Operations and Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 28, 2013 |
Operations and Summary of Significant Accounting Policies: | ' |
Operations and Summary of Significant Accounting Policies: | ' |
1. Operations and Summary of Significant Accounting Policies |
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Description of Business |
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Inventure Foods, Inc., a Delaware corporation (referred to herein as the “Company,” referred to as “we,” “our” or “us”), is a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands with more than $215 million in annual net revenues for fiscal year 2013. |
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We operate in two segments: frozen products and snack products. The frozen products segment produces frozen fruits, vegetables and beverages for sale primarily to groceries, club stores and mass merchandisers. All products sold under our frozen products segment are considered part of the healthy/natural food category. The snack products segment produces potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products and extruded products for sale primarily to snack food distributors and retailers. The products sold under our snack products segment includes products considered part of the indulgent specialty snack food category, as well as products considered part of the healthy/natural food category. |
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We specialize in two primary product categories: (1) healthy/natural food products (2) indulgent specialty snack products. We sell our products nationally through a number of channels including: grocery, natural, mass merchandisers, drug, club, value, vending, food service, convenience stores and international. Our goal is to have a diversified portfolio of brands, products, customers and distribution channels. |
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In our healthy/natural food category, products include Rader Farms® frozen berries, Boulder Canyon® Natural Foods brand kettle cooked potato chips, Willamette Valley Fruit CompanyTM brand frozen berries, Fresh FrozenTM brand frozen vegetables, Jamba® branded blend-and-serve smoothie kits under license from Jamba Juice Company, Seattle’s Best Coffee® Frozen Coffee Blends branded blend-and-serve frozen coffee beverage under license from Seattle’s Best Coffee, LLC and private label frozen fruit and healthy/natural snacks. |
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In our indulgent specialty snack food category, products include T.G.I. Friday’s® brand snacks under license from T.G.I. Friday’s Inc. (“T.G.I. Friday’s”), Nathan’s Famous® brand snack products under license from Nathan’s Famous Corporation, Vidalia® brand snack products under license from Vidalia Brands, Inc., Poore Brothers® kettle cooked potato chips, Bob’s Texas Style® kettle cooked chips, and Tato Skins® brand potato snacks. We also manufacture private label snacks for certain grocery retail chains and co-pack products for other snack and cereal manufacturers. |
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We operate manufacturing facilities in seven locations. Our frozen berry products are manufactured in Lynden, Washington and two facilities in Salem, Oregon. Our frozen berry business grows, processes and markets premium berry blends, raspberries, blueberries and rhubarb and purchases marionberries, cherries, cranberries, strawberries and other fruits from a select network of fruit growers for resale. The fruit is processed, frozen and packaged for sale and distribution to wholesale customers. Our frozen vegetable products are manufactured in Jefferson, Georgia and Thomasville, Georgia. Our frozen beverage products are packaged at our Lynden, Washington facility. We also use third-party processors for certain frozen products and package certain frozen fruits for other manufacturers. Our snack products are manufactured at our Phoenix, Arizona and Bluffton, Indiana plants, as well as some third-party plants for certain products. |
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Acquisitions and Dispositions |
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We account for acquisitions using the acquisition method of accounting. The results of operations of our acquired businesses have been included in our consolidated results from their respective dates of acquisition. |
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On November 8, 2013, we completed our acquisition of Fresh Frozen Foods, LLC (“Fresh Frozen Foods”) for a cash purchase price of $38.4 million plus a working capital adjustment of $0.4 million. An additional amount of up to $3.0 million is payable to Fresh Frozen Foods as contingent consideration in the form of an earn-out based on 2014 performance (see Note 2). |
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On May 28, 2013, we completed our acquisition of the berry processing business of Willamette Valley Fruit Company, LLC (“Willamette Valley Fruit Company”) for a cash purchase price of $9.3 million. An additional amount of up to $3.0 million is payable to Willamette Valley Fruit Company as contingent consideration in the form of an earn-out if certain performance thresholds are met during the seven-year period following the closing of the transaction (see Note 2). |
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On November 5, 2012, we sold our direct-store-delivery (“DSD”) business for $1.2 million in cash, which included a network of independently operated and owned service routes and limited fixed assets associated with the DSD business. We received an additional $0.3 million as a purchase price adjustment for inventory on-hand. We recognized a net gain of $1.1 million in continuing operations, as we will continue to indirectly sell our products through this network at a reduced cost and will no longer sell distributed products. Our sales of distributed products were $2.6 million in fiscal year 2012. Our DSD business was part of our indulgent specialty snack segment and included a limited number of snack food products purchased and sold through our DSD network in Arizona. |
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Principles of Consolidation |
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The consolidated financial statements include the accounts of Inventure Foods, Inc. and all of its wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. |
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Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year. Accordingly, the fiscal year end dates result in an additional week of results every five or six years. Fiscal year 2013 commenced December 30, 2012 and ended December 28, 2013, resulting in a 52-week fiscal year. Fiscal year 2012 commenced January 1, 2012 ended December 29, 2012, resulting in a 52-week fiscal year. Fiscal year 2011 commenced December 26, 2010 ended December 31, 2011, resulting in a 53-week fiscal year. |
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Use of Estimates |
