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   UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the period ended March 28, 2020

or

 

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

 

Commission File Number:     0-14616

 

J&J SNACK FOODS CORP.

(Exact name of registrant as specified in its charter)

 

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

                                       

6000 Central Highway, Pennsauken, New Jersey 08109

(Address of principal executive offices)

 

Telephone (856) 665-9533

 

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

 

 

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

               

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

  Yes No

 

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

  Yes No

 

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

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

 

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

 

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

  Yes No

 

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

 

 

 

 

INDEX

    Page
    Number

Part I.

Financial Information

 
     

Item l.

Consolidated Financial Statements

 
 

   

 
 

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

3

     
 

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

4

     
 

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

5

     
 

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

6

     

        

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

7

     
 

Notes to the Consolidated Financial Statements (unaudited)

8

     

Item 2.

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

26

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

     

Item 4.

Controls and Procedures

31

     

Part II.

Other Information

 
     

Item 6.

Exhibits 

32

 

2

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

   

March 28,

         
   

2020

   

September 28,

 
   

(unaudited)

   

2019

 

Assets

               

Current assets

               

Cash and cash equivalents

  $ 142,969     $ 192,395  

Marketable securities held to maturity

    69,337       51,091  

Accounts receivable, net

    134,746       140,938  

Inventories

    128,090       116,165  

Prepaid expenses and other

    7,352       5,768  

Total current assets

    482,494       506,357  
                 

Property, plant and equipment, at cost

               

Land

    2,494       2,494  

Buildings

    26,582       26,582  

Plant machinery and equipment

    331,535       315,360  

Marketing equipment

    256,502       240,681  

Transportation equipment

    9,839       9,725  

Office equipment

    32,271       31,217  

Improvements

    41,774       40,626  

Construction in progress

    10,050       10,039  

Total Property, plant and equipment, at cost

    711,047       676,724  

Less accumulated depreciation and amortization

    441,886       423,276  

Property, plant and equipment, net

    269,161       253,448  
                 

Other assets

               

Goodwill

    123,033       102,511  

Other intangible assets, net

    81,948       54,922  

Marketable securities held to maturity

    41,091       79,360  

Marketable securities available for sale

    12,947       19,903  

Operating lease right-of-use assets

    64,502       -  

Other

    2,761       2,838  

Total other assets

    326,282       259,534  

Total Assets

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

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current finance lease liabilities

  $ 345     $ 339  

Accounts payable

    67,494       72,029  

Accrued insurance liability

    12,940       10,457  

Accrued liabilities

    6,945       7,808  

Current operating lease liabilities

    13,109       -  

Accrued compensation expense

    16,345       21,154  

Dividends payable

    10,879       9,447  

Total current liabilities

    128,057       121,234  
                 

Noncurrent finance lease liabilities

    544       718  

Noncurrent operating lease liabilities

    54,267       -  

Deferred income taxes

    61,464       61,920  

Other long-term liabilities

    537       1,716  
                 

Stockholders' Equity

               

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

    -       -  

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

    45,549       45,744  

Accumulated other comprehensive loss

    (16,099 )     (12,988 )

Retained Earnings

    803,618       800,995  

Total stockholders' equity

    833,068       833,751  

Total Liabilities and Stockholders' Equity

  $ 1,077,937     $ 1,019,339  

 

 

The accompanying notes are an integral part of these statements.

 

3

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands, except per share amounts)

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net Sales

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

Cost of goods sold

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

Gross Profit

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

Operating expenses

                               

Marketing

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

Distribution

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

Administrative

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

Other general (income) expense

    (395 )     405       (129 )     549  

Total Operating Expenses

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

Operating Income

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

Other (expense)income

                               

Investment(loss)income

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

Interest expense & other

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

Earnings before income taxes

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

Income taxes

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

NET EARNINGS

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

Earnings per diluted share

  $ 0.38     $ 1.08     $ 1.28     $ 2.00  
                                 

Weighted average number of diluted shares

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

Earnings per basic share

  $ 0.39     $ 1.08     $ 1.29     $ 2.02  
                                 

Weighted average number of basic shares

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

 

 

The accompanying notes are an integral part of these statements.

 

4

 

 

J&J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net Earnings

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

Foreign currency translation adjustments

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

Total Other Comprehensive (Loss) income , net of tax

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

Comprehensive Income

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

 

 

The accompanying notes are an integral part of these statements.

