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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 27, 2014

 

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: 001-14556

 

INVENTURE FOODS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

86-0786101

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

5415 East High Street, Suite 350

Phoenix, Arizona 85054

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code:  (623) 932-6200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o No  x

 

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

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant was approximately $167.3 million based upon the closing market price on June 28, 2014, the last business day of the registrant’s most recently completed second fiscal quarter.

 

The number of issued and outstanding shares of the registrant’s common stock, $.01 par value, as of March 5, 2015 was 19,547,765.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the registrant’s 2015 Annual Meeting of Stockholders to be held on May 20, 2015 are incorporated herein by reference in Part III of this Form 10-K to the extent stated herein.

 

 

 



Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

 

ANNUAL REPORT ON FORM 10-K

Year Ended December 27, 2014

 

TABLE OF CONTENTS

 

PART I

Item 1.

Business

2

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

15

Item 3.

Legal Proceedings

15

Item 4.

Mine Safety Disclosures

16

 

 

 

PART II

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16

Item 6.

Selected Financial Data

18

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 8.

Financial Statements and Supplementary Data

29

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

59

Item 9A.

Controls and Procedures

59

Item 9B.

Other Information

60

 

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

61

Item 11.

Executive Compensation

61

Item 12.

Security Ownership of Beneficial Owners and Management and Related Stockholder Matters

61

Item 13.

Certain Relationships and Related Transactions, and Director Independence

61

Item 14.

Principal Accounting Fees and Services

61

 

 

 

PART IV

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

62

 

 

 

SIGNATURES

63

EXHIBITS TO FORM 10-K

64

 



Table of Contents

 

Cautionary Statement Regarding Forward-Looking Statements

 

Our disclosure and analysis in this Annual Report on Form 10-K and in our 2014 Annual Report to Stockholders contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995.  From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements.  We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “believe,” “expect,” “intend,” “estimate,” “project,” “may,” “should,” “will,” “likely,” “will likely result,” “will continue,” “future,” “plan,” “target,” “forecast,” “goal,” “observe,” “seek,” “strategy” and other words and terms of similar meaning.  The forward-looking statements in this Annual Report on Form 10-K reflect the Company’s current views with respect to future events and financial performance.

 

Forward-looking statements are neither historical facts nor assurances of future performance.  Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to certain risks and uncertainties, including, without limitation, general economic conditions, increases in cost or availability of ingredients, packaging, energy and employees, price competition and industry consolidation, ability to execute strategic initiatives, product recalls or safety concerns, disruptions of supply chain or information technology systems, customer acceptance of new products and changes in consumer preferences, food industry and regulatory factors, interest rate risks, dependence upon major customers, dependence upon existing and future license agreements, the possibility that we will need additional financing due to future operating losses or in order to implement the Company’s business strategy, acquisition and divestiture-related risks, volatility of the market price of the Company’s common stock, and those other risks and uncertainties discussed herein, that could cause actual results to differ materially from historical results or those anticipated.  In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Annual Report on Form 10-K will in fact transpire or prove to be accurate.  Readers are cautioned to consider the specific risk factors described herein and in “Item 1A. Risk Factors” of this Form 10-K, and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.

 

The Company undertakes no obligation to update or publicly revise any forward-looking statement whether as a result of new information, future developments or otherwise.  All subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph.  You are advised, however, to consult any further disclosures we make on related subjects in our subsequently filed Form 10-Q and Form 8-K reports and our other filings with the SEC.  Also note that we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business under “Item 1A. Risk Factors” of this Form 10-K.  We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995.  You should understand it is not possible to predict or identify all such factors.

 

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PART I

 

Item 1.           Business.

 

General

 

Inventure Foods, Inc., a Delaware corporation (referred to herein as the “Company,” “we,” “our,” or “us”), is a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands with more than $285 million in annual net revenues for the most recently completed fiscal year.  We are headquartered in Phoenix, Arizona with plants in Arizona, Florida, Georgia, Indiana, Oregon and Washington.  Our executive offices are located at 5415 East High Street, Suite 350, Phoenix, Arizona 85054, and our telephone number is (623) 932-6200.

 

The Company was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business that was founded by Donald and James Poore in 1986.  In December 1996, we completed an initial public offering of our common stock, $.01 par value (“Common Stock”).  In November 1998, we acquired the business and certain assets, including the Bob’s Texas Style® potato chip brand, of Tejas Snacks, L.P., a Texas-based potato chip manufacturer.  In October 1999, we acquired Wabash Foods, LLC (“Wabash”), including the Tato Skins®, O’Boisies® and Pizzarias® trademarks and the Bluffton, Indiana manufacturing operation, and assumed all of Wabash’s liabilities.  In June 2000, we acquired Boulder Authentic Foods, Inc., including the Boulder Canyon® brand of totally natural potato chips.  In May 2006, we changed our name from Poore Brothers, Inc. to The Inventure Group, Inc.  In May 2007, we acquired a farming operation and berry processing facility in Lynden, Washington from Rader Farms, Inc. (“Rader Farms”).  In May 2010, we changed our name from The Inventure Group, Inc. to Inventure Foods, Inc.  In May 2013, we acquired the berry processing business of Willamette Valley Fruit Company, LLC (“Willamette Valley Fruit Company”), including the Willamette Valley Fruit CompanyTM frozen fruit and vegetable products.  In November 2013, we acquired Fresh Frozen Foods, LLC (“Fresh Frozen Foods”), including the Fresh FrozenTM frozen vegetable and fruit products.

 

Segments

 

We operate in two segments: frozen products and snack products. The frozen products segment produces frozen fruits, vegetables, beverages and frozen 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 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.

 

The contribution of each segment to net revenues from external customers and gross profit are set forth in Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

 

Products

 

In our healthy/natural food category, products include Rader Farms® frozen berries, Boulder Canyon® Authentic Foods brand kettle cooked potato chips, Willamette Valley Fruit CompanyTM frozen fruit and vegetables, Fresh FrozenTM frozen vegetables and fruit, 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. Our Boulder Canyon® Authentic Foods branded products have received increased investment support as we believe Boulder Canyon® is a highly extendable brand that can be leveraged into adjacent product categories.  Net revenues of our Boulder Canyon® products increased 70.3% in 2014 compared to the prior year, while 2013 net revenues were up 23.5% compared to 2012. For the year ended December 27, 2014, our healthy/natural foods represented 83% of net sales.

 

In our indulgent specialty snack food category, products include T.G.I. Friday’s® brand snacks under license from 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, Tato Skins® brand potato snacks, and Sin In A Tin® chocolate pate and other frozen desserts.

 

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During 2013 and 2014, we launched a number of new items under our existing brands. In 2013, in our frozen products segment, new products included Jamba® Green Fusion and Seattle’s Best Coffee® Frozen Coffee Blends (Coffee Chiller, Mega Mocha, Creamy Caramel and Very Vanilla). We also added Rader Farms® Organic Blackberries, Organic Mangos and Raspberry to our product line. In our snack products segment, new items included Boulder Canyon® Authentic Foods Sweet Potato Fries, Avocado Oil Sea Salt Kettle Chips, Olive Oil Sea Salt & Cracked Pepper Kettle Chips and Organic Sea Salt Kettle Chips, T.G.I. Friday’s® Jalapeno Poppers and Extreme Heat Hot Fries, and Nathan’s Famous® Bacon & Cheddar. We also launched Vidalia® Sweet Potato Fries and Sweet Onion Petal under our license agreement with Vidalia Brands, Inc. In 2014, in our frozen products segment, new products included Jamba® Straw Wild Mexico, Blue Fusion, and Red Fusion. We also added several organic frozen berries under our Rader Farms® brand, Rader Farms® Plus Mixed Berry, Plus Straw/Blue, Summers Peak Blueberry, Fresh Start Morning Vitality, Fresh Start Daily Power and Fresh Start Sunrise Refresh, Fresh Frozen steamable vegetables, Fresh Frozen Country Blends and Fresh Frozen Triple Berry Blends to our product line.  In our snack products segment, new items included Boulder Canyon® Authentic Foods Asiago Cheese Protein Chip, Chocolate Protein Chip, Chocolate Arise Cereal, and Yogurt Arise Cereal, Boulder Canyon® Organic Vegi Sticks, Boulder Canyon® Organic Kettle Chips With Sea Salts, the Boulder Canyon® Thanksgiving Feast Variety Pack, T.G.I. Friday’s® Bacon Ranch, and Nathan’s Famous® Beer Battered Onion Rings. We also launched Vidalia® Sweet Onion BBQ Kettle, Sweet Onion Kettle, and Zesty Ranch Sweet Onion Petal under our license agreement with Vidalia Brands, Inc.

 

For the fiscal years 2014, 2013 and 2012, net revenues totaled $285.7 million, $215.6 million and $185.2 million, respectively.  T.G.I. Friday’s® brand salted snacks represented 12%, 18% and 25% of our total net revenues in 2014, 2013 and 2012, respectively.  We also manufacture private label and co-branded fruit and snack chip products for several grocery chains and natural stores and co-pack products for other snack manufacturers.  While extremely price competitive, we believe that such arrangements provide a profitable opportunity for us to improve the capacity utilization of our facilities.

 

Business Strategy

 

Our business strategy is to continue building a diverse portfolio of high quality, competitively priced healthy/natural food brands and indulgent specialty snack food brands through expansion of existing brands, licensing, acquisition and development.  Our goals are to (i) capitalize on healthy/natural and indulgent specialty snack food brand opportunities, (ii) deliver incremental category growth for retailers, (iii) provide product innovation targeted to a defined consumer segment, (iv) build relationships with major retailers in all channels of distribution by providing them higher margins, excellent customer service and constant innovation and (v) maintain a diverse set of brands, products, customers and channels.  The primary elements of our long-term business strategy are as follows:

 

Promote, Develop, Acquire or License Innovative Healthy/Natural and Indulgent Specialty Snack Food Brands.  A significant element of our business strategy is to promote, develop, acquire or license new innovative healthy/natural and indulgent specialty snack food brands that provide a strategic fit with our existing business and that have strong national brand recognition in order to expand, complement and diversify our existing business. Our primary focus is to promote products under brands which we own.

 

Broaden Distribution of Existing Brands.     We plan to increase distribution and the market share of our existing branded products through selected trade activity in various existing or new markets and channels. Marketing efforts may include, among other things, trade advertising and promotional programs with distributors and retailers, in-store advertisements, in-store displays and limited consumer advertising, public relations and coupon programs. We believe growth opportunities exist to increase the distribution of our (i) Boulder Canyon®, Fresh Frozen™ and Radar Farms products in grocery stores, which have all-commodity volumes, or ACVs, in such stores of less than 33% for Boulder Canyon®, less than 20% for Fresh Frozen™ and less than 20% for Radar Farms, (ii) Boulder Canyon® and Fresh Frozen TM products in mass merchandise stores, (iii) Boulder Canyon® and Radar Farms products in club stores, and (iv) Boulder Canyon® products in natural, drug and convenience stores. Our Boulder Canyon® products have an ACV of approximately 76% in natural food stores.

 

Broaden Distribution of Private Label.  We plan to increase distribution of our private label products to existing or new customers.  This will help leverage our infrastructure and capacity and is expected to improve profit margins as there are no related advertising and promotional costs.  Our manufacturing and distribution of private label products enhances our ability to partner with key retailers.

 

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Develop New Products for Existing Brands.  We plan to continue our innovation activities to identify and develop (i) new line extensions for our brands, such as new flavors or products, and (ii) new food segments in which to expand the presence of our brands.

 

Leverage Infrastructure and Capacity.     Our Bluffton, Indiana, Goodyear, Arizona, Lynden, Washington, Salem, Oregon, Jefferson, Georgia, and Thomasville, Georgia facilities operated at approximately 40%, 90%, 70%, 40%, 80% and 50% of their respective manufacturing capacities as of December 27, 2014.  We intend to continue to expand our branded product lines, as well as secure new manufacturing opportunities in private label and co-packing arrangements. In addition, we plan to continue capital investment in our plants and improve operating efficiencies.

 

Pursue Selective Licenses and Acquisitions.     We continue to evaluate acquisition opportunities where we can use our competencies in operations, sales, marketing and distribution in order to drive revenue and profit growth.

 

Improve Profit Margins.     We plan to increase our profit margins through increased long-term revenue growth, improved operating efficiencies, higher margin new products and high-growth product categories. For example, we believe the following margin improvement initiatives are important elements of our strategy: rationalization of unprofitable customer accounts, improved product mix and channel flow, expanded sales growth, improved operating efficiencies and leverage and higher margin new product introductions. We believe that improved profit margins are possible with the achievement of the business strategies discussed above.