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates, including those related to accruals for customer programs and incentives, product returns, bad debts, income taxes, long-lived assets, inventories, stock-based compensation, interest rate swap valuations, accrued broker commissions and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. |
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Fair Value of Financial Instruments |
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. We classify our investments based upon an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are described as follows: |
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Level 1 | | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | | | | | | | | | | | | | | | | |
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Level 2 | | Quoted prices in markets that are not considered to be active or financial instruments without quoted market prices, but for which all significant inputs are observable, either directly or indirectly. | | | | | | | | | | | | | | | | |
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Level 3 | | Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. | | | | | | | | | | | | | | | | |
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A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. |
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At December 28, 2013 and December 29, 2012, the carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate fair values since they are short term in nature. The carrying value of the long-term debt approximates fair value based on the borrowing rates currently available to us for long-term borrowings with similar terms. The following table summarized the valuation of our assets and liabilities measured at fair value on a recurring basis (in thousands): |
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| | | | December 28, 2013 | | December 29, 2012 | |
Balance Sheet Classification | | | | Interest Rate | | Non-qualified | | Earn-out | | Interest Rate | | Non-qualified | |
Swaps | Deferred | Contingent | Swaps | Deferred |
| Compensation | Consideration | | Compensation |
| Plan | Obligation | | Plan |
| Investments | | | Investments |
Other assets | | Level 1 | | $ | — | | $ | 579 | | $ | — | | $ | — | | $ | 440 | |
Interest rate swaps | | Level 2 | | $ | (526 | ) | $ | — | | $ | — | | $ | (766 | ) | $ | — | |
Other liabilities | | Level 3 | | $ | — | | $ | — | | $ | (5,053 | ) | $ | — | | $ | — | |
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Considerable judgment is required in interpreting market data to develop the estimate of fair value of our derivative instruments. Accordingly, the estimate may not be indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts. |
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Our non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets. |
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The fair value measurement of the earn-out contingent consideration obligation relates to the acquisition of Willamette Valley Fruit Company in May 2013 and Fresh Frozen Foods in November 2013, and is included in accrued liabilities and other long-term liabilities in the consolidated balance sheets. The fair value measurement is based upon significant inputs not observable in the market. Changes in the value of the obligation are recorded as income or expense in our consolidated statements of income. We estimated the original fair value of the contingent consideration as the present value of the expected contingent payments, determined using the weighted probabilities of the possible payments. We are required to reassess the fair value of the contingent payments on a contingent basis. Significant increases (decreases) in any of those probabilities in isolation may result in a higher (lower) fair value measurement. The significant inputs used in these estimates include numerous possible scenarios for the payments based on the contractual terms of the contingent consideration, for which probabilities are assigned to each scenario, which are then discounted based on an individual risk analysis of the respective liabilities (weighted average discount rate of 5.4% for the outstanding liabilities as of December 28, 2013). Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts. A one percentage point change in the discount rates used would not have significantly impacted the recorded liability as of December 28, 2013. |
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A summary of the activity of the fair value of the measurements using unobservable inputs (Level 3 Liabilities) for the year ended December 28, 2013, is as follows (in thousands): |
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| | Level 3 | | | | | | | | | | | | | | | |
Balance at December 29, 2012 | | $ | — | | | | | | | | | | | | | | | |
Earn-out compensation due to Willamette Valley Fruit Company | | 2,400 | | | | | | | | | | | | | | | |
Earn-out compensation due to Fresh Frozen Foods | | 2,653 | | | | | | | | | | | | | | | |
Balance at December 28, 2013 | | $ | 5,053 | | | | | | | | | | | | | | | |
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Derivative Financial Instruments |
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We utilize interest rate swaps in the management of our variable interest rate exposure and do not enter into derivatives for trading purposes. All derivatives are measured at fair value. Our interest rate swaps are classified as cash flow hedges. |
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Treasury Stock |
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We record repurchases of our Common stock, $.01 par value (“Common Stock”), as treasury stock at cost. We also record the subsequent retirement of these treasury shares at cost. The excess of the cost of the shares retired over their par value is allocated between additional paid-in capital and retained earnings. The amount recorded as a reduction of paid-in capital is based on such excess. |
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Cash and Cash Equivalents |
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We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. |
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Accounts Receivable |
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Accounts receivable consist primarily of receivables from customers and distributors for products purchased. Receivables are past due when they are unpaid greater than thirty days. We determine any required reserves by considering a number of factors, including the length of time the accounts receivable have been outstanding and our loss history. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. |
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Inventories |
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Inventories are stated at the lower of cost (first-in, first-out) or market. We identify slow moving or obsolete inventories and estimate appropriate write-down provisions related thereto. If actual market conditions are less favorable than those projected by management, additional inventory write downs may be required. In the ordinary course of business, we manage price and supply risk of commodities by entering into various short-term purchase arrangements with our vendors. |
