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   UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the period ended March 28, 2020

or

 

☐     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number:     0-14616

 

J&J SNACK FOODS CORP.

(Exact name of registrant as specified in its charter)

 

New Jersey 22-1935537 
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

                                       

6000 Central Highway, Pennsauken, New Jersey 08109

(Address of principal executive offices)

 

Telephone (856) 665-9533

 

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

 

 

Title of Each Class   Trading Symbol(s)    Name of Each Exchange on Which Registered
Common Stock, no par value   JJSF   The NASDAQ Global Select Market

               

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 No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

  Yes No

 

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

         
Large Accelerated filer   Accelerated filer
         
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes No

 

As of April 23, 2020 there were 18,887,853 shares of the Registrant’s Common Stock outstanding.

 

 

 

 

INDEX

    Page
    Number

Part I.

Financial Information

 
     

Item l.

Consolidated Financial Statements

 
 

   

 
 

Consolidated Balance Sheets – March 28, 2020 (unaudited) and September 28, 2019

3

     
 

Consolidated Statements of Earnings (unaudited) – Three months ended March 28, 2020 and March 30, 2019

4

     
 

Consolidated Statements of Comprehensive Income (unaudited) – Three Months Ended March 28, 2020 and March 30, 2019

5

     
 

Consolidated Statements of Changes In Stockholders’ Equity (unaudited) – Three Months Ended March 28,2020 and March 30, 2019  

6

     

        

Consolidated Statements of Cash Flows (unaudited) – Three Months Ended March 28, 2020 and March 30, 2019

7

     
 

Notes to the Consolidated Financial Statements (unaudited)

8

     

Item 2.

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

26

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

     

Item 4.

Controls and Procedures

31

     

Part II.

Other Information

 
     

Item 6.

Exhibits 

32

 

2

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

   

March 28,

         
   

2020

   

September 28,

 
   

(unaudited)

   

2019

 

Assets

               

Current assets

               

Cash and cash equivalents

  $ 142,969     $ 192,395  

Marketable securities held to maturity

    69,337       51,091  

Accounts receivable, net

    134,746       140,938  

Inventories

    128,090       116,165  

Prepaid expenses and other

    7,352       5,768  

Total current assets

    482,494       506,357  
                 

Property, plant and equipment, at cost

               

Land

    2,494       2,494  

Buildings

    26,582       26,582  

Plant machinery and equipment

    331,535       315,360  

Marketing equipment

    256,502       240,681  

Transportation equipment

    9,839       9,725  

Office equipment

    32,271       31,217  

Improvements

    41,774       40,626  

Construction in progress

    10,050       10,039  

Total Property, plant and equipment, at cost

    711,047       676,724  

Less accumulated depreciation and amortization

    441,886       423,276  

Property, plant and equipment, net

    269,161       253,448  
                 

Other assets

               

Goodwill

    123,033       102,511  

Other intangible assets, net

    81,948       54,922  

Marketable securities held to maturity

    41,091       79,360  

Marketable securities available for sale

    12,947       19,903  

Operating lease right-of-use assets

    64,502       -  

Other

    2,761       2,838  

Total other assets

    326,282       259,534  

Total Assets

  $ 1,077,937     $ 1,019,339  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current finance lease liabilities

  $ 345     $ 339  

Accounts payable

    67,494       72,029  

Accrued insurance liability

    12,940       10,457  

Accrued liabilities

    6,945       7,808  

Current operating lease liabilities

    13,109       -  

Accrued compensation expense

    16,345       21,154  

Dividends payable

    10,879       9,447  

Total current liabilities

    128,057       121,234  
                 

Noncurrent finance lease liabilities

    544       718  

Noncurrent operating lease liabilities

    54,267       -  

Deferred income taxes

    61,464       61,920  

Other long-term liabilities

    537       1,716  
                 

Stockholders' Equity

               

Preferred stock, $1 par value; authorized 10,000,000 shares; none issued

    -       -  

Common stock, no par value; authorized, 50,000,000 shares; issued and outstanding 18,888,000 and 18,895,000 respectively

    45,549       45,744  

Accumulated other comprehensive loss

    (16,099 )     (12,988 )

Retained Earnings

    803,618       800,995  

Total stockholders' equity

    833,068       833,751  

Total Liabilities and Stockholders' Equity

  $ 1,077,937     $ 1,019,339  

 

 

The accompanying notes are an integral part of these statements.

 

3

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands, except per share amounts)

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net Sales

  $ 272,042     $ 276,302     $ 554,939     $ 547,914  
                                 

Cost of goods sold

    202,599       197,054       407,635       391,803  

Gross Profit

    69,443       79,248       147,304       156,111  
                                 

Operating expenses

                               

Marketing

    23,848       21,952       46,580       43,394  

Distribution

    24,834       22,122       48,376       46,074  

Administrative

    10,174       9,998       19,792       19,241  

Other general (income) expense

    (395 )     405       (129 )     549  

Total Operating Expenses

    58,461       54,477       114,619       109,258  
                                 

Operating Income

    10,982       24,771       32,685       46,853  
                                 

Other (expense)income

                               

Investment(loss)income

    (413 )     2,782       1,373       3,822  

Interest expense & other

    (27 )     (25 )     (53 )     (52 )
                                 

Earnings before income taxes

    10,542       27,528       34,005       50,623  
                                 

Income taxes

    3,233       7,174       9,637       12,743  
                                 

NET EARNINGS

  $ 7,309     $ 20,354     $ 24,368     $ 37,880  
                                 

Earnings per diluted share

  $ 0.38     $ 1.08     $ 1.28     $ 2.00  
                                 

Weighted average number of diluted shares

    19,014       18,891       19,079       18,894  
                                 

Earnings per basic share

  $ 0.39     $ 1.08     $ 1.29     $ 2.02  
                                 

Weighted average number of basic shares

    18,921       18,795       18,910       18,780  

 

 

The accompanying notes are an integral part of these statements.

 

4

 

 

J&J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net Earnings

  $ 7,309     $ 20,354     $ 24,368     $ 37,880  
                                 

Foreign currency translation adjustments

    (3,921 )     394       (3,111 )     (965 )

Total Other Comprehensive (Loss) income , net of tax

    (3,921 )     394       (3,111 )     (965 )
                                 

Comprehensive Income

  $ 3,388     $ 20,748     $ 21,257     $ 36,915  

 

 

The accompanying notes are an integral part of these statements.