 

Manufacturing

 

Our Company-owned manufacturing facility in Bluffton, Indiana produces snack products utilizing a sheeting and frying process with three fryer lines that can produce up to approximately 9,000 pounds per hour and two extruded lines capable of producing up to 4,000 pounds per hour. Previously introduced production capabilities at our Bluffton, Indiana facility allow us to use existing equipment to make additional snacks, including pellet snacks, which are entirely different in appearance and taste from our other product lines. We believe this technology will help expand our product lines and facilitate growth. In 2013, we installed additional packaging capacity to meet increasing demand on branded, licensed and contract manufacturing opportunities.  In 2014, we installed additional extrusion capacity to service this growing business segment.  We also produce snack products for customers under private label and co-packing agreements. Our Indiana facility is operating at approximately 30% of sheeted processing capacity and 60% of extruded capacity as of December 27, 2014.

 

Our Company-owned manufacturing facility in Goodyear, Arizona has the capacity to produce up to approximately 4,600 pounds of potato chips per hour, including 2,500 pounds of batch-fried potato chips per hour and 2,100 pounds of continuous-fried potato chips per hour. Poore Brothers®, Bob’s Texas Style®, Boulder Canyon® Authentic Foods, co-packing and private label branded potato chips are produced in a variety of flavors utilizing a batch-frying process. While conventional continuous line cooking methods may produce higher production volume, we believe that our batch-frying process is superior and produces premium potato chip products with enhanced crispness and distinctive flavor. Our Arizona facility is operating at approximately 90% of packaging capacity as of December 27, 2014.

 

Our Company-owned Rader Farms farming facility in Lynden, Washington has the capacity to grow up to eight million pounds of raspberries and blueberries per year. Rader Farms 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 and packaged for sale and distribution nationally to wholesale customers under the Rader Farms® brand, as well as through store brands. We also use third-party processors for certain products. Our individually quick frozen, or IQF, processing facilities located at the same location have the capacity to apply the IQF process to 55 million pounds of berries annually.  In 2013, we invested in new processing equipment to more effectively and efficiently cool the fruit after being harvested, thereby increasing quality. Additionally, we added a packaging line to increase capacity. In 2014, additional IQF processing equipment was added for further capacity. Our Washington processing facility is operating at approximately 70% of packaging capacity as of December 27, 2014.

 

In May 2013, we acquired the berry processing business of Willamette Valley Fruit Company. Willamette Valley Fruit Company has two plants in Salem, Oregon. Both plants occupy leased facilities and process and package marionberries, other blackberries, blueberries, strawberries, cranberries, rhubarb, and other fruits and vegetables for industrial customers, as well as contract manufacturing and private label brands. The processing facility has four IQF lines capable of freezing 35,000 pounds per hour of fruit during peak production. As this plant is seasonal with the fruit harvests, it operates at approximately 100% of capacity in the peak production months of June through September and at approximately 20% of capacity the remainder of the year. The packaging plant has the ability to package up to approximately 19 million pounds annually and is operating at 40% of capacity as of December 27, 2014.

 

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In November 2013, we acquired Fresh Frozen Foods. Fresh Frozen Foods has two plants located in Jefferson, Georgia and Thomasville, Georgia which process and package IQF vegetables, breads and other items sold under the Fresh FrozenTM brand. The plant in Jefferson operates as a packaging facility capable of packaging approximately 83 million pounds of products annually. This plant is operated at approximately 80% of capacity as of December 27, 2014. The Thomasville facility is a processing facility which has one IQF line capable of producing approximately 77 million pounds of IQF carrots, peas, potatoes, onions and other vegetables and fruits annually. This plant is operated at approximately 50% of capacity as of December 27, 2014.

 

Marketing and Distribution

 

We conduct our marketing efforts through three principal sets of activities: (i) consumer marketing in print, outdoor, digital and social media; (ii) consumer incentives such as coupons; and (iii) trade promotions to support price features, displays and other merchandising of our products by our customers.

 

Our products are sold through a number of channels, including: grocery, natural, mass merchandisers, drug, club, value, vending, food service, convenience store, industrial and international. Our products are distributed through Company-owned and satellite warehouses, direct store delivery, distribution centers and other facilities.

 

Suppliers

 

The principal raw materials we utilize are potatoes, potato flakes, potato starch, corn, oils, seasonings, berries and vegetables. We believe that the raw materials we need to produce our products are readily available from numerous suppliers on commercially reasonable terms. Potatoes, potato flakes and corn are widely available year-round, although they are subject to seasonal price fluctuations. We use a variety of oils and seasonings in the production of our snack products and believe that alternative sources for such oils and seasonings, as well as alternative oils and seasonings, are readily abundant and available. We may lock in prices for raw materials, such as oils, as we deem appropriate. We freeze an average of approximately 50% of our total annual berry requirements and approximately 35% of our total annual vegetable requirements in our own processing facilities, and augment that production by purchasing additional frozen berries and vegetables to meet customer demand. We purchase both fresh berries and vegetables from local farmers and already frozen berries and vegetables for our repackaging business, and we purchase yogurt in cube form from a third-party company for use in our at home smoothie kits. We use packaging materials in our snack and frozen businesses.

 

We choose our suppliers based primarily on price, quality, availability and service. Although we believe that our required products and ingredients are readily available, and that our business success is not dependent on any single supplier, the failure of certain suppliers to meet our performance specifications, quality standards or delivery schedules could have a material adverse effect on our business and results of operations. In particular, a sudden scarcity, a substantial price increase, or an unavailability of product ingredients could materially adversely affect our operations. In such circumstances, alternative ingredients may not be available when needed or, if available, on terms acceptable to the Company.

 

Customers

 

Costco accounted for 26%, 35% and 35% of the Company’s 2014, 2013 and 2012 net revenues, respectively.  With the addition of our Willamette Valley Fruit Company and Fresh Frozen Foods businesses in 2013, Costco accounted for 27% of consolidated 2013 pro forma net revenues (see Note 2 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K).  The remainder of our revenues were derived from sales to customers, grocery chains, club stores, regional distributors and other manufacturers, none of which individually accounted for more than 10% of our net revenues in 2014.  A decision by any of our major customers to cease or substantially reduce their purchases could have a material adverse effect on our business.

 

The majority of our revenues are attributable to external customers in the United States.  We do sell to Canadian and international customers as well, however, the revenues attributable to these customers are immaterial.  All of our assets are located in the United States.

 

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Competition

 

Our snack products generally compete against other snack foods, including potato chips, tortilla chips, popcorn, cheese snacks and other specialty snack brands. The snack food industry is large and highly competitive and is dominated by large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc., The Kellogg Company, ConAgra Foods, Inc., Diamond Foods, Inc., General Mills, Inc. and Snyder’s-Lance, Inc. These companies possess substantially greater financial, production, marketing, distribution and other resources than us, and their brands are more widely recognized than our products.  Numerous other companies that are actual or potential competitors offer products similar to ours, and some of these have greater financial and other resources (including more employees and more extensive facilities) than us. In addition, many competitors offer a wider range of products than we offer. Local or regional markets often have significant smaller competitors, many of whom offer products similar to ours. Expansion of our operations into new markets has and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by us in our existing markets. In addition, such competitors may challenge our position in our existing markets. While we believe that we have innovative products and methods of operation that will enable us to compete successfully, no assurance can be given that we will be able to do so when faced with such competition.

 

Our frozen berry products generally compete against other packaged berries on the basis of quality and price. Key competitors include Townsend Farms, Inc., Sunopta Inc., Cascadia Farm of Small Planet Foods, Inc., Wyman’s of Maine, Dole Food Company, Inc., Frozsun Foods Inc., Stahlbush Island Farms Inc. and other regional IQF and bagging fruit operations.  Obtaining freezer space at supermarkets and club stores is critical to successfully compete with other berry products, as supermarkets and club stores will frequently only carry one brand of frozen berry products, contrasted to snack products where multiple brands are typically carried.

 

Our frozen vegetable products generally compete against other packaged vegetables on the basis of quality and price. Key competitors include the Birds Eye Frozen division of Pinnacle Foods, Inc., General Mills, Inc., The Pictsweet Company and Hanover Foods Corp. Obtaining freezer space at supermarkets and club stores is critical to successfully compete with other vegetable products, as supermarkets and club stores will frequently only carry a few brands of frozen vegetable products.

 

Our smoothie kits generally compete against other packaged smoothie kits on the basis of quality and price. Key competitors include Dole Food Company, Inc. smoothies and a number of smaller brands. Obtaining freezer space at grocery, mass merchandiser and club stores is critical to successfully compete with other smoothie products, as grocery, mass merchandisers and club stores will frequently only carry two to three brands of frozen smoothie products, contrasted to snack products where multiple brands are typically carried.

 

The principal competitive factors affecting the markets in which we compete include product quality and taste, brand awareness among consumers, access to shelf or freezer space, price, advertising and promotion, varieties offered, nutritional content, product packaging and package design. We compete in our markets principally on the basis of product quality and taste. Frozen products are produced at our Lynden, Washington; Salem, Oregon and Thomasville, Georgia facilities utilizing IQF technology, for which we do not have exclusive rights.  However, we have patent pending technology to apply nutrients sourced from fruits and vegetables to boost the nutrition level in our fortified fruit products.  Products produced at our Bluffton, Indiana facility involve the use of unique technology including sheeted dough and pellet snacks. We do not have exclusive rights for this technology either. The taste and quality of the products we produce at our Goodyear, Arizona facility are largely attributable to two elements of our manufacturing process: batch-frying and distinctive seasonings to produce a variety of flavors. We do not have exclusive rights to the use of either element. Consequently, competitors may incorporate such elements into their own processes.

 

Government Regulation

 

The manufacture, labeling and distribution of our products are subject to the rules and regulations of a variety of federal, state and other governmental agencies.  There can be no assurance that new laws or regulations will not be passed that could require us to alter the taste or composition of our products or impose other obligations on us.  New or increased government regulation of the food industry, including, but not limited to, laws or regulations related to food safety, chemical composition, production processes, traceability, product quality, packaging, labeling and product recalls, could adversely impact our results of operations by increasing production costs, or restricting our methods of operation and distribution.  Such changes could also affect sales of our products and have a material adverse effect on our financial condition and results of operations.  These regulations may address food industry or society factors, such as obesity, nutritional and environmental concerns and diet trends.  In addition to laws relating to food products, our operations are governed by laws relating to environmental matters, workplace safety and worker health.  We believe that we presently comply in all material respects with such laws and regulations.

 

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Employees

 

As of December 27, 2014, we had 821 total employees.  There are 700 employees in manufacturing and distribution, composed of 485 full-time, 72 part-time, and 143 temporary positions.  There are 41 employees in sales and marketing, and 80 in administration and finance.  Our employees are not represented by any collective bargaining organization, and we have never experienced a work stoppage.  We believe that our relations with our employees are good.

 

Patents, Trademarks and Licenses

 

We own the following trademarks in the United States: Boulder Canyon®, Canyon Cut®, Rader Farms®, Poore Brothers®, Intensely Different®, Texas Style®, Tato Skins®, O’Boisies®, Pizzarias®, Braids®, Willamette Valley Fruit Company™, Fresh Frozen™ and Sin In A Tin™. We consider our trademarks to be of significant importance in our business. We are not aware of any circumstances that would have a material adverse effect on our ability to use our trademarks.

 

From time to time, we enter into licenses with owners of distinctive brands to produce branded snack food products. These licenses may require us to make royalty payments on sales and to achieve certain minimum sales levels by certain dates during the contract term.  The termination of any of our license agreements, whether at the expiration of their term or prior thereto, could have a material adverse effect on our financial condition and results of operations.

 

In 2000, we launched our T.G.I. Friday’s® brand snack products under a license agreement with T.G.I. Friday’s, which expires in December 2019.  In July 2009, we entered into a license agreement with Jamba Juice, which expires in 2035, and, in 2010, launched a line of Jamba® branded blend-and-serve smoothie kits.  In January 2011, we entered into a license agreement with Nathan’s Famous Corporation, which expires in 2031, and launched a line of Crunchy Crinkle Fries. In June 2012, we entered into a license agreement with Vidalia Brands, Inc. to launch a line of onion flavored snacks, which expires in 2019. In November 2012, we entered into a license agreement with Seattle’s Best Coffee LLC, and created a line of blend-and-serve frozen coffee drink kits with an initial term expiring in November 2017, which automatically extends for a five-year period upon meeting certain minimum sales targets.

