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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 29, 2019

or

 

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

 

Commission File Number:     0-14616

J & J SNACK FOODS CORP.

(Exact name of registrant as specified in its charter)

 

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

 

6000 Central Highway, Pennsauken, New Jersey 08109

(Address of principal executive offices)

 

Telephone (856) 665-9533

 

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

 

 

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

X

Yes

No

 

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

 

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 152-2 of the Exchange Act.

 

  Large Accelerated filer (X) Accelerated filer (  )
         
  Non-accelerated filer (  )    
      Smaller reporting company (  )
      Emerging growth company (  )

 

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

 

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

 

 

Yes

X

No

 

As July 25, 2019, there were 18,840,904 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 29, 2019 (unaudited) and September 29, 2018

3

       
    Consolidated Statements of Earnings (unaudited) – Three and nine months ended June 29, 2019 and June 30, 2018 4

        

     
   

Consolidated Statements of Comprehensive Income (unaudited) – Three and nine months Ended June 29, 2019 and June 30, 2018

5

       

     
   

Consolidated Statements of Changes In Stockholders’ Equity (unaudited) – Nine months Ended June 29, 2019 and June 30, 2018

6
       
   

Consolidated Statements of Cash Flows (unaudited) – Nine months Ended June 29, 2019 and June 30, 2018

8
   

 

 
   

Notes to the Consolidated Financial Statements (unaudited)

9
       
 

Item 2.

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

23
       
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28
       
 

Item 4.

Controls and Procedures

28

   

     

Part II.     Other Information

 

   

     

 

Item 6. Exhibits

29

 

2

 

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

   

June 29,

   

September 29,

 
   

2019

   

2018

 
   

(unaudited)

         

Assets

               

Current assets

               

Cash and cash equivalents

  $ 156,097     $ 111,479  

Marketable securities held to maturity

    40,809       21,048  

Accounts receivable, net

    146,553       132,342  

Inventories

    119,190       112,884  

Prepaid expenses and other

    4,146       5,044  

Total current assets

    466,795       382,797  
                 

Property, plant and equipment, at cost

               

Land

    2,494       2,494  

Buildings

    26,582       26,582  

Plant machinery and equipment

    307,787       290,396  

Marketing equipment

    307,077       290,955  

Transportation equipment

    9,534       8,929  

Office equipment

    30,958       30,752  

Improvements

    39,761       38,941  

Construction in progress

    12,978       8,468  

Total Property, plant and equipment, at cost

    737,171       697,517  

Less accumulated depreciation and amortization

    486,519       454,844  

Property, plant and equipment, net

    250,652       242,673  
                 

Other assets

               

Goodwill

    102,511       102,511  

Other intangible assets, net

    55,721       57,762  

Marketable securities held to maturity

    96,064       118,765  

Marketable securities available for sale

    21,032       24,743  

Other

    2,915       2,762  

Total other assets

    278,243       306,543  

Total Assets

  $ 995,690     $ 932,013  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current obligations under capital leases

  $ 330     $ 324  

Accounts payable

    80,237       69,592  

Accrued insurance liability

    9,281       11,217  

Accrued liabilities

    14,098       8,031  

Accrued compensation expense

    17,177       20,297  

Dividends payable

    9,413       8,438  

Total current liabilities

    130,536       117,899  
                 

Long-term obligations under capital leases

    714       753  

Deferred income taxes

    53,009       52,322  

Other long-term liabilities

    1,764       1,948  
                 

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 18,830,000 and 18,754,000 respectively

    37,840       27,340  

Accumulated other comprehensive loss

    (12,548 )     (11,994 )

Retained Earnings

    784,375       743,745  

Total stockholders' equity

    809,667       759,091  

Total Liabilities and Stockholders' Equity

  $ 995,690     $ 932,013  

 

 

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 29,

   

June 30,

   

June 29,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net Sales

  $ 326,701     $ 306,239     $ 874,615     $ 837,550  
                                 

Cost of goods sold(1)