 

5

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands)

 

                   

Accumulated

                 
                   

Other

                 
   

Common Stock

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Loss

   

Earnings

   

Total

 
                                         

Balance at September 28, 2019

    18,895     $ 45,744     $ (12,988 )   $ 800,995     $ 833,751  

Issuance of common stock upon exercise of stock options

    5       468       -       -       468  

Foreign currency translation adjustment

    -       -       810       -       810  

Dividends declared

    -       -       -       (10,867 )     (10,867 )

Share-based compensation

    -       1,299       -       -       1,299  

Net earnings

    -       -       -       17,059       17,059  
                                         

Balance at December 28, 2019

    18,900     $ 47,511     $ (12,178 )   $ 807,187     $ 842,520  

Issuance of common stock upon exercise of stock options

    47       5,049       -       -       5,049  
Issuance of common stock for employee stock purchase plan     6       783       -       -       783  

Foreign currency translation adjustment

    -       -       (3,921 )     -       (3,921 )

Issuance of common stock under deferred stock plan

    1       90       -       -       90  

Dividends declared

    -       -       -       (10,878 )     (10,878 )

Share-based compensation

    -       1,088       -       -       1,088  

Repurchase of common stock

    (66 )     (8,972 )     -       -       (8,972 )

Net earnings

    -       -       -       7,309       7,309  
                                         

Balance at March 28, 2020

    18,888       45,549       (16,099 )     803,618       833,068  

 

 

                   

Accumulated

                 
                   

Other

                 
   

Common Stock

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Loss

   

Earnings

   

Total

 
                                         

Balance at September 29, 2018

    18,754     $ 27,340     $ (11,994 )   $ 743,745     $ 759,091  

Issuance of common stock upon exercise of stock options

    20       1,704       -       -       1,704  

Foreign currency translation adjustment

    -       -       (1,359 )     -       (1,359 )

Reclass from accumulated other comprehensive gain

    -       -       (85 )     85       -  

Dividends declared

    -       -       -       (9,389 )     (9,389 )

Share-based compensation

    -       972       -       -       972  

Net earnings

    -       -       -       17,526       17,526  
                                         

Balance at December 29, 2018

    18,774     $ 30,016     $ (13,438 )   $ 751,967     $ 768,545  

Issuance of common stock upon exercise of stock options

    34       3,451       -       -       3,451  

Issuance of common stock for employee stock purchase plan

    6       772       -       -       772  

Foreign currency translation adjustment

    -       -       394       -       394  

Issuance of common stock under deferred stock plan

    1       90       -       -       90  

Dividends declared

    -       -       -       (9,405 )     (9,405 )

Share-based compensation

    -       914       -       -       914  

Repurchase of common stock

    -       -       -       -       -  

Net earnings

    -       -       -       20,354       20,354  
                                         

Balance at March 30, 2019

    18,815       35,243       (13,044 )     762,916       785,115  

 

 

The accompanying notes are an integral part of these statements.

 

6

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (in thousands)

 

   

Six Months Ended

 
                 
   

March 28,

   

March 30,

 
   

2020

   

2019

 

Operating activities:

               

Net earnings

  $ 24,368     $ 37,880  

Adjustments to reconcile net earnings to net cash provided by operating activities:

               

Depreciation of fixed assets

    24,810       21,890  

Amortization of intangibles and deferred costs

    1,677       1,747  

Share-based compensation

    2,432       1,931  

Deferred income taxes

    (298 )     615  

Loss on marketable securities

    2,070       284  

Other

    (286 )     268  

Changes in assets and liabilities net of effects from purchase of companies

               

Decrease in accounts receivable

    6,343       2,003  

Increase in inventories

    (11,328 )     (10,186 )

(Increase) decrease in prepaid expenses

    (1,598 )     172  

Decrease in accounts payable and accrued liabilities

    (5,920 )     (6,345 )

Net cash provided by operating activities

    42,270       50,259  

Investing activities:

               

Payments for purchases of companies, net of cash acquired

    (57,197 )     -  

Purchases of property, plant and equipment

    (36,985 )     (26,351 )

Purchases of marketable securities

    (6,103 )     (19,531 )

Proceeds from redemption and sales of marketable securities

    30,938       23,137  

Proceeds from disposal of property and equipment

    1,853       878  

Other

    (63 )     (207 )

Net cash used in investing activities

    (67,557 )     (22,074 )

Financing activities:

               

Payments to repurchase common stock

    (8,972 )     -  

Proceeds from issuance of stock

    6,300       5,926  

Payments on capitalized lease obligations

    (168 )     (167 )

Payment of cash dividend

    (20,314 )     (17,825 )

Net cash used in financing activities

    (23,154 )     (12,066 )

Effect of exchange rate on cash and cash equivalents

    (985 )     (943 )

Net (decrease) increase in cash and cash equivalents

    (49,426 )     15,176  

Cash and cash equivalents at beginning of period

    192,395       111,479  

Cash and cash equivalents at end of period

  $ 142,969     $ 126,655  

 

 

The accompanying notes are an integral part of these statements.

 

7

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 1

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended September 28, 2019.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows.

 

The results of operations for the three and six months ended March 28, 2020 and March 30, 2019 are not necessarily indicative of results for the full year. Sales of our frozen beverages and frozen juice bars and ices are generally higher in the third and fourth quarters due to warmer weather.

 

Certain prior year financial statement amounts have been reclassified to be consistent with the presentation for the current year.

 

While we believe that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2019.

 

 

 

Note 2

 

Revenue Recognition

 

When Performance Obligations Are Satisfied

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

 

8

 

The singular performance obligation of our customer contracts for product and machine sales is determined by each individual purchase order and the respective products ordered, with revenue being recognized at a point-in-time when the obligation under the terms of the agreement is satisfied and product control is transferred to our customer. Specifically, control transfers to our customers when the product is delivered to, installed or picked up by our customers based upon applicable shipping terms, as our customers can direct the use and obtain substantially all of the remaining benefits from the product at this point in time. The performance obligations in our customer contracts for product are generally satisfied within 30 days.

 

The singular performance obligation of our customer contracts for time and material repair and maintenance equipment service is the performance of the repair and maintenance with revenue being recognized at a point-in-time when the repair and maintenance is completed.

 

The singular performance obligation of our customer repair and maintenance equipment service contracts is the performance of the repair and maintenance with revenue being recognized over the time the service is expected to be performed. Our customers are billed for service contracts in advance of performance and therefore we have contract liability on our balance sheet.

 

Significant Payment Terms

In general, within our customer contracts, the purchase order identifies the product, quantity, price, pick-up allowances, payment terms and final delivery terms. Although some payment terms may be more extended, presently the majority of our payment terms are 30 days. As a result, we have used the available practical expedient and, consequently, do not adjust our revenues for the effects of a significant financing component.

 

Shipping

All amounts billed to customers related to shipping and handling are classified as revenues; therefore, we recognize revenue for shipping and handling fees at the time the products are shipped or when services are performed. The cost of shipping products to the customer is recognized at the time the products are shipped to the customer and our policy is to classify them as Distribution expenses.

 

Variable Consideration

In addition to fixed contract consideration, our contracts include some form of variable consideration, including sales discounts, trade promotions and certain other sales and consumer incentives, including rebates and coupon redemptions. In general, variable consideration is treated as a reduction in revenue when the related revenue is recognized. Depending on the specific type of variable consideration, we use the most likely amount method to determine the variable consideration. We believe there will be no significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. We review and update our estimates and related accruals of variable consideration each period based on historical experience. Our recorded liability for allowances, end-user pricing adjustments and trade spending was approximately $14 million at March 28, 2020 and $14.8 million at September 28, 2019.

 

9

 

Warranties & Returns

We provide all customers with a standard or assurance type warranty. Either stated or implied, we provide assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No services beyond an assurance warranty are provided to our customers.

