10-Q 1 jjsf20160531_10q.htm FORM 10-Q jjsf20160531_10q.htm

 UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

X

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

 

For the period ended June 25, 2016

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 incorporation or organization)

 (I.R.S. Employer Identification No.)

                       

6000 Central Highway, Pennsauken, NJ 08109

(Address of principal executive offices)

 

Telephone (856) 665-9533

  

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.

               X     Yes                              No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

               X     Yes                              No

 

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

 

Large Accelerated filer (X)

Accelerated filer ( )

Non-accelerated filer ( ) 

Smaller reporting company ( )

(Do not check if a smaller reporting company)

 

               

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

                    Yes                         X     No

 

As July 20, 2016 there were 18,657,757 shares of the Registrant’s Common Stock outstanding.

 

 

 
1

 

  

INDEX

 

 

 

Page

Number

     

Part I.

Financial Information  
     

Item l.

Consolidated Financial Statements  
     

 

Consolidated Balance Sheets – June 25, 2016 (unaudited) and September 26, 2015 3

 

   

 

Consolidated Statements of Earnings (unaudited) - Three and Nine Months Ended June 25, 2016 and June 27, 2015 4

 

   
 

Consolidated Statements of Comprehensive Income (unaudited) – Three and Nine Months Ended June 25, 2016 and June 27, 2015

5

 

   

 

Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended June 25, 2016 and June 27, 2015 6
     

 

Notes to the Consolidated Financial Statements (unaudited) 7

 

   
Item 2.

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

21
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk 25
     

Item 4.

Controls and Procedures 26
     

Part II.

Other Information  
     

Item 6.

Exhibits 26

 

 

 
2

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

   

June 25,

   

September 26,

 
   

2016

   

2015

 
   

(unaudited)

         

Assets

               

Current assets

               

Cash and cash equivalents

  $ 104,321     $ 133,689  

Marketable securities held to maturity

    9,667       -  

Accounts receivable, net

    114,543       102,649  

Inventories

    94,906       82,657  

Prepaid expenses and other

    5,109       6,557  

Deferred income taxes

    3,332       3,266  

Total current assets

    331,878       328,818  
                 

Property, plant and equipment, at cost

               

Land

    2,496       2,496  

Buildings

    26,741       26,741  

Plant machinery and equipment

    225,055       210,728  

Marketing equipment

    274,371       266,047  

Transportation equipment

    7,490       6,866  

Office equipment

    21,739       20,586  

Improvements

    34,529       28,725  

Construction in progress

    4,919       9,486  

Total Property, plant and equipment, at cost

    597,340       571,675  

Less accumulated depreciation and amortization

    414,872       399,621  

Property, plant and equipment, net

    182,468       172,054  
                 

Other assets

               

Goodwill

    86,442       86,442  

Other intangible assets, net

    41,895       45,819  

Marketable securities held to maturity

    96,197       66,660  

Marketable securities available for sale

    29,440       39,638  

Other

    2,913       3,504  

Total other assets

    256,887       242,063  

Total Assets

  $ 771,233     $ 742,935  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current obligations under capital leases

  $ 363     $ 273  

Accounts payable

    65,866       59,206  

Accrued insurance liability

    10,705       10,231  

Accrued liabilities

    5,587       5,365  

Accrued compensation expense

    14,608       15,318  

Dividends payable

    7,257       6,723  

Total current liabilities

    104,386       97,116  
                 

Long-term obligations under capital leases

    1,327       1,196  

Deferred income taxes

    43,657       43,789  

Other long-term liabilities

    813       915  
                 

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 18,618,000 and 18,676,000 respectively

    21,756       31,653  

Accumulated other comprehensive loss

    (13,426 )     (10,897 )

Retained Earnings

    612,720       579,163  

Total stockholders' equity

    621,050       599,919  

Total Liabilities and Stockholders' Equity

  $ 771,233     $ 742,935  

 

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

   

Nine months ended

 
   

June 25,

   

June 27,

   

June 25,

   

June 27,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net Sales

  $ 277,981     $ 278,724     $ 730,541     $ 716,484  
                                 

Cost of goods sold(1)

    185,895       188,328       505,871       498,037  

Gross Profit

    92,086       90,396       224,670       218,447  
                                 

Operating expenses

                               

Marketing (2)

    23,721       23,201       63,714       62,674  

Distribution (3)

    19,006       20,429       54,784       55,583  

Administrative (4)

    8,530       7,910       23,857       22,897  

Other general expense

    392       45       239       67  
Total operating expenses     51,649       51,585       142,594       141,221  
                                 

Operating Income

    40,437       38,811       82,076       77,226  
                                 

Other income (expense)

                               

Investment income (loss)

    981       (53 )     3,118       2,579  

Interest expense & other

    (31 )     (34 )     (94 )     (88 )
                                 

