	67,187
Work in process	285		286
Raw materials	2,481		2,346
Packaging and supplies	1,728		1,122
Total	$	77,862	$	70,941

9

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Note 5 – Property, Plant and Equipment

Property, plant and equipment consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Buildings	$	59,314	$	59,314
Machinery and equipment	53,959		49,079
Computer software	16,875		14,849
Computer equipment	4,582		4,599
Furniture and fixtures	1,840		1,772
Leasehold improvements	1,589		1,477
Land improvements	493		493
Land	395		401
Buildings improvements	600		189
Construction in progress	133,266		53,891
	272,913		186,064
Accumulated depreciation and amortization	(30,211)		(23,832)
Total	$	242,702	$	162,232

Depreciation and amortization expense was approximately $2.5 million and $2.3 million for the three months ended September 30,2017 and 2016, respectively and approximately $7.8 million and $6.8 million for the nine months ended September 30, 2017 and 2016, 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, 2017, Joplin had issued and Heartland had purchased approximately $10.8 million of industrial revenue bonds and Joplin had purchased from, and leased back to, Heartland the land for a corresponding amount.

10

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, 2017			December 31, 2016
Term loan	$	394,776		$	383,137
Less current maturities	(4,000		)	(3,960		)
Total long-term debt	$	390,776		$	379,177

New Credit Agreement

On May 25, 2017, the Company, as borrower, entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent, and a syndicate of financial institutions, as lenders and other agents. The Credit Agreement provides for a $120.0 million revolving facility (the “Revolving Facility”), of which up to $10.0 million is available for letters of credit, and for a $400.0 million term loan facility (the “Term Facility”). A majority of the proceeds of the Term Facility were used to refinance the Old Credit Agreement (as defined below).

All obligations under the Credit Agreement are guaranteed by each of the material wholly-owned domestic restricted subsidiaries of the Company, subject to certain exceptions. Substantially all of the assets of the Company and each guarantor, subject to customary exceptions, are pledged as collateral in support of all obligations under the Credit Agreement, and the guarantees of those obligations.

Pursuant to the Credit Agreement, $1.0 million of the Term Facility must be repaid each fiscal quarter commencing with the fiscal quarter of the Company ending September 30, 2017. Upon maturity on May 25, 2024, the remaining principal balance of $373.0 million will be due.

Interest under the Revolving Facility and the Term Facility is payable, at the Company’s option, either at a base rate (subject to a floor of 0.00% and based on the highest of the prime rate, the overnight federal funds rate plus 1⁄2 of 1.00% and the one-month LIBOR rate plus 1.00%) plus an applicable margin of 1.00% per annum or a LIBOR-based rate (subject to a floor of 0.00%) plus an applicable margin of 2.00% per annum. The interest payment dates of the loans are dependent on the duration of the interest periods for the types of loans selected by the Company and are set forth in the Credit Agreement. Such applicable margins will be reduced by 0.25%, in each case, if (i) the Company’s Consolidated First Lien Gross Leverage Ratio (as defined in the Credit Agreement) is less than or equal to 1.00 to 1.00 or (ii) the Company maintains credit rating equal to or higher than Baa3 from Moody’s and BBB- from S&P.

The Company’s Term Facility and Revolving Facility contain financial covenants, including a financial covenant to maintain, commencing on December 31, 2017, a Consolidated First Lien Net Leverage Ratio (“leverage ratio”), defined as, with certain adjustments, the ratio of (i) the Company’s net debt that is secured by certain liens on the collateral to (ii) consolidated net income before interest, taxes, depreciation and amortization for the most recently ended period of four consecutive fiscal quarters for which financial statements have been delivered, that does not exceed 4.00 to 1.00. The Credit Agreement also sets forth mandatory and optional prepayment conditions, including, commencing with the fiscal year ending on December 31, 2018, an annual excess cash flow requirement, as defined, that may result in our use of cash to reduce our debt obligations.

11

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Termination of Old Credit Agreement

On May 25, 2017, in connection with the closing of the Credit Agreement, the Company repaid in full approximately $382 million of borrowings under the Credit Agreement, dated as of August 8, 2012, by and among Blue Pet Products, Inc., Blue Buffalo Company, Ltd., the lenders from time to time party thereto and Citibank, N.A as administrative agent (as amended from time to time, the “Old Credit Agreement”). The credit facilities and related agreements and documents under the Old Credit Agreement were terminated and amounts due and payable thereunder were repaid upon the effectiveness of the Credit Agreement.

Accounting Treatment

Based on management’s review of the Credit Agreement and the refinancing transaction, the accounting for debt extinguishment applied. As such, the costs incurred related to third parties and debt issuance of $4.4 million were treated as a direct deduction of the net carrying amount of the Term Facility. These costs will be amortized to interest expense using the effective interest method through the Term Facility’s maturity date of May 25, 2024. There were no direct costs categorized as payments to creditors related to the Term Facility.

Fees paid to creditors of $0.3 million related to the Revolving Facility. As the borrowing capacity of the Revolving Facility is greater than the borrowing capacity that existed under the Old Credit Agreement, these costs are deferred and will be amortized to interest expense using the effective interest method over the Revolving Facility’s term, maturing on May 25, 2022.

At September 30, 2017, we had a carrying value of $394.8 million of term loan borrowings (fair value of $397.2 million) at an effective interest rate of 3.51% and no outstanding borrowings under the Revolving Facility. At December 31, 2016, the Company had $383.1 million of term loan borrowings (fair value of $386.5 million) at an effective interest rate of 3.79% and no outstanding borrowings under the revolving credit facility.

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.

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)

12

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

At September 30, 2017 and December 31, 2016, the Company had approximately $281.7 million and $270.9 million, respectively, of cash primarily invested in interest bearing demand deposit accounts and 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, 2017 and the year ended December 31, 2016.

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, 2017, the carrying value of the Company’s outstanding borrowings under the Term Facility was approximately $394.8 million as compared to a fair value of $397.2 million (Level 2). As of December 31, 2016, the carrying value of the Company’s outstanding borrowings under the Term Facility was approximately $383.1 million as compared to a fair value of $386.5 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 – Treasury Stock

On July 31, 2017, the Board of Directors approved the terms of a share repurchase program, under which the Company is authorized to repurchase up to $50.0 million of its common shares. The Company repurchased shares through open market purchases in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities Exchange Act of 1934.  Purchases were made at times and prices considered appropriate by management. Repurchased common stock is available for use in connection with the Company's stock plans and for other corporate purposes. This authority is primarily used to offset dilution caused by the issuance and exercise of stock options and other equity compensation programs. Based on the Company’s strong cash flow and balance sheet, this program did not impact our ability to execute our business plans, allocate capital for our capital investment projects or pursue other strategic initiatives. The Company financed the share repurchase program through its operating cash flow and cash on hand.

During the three months ended September 30, 2017, the Company repurchased approximately 2.1 million shares of its common stock through open market purchases at an average price of $23.89, and a total cost of $50.0 million, including broker's commissions. As of September 30, 2017, the share repurchase program was fully executed.

The repurchase of these shares by the Company was accounted for under the cost method. The share repurchases were recorded as "Treasury stock, at cost" on the Unaudited Condensed Consolidated Balance Sheets.

13

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 – 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, 2017, there were 5,230,642 shares of common stock reserved under the Amended Plan. As of September 30, 2017, the maximum number of shares available for grant under the Amended Plan was 172,377.

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 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, 2017, the maximum number of shares available for grant under the 2015 Plan was 7,524,531.

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:

	2017			2016
Volatility	30.68		%	32.58		%
Risk-free interest rate	1.93		%	1.23		%
Expected term (years)	5			5
Dividend yield	—			—
Grant-date fair value	$	7.00		$	7.81

14

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table summarizes stock option activity during the year and also presents stock options outstanding and exercisable as of September 30, 2017 (dollars in millions, except for per share data):

	Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2016	4,248,156		$	7.20
Granted	383,887		$	23.00
Exercised	(785,257	)	$	5.76
Forfeited	(59,924	)	$	17.72
Expired	(43,021	)	$	10.73
Options outstanding at September 30, 2017	3,743,841		$	8.92
Options exercisable at September 30, 2017	2,208,015		$	5.87

During the three and nine months ended September 30, 2017, the Company granted 8,718 and 184,752 ISOs and 142 and 199,135 non-qualified stock option grants. respectively.

Restricted Stock

The following table summarizes RSA and RSU activity for the nine months ended September 30, 2017:

	RSAs				RSUs
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016	—		$	—	61,861		$	25.45
Granted	35,430		$	23.00	106,609		$	23.00
Vested	(35,430	)	$	23.00	—		$	—
Forfeited	—		$	—	(5,769	)	$	24.61
Outstanding at September 30, 2017	—		$	—	162,701		$	23.87

During the three months ended March 31, 2017, members of the Company's Board of Directors received a fully-vested grant of 35,430 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 months ended March 31, 2017. There were no grants of RSAs during the three months ended September 30, 2017.