 

We do not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. We do not estimate a right of return and related refund liability as returns of our products are rare.

 

Contract Balances

Our customers are billed for service contracts in advance of performance and therefore we have contract liability on our balance sheet as follows:

 

    (in thousands)  
   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Beginning Balance

  $ 1,094     $ 1,923     $ 1,334     $ 1,865  

Additions to contract liability

    1,474       1,337       2,749       3,028  

Amounts recognized as revenue

    (1,333 )     (1,605 )     (2,848 )     (3,238 )

Ending Balance

  $ 1,235     $ 1,655     $ 1,235     $ 1,655  

 

Disaggregation of Revenue

See Note 9 for disaggregation of our net sales by class of similar product and type of customer.

 

Allowance for Doubtful Receivables

 

We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors. The allowance for doubtful receivables was $588,000 and $572,000 at March 28, 2020 and September 28, 2019, respectively.

 

10

 

 

Note 3

Depreciation of equipment and buildings is provided for by the straight-line method over the assets’ estimated useful lives. Amortization of improvements is provided for by the straight-line method over the term of the lease or the assets’ estimated useful lives, whichever is shorter. Licenses and rights, customer relationships and non-compete agreements arising from acquisitions are amortized by the straight-line method over periods ranging from 2 to 20 years. Depreciation expense was $12,923,000 and $11,116,000 for the three months ended March 28, 2020 and March 30, 2019, respectively and $24,810,000 and $21,890,000 for the six months ended March 28, 2020 and March 30, 2019, respectively.

 

 

 

Note 4

Basic earnings per common share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into consideration the potential dilution that could occur if securities (stock options) or other contracts to issue common stock were exercised and converted into common stock. Our calculation of EPS is as follows:

 

   

Three Months Ended March 28, 2020

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 7,309       18,921     $ 0.39  
                         

Effect of Dilutive Securities

                       

Options

    -       93       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 7,309       19,014     $ 0.38  

 

180,258 anti-dilutive shares have been excluded in the computation of EPS for the three months ended March 28, 2020

 

   

Six Months Ended March 28, 2020

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 24,368       18,910     $ 1.29  
                         

Effect of Dilutive Securities

                       

Options

    -       169       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 24,368       19,079     $ 1.28  

 

180,258 anti-dilutive shares have been excluded in the computation of EPS for the six months ended March 28, 2020

 

11

 

   

Three Months Ended March 30, 2019

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 20,354       18,795     $ 1.08  
                         

Effect of Dilutive Securities

                       

Options

    -       96       -  
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 20,354       18,891     $ 1.08  

 

800 anti-dilutive shares have been excluded in the computation of EPS for the three months ended March 30, 2019

 

   

Six Months Ended March 30, 2019

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 37,880       18,780     $ 2.02  
                         

Effect of Dilutive Securities

                       

Options

    -       114       (0.02 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 37,880       18,894     $ 2.00  

 

800 anti-dilutive shares have been excluded in the computation of EPS for the six months ended March 30, 2019

 

12

 

 

Note 5

At March 28, 2020, the Company has three stock-based employee compensation plans. Share-based compensation expense was recognized as follows:

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Stock Options

  $ 412     $ 449     $ 1,377     $ 1,078  

Stock purchase plan

    69       68       271       137  

Stock issued to an outside director

    33       33       33       33  

Total share-based compensation

  $ 514     $ 550     $ 1,681     $ 1,248  
                                 

The above compensation is net of tax benefits

  $ 620     $ 410     $ 751     $ 683  

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in fiscal 2020 six months: expected volatility of 17.4%; risk-free interest rate of 1.1%; dividend rate of 1.3% and expected lives of 51 months.

 

During the fiscal year 2020 six month period, the Company granted 1,300 stock options. The weighted-average grant date fair value of these options was $24.67.

 

During the fiscal year 2019 six month period, the Company granted 1,800 stock options. The weighted-average grant date fair value of these options was $26.33. 

 

Expected volatility is based on the historical volatility of the price of our common shares over the past 51 months for 5 year options and 10 years for 10 year options. We use historical information to estimate expected life and forfeitures within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.

 

 

 

Note 6

We account for our income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse.  Deferred tax expense is the result of changes in deferred tax assets and liabilities.

 

Additionally, we recognize a liability for income taxes and associated penalties and interest for tax positions taken or expected to be taken in a tax return which are more likely than not to be overturned by taxing authorities (“uncertain tax positions”).  We have not recognized a tax benefit in our financial statements for these uncertain tax positions.  

 

13

 

The total amount of gross unrecognized tax benefits is $414,000 and $414,000 on March 28, 2020 and September 28, 2019, respectively, all of which would impact our effective tax rate over time, if recognized. We recognize interest and penalties related to uncertain tax positions as a part of the provision for income taxes. As of March 28, 2020, and September 28, 2019, respectively, the Company has $279,000 and $279,000 of accrued interest and penalties.


In addition to our federal tax return and tax returns for Mexico and Canada, we file tax returns in all states that have a corporate income tax with virtually all open for examination for three to four years.

 

Net earnings in last year’s six months benefitted by a reduction of approximately $900,000 in tax as the provision for the one time repatriation tax as a result of the Tax Cuts and Job Act of 2017 was reduced as the amount recorded the year prior was an estimate. Excluding the reduction in the provision for the one time repatriation tax, our effective tax rate was 27.0% in last year’s six months.

 

 

 

Note 7

In February 2016, the FASB issued guidance on lease accounting which requires that an entity recognize most leases on its balance sheet.  The guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as “capital” and “operating” leases for lessees. We adopted the guidance on September 29, 2019 using this alternate transition method, but we did not record a cumulative-effect adjustment from initially applying the standard. We elected the package of practical expedients that permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs and made an accounting policy election to exclude short-term leases with an initial term of 12 months or less from our Consolidated Balance Sheets. We have completed the implementation of a lease accounting system to enable the preparation of financial information and have implemented relevant accounting policies and internal controls surrounding the lease accounting process. As a result of adoption, we recognized a right-of-use asset and lease liability of $71 million and $72 million, respectively. The right-of-use asset balance reflects the reclassification of deferred rent and prepaid rent against the initial asset. The adoption did not impact our results of operations or cash flows. See additional lease disclosures in Note 14.

 

14

 

In June 2016, the FASB issued guidance to update the methodology used to measure current expected credit losses (CECL). This guidance applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This guidance replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. This guidance will be effective beginning in the first quarter of our fiscal year 2021.  Early adoption is permitted. We are currently evaluating the impact this guidance will have on our financial statements and related disclosures.

 

 

 

Note 8

Inventories consist of the following:

 

   

March 28,

   

September 28,

 
   

2020

   

2019

 
   

(unaudited)

         
   

(in thousands)

 
                 

Finished goods

  $ 61,892     $ 53,225  

Raw materials

    23,075       22,146  

Packaging materials

    9,438       9,703  

Equipment parts and other

    33,685       31,091  

Total Inventories

  $ 128,090     $ 116,165  

 

 

 

Note 9

We principally sell our products to the food service and retail supermarket industries. Sales and results of our frozen beverages business are monitored separately from the balance of our food service business because of different distribution and capital requirements. We maintain separate and discrete financial information for the three operating segments mentioned above which is available to our Chief Operating Decision Makers.

