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SNAK > SEC Filings for SNAK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for INVENTURE FOODS, INC.

Form 10-Q for INVENTURE FOODS, INC.


9-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q.

Quarterly Overview

We are a leading specialty food 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®, BURGER KINGTM, Nathan's Famous ®, Vidalia®, Jamba®, Bob's Texas Style® and Tato Skins®. T.G.I. Friday's®, BURGER KINGTM, Nathan's Famous®, Vidalia® and Jamba® are licensed brand names.

Consolidated net revenues increased 24.2% to $46.6 million in the third quarter ended September 29, 2012, an increase of $9.1 million compared to $37.5 million during the prior-year period. Gross profit increased 47.8% to $9.5 million, compared to $6.4 million in the prior-year period. Gross margin improved 320 basis points to 20.3% from 17.1% last year, primarily as a result of lower cost berries in our Frozen Products segment. Selling, general and administrative expenses decreased to 14.0% of net revenues, or 360 basis points, compared to 17.6% during the third quarter of 2011. This decrease is primarily attributable to decreased marketing and sampling expenses related to the prior year promotions for the Jamba® brand. Net income increased to $1.7 million compared to a net loss of $0.2 million in the prior year. We finished the third quarter of 2012 with diluted earnings per share of $0.09, compared to a diluted loss per share of $0.01 in the third quarter of 2011.

Details about segment results of operations can be found in Note 7 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our condensed consolidated financial statements, the changes in certain key items in those condensed consolidated financial statements from period to period and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our condensed consolidated financial statements.

                             Results of Operations



The following table sets forth for the periods presented certain financial data
as a percentage of net sales for the three and nine months ended September 29,
2012 and September 24, 2011:



                                      Quarter Ended                   Nine Months Ended
                              September 29,    September 24,    September 29,    September 24,
                                   2012            2011              2012            2011
Net revenues                          100.0 %          100.0 %          100.0 %          100.0 %
Cost of revenues                       79.7             82.9             80.2             81.0
Gross profit                           20.3             17.1             19.8             19.0
Selling, general and
administrative expenses                14.0             17.7             13.7             15.9
Operating income (loss)                 6.3             (0.6 )            6.1              3.2
Interest expense, net                   0.4              0.6              0.4              0.5
Income (loss) before
income taxes                            5.9             (1.2 )            5.7              2.7
Income tax provision
(benefit)                               2.2             (0.7 )            2.1              0.9
Net income (loss)                       3.7 %           (0.5 )%           3.6 %            1.8 %

Our operations consist of two reportable segments: snack products and frozen products. The snack products segment includes manufactured potato chips, kettle chips, potato crisps, potato skins, pellet snacks and extruded product for sale primarily to snack food distributors and retailers. This segment includes a limited number of snack food products purchased and sold through our local distribution network in Arizona. The frozen product segment produces frozen fruit products, such as berries and smoothies, for sale primarily to groceries, club stores and mass merchandisers.


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Net Revenues. Net revenues for the quarter ended September 29, 2012 increased 24.2% compared to the quarter ended September 24, 2011. Net revenues for the nine months ended September 29, 2012 increased 20.3% compared to the nine months ended September 24, 2011. Our net revenues by operating segment were as follows:

                         Quarter Ended                              Nine Months Ended
                September 29,     September 24,       %      September 29,    September 24,       %
                    2012              2011          Change        2012             2011         Change
Snack          $    23,800,699   $    23,473,328       1.4 % $   72,831,257   $   70,136,637       3.8 %
Frozen              22,800,633        14,045,006      62.3 %     68,805,871       47,631,715      44.5 %
Consolidated   $    46,601,332   $    37,518,334      24.2 % $  141,637,128   $  117,768,352      20.3 %

Our Snack Products segment net revenues increased 1.4%, or $0.3 million, to $23.8 million for the quarter ended September 29, 2012 compared to $23.5 million for the third quarter in 2011. T.G.I. Friday's® and premium private label net revenues increased 10.7% and 20.9%, respectively, partially offset by a decrease of 13.2% in Boulder Canyon® premium private label sales. Boulder Canyon® sales were affected by competitive pricing pressure and lower volume in the grocery and club channels during the quarter. During the third quarter of the prior year, T.G.I. Friday's® sales benefited from higher volume from increased distribution in new and existing channels.

During the nine months ended September 29, 2012 net revenues of the Snack segment increased $2.7 million or 3.8% to $72.8 million compared to $70.1 million in the first nine months of the previous year. Snack product segment net revenues during the first nine months of 2012 were led by our T.G.I. Friday's® and private label products with growth of 8.6% and 17.0%, respectively. This growth was partially offset by a decrease of 1.8% in our Boulder Canyon® sales.