Earnings before income taxes

    41,387       38,724       85,100       79,717  
                                 

Income taxes

    14,596       14,262       29,743       29,362  
                                 

NET EARNINGS

  $ 26,791     $ 24,462     $ 55,357     $ 50,355  
                                 

Earnings per diluted share

  $ 1.43     $ 1.30     $ 2.95     $ 2.68  
                                 

Weighted average number of diluted shares

    18,705       18,823       18,765       18,815  
                                 

Earnings per basic share

  $ 1.44     $ 1.31     $ 2.97     $ 2.70  
                                 

Weighted average number of basic shares

    18,615       18,691       18,646       18,683  

 

(1) Includes share-based compensation expense of $174 and $445 for the three months and nine months ended June 25, 2016, respectively and $134 and $354 for the three months and nine months ended June 27, 2015.

(2) Includes share-based compensation expense of $264 and $673 for the three months and nine months ended June 25,2016, respectively and $201 and $531 for the three months and nine months ended June 27, 2015.

(3) Includes share-based compensation expense of $13 and $35 for the three months and nine months ended June 25, 2016, respectively and $12 and $33 for the three months and nine months ended June 27, 2015.

(4) Includes share-based compensation expense of $228 and $581 for the three months and nine months ended June 25, 2016, respectively and $269 and $707 for the three months and nine months ended June 27, 2015.

 

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

   

Nine months ended

 
   

June 25,

   

June 27,

   

June 25,

   

June 27,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net Earnings

  $ 26,791     $ 24,462     $ 55,357     $ 50,355  
                                 

Foreign currency translation adjustments

    (1,387 )     (420 )     (2,067 )     (3,289 )

Unrealized holding gain (loss) on marketable securities

    640       371       (462 )     (1,018 )
                                 

Total Other Comprehensive Income (loss)

    (747 )     (49 )     (2,529 )     (4,307 )
                                 

Comprehensive Income

  $ 26,044     $ 24,413     $ 52,828     $ 46,048  

 

The accompanying notes are an integral part of these statements.

  

 

 
5

 

   

 J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (in thousands)

 

   

Nine months ended

 
   

June 25,

   

June 27,

 
   

2016

   

2015

 

Operating activities:

               

Net earnings

  $ 55,357     $ 50,355  

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

               

Depreciation of fixed assets

    25,526       24,013  

Amortization of intangibles and deferred costs

    4,304       4,445  

Share-based compensation

    1,735       1,625  

Deferred income taxes

    (172 )     (131 )

Loss on sale of marketable securities

    582       1,904  

Other

    493       (255 )

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

               

Increase in accounts receivable

    (11,984 )     (15,821 )

Increase in inventories

    (12,478 )     (8,052 )

Decrease (increase) in prepaid expenses

    1,419       (511 )

Increase in accounts payable and accrued liabilities

    6,566       8,980  

Net cash provided by operating activities

    71,348       66,552  

Investing activities:

               

Payment for purchases of companies, net of cash acquired

    -       (615 )

Purchases of property, plant and equipment

    (37,221 )     (34,180 )

Purchases of marketable securities

    (41,786 )     (16,126 )

Proceeds from redemption and sales of marketable securities

    11,008       39,968  

Proceeds from disposal of property and equipment

    1,578       1,322  

Other

    308       (167 )

Net cash used in investing activities

    (66,113 )     (9,798 )

Financing activities:

               

Payments to repurchase common stock

    (15,265 )     (2,114 )

Proceeds from issuance of stock

    3,634       2,174  

Payments on capitalized lease obligations

    (265 )     (176 )

Payment of cash dividend

    (21,267 )     (19,425 )

Net cash used in financing activities

    (33,163 )     (19,541 )

Effect of exchange rate on cash and cash equivalents

    (1,440 )     (2,425 )

Net (decrease) increase in cash and cash equivalents

    (29,368 )     34,788  

Cash and cash equivalents at beginning of period

    133,689       91,760  

Cash and cash equivalents at end of period

  $ 104,321     $ 126,548  

 

The accompanying notes are an integral part of these statements.

 

 

 
6

 

   

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 26, 2015.

 

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. Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported net earnings.

 

The results of operations for the three months ended June 25, 2016 and June 27, 2015 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.

 

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 26, 2015.

 

Note 2

We recognize revenue from our products when the products are shipped to our customers. Repair and maintenance equipment service revenue is recorded when it is performed provided the customer terms are that the customer is to be charged on a time and material basis or on a straight-line basis over the term of the contract when the customer has signed a service contract. Revenue is recognized only where persuasive evidence of an arrangement exists, our price is fixed or estimable and collectability is reasonably assured. We record offsets to revenue for allowances, end-user pricing adjustments, trade spending, coupon redemption costs and returned product. Customers generally do not have the right to return product unless it is damaged or defective. We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors. The allowance for doubtful receivables was $655,000 and $304,000 at June 25, 2016 and September 26, 2015, respectively.