 

We produce T.G.I. Friday’s® brand snack products, Tato Skins® brand potato crisps and Boulder Canyon® Authentic Foods Rice and Bean, Hummus Chips, Garden Select Vegetable Crisps and Ancient Grains utilizing a sheeting and frying process that includes technology that we license from a third party. Under the terms of such license agreement, we have a royalty-bearing license to use the technology in the United States, Canada and Mexico until such time as the parties mutually agree to terminate the license agreement. Even though the patents for this technology expired in December 2006, in consideration for the use of this technology, we are required to make royalty payments on sales of products manufactured utilizing the technology until the termination date of such agreement. However, should products substantially similar to Tato Skins®, O’Boisies® and Pizzarias® become available for any reason in the marketplace by any manufacturer other than us which results in a sales decline of 10% or more, any royalty obligation for the respective products shall cease.

 

In 2014, we introduced Rader Farms® Fruit PLUS Vitamins™, the first-ever fortified whole frozen fruit product.  Using proprietary technology and topical nutrients sourced from whole fruits and vegetables, Fruit PLUS Vitamins builds on naturally-occurring vitamins found within whole strawberries, blueberries and blackberries and boosts the nutrition level with five additional vitamins: B1, B6, D, E and K.  We currently have a patent pending for this technology.

 

Seasonality

 

The food products industry is seasonal.  Consumers tend to purchase our snack products at higher levels during the major summer holidays and also at times surrounding major sporting events throughout the year.  Additionally, smoothie sales tend to peak during the warmer summer months. Our industrial berry business at Willamette Valley Fruit Company is generally slower during the first quarter of the year. Additionally, we may face seasonal price increases for raw materials.

 

Industry Practices

 

Our agreements with customers are generally short-term, primarily due to the nature of our products, industry practices and fluctuations in supply, demand and price for such products. In certain instances where we are selling further processed products to large customers, we may enter into written agreements whereby we will act as the exclusive or preferred supplier to the customer, with pricing terms that are either fixed or variable.

 

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Research and Development

 

We incur research and development costs to support growth through the introduction of new products and the improvement in quality of existing products.  We recorded $0.3 million, $0.3 million and $0.2 million in fiscal years 2014, 2013 and 2012, respectively, for research and development costs.

 

Available Information

 

Our Internet address is www.inventurefoods.com. We make available at this address, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). In this Annual Report on Form 10-K, we incorporate by reference as identified herein certain information from parts of our proxy statement for the 2015 Annual Meeting of Stockholders, which we will file with the SEC and will be available free of charge on our website. Reports of our executive officers, directors and any other persons required to file securities ownership reports under Section 16(a) of the Exchange Act are also available through our website. Information contained on our website is not part of this Annual Report.

 

You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet website located at http://www.sec.gov that contains the information we file or furnish electronically with the SEC.

 

Item 1A.        Risk Factors.

 

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could materially adversely affect our business, financial condition, results of operations, cash flows and the trading price of our Common Stock.  You should read and carefully consider these risk factors, and the entirety of this Annual Report on Form 10-K, before you invest in our securities.

 

Risks Related to Our Business

 

We expect some of our future growth to be derived in part from acquisitions, but our acquisition strategy may not be successful, or we may not be successful integrating acquisitions.

 

An element of our business strategy is the pursuit of selected strategic acquisition opportunities for the purpose of expanding, complementing and/or diversifying our business.  We may not be able to identify, finance and complete strategic acquisitions on acceptable terms. Any future acquisitions could divert management’s attention from our daily operations and otherwise require additional management, operational and financial resources. Moreover, we may not be able to successfully integrate acquired companies or their management teams into our operating structure, retain management teams of acquired companies on a long-term basis, or operate acquired companies profitably.  Acquisitions may also involve a number of other risks, including adverse short-term effects on our operating results, dependence on retaining key personnel and customers, and risks associated with unanticipated liabilities or contingencies.

 

Changes in the legal and regulatory environment in which we operate could limit our business activities, increase our operating costs, reduce demand for our products or result in litigation.

 

The conduct of our businesses, including the production, storage, distribution, sale, display, advertising, marketing, labeling, health and safety practices, transportation and use of many of our products, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to laws and regulations administered by government entities and agencies outside the United States in markets in which our products are made, manufactured or sold.  These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic or social events.  Such changes may include changes in: food and drug laws; laws related to product labeling, advertising and marketing practices; laws regarding the import or export of our products or ingredients used in our products; laws and programs restricting the sale and advertising of certain of our products; laws and programs aimed at reducing, restricting or eliminating ingredients present in certain of our products; laws and programs aimed at discouraging the consumption or altering the package or portion size of certain of our products; increased

 

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regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the effects on health of ingredients in, or attributes of, certain of our products; state consumer protection laws; taxation requirements, including the imposition or proposed imposition of new or increased taxes or other limitations on the sale of our products; competition laws; anti-corruption laws; employment laws; privacy laws; laws regulating the price we may charge for our products; and environmental laws.  New laws, regulations or governmental policy and their related interpretations, or changes in any of the foregoing, including taxes or other limitations on the sale of our products, ingredients contained in our products or commodities used in the production of our products, may alter the environment in which we do business and, therefore, may impact our operating results or increase our costs or liabilities.

 

Our operations and financial conditions may be impacted by general economic conditions and an economic downturn.

 

Recessionary pressures from an overall decline in U.S. economic activity could adversely impact our results of operations.  Economic uncertainty may reduce consumer spending and could result in increased pressure from competitors or customers to reduce the prices of our products and/or limit our ability to increase or maintain prices, which could negatively impact our revenues and profitability.  Instability in the financial markets may impact our ability or increase the cost to enter into new credit agreements in the future.  Additionally, it may weaken the ability of customers, suppliers, distributors, banks, insurance companies and other business partners to perform in the normal course of business, which could expose us to losses or disrupt supply of inputs used to conduct our business.  If one or more key business partners fail to perform as expected or contracted, our operating results could be negatively impacted.

 

We may incur significant future expenses in connection with the implementation of our business strategy.

 

We strive to achieve our long-term vision of being a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands. Our efforts are subject to the substantial risks, expenses and difficulties frequently encountered in the implementation of a business strategy. If we are unsuccessful in developing, acquiring and/or licensing new brands, and increasing distribution and sales volume of our existing products, our operating results could be negatively impacted. Even if we are successful, this business strategy may require us to incur substantial additional expenses, including advertising and promotional costs, “slotting” expenses (i.e., the cost of obtaining shelf or freezer space in certain grocery stores), and integration costs of any future acquisitions. We also may be unsuccessful at integrating any future acquisitions.

 

We may not be able to obtain the additional financing we need to implement our business strategy.

 

A significant element of our business strategy is the development, acquisition and/or licensing of innovative specialty food brands, for the purpose of expanding, complementing and/or diversifying our business. In connection with our previous acquisitions, we borrowed funds or assumed additional indebtedness in order to satisfy a substantial portion of the consideration required to be paid by us. We may, in the future, require additional third-party financing (debt or equity) as a result of any future operating losses, in connection with the expansion of our business through non-acquisition means, in connection with any additional acquisitions completed by us, or to provide working capital for general corporate purposes. Third-party financing may not be available when required or, if available, may not be on terms attractive to us. Any third-party financing obtained by us may result in dilution of the equity interests of our stockholders.

 

We are required to maintain certain ongoing financial covenants under our credit facility, and if we fail to meet those covenants or otherwise suffer a default thereunder, our lender may accelerate the payment of such indebtedness.

 

At December 27, 2014, we had outstanding indebtedness in the aggregate principal amount of $85.1 million.

 

Our credit agreement (the “Credit Agreement”) with a syndicate of lenders led by U.S. Bank National Association (“U.S. Bank”) is secured by substantially all of our assets.  Our obligations under the Credit Agreement are guaranteed by our subsidiaries.  We are required to comply with certain financial covenants pursuant to the Credit Agreement so long as borrowings from U.S. Bank remain outstanding.  Should we be in default under any of such covenants, U.S. Bank has the right, upon written notice and after the expiration of any applicable period during which such default may be cured, to demand immediate payment of all of the then unpaid principal and accrued but unpaid interest under the Credit Agreement.  At December 27, 2014, we were in compliance with all covenants of the Credit Agreement.

 

As we execute our business strategy, we may not be able to remain in compliance with our financial covenants.  Any acceleration of the borrowings under the Credit Agreement prior to the applicable maturity dates could have a material adverse effect upon our business, financial condition and results of operations.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

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We may incur losses and costs as a result of any product recalls we are required to make or product liability claims that may be brought against us.

 

We may need to recall some of our products if they become adulterated or if they are mislabeled.  We may also be liable if the consumption of any of our products causes injury.  Such injury could result from tampering by unauthorized third parties; product contamination (such as listeria, e-coli, and salmonella) or spoilage; the presence of foreign objects, substances, chemicals, and other agents; residues introduced during the growing, storage, handling or transportation phases; or improperly formulated products.  A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory and lost sales due to the unavailability of product for a period of time.  We could also suffer losses from a significant product liability judgment against us.  The product liability and product recall insurance maintained by us may not be adequate to cover any loss or exposure for product liability, and such insurance may not continue to be available on terms acceptable to us.  Any product liability claim not fully covered by insurance, as well as any adverse publicity resulting from a product liability claim or product recall, could have a material adverse effect on our operating results, and could also result in adverse publicity, damage to our reputation and a loss of consumer confidence in our products.  In addition, our results could be adversely affected if consumers lose confidence in the safety and quality of our products, ingredients or packaging, even in the absence of a recall or a product liability case.

 

Concerns with the safety and quality of our food products or ingredients could negatively impact our brand image and profitability.

 

Our success depends on our ability to maintain consumer confidence in the safety and quality of our products or ingredients.  Our success also depends on our ability to maintain the brand image of our existing products, build up brand image for new products and brand extensions, and maintain our corporate reputation.  We cannot assure you, however, that our commitment to product safety and quality and our continuing investment in advertising and marketing will have the desired impact on our products’ brand image and on consumer preferences. Product safety or quality issues, actual or perceived, or allegations of product contamination, even when false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products.  Allegations of product safety or quality issues or contamination, even if untrue, may require us from time to time to recall a product from all of the markets in which the affected production was distributed.  Such issues or recalls could negatively affect our profitability and brand image.

 

A significant portion of our revenues are derived from one product and one customer.

 

In 2014, 20% of our net revenues were attributable to Rader Farms®/Kirkland® co-branded frozen berry product sales to Costco.  Overall, Costco accounted for 26% of our 2014 net revenues.  Taking into account our Willamette Valley Fruit Company and Fresh Frozen Foods acquisitions, Costco accounted for 27% of consolidated 2013 pro forma net revenues (see Note 2 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K).  A decision by Costco to no longer carry certain frozen berry products could have a material adverse inpact on our Frozen business.  A decision by any major customer to cease or substantially reduce its purchases, or a decrease in the popularity of frozen berries during any year, could have a material adverse effect on our operating results, and such decision by Costco would have a material adverse effect on our business, financial condition and results of operations.

 

We depend on a license agreement for the right to sell our T.G.I. Friday’s® brand.

 

For the year ended December 27, 2014, 12% of our net revenues were attributable to the T.G.I. Friday’s® brand products, which are manufactured and sold by us under our license agreement with T.G.I. Friday’s that expires in December 2019.  The license agreement imposes certain requirements and conditions on us (including, without limitation, minimum sales targets).  Our failure to comply with these requirements and conditions could result in the early termination of the license agreement by T.G.I. Friday’s.  If we are unsuccessful in negotiating an extension of this license agreement, or the license agreement is not renewed at the expiration of its term or is terminated prior thereto, our business, financial condition and results of operations would be materially and adversely affected.

 

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Our business may be adversely affected by oversupply of snack and frozen products at the wholesale and retail levels and seasonal fluctuations.

 

Profitability in the food product industry is subject to oversupply of certain snack and frozen products at the wholesale and retail levels, which can result in our products going out of date before they are sold.  The snack and frozen products industry is also seasonal.  Consumers tend to purchase our snack products at higher levels during the major summer holidays and also at times surrounding the major sporting events throughout the year.  Our industrial berry business at Willamette Valley Fruit Company is generally slower during the first quarter of the year.  Additionally, we may face seasonal price increases for raw materials.  Such seasonal costs could materially and adversely affect our operating results in any given quarter.

 

We may incur substantial costs in order to market our products.