Our Frozen Products segment net revenues were $22.8 million during the third quarter 2012, an increase of $8.8 million or 62.3% compared to the prior year period. The Frozen segment revenue increase was primarily driven by increased distribution and new sales of both our branded and private label frozen fruit. Jamba® net revenues for the quarter were $4.3 million, an increase of 28.6% compared to $3.3 million in the prior-year period, primarily due to new distribution. Excluding Jamba® net revenues, frozen products segment net revenues were up 72.7% for the quarter.

During the nine months ended September 29, 2012, the Frozen segment net revenues were $68.8 million, up 44.5% compared to the first nine months of 2011. The increase in the Frozen segment net revenues was primarily driven by increased volume and new distribution of fruit sales. Jamba® Smoothies totaled $11.2 million in net revenues for the first nine months of 2012, a decrease of 3.8% versus the prior year as we did not repeat a coupon event at a major warehouse retailer. Excluding Jamba® net revenues, the frozen products segment net revenues were up 60% for the first nine months of 2012.

Gross Profit. Gross profit for the quarter ended September 29, 2012 increased 47.8% compared to the quarter ended September 24, 2011, with gross margin increasing 320 basis points to 20.3% for the three months ended September 29, 2012 compared to 17.1% for the three months ended September 24, 2011. For the nine months ended September 29, 2012, gross profit increased 24.9% compared to the nine months ended September 24, 2011, with gross margin increasing 80 basis points to 19.8% for the nine months ended September 29, 2012 compared to 19.0% for the nine months ended September 24, 2011. Our gross profit and gross profit as a percentage of net sales by operating segment were as follows:

                                    Quarter Ended                                           Nine Months Ended
                September 29,    % of Net    September 24,    % of Net    September 29,    % of Net    September 24,    % of Net
                     2012        Revenues        2011         Revenues         2012        Revenues        2011         Revenues
Snack          $     4,148,259       17.4 % $     4,333,033       18.5 % $    14,636,609       20.1 % $    13,945,502       19.9 %
Frozen               5,323,044       23.3 %       2,073,556       14.8 %      13,383,124       19.5 %       8,489,135       17.8 %
Consolidated   $     9,471,303       20.3 % $     6,406,589       17.1 % $    28,019,733       19.8 % $    22,434,637       19.0 %

Snack segment gross profit for the quarter decreased $0.2 million or 4.3% to $4.1 million, and decreased as a percentage of net revenues to 17.4% for the quarter ended September 29, 2012 compared to 18.5% during the third quarter of 2011. This decrease in gross margin was primarily due to product and channel
mix. The Frozen segment gross profit for the quarter increased $3.2 million or 156.7% to $5.3 million, and increased as a percentage of net revenues to 23.3% for the quarter ended September 29, 2012 compared to 14.8% in the third quarter of 2011. This increase in gross margin for the quarter was primarily attributable to a lower cost of berries compared to the prior-year period.


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Snack segment gross profit for the first nine months of 2012 increased $0.7 million or 5.0% to $14.6 million, and remained relatively flat as a percentage of net revenues at 20.1% compared to 19.9% during the same period of the prior year. The Frozen segment gross profit increased $4.9 million or 57.7% to $13.4 million, and increased as a percentage of net revenues to 19.5% for the nine month period ended September 29, 2012 compared to 17.8% during the same period of 2011. This increase in gross margin for the quarter was primarily attributable to a lower cost of berries compared to the prior-year period.

Selling, General and Administrative Expenses. Selling and administrative ("SG&A") expenses decreased $0.1 million, or 1.2%, for the quarter ended September 29, 2012 compared to the quarter ended September 24, 2011. As a percentage of net revenues, SG&A expenses decreased 360 basis points to 14.0%, compared to 17.6% during the third quarter of 2011. The decrease in SG&A expenses was primarily driven by decreased marketing and sampling expenses related to prior year's national rollout of the Jamba® brand smoothies.

For the nine months ended September 29, 2012, SG&A expenses increased $0.7 million, or 4.0%, compared to the nine months ended September 24, 2011, while as a percentage of net revenues, SG&A expenses decreased 220 basis points to 13.7%, compared to 15.9% during the first nine months of 2011. The increase in SG&A expenses is primarily a result of increased salary and benefits, and professional fees expenses, partially offset by decreased marketing and sampling expenses related to prior year's national rollout of the Jamba® brand smoothies.

