Organization and Summary of Significant Accounting Policies | 9 Months Ended |
Sep. 27, 2014 |
Organization and Summary of Significant Accounting Policies | ' |
Organization and Summary of Significant Accounting Policies | ' |
1.Organization and Summary of Significant Accounting Policies |
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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 specialize in two primary product categories: (1) healthy/natural food products and (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® 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 in two segments: frozen products and snack products. The frozen products segment includes 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 includes potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products, cereal 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 operate manufacturing facilities in seven locations. Our frozen berry products are processed in Lynden, Washington, Salem, Oregon and Jefferson, Georgia. Our frozen berry business grows, processes and markets premium berry blends, raspberries, blueberries and rhubarb and purchases blackberries, 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 processed in Jefferson, Georgia, Thomasville, Georgia and in Salem, Oregon. Our frozen beverage products are packaged at our Lynden, Washington and Jefferson, Georgia facilities. 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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Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year. Accordingly, the third quarter of 2014 commenced June 29, 2014 and ended September 27, 2014. |
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Basis of Presentation |
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The consolidated financial statements for the quarter and nine months ended September 27, 2014 are unaudited and include the accounts of Inventure Foods, Inc. and all of our wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The consolidated financial statements, including the December 28, 2013 consolidated balance sheet data which was derived from audited financial statements, have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the consolidated financial statements not misleading. A description of our accounting policies and other financial information is included in the audited financial statements filed with our Annual Report on Form 10-K/A for the fiscal year ended December 28, 2013. The results of operations for the quarter ended September 27, 2014 are not necessarily indicative of the results expected for the full year. |
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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 measurements). The three levels of the fair value hierarchy are described as follows: |
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Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
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Level 2Quoted 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 3Prices 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 September 27, 2014 and December 28, 2013, 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 summarizes the valuation of our financial instruments (in thousands): |
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| | | | September 27, 2014 | | December 28, 2013 | |
Balance Sheet Classification | | | | Interest Rate | | Non-qualified | | Earn-out | | Interest Rate | | Non-qualified | | Earn-out | |
Swaps | Deferred | Contingent | Swaps | Deferred | Contingent |
| Compensation | Consideration | | Compensation | Consideration |
| Plan | Obligation | | Plan | Obligation |
| Investments | | | Investments | |
Other assets | | Level 1 | | $ | — | | $ | 653 | | $ | — | | $ | — | | $ | 579 | | $ | — | |
Interest rate swaps | | Level 2 | | (377 | ) | — | | — | | (526 | ) | — | | — | |
Accrued liabilities | | Level 3 | | — | | — | | (120 | ) | — | | — | | — | |
Other liabilities | | Level 3 | | — | | — | | (1,830 | ) | — | | — | | (5,053 | ) |
| | | | $ | (377 | ) | $ | 653 | | $ | (1,950 | ) | $ | (526 | ) | $ | 579 | | $ | (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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The Company’s 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. To determine the fair value, we valued the contingent consideration liability based on the expected probability weighted earn-out payments corresponding to the performance thresholds agreed to under the applicable purchase agreements. The expected earn-out payments were then present valued by applying a discount rate that captures a market participants view of the risk associated with the expected earn-out payments. During the nine months ended September 27, 2014, we reduced the value of the contingent consideration related to the Fresh Frozen Foods acquisition to $0 due to forecasted reduction in estimated achievement of targets. |
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A summary of the activity of the fair value of the measurements using unobservable inputs (Level 3 Liabilities) for the quarter ended September 27, 2014, is as follows (in thousands): |
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| | Level 3 | | | | | | | | | | | | | | | | | | |
Balance at December 28, 2013 | | $ | 5,053 | | | | | | | | | | | | | | | | | | |
Earn-out compensation paid to Willamette Valley Fruit Company | | (450 | ) | | | | | | | | | | | | | | | | | |
Fresh Frozen Foods earn-out revaluation | | (2,653 | ) | | | | | | | | | | | | | | | | | |
Balance at September 27, 2014 | | $ | 1,950 | | | | | | | | | | | | | | | | | | |
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Income Taxes |
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For the quarters ended September 27, 2014 and September 28, 2013, our provisions for income taxes were $1.6 million and $1.3 million, respectively. The effective tax rate for the third quarter of 2014 was 34.5% compared with 37.0% for the third quarter of 2013. The change in the effective tax rate is primarily due to an increase in state research and development credits. |
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For the nine months ended September 27, 2014 and September 28, 2013 our provisions for income taxes were $3.9 million and $2.5 million respectively. Our effective tax rate for the nine months ended September 27, 2014 decreased slightly to 35.3% from 35.4% for the nine months ended September 28, 2013. |
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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 and includes unvested restricted stock grants. Diluted earnings per share is calculated by including all dilutive common shares such as stock options. Under the Financial Accounting Standards Board (“FASB”) ASC 260-10, unvested restricted stock grants that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, requires earnings per share to be presented pursuant to the two-class method. However, the application of this method would have no effect on basic and diluted earnings per common share and is therefore not presented. |
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Options to purchase 46,652 and 19,524 shares of our common stock were excluded from the computation of diluted earnings per share for the quarter and nine months ended September 27, 2014, respectively. Options to purchase 215,010 and 266,898 shares of our common stock were excluded from the computation of diluted earnings per share for the quarter and nine months ended September 28, 2013, respectively. 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 quarters and nine months ended September 27, 2014 and September 28, 2013 (in thousands, except per share data): |
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| | Quarters Ended | | Nine months ended | | | | | | | | | |
| | September 27, | | September 28, | | September 27, | | September 28, | | | | | | | | | |
2014 | 2013 | 2014 | 2013 | | | | | | | | |
Basic Earnings Per Share: | | | | | | | | | | | | | | | | | |
Net income | | $ | 3,084 | | $ | 2,148 | | $ | 7,153 | | $ | 4,611 | | | | | | | | | |
Weighted average number of common shares | | 19,530 | | 19,473 | | 19,478 | | 19,329 | | | | | | | | | |
Earnings per common share | | $ | 0.16 | | $ | 0.11 | | $ | 0.37 | | $ | 0.24 | | | | | | | | | |
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Diluted Earnings Per Share: | | | | | | | | | | | | | | | | | |
Net income | | $ | 3,084 | | $ | 2,148 | | $ | 7,153 | | $ | 4,611 | | | | | | | | | |
Weighted average number of common shares | | 19,530 | | 19,473 | | 19,478 | | 19,329 | | | | | | | | | |
Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock | | 484 | | 370 | | 488 | | 417 | | | | | | | | | |
Adjusted weighted average number of common shares | | 20,014 | | 19,843 | | 19,966 | | 19,746 | | | | | | | | | |
Earnings per common share | | $ | 0.15 | | $ | 0.11 | | $ | 0.36 | | $ | 0.23 | | | | | | | | | |
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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 service period of the award, which is currently five to ten 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 share-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 share-based payment arrangements are classified as cash inflows from financing activities and cash outflows from operating activities. |
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See Note 9 “Shareholders’ Equity” for additional information. |
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Recent Accounting Pronouncements |
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Changes to U.S. GAAP are established by the FASB in the form of accounting standards updates (“ASU”) to the FASB’s Accounting Standards Codification. |
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We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations. |
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In 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. The implementation of the guidance did not have a material impact on our consolidated financial position or results of operations. |
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In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on our consolidated financial position or results of operations. |
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In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective at the beginning of our 2017 fiscal year and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact, if any, of adopting this new accounting standard on our financial statements. |
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In June 2014, the FASB issued new guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements. |
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