 

Successful marketing of our products generally depends upon obtaining adequate retail shelf space for product display, particularly in supermarkets.  Frequently, food manufacturers and distributors such as us, incur additional costs in order to obtain additional shelf space.  Whether or not we incur such costs in a particular market is dependent upon a number of factors, including demand for our products, relative availability of shelf space and general competitive conditions.  We may incur significant shelf space or other promotional costs as a necessary condition of entering into competition or maintaining market share in particular markets or stores.  If incurred, such costs may have a material adverse effect on our operating results.

 

We may not be able to respond successfully to shifting consumer preferences.

 

Consumer preferences evolve over time and are extremely difficult to predict.  Our success depends in part on our ability to timely respond to current market trends and anticipate changing consumer tastes and dietary habits and to develop and license new products that appeal to such preferences, including concerns of consumers regarding health and wellness, obesity, product attributes, and ingredients.  Introduction of new products and product extensions requires significant development and marketing investment.  If our products fail to meet consumer preferences, or we fail to introduce new and improved products on a timely basis, then the return on that investment will be less than anticipated and our strategy to grow sales and profits with investments in marketing and innovation will be less successful.  Similarly, demand for our products could be affected by increased attention to nutritional values, such as the sodium, fat, protein, or calorie content of different products, or concerns regarding the health effects of specific ingredients, such as gluten, soybeans, nuts, and oils.  If consumer demand for our products declines, our sales volumes and our business could be negatively affected.

 

The loss of certain key employees could adversely affect our business.

 

Our success is dependent in large part upon the abilities of our executive officers, including Terry McDaniel, Chief Executive Officer, and Steve Weinberger, Chief Financial Officer.  Implementation of our business strategy will challenge our executive officers, and the inability of such officers to perform their duties or our inability to attract and retain other highly qualified personnel could have a material adverse effect upon our operating results.

 

We may not be able to successfully implement our strategy to expand our business internationally.

 

We plan to expand sales to Canadian customers and are exploring other international market opportunities for our brands.  Such expansion may require significant management attention and financial resources and may not produce desired levels of revenue.  International business is subject to inherent risks, including longer accounts receivable collection cycles, difficulties in managing operations across disparate geographical areas, difficulties enforcing agreements and intellectual property rights, fluctuations in local economic, market and political conditions, compliance requirements with U.S. and foreign export regulations, potential adverse tax consequences and currency exchange rate fluctuations.  Currency exchange rate fluctuations may impact our ability to remain competitive in international markets.

 

We rely on information technology in our operations, and any material failure, inadequacy, interruption or breach of security of that technology could harm our ability to effectively operate our business.

 

We rely on information systems across our operations, including for management, sales, and order processing. Our ability to effectively manage our business and coordinate the sales and delivery of our products depends significantly on the reliability and capacity of these systems.  Like other companies, our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks,

 

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telecommunications failures, computer viruses, hackers, and other security issues.  The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, a material network breach in the security of these systems as a result of cyber-attack, or any other failure to maintain a continuous and secure cyber network could result in substantial harm or inconvenience to us or our customers.  This could include the theft of our intellectual property or trade secrets, or the improper use of personal information or other “identity theft.”  Each of these situations or data privacy breaches may cause delays in customer service, reduce efficiency in our operations, require significant capital investments to remediate the problem, or result in negative publicity that could harm our reputation and results.

 

Risks Related to the Frozen Products Segment

 

Farming is subject to numerous inherent risks including changes in weather conditions or natural disasters that can have an adverse impact on crop production and materially affect our results of operations.

 

We are subject to the risks that generally relate to the agricultural industry.  Adverse changes in weather conditions and natural disasters, such as windstorms, floods, earthquakes, droughts, extreme temperatures or pestilence, may affect the crop quality and size.  In extreme cases, entire harvests may be lost in some geographic areas.  These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.  Fresh berries and vegetables are also vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions.  Moreover, there can be no assurance that available technologies to control such infestations will continue to be effective.  These infestations can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.  Our competitors may be affected differently by such weather conditions and natural disasters depending on the location of their supplies or operations.

 

Unavailability of purchased berries and vegetables, at reasonable prices, could adversely affect operations.

 

Our manufacturing costs are subject to fluctuations in certain commodity prices. Berries and vegetables are not readily available year-round.  Therefore, we use the IQF technique to freeze the berries and vegetables harvested for use during the year to meet processing demands.  In addition to freezing our own home-grown berries, we also purchase a substantial amount of berries from outside suppliers to meet customer demands. We are dependent on our suppliers to provide us with an adequate supply of vegetables and berries on a timely basis. The failure of certain suppliers to meet our performance specifications, quality standards or delivery schedules could have a material adverse effect on our operating results.  To the extent that certain types of berries or vegetables become scarce, substantially increase in price, or become unavailable or unavailable on commercially attractive terms, our operating results could be materially and adversely affected.

 

Risks Related to the Snack Product Segment

 

We may not be able to compete successfully in the highly competitive snack food industry.

 

The market for snack foods, such as those sold by us, is large and intensely competitive.  Competitive factors in the snack food industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design.  We compete in that market principally on the basis of product taste and quality.

 

The snack food industry is dominated by large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc., The Kellogg Company, ConAgra Foods, Inc., Diamond Foods, Inc., General Mills, Inc., Snyder’s-Lance, Inc. and others which have substantially greater financial and other resources than us and sell brands that are more widely recognized than our products. Numerous other companies that are actual or potential competitors of ours, many with greater financial and other resources (including more employees and more extensive facilities) than us, offer products similar to ours. In addition, many of our competitors offer a wider range of products than that offered by us.  Local or regional markets often have a significant number of smaller competitors, many of whom offer products similar to ours. With the expansion of our operations into new markets, we have and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by us in our existing markets. In addition, such competitors may challenge our position in our existing markets.

 

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A disruption in the performance of our suppliers could have an adverse effect on our operations.

 

Our manufacturing costs are subject to fluctuations in the prices of potatoes, potato flakes, potato starch, corn and oil, as well as other ingredients used in our products.  Potatoes, potato flakes, potato starch and corn are widely available year-round, and we use a variety of oils in the production of our products.  Nonetheless, we are dependent on our suppliers to provide us with products and ingredients in adequate supply and on a timely basis.  The failure of certain suppliers to meet our performance specifications, quality standards or delivery schedules could have a material adverse effect on our operating results.  Changing suppliers can require long lead times. The failure of our suppliers to meet our needs could occur for many reasons, including fires, natural disasters, weather, manufacturing problems, disease, crop failure, strikes, transportation interruption, government regulation, political instability and terrorism.  A failure of supply could also occur due to suppliers’ financial difficulties, including bankruptcy.  Any significant interruption to supply or cost increase could substantially harm our business and financial performance.  To the extent that product ingredients become scarce, substantially increase in price, or become unavailable or unavailable on commercially attractive terms, our operating results could be materially and adversely affected.  From time to time, we may lock in prices for raw materials, such as oils, as we deem appropriate, and such strategies may result in us paying prices for raw materials that are above market at the time of purchase.

 

We do not own the patents for the technology we use to manufacture certain T.G.I. Friday’s®, Boulder Canyon® and Tato Skins® brand products, as well as certain private label branded products.

 

We license technology from a third party in connection with the manufacture of certain T.G.I. Friday’s®, Boulder Canyon® and Tato Skins® brand products, as well as certain private label branded products, and have a royalty-bearing, exclusive right license to use the technology necessary to produce these products in the United States, Canada, and Mexico until such time as the parties mutually agree to terminate the agreement. Even though the patents for this technology expired in December 2006, in consideration for the use of this technology, we are required to make royalty payments to the third party on sales of products manufactured utilizing the technology until the termination of such license agreement.  Since these patents have expired, we no longer have exclusive rights to this technology and, as a result, may face additional competition that could adversely affect our revenues. Moreover, our competitors, some of which may have significantly greater resources than us, may utilize different technology in the manufacture of products that are similar to those we currently manufacture, or that we may manufacture in the future. The entry of any such products into the marketplace could have a material adverse effect on our sales of certain T.G.I. Friday’s®, Boulder Canyon® and Tato Skins® brand products, certain private label branded products, as well as any such future products.

 

We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.

 

Our ability to compete effectively depends in part upon our ability to protect our rights to trademarks, copyrights and other intellectual property we own or license. Our use of contractual provisions, confidentiality procedures and agreements, and trademark, copyright, unfair competition, trade secret and other laws to protect our intellectual property and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our services or our use of intellectual property infringe their intellectual property rights.  Any litigation or claims brought by or against us could result in substantial costs and diversion of our resources.  A successful claim of trademark, copyright or other intellectual property infringement against us could prevent us from providing services, which could have a material adverse effect on our business, financial condition or results of operations. In addition, a breakdown in our internal policies and procedures may lead to an unintentional disclosure of our proprietary, confidential or material non-public information, which could in turn harm our business, financial condition or results of operations.

 

Risks Related to Our Securities

 

Substantial sales of our common stock by our stockholders could depress the market price of our common stock regardless of our operating results.

 

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our common stock and impair our ability to raise capital through offerings of our common stock.  As of December 27, 2014, we had 19,592,651 shares of our common stock outstanding.  In addition, as of December 27, 2014, there were outstanding options to purchase 732,852 shares of our common stock and 353,529 shares of common stock issuable upon the vesting of restricted stock units. Substantially all of our outstanding common stock is

 

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eligible for sale, subject to Rule 144 volume limitations for holders affected by such limitations, as are shares of our common stock issuable under vested and exercisable options. If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell our common stock, the market price of our common stock could decline significantly. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

 

Our stock price has been, and may continue to be, volatile, and may decline regardless of our financial performance.

 

The market price of our common stock has fluctuated and may continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

·                  actual or anticipated fluctuations in our financial results;

·                  announcements relating to our industry or to our own business or prospects;

·                  the failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

·                  changes in operating performance and stock market valuations of other public companies generally, or those in our industry in particular;

·                  price and volume fluctuations in the overall stock market, including as a result of trends in the global economy;

·                  our ability or inability to raise additional capital and the terms on which we raise it;

·                  future sales of common stock or the perception that sales could occur;

·                  failure of suppliers to meet expectations;

·                  the unavailability of berries or vegetables at attractive prices;

·                  any major change in our board of directors or management;

·                  developments relating to litigation, governmental investigation, the legal and regulatory environment, product recalls or changes in competitive conditions; and

·                  other events or factors, including those resulting from war, incidents of terrorism, changes in weather conditions or natural disasters, or responses to these events.

 

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of publicly traded companies.  Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against such a company. If securities class action litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources and could materially adversely affect our operating results.

 

Anti-takeover provisions contained in our amended certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

 

Our amended certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of delaying, preventing or rendering more difficult an acquisition of us if such acquisition is deemed undesirable by our board of directors, including provisions that:

 

·                  authorize “blank check” preferred stock, which could be issued by the board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

·                  restrict our ability to engage in transactions with stockholders with 15% or more of outstanding voting stock; and

·                  limit the ability of our stockholders to call special meetings.

 

These provisions, alone or together, could delay or prevent unsolicited takeovers and changes in control or changes in our management. Any provision of our amended certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

 

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If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, if they change their recommendations regarding our stock adversely, or if our operating or financial results do not meet expectations, our stock price and trading volume could decline.

 

The trading market for our common stock is influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors.  If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline.  If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets.  In addition, if our operating or financial results do not meet analysts’ expectations, our stock price or trading volume could decline. Any of these factors could cause you to lose part or all of you investment in our common stock.

 

We do not expect to declare any dividends in the foreseeable future.

 

We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. In addition, certain debt agreements of ours limit our ability to declare and pay cash dividends, and any future financing agreements may prohibit us from paying any type of dividends. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

Item 1B.        Unresolved Staff Comments.

 

We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2014 fiscal year that remain unresolved.

 

Item 2.           Properties.