During the three and nine months ended September 30, 2017, the Company granted 2,746 and 106,609 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 $2.5 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.

15

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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, 2017 and 2016 was approximately $0.8 million and $1.0 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, 2017 and 2016 was approximately $3.0 million and $3.1 million, respectively.

Unrecognized stock-based compensation related to outstanding unvested stock options and restricted stock units is expected to be recognized in the Company’s statements of income as follows (by fiscal year):

(dollars in thousands)
2017 (period from October 1 to December 31, 2017)	$	850
2018	2,957
2019	2,031
2020	469
Total	$	6,307

Note 10 – 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)	2017		2016		2017		2016
Net income	$	53,137	$	21,482	$	139,909	$	95,439
Basic weighted average number of shares outstanding	196,121,691		196,445,684		196,577,436		196,311,529
Dilutive effect of stock options and RSUs	2,537,768		3,006,624		2,681,324		2,978,488
Diluted weighted average number of shares outstanding	198,659,459		199,452,308		199,258,760		199,290,017
Basic net income per common share	$	0.27	$	0.11	$	0.71	$	0.49
Diluted net income per common share	$	0.27	$	0.11	$	0.70	$	0.48
Anti-dilutive shares excluded from diluted earnings per share computation	606,903		385,861		486,008		407,845

Note 11 – Related Parties

Invus Partners LLC which, as of September 30, 2017, beneficially owned 44.8% of the Company's outstanding common stock, holds $19.7 million of the Company’s outstanding debt under the Term Facility. Several of the

16

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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 $1.5 million of our debt under the Term Facility.

Note 12 – 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, among other things, 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 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.

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.

On October 15, 2014, we initiated a separate false advertising 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 sought an injunction prohibiting Nestlé Purina from continuing these false and misleading advertisements, as well as damages

17

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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.

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 (the “Nestlé Purina Settlement”). 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. However, we may not be able to fully recover from such supplier or broker, or from our insurance providers the full amount paid in the Nestlé Purina Settlement or other damages incurred in connection with our litigation with Nestlé Purina. In addition, our lawsuits against (i) the third party ingredient supplier and broker, and (ii) our insurance providers, are currently subject to a stay. On March 9, 2017, the United States District Court for the Eastern District of Missouri, which is presiding over our lawsuit against the third party ingredient supplier and broker, granted a motion by the United States Department of Justice to stay all proceedings in our lawsuit until otherwise ordered by the court, due to the potential for the lawsuit to interfere with an ongoing criminal investigation. The Department of Justice has already filed criminal charges against both the third party ingredient supplier and broker for violations of the Federal Food, Drug and Cosmetic Act, and has indicated that its investigation is ongoing.

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 these U.S. 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 “Class Action Settlement”). Under the terms of the Class Action 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 Class Action Settlement received final trial court approval on May 19, 2016. On July 5, 2017, the United States Court of Appeals for the Eighth Circuit affirmed the trial court’s decision, and on July 31, 2017, appellant’s petition for rehearing was denied. 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 Class Action 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. However, we may not be able to fully recover from such supplier or broker, or from our insurance providers, the full amount of paid in the Class Action Settlement or other damages incurred in connection with the U.S. class action lawsuits.

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.

On July 11, 2016, we filed a lawsuit in State of Connecticut Superior Court against 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”), 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

18

Blue Buffalo Pet Products, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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.

On March 13, 2017, the court granted a joint motion by the parties to stay this litigation pending resolution of our claims against the third party ingredient supplier and broker discussed above.

19

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, 2016 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 Annual Report on Form 10-K, 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 one of 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 six product lines: BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom, BLUE Natural Veterinary Diet, and our recently introduced BLUE Earth's Essentials.

Sales and Distribution Channels

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, and to a limited number of grocery and mass retailers in the United States.

During the second quarter of 2017, PetSmart, a national pet superstore and our largest customer, acquired Chewy.com ("Chewy"), an eCommerce retailer. We have experienced significant growth in our net sales to eCommerce retailers, and these sales have continued to grow faster than our net sales to national pet superstores including PetSmart. Despite our growth within eCommerce, as a result of PetSmart’s acquisition of Chewy, we expect our sales will continue to be concentrated in a limited number of customers. Year to date, our net sales to PetSmart and Chewy on a combined, pro forma basis accounted for approximately 45% of our total net sales.

On August 1, 2017, we announced the introduction of our BLUE Life Protection Formula product line to a limited number of select retailers in the grocery and mass channels in the United States, further expanding our retail distribution footprint. Partnering with leading retailers in the grocery and mass channels reflects a natural evolution of our go-to-market model that will allow us to reach more pet parents and feed more pets. We will continue to work closely with our specialty retail customers, but our introduction in the grocery and mass channels may result in a decrease in our sales from existing specialty channels. For additional information see “Risk Factors - Risks Related to Our Business and Industry, We are dependent on a relatively limited number of customers for a significant portion of our sales” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

20

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)	2017			2016			2017		2016
Net sales	$	340,845		$	287,996		100.0	%	100.0	%
Cost of sales	180,028			154,787			52.8	%	53.7	%
Gross profit	160,817			133,209			47.2	%	46.3	%
Selling, general, and administrative expenses	75,188			65,493			22.1	%	22.7	%
Provision for legal settlement	—			32,000			—	%	11.1	%
Operating income	85,629			35,716			25.1	%	12.4	%
Interest expense	2,667			3,766			0.8	%	1.3	%
Interest income	(488		)	(137		)	(0.1	)%	—	%
Other non-operating (income) expense, net	(52		)	—			—	%	—	%
Income before income taxes	83,502			32,087			24.5	%	11.1	%
Provision for income taxes	30,365			10,605			8.9	%	3.7	%
Net income	$	53,137		$	21,482		15.6	%	7.5	%
Basic net income per common share	$	0.27		$	0.11
Diluted net income per common share	$	0.27		$	0.11

	Nine Months Ended September 30,						% of Net Sales
(dollars in thousands, except for per share amounts and percentages)	2017			2016			2017		2016
Net sales	$	937,627		$	854,682		100.0	%	100.0	%
Cost of sales	500,398			470,938			53.4	%	55.1	%
Gross profit	437,229			383,744			46.6	%	44.9	%
Selling, general, and administrative expenses	210,799			190,849			22.5	%	22.3	%
Provision for legal settlement	—			32,000			—	%	3.7	%
Operating income	226,430			160,895			24.1	%	18.8	%
Interest expense	8,979			11,233			1.0	%	1.3	%
Interest income	(787		)	(361		)	(0.1	)%	—	%
Other non-operating (income) expense, net	32			—			—	%	—	%
Income before income taxes	218,206			150,023			23.3	%	17.6	%
Provision for income taxes	78,297			54,584			8.4	%	6.4	%
Net income	$	139,909		$	95,439		14.9	%	11.2	%
Basic net income per common share	$	0.71		$	0.49
Diluted net income per common share	$	0.70		$	0.48

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Three Months Ended September 30, 2017 Compared With Three Months Ended September 30, 2016

Net Sales

Net sales increased $52.8 million, or 18.4%, to $340.8 million for the three months ended September 30, 2017, compared to $288.0 million for the three months ended September 30, 2016. Volume growth accounted for 9.8 percentage points of the increase in net sales, favorable mix contributed 8.3 percentage points, and favorable net pricing contributed 0.3 percentage point.

Net sales of Dry Foods increased $31.1 million, or 13.3%, to $265.0 million for the three months ended September 30, 2017, compared to $233.8 million for the three months ended September 30, 2016. Volume growth accounted for 7.8 percentage points of the increase in net sales, favorable mix contributed 4.5 percentage points, and favorable net pricing contributed 1.0 percentage point. The performance of our BLUE Life Protection Formula and BLUE Wilderness product lines primarily drove the growth in net sales of Dry Foods.

Net sales of Wet Foods, Treats and Other Products increased $21.7 million, or 40.1%, to $75.9 million for the three months ended September 30, 2017, compared to $54.1 million for the three months ended September 30, 2016. Favorable product mix accounted for 24.7 percentage points of the increase in net sales, volume growth accounted for 18.2 percentage points of the increase, which was partially offset by unfavorable net pricing of 2.9 percentage points. The performance of our BLUE Life Protection Formula and BLUE Wilderness product lines primarily drove the growth in net sales of Wet Foods, Treats and Other Products. The decrease in net pricing was primarily driven by an increase in promotional activity and partially offset by pricing actions taken on selected items during the first quarter of 2017.

Gross Profit

Gross profit increased $27.6 million, or 20.7%, to $160.8 million for the three months ended September 30, 2017, compared to $133.2 million for the three months ended September 30, 2016, driven primarily by supply chain efficiencies. Gross margin increased to 47.2% for the three months ended September 30, 2017 from 46.3% for the three months ended September 30, 2016, driven primarily by favorable product mix and supply chain efficiencies, which were partially offset by higher distribution and warehousing costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $75.2 million for the three months ended September 30, 2017, up $9.7 million, or 14.8%, from $65.5 million for the three months ended September 30, 2016. The increase was primarily due to incremental expense related to our ongoing investments in advertising and marketing consistent with our strategy to invest in our brand and product lines.