    225,352       211,764       617,155       592,518  

Gross Profit

    101,349       94,475       257,460       245,032  
                                 

Operating expenses

                               

Marketing (2)

    26,398       25,589       69,792       69,672  

Distribution (3)

    24,447       24,325       70,521       67,901  

Administrative (4)

    10,668       9,654       29,909       28,014  

Other general expense (income)

    794       38       1,343       (193 )

Total operating expenses

    62,307       59,606       171,565       165,394  
                                 

Operating Income

    39,042       34,869       85,895       79,638  
                                 

Other income (expense)

                               

Investment income

    1,953       1,705       5,775       4,687  

Interest expense & other

    1,972       (209 )     1,920       267  
                                 

Earnings before income taxes

    42,967       36,365       93,590       84,592  
                                 

Income taxes

    12,095       10,236       24,838       4,381  
                                 

NET EARNINGS

  $ 30,872     $ 26,129     $ 68,752     $ 80,211  
                                 

Earnings per diluted share

  $ 1.63     $ 1.39     $ 3.64     $ 4.27  
                                 

Weighted average number of diluted shares

    18,947       18,822       18,912       18,801  
                                 

Earnings per basic share

  $ 1.64     $ 1.40     $ 3.66     $ 4.29  
                                 

Weighted average number of basic shares

    18,823       18,698       18,794       18,683  

 

(1)

Includes share-based compensation expense of $271 and $735 for the three months and nine months ended June 29, 2019, respectively and $225 and $642 for the three months and nine months ended June 30, 2018.

(2)

Includes share-based compensation expense of $391 and $1,061 for the three months and nine months ended June 29, 2019, respectively and $349 and $998 for the three months and nine months ended June 30, 2018.

(3)

Includes share-based compensation expense of $24 and $65 for the three months and nine months ended June 29, 2019,, respectively and $20 and $56 for the three months and nine months ended June 30, 2018.

(4)

Includes share-based compensation expense of $435 and $1,191 for the three months and nine months ended June 29, 2019, respectively and $412 and $1,178 for the three months and nine months ended June 30, 2018.

 

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 29,

   

June 30,

   

June 29,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net Earnings

  $ 30,872     $ 26,129     $ 68,752     $ 80,211  
                                 

Foreign currency translation adjustments

    496       (2,359 )     (469 )     (4,348 )

Unrealized holding loss on marketable securities

    -       (253 )     -       (547 )
                                 

Total Other Comprehensive Income(loss)

    496       (2,612 )     (469 )     (4,895 )
                                 

Comprehensive Income

  $ 31,368     $ 23,517     $ 68,283     $ 75,316  

 

 

The accompanying notes are an integral part of these statements.

 

5

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands)

 

                   

Accumulated

                 
                   

Other

                 
   

Common Stock

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Loss

   

Earnings

   

Total

 
                                         

Balance at September 29, 2018

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

Issuance of common stock upon exercise of stock options

    20       1,704       -       -       1,704  

Foreign currency translation adjustment

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

Reclass from accumulated other comprehensive gain

    -       -       (85 )     85       -  

Dividends declared

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

Share-based compensation

    -       972       -       -       972  

Repurchase of common stock

    -       -       -       -       -  

Net earnings

    -       -       -       17,526       17,526  

Balance at December 29, 2018

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

Issuance of common stock upon exercise of stock options

    34       3,451       -       -       3,451  

Issuance of common stock for employee stock purchase plan

    6       772       -       -       772  

Foreign currency translation adjustment

    -       -       394       -       394  

Issuance of common stock under deferred stock plan

    1       90       -       -       90  

Dividends declared

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

Share-based compensation

    -       914       -       -       914  

Repurchase of common stock

    -       -       -       -       -  

Net earnings

    -       -       -       20,354       20,354  

Balance at March 30, 2019

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

Issuance of common stock upon exercise of stock options

    15       1,499       -       -       1,499  

Foreign currency translation adjustment

    -       -       496       -       496  

Dividends declared

    -       -       -       (9,413 )     (9,413 )