 

 

 
7

 

  

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 3 to 20 years. Depreciation expense was $8,765,000 and $8,026,000 for the three months ended June 25, 2016 and June 27, 2015, respectively, and for the nine months ended June 25, 2016 and June 27, 2015 was $25,526,000 and $24,013,000, 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 June 25, 2016

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 26,791       18,615     $ 1.44  
                         

Effect of Dilutive Securities

                       

Options

    -       90       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 26,791       18,705     $ 1.43  

 

189,170 anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 25, 2016.

 

 

 
8

 

  

   

Nine Months Ended June 25, 2016

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 55,357       18,646     $ 2.97  
                         

Effect of Dilutive Securities

                       

Options

    -       119       (0.02 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 55,357       18,765     $ 2.95  

 

189,670 anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 25, 2016.

 

   

Three Months Ended June 27, 2015

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       
                         

Net Earnings available to common stockholders

  $ 24,462       18,691     $ 1.31  
                         

Effect of Dilutive Securities

                       

Options

    -       132       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 24,462       18,823     $ 1.30  

  

   

Nine Months Ended June 27, 2015

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 50,355       18,683     $ 2.70  
                         

Effect of Dilutive Securities

                       

Options

    -       132       (0.02 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 50,355       18,815     $ 2.68  

 

 

 
9

 

  

Note 5

At June 25, 2016, the Company has three stock-based employee compensation plans. Share-based compensation expense (benefit) was recognized as follows:

  

   

Three months ended

   

Nine months ended

 
   

June 25,

   

June 27,

   

June 25,

   

June 27,

 
   

2016

   

2015

   

2016

   

2015

 
   

(in thousands, except per share amounts)

 
                                 

Stock Options

  $ 112     $ 439     $ 56     $ 987  

Stock purchase plan

    96       77       248       274  

Restricted stock issued to an employee

    1       1       3       4  

Total share-based compensation

  $ 209     $ 517     $ 307     $ 1,265  
                                 

The above compensation is net of tax benefits

  $ 470     $ 99     $ 1,427     $ 360  

  

Income tax benefit related to share-based compensation for the three months ended December 26, 2015 has been revised to $674,000 from $175,000 as a result of our early adoption as of our fiscal March 2016 quarter of Accounting Standards Update NO. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this new standard, the $499,000 increase of first quarter income tax benefit was recognized via a reduction of amounts previously recorded as additional paid in capital upon exercise of stock options. In the fiscal quarters ended in March 2016 and June 2016, we realized tax benefits of $89,000 and $163,000; respectively, upon similar exercises of stock options.

 

The Company anticipates that share-based compensation for 2016 will not exceed $800,000 net of tax benefits.

 

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 2016 first nine months: expected volatility of 15.9%; risk-free interest rate of 1.2%; dividend rate of 1.4% and expected lives of 5 years.

 

During the 2016 nine month period, the Company granted 159,170 stock options. The weighted-average grant date fair value of these options was $13.94. During the 2015 nine month period, the Company granted 148,840 stock options. The weighted-average grant date fair value of these options was $15.23.

 

Expected volatility is based on the historical volatility of the price of our common shares over the past 49 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.

 

 
10

 

  

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.  

 

The total amount of gross unrecognized tax benefits is $349,000 and $334,000 on June 25, 2016 and September 26, 2015, respectively, all of which would impact our effective tax rate over time, if recognized. We recognize interest and penalties related to income tax matters as a part of the provision for income taxes. As of June 25, 2016 and September 26, 2015, respectively, the Company has $214,000 and $199,000 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.

 

Note 7

In May 2014, the FASB issued guidance on revenue recognition which says that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services.  This guidance is effective for our fiscal year ending September 2019.  Early application is permitted.  We anticipate that the impact of this guidance on our consolidated financial statements will not be material.

 

In July 2015, the FASB issued guidance which requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance will simplify the subsequent measurement of inventory, as current guidance requires an entity to measure inventory at the lower of cost or market. Under current guidance, market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. The adoption of this guidance in the December quarter did not have a material impact on our consolidated financial statements.

 

 

 
11

 

 

In September 2015, the FASB issued guidance on accounting for business combinations which require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance eliminates the requirement to retrospectively account for these adjustments. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. This guidance did not impact amounts and disclosures related to previous business combinations; therefore, the adoption of this guidance in the December quarter did not impact our consolidated financial statements.

 

In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes which eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires entities to classify all deferred tax assets and liabilities as noncurrent. This guidance is effective for our fiscal year ended September 2018.  Early adoption is permitted.   We anticipate that the impact on our financial statements will be inconsequential.

 

In January 2016,  the FASB issued guidance which requires an entity to measure equity investments at fair value with changes in fair value recognized in net income , to use the price that would be received by a seller  when measuring the fair value of financial instruments for disclosure purposes, and which eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.  Under present guidance, changes in fair value of equity investments are recognized in Stockholder’s Equity.   This guidance is effective for our fiscal year ended September 2019.  Early adoption is not permitted.  We do not anticipate that the adoption of this new guidance will have a material impact on our consolidated financial statements.