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 12 to our unaudited condensed consolidated financial statements.

Interest Expense, Net

Interest expense, net decreased $1.5 million, or 40.0%, to $2.2 million for the three months ended September 30, 2017, compared to $3.6 million for the three months ended September 30, 2016. This decrease was primarily due to capitalized interest expense related to construction in progress and higher interest income recorded during the three months ended September 30, 2017. There was no capitalized interest recorded

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during the three months ended September 30, 2016. Our effective interest rate quarter-over-quarter was 3.59% and 3.90% for the three months ended September 30, 2017 and 2016, respectively.

Provision for Income Taxes

Provision for income taxes increased $19.8 million, or 186.3%, to $30.4 million for the three months ended September 30, 2017, compared to $10.6 million for the three months ended September 30, 2016. Our effective tax rate was 36.4% for the three months ended September 30, 2017 as compared to 33.1% for the three months ended September 30, 2016. The increase in our effective tax rate was primarily driven by the effects of fewer stock option exercises during the three months ended September 30, 2017.

Net Income

As a result of the factors above, net income increased $31.7 million, or 147.4%, to $53.1 million for the three months ended September 30, 2017, compared to $21.5 million for the three months ended September 30, 2016.

Nine Months Ended September 30, 2017 Compared With Nine Months Ended September 30, 2016

Net Sales

Net sales increased $82.9 million, or 9.7%, to $937.6 million for the nine months ended September 30, 2017, compared to $854.7 million for the nine months ended September 30, 2016. Volume growth accounted for 5.1 percentage points of the increase in net sales, favorable product mix contributed 4.2 percentage points, and favorable net pricing contributed 0.4 percentage point.

Net sales of Dry Foods increased $53.4 million, or 7.7%, to $747.6 million for the nine months ended September 30, 2017, compared to $694.3 million for the nine months ended September 30, 2016. Volume growth accounted for 4.4 percentage points of the increase in net sales of Dry Foods, favorable product mix contributed 1.8 percentage points, and favorable net pricing contributed 1.4 percentage points of growth. The strong performance of our BLUE Life Protection Formula and BLUE Wilderness product lines primarily drove the growth in net sales of Dry Foods.

Net sales of Wet Foods, Treats and Other Products increased $29.6 million, or 18.4%, to $190.0 million for the nine months ended September 30, 2017, compared to $160.4 million for the nine months ended September 30, 2016. Favorable product mix contributed 14.5 percentage points of the increase in net sales of Wet Foods, Treats and Other Products, favorable volume growth accounted for 8.0 percentage points, which was partially offset by unfavorable net pricing contributing 4.1 percentage points. The strong performance of our BLUE Life Protection Formula and BLUE Wilderness product lines primarily drove the growth in net sales of Wet Foods, Treats and Other Products. The decrease in net pricing was primarily driven by an increase in promotional activity and partially offset by pricing actions taken on selected items during the first quarter of 2017.

Gross Profit

Gross profit increased $53.5 million, or 13.9%, to $437.2 million for the nine months ended September 30, 2017, compared to $383.7 million for the nine months ended September 30, 2016, driven primarily by increased volume and supply chain efficiencies. Gross margin increased to 46.6% for the nine months ended September 30, 2017 from 44.9% for the nine months ended September 30, 2016, driven primarily by supply chain efficiencies and favorable product mix.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses were $210.8 million for the nine months ended September 30, 2017, up $20.0 million, or 10.5%, from $190.8 million for the nine months ended September 30, 2016. The increase was primarily due to incremental expense related to our ongoing investments in advertising and marketing consistent with our strategy to invest in our brand and product lines.

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 12 to our unaudited condensed consolidated financial statements.

Interest Expense, Net

Interest expense, net decreased $2.7 million, or 24.7%, to $8.2 million for the nine months ended September 30, 2017, compared to $10.9 million for the nine months ended September 30, 2016. This decrease was primarily due to capitalized interest expense related to construction in progress and higher interest income recorded during the nine months ended September 30, 2017. There was no capitalized interest recorded during the nine months ended September 30, 2016. Our effective interest rate was 3.51% over the nine months ended September 30, 2017 as compared to 3.63% for the nine months ended September 30, 2016.

Provision for Income Taxes

Provision for income taxes increased $23.7 million, or 43.4%, to $78.3 million for the nine months ended September 30, 2017, compared to $54.6 million for the nine months ended September 30, 2016. Our effective tax rate was 35.9% for the nine months ended September 30, 2017 as compared to 36.4% for the nine months ended September 30, 2016. The decrease in our effective tax rate was primarily driven by the effects of larger stock option exercises during the nine months ended September 30, 2017.

Net Income

As a result of the factors above, net income increased $44.5 million, or 46.6%, to $139.9 million for the nine months ended September 30, 2017, compared to $95.4 million for the nine months ended September 30, 2016.

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 $120.0 million Revolving Facility to provide us with an additional source of liquidity but have not had to draw on our Revolving Facility. As of September 30, 2017, our cash and cash equivalents were $308.4 million compared to cash and cash equivalents as of December 31, 2016 of $292.7 million. On May 25, 2017, we entered into a new $400.0 million Term Facility. A majority of the proceeds of the Term Facility were used to refinance the Old Credit Agreement. As of September 30, 2017, we had outstanding indebtedness of $399.0 million under the term loan facilities. Pursuant to the Credit Agreement, $1.0 million of the Term Facility must be repaid each fiscal quarter commencing with the fiscal quarter of the Company ending September 30, 2017. Upon maturity on May 25, 2024, the remaining principal balance of $373.0 million will be due.

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 $150.0 million to $170.0 million in fiscal 2017, which we expect to fund from cash generated

24

from operations. We expect the majority of expenditures in fiscal 2017 will be used to fund our multi-year 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 fluctuations in accounts receivable. As of September 30, 2017, we had working capital of $415.6 million, compared to $386.3 million as of December 31, 2016.

On July 31, 2017, the Board of Directors approved the terms of a share repurchase program, under which the Company is authorized to repurchase up to $50.0 million of its common shares. The Company financed the $50.0 million share repurchase program through its cash generated from operations and cash on hand. Based on the Company’s strong cash flow and balance sheet, this program did not impact our ability to execute our business plans, allocate capital for our capital investment projects or pursue other strategic initiatives. We completed this share repurchase program during the three months ended September 30, 2017.

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 Annual Report on Form 10-K, as filed with the SEC on March 1, 2017. 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 May 25, 2024. 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 $121.2 million for the nine months ended September 30, 2017, compared to $111.5 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we made a $32.0 million payment related to our settlement agreement in the U.S. consumer class action lawsuits. During the nine months ended September 30, 2017, the increase in cash provided by operating activities was primarily due to an increase in net income, which was partially offset by working capital changes.

Investing Activities

Net cash used in investing activities was $71.7 million for the nine months ended September 30, 2017, compared to $18.2 million for nine months ended September 30, 2016. The increase in net cash used in

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investing activities were the result of capital expenditures for investments to expand our internal manufacturing capabilities.

Financing Activities

Net cash used in financing activities was $34.0 million for the nine months ended September 30, 2017, compared to net cash used in financing activities of $1.2 million for the nine months ended September 30, 2016. The increase in net cash used by financing activities was primarily due to repurchases of common stock, which was partially offset by proceeds received from the issuance of new debt and the exercise of stock options during the nine months ended September 30, 2017.

Description of Indebtedness

As of September 30, 2017, our Term Facility consisted of $399.0 million of outstanding term loans maturing on May 25, 2024 and an undrawn $120.0 million Revolving Facility (which includes borrowing capacity available for letters of credit and for short-term borrowings) maturing on May 25, 2022. As of September 30, 2017, the interest rate on the term loan facilities was 3.23%.

All obligations under the Credit Agreement are guaranteed by each of the material wholly-owned domestic restricted subsidiaries of the Company, subject to certain exceptions. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and each guarantor, subject to customary exceptions, including:

• a pledge of 100% of the equity interests directly held by the Company and each guarantor in any wholly-owned material subsidiary of the Company or any guarantor (which pledge, in the case of any non-U.S. subsidiary or FSHCO, will not include more than 65% of the voting stock of such non-U.S. subsidiary or FSHCO), subject to certain exceptions; and

• a security interest in substantially all of the tangible and intangible assets of the Company and each guarantor, subject to customary exceptions.

The Credit Agreement contains other customary terms, including (i) representations and warranties, (ii) affirmative covenants, (iii) negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt, and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and a financial covenant to maintain a certain Consolidated First Lien Net Leverage Ratio as set forth in the Credit Agreement, and (iv) customary events of default.