 

Our three reportable segments are Food Service, Retail Supermarkets and Frozen Beverages. All inter-segment net sales and expenses have been eliminated in computing net sales and operating income. These segments are described below.

 

Food Service

 

The primary products sold by the food service group are soft pretzels, frozen juice treats and desserts, churros, dough enrobed handheld products and baked goods. Our customers in the food service industry include snack bars and food stands in chain, department and discount stores; malls and shopping centers; fast food outlets; stadiums and sports arenas; leisure and theme parks; convenience stores; movie theatres; warehouse club stores; schools, colleges and other institutions. Within the food service industry, our products are purchased by the consumer primarily for consumption at the point-of-sale.

 

Retail Supermarkets

 

The primary products sold to the retail supermarket channel are soft pretzel products – including SUPERPRETZEL, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, WHOLE FRUIT frozen fruit bars and sorbet, PHILLY SWIRL cups and sticks, ICEE Squeeze-Up Tubes and dough enrobed handheld products including PATIO burritos. Within the retail supermarket channel, our frozen and prepackaged products are purchased by the consumer for consumption at home.

 

Frozen Beverages

 

We sell frozen beverages and related products to the food service industry primarily under the names ICEE, SLUSH PUPPIE and PARROT ICE in the United States, Mexico and Canada. We also provide repair and maintenance service to customers for customers’ owned equipment.

 

15

 

The Chief Operating Decision Maker for Food Service and Retail Supermarkets and the Chief Operating Decision Maker for Frozen Beverages monthly review detailed operating income statements and sales reports in order to assess performance and allocate resources to each individual segment. Sales and operating income are key variables monitored by the Chief Operating Decision Makers and management when determining each segment’s and the company’s financial condition and operating performance. In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment. Due to a change in management and the reporting of our MARYB’s biscuit operations, which had sales and operating income of $25,316,000 and $1,584,000, respectively, in our 2019 fiscal year, we have reclassified the operations from our Food Service segment to our Retail Supermarket segment, which is reflected in both periods reported. Information regarding the operations in these three reportable segments is as follows:

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Sales to External Customers:

                               

Food Service

                               

Soft pretzels

  $ 45,660     $ 49,812     $ 95,601     $ 98,803  

Frozen juices and ices

    9,491       8,947       16,534       16,474  

Churros

    14,754       15,770       31,145       30,905  

Handhelds

    7,447       7,987       14,636       16,789  

Bakery

    89,407       84,406       185,779       178,651  

Other

    4,573       8,145       11,085       13,471  

Total Food Service

  $ 171,332     $ 175,067     $ 354,780     $ 355,093  
                                 

Retail Supermarket

                               

Soft pretzels

  $ 12,332     $ 10,829     $ 22,158     $ 21,015  

Frozen juices and ices

    15,864       14,668       25,957       25,664  

Biscuits

    6,630       6,358       13,608       14,222  

Handhelds

    3,117       2,479       5,878       5,047  

Coupon redemption

    (866 )     (507 )     (1,409 )     (1,201 )

Other

    494       340       805       699  

Total Retail Supermarket

  $ 37,571     $ 34,167     $ 66,997     $ 65,446  
                                 

Frozen Beverages

                               

Beverages

  $ 31,895     $ 33,603     $ 67,150     $ 65,039  

Repair and maintenance service

    21,779       20,034       44,265       39,777  

Machines revenue

    8,910       13,161       20,891       22,065  

Other

    555       270       856       494  

Total Frozen Beverages

  $ 63,139     $ 67,068     $ 133,162     $ 127,375  
                                 

Consolidated Sales

  $ 272,042     $ 276,302     $ 554,939     $ 547,914  
                                 

Depreciation and Amortization:

                               

Food Service

  $ 7,240     $ 6,616     $ 14,158     $ 12,938  

Retail Supermarket

    329       320       688       655  

Frozen Beverages

    6,188       5,066       11,641       10,044  

Total Depreciation and Amortization

  $ 13,757     $ 12,002     $ 26,487     $ 23,637  
                                 

Operating Income :

                               

Food Service

  $ 7,951     $ 19,182     $ 25,985     $ 36,879  

Retail Supermarket

    4,337       3,039       6,554       5,250  

Frozen Beverages

    (1,306 )     2,550       146       4,724  

Total Operating Income

  $ 10,982     $ 24,771     $ 32,685     $ 46,853  
                                 

Capital Expenditures:

                               

Food Service

  $ 10,331     $ 8,403     $ 18,734     $ 14,681  

Retail Supermarket

    275       581       1,235       1,133  

Frozen Beverages

    8,774       5,530       17,016       10,537  

Total Capital Expenditures

  $ 19,380     $ 14,514     $ 36,985     $ 26,351  
                                 

Assets:

                               

Food Service

  $ 740,318     $ 699,028     $ 740,318     $ 699,028  

Retail Supermarket

    31,636       30,034       31,636       30,034  

Frozen Beverages

    305,983       223,650       305,983       223,650  

Total Assets

  $ 1,077,937     $ 952,712     $ 1,077,937     $ 952,712  

 

16

 

 

Note 10

Our three reporting units, which are also reportable segments, are Food Service, Retail Supermarkets and Frozen Beverages.

 

The carrying amounts of acquired intangible assets for the Food Service, Retail Supermarkets and Frozen Beverage segments as of March 28, 2020 and September 28, 2019 are as follows:

 

    March 28, 2020    

September 28, 2019

 
   

Gross

           

Gross

         
   

Carrying

   

Accumulated

   

Carrying

   

Accumulated

 
    Amount     Amortization     Amount     Amortization  
            (in thousands)          

FOOD SERVICE

                               
                                 

Indefinite lived intangible assets

                               

Trade names

  $ 10,408     $ -     $ 10,408     $ -  
                                 

Amortized intangible assets

                               

Non compete agreements

    670       561       858       665  

Customer relationships

    19,737       10,763       19,900       9,954  

License and rights

    1,690       1,270       1,690       1,227  

TOTAL FOOD SERVICE

  $ 32,505     $ 12,594     $ 32,856     $ 11,846  
                                 

RETAIL SUPERMARKETS

                               
                                 

Indefinite lived intangible assets

                               

Trade names

  $ 12,750     $ -     $ 12,750     $ -  
                                 

Amortized Intangible Assets

                               

Trade names

    676       454       676       389  

Customer relationships

    7,907       4,744       7,979       4,421  

TOTAL RETAIL SUPERMARKETS

  $ 21,333     $ 5,198     $ 21,405     $ 4,810  
                                 
                                 

FROZEN BEVERAGES

                               
                                 

Indefinite lived intangible assets

                               

Trade names

  $ 9,315     $ -     $ 9,315     $ -  

Distribution rights

    34,900       -       6,900       -  
                                 

Amortized intangible assets

                               

Customer relationships

    1,439       185       737       102  

Licenses and rights

    1,400       967       1,400       933  

TOTAL FROZEN BEVERAGES

  $ 47,054     $ 1,152     $ 18,352     $ 1,035  
                                 

CONSOLIDATED

  $ 100,892     $ 18,944     $ 72,613     $ 17,691  

 

Fully amortized intangible assets have been removed from the March 28, 2020 amounts. Intangible assets of $21,769,000 were added in the frozen beverages segment from the acquisition of ICEE Distributors in the quarter ended December 28, 2019 and $6,933,000 from the acquisition of BAMA ICEE in the quarter ended March 28, 2020.