Share-based compensation

    -       1,098       -       -       1,098  

Repurchase of common stock

    -       -       -       -       -  

Net earnings

    -       -       -       30,872       30,872  

Balance at June 29, 2019

    18,830     $ 37,840     $ (12,548 )   $ 784,375     $ 809,667  

 

6

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands)

 

                   

Accumulated

                 
                   

Other

                 
   

Common Stock

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Loss

   

Earnings

   

Total

 
                                         

Balance at September 30, 2017

    18,663     $ 17,382     $ (8,875 )   $ 673,815     $ 682,322  

Issuance of common stock upon exercise of stock options

    5       253       -       -       253  

Foreign currency translation adjustment

    -       -       (3,887 )     -       (3,887 )

Unrealized holding loss on marketable securities

    -       -       (110 )     -       (110 )

Issuance of common stock under deferred stock plan

    -       2       -       -       2  

Dividends declared

    -       -       -       (8,400 )     (8,400 )

Share-based compensation

    -       952       -       -       952  

Repurchase of common stock

    -       -       -       -       -  

Net earnings

    -       -       -       36,249       36,249  
                                         

Balance at December 30, 2017

    18,668     $ 18,589     $ (12,872 )   $ 701,664     $ 707,381  

Issuance of common stock upon exercise of stock options

    21       1,951       -       -       1,951  

Issuance of common stock for employee stock purchase plan

    7       756       -       -       756  

Foreign currency translation adjustment

    -       -       1,898       -       1,898  

Unrealized holding loss on marketable securities

    -       -       (184 )     -       (184 )

Issuance of common stock under deferred stock plan

    1       92       -       -       92  

Dividends declared

    -       -       -       (8,413 )     (8,413 )

Share-based compensation

    -       868       -       -       868  

Repurchase of common stock

    -       -       -       -       -  

Net earnings

    -       -       -       17,833       17,833  
                                         

Balance at March 31, 2018

    18,697     $ 22,256     $ (11,158 )   $ 711,084     $ 722,182  
                                         

Issuance of common stock upon exercise of stock options

    29       2,601       -       -       2,601  

Foreign currency translation adjustment

    -       -       (2,359 )     -       (2,359 )

Unrealized holding loss on marketable securities

    -       -       (253 )     -       (253 )

Issuance of common stock under deferred stock plan

    -       2       -       -       2  

Dividends declared

    -       -       -       (8,415 )     (8,415 )

Share-based compensation

    -       982       -       -       982  

Repurchase of common stock

    (21 )     (2,794 )     -       -       (2,794 )

Net earnings

    -       -       -       26,129       26,129  
                                         

Balance at June 30, 2018

    18,705     $ 23,047     $ (13,770 )   $ 728,798     $ 738,075  

 

 
7

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)     (in thousands)

 

   

Nine months ended

 
   

June 29,

   

June 30,

 
   

2019

   

2018

 

Operating activities:

               

Net earnings

  $ 68,752     $ 80,211  

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

               

Depreciation of property, plant and equipment

    33,374       31,929  

Amortization of intangibles and deferred costs

    2,586       2,639  

Share-based compensation

    3,006       2,874  

Deferred income taxes

    690       (12,502 )

Loss on marketable securities

    410       32  

Other

    350       (3 )

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

               

Increase in accounts receivable

    (14,289 )     (7,530 )

Increase in inventories

    (6,257 )     (13,020 )

Decrease (increase) in prepaid expenses

    957       (2,949 )

Increase in accounts payable and accrued liabilities

    11,584       3,606  

Net cash provided by operating activities

  $ 101,163       85,287  

Investing activities:

               

Payment for purchases of companies, net of cash acquired

    (1,155 )     -  

Purchases of property, plant and equipment

    (42,136 )     (43,344 )

