| Organization and Summary of Significant Accounting Policies | 1. Operations and Summary of Significant Accounting Policies
Description of Business
Inventure Foods, Inc., a Delaware corporation (referred to herein as the “Company,” “Inventure Foods,” “we,” “our” or “us”), is a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands with more than $282 million in annual net revenues for fiscal 2015.
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 stores, natural food stores, mass merchandisers, drug and convenience stores, club stores, value, vending, food service and international. Our goal is to have a diversified portfolio of brands, products, customers and distribution channels.
In our healthy/natural food category, products include Rader Farms® frozen berries, Boulder Canyon® brand kettle cooked potato chips, Willamette Valley Fruit Company TM brand frozen berries, Fresh Frozen TM 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, Sin In A Tin TM chocolate pate and other frozen desserts and private label frozen fruit and healthy/natural snacks.
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.
We operate in two segments: frozen products and snack products. The frozen products segment includes frozen fruits, vegetables, beverages and desserts 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, popcorn and extruded products for sale primarily to snack food distributors and retailers. The products sold under our snack products segment include products considered part of the indulgent specialty snack food category, as well as products considered part of the healthy/natural food category.
We operate manufacturing facilities in eight locations. Our frozen berry products are processed in our Lynden, Washington, Salem, Oregon and Jefferson, Georgia facilities. 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 our Jefferson, Georgia, Thomasville, Georgia and Salem, Oregon facilities. 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. The products of our frozen desserts business are produced in Pensacola, Florida. Our snack products are manufactured at our Phoenix, Arizona and Bluffton, Indiana plants, as well as some third-party plants for certain products.
Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year.
Acquisitions
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.
On September 29, 2014, we acquired the assets and intellectual property of a small boutique frozen desserts business, Sin In A Tin TM , for approximately $160,000 in cash. An additional amount of up to $0.5 million is payable to the seller in the form of an earn-out based on future net revenues attributable to Sin In A Tin TM products (see Note 3 “Acquisitions”) .
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 could have been payable to Fresh Frozen Foods as contingent consideration in the form of an earn-out based on the achievement of specified fiscal 2014 performance objectives, which were not met (see Note 3 “Acquisitions”).
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 may be 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 3 “Acquisitions”).
Principles of Consolidation
The consolidated financial statements include the accounts of Inventure Foods and all of its wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated.
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 2015 commenced December 28, 2014 and ended December 26, 2015, resulting in a 52-week fiscal year. Fiscal 2014 commenced December 29, 2013 and ended December 27, 2014, resulting in a 52-week fiscal year. Fiscal 2013 commenced December 30, 2012 ended December 28, 2013, resulting in a 52-week fiscal year.
Use of Estimates
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.
Fair Value of Financial Instruments
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:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
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.
At December 26, 2015 and December 27, 2014, 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 assets and liabilities measured at fair value on a recurring basis (in thousands) at the respective dates set forth below:
December 26, 2015
December 27, 2014
Balance Sheet Classification
Interest Rate Swaps
Non-qualified Deferred Compensation Plan Investments
Earn-out Contingent Consideration Obligation
Interest Rate Swaps
Non-qualified Deferred Compensation Plan Investments
Earn-out Contingent Consideration Obligation
Other assets
Level 1
$
—
$
$
—
$
—
$
$
—
Interest rate swaps
Level 2
—
—
—
)
—
—
Accrued liabilities
Level 3
—
—
)
—
—
)
Other liabilities
Level 3
—
—
)
—
—
)
$
—
$
$
)
$
)
$
$
)
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.
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.
The fair value measurement of the earn-out contingent consideration obligation relates to the acquisitions of Sin In A Tin TM in September 2014 and Willamette Valley Fruit Company in May 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. In fiscal 2015, we increased our estimate of the total earn-out expected to be achieved, which resulted in an increase in operating expenses of $0.2 million during the year ended December 26, 2015. In fiscal 2014, we reduced the value of the contingent consideration related to the Fresh Frozen Foods acquisition to zero due to the forecasted reduction in estimated achievement of targets, and we reduced the value of the contingent consideration related to the Willamette Valley Fruit Company acquisition by $0.3 million based on a reduction in our estimate of the total earn-out expected to be achieved.