 

17

 

Amortizing intangible assets are being amortized by the straight-line method over periods ranging from 2 to 20 years and amortization expense is reflected throughout operating expenses. Aggregate amortization expense of intangible assets for the three months ended March 28, 2020 and March 30, 2019 was $833,000 and $831,000, respectively. Aggregate amortization expense of intangible assets for the six months ended March 28, 2020 and March 30, 2019 was $1,676,000 and $1,686,000, respectively.

 

Estimated amortization expense for the next five fiscal years is approximately $3,100,000 in 2020, $2,500,000 in 2021, $2,300,000 in 2022, $2,300,000 in 2023 and $2,000,000 in 2024. The weighted amortization period of the intangible assets is 10.7 years.

 

Goodwill 

 

The carrying amounts of goodwill for the Food Service, Retail Supermarket and Frozen Beverage segments are as follows:

 

   

Food

   

Retail

   

Frozen

         
    Service     Supermarket     Beverages     Total  
   

(in thousands)

 

Balance at March 28, 2020

  $ 61,189     $ 4,146     $ 57,698     $ 123,033  
                                 

Balance at September 28, 2019

  $ 61,189     $ 4,146     $ 37,176     $ 102,511  

 

Goodwill of $16,973,000 was added in the frozen beverages segment from the acquisition of ICEE Distributors in the quarter ended December 28, 2019 and $3,549,000 from the acquisition of BAMA ICEE in the quarter ended March 28, 2020.

 

 

 

Note 11

We have classified our investment securities as marketable securities held to maturity and available for sale. The FASB defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the FASB has established three levels of inputs that may be used to measure fair value:

 

Level 1

Observable input such as quoted prices in active markets for identical assets or liabilities;

 

Level 2

Observable inputs, other than Level 1 inputs in active markets, that are observable either directly or indirectly; and

 

Level 3

Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

18

 

Marketable securities held to maturity and available for sale consist primarily of investments in mutual funds, preferred stock and corporate bonds.  The fair values of mutual funds are based on quoted market prices in active markets and are classified within Level 1 of the fair value hierarchy.  The fair values of preferred stock, corporate bonds and certificates of deposit are based on quoted prices for identical or similar instruments in markets that are not active.  As a result, preferred stock, corporate bonds and certificates of deposit are classified within Level 2 of the fair value hierarchy. 

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at March 28, 2020 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
      (in thousands)  
                                 

Corporate Bonds

  $ 109,468     $ 527     $ 850     $ 109,145  

Certificates of Deposit

    960       5       -       965  

Total marketable securities held to maturity

  $ 110,428     $ 532     $ 850     $ 110,110  

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at March 28,2020 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(in thousands)

 
                                 

Mutual Funds

  $ 3,588     $ -     $ 862     $ 2,726  

Preferred Stock

    11,596       -       1,375       10,221  

Total marketable securities available for sale

  $ 15,184     $ -     $ 2,237     $ 12,947  

 

The mutual funds seek current income with an emphasis on maintaining low volatility and overall moderate duration. The Fixed-to-Floating Perpetual Preferred Stock generate fixed income to call dates in 2020 and 2025 and then income is based on a spread above LIBOR if the securities are not called. The mutual funds and Fixed-to-Floating Perpetual Preferred Stock do not have contractual maturities; however, we classify them as long term assets as it is our intent to hold them for a period of over one year, although we may sell some or all of them depending on presently unanticipated needs for liquidity or market conditions. The corporate bonds generate fixed income to maturity dates in 2020 through 2024, with $99 million maturing within 2 years. Our expectation is that we will hold the corporate bonds to their maturity dates and redeem them at our amortized cost.

 

19

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 28, 2019 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
       (in thousands)  
                                 

Corporate Bonds

  $ 127,571     $ 1,204     $ 36     $ 128,739  

Certificates of Deposit

    2,880       6       -       2,886  

Total marketable securities held to maturity

  $ 130,451     $ 1,210     $ 36     $ 131,625  

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 28, 2019 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
      (in thousands)  
                                 

Mutual Funds

  $ 5,549     $ -     $ 495     $ 5,054  

Preferred Stock

    14,598       266       15       14,849  

Total marketable securities available for sale

  $ 20,147     $ 266     $ 510     $ 19,903  

 

The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at March 28,2020 and September 28, 2019 are summarized as follows:

 

    March 28, 2020     September 28, 2019  
           

Fair

           

Fair

 
   

Amortized

   

Market

   

Amortized

   

Market

 
   

Cost

   

Value

   

Cost

   

Value

 
       (in thousands)  

Due in one year or less

  $ 69,337     $ 69,410     $ 51,091     $ 51,325  

Due after one year through five years

    41,091       40,699       79,360       80,300  

Due after five years through ten years

    -       -       -       -  

Total held to maturity securities

  $ 110,428     $ 110,109     $ 130,451     $ 131,625  

Less current portion

    69,337       69,410       51,091       51,325  

Long term held to maturity securities

  $ 41,091     $ 40,699     $ 79,360     $ 80,300  

 

20

 

Proceeds from the redemption and sale of marketable securities were $12,156,000 and $30,938,000 in the three and six months ended March 28, 2020 and were $6,012,000 and $23,137,000 in the three and six months ended March 30, 2019, respectively. Losses of $2,059,000 and $2,070,000 were recorded in the three and six months ended March 28, 2020 and losses of $973,000 and $284,000 were recorded in the three and six months ended March 30, 2019. Included in the losses were unrealized losses of $1,993,000 and $267,000 in the six months ended March 28, 2020 and March 30, 2019 respectively. Unrealized losses of $2,064,000 were recorded in the three months ended March 28, 2020 and unrealized gains of $760,000 were recorded in the three months ended March 30, 2019. We use the specific identification method to determine the cost of securities sold.

