Note 3 – Acquisition of Squirrel Brand L.P.
On November 30, 2017, we acquired certain assets and assumed
certain liabilities (the “Acquisition”) of Squirrel
Brand L.P. (“Squirrel Brand”) for a purchase price of
$31,500, subject to a working capital adjustment. After giving
effect to the initial working capital adjustment, the purchase
price was $33,409, of which $21,909 was paid in cash and $11,500
was financed by the seller through a three-year unsecured
promissory note (the “Promissory Note”). The final
working capital adjustment, if any, will be completed in our
upcoming third quarter of fiscal 2018. The cash portion of the
acquisition price was funded from our credit facility. The
Promissory Note bears interest at 5.5% per annum and is payable in
equal monthly principal payments of $319, plus interest, beginning
in January 2018. The Promissory Note can be prepaid without
penalty.
The Squirrel Brand business is one of the nation’s leading
suppliers of indulgent and premium roasted nuts and snack mixes
under its Squirrel Brand and Southern Style Nuts
brands. Prior to the Acquisition, Squirrel Brand was a customer in
our Contract Packaging sales channel for fourteen years. The
Acquisition has been accounted for as a business combination in
accordance with ASC Topic 805, “Business
Combinations”. As a result of the Acquisition, we expanded
our customer base and branded product portfolio, as well as
increased our customer reach, especially into alternative
distribution channels.
The total purchase price of $33,409 has been allocated on a
preliminary basis to the fair values of the assets acquired and
liabilities assumed as follows:
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Accounts receivable
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$ |
2,446 |
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Inventories
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1,957 |
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Other assets
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75 |
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Identifiable intangible assets:
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Customer relationships
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10,500 |
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Brand names
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8,900 |
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Non-compete agreement
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270 |
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Goodwill
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9,638 |
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Accounts payable and accrued expenses
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(377 |
) |
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Total Purchase Price
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$ |
33,409 |
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The customer relationship assets represent the value of the
long-term strategic relationship the Squirrel Brand business has
with its significant customers, which we are amortizing over a
weighted-average life of 7.5 years. The assets were valued using an
income approach, specifically the “multi-period excess
earnings” method, which identifies an estimated stream of
revenues and expenses for a particular group of assets from which
deductions of portions of the projected economic benefits,
attributable to assets other than the subject asset (contributory
assets), are deducted in order to isolate the prospective earnings
of the subject asset. This value is considered a level 3
measurement under the GAAP fair value hierarchy.
The brand name assets represent the value of the established
Squirrel Brand and Southern Style Nuts names. We
applied the income approach through a relief from royalty method
analysis to determine the preliminary fair value of the brand name
assets. We are amortizing the brand name assets over a
weighted-average life of 13.8 years.
Goodwill, which is expected to be deductible for taxes, arises from
intangible assets that do not qualify for separate recognition and
expected synergies from combining the operations of Squirrel Brand
with the Company. There were no material contingencies recognized
or unrecognized associated with the acquired business.
The purchase price allocation, especially amounts allocated to
goodwill and intangible assets are based on preliminary valuations
and are subject to final adjustments to reflect the final net
working capital adjustment and valuations.
The following reflects the unaudited pro forma results of
operations of the Company as if the Acquisition had taken place at
the beginning of fiscal 2017. This pro forma information does not
purport to represent what the Company’s actual results would
have been if the Acquisition had occurred as of the date indicated
or what such results would be for any future periods.
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Year-Ended
June 29,
2017 |
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Twenty-six
weeks ended
December 28,
2017 |
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Pro forma net sales
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$ |
863,267 |
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$ |
479,054 |
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Pro forma net income
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36,723 |
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|
18,762 |
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Pro forma diluted earnings per share
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$ |
3.22 |
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$ |
1.64 |
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These unaudited pro forma results have been calculated after
applying our accounting policies and adjusting the results of the
Squirrel Brand business to reflect elimination of transaction costs
and to record additional amortization and interest expense that
would have been charged, assuming the fair value adjustment to
intangible assets since July 1, 2016, net of related income
taxes in respect of pro forma net income and diluted earnings per
share performance. Transaction costs of $500, already recorded in
Administrative expenses, are excluded from the pro forma net income
for the twenty-six weeks
ended December 28, 2017 stated above.
Net sales of $3,976 resulting from the Acquisition are included in
our consolidated financial results as of December 28, 2017
since the Acquisition closed on November 30, 2017.
Since the Acquisition, we continue to operate in a single
reportable operating segment that consists of selling various nut
and nut-related products
through three sales distribution channels.