 

5

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands)

 

                   

Accumulated

                 
                   

Other

                 
   

Common Stock

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Loss

   

Earnings

   

Total

 
                                         

Balance at September 28, 2019

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

Issuance of common stock upon exercise of stock options

    5       468       -       -       468  

Foreign currency translation adjustment

    -       -       810       -       810  

Dividends declared

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

Share-based compensation

    -       1,299       -       -       1,299  

Net earnings

    -       -       -       17,059       17,059  
                                         

Balance at December 28, 2019

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

Issuance of common stock upon exercise of stock options

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

Foreign currency translation adjustment

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

Issuance of common stock under deferred stock plan

    1       90       -       -       90  

Dividends declared

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

Share-based compensation

    -       1,088       -       -       1,088  

Repurchase of common stock

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

Net earnings

    -       -       -       7,309       7,309  
                                         

Balance at March 28, 2020

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

 

 

                   

Accumulated

                 
                   

Other

                 
   

Common Stock

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Loss

   

Earnings

   

Total

 
                                         

Balance at September 29, 2018

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

Issuance of common stock upon exercise of stock options

    20       1,704       -       -       1,704  

Foreign currency translation adjustment

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

Reclass from accumulated other comprehensive gain

    -       -       (85 )     85       -  

Dividends declared

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

Share-based compensation

    -       972       -       -       972  

Net earnings

    -       -       -       17,526       17,526  
                                         

Balance at December 29, 2018

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

Issuance of common stock upon exercise of stock options

    34       3,451       -       -       3,451  

Issuance of common stock for employee stock purchase plan

    6       772       -       -       772  

Foreign currency translation adjustment

    -       -       394       -       394  

Issuance of common stock under deferred stock plan

    1       90       -       -       90  

Dividends declared

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

Share-based compensation

    -       914       -       -       914  

Repurchase of common stock

    -       -       -       -       -  

Net earnings

    -       -       -       20,354       20,354  
                                         

Balance at March 30, 2019

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

 

 

The accompanying notes are an integral part of these statements.

 

6

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (in thousands)

 

   

Six Months Ended

 
                 
   

March 28,

   

March 30,

 
   

2020

   

2019

 

Operating activities:

               

Net earnings

  $ 24,368     $ 37,880  

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

               

Depreciation of fixed assets

    24,810       21,890  

Amortization of intangibles and deferred costs

    1,677       1,747  

Share-based compensation

    2,432       1,931  

Deferred income taxes

    (298 )     615  

Loss on marketable securities

    2,070       284  

Other

    (286 )     268  

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

               

Decrease in accounts receivable

    6,343       2,003  

Increase in inventories

    (11,328 )     (10,186 )

(Increase) decrease in prepaid expenses

    (1,598 )     172  

Decrease in accounts payable and accrued liabilities

    (5,920 )     (6,345 )

Net cash provided by operating activities

    42,270       50,259  

Investing activities:

               

Payments for purchases of companies, net of cash acquired

    (57,197 )     -  

Purchases of property, plant and equipment

    (36,985 )     (26,351 )

Purchases of marketable securities

    (6,103 )     (19,531 )

Proceeds from redemption and sales of marketable securities

    30,938       23,137  

Proceeds from disposal of property and equipment

    1,853       878  

Other

    (63 )     (207 )

Net cash used in investing activities

    (67,557 )     (22,074 )

Financing activities:

               

Payments to repurchase common stock

    (8,972 )     -  

Proceeds from issuance of stock

    6,300       5,926  

Payments on capitalized lease obligations

    (168 )     (167 )

Payment of cash dividend

    (20,314 )     (17,825 )

Net cash used in financing activities

    (23,154 )     (12,066 )

Effect of exchange rate on cash and cash equivalents

    (985 )     (943 )

Net (decrease) increase in cash and cash equivalents

    (49,426 )     15,176  

Cash and cash equivalents at beginning of period

    192,395       111,479  

Cash and cash equivalents at end of period

  $ 142,969     $ 126,655  

 

 

The accompanying notes are an integral part of these statements.

 

7

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 1

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

 

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

 

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

 

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

 

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

 

 

 

Note 2

 

Revenue Recognition

 

When Performance Obligations Are Satisfied

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

 

8

 

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

 

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

 

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

 

Significant Payment Terms

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

 

Shipping

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

 

Variable Consideration

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

 

9

 

Warranties & Returns

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

 

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

 

Contract Balances

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

 

    (in thousands)  
   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Beginning Balance

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

Additions to contract liability

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

Amounts recognized as revenue

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

Ending Balance

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

 

Disaggregation of Revenue

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

 

Allowance for Doubtful Receivables

 

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

 

10

 

 

Note 3

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

 

 

 

Note 4

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

 

   

Three Months Ended March 28, 2020

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 7,309       18,921     $ 0.39  
                         

Effect of Dilutive Securities

                       

Options

    -       93       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 7,309       19,014     $ 0.38  

 

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

 

   

Six Months Ended March 28, 2020

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 24,368       18,910     $ 1.29  
                         