 

The following table summarizes information about our significant manufacturing, distribution, farming and administrative facilities in use as of December 27, 2014:

 

Operating Segment

 

Location

 

Primary Activities

 

Own or Lease

 

Total Space

 

Headquarters

 

Phoenix, Arizona

 

Executive Offices

 

Lease

 

13,865 sq ft

 

 

 

 

 

 

 

 

 

 

 

Snack products

 

Goodyear, Arizona

 

Manufacturing

 

Own

 

59,840 sq ft

 

 

 

Bluffton, Indiana

 

Manufacturing

 

Own

 

135,781 sq ft

 

 

 

Bluffton, Indiana

 

Distribution

 

Lease

 

100,000 sq ft

 

 

 

 

 

 

 

 

 

 

 

Frozen products

 

Lynden, Washington

 

Farming

 

Lease

 

840 acres

 

 

 

Lynden, Washington

 

Manufacturing

 

Own

 

50,229 sq ft

 

 

 

Salem, Oregon

 

Manufacturing

 

Lease

 

28,524 sq ft

 

 

 

Salem, Oregon

 

Manufacturing

 

Lease

 

65,000 sq ft

 

 

 

Jefferson, Georgia

 

Manufacturing

 

Own

 

59,480 sq ft

 

 

 

Thomasville, Georgia
Pensacola, Florida

 

Manufacturing
Manufacturing

 

Own
Lease

 

101,290 sq ft
1,600 sq ft

 

 

We are responsible for all insurance costs, utilities and real estate taxes in connection with our facilities.  We believe that our facilities are adequately covered by insurance.  We also believe that our properties generally are in good operating condition and are suitable for our current purposes.

 

Item 3.           Legal Proceedings.

 

For a discussion of legal proceedings, see also Note 12 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

 

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Item 4.           Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

Item 5.                                 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our Common Stock is traded on the Nasdaq Global Select Market tier of the Nasdaq Stock Market under the symbol “SNAK.”

 

The following table sets forth the range of high and low sale prices of our Common Stock as reported on the Nasdaq Global Market for each quarter of the fiscal year ended December 27, 2014, and as reported on the Nasdaq Global Market for each quarter of the fiscal year ended December 28, 2013.

 

 

 

Common Stock

 

 

 

High

 

Low

 

Fiscal 2014:

 

 

 

 

 

First Quarter

 

$

14.28

 

$

11.49

 

Second Quarter

 

$

14.28

 

$

11.40

 

Third Quarter

 

$

13.62

 

$

10.52

 

Fourth Quarter

 

$

13.92

 

$

11.24

 

 

 

 

 

 

 

Fiscal 2013:

 

 

 

 

 

First Quarter

 

$

7.85

 

$

6.49

 

Second Quarter

 

$

8.36

 

$

7.11

 

Third Quarter

 

$

10.63

 

$

8.41

 

Fourth Quarter

 

$

13.53

 

$

10.33

 

 

Stockholders of Record

 

There were approximately 145 stockholders of record as of March 5, 2015.  We believe the number of beneficial owners is substantially greater than the number of record holders because a large portion of the Common Stock is held of record in broker “street names.”

 

Dividends

 

We have never declared or paid any dividends on the shares of our Common Stock.  Management intends to retain any future earnings for the operation and expansion of our business and does not anticipate paying any dividends at any time in the foreseeable future.  Additionally, certain debt agreements of ours limit our ability to declare and pay dividends.

 

Sales of Unregistered Securities

 

We did not make any sales of unregistered securities during 2014.

 

Issuer Purchases of Equity Securities

 

There were no shares repurchased during the quarter ended December 27, 2014.

 

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Stock Price Performance Graph

 

Set forth below is a graph comparing the percentage change in the cumulative total stockholder return on our Common Stock with the cumulative total return of the Russell 2000 Index (Market Index) and the S&P Packaged Foods Index (Peer Index) for the period starting December 27, 2009 and ending December 27, 2014.  The graph assumes that $100 was invested on December 27, 2009 in our Common Stock and in each of the two indices, and that, as to such indices, dividends were reinvested.  We have not, since our inception, paid any cash dividends on our Common Stock.  Historical stock price performance shown on the graph is not necessarily indicative of future price performance.

 

 

 

 

December 27,
2009

 

December 25,
2010

 

December 31,
2011

 

December 29,
2012

 

December 28,
2013

 

December 27,
2014

 

Inventure Foods, Inc. Common Stock (SNAK)

 

100.00

 

186.21

 

161.21

 

271.98

 

580.60

 

531.03

 

Russell 2000 Index (Market Index)

 

100.00

 

124.43

 

116.85

 

131.23

 

183.12

 

191.65

 

S&P Packaged Foods (Peer Index)

 

100.00

 

112.10

 

126.93

 

134.64

 

173.04

 

194.53

 

 

See Note 9 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a summary of treasury stock repurchases and retirements.

 

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Table of Contents

 

Item 6.           Selected Financial Data.

 

The following selected historical consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited Consolidated Financial Statements and related notes to those statements included in this Annual Report on Form 10-K.  Numbers are expressed in thousands except per share data.  The selected historical consolidated financial data as of and for the years ended December 27, 2014, December 28, 2013, December 29, 2012, December 31, 2011 and December 25, 2010 have been derived from our audited Consolidated Financial Statements.  Fiscal 2011 contained 53 weeks and the fiscal years 2014, 2013, 2012 and 2010 each contained 52 weeks.

 

 

 

December 27,
2014

 

December 28,
2013

 

December 29,
2012

 

December 31,
2011

 

December 25,
2010

 

Year ended:

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

285,663

 

$

215,580

 

$

185,179

 

$

162,232

 

$

133,987

 

Gross profit

 

53,121

 

38,886

 

36,892

 

30,134

 

29,034

 

Operating income

 

18,933

 

10,850

 

11,344

 

5,210

 

7,354

 

Net income

 

10,561

 

6,618

 

7,449

 

2,817

 

4,469

 

Earnings per common share — diluted

 

$

0.53

 

$

0.33

 

$

0.38

 

$

0.15

 

$

0.24

 

Weighted average common shares — diluted

 

19,990

 

19,789

 

19,574

 

19,199

 

18,546

 

As of:

 

 

 

 

 

 

 

 

 

 

 

Net working capital

 

$

55,027

 

$

33,981

 

$

25,151

 

$

22,934

 

$

20,564

 

Total assets

 

195,310

 

170,091

 

95,894

 

97,975

 

78,821

 

Long-term debt

 

78,020

 

65,088

 

17,014

 

23,779

 

20,665

 

Stockholders’ equity

 

71,966

 

59,153

 

51,099

 

41,610

 

37,790

 

 

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Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Item 7.                                           Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Item 1. Business” and “Item 8. Financial Statements and Supplementary Data.”  The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Item 1A. Risk Factors.”  Accordingly, the Company’s actual future results may differ materially from historical results or those currently anticipated.

 

Overview

 

The Company is a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands.  Our products are marketed under a strong portfolio of brands, including T.G.I. Friday’s®, Rader Farms®, Boulder Canyon®, Poore Brothers®, Willamette Valley Fruit CompanyTM, Fresh FrozenTM, Nathan’s Famous ®, Jamba®, Seattle’s Best Coffee®, Bob’s Texas Style®, Vidalia® and Tato Skins®.  T.G.I. Friday’s®, Jamba®, Nathan’s Famous® and Vidalia® are licensed brand names.  We complement our branded product retail sales with private label retail sales and co-packing arrangements.  The majority of our revenues are attributable to external customers in the United States.  We sell to external customers internationally; however, the revenues attributable to those customers are immaterial.

 

Fiscal year 2014 was a record volume year for the Company with net revenues of $285.7 million, a 32.5% increase over the prior fiscal year.  In fiscal 2014, our products in the healthy/natural category represented 83% of net sales, a 12 point increase from the prior year.

 

Our frozen fruit business experienced growth in fiscal year 2014, both in the branded product and private label categories, as more consumers recognize the health and nutritional benefits of frozen fruits that are harvested at the peak of ripeness when essential vitamins and minerals can be locked in.  Consumers are looking for easy ways to eat more fruits and vegetables and sales are on the rise as a result of the smoothie and jucing trends.  We continued to focus on product innovation in our frozen beverages including expanding our Jamba® Fusion smoothie line, which includes unique blends of vegetables and fruit.

 

In addition, the snack industry has been heavily influenced by a proliferation of new flavors and health focused snacks, with a rapid increase in the number of low-fat, low-carb, all-natural and organic products.  We believe the trend for healthier snacks will continue and will provide new revenue growth opportunities for our Rader Farms®, Boulder Canyon®, Fresh FrozenTM and premium private label products.  We intend to continue brand investments in 2015 to drive continued sales and earnings growth in the long term.  During fiscal year 2014, we also launched new flavors of Boulder Canyon® Kettle Chips, including organic, olive oil and avocado oil chips as well as Ancient Grains and Protein Crisps.  Under the T.G.I. Friday’s® brand, we launched two new products including Extreme Heat Hot Fries and Jalapeno Poppers.

 

On May 28, 2013, we completed our acquisition of the berry processing business of 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 this transaction (see Note 2 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K).

 

On November 8, 2013, we completed our acquisition of 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 in the form of an earn-out based on the achievement of specified 2014 performance objectives, which were not met (see Note 2 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K).

 

On September 29, 2014, we acquired the assets and intellectual property of a small boutique frozen desserts business, Sin In A Tin, 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 derived from the Sin In A Tin products.

 

All of our assets are located in the United States and include manufacturing facilities in Arizona, Georgia, Florida, Indiana, Oregon and Washington.

 

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Table of Contents

 

Results of Operations

 

The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources.  This discussion should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” and the “Cautionary Statement Regarding Forward-Looking Statements” on page 1.

 

Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year.  Accordingly, fiscal 2014 commenced December 29, 2013 and ended December 27, 2014.  The fiscal year end dates result in an additional week of results every five or six years.  There were 52 weeks in each of the 2014, 2013 and 2012 fiscal years.  The following table sets forth for the periods presented certain financial data as a percentage of net sales for the years ended December 27, 2014, December 28, 2013 and December 29, 2012:

 

 

 

2014

 

2013

 

2012

 

Net revenues

 

100.0

%

100.0

%

100.0

%

Cost of revenues

 

81.4

 

82.0

 

80.1

 

Gross profit

 

18.6

 

18.0

 

19.9

 

Selling, general and administrative expenses

 

12.0

 

13.0

 

13.8

 

Operating income

 

6.6

 

5.0

 

6.1

 

Gain on sale of DSD

 

 

 

(0.6

)

Interest expense, net

 

0.9

 

0.4

 

0.4

 

Income before income taxes

 

5.7

 

4.6

 

6.3

 

Income tax provision

 

2.0

 

1.5

 

2.3

 

Net income

 

3.7

%

3.1

%

4.0

%

 

Our operations consist of two reportable segments:  frozen products and snack products.  The frozen product segment includes frozen fruits, vegetables and beverages, for sale primarily to groceries, club stores and mass merchandisers. The snack product segment includes manufactured 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.

 

2014 Compared to 2013

 

Net Revenues.  In 2014, net revenues increased $70.1 million, or 32.5%, to $285.7 million compared with net revenues of $215.6 million for the previous fiscal year. Our net revenues by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

 

 

December 27,
2014

 

December 28,
2013

 

%
Change

 

Frozen Products

 

$

179,518

 

$

117,124

 

53.3

%

Snack Products

 

106,145

 

98,456

 

7.8

%

Consolidated

 

$

285,663

 

$

215,580

 

32.5

%

 

The frozen products segment net revenues were $179.5 million, an increase of $62.4 million, or 53.3%, compared with net revenues of $117.1 million for the previous fiscal year.  This increase was primarily a result of the additional revenues from Willamette Valley Fruit Company and Fresh Frozen Foods which businesses we acquired in 2013.

 

The snack products segment net revenues were $106.1 million, an increase of $7.7 million, or 7.8%, compared with net revenues of $98.5 million for the previous fiscal year.  This increase was primarily due to increased sales of Boulder Canyon® and healthy/natural private label products, partially offset by a reduction in sales of T.G.I. Friday’s® branded snacks.

 

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Table of Contents

 

Gross Profit.  Gross profit for 2014 was $53.1 million, compared to $38.9 million for the prior year, with gross margin increasing 60 basis points to 18.6% for the year ended December 27, 2014, compared to 18.0% for the year ended December 28, 2013.  Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

December 27,
2014

 

% of Net
Revenues

 

December 28,
2013

 

% of Net
Revenues

 

Frozen Products

 

$

32,329

 

18.0

%

$

22,745

 

19.4

%

Snack Products

 

20,792

 

19.6

%

16,141

 

16.4

%

Consolidated

 

$

53,121

 

18.6

%

$

38,886

 

18.0

%

 

The frozen products segment gross profit was $32.3 million, an increase of $9.6 million, or 42.1%, compared to gross profit of $22.7 million for the prior fiscal year.  The increase in gross profit for the year was primarily attributable to the additional business contributed by Fresh Frozen Foods as well as increased production capability from our acquisition of Willamette Valley Fruit Company.  As a percentage of net revenues, gross profit decreased to 18.0% in 2014 from 19.4% in 2013 due primarily to lower margins from our Fresh Frozen Foods business, largely due to increased trade promotional spending.