A summary of the activity of the fair value of the measurements using unobservable inputs (Level 3 Liabilities) for the year ended December 26, 2015, is as follows (in thousands):
Level 3
Balance at December 27, 2014
$
Earn-out compensation paid to Willamette Valley Fruit Company
)
Earn-out compensation paid to Sin In A Tin
)
Willamette Valley Fruit Company earn-out revaluation
Sin In A Tin earn-out revaluation
Balance at December 26, 2015
$
Derivative Financial Instruments
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. In fiscal 2015, the Company settled all existing interest rate swaps as part of our debt refinancing. As of December 26, 2015 the Company did not have any interest rate swaps.
Treasury Stock
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.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consist primarily of receivables from customers and distributors for products purchased. Receivables are generally 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.
Inventories
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.
Property and Equipment
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 to ten years.
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.
Intangible Assets
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 was 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. In 2015, as a result of the product recall (see Note 2 “Product Recall”) we concluded that the intangible asset related to the acquired customer relationships of Fresh Frozen Foods was fully impaired. Accordingly, the Company recorded an intangible asset impairment charge of $9.3 million.
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.
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.
See Note 4 “ Goodwill, Trademarks and Other Intangible Assets ” for additional information.
Self-Insurance Reserves
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 $0.2 million and $0.3 million at December 26, 2015 and December 27, 2014, 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.
Revenue Recognition
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.
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.
Selling and Administrative Expenses
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.
We recorded $1.1million, $1.4 million and $0.9 million in fiscal 2015, 2014 and 2013, 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.
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 $1.5 million, $1.7 million and $2.2 million for the years ended December 26 2015, December 27, 2014 and December 28, 2013, 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.
Shipping and Handling
Shipping and handling costs are included in cost of revenues. We do not bill customers for freight.
Income Taxes
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.
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.
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 26, 2015.
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 fiscal years ended December 26, 2015 and December 27, 2014.
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, Georgia, Indiana and Oregon. Our U.S. federal income tax returns for fiscal 2012 through 2014 remain open to examination by the Internal Revenue Service. Our state tax returns for fiscal 2011 through 2014 remain open to examination by the state jurisdictions.
Stock-Based Compensation
Compensation expense for restricted stock and stock option awards is adjusted for estimated attainment thresholds and forfeitures and is recognized on a straight-line basis over the requisite period of the award, which is currently one to five years for restricted stock and one to five years for stock options. We estimate future forfeiture rates based on our historical experience.
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 10 “Stockholders’ Equity” for additional information.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings (loss) per share is calculated by including all dilutive common shares such as stock options and restricted stock. For the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013 551,886, 117,534 and 291,571 shares of Common Stock underlying stock options and restricted stock units were not included in the computation of diluted earnings (loss) per share because inclusion of such shares would be antidilutive or because the exercise prices were greater than the average market price of Common Stock for the period. Exercises of outstanding stock options or warrants are assumed to occur for purposes of calculating diluted earnings (loss) per share for periods in which their effect would not be anti-dilutive.
Earnings (loss) per common share was computed as follows for the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013 (in thousands, except per share data):
December 26, 2015
December 27, 2014
December 28, 2013
Basic Earnings (Loss) Per Share:
Net income (Loss)
$
)
$
$
Weighted average number of common shares
Earnings (Loss) per common share
$
)
$
$
Diluted Earnings (Loss) Per Share:
Net income (loss)
$
)
$
$
Weighted average number of common shares
Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock
—
Adjusted weighted average number of common shares
Earnings (loss) per common share
$
)
$
$
Subsequent Events
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 filed.
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU”) to the FASB’s Accounting Standards Codification.
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.
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.
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 did not have a material impact on our consolidated financial position or results of operations.
In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current 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.
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.
In April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct |
