10-Q 1 jjsf20170630_10q.htm FORM 10-Q jjsf20170630_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 24, 2017

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, 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, 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

(X) 

Accelerated filer

(   )

 

 

 

 
Non-accelerated filer (   ) (Do not check if a smaller reporting company)  

 

 

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

X     No

                          

As July 20, 2017 there were 18,738,633 shares of the Registrant’s Common Stock outstanding.

 

 
 

 

   

INDEX

   

 

 

Page

Number

Part I.        Financial Information

 
   

Item l.    Consolidated Financial Statements

 

 

 

Consolidated Balance Sheets – June 24, 2017 (unaudited) and September 24, 2016

3

 

 

Consolidated Statements of Earnings (unaudited) -Three and Nine Months Ended June 24, 2017 and June 25, 2016

4

 

 

Consolidated Statements of Comprehensive Income (unaudited) – Three and Nine Months Ended June 24, 2017 and  June 25, 2016

5

 

 

Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended June 24, 2017 and  June 25, 2016

6

 

 

Notes to the Consolidated Financial Statements (unaudited)

7

 

 

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

22
   

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

26
   

Item 4.     Controls and Procedures

26

   

Part II.     Other Information

 
   

Item 6.     Exhibits

27

 

 

 
2

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

   

June 24,

   

September 24,

 
   

2017

   

2016

 
   

(unaudited)

         

Assets

               

Current assets

               

Cash and cash equivalents

  $ 92,614     $ 140,652  

Marketable securities held to maturity

    50,857       13,539  

Accounts receivable, net

    126,236       98,325  

Inventories

    107,179       88,684  

Prepaid expenses and other

    8,202       13,904  

Total current assets

    385,088       355,104  
                 

Property, plant and equipment, at cost

               

Land

    2,482       2,512  

Buildings

    26,741       26,741  

Plant machinery and equipment

    246,410       227,614  

Marketing equipment

    274,380       278,299  

Transportation equipment

    8,403       7,637  

Office equipment

    24,644       22,136  

Improvements

    37,510       34,750  

Construction in progress

    17,535       5,356  

Total Property, plant and equipment, at cost

    638,105       605,045  

Less accumulated depreciation and amortization

    418,912       420,832  

Property, plant and equipment, net

    219,193       184,213  
                 

Other assets

               

Goodwill

    101,853       86,442  

Other intangible assets, net

    61,579       41,819  

Marketable securities held to maturity

    65,113       90,732  

Marketable securities available for sale

    30,164       29,465  

Other

    2,794       2,712  

Total other assets

    261,503       251,170  

Total Assets

  $ 865,784     $ 790,487  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current obligations under capital leases

  $ 345     $ 365  

Accounts payable

    81,285       62,026  

Accrued insurance liability

    9,848       10,119  
Income taxes payable     5,913       -  

Accrued liabilities

    7,434       6,161  

Accrued compensation expense

    15,631       16,340  

Dividends payable

    7,866       7,280  

Total current liabilities

    128,322       102,291  
                 

Long-term obligations under capital leases

    982       1,235  

Deferred income taxes

    58,641       48,186  

Other long-term liabilities

    2,393       801  
                 

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 18,729,000 and 18,668,000 respectively

    28,966       25,332  

Accumulated other comprehensive loss

    (10,831 )     (13,415 )

Retained Earnings

    657,311       626,057  

Total stockholders' equity

    675,446       637,974  

Total Liabilities and Stockholders' Equity

  $ 865,784     $ 790,487  

 

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 24,

   

June 25,

   

June 24,

   

June 25,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Net Sales

  $ 295,415     $ 277,981     $ 767,498     $ 730,541  
                                 

Cost of goods sold(1)

    200,651       185,895       534,022       505,871  

Gross Profit

    94,764       92,086       233,476       224,670  
                                 

Operating expenses

                               

Marketing (2)

    25,571       23,721       67,435       63,714  

Distribution (3)

    21,865       19,006       58,537       54,784  

Administrative (4)

    9,588       8,530       26,404       23,857  

Other general expense

    (60 )     392       (138 )     239  

Total operating expenses

    56,964       51,649       152,238       142,594  
                                 

Operating Income

    37,800       40,437       81,238       82,076  
                                 

Other income (expense)

                               

Investment income

    1,422       981       3,824       3,118  

Interest expense & other

    (80 )     (31 )     (651 )     (94 )
                                 

Earnings before income taxes

    39,142       41,387       84,411       85,100  
                                 

Income taxes

    13,838       14,596       29,580       29,743  
                                 

NET EARNINGS

  $ 25,304     $ 26,791     $ 54,831     $ 55,357  
                                 

Earnings per diluted share

  $ 1.34     $ 1.43     $ 2.91     $ 2.95  
                                 

Weighted average number of diluted shares

    18,846       18,705       18,818       18,765  
                                 

Earnings per basic share

  $ 1.35     $ 1.44     $ 2.93     $ 2.97  
                                 

Weighted average number of basic shares

    18,727       18,615       18,708       18,646  

 

(1)

Includes share-based compensation expense of $192 and $529 for the three months and nine months ended June 24, 2017, respectively and $174 and $445 for the three months and nine months ended June 25, 2016.

(2)

Includes share-based compensation expense of $277 and $763 for the three months and nine months ended June 24,2017, respectively and $264 and $673 for the three months and nine months ended June 25, 2016.

(3)

Includes share-based compensation expense of $19 and $52 for the three months and nine months ended June 24, 2017, respectively and $13 and $35 for the three months and nine months ended June 25, 2016.

(4)

Includes share-based compensation expense of $323 and $896 for the three months and nine months ended June 24, 2017, respectively and $228 and $581 for the three months and nine months ended June 25, 2016.

 

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 24,

   

June 25,

   

June 24,

   

June 25,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Net Earnings

  $ 25,304     $ 26,791     $ 54,831     $ 55,357  
                                 

Foreign currency translation adjustments

    1,095       (1,387 )     1,885       (2,067 )

Unrealized holding gain (loss) on marketable securities

    204       640       699       (462 )
                                 

Total Other Comprehensive Income (loss)

    1,299       (747 )     2,584       (2,529 )
                                 

Comprehensive Income

  $ 26,603     $ 26,044     $ 57,415     $ 52,828  

 

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 24,

   

June 25,

 
   

2017

   

2016

 

Operating activities:

               

Net earnings

  $ 54,831     $ 55,357  

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

               

Depreciation of property, plant and equipment

    28,060       25,526  

Amortization of intangibles and deferred costs

    3,336       4,304  

Share-based compensation

    2,240       1,735  

Deferred income taxes

    (347 )     (172 )

(Gain)loss on sale and redemption of marketable securities

    (13 )     582  

Other

    712       493  
Changes in assets and liabilities net of effects from purchase of companies                

Increase in accounts receivable

    (23,385 )     (11,984 )

Increase in inventories

    (12,154 )     (12,478 )

Decrease in prepaid expenses

    10,035       1,419  

Increase in accounts payable and accrued liabilities

    20,023       6,566  

Net cash provided by operating activities

    83,338       71,348  

Investing activities:

               

Payment for purchases of companies, net of cash acquired

    (42,058 )     -  

Purchases of property, plant and equipment

    (57,151 )     (37,221 )

Purchases of marketable securities

    (27,269 )     (41,786 )

Proceeds from redemption and sales of marketable securities

    14,681       11,008  

Proceeds from disposal of property, plant and equipment

    1,385       1,578  

Other

    (404 )     308  

Net cash used in investing activities

    (110,816 )     (66,113 )

Financing activities:

               

Payments to repurchase common stock

    (3,374 )     (15,265 )

Proceeds from issuance of stock

    4,745       3,634  

Payments on capitalized lease obligations

    (273 )     (265 )

Payment of cash dividend

    (22,992 )     (21,267 )

Net cash used in financing activities

    (21,894 )     (33,163 )

Effect of exchange rate on cash and cash equivalents

    1,334       (1,440 )

Net decrease in cash and cash equivalents

    (48,038 )     (29,368 )

Cash and cash equivalents at beginning of period

    140,652       133,689  

Cash and cash equivalents at end of period

  $ 92,614     $ 104,321  

 

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 24, 2016.

 

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 nine months ended June 24, 2017 and June 25, 2016 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 24, 2016. 

 

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 $421,000 and $571,000 at June 24, 2017 and September 24, 2016, 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 $9,629,000 and $8,765,000 for the three months ended June 24, 2017 and June 25, 2016, respectively, and for the nine months ended June 24, 2017 and June 25, 2016 was $28,060,000 and $25,526,000, 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 24, 2017

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 25,304       18,727     $ 1.35  
                         

Effect of Dilutive Securities

                       

Options

    -       119       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 25,304       18,846     $ 1.34  

 

500 anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 24, 2017.

 

   

Nine Months Ended June 24, 2017

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 54,831       18,708     $ 2.93  
                         

Effect of Dilutive Securities

                       

Options

    -       110       (0.02 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 54,831       18,818     $ 2.91  

 

158,494 anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 24, 2017.

 

 

 
8

 

 

   

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. 

 

   

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.

 

 

 
9

 

 

Note 5

At June 24, 2017, 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 24,

   

June 25,

   

June 24,

   

June 25,

 
   

2017

   

2016

   

2017

   

2016

 
    (in thousands, except per share amounts)  
                                 
                                 

Stock Options

  $ (20 )   $ 112     $ (165 )   $ 56  

Stock purchase plan

    65       96       300       248  

Stock issued to an outside director

    14       -       42       -  

Restricted stock issued to an employee

    1       1       3       3  

Total share-based compensation

  $ 60     $ 209     $ 180     $ 307  
                                 

The above compensation is net of tax benefits

  $ 751     $ 470     $ 2,060     $ 1,427  

  

 

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 2017 first nine months: expected volatility of 15.8%; risk-free interest rate of 2.0%; dividend rate of 1.3% and expected lives of 5 years.

 

During the 2017 nine month period, the Company granted 159,294 stock options. The weighted-average grant date fair value of these options was $18.85. 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.

 

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.  

 

 

 
10

 

 

 

The total amount of gross unrecognized tax benefits is $369,000 and $354,000 on June 24, 2017 and September 24, 2016, 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 June 24, 2017 and September 24, 2016, respectively, the Company has $234,000 and $219,000 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 and in subsequent updates, the FASB issued guidance on revenue recognition which requires that we 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. We have performed a review of the requirements of the new revenue standard and are in the process of reviewing customer contracts and applying the five-step model of this new guidance to each contract category we have identified and will compare the results to our current accounting practices. Our analysis to date has focused on the identification of the contracts in place, including the related accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard.  Based on the assessment to date, we do not expect the adoption of the new revenue recognition standard to have a material impact on our financial statements. We plan to adopt this guidance on the first day of our  fiscal 2019 year. We will likely apply the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts in process as of the adoption date. Under this method, we would not restate the prior financial statements presented. Therefore, this guidance would require additional disclosures of the amount by which each financial statement line item is affected in the fiscal year 2019 reporting period.

 

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.

 

 

 
11

 

  

 

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 January 2017, the FASB issued guidance to clarify the definition of a business. The updated standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it is not met, the entity then evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The updated guidance is effective for our fiscal year ending September 2019 and interim periods within that year. Early adoption is permitted, including for interim and annual periods in which the financial statements have not been issued or made available for issuances. We have adopted this new guidance in the March 2017 quarter and the adoption had no impact on our consolidated financial statements.

 

In January 2017, the FASB issued guidance to simplify the test for goodwill impairment. This updated standard simplifies the subsequent measurement of goodwill and eliminates the two-step goodwill impairment test. Under the new guidance, an annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and two-step goodwill impairment test. The updated guidance is effective for our fiscal year ending September 2021 and interim periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate that the adoption of this new guidance will have a material impact on our consolidated financial statements.

 

 

 
12

 

 

Note 8

Inventories consist of the following:

 

   

June 24,

   

September 24,

 
   

2017

   

2016

 
   

(unaudited)

         
   

(in thousands)

 
                 

Finished goods

  $ 47,504     $ 38,285  

Raw Materials

    24,635       18,223  

Packaging materials

    8,829       6,799  

Equipment parts & other

    26,211       25,377  

Total Inventories

  $ 107,179     $ 88,684  

 

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.

 

 

 
13

 

 

 

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.

 

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 24,

   

June 25,

   

June 24,

   

June 25,

 
   

2017

   

2016

   

2017

   

2016

 
   

(unaudited)

 
   

(in thousands)

 

Sales to External Customers:

                               

Food Service

                               

Soft pretzels

  $ 45,069     $ 44,410     $ 129,556     $ 125,943  

Frozen juices and ices

    16,281       18,564       33,453       37,850  

Churros

    17,536       15,819       46,693       43,452  

Handhelds

    8,574       7,047       24,155       20,371  

Bakery

    89,712       74,475       248,795       221,500  

Other

    5,938       8,833       14,833       15,507  

Total Food Service

  $ 183,110     $ 169,148     $ 497,485     $ 464,623  
                                 

Retail Supermarket

                               

Soft pretzels

  $ 7,496     $ 7,136     $ 25,626     $ 25,611  

Frozen juices and ices

    27,317       26,038       50,359       48,009  

Handhelds

    3,548       3,813       10,374       11,121  

Coupon redemption

    (1,092 )     (826 )     (3,246 )     (1,911 )

Other

    873       852       2,260       2,143  

Total Retail Supermarket

  $ 38,142     $ 37,013     $ 85,373     $ 84,973  
                                 

Frozen Beverages

                               

Beverages

  $ 48,714     $ 44,352     $ 108,812     $ 102,966  

Repair and maintenance service

    18,549       18,398       54,327       53,105  

Machines sales

    6,496       8,942       20,547       23,911  

Other

    404       128       954       963  

Total Frozen Beverages

  $ 74,163     $ 71,820     $ 184,640     $ 180,945  
                                 

Consolidated Sales

  $ 295,415     $ 277,981     $ 767,498     $ 730,541  
                                 

Depreciation and Amortization:

                               

Food Service

  $ 6,028     $ 5,777     $ 18,155     $ 16,846  

Retail Supermarket

    221       288       859       862  

Frozen Beverages

    4,437       4,095       12,382       12,122  

Total Depreciation and Amortization

  $ 10,686     $ 10,160     $ 31,396     $ 29,830  
                                 

Operating Income:

                               

Food Service

  $ 22,005     $ 24,619     $ 58,695     $ 59,041  

Retail Supermarket

    4,890       4,266       8,390       7,825  

Frozen Beverages

    10,905       11,552       14,153       15,210  

Total Operating Income

  $ 37,800     $ 40,437     $ 81,238     $ 82,076  
                                 

Capital Expenditures:

                               

Food Service

  $ 16,923     $ 5,961     $ 35,536     $ 19,470  

Retail Supermarket

    15       140       228       339  

Frozen Beverages

    7,230       7,385       21,387       17,412  

Total Capital Expenditures

  $ 24,168     $ 13,486     $ 57,151     $ 37,221  
                                 

Assets:

                               

Food Service

  $ 631,131     $ 563,571     $ 631,131     $ 563,571  

Retail Supermarket

    25,212       26,110       25,212       26,110  

Frozen Beverages

    209,441       181,552       209,441       181,552  

Total Assets

  $ 865,784     $ 771,233     $ 865,784     $ 771,233  

 

 

 
14

 

   

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 24, 2017 and September 24, 2016 are as follows:

 

   

June 24, 2017

   

September 24, 2016

 
   

Gross

           

Gross

         
   

Carrying

   

Accumulated

   

Carrying

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 
    (in thousands)    
                                 

FOOD SERVICE

                               

Indefinite lived intangible assets

                               

Trade Names

  $ 16,240     $ -     $ 14,150     $ -  
                                 

Amortized intangible assets

                               

Non compete agreements

    792       192       122       93  

Customer relationships

    48,491       33,923       35,491       31,895  

License and rights

    1,690       1,037       1,690       974  

TOTAL FOOD SERVICE

  $ 67,213     $ 35,152     $ 51,453     $ 32,962  
                                 

RETAIL SUPERMARKETS

                               
                                 

Indefinite lived intangible assets

                               

Trade Names

  $ 6,557     $ -     $ 7,206     $ -  
                                 

Amortized Intangible Assets

                               

Trade Names

    649       97       -       -  

Customer relationships

    7,979       2,622       7,979       2,021  

TOTAL RETAIL SUPERMARKETS

  $ 15,185     $ 2,719     $ 15,185     $ 2,021  
                                 
                                 

FROZEN BEVERAGES

                               
                                 

Indefinite lived intangible assets

                               

Trade Names

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

Distribution rights

    6,900       -       -       -  
                                 

Amortized intangible assets

                               

Customer relationships

    257       44       200       28  

Licenses and rights

    1,400       776       1,400       723  

TOTAL FROZEN BEVERAGES

  $ 17,872     $ 820     $ 10,915     $ 751  
                                 

CONSOLIDATED

  $ 100,270     $ 38,691     $ 77,553     $ 35,734  

 

 

 
15

 

 

Fully amortized intangible assets were removed from the above table during the March 25, 2017 quarter and at September 24, 2016.

 

Trade names of $649,000 that were classified as indefinite lived intangible assets at September 24, 2016 were reclassified to amortized intangible assets at March 25, 2017 because of our current expectation that moderately declining product sales under that trade name are likely to continue. We have assigned a finite life of five years to that trade name.

 

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. Intangible assets of $6,957,000 were acquired during the quarter ended June 24, 2017 in an ICEE distributor acquisition in our frozen beverage segment and intangible assets of $15,760,000 were acquired in the nine months ended June 24, 2017 in the Hill & Valley acquisition in our food service segment. There were no intangible assets acquired in the nine months ended June 25, 2016. Aggregate amortization expense of intangible assets for the three months ended June 24, 2017 and June 25, 2016 was $828,000 and $1,267,000, respectively and for the nine months ended June 24, 2017 and June 25, 2016 was $2,957,000 and $3,924,000, respectively.

 

Estimated amortization expense including the estimated impact from the Hill & Valley purchase and the ICEE distributor purchase described above and in Note 13 for the next five fiscal years is approximately $3,900,000 in 2017, $3,500,000 in 2018, $3,400,000 in 2019, $3,200,000 in 2020 and $2,500,000 in 2021. The weighted average amortization period of the intangible assets is 10.6 years.

 

Goodwill 

 

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

 

   

Food

Service

   

Retail

Supermarket

   

Frozen

Beverages

   

Total

 

 

    (in thousands)   

Balance at June 24, 2017

  $ 61,007     $ 3,670     $ 37,176     $ 101,853  
                                 
Balance at September 24, 2016   $ 46,832     $ 3,670     $ 35,940     $ 86,442  

     

Goodwill of $1,236,000 was acquired in an ICEE distributor acquisition in our frozen beverage segment during the quarter ended June 24, 2017 and goodwill of $14,175,000 was acquired in the Hill & Valley acquisition in our food service segment in the nine months ended June 24, 2017 and none was acquired in the three and nine months ended June 25, 2016.

 

 

 
16

 

 

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.

 

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 June 24, 2017 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)  
                                 

Corporate Bonds

  $ 114,050     $ 425     $ 164     $ 114,311  

Certificates of Deposit

    1,920       3       2       1,921  

Total investment securities held to maturity

  $ 115,970     $ 428     $ 166     $ 116,232  

 

 

 
17

 

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at June 24, 2017 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)  
                                 

Mutual Funds

  $ 13,003     $ 34     $ 242     $ 12,795  

Preferred Stock

    16,791       628       50       17,369  

Total investment securities available for sale

  $ 29,794     $ 662     $ 292     $ 30,164  

 

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 2018, 2019 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 2017 through 2021, with $108 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.  

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 24, 2016 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)    

Corporate Bonds

  $ 103,311     $ 734     $ 138     $ 103,907  

Certificates of Deposit

    960       11       -       971  

Total investment securities held to maturity

  $ 104,271     $ 745     $ 138     $ 104,878  

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 24, 2016 are summarized as follows:

 

           

Gross

   

Gross

   

Fair

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 
    (in thousands)   
                                 

Mutual Funds

  $ 13,003     $ -     $ 520     $ 12,483  

Preferred Stock

    16,791       273       82       16,982  

Total investment securities available for sale

  $ 29,794     $ 273     $ 602     $ 29,465  

 

 

 
18

 

 

The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at June 24, 2017 and September 24, 2016 are summarized as follows:

 

   

June 24, 2017

   

September 24, 2016

 
                                 
           

Fair

           

Fair

 
   

Amortized

   

Market

   

Amortized

   

Market

 
   

Cost

   

Value

   

Cost

   

Value

 
      (in thousands)    

Due in one year or less

  $ 50,857     $ 50,917     $ 13,539     $ 13,552  

Due after one year through five years

    65,113       65,315       90,732       91,326  

Due after five years through ten years

    -       -       -       -  

Total held to maturity securities

  $ 115,970     $ 116,232     $ 104,271     $ 104,878  

Less current portion

    50,857       50,917       13,539       13,552  

Long term held to maturity securities

  $ 65,113     $ 65,315     $ 90,732     $ 91,326  

      

Proceeds from the redemption and sale of marketable securities were $9,577,000 and $14,681,000 in the three and nine months ended June 24, 2017 and $5,624,000 and $11,008,000 in the three and nine months ended June 25, 2016, respectively. Gains of $13,000 were recorded in the three and nine months ended June 24, 2017 and losses of $176,000 and $582,000 were recorded in the three and nine months ended June 25, 2016, respectively.

We use the specific identification method to determine the cost of securities sold.

 

 

 
19

 

 

Note 12

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

 

   

Three Months Ended June 24, 2017

   

Nine Months Ended June 24, 2017

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

Foreign

Currency 

Translation 

Adjustments

   

Unrealized 

Holding Gain on Marketable Securities

   

Total

   

Foreign

Currency

Translation Adjustments

   

Unrealized

Holding

Loss (Gain) on Marketable

Securities

   

Total

 
                                                 

Beginning Balance

  $ (12,296 )   $ 166     $ (12,130 )   $ (13,086 )   $ (329 )   $ (13,415 )
                                                 

Other comprehensive income (loss) before reclassifications

    1,095       204       1,299       1,885       699       2,584  
                                                 

Amounts reclassified from accumulated other comprehensive income

    -       -       -       -               -  
                                                 

Ending Balance

  $ (11,201 )   $ 370     $ (10,831 )   $ (11,201 )   $ 370     $ (10,831 )

 

   

Three Months Ended June 25, 2016

   

Nine Months Ended June 25, 2016

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

Foreign

Currency

Translation Adjustments

   

Unrealized

Holding Loss on Marketable

Securities

   

Total

   

Foreign

Currency

Translation Adjustments

   

Unrealized

Holding Loss on Marketable

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 )

 

Note 13 

On December 30, 2016, we acquired Hill & Valley Inc., a premium bakery located in Rock Island, IL., for approximately $31 million.   Hill & Valley, with sales of over $45 million annually, is a manufacturer of a variety of pre-baked cakes, cookies, pies, muffins and other desserts to retail in-store bakeries.  Hill & Valley is a leading brand of Sugar Free and No Sugar Added pre-baked in-store bakery items. Additionally, Hill & Valley sustains strategic private labeling partnerships with retailers nationwide. Sales and operating (loss) income of Hill & Valley were $11.4 million and $(43,000) for the quarter and $20.9 million and $102,000 for the nine months ended June 24, 2017.

 

 

 
20

 

 

  The purchase price allocation for the acquisition is as follows:

 

(in thousands)        
         

Accounts Receivable, net

  $ 4,054  

Inventories

    6,088  

Prepaid expenses and other

    122  

Property, plant & equipment, net

    4,398  

Trade Names

    2,090  

Customer Relationships

    13,000  

Goodwill

    14,175  

Covenant not to compete

    670  

Accounts Payable

    (2,259 )

Accrued Liabilities

    (2,162 )

Accrued compensation expense

    (650 )

Other long-term liabilities

    (1,782 )

Deferred income taxes

    (6,633 )

Purchase Price

  $ 31,111  

  

 

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

 

Acquisition costs of $519,000 are included in other expense for the nine months ended June 24, 2017.

 

On May 22, 2017, we acquired an ICEE distributor doing business in Georgia and Tennessee for approximately $11 million.  Sales and operating income of the acquired business were $505,000 and $153,000 for the quarter and nine months ended June 24, 2017

 

The preliminary purchase price allocation, subject to final valuation, for the acquisition is as follows:

  

(in thousands)        
         

Accounts Receivable, net

  $ 340  

Inventories

    217  

Prepaid expenses and other

    25  

Property, plant & equipment, net

    2,277  

Customer Relationships

    57  

Distribution rights

    6,900  

Goodwill

    1,236  

Accounts Payable

    (79 )

Accrued Liabilities

    (26 )

Purchase Price

  $ 10,947  

 

 

 
21

 

  

 

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

 

Acquisition costs of $48,000 are included in other expense for the three and nine months ended June 24, 2017.

 

Our proforma results, giving effect to these two acquisitions and assuming an acquisition date of September 27, 2015, would have been:

 

    (in thousands, except per share amounts)  
                                 
   

Three months ended

   

Nine months ended

 
   

June 24,

   

June 25,

   

June 24,

   

June 25,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Net Sales

  $ 296,115     $ 290,854     $ 783,938     $ 766,048  
                                 

Net Earnings

  $ 25,395     $ 27,098     $ 54,903     $ 55,957  

  

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, 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 $.42 per share of its common stock payable on July 6, 2017, to shareholders of record as of the close of business on June 21, 2017.

 

In our fiscal year ended September 24, 2016, we purchased and retired 141,700 shares of our common stock at a cost of $15,265,019. In the three and nine months ended June 24, 2017 we purchased and retired 13,004 and 25,930 shares at a cost of $1,682,342 and $3,373,699, respectively. 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; 21,845 shares remain to be purchased under this authorization.

 

Capital expenditures in our food service segment increased from $19,470,000 in the nine months ended June 25, 2016 to $35,536,000 in the nine months ended June 24, 2017 due to an increased emphasis on improving efficiencies and reducing costs in our manufacturing facilities.

  

 

 
22

 

 

In the three months ended June 24, 2017 and June 25, 2016 fluctuations in the valuation of the Mexican and Canadian currencies and the resulting translation of the net assets of our Mexican