Purchases of marketable securities

    (24,056 )     (65,227 )

Proceeds from redemption and sales of marketable securities

    29,721       51,417  

Proceeds from disposal of property, plant and equipment

    1,463       1,895  

Other

    (212 )     171  

Net cash used in investing activities

    (36,375 )     (55,088 )

Financing activities:

               

Payments to repurchase common stock

    -       (2,794 )

Proceeds from issuance of stock

    7,426       5,561  

Payments on capitalized lease obligations

    (33 )     (278 )

Payment of cash dividend

    (27,230 )     (24,652 )

Net cash used in financing activities

    (19,837 )     (22,163 )

Effect of exchange rate on cash and cash equivalents

    (333 )     (3,370 )

Net increase in cash and cash equivalents

  $ 44,618     $ 4,666  

Cash and cash equivalents at beginning of period

    111,479       90,962  

Cash and cash equivalents at end of period

  $ 156,097     $ 95,628  

 

The accompanying notes are an integral part of these statements.

 

8

 

 

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 29, 2018.

 

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 nine months ended June 29, 2019 and June 30, 2018 are not necessarily indicative of results for the full year. Sales of our frozen beverages and frozen juice bars and ices are generally higher in the third and fourth quarters due to warmer weather.

 

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

 

While we believe that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2018.

 

 

Note 2

 

Revenue Recognition

We adopted the new revenue recognition guidance on the first day of our fiscal 2019 year using a modified retrospective approach; however, we did not record a cumulative-effect adjustment from initially applying the standard as the adoption did not have a material impact on our financial position or results of operations. We completed a review of customer contracts and evaluated the impact of the new standard on certain common practices currently employed by us. We also finalized our assessment of the impact on our accounting policies, processes, system requirements, internal controls and disclosures.

 

9

 

 

 When Performance Obligations Are Satisfied

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

 

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

 

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

 

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

 

 Significant Payment Terms

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

 

 Shipping 

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

 

10

 

 

 Variable Consideration

In addition to fixed contract consideration, our contracts include some form of variable consideration, including sales discounts, trade promotions and certain other sales and consumer incentives, including rebates and coupon redemptions. In general, variable consideration is treated as a reduction in revenue when the related revenue is recognized. Depending on the specific type of variable consideration, we use the most likely amount method to determine the variable consideration. We believe there will be no significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. We review and update our estimates and related accruals of variable consideration each period based on historical experience.

 

 Warranties & Returns

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

 

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

 

 Contract Balances

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 29, 2019

   

June 29, 2019

 
   

(unaudited)

   

(unaudited)

 
   

(in thousands)

   

(in thousands)

 
                 

Beginning Balance

  $ 1,655     $ 1,865  

Additions to contract liability

    1,271       4,299  

Amounts recognized as revenue

    (1,499 )     (4,737 )

Ending Balance

  $ 1,427     $ 1,427  

 

11

 

 

 Disaggregation of Revenue

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

 

 Allowance for Doubtful Receivables

 

We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors. The allowance for doubtful receivables was $665,000 and $400,000 at June 29, 2019 and September 29, 2018, respectively.

 

 

Note 3

Depreciation of equipment and buildings is provided for by the straight-line method over the assets’ estimated useful lives. Amortization of improvements is provided for by the straight-line method over the term of the lease or the assets’ estimated useful lives, whichever is shorter. Licenses and rights, customer relationships and non-compete agreements arising from acquisitions are amortized by the straight-line method over periods ranging from 2 to 20 years. Depreciation expense was $11,484,000 and $10,569,000 for the three months ended June 29, 2019 and June 30, 2018, respectively and $33,374,000 and $31,929,000 for the nine months ended June 29, 2019 and June 30, 2018, 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 29, 2019

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 30,872       18,823     $ 1.64  
                         

Effect of Dilutive Securities

                       

Options

    -       124       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 30,872       18,947     $ 1.63  

 

 

163,170 anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 29, 2019.