 

 

 

Note 12

Changes to the components of accumulated other comprehensive loss are as follows:

   

 

Three Months Ended March 28, 2020

   

 

Six Months Ended March 28, 2020

 
             
    (unaudited)     (unaudited)  
    (in thousands)     (in thousands)  
                                 
   

Foreign Currency

           

Foreign Currency

         
   

Translation

           

Translation

         
   

Adjustments

   

Total

   

Adjustments

   

Total

 
                                 

Beginning Balance

  $ (12,178 )   $ (12,178 )   $ (12,988 )   $ (12,988 )
                                 

Other comprehensive income (loss) before reclassifications

    (3,921 )   $ (3,921 )     (3,111 )   $ (3,111 )
                                 

Ending Balance

  $ (16,099 )   $ (16,099 )   $ (16,099 )   $ (16,099 )

 

21

 

   

Three Months Ended March 30, 2019

           

Six Months Ended March 30, 2019

         
    (unaudited)             (unaudited)          
    (in thousands)             (in thousands)          
                                                 
           

Unrealized

                   

Unrealized

         
   

Foreign Currency

   

Holding Gain

           

Foreign Currency

   

Holding Gain

         
   

Translation

   

on Marketable

           

Translation

   

on Marketable

         
   

Adjustments

   

Securities

   

Total

   

Adjustments

   

Securities

   

Total

 
                                                 

Beginning Balance

  $ (13,438 )   $ -     $ (13,438 )   $ (12,079 )   $ 85     $ (11,994 )
                                                 

Other comprehensive income (loss) before reclassifications

    394       -       394       (965 )     -       (965 )
                                                 

Amounts reclassified from accumulated other comprehensive income

    -       -       -       -       (85 )     (85 )
                                                 

Ending Balance

  $ (13,044 )   $ -     $ (13,044 )   $ (13,044 )   $ -     $ (13,044 )

 

 

 

Note 13

On October 1, 2019, we acquired the assets of ICEE Distributors LLC, based in Bossier City, Louisiana. ICEE Distributors does business in Arkansas, Louisiana and Texas with annual sales of approximately $13 million. Sales and operating income of ICEE Distributors were approximately $2.5 million and $400,000 for the second quarter and were approximately $5 million and $900,000 for the six months ended March 28,2020.

   

On February 4, 2020, we acquired the assets of BAMA ICEE, based in Birmingham, Alabama. BAMA ICEE does business in Alabama and Georgia with annual sales of approximately $3.5 million. Sales and operating income of BAMA ICEE were approximately $300,000 and $100,000 for the second quarter.

 

22

 

The preliminary purchase price allocations for the acquisitions are as follows:

 

   

(in thousands)

 
                         
   

ICEE

   

BAMA

   

Total

 
   

Distributors

   

ICEE

         
                         

Accounts Receivable, net

  $ 722     $ 71     $ 793  

Inventories

    866       77       943  

Property, plant & equipment, net

    4,851       1,722       6,573  

Customer Relationships

    569       133       702  

Distribution rights

    21,200       6,800       28,000  

Goodwill

    16,973       3,549       20,522  

Accounts Payable

    (210 )     (125 )     (335 )

Purchase Price

  $ 44,970     $ 12,227     $ 57,197  

 

 

The goodwill recognized is attributable to the assembled workforce of ICEE Distributors and certain other strategic intangible assets that do not meet the requirements for recognition separate and apart from goodwill.

 

Acquisition costs of $62,000 and $98,000 are included in other general expense for the three and six months ended March 28, 2020, respectively.

 

Our unaudited proforma results, giving effect to this acquisition and assuming an acquisition date of September 29, 2018, would have been:

 

    (in thousands)  
                                 
   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net Sales

  $ 272,242     $ 279,288     $ 555,739     $ 553,745  
                                 

Net Earnings

  $ 7,308     $ 20,385     $ 24,366     $ 37,914  

 

 

 

Note 14 – Leases     

                                       

General Lease Description      

                                  

We have operating leases with initial noncancelable lease terms in excess of one year covering the rental of various facilities and equipment. Certain of these leases contain renewal options and some provide options to purchase during the lease term. Our operating leases include leases for real estate for some of our office and manufacturing facilities as well as manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these operating leases range from 1 month to 13 years.          

                                   

23

 

We have finance leases with initial noncancelable lease terms in excess of one year covering the rental of various equipment. These leases are generally for manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these finance leases range from 1 year to 6 years.                                    

         

Significant Assumptions and Judgments 

 

Contract Contains a Lease      

                                  

In evaluating our contracts to determine whether a contract is or contains a lease, we considered the following:          

                         

•         Whether explicitly or implicitly identified assets have been deployed in the contract; and     

               

•         Whether we obtain substantially all of the economic benefits from the use of that underlying asset, and we can direct how and for what purpose the asset is used during the term of the contract.              

                               

Allocation of Consideration        

                                

In determining how to allocate consideration between lease and non-lease components in a contract that was deemed to contain a lease, we used judgment and consistent application of assumptions to reasonably allocate the consideration.           

                                       

Options to Extend or Terminate Leases             

                           

We have leases which contain options to extend or terminate the leases. On a lease-by-lease basis, we have determined if the extension should be considered reasonably certain to be exercised and thus a right-of-use asset and a lease liability should be recorded.      

                                       

Discount Rate                        

                

The discount rate for leases, if not explicitly stated in the lease, is the incremental borrowing rate, which is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.             

                                

We used the discount rate to calculate the present value of the lease liability at the date of adoption. In the development of the discount rate, we considered our incremental borrowing rate as provided by our lender which was based on cash collateral and credit risk specific to us, and our lease portfolio characteristics.                                             

 

As of  September 29, 2019, the weighted-average discount rate of our operating and finance leases was 3.3% and 3.1%, respectively.

 

Practical Expedients and Accounting Policy Elections               

 

We elected the package of practical expedients that permits us not to reassess our prior conclusions about lease     identification, lease classification and initial direct costs and made an accounting policy election to exclude short-term leases with an initial term of 12 months or less from our Consolidated Balance Sheets.          

                                        

24

 

Amounts Recognized in the Financial Statements     

 

The components of lease expense were as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

March 28, 2020

   

March 28, 2020

 
   

(in thousands)

   

(in thousands)

 
                 

Operating lease cost in Cost of goods sold and Operating Expenses

  $ 4,065     $ 8,344  

Finance lease cost:

               

Amortization of assets in Cost of goods sold and Operating Expenses

    84       169  

Interest on lease liabilities in Interest expense & other

    8       16  

Total finance lease cost

    92       185  

Short-term lease cost in Cost of goods sold and Operating Expenses

    -        

Total net lease cost

  $ 4,157     $ 8,529  

 

Supplemental balance sheet information related to leases is as follows:

 

   

March 28, 2020

 
   

(in thousands)

 

Operating Leases

       

Operating lease right-of-use assets

  $ 64,502  
         

Current operating lease liabilities

  $ 13,109  

Noncurrent operating lease liabilities

    54,267  

Total operating lease liabilities

  $ 67,376  
         

Finance Leases

       

Finance lease right-of-use assets in Property, plant and equipment, net

  $ 873  
         

Current finance lease liabilities

  $ 345  

Noncurrent finance lease liabilities

    544  

Total finance lease liabilities

  $ 889  

 

Supplemental cash flow information related to leases is as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

March 28, 2020

   

March 28, 2020

 
   

(in thousands)

   

(in thousands)

 

Cash paid for amounts included in the measurement of lease liabilities:

               

Operating cash flows from operating leases

  $ 4,126     $ 8,370  

Operating cash flows from finance leases

  $ 83     $ 169  

Financing cash flows from finance leases

  $ 9     $ 16  
                 

Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets

  $ -          

Supplemental noncash information on lease liabilities removed due to purchase of leased asset

  $ -          

 

As of  March 28, 2020, the maturities of lease liabilities were as follows:

 

      (in thousands)  
   

Operating Leases

     

Finance Leases

 

Six months ending September 26, 2020

  $ 6,257       $ 184  

2021

    14,583         369  

2022

    12,303         168  

2023

    10,456         98  

2024

    8,078         98  

Thereafter

    25,550         26  

Total minimum payments

  $ 77,227       $ 943  

Less amount representing interest

    (9,851 )       (54 )

Present value of lease obligations

  $ 67,376       $ 889  

 

25

 

As of  December 28, 2019, the weighted-average remaining term of our operating and finance leases was 7.3 years and 4.0 years, respectively.