 

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.  This guidance is effective for our fiscal year ended September 2020.   We anticipate that the impact of this guidance on our financial statements will be material.

 

In March 2016, the FASB issued guidance on share based compensation which requires that an entity recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Under current guidance, excess tax benefits are recognized in additional paid-in capital and tax deficiencies are recognized either as an offset to accumulated excess tax benefits, or in the income statement.  This guidance is effective for our fiscal year ended September 2018.  Early adoption is permitted.  See Note 5 to these financial statements for a discussion of the impact the adoption of this guidance in our March 2016 quarter had on our consolidated financial statements.

 

 

 
12

 

 

Note 8

Inventories consist of the following:

 

   

June 25,

   

September 26,

 
   

2016

   

2015

 
   

(unaudited)

         
   

(in thousands)

 
                 

Finished goods

  $ 41,991     $ 34,258  

Raw Materials

    20,077       17,000  

Packaging materials

    6,845       5,949  

Equipment parts & other

    25,993       25,450  

Total Inventories

  $ 94,906     $ 82,657  

 

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 (loss). 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.

 

 
13

 

     

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.

 

 

 
14

 

 

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. 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. Information regarding the operations in these three reportable segments is as follows:

  

   

Three months ended

   

Nine months ended

 
   

June 25,

   

June 27,

   

June 25,

   

June 27,

 
   

2016

   

2015

   

2016

   

2015

 
   

(unaudited)

 
   

(in thousands)

 

Sales to External Customers:

                               

Food Service

                               

Soft pretzels

  $ 44,410     $ 42,920     $ 125,943     $ 124,737  

Frozen juices and ices

    18,564       19,331       37,850       38,604  

Churros

    15,819       14,979       43,452       42,568  

Handhelds

    7,047       5,853       20,371       16,055  

Bakery

    74,475       79,643       221,500       224,865  

Other

    8,833       4,522       15,507       9,242  

Total Food Service

  $ 169,148     $ 167,248     $ 464,623     $ 456,071  
                                 

Retail Supermarket

                               

Soft pretzels

  $ 7,136     $ 7,431     $ 25,611     $ 27,460  

Frozen juices and ices

    26,038       29,421       48,009       52,298  

Handhelds

    3,813       4,667       11,121       14,115  

Coupon redemption

    (826 )     (811 )     (1,911 )     (2,811 )

Other

    852       420       2,143       986  

Total Retail Supermarket

  $ 37,013     $ 41,128     $ 84,973     $ 92,048  
                                 

Frozen Beverages

                               

Beverages

  $ 44,352     $ 44,990     $ 102,966     $ 99,278  

Repair and maintenance service

    18,398       17,270       53,105       48,303  

Machines sales

    8,942       7,696       23,911       19,771  

Other

    128       392       963       1,013  

Total Frozen Beverages

  $ 71,820     $ 70,348     $ 180,945     $ 168,365  
                                 

Consolidated Sales

  $ 277,981     $ 278,724     $ 730,541     $ 716,484  
                                 

Depreciation and Amortization:

                               

Food Service

  $ 5,777     $ 5,267     $ 16,846     $ 15,782  

Retail Supermarket

    288       283       862       849  

Frozen Beverages

    4,095       4,052       12,122       11,827  

Total Depreciation and Amortization

  $ 10,160     $ 9,602     $ 29,830     $ 28,458  
                                 

Operating Income:

                               

Food Service

  $ 24,619     $ 20,479     $ 59,041     $ 51,621  

Retail Supermarket

    4,266       6,406       7,825       9,607  

Frozen Beverages

    11,552       11,926       15,210       15,998  

Total Operating Income

  $ 40,437     $ 38,811     $ 82,076     $ 77,226  
                                 

Capital Expenditures:

                               

Food Service

  $ 5,961     $ 9,315     $ 19,470     $ 20,065  

Retail Supermarket

    140       -       339       62  

Frozen Beverages

    7,385       6,932       17,412       14,053  

Total Capital Expenditures

  $ 13,486     $ 16,247     $ 37,221     $ 34,180  
                                 

Assets:

                               

Food Service

  $ 563,571     $ 541,314     $ 563,571     $ 541,314  

Retail Supermarket

    26,110       26,711       26,110       26,711  

Frozen Beverages

    181,552       174,901       181,552       174,901  

Total Assets

  $ 771,233     $ 742,926     $ 771,233     $ 742,926  

 

 

 
15

 

   

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 June 25, 2016 and September 26, 2015 are as follows:

  

   

June 25, 2016

   

September 26, 2015

 
   

Gross

           

Gross

         
   

Carrying

   

Accumulated

   

Carrying

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 
    (in thousands)  
                                 