 

12

 

 

   

Nine Months Ended June 29, 2019

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 68,752       18,794     $ 3.66  
                         

Effect of Dilutive Securities

                       

Options

    -       118       (0.02 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 68,752       18,912     $ 3.64  

 

 

163,670 anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 29, 2019.

 

   

Three Months Ended June 30, 2018

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 26,129       18,698     $ 1.40  
                         

Effect of Dilutive Securities

                       

Options

    -       124       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 26,129       18,822     $ 1.39  

 

 

1,000 anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 30, 2018.

 

13

 

 

   

Nine Months Ended June 30, 2018

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 80,211       18,683     $ 4.29  
                         

Effect of Dilutive Securities

                       

Options

    -       118       (0.02 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 80,211       18,801     $ 4.27  

 

1,000 anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 30, 2018.

 

 

 

 

Note 5

At June 29, 2019, the Company has three stock-based employee compensation plans. Share-based compensation expense was recognized as follows:

 

   

Three months ended

   

Nine months ended

 
   

June 29,

   

June 30,

   

June 29,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

 
                                 
                                 

Stock Options

  $ 663     $ 473     $ 1,741     $ 1,559  

Stock purchase plan

    187       89       324       355  

Stock issued to an outside director

    17       16       50       48  

Restricted stock issued to an employee

    -       1       -       3  

Total share-based compensation

  $ 867     $ 579     $ 2,115     $ 1,965  
                                 

The above compensation is net of tax benefits

  $ 254     $ 427     $ 937     $ 909  

 

14

 

 

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 2019 nine months: expected volatility of 16.8%; risk-free interest rate of 2.2%; dividend rate of 1.2% and expected lives of 5 years.

 

During the fiscal year 2019 nine month period, the Company granted 165,170 stock options. The weighted-average grant date fair value of these options was $26.29.

 

During the fiscal year 2018 nine month period, the Company granted 159,878 stock options. The weighted-average grant date fair value of these options was $23.67.

 

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.

 

The total amount of gross unrecognized tax benefits is $409,000 and $394,000 on June 29, 2019 and September 29, 2018, 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 29, 2019, and September 29, 2018, respectively, the Company has $274,000 and $259,000 of accrued interest and penalties.


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

 

Net earnings for last year’s nine months benefited from a $20.9 million gain on the remeasurement of deferred tax liabilities which was partially offset by a $1.2 million provision for the one time repatriation tax, both of which resulted from the Tax Cuts and Jobs Act enacted in December 2017. Excluding the deferred tax gain and the one time repatriation tax, our effective tax rate was 28.4% in last year’s nine months. Net earnings in this year’s nine months benefitted by a reduction of approximately $900,000 in tax as the provision for the one time repatriation tax was reduced as the amount recorded last year was an estimate.  Excluding the reduction in the provision for the one time repatriation tax, our effective tax rate was 27.5% in this year’s nine months.

 

15

 
 

 

 

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 performed a review of the requirements of the new revenue standard, including reviewing customer contracts and applying the five-step model of this new guidance to each contract category we identified. We adopted this guidance on the first day of our fiscal 2019 year using a modified retrospective approach; however, we did not record a cumulative-effect adjustment from initially applying the standard as the adoption did not have a material impact on our financial position or results of operations. See additional revenue recognition disclosures in Note 2.

 

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 prior guidance, changes in fair value of equity investments available for sale were recognized in Stockholders’ Equity.   We adopted this guidance on the first day of our 2019 fiscal year. The adoption of this guidance on our consolidated financial statements was not material.

 

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.  While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities. We anticipate that the impact of this guidance on our financial statements will be material.

 

16

 

 

 

Note 8 Inventories consist of the following:

 

   

June 29,

   

September 29,

 
   

2019

   

2018

 
   

(unaudited)

         
   

(in thousands)

 
                 

Finished goods

  $ 55,282     $ 52,221  

Raw materials

    22,910       23,173  

Packaging materials

    10,754       9,780  

Equipment parts and other

    30,244       27,710  

Total Inventories

  $ 119,190     $ 112,884  

 

 

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.