 

As previously disclosed in our 2019 Annual Report on Form 10-K and under the previous lease accounting standard (Topic 840), as of September 28, 2019, future minimum lease payments under noncancelable leases with initial lease terms in excess of one year were as follows:

 

   

(in thousands)

 
   

Operating Leases

   

Capital Leases

 

2020

  $ 14,814     $ 339  

2021

    12,686       349  

2022

    10,491       156  

2023

    8,971       91  

2024

    6,988       95  

Thereafter

    25,588       27  

Total minimum payments

  $ 79,538     $ 1,057  

 

 

Note 15 – Subsequent Event

 

Net Sales for the first 4 weeks of our third quarter ending June 27, 2020 were down approximately 45% from a year ago.  Although we cannot estimate whether  net sales will continue to be down at the same rate for the balance of the quarter, we estimate that we may have an operating loss in the quarter which would compare to operating income of $39 million in the year ago June quarter if sales continue to be down at the same rate. Approximately 2/3 of our sales are to venues and locations that have shut down or sharply curtailed their foodservice operations so we anticipate COVID-19 will continue to have a negative impact on our business. As we have $267 million of cash and marketable securities on our balance sheet, we do not expect to have any liquidity issues, nor do we anticipate a material amount of our assets would be impaired.   

 

 

 

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

 

 

Note About Forward-Looking Statements

 

In addition to historical information, this report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  Important factors that might cause such a difference include, but are not limited to, those discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

 

Liquidity and Capital Resources

 

Our current cash and cash equivalents balances, investments and cash expected to be provided by future operations are our primary sources of liquidity. We believe that these sources, along with our borrowing capacity, are sufficient to fund future growth and expansion. See Note 11 to these financial statements for a discussion of our investment securities.

 

The Company’s Board of Directors declared a regular quarterly cash dividend of $.575 per share of its common stock payable on April 8, 2020, to shareholders of record as of the close of business on March 17, 2020.

 

In the three and six months ended March 28, 2020, we purchased and retired 65,648 shares of our common stock at a cost of $8,972,292. We did not purchase any shares of our common stock in fiscal year 2019. On August 4, 2017 the Company’s Board of Directors authorized the purchase and retirement of 500,000 shares of the Company’s common stock; 318,858 shares remain to be purchased under this authorization.

 

26

 

In the three months ended March 28, 2020 and March 30, 2019, fluctuations in the valuation of the Mexican and Canadian currencies and the resulting translation of the net assets of our Mexican and Canadian subsidiaries caused an increase of $3,921,000 in accumulated other comprehensive loss in the 2020 second quarter and a decrease of $394,000 in accumulated other comprehensive loss in the 2019 second quarter. In the six-month period, fluctuations in the valuation of the Mexican and Canadian currencies and the resulting translation of the net assets of our Mexican and Canadian subsidiaries caused an increase of $3,111,000 in accumulated other comprehensive loss in the 2020 six-month period and an increase of $965,000 in accumulated other comprehensive loss in the 2019 six-month period.

 

Our general-purpose bank credit line which expires in November 2021 provides for up to a $50,000,000 revolving credit facility. The agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. There were no outstanding balances under this facility at March 28, 2020.

 

RESULTS OF OPERATIONS

 

Net sales decreased $4,260,000 or 2% to $272,042,000 for the three months and increased $7,025,000 or 1% to $554,939,000 for the six months ended March 28, 2020 compared to the three and six months ended March 30, 2019, respectively. Excluding sales from the acquisition of ICEE Distributors in October 2019 and BAMA ICEE in February 2020, sales decreased 2% for the quarter and increased about 1/3 of 1% for the six months. Sales for the first 11 weeks of our second quarter increased approximately 2% and decreased approximately 20% in the last 2 weeks of the quarter due to the slowdown in the economy.

 

Net Sales for the first 4 weeks of our third quarter that will end June 27, 2020 were down approximately 45% from a year ago.  Although we cannot estimate whether  net sales will continue to be down at the same rate for the balance of the quarter, we estimate that we may have an operating loss in the quarter which would compare to operating income of $39 million in the year ago June quarter if sales continue to be down at the same rate. Approximately 2/3 of our sales are to venues and locations that have shut down or sharply curtailed their foodservice operations so we anticipate COVID-19 will continue to have a negative impact on our business. As we have $267 million of cash and marketable securities on our balance sheet, we do not expect to have any liquidity issues, nor do we anticipate a material amount of our assets would be impaired.          

 

27

 

FOOD SERVICE

 

Sales to food service customers decreased $3,735,000 or 2% in the second quarter to $171,332,000 and decreased $313,000 or 1% to $354,780,000 for the six months. For the first 11 weeks of the quarter, sales increased approximately 2% and sales decreased approximately 24% in the last 2 weeks of the quarter. Soft pretzel sales to the food service market decreased 8% to $45,660,000 in the three months and 3% to $95,601,000 in the six months. Prior to COVID-19, soft pretzel sales were strong to convenience store chains and schools in the quarter.

 

Frozen juices and ices sales increased 6% to $9,491,000 in the three months and were essentially the same as last year at $16,534,000 in the six months as sales to warehouse club stores were strong in the quarter.

 

Churro sales to food service customers were down 6% in the quarter to $14,754,000 and were up less than 1% to $31,145,000 in the six months due to the dropoff in sales due to COVID-19.

 

Sales of bakery products increased $5,001,000 or 6% in the second quarter and increased $7,128,000 or 4% to $185,779,000 for the six months with significant offsetting increases and decreases in sales to particular customers.

 

Sales of handhelds decreased $540,000 or 7% in the quarter and $2,153,000 or 13% in the six months with the decrease primarily coming from lower sales to co-pack customers.

 

Sales of funnel cake decreased $3,370,000 or 44%, to $4,362,000 in the quarter and $2,130,000, or 17%, to $10,562,000 in the six months due primarily to lower sales to one quick service restaurant chain that ran a limited time offer in last year’s quarter.

 

Sales of new products in the first twelve months since their introduction were approximately $1.6 million in this quarter and $4.1 million in the six months.

 

Operating income in our Food Service segment decreased to $7,951,000 from $19,182,000 in the quarter and decreased to $25,985,000 from $36,879,000 in the six months primarily because of lower volume and higher operating expenses throughout the quarter and a significant dropoff in sales and production due to COVID-19.