FOOD SERVICE

                               

Indefinite lived intangible assets

                               

Trade Names

  $ 13,072     $ -     $ 13,072     $ -  
                                 

Amortized intangible assets

                               

Non compete agreements

    592       557       592       538  

Customer relationships

    40,797       36,296       40,797       33,584  

License and rights

    3,606       2,869       3,606       2,802  

TOTAL FOOD SERVICE

  $ 58,067     $ 39,722     $ 58,067     $ 36,924  
                                 

RETAIL SUPERMARKETS

                               
                                 

Indefinite lived intangible assets

                               

Trade Names

  $ 7,206     $ -     $ 7,206     $ -  
                                 

Amortized Intangible Assets

                               

Non compete agreements

    160       160       160       114  

Customer relationships

    7,979       1,821       7,979       1,220  

TOTAL RETAIL SUPERMARKETS

  $ 15,345     $ 1,981     $ 15,345     $ 1,334  
                                 

FROZEN BEVERAGES

                               
                                 

Indefinite lived intangible assets

                               

Trade Names

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

Amortized intangible assets

                               

Non compete agreements

    198       198       198       198  

Customer relationships

    6,678       6,501       6,678       6,075  

Licenses and rights

    1,601       907       1,601       854  

TOTAL FROZEN BEVERAGES

  $ 17,792     $ 7,606     $ 17,792     $ 7,127  
                                 

CONSOLIDATED

  $ 91,204     $ 49,309     $ 91,204     $ 45,385  

 

 

 
16

 

 

Amortized intangible assets are being amortized by the straight-line method over periods ranging from 3 to 20 years and amortization expense is reflected throughout operating expenses. There were no intangible assets acquired in the three and nine months ended June 25, 2016. Aggregate amortization expense of intangible assets for the three months ended June 25, 2016 and June 27, 2015 was $1,267,000 and $1,332,000, respectively and for the nine months ended June 25, 2016 and June 27, 2015 was $3,924,000 and $4,039,000, respectively.

 

Estimated amortization expense for the next five fiscal years is approximately $5,100,000 in 2016, $2,600,000 in 2017, $1,800,000 in 2018, $1,700,000 in 2019 and $1,400,000 in 2020. The weighted average amortization period of the intangible assets is 10.0 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 June 25, 2016

  $ 46,832     $ 3,670     $ 35,940     $ 86,442  
                                 

Balance at September 26, 2015

  $ 46,832     $ 3,670     $ 35,940     $ 86,442  

                 

There was no goodwill acquired in the three and nine months ended June 25, 2016.

 

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.

 

 

 
17

 

  

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 and corporate bonds are based on quoted prices for identical or similar instruments in markets that are not active.  As a result, preferred stock and corporate bonds 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 June 25, 2016 are summarized as follows:

  

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)  
                                 

Corporate Bonds

  $ 104,904     $ 594     $ 418     $ 105,080  

Certificates of Deposit

    960       11       -       971  
Total investment securities held to maturity   $ 105,864     $ 605     $ 418     $ 106,051  

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at June 25, 2016 are summarized as follows:

  

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)  
                                 

Mutual Funds

  $ 13,987     $ -     $ 884     $ 13,103  

Preferred Stock

    16,791       25       479       16,337  

Total investment securities available for sale

  $ 30,778     $ 25     $ 1,363     $ 29,440  

 

The mutual funds seek current income with an emphasis on maintaining low volatility and overall moderate duration. The unrealized losses of $884,000 are spread over 4 funds with total fair market value of $13.1 million. The Fixed-to-Floating Perpetual Preferred Stock generate fixed income to call dates in 2018, 2019 and 2025 and then income is based on a spread above LIBOR if the securities are not called. The unrealized losses of $479,000 on the Preferred Stock are spread over 12 holdings with fair market value of $14.8 million. 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 2017 through 2021, with $85 million maturing within 3 years. Our expectation is that we will hold the corporate bonds to their maturity dates and redeem them at our amortized cost.

 

 

 
18

 

  

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 26, 2015 are summarized as follows:

  

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)  
                                 

Corporate Bonds

  $ 66,660     $ 15     $ 663     $ 66,012  

Total investment securities held to maturity

  $ 66,660     $ 15     $ 663     $ 66,012  

   

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 26, 2015 are summarized as follows:

  

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)  

Mutual Funds

  $ 20,041     $ -     $ 827     $ 19,214  

Preferred Stock

    20,473       114       163       20,424  

Total investment securities available for sale

  $ 40,514     $ 114     $ 990     $ 39,638  

 

The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at June 25, 2016 and September 26, 2015 are summarized as follows:

           

   

June 25, 2016

   

September 26, 2015

 
           

Fair

           

Fair

 
   

Amortized

   

Market

   

Amortized

   

Market

 
   

Cost

   

Value

   

Cost

   

Value

 
    (in thousands)  