 

The snack products segment gross profit was $20.8 million, an increase of $4.7 million, or 28.8%, compared to gross profit of $16.1 million for the prior fiscal year, and increased as a percentage of net revenues to 19.6% in 2014 from 16.4% in 2013.  The increase in gross margin for the year was primarily driven by improved product and channel mix with a stronger emphasis on higher margin branded products.

 

Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses increased $6.2 million, or 21.9%, for the year ended December 27, 2014, compared to the prior fiscal year.  SG&A expense reflects a number of adjustments including the reversal of the Fresh Frozen Foods contingent consideration liability offset by estimated Jamba litigation settlement costs and fees associated with the Company’s secondary offering.  The net impact of these items reduced SG&A expenses by $1.9 million in fiscal 2014.  In fiscal 2013 SG&A expenses included $1.4 million of acquisition-related transaction costs.  Excluding the impact of these items, SG&A expenses increased $9.5 million to $36.1 million, compared to $26.6 million in the prior year and as a percentage of net revenues, increased 30 basis points to 12.6%, compared to 12.3% in the prior year.  The increase in SG&A expenses were primarily due to full year costs of our two acquired business in 2013, increased incentive compensation expenses, higher health insurance costs under the Company’s partially self-insured plan, and as a result of reinvesting a portion of earnings back into the business to support future growth.

 

Interest Expense.  Net interest expense for the year ended December 27, 2014 increased 198.6%, to $2.6 million, compared to $0.9 million during the year ended December 28, 2013.  The increase was primarily due to higher debt balances related to the two acquisitions that occurred during 2013.

 

Income Tax Provision.  The income tax provision of $5.8 million for 2014 is $2.4 million higher than the $3.4 million of tax provision in the prior year.  Our effective income tax expense rate was 35.3% in 2014, compared to 33.7% in 2013.  The change in the effective tax rate is primarily due to an increase in state tax rates.

 

2013 Compared to 2012

 

Net Revenues.  In 2013, net revenues increased 16.4%, or $30.4 million, to $215.6 million, compared with net revenues of $185.2 million for the previous fiscal year.  Our net revenues by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

 

 

December 28,
2013

 

December 29,
2012

 

%
Change

 

Frozen Products

 

$

117,124

 

$

90,823

 

29.0

%

Snack Products

 

98,456

 

94,356

 

4.3

%

Consolidated

 

$

215,580

 

$

185,179

 

16.4

%

 

The frozen products segment net revenues were $117.1 million, an increase of $26.3 million, or 29.0%, compared with net revenues of $90.8 million for the previous fiscal year.  This increase was a result of strong volume growth in both our branded and private label business, as well as the acquisition of Willamette Valley Fruit Company and Fresh Frozen Foods.

 

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Table of Contents

 

The snack products segment net revenues were $98.5 million, an increase of $4.1 million, or 4.3%, compared with net revenues of $94.4 million for the previous fiscal year.  This increase was primarily attributable to additional revenues from our new co-packing agreements, which began production early in 2013, increases in sales of Boulder Canyon® products, premium private label products and Vidalia® products.  The increase was partially offset by a decrease in sales of certain licensed products and selling our direct-store-delivery (“DSD”) business in the fourth quarter of 2012.

 

Gross Profit.  Gross profit for 2013 was $38.9 million, compared to $36.9 million for the prior year, with gross margin decreasing 190 basis points to 18.0% for the year ended December 28, 2013, compared to 19.9% for the year ended December 29, 2012.  Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

December 28,
2013

 

% of Net
Revenues

 

December 29,
2012

 

% of Net
Revenues

 

Frozen Products

 

$

22,745

 

19.4

%

$

17,505

 

19.3

%

Snack Products

 

16,141

 

16.4

%

19,387

 

20.5

%

Consolidated

 

$

38,886

 

18.0

%

$

36,892

 

19.9

%

 

The frozen products segment gross profit was $22.7 million, an increase of $5.2 million, or 29.9%, compared to gross profit of $17.5 million for the prior fiscal year, and increased as a percentage of net revenues to 19.4% in 2013 from 19.3% in 2012.  The increase in gross profit for the year is primarily attributable to increased production capability with our acquisition of Willamette Valley Fruit Company.

 

The snack products segment gross profit was $16.1 million, a decrease of $3.2 million, or 16.7%, compared to gross profit of $19.4 million for the prior fiscal year, and decreased as a percentage of net revenues to 16.4% in 2013 from 20.5% in 2012.  The decrease in gross profit for the year is largely due to a decrease in sales of certain licensed products, partially offset by an increase in co-packing production.

 

Selling, General and Administrative Expenses.  SG&A expenses increased 9.7%, or $2.5 million, for the year ended December 28, 2013, compared to the prior fiscal year.  SG&A expense decreased 80 basis points to 13.0% as a percentage of net sales for the year ended December 28, 2013, compared to 13.8% in the prior fiscal year.  The increase in SG&A expense dollars was primarily attributable to transaction and integration related costs of approximately $1.4 million associated with the Willamette Valley Fruit Company and Fresh Frozen Foods acquisitions that occurred during 2013, as well as increased commissions on higher sales.

 

Interest Expense.  Net interest expense for the year ended December 28, 2013 increased 14.1%, to $0.9 million, compared to $0.8 million during the year ended December 29, 2012.  The increase was due to increased debt balances related to the two acquisitions that occurred during 2013.

 

Income Tax Provision.  The income tax provision of $3.4 million for 2013 is $0.8 million less than the $4.2 million of tax provision in the prior year.  Our effective income tax expense rate was 33.7% in 2013, compared to 36.2% in 2012.  The change in the effective tax rate is primarily due to a decrease in the state effective tax rate.

 

Liquidity and Capital Resources

 

Liquidity represents our ability to generate sufficient cash flows from operating activities to satisfy obligations, as well as our ability to obtain appropriate financing.  Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving our objectives.  Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures and debt repayment.  Sufficient liquidity is expected to be available to enable us to meet these demands.  Net working capital was $55.0 million (a current ratio of 2.5:1) and $34.0 million (a current ratio of 2.0:1) at December 27, 2014 and December 28, 2013, respectively.

 

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Table of Contents

 

The following table sets forth for the periods presented certain consolidated cash flow information for the fiscal years ended December 27, 2014, December 28, 2013 and December 29, 2012 (in thousands):

 

 

 

December 27,
2014

 

December 28,
2013

 

December 29,
2012

 

Net cash (used in) provided by operating activities

 

$

(1,282

)

$

5,346

 

$

11,224

 

Net cash used in investing activities

 

(13,243

)

(57,023

)

(4,098

)

Net cash provided by (used in) financing activities

 

14,110

 

52,168

 

(7,371

)

Net decrease (increase) in cash and cash equivalents

 

(415

)

491

 

(245

)

Cash and cash equivalents at beginning of year

 

910

 

419

 

664

 

Cash and cash equivalents at end of year

 

$

495

 

$

910

 

$

419

 

 

Cash and Cash Flow

 

Our primary uses of cash during 2014 were to fund capital additions and operations, including building inventory to accommodate the continued growth in demand for our products.

 

Our primary uses of cash during 2013 were to fund the acquisitions of Willamette Valley Fruit Company and Fresh Frozen Foods, which were primarily funded through our new $60.0 million Credit Agreement with U.S. Bank.

 

Operating Cash Flows

 

Cash flows from operating activities reflect our net earnings, adjusted for non-cash items such as, depreciation, amortization, stock-based compensation expense, write-offs and write-downs of assets, as well as changes in accounts receivable, inventories, accounts payable and accrued liabilities, and other assets and liabilities.

 

Net cash used in operating activities totaled $1.3 million for the fiscal year ended December 27, 2014 compared to net cash provided by operating activities of $5.3 million for the fiscal year ended December 28, 2013.  The $6.6 million year-over-year change was primarily a result of increased cash used to grow inventory in the current year as a result of continued growth in demand primarily for our frozen berry business.   During 2014, not only did berry costs increase, but we added capacity at our IQF facilities in order to expand our ability to freeze more fresh fruit, allowing us to reduce our dependence on higher priced purchased frozen berries. Inventories of lower cost fresh berries we grow or purchase from local farms and freeze through our IQF tunnels peak during the summer harvest and are generally sold over the next several months. We purchase frozen berries to supplement our needs until the next harvest or as needed for fruit we do not freeze ourselves. The emphasis on freezing more berries instead of purchasing them results in a higher upfront investment in inventory.  The impact from higher cash outlays for inventory was partially offset by the overall increase in sales and the related higher collections of accounts receivables.

 

Net cash provided by operating activities was $5.3 million for the fiscal year ended December 28, 2013 and $11.2 million for the fiscal year ended December 29, 2012.  The overall decrease of $5.9 million in net cash provided by operating activities in fiscal 2013 was primarily driven by an increase in inventory, largely related to increased inventory requirements related to Willamette Valley Fruit Company since its acquisition as well as an increase in inventory related to our co-packing business and a related increase in payables and accrued liabilities.

 

Net cash provided by operating activities was $11.2 million for the fiscal year ended December 29, 2012 and $4.7 million for the fiscal year ended December 31, 2011.  The overall increase of $6.5 million in fiscal 2012 was primarily driven by an increase in cash from operations and working capital requirements.  In 2012, our inventories decreased $4.2 million during the year as a result of increased sales volume, reduced overall berry prices and a lower yield from our 2012 berry harvest.  Additionally, we incurred increases in accounts receivable of $1.8 million in 2012, compared to an increase of $4.2 million in 2011, attributable to our net revenue growth.  The $14.0 million year-over-year inventory decrease is the primary driver of the $14.0 million year-over-year decrease in accounts payable and accrued liabilities during 2012.

 

Investing Cash Flows

 

Net cash used in investing activities was $13.2 million in 2014, compared to $57.0 million in 2013 and to $4.1 million in 2012.  Our 2014 investing activities primarily were driven by capital additions made to increase the Company’s production capacity.   Our 2013 investing activities included the acquisition of Willamette Valley Fruit Company and Fresh Frozen Foods for $8.5 million and $38.8 million, respectively, as well as $9.8 million in capital expenditures.  Capital expenditures of $9.8 million in 2013 relate to the purchase of manufacturing equipment of $7.9 million, primarily for new

 

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packaging equipment and new extrusion equipment at our Bluffton, Indiana facility, $0.9 million of capital expenditures related to the purchase and preproduction costs of berry plants, and $1.0 million in other expenditures relating to software, building improvements and office equipment.  Capital expenditures of $5.6 million in 2012 primarily relate to the purchase of manufacturing equipment of $3.8 million, primarily for cooling equipment to efficiently and effectively cool fruit directly from the fields after harvesting and new packaging equipment at our Lynden, Washington facility, $0.6 million of capital expenditures related to the purchase and preproduction costs of berry plants, and $1.2 million in other expenditures relating to software, building improvements and office equipment.  In 2015, we plan to spend $12.9 million in capital expenditures, primarily at our manufacturing facilities.  Capital expenditures are funded primarily by net cash flow from operating activities, cash on hand, and available credit from our credit facility.

 

Financing Cash Flows

 

Net cash provided by financing activities totaled $14.1 million and $52.2 million for fiscal year 2014 and 2013, respectively.  The $38.1 million decrease in year-over-year net cash provided by financing activities primarily reflects the higher level of new financing experienced in 2013 relating to our two acquisitions.

 

Net cash used by financing activities for fiscal year 2012 totaled $7.4 million reflecting the paying down of our revolving line of credit and other long term debt, which includes the payoff of our mortgage on our Goodyear, Arizona facility.  Our decrease in borrowings was funded with cash provided by operating activities and proceeds from the sale of our DSD business. These cash outlays were partially offset by cash provided by financing activities related to equity compensation.

 

Debt and Capital Resources

 

At December 27, 2014, there was $11.2 million of borrowings available under our line of credit.  As is customary in such financings, U.S. Bank may terminate its commitments and accelerate the repayment of amounts outstanding and exercise other remedies upon the occurrence of an event of default (as defined in the Credit Agreement), subject, in certain instances, to the expiration of any applicable cure period.  The Credit Agreement requires us to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a leverage ratio.  At December 27, 2014, we were in compliance with all of the financial covenants.

 

See Note 7 to our Consolidated Financial Statements “Long-Term Debt and Line of Credit” in Part II, Item 8 of this Annual Report on Form 10-K.