Pricing Options

Interest under the Revolving Facility and the Term Facility is payable, at the Company’s option, either at a base rate (subject to a floor of 0.00% and based on the highest of the prime rate, the overnight federal funds rate plus 1⁄2 of 1.00% and the one-month LIBOR rate plus 1.00%) plus an applicable margin of 1.00% per annum or a LIBOR-based rate (subject to a floor of 0.00%) plus an applicable margin of 2.00% per annum. Such applicable margins will be reduced by 0.25%, in each case, if (i) the Company’s Consolidated First Lien Gross Leverage Ratio (as defined in the Credit Agreement) is less than or equal to 1.00 to 1.00 or (ii) the Company maintains credit rating equal to or higher than Baa3 from Moody’s and BBB- from S&P. As of September 30, 2017, the interest rate applicable to borrowings under the term loan facilities was 3.23%.

Interest Expense

The interest payment dates of the loans are dependent on the duration of the interest periods for the types of loans selected by the Company and are set forth in the Credit Agreement. In addition, we are required to pay

26

a commitment fee on any unutilized commitments under the Revolving Facility. The initial commitment fee rate is 0.25% 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

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, 2017, Joplin had issued and Heartland had purchased approximately $10.8 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, 2016included 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.

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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 Term Facility is variable rate debt. Interest rate changes generally do not affect the market value of our Term Facility but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of September 30, 2017, we had variable rate debt of approximately $399.0 million under our Term Facility. An increase of 1% would have increased our interest expense for the three and nine months ended September 30, 2017 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 2017, 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

Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the our management, including our Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer

28

and Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our second quarter of fiscal 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation and related class action lawsuits described below, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.

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, among other things, 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 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 May 14, 2014, we filed a lawsuit against Nestlé Purina in the United States District Court for the Eastern District of Missouri, which alleged that Nestlé Purina has engaged in false advertising, unfair competition, unjust enrichment, and defamation. We alleged, among other things, that the statements made by Nestlé Purina advertising the allegations of their lawsuit were false and misleading, and we denied that our product formulas contain chicken or poultry by-product meals, artificial preservatives or corn and we denied that any of our grain-free products contain grains. Our complaint in this lawsuit sought, among other things, a preliminary and permanent injunction prohibiting Nestlé Purina from disseminating such false information, as well as damages (including punitive damages), restitution and disgorgement of all profits attributable to their false and deceptive advertising. On June 4, 2014, this lawsuit was consolidated with the Nestlé Purina lawsuit. We later amended our pleading to name as additional defendants the two advertising and public relations agencies that assisted Nestlé Purina with its advertising campaign.

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.

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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.

On October 15, 2014, we initiated a separate false advertising 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 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.

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 (the “Nestlé Purina Settlement”). 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. However, we may not be able to fully recover from such supplier or broker, or from our insurance providers, the full amount paid in the Nestlé Purina Settlement or other damages incurred in connection with our litigation with Nestlé Purina. In addition, our lawsuits against (i) the third party ingredient supplier and broker, and (ii) our insurance providers, are currently subject to a stay. On March 9, 2017, the United States District Court for the Eastern District of Missouri, which is presiding over our lawsuit against the third party ingredient supplier and broker, granted a motion by the United States Department of Justice to stay all proceedings in our lawsuit until otherwise ordered by the court, due to the potential for the lawsuit to interfere with an ongoing criminal investigation. The Department of Justice has already filed criminal charges against both the third party ingredient supplier and broker for violations of the Federal Food, Drug and Cosmetic Act, and has indicated that its investigation is ongoing.

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 these U.S. 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 “Class Action Settlement”). Under the terms of the Class Action 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 Class Action Settlement received final trial court approval on May 19, 2016. On July 5, 2017, the United States Court of Appeals for the Eighth Circuit affirmed the trial court’s decision, and on July 31, 2017, appellant’s petition for rehearing was denied. 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 Class Action 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. However, we may not be able to fully recover from such supplier or broker, or from our insurance providers the full amount of paid in the Class Action Settlement or other damages incurred in connection with the U.S. class action lawsuits.

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

31

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.

On July 11, 2016, we filed a lawsuit in State of Connecticut Superior Court against 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”), 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.

On March 13, 2017, the court granted a joint motion by the parties to stay this litigation pending resolution of our claims against the third party ingredient supplier and broker discussed above.

ITEM 1A. RISK FACTORS

There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition from the risk factors disclosed in our Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

31.1	Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS	XBRL Instance Document (filed herewith).
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

33

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BLUE BUFFALO PET PRODUCTS, INC.
By:	/s/ William Bishop, Jr.
	William Bishop, Jr.
	Chief Executive Officer and President
	(Principal Executive Officer)
By:	/s/ Michael Nathenson
	Michael Nathenson
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

Dated: November 8, 2017

34

EX-31.1

Exhibit 31.1

CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, William Bishop, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2017 of Blue Buffalo Pet Products, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2017

/s/ William Bishop, Jr.William Bishop, Jr.

Chief Executive Officer and President

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Michael Nathenson, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2017 of Blue Buffalo Pet Products, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2017

/s/ Michael NathensonMichael Nathenson
Executive Vice President, Chief Financial Officer, and Treasurer
(Principal Financial and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Blue Buffalo Pet Products, Inc. (the “Company”) for the quarterly period ended September 30, 2017 filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, the undersigned officers of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

• The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

• The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

Date: November 8, 2017

/s/ William Bishop, Jr.

William Bishop, Jr.

Chief Executive Officer and President
(Principal Executive Officer)

/s/ Michael Nathenson

Michael Nathenson

Executive Vice President, Chief Financial Officer, and Treasurer

(Principal Financial and Principal Accounting Officer)

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Nov. 03, 2017
Entity [Abstract]
Entity Registrant Name	Blue Buffalo Pet Products, Inc.
Entity Central Index Key	0001609989
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus (Q1,Q2,Q3,FY)	Q3
Amendment Flag	false
Entity Common Stock, Shares Outstanding		195,263,113

XML

Unaudited Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 308,382	$ 292,656
Receivables, net	150,545	115,446
Inventories	77,862	70,941
Prepaid expenses and other current assets	7,712	6,130
Total current assets	544,501	485,173
Restricted cash	781	781
Property, plant and equipment, net	242,702	162,232
Deferred income taxes	52	1,311
Other assets	1,056	853
Total assets	789,092	650,350
Current liabilities:
Current maturities of long-term debt	4,000	3,960
Accounts payable	56,473	35,238
Other current liabilities	68,436	59,629
Total current liabilities	128,909	98,827
Long-term debt	390,776	379,177
Deferred income taxes	13,687	12,660
Other long-term liabilities	12,465	13,348
Total liabilities	545,837	504,012
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 150,000,000 shares authorized; none issued or outstanding at September 30, 2017 and December 31, 2016	0	0
Common stock, voting; $0.01 par value; 1,500,000,000 shares authorized; 197,344,697 and 196,524,010 shares issued at September 30, 2017 and December 31, 2016, respectively	1,973	1,965
Additional paid-in capital	78,915	71,420
Retained earnings	212,601	72,692
Accumulated other comprehensive (loss) income	(234)	261
Treasury stock, at cost; 2,092,774 and no shares at September 30, 2017 and December 31, 2016, respectively	(50,000)	0
Total stockholders’ equity	243,255	146,338
Total liabilities and stockholders’ equity	$ 789,092	$ 650,350

XML

Unaudited Condensed Consolidated Balance Sheets Parenthetical - $ / shares	Sep. 30, 2017	Dec. 31, 2016
Statement of Financial Position [Abstract]
Preferred stock, par value per share	$ 0.01	$ 0.01
Preferred stock, shares authorized	150,000,000	150,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par or stated value per share	$ 0.01	$ 0.01
Common stock, shares authorized	1,500,000,000	1,500,000,000
Common stock, shares, issued	197,344,697	196,524,010
Common stock, shares, outstanding	195,251,923	196,524,010
Treasury stock, at cost, shares	2,092,774	0

XML

Unaudited Condensed Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Income Statement [Abstract]
Net sales	$ 340,845	$ 287,996	$ 937,627	$ 854,682
Cost of sales	180,028	154,787	500,398	470,938
Gross profit	160,817	133,209	437,229	383,744
Selling, general and administrative expenses	75,188	65,493	210,799	190,849
Provision for legal settlement	0	32,000	0	32,000
Operating income	85,629	35,716	226,430	160,895
Interest expense	2,667	3,766	8,979	11,233
Interest income	488	137	787	361
Other non-operating (income) expense, net	(52)	0	32	0
Income before income taxes	83,502	32,087	218,206	150,023
Provision for income taxes	30,365	10,605	78,297	54,584
Net income	$ 53,137	$ 21,482	$ 139,909	$ 95,439
Basic net income per common share (in usd per share)	$ 0.27	$ 0.11	$ 0.71	$ 0.49
Diluted net income per common share (in usd per share)	$ 0.27	$ 0.11	$ 0.70	$ 0.48
Basic weighted average shares	196,121,691	196,445,684	196,577,436	196,311,529
Diluted weighted average shares	198,659,459	199,452,308	199,258,760	199,290,017