Due in one year or less

  $ 9,667     $ 9,675     $ -     $ -  

Due after one year through five years

    96,197       96,376       63,522       63,010  

Due after five years through ten years

    -       -       3,138       3,002  

Total held to maturity securities

  $ 105,864     $ 106,051     $ 66,660     $ 66,012  

Less current portion

    9,667       9,675       -       -  

Long term held to maturity securities

  $ 96,197     $ 96,376     $ 66,660     $ 66,012  

 

 

 
19

 

 

Proceeds from the redemption and sale of marketable securities were $5,624,000 and $11,008,000 in the three and nine months ended June 25, 2016 and $26,367,000 and $39,968,000 in the three and nine months ended June 27, 2015, respectively. Losses of $176,000 and $582,000 were recorded in the three and nine months ended June 25, 2016 and $1,395,000 and $1,904,000 were recorded in the three and nine months ended June 27, 2015, respectively.

 

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 June 25, 2016

           

Nine Months Ended June 25, 2016

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

Unrealized

                   

Unrealized

         
   

Foreign Currency

   

Holding Loss on

           

Foreign Currency

   

Holding Loss on

         
   

Translation

   

Marketable

           

Translation

   

Marketable

         
   

Adjustments

   

Securities

   

Total

   

Adjustments

   

Securities

   

Total

 
                                                 

Beginning Balance

  $ (10,701 )   $ (1,978 )   $ (12,679 )   $ (10,021 )   $ (876 )   $ (10,897 )
                                                 

Other comprehensive income (loss) before reclassifications

    (1,387 )     534       (853 )     (2,067 )     (812 )     (2,879 )
                                                 

Amounts reclassified from accumulated other comprehensive income

    -       106       106       -       350       350  
                                                 

Ending Balance

  $ (12,088 )   $ (1,338 )   $ (13,426 )   $ (12,088 )   $ (1,338 )   $ (13,426 )

 

 

 
20

 

   

   

Three Months Ended June 27, 2015

           

Nine Months Ended June 27, 2015

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

Unrealized

                   

Unrealized

         
   

Foreign Currency

   

Holding Loss on

           

Foreign Currency

   

Holding Loss on

         
   

Translation

   

Marketable

           

Translation

   

Marketable

         
   

Adjustments

   

Securities

   

Total

   

Adjustments

   

Securities

   

Total

 
                                                 

Beginning Balance

  $ (7,501 )   $ (2,745 )   $ (10,246 )   $ (4,632 )   $ (1,356 )   $ (5,988 )
                                                 

Other comprehensive income (loss) before reclassifications

    (420 )     (728 )     (1,148 )     (3,289 )     (2,333 )     (5,622 )
                                                 

Amounts reclassified from accumulated other comprehensive income

    -       1,099       1,099       -       1,315       1,315  
                                                 

Ending Balance

  $ (7,921 )   $ (2,374 )   $ (10,295 )   $ (7,921 )   $ (2,374 )   $ (10,295 )

  

Item 2.

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

 

Liquidity and Capital Resources

 

Our current cash and cash equivalents balances 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 $.39 per share of its common stock payable on July 7, 2016, to shareholders of record as of the close of business on June 15, 2016.

 

In our fiscal year ended September 26, 2015, we purchased and retired 72,698 shares of our common stock at a cost of $8,011,118. In the three months ended June 25, 2016 we purchased and retired 34,052 shares at a cost of $3,506,693 and in the nine months ended June 25, 2016, we purchased and retired 141,700 shares at a cost of $15,265,019. On November 8, 2012 the Company’s Board of Directors authorized the purchase and retirement of an additional 500,000 shares of the Company’s common stock; 47,775 shares remain to be purchased under this authorization.

 

In the three months ended June 25, 2016 and June 27, 2015 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 $1,387,000 in accumulated other comprehensive loss in the 2016 third quarter and an increase of $420,000 accumulated other comprehensive loss in the 2015 third quarter. In the nine 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 $2,067,000 in accumulated other comprehensive loss in the 2016 nine month period and an increase of $3,289,000 in accumulated other comprehensive loss in the 2015 nine month period.

 

 

 
21

 

 

Our general-purpose bank credit line which expires in December 2016 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 June 25, 2016.

  

Results of Operations

 

Net sales decreased $743,000 or about 1/4 of 1% to $277,981,000 for the three months and increased $14,057,000 or 2% to $730,541,000 for the nine months ended June 25, 2016 compared to the three and nine months ended June 27, 2015.

 

FOOD SERVICE

 

Sales to food service customers increased $1,900,000 or 1% in the third quarter to $169,148,000 and increased $8,552,000 or 2% for the nine months. Soft pretzel sales to the food service market increased 3% to $44,410,000 in the third quarter and increased 1% to $125,943,000 in the nine months with sales increases and decreases in the third quarter spread among our customers and with sales of $1.2 million under an already ended limited time offer program to a new restaurant chain customer. Soft pretzel sales to restaurant chains were 13% higher compared to last year’s quarter primarily due to the above mentioned sales and for the nine months, soft pretzel sales to restaurant chains were marginally higher than last year.