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Property and Equipment |
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Property and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements. Maintenance and repairs are charged to operations when incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the appropriate accounts, and the resulting gain or loss is recognized. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, ranging from two to thirty years. We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are included in property, plant and equipment and amortized on a straight-line basis when placed into service over three years. |
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We evaluate the recoverability of property and equipment not held for sale by comparing the carrying amount of the asset or group of assets against the estimated undiscounted future cash flows expected to result from the use of the asset or group of assets and their eventual disposition, in accordance with relevant authoritative guidance. If the undiscounted future cash flows are less than the carrying value of the asset or group of assets being evaluated, an impairment loss is recorded. The loss is measured as the difference between the fair value and carrying value of the asset or group of assets being evaluated. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell. The estimated fair value would be based on the best information available under the circumstances, including prices for similar assets or the results of valuation techniques, including the present value of expected future cash flows using a discount rate commensurate with the risks involved. |
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Intangible Assets |
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Goodwill and trademarks are reviewed for impairment annually or more frequently if impairment indicators arise. Goodwill, by reporting unit, is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduces the fair value of a reporting unit below its carrying value. We have concluded from our annual impairment testing performed in December that neither of our two reporting units were at risk of failing the impairment test in the near term, and we believe that there are no known risks for that conclusion to change at either of our reporting units. Intangible assets with indefinite lives are required to be tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired. Amortizable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the estimated period over which economic benefits are expected to be provided. |
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Management believes that each of our trademarks has the continued ability to generate cash flows indefinitely. Therefore, each of our trademarks has been determined to have an indefinite life. Management’s determination that our trademarks have indefinite lives includes an evaluation of historical cash flows and projected cash flows for each of these trademarks. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of these trademarks. Management intends to renew each of these trademarks, which can be accomplished at little cost. |
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See Note 3 “Goodwill, Trademarks and Other Intangible Assets” for additional information. |
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Self-Insurance Reserves |
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We are partially self-insured for the purposes of providing health care benefits to employees covered by our insurance plan. The plan covers all full-time employees of the Company on the first day of the month after each such employee’s hiring date for salaried employees, and the first day of the month following the ninetieth day of service for hourly employees. The plan covers the employees’ dependents, if elected by each such employee. We have contracted with an insurance carrier for stop loss coverage that commences when $100,000 in claims is paid annually for a covered participant. In addition, we have contracted for aggregate stop loss insurance, which provides coverage after the maximum amount paid by us exceeds approximately $1.5 million. Estimated unpaid claims included in accrued liabilities are $0.3 million and $0.4 million at December 28, 2013 and December 29, 2012, respectively. These amounts represent management’s best estimate of amounts that have not been paid prior to the year-end dates. It is reasonably possible that the actual expense we will ultimately incur could differ from such estimates. |
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Revenue Recognition |
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In accordance with GAAP, we recognize operating revenues upon shipment of products to customers, provided title and risk of loss pass to our customers. In those instances where title and risk of loss does not pass until delivery, revenue recognition is deferred until delivery has occurred. In our snack products segment, revenue for products sold through our local distribution network prior to our sale of the DSD business in November 2012 was recognized when the product was received by the retailer. |
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Provisions and allowances for sales returns, promotional allowances, coupon redemption and discounts are also recorded as a reduction of revenues in our consolidated financial statements. These allowances are estimated based on a percentage of sales returns using historical and current market information. We record certain reductions to revenue for promotional allowances. There are several types of promotional allowances, such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. We record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. Anytime we offer consideration (cash or credit) as a trade advertising or promotional allowance to a purchaser of products at any point along the distribution chain, the amount is accrued and recorded as a reduction in revenue. Costs associated with obtaining shelf space (i.e., “slotting fees”) are accounted for as a reduction of revenue in the period in which we incur such costs. The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion. |
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Selling and Administrative Expenses |
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Selling and administrative expenses include salaries and wages, bonuses and incentives, stock-based compensation expenses, employee related expenses, facility-related expenses, marketing and advertising expenses, depreciation of property and equipment, professional fees, amortization of intangible assets, provisions for losses on accounts receivable and other operating expenses. |