 

RETAIL SUPERMARKETS

 

Sales of products to retail supermarkets increased $3,404,000 or 10% to $37,571,000 in the second quarter and increased $1,551,000 or 2% in the six months. For the first 11 weeks of the quarter, sales increased approximately 4% and increased approximately 45% in the last 2 weeks of the quarter. Soft pretzel sales for the second quarter were up 14% to $12,332,000 and up 5% to $22,158,000 for the six months. Sales of frozen juices and ices increased $1,196,000 or 8% to $15,864,000 in the second quarter and increased $293,000 or 1% in the six months. Handheld sales to retail supermarket customers increased 26% to $3,117,000 in the quarter and 16% to $5,878,000 in the six months. Biscuit sales for the second quarter were up 4% to $6,630,000 and down 4% to $13,608,000 for the six months. Sales were generally higher for all product lines as sales in the year ago periods were impacted by lost volume and placements due the price increases implemented in last year’s first quarter and because of increased sales to supermarkets generally in the last 2 weeks of the quarter due to COVID-19.

 

28

 

Sales of new products in the second quarter were approximately $300,000 and were approximately $400,000 for the six months.

 

Operating income in our Retail Supermarkets segment was $4,337,000 in this year’s second quarter compared to $3,039,000 in last year’s quarter, a 43% increase and increased to $6,554,000 in this year’s six months compared to $5,250,000 in last year’s six months due to higher volume and higher prices.

   

FROZEN BEVERAGES

 

Frozen beverage and related product sales decreased 6% to $63,139,000 in the second quarter and increased 5% to $133,162,000 in the six months. For the first 11 weeks of the quarter, sales increased approximately 1% and decreased approximately 38% in the last 2 weeks of the quarter. Beverages sales were down 5% to $31,895,000 in the quarter and up 5% to $67,150,000 in the six months. Excluding sales from the acquisition of ICEE Distributors in October 2019 and BAMA ICEE in February 2020, frozen beverages and related product sales decreased 10% in the quarter and were up less than 1% for the six months and beverages sales decreased 14% for the quarter and 3% for the six months. Gallon sales were down 12% in the quarter and down 6% in the six months exclusive of ICEE Distributors’ gallons. Service revenue increased 9% to $21,779,000 in the second quarter and increased 10% to $44,265,000 in the six months with sales increases and decreases spread throughout our customer base.

 

Machines revenue (primarily sales of frozen beverage machines) were $8,910,000, a decrease of $4,251,000 in the quarter and $20,891,000, a decrease of $1,174,000 in the six months, with the decrease because of a significant install project at one quick service restaurant chain in last year’s quarter. Our Frozen Beverage segment had an operating loss of $1,306,000 compared to operating income of $2,550,000 in last year’s quarter and operating income for the six months was $146,000 this year and $4,724,000 last year primarily as a result of lower volume due to COVID-19 and relocation costs of our ICEE’s headquarters of about $1.5 million in our second quarter and $2.3 million in the six months.   

 

CONSOLIDATED

 

Gross profit as a percentage of sales was 25.53% in the second quarter and 28.68% last year.  Gross profit as a percentage of sales was 26.54% in the six month period this year and 28.49% last year. Gross profit percentage decreased for both periods because of lower volume in our food service and frozen beverages segments in the second quarter, product mix changes and significant dropoff in production at the end of the second quarter due to COVID-19, although gross profit as a percentage of sales was lower prior to COVID-19 for both the quarter and six months primarily because of lower volume and product mix changes.

 

29

 

Total operating expenses increased $3,984,000 in the second quarter and as a percentage of sales increased to 21.5% from 19.7% last year. For the first half, operating expenses increased $5,361,000 and as a percentage of sales increased to 20.7% from 19.9% last year. Marketing expenses increased to 8.8% of sales in this year’s quarter from 7.9% last year and were 8.4% in the six months compared to 7.9% of sales in last year’s six months primarily because of increased spending in our retail supermarket and frozen beverages segments and because of lower sales in the second quarter (lower denominator) . Distribution expenses were 9.1% of sales in the second quarter and 8.0% of sales in last year’s quarter and were 8.7% in this year’s six months compared to 8.4% of sales in last year’s six months primarily due to higher freight and storage costs and because of lower sales in the second quarter (lower denominator). Administrative expenses were 3.7% of sales in the second quarter compared to 3.6% of sales last year in the second quarter and were 3.6% in this year’s six months compared to 3.5% of sales in last year’s six months.

 

Operating income decreased $13,789,000 or 56% to $10,982,000 in the three months and decreased $14,168,000 or 30% to $32,685,000 in the first six months as a result of the aforementioned items. About $6.5 million of the decrease in operating income was in January and February primarily due to higher costs and lower volume in our foodservice segment and the $1.5 million of relocation costs in our frozen beverages segment.

 

We had an investment loss, net of income, of $413,000 in this year’s quarter compared to investment income of $2,782,000 in last year’s quarter. Investment income decreased to $1,373,000 from $3,822,000 in the six month periods. We had unrealized losses of $1,993,000 and $267,000 in the six months ended March 28, 2020 and March 30, 2019 respectively. We had unrealized losses of $2,064,000 in the three months ended March 28, 2020 and unrealized gains of $760,000 in the three months ended March 30, 2019.

 

Net earnings decreased $13,045,000, or 64%, in the current three month period to $7,309,000 and decreased $13,512,000, or 36%, to 24,368,000 for the six month period this year compared to $37,880,000 for the six month period last year.

 

Net earnings in last year’s six months benefitted by a reduction of approximately $900,000 in tax as the provision for the one time repatriation tax as a result of the Tax Cuts and Job Act of 2017 was reduced as the amount recorded the year prior was an estimate. Excluding the reduction in the provision for the one time repatriation tax, our effective tax rate was 27.0% in last year’s six months. Our effective tax rate was 28.3% in this year’s six months.    

  

There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.

 

30

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth, in item 7a. “Quantitative and Qualitative Disclosures About Market Risk,” in its 2017 annual report on Form 10-K filed with the SEC.

 

Item 4.

Controls and Procedures

 

 

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of March 28, 2020, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

There has been no change in the Company’s internal control over financial reporting during the quarter ended March 28,2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

31

 

PART II. OTHER INFORMATION

 

Item 6.

Exhibits

 

  Exhibit No.    
       
  31.1     &  Certification Pursuant to Section 302 of
  31.2 the Sarbanes-Oxley Act of 2002
       
  99.5     & Certification Pursuant to the 18 U.S.C.
  99.6  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
    101.1 The following financial information from J&J Snack Foods Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, formatted in XBRL (extensible Business Reporting Language):
    (i) Consolidated Balance Sheets,
    (ii) Consolidated Statements of Earnings,
    (iii) Consolidated Statements of Comprehensive Income, 
    (iv) Consolidated Statements of Cash Flows and
    (v) the Notes to the Consolidated Financial Statements

 

32

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  J & J SNACK FOODS CORP.  
   
   
   
Dated: May 1,2020  /s/ Gerald B. Shreiber
  Gerald B. Shreiber
  Chairman of the Board,
  President, Chief Executive
  Officer and Director
  (Principal Executive Officer)
   
   
   
Dated: May 1,2020 /s/ Dennis G. Moore
  Dennis G. Moore, Senior Vice
  President, Chief Financial
  Officer and Director
  (Principal Financial Officer)
  (Principal Accounting Officer)

   

33
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