 

Frozen juices and ices sales decreased 4% to $18,564,000 in the three months and were down 2% to $37,850,000 in the nine months with lower sales to one customer accounting for the entire decrease in both periods. Churro sales to food service customers increased 6% to $15,819,000 in the third quarter and were up 2% to $43,452,000 for the nine months with sales increases and decreases spread among our customers.

 

Sales of bakery products decreased $5,168,000 or 6% in the third quarter to $74,475,000 and decreased $3,365,000 or 1% for the nine months. Sales to one customer were down $4.4 million in the quarter compared to last year as the customer added a secondary supplier. We expect sales to this customer to be down approximately $1 million a month through January 2017.

 

Sales of handhelds increased $1,194,000 or 20% in the quarter with the sales increase split among two customers and $4,317,000 or 27% for the nine months with 90% of the increase coming from sales to one customer. Sales of funnel cake increased $4,463,000 or 109% in the quarter to $8,570,000 and $6,559,000 or 81% to $14,651,000 for the nine months primarily due to increased sales to school food service and to sales of $3.8 million in the third quarter to a new restaurant chain customer. We do not expect additional funnel cake sales to this customer until the second quarter of our fiscal year 2017.

 

 

 
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Sales of new products in the first twelve months since their introduction were approximately $14 million in this quarter and $24 million in the nine months. Price increases accounted for approximately $900,000 of sales in the quarter and $6.8 million in the nine months and net volume increases, including new product sales as defined above, accounted for approximately $1.0 million of sales in the quarter and $1.7 in the nine months.

 

Operating income in our Food Service segment increased from $20,479,000 to $24,619,000 in the quarter and increased from $51,621,000 to $59,041,000 in the nine months. Operating income for both periods benefitted from lower marketing expenses, lower ingredient costs, significantly increased volume of our handhelds and funnel cake products, pricing and more favorable product mix and was hurt by higher group health insurance costs and lower volume of our frozen juices and ices and bakery products.

 

RETAIL SUPERMARKETS

 

Sales of products to retail supermarkets decreased $4,115,000 or 10% to $37,013,000 in the third quarter and decreased $7,075,000 or 8% to $84,973,000 in the nine months. Soft pretzel sales for the third quarter were down 4% to $7,136,000 with sales increases and decreases spread over our customer base and products and were down 7% to $25,611,000 for the nine months. About one third of the pretzel sales decline in the nine month period was due to the discontinuance of SUPERPRETZEL BAVARIAN Soft Pretzel Bread and lower sales to two customers accounted for roughly 90% of the balance of the decline. Sales of frozen juices and ices decreased $3,383,000 or 11% to $26,038,000 in the third quarter and were down 8% to $48,009,000 for the nine months. Increased trade spending to introduce WHOLE FRUIT Organic juice tubes and new PHILLY SWIRL products and general declines in sales of our existing PHILLY SWIRL products accounted for all of the sales decline in frozen juices and ices in the nine months and over 80% of the decline in the third quarter. PHILLY SWIRL sales were down in both periods primarily because of lower sales to a customer in Canada due to the stronger US dollar, lower sales to one warehouse club store which carried fewer SKUS this year and decreased sales to one retail supermarket customer of a product that is being discontinued. We expect a significant improvement of sales of PHILLY SWIRL products in our fourth quarter compared to last year. Coupon redemption costs, a reduction of sales, which were higher in the first six months a year ago supporting the introduction of the SUPERPRETZEL BAVARIAN Soft Pretzel Bread, were essentially unchanged for the quarter at $826,000 and decreased 32% to $1,911,000 for the nine months. Handheld sales to retail supermarket customers decreased 18% to $3,813,000 in the quarter and decreased 21% to $11,121,000 for the nine months. Roughly 25% of the handhelds sales decline in the quarter and 40% for the nine months resulted from increased trade spending to introduce PILLSBURY mini dessert pies. The balance of the sales decline was spread over our customer base. We expect significant sales in our fourth quarter of our new products, especially OREO Churros and WHOLE FRUIT Organic Juice tubes.

 

Sales of new products in the third quarter were approximately $2.5 million and were $4.5 million for the nine months. Price increases accounted for approximately $300,000 of sales in the quarter and $1.5 million in the nine months and net volume decreases including new product sales as defined above and net of decreased coupon costs, lowered sales by approximately $4.4 million in this quarter and $8.6 million in the nine months. Operating income in our Retail Supermarkets segment decreased from $6,406,000 to $4,266,000 in the quarter primarily because of approximately $600,000 of increased trade spending related to the introduction of WHOLE FRUIT Organic juice tubes, OREO churros, PILLSBURY mini dessert pies and other new products and sharply lower frozen juices and ices sales volume and decreased from $9,607,000 to $7,825,000 in the nine months primarily because of increased trade spending of $1.8 million for the introduction of new products as mentioned above and lower sales volume offset by $900,000 of lower coupon expenses.