Interest Expense. Interest expense for the three and nine months ended September 29, 2012 declined 21.3%, to $0.2 million, and 4.9%, to $0.6 million, respectively, compared to the three and nine months ended September 24, 2011. The decrease was due primarily to lower average borrowing rates year to year and the pay-off of our Goodyear mortgage, which was our highest interest rate debt. Interest expense for the three and nine months ended September 29, 2012 and September 24, 2011 primarily relates to borrowings on our revolving line of credit and capital lease financing. For a description of our various financing facilities, see Note 5 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Income Tax Provision. Our income tax provision for the quarter ended September 29, 2012 was $1.0 million, compared to an income tax benefit of $0.2 million for the quarter ended September 24, 2011. Our effective tax rate for the three months ended September 29, 2012 and September 24, 2011 was 36.9% and a benefit of 56.2%, respectively. The change in the effective rate is due to slightly smaller benefits of the domestic production activity deductions, research credits and other items, along with lesser tax-effected equity compensation costs.

The income tax provision for the nine months ended September 29, 2012 was $2.9 million, compared $1.0 million for the first nine months of 2011. Our effective tax rate for the nine months ended September 29, 2012 and September 24, 2011 was 36.4% and 33.5%, respectively. The change in the effective rate is due to higher tax-effected equity compensation costs and lesser benefits associated with research tax credits.

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 $24.4 million (a current ratio of 2.0:1) and $22.9 million (a current ratio of 1.8:1) at September 29, 2012 and December 31, 2011, respectively.

Operating Cash Flows

Cash flows from operations for the nine months ended September 29, 2012 and September 24, 2011 reflect our net income, adjusted for non-cash items such as depreciation, amortization, share-based compensation expense and write-offs and write-downs of assets, as well as changes in accounts receivable, inventories, other current assets and liabilities, accounts payable and accrued expenses and other liabilities. Net cash provided by operating activities was $9.4 million for the nine months ended September 29, 2012 and $0.1 million for the nine months ended September 24, 2011. The year-over-year increase was primarily a result of less cash used to build inventory in the first nine months of 2012. During the prior year, we elected to take advantage of purchasing higher quantities of lower cost fresh berries in order to reduce our frozen berry purchase requirements. The increase in inventory during 2011 was the primary driver of the increase in accounts payable and accrued liabilities during the period.


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Investing Cash Flows

Net cash used in investing activities, all representing capital expenditures, was $5.3 million in the first nine months of 2012 compared to $8.6 million in the first nine months of 2011. Capital expenditures in 2012 relate to the purchase of manufacturing equipment of $4.3 million, primarily at our Lynden facility, $0.6 million in furniture and office equipment and $0.4 million of building improvements. Capital expenditures of $8.6 million in 2011 relate to the purchase of manufacturing equipment of $6.0 million, primarily at our Goodyear facility for new kettles and packaging, $1.8 million of building improvements, and $0.8 million in furniture and office equipment. During the full year 2012, we plan to spend approximately $6.0 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 used in financing activities for the first nine months of 2012 was $4.2 million compared to net cash provided of $8.9 million in the first nine months of 2011. The year-over-year increase in net cash used in financing activities was primarily a result of debt repayments occurring during the first nine months of 2012, including a $1.3 million payment on the maturing mortgage loan on the Goodyear facility. The cash provided by financing activities during the first nine months of 2011 were primarily due to borrowings on our credit facility to fund capital expenditure initiatives at our Goodyear facility and planned build-up of inventories.

Debt and Capital Resources

At September 29, 2012, there was $10.3 million of borrowing availability under the revolving line of credit in our Loan Agreement with U.S. Bank. 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 Loan Agreement), subject, in certain instances, to the expiration of an applicable cure period. The agreement requires us to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a leverage ratio.
At September 29, 2012, we were in compliance with all of the financial covenants. See Note 5 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this report for detail regarding our financing arrangements.

Outlook

We believe that our current financing arrangement with U.S. Bank will provide adequate ability to finance future capital expenditures. During the full year 2012, we plan to spend approximately $6.0 million in capital expenditures, 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 the our business strategy, 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. Management believes 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. The 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.

Interest Rate Swaps

See Note 5 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this report for detail regarding our interest rate swaps.


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Contractual Obligations

Our future contractual obligations consist principally of long-term debt, operating leases, minimum commitments regarding third party warehouse operations services, remaining minimum royalty payments due licensors pursuant to brand licensing agreements and severance charges to terminated executives. As of September 29, 2012 there have been no material changes to our contractual obligations since our December 31, 2011 fiscal year end, other than scheduled payments.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates since the filing of our Form 10-K for the year ended December 31, 2011.

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