Effect of Dilutive Securities

                       

Options

    -       169       (0.01 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 24,368       19,079     $ 1.28  

 

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

 

11

 

   

Three Months Ended March 30, 2019

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 20,354       18,795     $ 1.08  
                         

Effect of Dilutive Securities

                       

Options

    -       96       -  
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 20,354       18,891     $ 1.08  

 

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

 

   

Six Months Ended March 30, 2019

 
   

Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
                         
   

(in thousands, except per share amounts)

 

Basic EPS

                       

Net Earnings available to common stockholders

  $ 37,880       18,780     $ 2.02  
                         

Effect of Dilutive Securities

                       

Options

    -       114       (0.02 )
                         

Diluted EPS

                       

Net Earnings available to common stockholders plus assumed conversions

  $ 37,880       18,894     $ 2.00  

 

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

 

12

 

 

Note 5

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

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Stock Options

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

Stock purchase plan

    69       68       271       137  

Stock issued to an outside director

    33       33       33       33  

Total share-based compensation

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

The above compensation is net of tax benefits

  $ 620     $ 410     $ 751     $ 683  

 

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

 

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

 

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

 

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

 

 

 

Note 6

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

 

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

 

13

 

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


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

 

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

 

 

 

Note 7

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

 

14

 

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

 

 

 

Note 8

Inventories consist of the following:

 

   

March 28,

   

September 28,

 
   

2020

   

2019

 
   

(unaudited)

         
   

(in thousands)

 
                 

Finished goods

  $ 61,892     $ 53,225  

Raw materials

    23,075       22,146  

Packaging materials

    9,438       9,703  

Equipment parts and other

    33,685       31,091  

Total Inventories

  $ 128,090     $ 116,165  

 

 

 

Note 9

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

 

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

 

Food Service

 

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

 

Retail Supermarkets

 

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

 

Frozen Beverages

 

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

 

15

 

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

 

   

Three months ended

   

Six months ended

 
   

March 28,

   

March 30,

   

March 28,

   

March 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Sales to External Customers:

                               

Food Service

                               

Soft pretzels

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

Frozen juices and ices

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

Churros

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

Handhelds

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

Bakery

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

Other

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

Total Food Service

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

Retail Supermarket

                               

Soft pretzels

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

Frozen juices and ices

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

Biscuits

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

Handhelds

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

Coupon redemption

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

Other

    494       340       805       699  

Total Retail Supermarket

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

Frozen Beverages

                               

Beverages

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

Repair and maintenance service

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

Machines revenue

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

Other

    555       270       856       494  

Total Frozen Beverages

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

Consolidated Sales

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

Depreciation and Amortization:

                               

Food Service

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

Retail Supermarket

    329       320       688       655  

Frozen Beverages

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

Total Depreciation and Amortization

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

Operating Income :

                               

Food Service

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

Retail Supermarket

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

Frozen Beverages

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

Total Operating Income

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

Capital Expenditures:

                               

Food Service

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

Retail Supermarket

    275       581       1,235       1,133  

Frozen Beverages

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

Total Capital Expenditures

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

Assets:

                               

Food Service

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

Retail Supermarket

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

Frozen Beverages

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

Total Assets

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

 

16

 

 

Note 10

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

 

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

 

    March 28, 2020    

September 28, 2019

 
   

Gross

           

Gross

         
   

Carrying

   

Accumulated

   

Carrying

   

Accumulated

 
    Amount     Amortization     Amount     Amortization  
            (in thousands)          

FOOD SERVICE

                               
                                 

Indefinite lived intangible assets

                               

Trade names

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

Amortized intangible assets

                               

Non compete agreements

    670       561       858       665  

Customer relationships

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

License and rights

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

TOTAL FOOD SERVICE

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

RETAIL SUPERMARKETS

                               
                                 

Indefinite lived intangible assets

                               

Trade names

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

Amortized Intangible Assets

                               

Trade names

    676       454       676       389  

Customer relationships

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

TOTAL RETAIL SUPERMARKETS

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

FROZEN BEVERAGES

                               
                                 

Indefinite lived intangible assets

                               

Trade names

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

Distribution rights

    34,900       -       6,900       -  
                                 

Amortized intangible assets

                               

Customer relationships

    1,439       185       737       102  

Licenses and rights

    1,400       967       1,400       933  

TOTAL FROZEN BEVERAGES

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

CONSOLIDATED

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

 

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

 

17

 

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

 

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

 

Goodwill 

 

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

 

   

Food

   

Retail

   

Frozen

         
    Service     Supermarket     Beverages     Total  
   

(in thousands)

 

Balance at March 28, 2020

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

Balance at September 28, 2019

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

 

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

 

 

 

Note 11

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

 

Level 1

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