XML

Unaudited Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
Net income	$ 53,137	$ 21,482	$ 139,909	$ 95,439
Foreign currency translation adjustment	(29)	6	(495)	72
Other comprehensive income (loss), before tax	(29)	6	(495)	72
Income tax expense on other comprehensive income (loss)	0	0	0	0
Other comprehensive income (loss), net of tax	(29)	6	(495)	72
Comprehensive income	$ 53,108	$ 21,488	$ 139,414	$ 95,511

XML

Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) - 9 months ended Sep. 30, 2017 - USD ($) $ in Thousands	Total	Common Stock	Additional paid-in capital	Retained earnings	Accumulated other comprehensive (loss) income	Treasury Stock
Balance at December 31, 2016 (shares) at Dec. 31, 2016	196,524,010	196,524,010
Balance at December 31, 2016 at Dec. 31, 2016	$ (146,338)	$ (1,965)	$ (71,420)	$ (72,692)	$ (261)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Other comprehensive income (loss)	$ (495)				(495)
Issuance of restricted stock (shares)	35,430
Issuance of restricted stock awards	$ 815	$ 0	815
Exercise of stock options (shares)	785,257	785,257
Exercise of stock options	$ 4,527	$ 8	4,519
Repurchases of common stock (shares)						2,092,774
Repurchases of common stock	(50,000)					$ 50,000
Stock-based compensation expense	2,161		2,161
Net income	$ 139,909			139,909
Balance at September 30, 2017 (shares) at Sep. 30, 2017	195,251,923	197,344,697				2,092,774
Balance at September 30, 2017 at Sep. 30, 2017	$ (243,255)	$ 1,973	$ 78,915	$ 212,601	$ (234)	$ (50,000)

XML

Unaudited Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net income	$ 139,909	$ 95,439
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,767	6,766
Amortization of debt issuance costs	247	91
Stock-based compensation	2,976	3,051
(Gain) loss on disposal of fixed assets	562	(2)
Deferred income taxes	2,286	3,061
Provision for legal settlement	0	(32,000)
Payment of legal settlement	0	(32,000)
Effect of changes in operating assets and liabilities:
Receivables	(35,324)	(12,282)
Inventories	(6,850)	8,257
Prepaid expenses and other assets	(1,849)	(2,066)
Accounts payable	20,812	4,055
Other liabilities	(9,292)	5,158
Net cash provided by operating activities	121,244	111,528
Cash flows from investing activities:
Capital expenditures	(71,665)	(17,901)
Restricted Cash	0	308
Proceeds from Sale of Productive Assets	0	15
Net cash used in investing activities	(71,665)	(18,194)
Cash flows from financing activities:
Proceeds from borrowings of new debt	400,000	0
Repayment of long-term debt	(382,147)	0
Payments related to long-term refinancing	(4,382)	0
Principal payments on long-term debt	(1,990)	(2,970)
Repurchases of Common Stock	50,000	0
Net cash used in financing activities	4,527	1,805
Net cash provided by (used in) financing activities	(33,992)	(1,165)
Effect of exchange rate changes on cash and cash equivalents	139	(60)
Net increase in cash and cash equivalents	15,726	92,109
Cash and cash equivalents at beginning of period	292,656	224,253
Cash and cash equivalents at end of period	308,382	316,362
Supplemental schedule of non-cash investing activities
Accruals related to property, plant and equipment	$ 17,125	$ 0

XML

The Company

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

The Company

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 six wholly-owned subsidiaries: Great Plains Leasing, LLC, Heartland Pet Food Manufacturing Holding, LLC, Sierra Pet Products, LLC, Blue Buffalo Pet Products Canada, Ltd., Blue Buffalo Japan Kabushiki Kaisha, and Blue Buffalo Pet Food Co., Ltd. Additionally, Blue Buffalo Import Mexico, S. de R.L. de C.V., Blue Buffalo Mexico, S. de R.L. de C.V., Heartland Pet Food Manufacturing, Inc. and Heartland Pet Food Manufacturing Indiana, LLC are indirect wholly-owned subsidiaries of BBPP. BBPP and its subsidiaries develop, produce, market, and sell pet food under the following product lines: BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom, BLUE Natural Veterinary Diet, and our recently introduced BLUE Earth's Essentials. 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, and to a limited number of grocery and mass retailers in the United States.

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 Offerings

In July 2016 and September 2016, BBPP completed two secondary offerings of shares of its common stock. Certain existing stockholders of BBPP sold 17,250,000 and 14,300,000 shares of common stock, respectively, in the July and September secondary offerings.

XML

Basis of Presentation

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of presentation

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 operations for interim periods may not be representative of results to be expected for a full year. Certain prior period amounts have been reclassified to conform to the current period presentation.

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, 2016, 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 1, 2017.

Accounting Standards Recently Adopted

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 Company elected to early adopt ASU 2016-15 in the second quarter of fiscal 2017. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.

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.

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 established an implementation team, completed an initial contract review, and is continuing to identify potential differences in its current accounting policies that would result from the implementation of the new revenue standard. Based on the assessment work to date, the Company expects to estimate and record certain variable payments, resulting from trade promotions and incentives, earlier than the historical accounting under Topic 605. The Company continues to evaluate the materiality of this impact on net revenues on an annual and interim basis and currently cannot reasonably estimate the expected financial impact of adoption on the Company’s financial statements. While significant progress has been made on the implementation of the new revenue standard, the Company’s final evaluation of the new revenue standard is ongoing and will continue throughout 2017, including making a final decision on expanded disclosures and whether the full retrospective or the modified retrospective method of adoption will be applied.

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 October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory", which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition method which is a cumulative-effective adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently in the process of evaluating the impact of this new standard on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which provides guidance on the classification of restricted cash in the statement of cash flows. ASU 2016-18 is effective after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-18 to have a material effect on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718)" ("ASU 2017-09") which provides clarity and expects to reduce both (1) diversity in practice and (2) cost and complexity when applying guidance in Topic 718, to a change to the terms or conditions of a share-based award. ASU 2017-09 is effective after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and the amendments to this ASU will be applied prospectively to an award modified on or after the adoption date. The Company does not expect to early adopt ASU 2017-09 and it is not expected to have a material effect on its consolidated financial statements.

XML

Receivables

9 Months Ended

Sep. 30, 2017

Receivables [Abstract]

Receivables

Receivables

Receivables consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Trade receivables, net	$	140,580	$	110,873
Other receivables	9,965		4,573
Total	$	150,545	$	115,446

Other receivables consist primarily of income tax receivables of $4.9 million and $0.5 million at September 30, 2017 and December 31, 2016, respectively and reimbursable amounts due from co-manufacturers for packaging of $4.2 million and $3.8 million at September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017 and December 31, 2016 the allowance for doubtful accounts was $0.8 million and $0.4 million, respectively.

XML

Inventories

9 Months Ended

Sep. 30, 2017

Inventory Disclosure [Abstract]

Inventories

Inventories

Inventories consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Finished goods	$	73,368	$	67,187
Work in process	285		286
Raw materials	2,481		2,346
Packaging and supplies	1,728		1,122
Total	$	77,862	$	70,941

XML

Property, Plant, and Equipment

9 Months Ended

Sep. 30, 2017

Property, Plant and Equipment [Abstract]

Property, plant, and equipment

Property, Plant and Equipment

Property, plant and equipment consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Buildings	$	59,314	$	59,314
Machinery and equipment	53,959		49,079
Computer software	16,875		14,849
Computer equipment	4,582		4,599
Furniture and fixtures	1,840		1,772
Leasehold improvements	1,589		1,477
Land improvements	493		493
Land	395		401
Buildings improvements	600		189
Construction in progress	133,266		53,891
	272,913		186,064
Accumulated depreciation and amortization	(30,211)		(23,832)
Total	$	242,702	$	162,232

Depreciation and amortization expense was approximately $2.5 million and $2.3 million for the three months ended September 30,2017 and 2016, respectively and approximately $7.8 million and $6.8 million for the nine months ended September 30, 2017 and 2016, 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, 2017, Joplin had issued and Heartland had purchased approximately $10.8 million of industrial revenue bonds and Joplin had purchased from, and leased back to, Heartland the land for a corresponding amount.

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Long-term Debt

9 Months Ended

Sep. 30, 2017

Debt Disclosure [Abstract]

Long-term debt

Long-term Debt

Long-term debt consisted of the following:

(dollars in thousands)	September 30, 2017			December 31, 2016
Term loan	$	394,776		$	383,137
Less current maturities	(4,000		)	(3,960		)
Total long-term debt	$	390,776		$	379,177

New Credit Agreement

On May 25, 2017, the Company, as borrower, entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent, and a syndicate of financial institutions, as lenders and other agents. The Credit Agreement provides for a $120.0 million revolving facility (the “Revolving Facility”), of which up to $10.0 million is available for letters of credit, and for a $400.0 million term loan facility (the “Term Facility”). A majority of the proceeds of the Term Facility were used to refinance the Old Credit Agreement (as defined below).