 

17

 

 

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. Sales and operating income are key variables monitored by the Chief Operating Decision Makers and management when determining each segment’s and the Company’s financial condition and operating performance. In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment. Information regarding the operations in these three reportable segments is as follows:

 

   

Three months ended

   

Nine months ended

 
   

June 29,

   

June 30,

   

June 29,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
   

(unaudited)

 
   

(in thousands)

 

Sales to External Customers:

                               

Food Service

                               

Soft pretzels

  $ 55,867     $ 53,880     $ 154,670     $ 151,649  

Frozen juices and ices

    13,862       12,825       30,336       29,448  

Churros

    18,888       16,739       49,793       46,603  

Handhelds

    8,550       9,974       25,339       30,667  

Bakery

    95,299       93,082       288,172       278,828  

Other

    6,105       5,201       19,576       16,235  

Total Food Service

  $ 198,571     $ 191,701     $ 567,886     $ 553,430  
                                 

Retail Supermarket

                               

Soft pretzels

  $ 7,294     $ 7,332     $ 28,309     $ 27,925  

Frozen juices and ices

    26,515       28,785       52,179       53,950  

Handhelds

    3,063       2,960       8,110       8,749  

Coupon redemption

    (962 )     (1,278 )     (2,163 )     (2,647 )

Other

    642       733       1,341       1,715  

Total Retail Supermarket

  $ 36,552     $ 38,532     $ 87,776     $ 89,692  
                                 

Frozen Beverages

                               

Beverages

  $ 56,937     $ 49,131     $ 121,976     $ 115,401  

Repair and maintenance service

    22,514       19,693       62,291       58,005  

Machines revenue

    11,810       6,856       33,875       20,183  

Other

    317       326       811       839  

Total Frozen Beverages

  $ 91,578     $ 76,006     $ 218,953     $ 194,428  
                                 

Consolidated Sales

  $ 326,701     $ 306,239     $ 874,615     $ 837,550  
                                 

Depreciation and Amortization:

                               

Food Service

  $ 6,973     $ 6,237     $ 19,911     $ 19,376  

Retail Supermarket

    335       332       990       980  

Frozen Beverages

    5,015       4,860       15,059       14,212  

Total Depreciation and Amortization

  $ 12,323     $ 11,429     $ 35,960     $ 34,568  
                                 

Operating Income:

                               

Food Service

  $ 21,154     $ 19,663     $ 59,195     $ 54,098  

Retail Supermarket

    3,651       3,203       7,739       8,295  

Frozen Beverages

    14,237       12,003       18,961       17,245  

Total Operating Income

  $ 39,042     $ 34,869     $ 85,895     $ 79,638  
                                 

Capital Expenditures:

                               

Food Service

  $ 8,665     $ 10,172     $ 23,346     $ 25,872  

Retail Supermarket

    597       273       1,730       376  

Frozen Beverages

    6,523       6,618       17,060       17,096  

Total Capital Expenditures

  $ 15,785     $ 17,063     $ 42,136     $ 43,344  
                                 

Assets:

                               

Food Service

  $ 752,117     $ 672,861     $ 752,117     $ 672,861  

Retail Supermarket

    24,349       24,215       24,349       24,215  

Frozen Beverages

    219,224       217,156       219,224       217,156  

Total Assets

  $ 995,690     $ 914,232     $ 995,690     $ 914,232  

 

18

 
 

 

 

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 29, 2019 and September 29, 2018 are as follows:

 

   

June 29, 2019

   

September 29, 2018

 
   

Gross

           

Gross

         
   

Carrying

   

Accumulated

   

Carrying

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 
    (in thousands)  

FOOD SERVICE

                               

Indefinite lived intangible assets