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We recorded $0.9 million, $0.9 million and $1.0 million in fiscal years 2013, 2012 and 2011, respectively, for advertising costs, which are included in selling, general and administrative expenses on the Consolidated Statements of Operations contained herein. These costs include various sponsorships, coupon administration and consumer advertising programs that we enter into throughout the year and are expensed as incurred. Our marketing programs also include selective event sponsorship designed to increase brand awareness and to provide opportunities to mass sample branded products. |
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Also included in selling, general and administrative expense are costs and fees relating to the execution of in-store product demonstrations with club stores or grocery retailers, which were $2.2 million, $1.9 million and $3.6 million for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively. The cost of product used in the demonstrations, which is insignificant, and the fee we pay to the independent third-party providers who conduct the in-store demonstrations, are recorded as an expense when the event occurs. Product demonstrations are conducted by independent third-party providers designated by the various retailer or club chains. During the in-store demonstrations, the consumers in the stores receive small samples of our products. The consumers are not required to purchase our product in order to receive the sample. |
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Shipping and Handling |
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Shipping and handling costs are included in cost of revenues. We do not bill customers for freight. |
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Income Taxes |
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We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. |
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We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. |
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The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of December 28, 2013. |
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It is our policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We do not have any accrued interest or penalties associated with unrecognized tax benefits for the years ended December 28, 2013 and December 29, 2012. |
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We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The material jurisdictions that are subject to examination by tax authorities include the U.S. federal, Arizona, California and Indiana. Our U.S. federal income tax returns for years 2010 through 2012 remain open to examination by the Internal Revenue Service. Our state tax returns for years 2009 through 2012 remain open to examination by the state jurisdictions. |
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Stock Options and Stock-Based Compensation |
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Stock options and other stock-based compensation awards expense are adjusted for estimated forfeitures and are recognized on a straight-line basis over the requisite period of the award, which is currently one to five years for stock options and one to three years for restricted stock. We estimate future forfeiture rates based on our historical experience. |
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Compensation costs related to all stock-based payment arrangements, including employee stock options, are recognized in the financial statements based on the fair value method of accounting. Excess tax benefits related to stock-based payment arrangements are classified as cash inflows from financing activities and cash outflows from operating activities. See Note 9 “Stockholders’ Equity” for additional information. |
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Earnings Per Common Share |
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Basic earnings per common share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share is calculated by including all dilutive common shares such as stock options and restricted stock. For the years ended December 28, 2013, December 29, 2012 and December 31, 2011 options to purchase 291,571, 281,017 and 215,500 shares of our common stock, respectively, were excluded from the calculation of diluted earnings per share because their effects were antidilutive. These exclusions were made because the options’ exercise prices were greater than the average market price of our Common Stock for those periods. Exercises of outstanding stock options or warrants are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive. |
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Earnings per common share was computed as follows for the years ended December 28, 2013, December 29, 2012 and December 31, 2011 (in thousands, except per share data): |
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| | December 28, | | December 29, | | December 31, | | | | | | | | | |
2013 | 2012 | 2011 | | | | | | | | |
Basic Earnings Per Share: | | | | | | | | | | | | | | | |
Net income | | $ | 6,618 | | $ | 7,449 | | $ | 2,817 | | | | | | | | | |
Weighted average number of common shares | | 19,360 | | 18,821 | | 18,110 | | | | | | | | | |
Earnings per common share | | $ | 0.34 | | $ | 0.4 | | $ | 0.16 | | | | | | | | | |
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Diluted Earnings Per Share: | | | | | | | | | | | | | | | |
Net income | | $ | 6,618 | | $ | 7,449 | | $ | 2,817 | | | | | | | | | |
Weighted average number of common shares | | 19,360 | | 18,821 | | 18,110 | | | | | | | | | |
Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock | | 429 | | 753 | | 1,089 | | | | | | | | | |
Adjusted weighted average number of common shares | | 19,789 | | 19,574 | | 19,199 | | | | | | | | | |
Earnings per common share | | $ | 0.33 | | $ | 0.38 | | $ | 0.15 | | | | | | | | | |
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Subsequent Events |
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Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. We recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. Our financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued. |
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Recent Accounting Pronouncements |
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In June 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the existing guidance on the presentation of comprehensive income. Under the amended guidance, an entity is required to present the effect of reclassification adjustments out of accumulated other comprehensive income in both net income and other comprehensive income in the financial statements. In February 2013, the FASB issued an amendment to this provision, which is effective on a prospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2013. We intend to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and do not anticipate any material impact on our consolidated financial statements and related disclosures. |
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In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. We intend to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and do not anticipate any material impact on our consolidated financial statements and related disclosures. |
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