All obligations under the Credit Agreement are guaranteed by each of the material wholly-owned domestic restricted subsidiaries of the Company, subject to certain exceptions. Substantially all of the assets of the Company and each guarantor, subject to customary exceptions, are pledged as collateral in support of all obligations under the Credit Agreement, and the guarantees of those obligations.

Pursuant to the Credit Agreement, $1.0 million of the Term Facility must be repaid each fiscal quarter commencing with the fiscal quarter of the Company ending September 30, 2017. Upon maturity on May 25, 2024, the remaining principal balance of $373.0 million will be due.

Interest under the Revolving Facility and the Term Facility is payable, at the Company’s option, either at a base rate (subject to a floor of 0.00% and based on the highest of the prime rate, the overnight federal funds rate plus 1⁄2 of 1.00% and the one-month LIBOR rate plus 1.00%) plus an applicable margin of 1.00% per annum or a LIBOR-based rate (subject to a floor of 0.00%) plus an applicable margin of 2.00% per annum. The interest payment dates of the loans are dependent on the duration of the interest periods for the types of loans selected by the Company and are set forth in the Credit Agreement. Such applicable margins will be reduced by 0.25%, in each case, if (i) the Company’s Consolidated First Lien Gross Leverage Ratio (as defined in the Credit Agreement) is less than or equal to 1.00 to 1.00 or (ii) the Company maintains credit rating equal to or higher than Baa3 from Moody’s and BBB- from S&P.

The Company’s Term Facility and Revolving Facility contain financial covenants, including a financial covenant to maintain, commencing on December 31, 2017, a Consolidated First Lien Net Leverage Ratio (“leverage ratio”), defined as, with certain adjustments, the ratio of (i) the Company’s net debt that is secured by certain liens on the collateral to (ii) consolidated net income before interest, taxes, depreciation and amortization for the most recently ended period of four consecutive fiscal quarters for which financial statements have been delivered, that does not exceed 4.00 to 1.00. The Credit Agreement also sets forth mandatory and optional prepayment conditions, including, commencing with the fiscal year ending on December 31, 2018, an annual excess cash flow requirement, as defined, that may result in our use of cash to reduce our debt obligations.

Termination of Old Credit Agreement

On May 25, 2017, in connection with the closing of the Credit Agreement, the Company repaid in full approximately $382 million of borrowings under the Credit Agreement, dated as of August 8, 2012, by and among Blue Pet Products, Inc., Blue Buffalo Company, Ltd., the lenders from time to time party thereto and Citibank, N.A as administrative agent (as amended from time to time, the “Old Credit Agreement”). The credit facilities and related agreements and documents under the Old Credit Agreement were terminated and amounts due and payable thereunder were repaid upon the effectiveness of the Credit Agreement.

Accounting Treatment

Based on management’s review of the Credit Agreement and the refinancing transaction, the accounting for debt extinguishment applied. As such, the costs incurred related to third parties and debt issuance of $4.4 million were treated as a direct deduction of the net carrying amount of the Term Facility. These costs will be amortized to interest expense using the effective interest method through the Term Facility’s maturity date of May 25, 2024. There were no direct costs categorized as payments to creditors related to the Term Facility.

Fees paid to creditors of $0.3 million related to the Revolving Facility. As the borrowing capacity of the Revolving Facility is greater than the borrowing capacity that existed under the Old Credit Agreement, these costs are deferred and will be amortized to interest expense using the effective interest method over the Revolving Facility’s term, maturing on May 25, 2022.

At September 30, 2017, we had a carrying value of $394.8 million of term loan borrowings (fair value of $397.2 million) at an effective interest rate of 3.51% and no outstanding borrowings under the Revolving Facility. At December 31, 2016, the Company had $383.1 million of term loan borrowings (fair value of $386.5 million) at an effective interest rate of 3.79% and no outstanding borrowings under the revolving credit facility.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

Fair value measurements

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.

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, 2017 and December 31, 2016, the Company had approximately $281.7 million and $270.9 million, respectively, of cash primarily invested in interest bearing demand deposit accounts and 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, 2017 and the year ended December 31, 2016.

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, 2017, the carrying value of the Company’s outstanding borrowings under the Term Facility was approximately $394.8 million as compared to a fair value of $397.2 million (Level 2). As of December 31, 2016, the carrying value of the Company’s outstanding borrowings under the Term Facility was approximately $383.1 million as compared to a fair value of $386.5 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.

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Treasury Stock (Notes)

9 Months Ended

Sep. 30, 2017

Treasury Stock [Abstract]

Treasury stock

Treasury Stock

On July 31, 2017, the Board of Directors approved the terms of a share repurchase program, under which the Company is authorized to repurchase up to $50.0 million of its common shares. The Company repurchased shares through open market purchases in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities Exchange Act of 1934.  Purchases were made at times and prices considered appropriate by management. Repurchased common stock is available for use in connection with the Company's stock plans and for other corporate purposes. This authority is primarily used to offset dilution caused by the issuance and exercise of stock options and other equity compensation programs. Based on the Company’s strong cash flow and balance sheet, this program did not impact our ability to execute our business plans, allocate capital for our capital investment projects or pursue other strategic initiatives. The Company financed the share repurchase program through its operating cash flow and cash on hand.

During the three months ended September 30, 2017, the Company repurchased approximately 2.1 million shares of its common stock through open market purchases at an average price of $23.89, and a total cost of $50.0 million, including broker's commissions. As of September 30, 2017, the share repurchase program was fully executed.

The repurchase of these shares by the Company was accounted for under the cost method. The share repurchases were recorded as "Treasury stock, at cost" on the Unaudited Condensed Consolidated Balance Sheets.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-based compensation

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, 2017, there were 5,230,642 shares of common stock reserved under the Amended Plan. As of September 30, 2017, the maximum number of shares available for grant under the Amended Plan was 172,377.

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 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, 2017, the maximum number of shares available for grant under the 2015 Plan was 7,524,531.

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:

	2017			2016
Volatility	30.68		%	32.58		%
Risk-free interest rate	1.93		%	1.23		%
Expected term (years)	5			5
Dividend yield	—			—
Grant-date fair value	$	7.00		$	7.81

The following table summarizes stock option activity during the year and also presents stock options outstanding and exercisable as of September 30, 2017 (dollars in millions, except for per share data):

	Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2016	4,248,156		$	7.20
Granted	383,887		$	23.00
Exercised	(785,257	)	$	5.76
Forfeited	(59,924	)	$	17.72
Expired	(43,021	)	$	10.73
Options outstanding at September 30, 2017	3,743,841		$	8.92
Options exercisable at September 30, 2017	2,208,015		$	5.87

During the three and nine months ended September 30, 2017, the Company granted 8,718 and 184,752 ISOs and 142 and 199,135 non-qualified stock option grants. respectively.

Restricted Stock

The following table summarizes RSA and RSU activity for the nine months ended September 30, 2017:

	RSAs				RSUs
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016	—		$	—	61,861		$	25.45
Granted	35,430		$	23.00	106,609		$	23.00
Vested	(35,430	)	$	23.00	—		$	—
Forfeited	—		$	—	(5,769	)	$	24.61
Outstanding at September 30, 2017	—		$	—	162,701		$	23.87

During the three months ended March 31, 2017, members of the Company's Board of Directors received a fully-vested grant of 35,430 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 months ended March 31, 2017. There were no grants of RSAs during the three months ended September 30, 2017.

During the three and nine months ended September 30, 2017, the Company granted 2,746 and 106,609 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 $2.5 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, 2017 and 2016 was approximately $0.8 million and $1.0 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, 2017 and 2016 was approximately $3.0 million and $3.1 million, respectively.

Unrecognized stock-based compensation related to outstanding unvested stock options and restricted stock units is expected to be recognized in the Company’s statements of income as follows (by fiscal year):

(dollars in thousands)
2017 (period from October 1 to December 31, 2017)	$	850
2018	2,957
2019	2,031
2020	469
Total	$	6,307

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Earnings Per Share

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Earnings per share

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)	2017		2016		2017		2016
Net income	$	53,137	$	21,482	$	139,909	$	95,439
Basic weighted average number of shares outstanding	196,121,691		196,445,684		196,577,436		196,311,529
Dilutive effect of stock options and RSUs	2,537,768		3,006,624		2,681,324		2,978,488
Diluted weighted average number of shares outstanding	198,659,459		199,452,308		199,258,760		199,290,017
Basic net income per common share	$	0.27	$	0.11	$	0.71	$	0.49
Diluted net income per common share	$	0.27	$	0.11	$	0.70	$	0.48
Anti-dilutive shares excluded from diluted earnings per share computation	606,903		385,861		486,008		407,845

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Related Parties

9 Months Ended

Sep. 30, 2017

Related Party Transactions [Abstract]

Related Parties

Related Parties

Invus Partners LLC which, as of September 30, 2017, beneficially owned 44.8% of the Company's outstanding common stock, holds $19.7 million of the Company’s outstanding debt under the Term 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 $1.5 million of our debt under the Term Facility.