 

Outlook

 

We believe that our current financing arrangement with U.S. Bank will provide adequate ability to finance our working capital needs and future capital expenditures.  We anticipate 2015 capital expenditures of approximately $12.9 million, funded through working capital and various purchase or leasing arrangements.  Our plans are not expected to materially affect our financial ratios or liquidity.  In connection with the implementation of our business strategy, discussed in detail in “Item 1. Business,” we may incur operating losses in the future and may require future debt or equity financings (particularly in connection with future strategic acquisitions, new brand introductions or capital expenditures).  Expenditures relating to acquisition-related integration costs, market and territory expansion and new product development and introduction may adversely affect promotional and operating expenses and consequently may adversely affect operating and net income.  These types of expenditures are expensed for accounting purposes as incurred, while revenue generated from the result of such expansion or new products may benefit future periods.  We believe that we will generate positive cash flow from operations during the next twelve months, which, along with our existing working capital and borrowing facilities, will enable us to meet our operating cash requirements for the next twelve months.  This belief is based on current operating plans and certain assumptions, including those relating to our future revenue levels and expenditures, industry and general economic conditions and other conditions.  For instance, if current general economic conditions continue or worsen, we believe that our sales forecasts may prove to be less reliable than they have in the past as consumers may change their buying habits with respect to snack food products.  Unexpected price increases for commodities used in our snack products, or adverse weather conditions affecting our Rader Farms crop yield could also impact our financial condition.  If any of these factors change, we may require future debt or equity financings to meet our business requirements.  Any required financings may not be available or, if available, may not be on terms attractive to us.

 

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Off-Balance Sheet Arrangements

 

Under SEC regulations, in certain circumstances, we are required to make certain disclosures regarding the following off-balance sheet arrangements, if material:

 

·                  Any obligation under certain guarantee contracts;

 

·                  Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

 

·                  Any obligation under certain derivative instruments; and

 

·                  Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

We do not have any off-balance sheet arrangements that are required to be disclosed pursuant to these regulations, other than those described in the Notes to our Consolidated Financial Statements contained herein.  We do not have, nor do we engage in, transactions with any special purpose entities.  Other than an interest rate swap, we are not engaged in any derivative activities and had no forward exchange contracts outstanding at December 27, 2014.  In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations.  These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), and are more fully discussed below.

 

Contractual Obligations

 

At December 27, 2014, our contractual obligations for continuing operations were as follows (in thousands):

 

 

 

Payments due by period

 

 

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than 5 years

 

Total

 

Long-term debt(a)

 

$

6,532

 

$

18,272

 

$

39,831

 

$

163

 

$

64,798

 

Capital lease obligations(b)

 

562

 

990

 

 

 

1,552

 

Operating lease obligations(c)

 

1,979

 

3,410

 

1,960

 

5,764

 

13,113

 

Purchase obligations(d)

 

54,154

 

 

 

 

54,154

 

Total

 

$

63,227

 

$

22,672

 

$

41,791

 

$

5,927

 

$

133,617

 

 


(a)         Reflects amounts outstanding under our Credit Agreement as of December 27, 2014.  During the year ended December 28, 2013 we entered into the $60.0 million Credit Agreement with a syndicate of lenders led by U.S. Bank, the terms of which are noted in Note 7 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.  In addition to the amounts in the table above, the Company has a revolving line of credit of up to $30.0 million.  Although the revolving line of credit matures on November 8, 2018, we are not able to reliably estimate the timing of future drawdowns or repayments under the borrowing facility.  At December 27, 2014, $18.8 million was outstanding under the line of credit.

 

(b)         Amounts represent the expected cash payments of our capital leases, including the expected cash payments of interest expense of approximately $0.1 million on our capital leases.  See further discussion of our capital lease obligations as of December 27, 2014 in Note 7 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

 

(c)          Reflects amounts outstanding under our operating lease obligations as of December 27, 2014.

 

(d)         In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels.  Our purchase commitments for certain ingredients, packaging materials and energy are generally less than 12 months.

 

Critical Accounting Policies and Estimates

 

The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of our financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  We believe that the following accounting policies fit this definition:

 

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Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  If our financial condition were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  We record specific allowances for receivable balances that are considered at higher risk due to known facts regarding the customer.

 

Inventories.  Our inventories are stated at the lower of cost (first-in, first-out) or market.  We identify slow moving or obsolete inventories and estimate appropriate loss provisions related thereto.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

Goodwill and Trademarks.  Goodwill and trademarks are reviewed for impairment annually, or more frequently if impairment indicators arise.  Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce 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.

 

We believe that each of our remaining trademarks has the continued ability to generate cash flows indefinitely, and therefore each of our trademarks has been determined to have an indefinite life.  Our determination that these trademarks have indefinite lives includes an evaluation of historical cash flows and projected cash flows for each of these trademarks.  We continue to make investments to market and promote each of these brands, and management continues to believe that the market opportunities and brand extension opportunities will generate cash flows for an indefinite period of time.  In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of these trademarks, and we intend to renew each of these trademarks, which can be accomplished at little cost.

 

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.  In our snack products segment, revenue for products sold through our local distribution network is recognized when the product is received by the retailer.  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.  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.

 

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 different 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.  The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.

 

Marketing Costs.  These costs include various sponsorships, coupon administration and consumer advertising programs that we enter into throughout the year, and are expensed as incurred.  We participate in a coupon programs, such as Sunday Free Standing Inserts (FSIs), digital marketing, coupon programs and social media, including Facebook, Twitter and Google advertising.  We use a national public relationship firm to promote all of our brands throughout the year targeting newspapers, magazines, web sites, bloggers, television and radio stations.  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.  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 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, and consumers are not required to purchase our product in order to receive the sample.

 

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Income Taxes.  We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage.  Our effective tax rate is based on the level of income of our separate legal entities.  Significant judgment is required in evaluating tax positions that affect the annual tax rate.  Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain.  We adjust these liabilities in light of changing facts and circumstances.

 

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 9 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

 

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 of full-time employees of the Company on the first day of the month after 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 employee’s dependents, if elected by the 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 are included in accrued liabilities, and represent management’s best estimate of amounts that have not been paid prior to the year-end dates.  It is reasonably possible that the expense we will ultimately incur could differ.

 

The above listing is not intended to be a comprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in their application.  See our audited Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP.

 

Item 7A.                Quantitative and Qualitative Disclosures About Market Risk

 

Commodity Pricing Risk

 

In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into forward purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels.  Our purchase commitments for certain ingredients, packaging materials and energy are generally less than 12 months.

 

Interest Rate Risk

 

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.

 

To the extent that we borrow under the New Loan Agreement, we are exposed to market risk related to changes in interest rates.  Using debt levels and interest rates as of December 27, 2014, the weighted average interest rate on borrowings was 2.4%.  At December 27, 2014, we had $73.7 million in variable rate debt.  A 10% increase in the variable interest rate would not have significantly impacted interest expense during the period.

 

To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements.  Our interest rate swaps qualify for and are designated as cash flow hedges.  Changes in the fair value of a swap that is highly effective and that is designated and qualifies as a cash flow hedge to the extent that the hedge is effective, are recorded in other comprehensive income (loss).  While these interest rate swap agreements fixed a portion of the interest rate at a predictable level, we estimate pre-tax interest expense would have been approximately $0.2 million less without these swaps in the first fiscal year 2014.

 

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The “Interest Rate Swaps” information contained in Note 7 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference herein.

 

Foreign Currency Exchange Rate Risk

 

We contract for and settle all purchases in U.S. dollars.  We only purchase a modest amount of goods directly from international vendors.  Therefore, we consider the effect of foreign currency rate changes to be indirect and we do not hedge using any derivative instruments.  Historically, we have not been impacted by changes in exchange rates.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Item 8.                                 Financial Statements and Supplementary Data.

 

Report of Independent Registered Public Accounting Firm

30

Consolidated Balance Sheets as of December 27, 2014 and December 28, 2013

31

Consolidated Statements of Operations for the years ended December 27, 2014, December 28, 2013, and December 29, 2012

32

Consolidated Statements of Comprehensive Income for the years ended December 27, 2014, December 28, 2013, and December 29, 2012

33

Consolidated Statements of Stockholders’ Equity for the years ended December 27, 2014, December 28, 2013, and December 29, 2012

34

Consolidated Statements of Cash Flows for the years ended December 27, 2014, December 28, 2013, and December 29, 2012

35

Notes to Consolidated Financial Statements

36

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Inventure Foods, Inc.

Phoenix, Arizona

 

We have audited the accompanying consolidated balance sheets of Inventure Foods, Inc. and subsidiaries (the “Company”) as of December 27, 2014 and December 28, 2013 and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 27, 2014. We also have audited the Company’s internal control over financial reporting as of December 27, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inventure Foods, Inc. and subsidiaries as of December 27, 2014 and December 28, 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 27, 2014, in conformity with generally accepted accounting principles in the United States of America. Also in our opinion, Inventure Foods, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 27, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

 

/s/ Moss Adams LLP

 

Scottsdale, Arizona

March 10, 2015

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)

 

 

 

December 27,
 2014

 

December 28,
 2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

495

 

$

910

 

Accounts receivable, net

 

22,420

 

23,618

 

Inventories

 

65,216

 

43,086

 

Deferred income tax asset

 

1,228

 

755

 

Other current assets

 

1,220

 

1,223

 

Total current assets

 

90,579

 

69,592

 

 

 

 

 

 

 

Property and equipment, net

 

55,200

 

50,140

 

Goodwill

 

23,286

 

23,064

 

Trademarks and other intangibles, net

 

24,543

 

25,624

 

Other assets

 

1,702

 

1,671

 

Total assets

 

$

195,310

 

$

170,091

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

15,533

 

$

19,380

 

Accrued liabilities

 

12,978

 

10,121

 

Current portion of long-term debt

 

7,041

 

6,110

 

Total current liabilities

 

35,552

 

35,611

 

 

 

 

 

 

 

Long-term debt, less current portion

 

59,218

 

61,865

 

Line of credit

 

18,802

 

3,223

 

Deferred income tax liability

 

6,869

 

4,188

 

Interest rate swaps

 

349

 

526

 

Other liabilities

 

2,554

 

5,525

 

Total liabilities

 

123,344

 

110,938

 

 

 

 

 

 

 

Commitments and contingencies (see Notes 8 and 12)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value; 50,000 shares authorized; 19,961 and 19,845 shares issued and outstanding at December 27, 2014 and December 28, 2013, respectively

 

200

 

198

 

Additional paid-in capital

 

33,100

 

30,960

 

Accumulated other comprehensive loss

 

(134

)

(244

)

Retained earnings

 

39,271

 

28,710

 

 

 

72,437

 

59,624

 

 

 

 

 

 

 

Less: treasury stock, at cost: 368 shares at December 27, 2014 and December 28, 2013

 

(471

)

(471

)

Total stockholders’ equity

 

71,966

 

59,153

 

Total liabilities and stockholders’ equity

 

$

195,310

 

$

170,091

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share data)

 

 

 

December 27,
2014

 

December 28,
2013

 

December 29,
2012

 

Net revenues

 

$

285,663

 

$

215,580

 

$

185,179

 

Cost of revenues

 

232,542

 

176,694

 

148,287

 

Gross profit

 

53,121

 

38,886

 

36,892

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

34,188

 

28,036

 

25,548

 

Operating income

 

18,933

 

10,850

 

11,344

 

Non-operating (income) expense:

 

 

 

 

 

 

 

Gain on sale of DSD business

 

 

 

(1,101

)

Interest expense, net

 

2,604

 

872

 

764

 

Income before income tax expense

 

16,329

 

9,978

 

11,681

 

Income tax expense

 

5,768

 

3,360

 

4,232

 

Net income

 

$

10,561

 

$

6,618

 

$

7,449

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.54

 

$

0.34

 

$

0.40

 

Diluted

 

$

0.53

 

$

0.33

 

$

0.38

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

Basic

 

19,500

 

19,360

 

18,821

 

Diluted

 

19,990

 

19,789

 

19,574

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

December 27,
2014

 

December 28,
2013

 

December 29,
2012

 

Net income

 

$

10,561

 

$

6,618

 

$

7,449

 

Change in fair value of interest rate swaps, net of tax

 

110

 

134

 

47

 

Comprehensive income

 

$

10,671

 

$

6,752

 

$

7,496

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

Common Stock

 

Additional
Paid-in

 

Retained

 

Accumulated
Other
Comprehensive

 

Treasury

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Stock, at Cost

 

Total

 

Balance, December 31, 2011

 

18,631

 

$

187

 

$

27,676

 

$

14,643

 

$

(425

)

$

(471

)

$

41,610

 

Net income

 

 

 

 

7,449

 

 

 

7,449

 

Change in fair value of interest rate swaps, net of tax

 