 

 

 
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FROZEN BEVERAGES

 

Frozen beverage and related product sales increased 2% to $71,820,000 in the third quarter and increased 7% to $180,945,000 in the nine month period. Beverage related sales alone were down 1% to $44,352,000 in the third quarter and were up 4% to $102,966,000 in the nine month period.    Gallon sales were essentially unchanged for the three months and were up 5% for the nine month period primarily due to higher sales to movie theaters. Service revenue increased 7% to $18,398,000 in the third quarter and increased 10% to $53,105,000 for the nine month period with sales increases and decreases spread throughout our customer base.

 

Sales of beverage machines, which tend to fluctuate from year to year while following no specific trend, were $8,942,000, an increase of 16% from last year’s third quarter and were $23,911,000, or 21% higher than last year, in the nine month period. The approximate number of company owned frozen beverage dispensers was 55,500 and 53,100 at June 25, 2016 and September 26, 2015, respectively. Operating income in our Frozen Beverage segment decreased to $11,552,000 in this quarter and $15,210,000 for the nine months compared to $11,926,000 and $15,998,000 in last years’ periods, respectively. Higher group health insurance costs of about $500,000 and flat gallons volume contributed to the lower operating income for the third quarter and higher group health insurance costs of about $1.1 million and a bad debt write off of $200,000 contributed to the lower operating income in the nine months.

 

CONSOLIDATED

 

Gross profit as a percentage of sales was 33.13% in the three month period this year and 32.43% last year. For the nine month period, gross profit as a percentage of sales was 30.75% this year and 30.49% a year ago. For both periods, gross profit percentage benefitted from lower ingredient costs, pricing, increased handhelds and funnel cake business and more favorable product mix in our food service business offset by higher costs in our frozen beverages business and increased trade spending related to the introduction of WHOLE FRUIT Organic juice tubes, OREO churros, PILLSBURY mini dessert pies and new PHILLY SWIRL products in our retail supermarket business, as well as by sharply lower volume in our retail supermarket business.

 

Total operating expenses were essentially unchanged at $51,649,000 in the third quarter and as a percentage of sales increased from 18.51% percent to 18.58%. For the nine months, operating expenses increased $1,373,000, and as a percentage of sales decreased from 19.71% to 19.51%. Marketing expenses increased to 8.5% of sales in this year’s quarter from 8.3% last year and were 8.7% of sales in both years’ nine months. Distribution expenses were 6.8% of sales in this year’s quarter and were 7.3% of sales in last year’s quarter, and were 7.5% in this year’s nine month period and 7.8% of sales last years’ nine month period. Distribution expenses benefitted this quarter and nine months from lower fuel costs and shipping efficiencies. Administrative expenses were 3.1% of sales this quarter and 3.3% for the nine month period as compared to 2.8% of sales last year in the third quarter and 3.2% for the nine months.

 

 

 
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Operating income increased $1,626,000 or 4% to $40,437,000 in the third quarter and increased $4,850,000 or 6% to $82,076,000 for the nine months as a result of the aforementioned items.      

 

Investment income of $981,000 this year compared to a loss of $53,000 last year and was higher by $539,000 in the nine months. Last year’s investment income was reduced by realized losses of $1.4 million and $1.9 million in the three and nine months periods which compares to realized losses of $176,000 and $582,000 in this year’s three and nine months.

 

The effective income tax rate has been estimated at 35% and 37% for the quarter this year and last year, respectively and 35% and 37% for the nine months this year and last year, respectively. The effective income tax rate for the three months ended December 26, 2015 has been revised to 33.4% as a result of our early adoption in the March 2016 quarter of Accounting Standards Update NO. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this new standard, $499,000 of first quarter income tax benefit was recognized via a reduction of amounts previously recorded as additional paid in capital upon exercise of stock options. In the March 2016 and June 2016 fiscal quarters, we have realized a tax benefit of $89,000 and $163,000; respectively, upon similar exercises of stock options. We are estimating an effective income tax rate of approximately 35 1/4-35 1/2% for the year, which includes approximately 3/4 of 1 percentage point decrease because of the above referenced change in accounting.

 

Net earnings increased $2,329,000 or 10% in the current three month period to $26,791,000 and were $55,357,000 for the nine months this year compared to $50,355,000 for the nine month period last year, an increase of 10%.

 

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.

  

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 2015 annual report on Form 10-K filed with the SEC.

 

 
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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 June 25, 2016, 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 June 25, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 PART II. OTHER INFORMATION

 

Item 6.

Exhibits

 

 

Exhibit No.    
       

 

31.1  & Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2     
       

 

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 forthe quarter ended June 25, 2016, 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

 

 

 
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SIGNATURES