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Legal Proceedings

9 Months Ended

Sep. 30, 2017

Commitments and Contingencies Disclosure [Abstract]

Legal Proceedings

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, among other things, 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 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.

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.

On October 15, 2014, we initiated a separate false advertising 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 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.

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 (the “Nestlé Purina Settlement”). 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. However, we may not be able to fully recover from such supplier or broker, or from our insurance providers the full amount paid in the Nestlé Purina Settlement or other damages incurred in connection with our litigation with Nestlé Purina. In addition, our lawsuits against (i) the third party ingredient supplier and broker, and (ii) our insurance providers, are currently subject to a stay. On March 9, 2017, the United States District Court for the Eastern District of Missouri, which is presiding over our lawsuit against the third party ingredient supplier and broker, granted a motion by the United States Department of Justice to stay all proceedings in our lawsuit until otherwise ordered by the court, due to the potential for the lawsuit to interfere with an ongoing criminal investigation. The Department of Justice has already filed criminal charges against both the third party ingredient supplier and broker for violations of the Federal Food, Drug and Cosmetic Act, and has indicated that its investigation is ongoing.

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 these U.S. 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 “Class Action Settlement”). Under the terms of the Class Action 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 Class Action Settlement received final trial court approval on May 19, 2016. On July 5, 2017, the United States Court of Appeals for the Eighth Circuit affirmed the trial court’s decision, and on July 31, 2017, appellant’s petition for rehearing was denied. 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 Class Action 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. However, we may not be able to fully recover from such supplier or broker, or from our insurance providers, the full amount of paid in the Class Action Settlement or other damages incurred in connection with the U.S. class action lawsuits.

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.

On July 11, 2016, we filed a lawsuit in State of Connecticut Superior Court against 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”), 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.

On March 13, 2017, the court granted a joint motion by the parties to stay this litigation pending resolution of our claims against the third party ingredient supplier and broker discussed above.

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Receivables (Tables)

9 Months Ended

Sep. 30, 2017

Receivables [Abstract]

Schedule of composition of receivables

Receivables consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Trade receivables, net	$	140,580	$	110,873
Other receivables	9,965		4,573
Total	$	150,545	$	115,446

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Inventories (Tables)

9 Months Ended

Sep. 30, 2017

Inventory Disclosure [Abstract]

Schedule of inventories

Inventories consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Finished goods	$	73,368	$	67,187
Work in process	285		286
Raw materials	2,481		2,346
Packaging and supplies	1,728		1,122
Total	$	77,862	$	70,941

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Property, Plant, and Equipment (Tables)

9 Months Ended

Sep. 30, 2017

Property, Plant and Equipment [Abstract]

Schedule of property, plant and equipment

Property, plant and equipment consisted of the following:

(dollars in thousands)	September 30, 2017		December 31, 2016
Buildings	$	59,314	$	59,314
Machinery and equipment	53,959		49,079
Computer software	16,875		14,849
Computer equipment	4,582		4,599
Furniture and fixtures	1,840		1,772
Leasehold improvements	1,589		1,477
Land improvements	493		493
Land	395		401
Buildings improvements	600		189
Construction in progress	133,266		53,891
	272,913		186,064
Accumulated depreciation and amortization	(30,211)		(23,832)
Total	$	242,702	$	162,232

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Long-term Debt (Tables)

9 Months Ended

Sep. 30, 2017

Debt Disclosure [Abstract]

Schedule of components of long-term debt

Long-term debt consisted of the following:

(dollars in thousands)	September 30, 2017			December 31, 2016
Term loan	$	394,776		$	383,137
Less current maturities	(4,000		)	(3,960		)
Total long-term debt	$	390,776		$	379,177

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of of Stock Option Weighted Average Assumptions

The following are the weighted-average assumptions used for grants issued during the nine month periods ended September 30:

	2017			2016
Volatility	30.68		%	32.58		%
Risk-free interest rate	1.93		%	1.23		%
Expected term (years)	5			5
Dividend yield	—			—
Grant-date fair value	$	7.00		$	7.81

Schedule of stock option activity

The following table summarizes stock option activity during the year and also presents stock options outstanding and exercisable as of September 30, 2017 (dollars in millions, except for per share data):

	Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2016	4,248,156		$	7.20
Granted	383,887		$	23.00
Exercised	(785,257	)	$	5.76
Forfeited	(59,924	)	$	17.72
Expired	(43,021	)	$	10.73
Options outstanding at September 30, 2017	3,743,841		$	8.92
Options exercisable at September 30, 2017	2,208,015		$	5.87

Schedule of RSA and RSU activity

The following table summarizes RSA and RSU activity for the nine months ended September 30, 2017:

	RSAs				RSUs
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016	—		$	—	61,861		$	25.45
Granted	35,430		$	23.00	106,609		$	23.00
Vested	(35,430	)	$	23.00	—		$	—
Forfeited	—		$	—	(5,769	)	$	24.61
Outstanding at September 30, 2017	—		$	—	162,701		$	23.87

Schedule of unrecognized compensation cost

Unrecognized stock-based compensation related to outstanding unvested stock options and restricted stock units is expected to be recognized in the Company’s statements of income as follows (by fiscal year):

(dollars in thousands)
2017 (period from October 1 to December 31, 2017)	$	850
2018	2,957
2019	2,031
2020	469
Total	$	6,307

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Reconciliations of Basic and Diluted Shares Calculations

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)	2017		2016		2017		2016
Net income	$	53,137	$	21,482	$	139,909	$	95,439
Basic weighted average number of shares outstanding	196,121,691		196,445,684		196,577,436		196,311,529
Dilutive effect of stock options and RSUs	2,537,768		3,006,624		2,681,324		2,978,488
Diluted weighted average number of shares outstanding	198,659,459		199,452,308		199,258,760		199,290,017
Basic net income per common share	$	0.27	$	0.11	$	0.71	$	0.49
Diluted net income per common share	$	0.27	$	0.11	$	0.70	$	0.48
Anti-dilutive shares excluded from diluted earnings per share computation	606,903		385,861		486,008		407,845

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The Company (Details)	Sep. 16, 2016 shares	Jul. 05, 2016 shares	Jul. 27, 2015 employee $ / shares shares	Sep. 30, 2017 subsidiary
Subsidiary, Sale of Stock [Line Items]
Number of wholly-owned subsidiaries | subsidiary				6
Number of shares issued to non-management employees (in shares)			30,682
Number of non-management employees receiving shares | employee			1,700
IPO and IPO Over-Allotment
Subsidiary, Sale of Stock [Line Items]
Number of shares sold (in shares)			38,906,286
Initial public offering share price (in usd per share) | $ / shares			$ 20.00
IPO Over-allotment option
Subsidiary, Sale of Stock [Line Items]
Number of shares sold (in shares)			5,074,732
SPO and SPO Over-Allotment
Subsidiary, Sale of Stock [Line Items]
Number of shares sold (in shares)	14,300,000	17,250,000

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Basis of Presentation (Details) $ in Millions	9 Months Ended
	Sep. 30, 2016 USD ($)
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Effective income tax rate reconciliation, share-based compensation, excess tax benefit, amount	$ 1.4

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Receivables (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Receivables [Abstract]
Trade receivables, net	$ 140,580	$ 110,873
Other receivables	9,965	4,573
Total	150,545	115,446
Income tax receivables	4,900	500
Due from co-manufacturers	4,200	3,800
Allowance for Doubtful Accounts Receivable, Current	$ 800	$ 400

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Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Inventory Disclosure [Abstract]
Finished goods	$ 73,368	$ 67,187
Work in process	285	286
Raw materials	2,481	2,346
Packaging and supplies	1,728	1,122
Total	$ 77,862	$ 70,941

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Property, Plant, and Equipment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016	Aug. 31, 2016
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	$ 272,913		$ 272,913		$ 186,064
Accumulated depreciation and amortization	(30,211)		(30,211)		(23,832)
Total	242,702		242,702		162,232
Depreciation and amortization	2,500	$ 2,300	7,800	$ 6,800
Buildings
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	59,314		59,314		59,314
Machinery and equipment
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	53,959		53,959		49,079
Computer software
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	16,875		16,875		14,849
Computer equipment
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	4,582		4,582		4,599
Furniture and fixtures
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	1,840		1,840		1,772
Leasehold improvements
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	1,589		1,589		1,477
Land improvements
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	493		493		493
Land
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	395		395		401
Buildings improvements
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	600		600		189
Construction in progress
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	133,266		133,266		$ 53,891
Heartland Pet Food Mfg.
Property, Plant and Equipment [Line Items]
Purchased industrial revenue bonds	$ 10,800		$ 10,800
City of Joplin, MO
Property, Plant and Equipment [Line Items]
Principal amount of industrial revenue bonds						$ 83,300