 

 

 

 

47

 

 

47

 

Stock-based compensation expense

 

 

 

1,275

 

 

 

 

1,275

 

Tax benefit from equity awards

 

 

 

840

 

 

 

 

840

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

940

 

9

 

(131

)

 

 

 

(122

)

Balance, December 29, 2012

 

19,571

 

$

196

 

$

29,660

 

$

22,092

 

$

(378

)

$

(471

)

$

51,099

 

Net income

 

 

 

 

6,618

 

 

 

6,618

 

Change in fair value of interest rate swaps, net of tax

 

 

 

 

 

134

 

 

134

 

Stock-based compensation expense

 

 

 

968

 

 

 

 

968

 

Tax benefit from equity awards

 

 

 

653

 

 

 

 

653

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

274

 

2

 

(321

)

 

 

 

(319

)

Balance, December 28, 2013

 

19,845

 

$

198

 

$

30,960

 

$

28,710

 

$

(244

)

$

(471

)

$

59,153

 

Net income

 

 

 

 

10,561

 

 

 

10,561

 

Change in fair value of interest rate swaps, net of tax

 

 

 

 

 

110

 

 

110

 

Stock-based compensation expense

 

 

 

1,697

 

 

 

 

1,697

 

Tax benefit from equity awards

 

 

 

332

 

 

 

 

332

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

116

 

2

 

111

 

 

 

 

113

 

Balance, December 27, 2014

 

19,961

 

$

200

 

$

33,100

 

$

39,271

 

$

(134

)

$

(471

)

$

71,966

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

December 27,
2014

 

December 28,
2013

 

December 29,
2012

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

10,561

 

$

6,618

 

$

7,449

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

6,683

 

5,445

 

4,678

 

Amortization

 

1,204

 

288

 

23

 

Provision for bad debts

 

17

 

(3

)

2

 

Deferred income taxes

 

2,540

 

627

 

154

 

Excess income tax benefit from stock-based compensation

 

(332

)

(653

)

(841

)

Stock-based compensation expense

 

557

 

619

 

736

 

Restricted stock compensation expense

 

1,140

 

349

 

539

 

Gain on sale of DSD business

 

 

 

(1,101

)

Loss (gain) on disposition of equipment

 

118

 

16

 

(20

)

Contingent consideration revaluation

 

(2,998

)

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

1,183

 

(2,634

)

(1,816

)

Inventories

 

(22,103

)

(7,554

)

4,166

 

Other assets and liabilities

 

135

 

626

 

993

 

Accounts payable and accrued liabilities

 

13

 

1,602

 

(3,738

)

Net cash (used in) provided by operating activities

 

(1,282

)

5,346

 

11,224

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(11,835

)

(9,775

)

(5,609

)

Purchase of Willamette Valley Fruit Company

 

(1,250

)

(8,472

)

 

Purchase of Fresh Frozen Foods

 

 

(38,776

)

 

Purchase of Sin In A Tin

 

(158

)

 

 

Proceeds from sale of DSD business

 

 

 

1,511

 

Net cash used in investing activities

 

(13,243

)

(57,023

)

(4,098

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings on line of credit

 

15,579

 

(6,894

)

(5,067

)

Proceeds from issuance of common stock under equity award plans

 

320

 

206

 

181

 

Payments made on capital lease obligations

 

(334

)

(486

)

(505

)

Borrowings on term loans

 

4,515

 

70,047

 

 

Repayments made on long term debt

 

(5,896

)

(10,161

)

(2,518

)

Payment of loan financing fees

 

(198

)

(671

)

 

Excess income tax benefit from stock-based compensation

 

332

 

653

 

841

 

Payment of payroll taxes on stock-based compensation through shares withheld

 

(208

)

(526

)

(303

)

Net cash provided by (used in) financing activities

 

14,110

 

52,168

 

(7,371

)

Net (decrease) increase  in cash and cash equivalents

 

(415

)

491

 

(245

)

Cash and cash equivalents at beginning of year

 

910

 

419

 

664

 

Cash and cash equivalents at end of year

 

$

495

 

$

910

 

$

419

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

1,950

 

$

734

 

$

776

 

Cash paid during the period for income taxes

 

$

3,144

 

$

1,307

 

$

3,094

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing transactions:

 

 

 

 

 

 

 

Capital lease obligations incurred for the acquisition of property and equipment

 

$

 

$

16

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

35



Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.     Operations and Summary of Significant Accounting Policies

 

Description of Business

 

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 $285 million in annual net revenues for fiscal year 2014.

 

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.

 

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.

 

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 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.

 

We operate manufacturing facilities in eight 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.  The products of our newly acquired 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 and Dispositions

 

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, 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 from the Sin In A Tin products (see Note 2).

 

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 2014 performance (see Note 2).

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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 2).

 

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.

 

Principles of Consolidation

 

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.

 

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 2014 commenced December 29, 2013 and ended December 27, 2014, resulting in a 52-week fiscal year.  Fiscal year 2013 commenced December 30, 2012 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.

 

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.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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 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 assets and liabilities measured at fair value on a recurring basis (in thousands) at the respective dates set forth below:

 

 

 

 

 

December 27, 2014

 

December 28, 2013

 

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

 

$

 

$

697

 

$

 

$

 

$

579

 

$

 

Interest rate swaps

 

Level 2

 

(349

)

 

 

(526

)

 

 

Accrued liabilities

 

Level 3

 

 

 

(246

)

 

 

 

Other liabilities

 

Level 3

 

 

 

(1,602

)

 

 

(5,053

)

 

 

 

 

$

(349

)

$

697

 

$

(1,848

)

$

(526

)

$

579

 

$

(5,053

)

 

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 in September 2014, 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 year ended December 27, 2014, we reduced the value of the contingent consideration related to the Fresh Frozen Foods acquisition to zero due to 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 27, 2014, is as follows (in thousands):

 

 

 

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

)

Willamette Valley Fruit Company earn-out revaluation

 

(345

)

Earn-out from Sin In A Tin purchase accounting

 

243

 

Balance at December 27, 2014

 

$

1,848

 

 

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.

 

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Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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.  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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Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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.

 

See Note 3 “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 $0.3 million at December 27, 2014 and December 28, 2013.  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.  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.

 

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 $1.4 million, $0.9 million and $0.9 million in fiscal years 2014, 2013 and 2012, 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 $1.7 million, $2.2 million and $1.9 million for the years ended December 27, 2014, December 28, 2013 and December 29, 2012, 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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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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 27, 2014.

 

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 27, 2014 and December 28, 2013.

 

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 2011 through 2013 remain open to examination by the Internal Revenue Service.  Our state tax returns for years 2010 through 2013 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 9 “Stockholders’ Equity” for additional information.

 

Earnings Per Common Share

 

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 27, 2014, December 28, 2013 and December 29, 2012 options to purchase 26,306, 291,571 and 281,017 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Earnings per common share was computed as follows for the years ended December 27, 2014, December 28, 2013 and December 29, 2012 (in thousands, except per share data):

 

 

 

December 27,
2014

 

December 28,
2013

 

December 29,
2012

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

Net income

 

$

10,561

 

$

6,618

 

$

7,449

 

Weighted average number of common shares

 

19,500

 

19,360

 

18,821

 

Earnings per common share

 

$

0.54

 

$

0.34

 

$

0.40

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

Net income

 

$

10,561

 

$

6,618

 

$

7,449

 

Weighted average number of common shares

 

19,500

 

19,360

 

18,821

 

Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock

 

490

 

429

 

753

 

Adjusted weighted average number of common shares

 

19,990

 

19,789

 

19,574

 

Earnings per common share

 

$

0.53

 

$

0.33

 

$

0.38

 

 

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 U.S. 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 is not expected to 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 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.

 

2.                                      Acquisitions

 

Sin In A Tin

 

On September 29, 2014, we acquired the assets and intellectual property of a small boutique frozen desserts business, Sin In A Tin, 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 from the Sin In A Tin products.  At the time of acquisition, the contingent consideration was recorded at $0.2 million based on the fair value assessment.   Additionally, we recorded $0.1 million of identifiable intangible assets and $0.1 million of net tangible assets that were assumed as a part of this acquisition based on their estimated fair values, and $0.2 million of residual goodwill.

 

The above allocation will remain preliminary until the Company has all of the information necessary to finalize the allocation of the purchase price, which shall be no later than one year following the acquisition date.

 

Fresh Frozen Foods

 

On November 8, 2013, we acquired substantially all of the assets, properties and rights of Fresh Frozen Foods, a branded frozen vegetable processor.  As consideration for the acquisition, we assumed certain liabilities and obligations of Fresh Frozen Foods and paid an aggregate purchase price of $38.4 million in cash plus a working capital adjustment of $0.4 million.  A portion of the purchase price was used to settle Fresh Frozen Foods’ existing debt as of the closing of the transaction.  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 2014 performance.  At the time of acquisition, the contingent consideration was recorded at $2.7 million based on the fair value assessment at acquisition.  Such contingent payment, if any, would be paid during the first quarter of 2015.   Acquisition costs of $1.1 million were incurred during the year ended December 28, 2013 and are included within selling, general and administrative expenses.  The amount of net revenues attributable to Fresh Frozen Foods included in the consolidated statements of operations since the acquisition date were $8.9 million in fiscal 2013.  We do not allocate certain selling, general and administrative expenses and therefore, it is impracticable for us to separately identify earnings of the acquired entity since acquisition.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

The following table summarizes the purchase price and estimated fair value of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Purchase price paid as:

 

 

 

 

 

Cash

 

 

 

$

38,375

 

Net working capital adjustment

 

 

 

401

 

Contingent consideration

 

 

 

2,653

 

Total purchase price

 

 

 

41,429

 

 

 

 

 

 

 

Fair value of net assets acquired:

 

 

 

 

 

Current assets

 

$

10,774

 

 

 

Property and equipment

 

8,424

 

 

 

Deferred tax assets

 

235

 

 

 

Identifiable intangible assets:

 

 

 

 

 

Trade name

 

9,475

 

 

 

Customer relationships

 

10,487

 

 

 

Current liabilities

 

(6,252

)

 

 

Long-term capital lease obligation

 

(15

)

 

 

Total fair value of net assets acquired

 

 

 

33,128

 

 

 

 

 

 

 

Excess purchase price over fair value of net assets acquired (goodwill)

 

 

 

$

8,301

 

 

Under the acquisition method of accounting, the purchase price as shown in the table above is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values.  The excess purchase price over fair value of net assets acquired was recorded as goodwill.  The goodwill recorded as a result of the acquisition of Fresh Frozen Foods is expected to be deductible for tax purposes.

 

Identified intangible assets of $20.0 million consist of customer relationships and trade name.  The customer relationships are amortized using the straight-line method over the estimated useful life of twelve years.  We believe the acquired trade name has the continued ability to generate cash flows indefinitely, and therefore the trade name has been determined to have an indefinite life.

 

Goodwill of $8.3 million represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed from Fresh Frozen Foods. In accordance with current accounting standards, the goodwill is not amortized and will be tested for impairment annually in the fourth quarter of our fiscal year.

 

See Note 3 “Goodwill, Trademarks and Other Intangible Assets” for additional information.

 

Based on Fresh Frozen Foods’ financial performance for fiscal 2014, we concluded the earn-out would not be paid.  Accordingly, the liability for contingent consideration was adjusted to $0, which resulted in a decrease in operating expenses of $2.7 million during the year ended December 27, 2014.

 

Willamette Valley Fruit Company

 

On May 28, 2013, we enhanced our berry purchase and freezing capabilities by acquiring the berry processing business of Willamette Valley Fruit Company, LLC, one of the Pacific Northwest’s leading processors of high-quality berry products, 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 if certain performance thresholds are met during the seven-year period following the closing of the transaction.  Under the terms of the purchase agreement, we acquired substantially all of the berry processing equipment assets, including a new Individually Quick Frozen (“IQF”) tunnel, and other intellectual property and inventory rights.  We also entered into leases of the land and buildings containing the purchased assets in connection with the transaction.  The amount of net revenues attributable to Willamette Valley Fruit Company included in the consolidated statements of operations since the acquisition date were $14.1 million in fiscal 2013.  We do not allocate certain selling, general and administrative expenses and therefore, it is impracticable for us to separately identify earnings of the acquired entity since acquisition.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

The following table summarizes the purchase price and the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition and provides certain supplemental cash flow information (in thousands):

 

Purchase price paid as:

 

 

 

 

 

Cash and borrowings on revolving line of credit

 

 

 

$

8,472

 

Holdback consideration