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Long-term Debt - Schedule of Long-term Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Debt Disclosure [Abstract]
Term loan	$ 394,776	$ 383,137
Less current maturities	(4,000)	(3,960)
Total long-term debt	$ 390,776	$ 379,177

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Long-term Debt (Details)		9 Months Ended
	May 25, 2017 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)
Debt Instrument [Line Items]
Repayments of credit facility		$ 382,147,000	$ 0
Long-term debt		394,776,000		$ 383,137,000
Amended Facility
Debt Instrument [Line Items]
Debt covenant, reduction of basis spread	0.25%
Covenant for marginal rates, secured leverage ratio, Maximum	1
Secured leverage ratio	4
Repayments of credit facility	$ 382,000,000
Debt issuance cost	4,400,000
Long-term debt		394,800,000		383,100,000
Amended Facility | Revolving credit facility
Debt Instrument [Line Items]
Maximum borrowing capacity	120,000,000
Debt fee amount	300,000
Revolving credit outstanding		0		0
Amended Facility | Term loan
Debt Instrument [Line Items]
Maximum borrowing capacity	400,000,000
Debt instrument, periodic payment		1,000,000
End of term payment		373,000,000
Long-term debt		394,800,000		383,100,000
Fair value of debt outstanding		$ 397,200,000		$ 386,500,000
Effective interest rate		3.51%		3.79%
Amended Facility | Letter of credit
Debt Instrument [Line Items]
Maximum borrowing capacity	$ 10,000,000
Variable Rate Option One | Base Rate | Amended Facility
Debt Instrument [Line Items]
Basis spread on variable rate	0.00%
Variable Rate Option One | Federal Fund Rate | Amended Facility
Debt Instrument [Line Items]
Basis spread on variable rate	0.50%
Variable Rate Option One | One Month LIBOR | Amended Facility
Debt Instrument [Line Items]
Basis spread on variable rate	1.00%
Variable Rate Option One | London Interbank Offered Rate (LIBOR) | Amended Facility
Debt Instrument [Line Items]
Basis spread on variable rate	1.00%
Variable Rate Option Two | Base Rate | Amended Facility
Debt Instrument [Line Items]
Basis spread on variable rate	0.00%
Variable Rate Option Two | London Interbank Offered Rate (LIBOR) | Amended Facility
Debt Instrument [Line Items]
Basis spread on variable rate	2.00%

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Fair Value Measurements (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Carrying value	$ 394,776	$ 383,137
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash invested in money market deposit accounts	281,700	270,900
Amended Facility
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Carrying value	394,800	383,100
Amended Facility | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value	$ 397,200	$ 386,500

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Treasury Stock (Details) - USD ($) $ / shares in Units, $ in Thousands, shares in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2017	Jul. 31, 2017
Treasury Stock [Abstract]
Authorized shares repurchase amount			$ 50,000
Repurchases of common stock (shares)	2.1
Treasury stock average cost per share (dollars per share)	$ 23.89
Repurchases of common stock	$ 50,000	$ 50,000

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Stock-Based Compensation (Details) - USD ($) $ in Thousands		3 Months Ended			9 Months Ended
	Mar. 04, 2013	Sep. 30, 2017	Mar. 31, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Jul. 27, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grants of ISO and non-qualified stock options (in shares)					383,887
Stock-based compensation					$ 2,976	$ 3,051
Selling, general and administrative expenses
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation costs charged to operations		$ 800		$ 1,000
Amended Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Increase in the maximum number of shares available under the Plan (in shares)	210,000
New maximum number of shares available under the Plan (in shares)	14,242,061
Number of shares reserved under the Plan (in shares)		5,230,642			5,230,642
Maximum number of shares available for grant under the Plan (in shares)		172,377			172,377
2015 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
New maximum number of shares available under the Plan (in shares)							8,400,000
Maximum number of shares available for grant under the Plan (in shares)		7,524,531			7,524,531
ISO
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grants of ISO and non-qualified stock options (in shares)		8,718			184,752
NQO
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grants of ISO and non-qualified stock options (in shares)		142			199,135
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted (shares)		2,746			106,609
Fair value of units on grant date					$ 2,500
Award vesting period					3 years
Restricted Stock Award (RSAs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted (shares)		0	35,430		35,430
Fair value of awards granted			$ 800
Award holding restriction period					3 years

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Stock-Based Compensation - Schedule of Weighted Average Assumptions (Details) - $ / shares	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Volatility	30.68%	32.58%
Risk-free interest rate	1.93%	1.23%
Expected term (years)	5 years	5 years
Dividend yield	0.00%	0.00%
Grant-date fair value	$ 7.00	$ 7.81

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Stock-Based Compensation - Schedule of Stock Options Outstanding (Details) - $ / shares	9 Months Ended
	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Number of shares - outstanding, December 31, 2016 (in shares)	4,248,156
Number of shares - granted (in shares)	383,887
Number of shares - exercised (shares)	(785,257)
Number of shares - forfeited (in shares)	(59,924)
Number of shares - expired (in shares)	(43,021)
Number of shares - outstanding, September 30, 2017 (in shares)	3,743,841
Number of shares - exercisable, September 30, 2017 (in shares)	2,208,015
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Abstract]
Weighted average exercise price per share - outstanding, December 31, 2016 (in usd per share)	$ 7.20
Weighted average exercise price per share - granted (in usd per share)	23.00
Weighted average exercise price per share - exercised (in usd per share)	5.76
Weighted average exercise price per share - forfeited (in usd per share)	17.72
Weighted average exercise price per share - expired (in usd per share)	10.73
Weighted average exercise price per share - outstanding, September 30, 2017 (in usd per share)	8.92
Weighted average exercise price per share - exercisable, September 30, 2017 (in usd per share)	$ 5.87

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Stock-Based Compensation - Schedule of Restricted Stock Activity (Details) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Mar. 31, 2017	Sep. 30, 2017
Restricted Stock Award (RSAs)
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Balance at beginning of period (shares)		0	0
Balance at beginning of period (in usd per share)		$ 0.00	$ 0.00
Granted (shares)	0	35,430	35,430
Granted (dollars per share)			$ 23.00
Vested (shares)			(35,430)
Vested (dollars per share)			$ 23.00
Forfeited (shares)			0
Forfeited (dollars per share)			$ 0.00
Balance at end of period (shares)	0		0
Balance at end of period (in usd per share)	$ 0.00		$ 0.00
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Balance at beginning of period (shares)		61,861	61,861
Balance at beginning of period (in usd per share)		$ 25.45	$ 25.45
Granted (shares)	2,746		106,609
Granted (dollars per share)			$ 23.00
Vested (shares)			0
Vested (dollars per share)			$ 0.00
Forfeited (shares)			(5,769)
Forfeited (dollars per share)			$ 24.61
Balance at end of period (shares)	162,701		162,701
Balance at end of period (in usd per share)	$ 23.87		$ 23.87

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Stock-Based Compensation - Schedule of Unrecognized Compensation Cost (Details) $ in Thousands	Sep. 30, 2017 USD ($)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
2017 (period from October 1 to December 31, 2017)	$ 850
2018	2,957
2019	2,031
2020	469
Total	$ 6,307

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Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Earnings Per Share [Abstract]
Net income	$ 53,137	$ 21,482	$ 139,909	$ 95,439
Basic weighted average number of shares outstanding (in shares)	196,121,691	196,445,684	196,577,436	196,311,529
Dilutive effect of stock options and RSUs (in shares)	2,537,768	3,006,624	2,681,324	2,978,488
Diluted weighted average number of shares outstanding (in shares)	198,659,459	199,452,308	199,258,760	199,290,017
Basic net income per common share (in usd per share)	$ 0.27	$ 0.11	$ 0.71	$ 0.49
Diluted net income per common share (in usd per share)	$ 0.27	$ 0.11	$ 0.70	$ 0.48
Anti-dilutive shares excluded from diluted earnings per share computation (in shares)	606,903	385,861	486,008	407,845

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Related Parties (Details) $ in Millions	Sep. 30, 2017 USD ($)
Related Party Transaction [Line Items]
Beneficial Ownership by Invus Partners LLC	44.80%
Invus Partners LLC | Affiliated Entity
Related Party Transaction [Line Items]
The Company's outstanding debt held by related parties	$ 19.7
Kunkemueller Enterprises LP | Affiliated Entity
Related Party Transaction [Line Items]
The Company's outstanding debt held by related parties	$ 1.5

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Legal Proceedings (Details) - USD ($) $ in Thousands			9 Months Ended
	Nov. 02, 2016	Jan. 08, 2016	Sep. 30, 2017	Sep. 30, 2016
Loss Contingencies [Line Items]
Payment of legal settlement			$ 0	$ 32,000
Nestle Purina Litigation
Loss Contingencies [Line Items]
Payment of legal settlement	$ 32,000
US Consumer Class Action Lawsuit
Loss Contingencies [Line Items]
Payment of legal settlement		$ 32,000