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 26, 2022

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

At April 29, 2022 there were 19,174,920 shares of the Registrant’s Common Stock outstanding.

1

INDEX

	Page Number
Part I.   Financial Information
Item l.   Consolidated Financial Statements
Consolidated Balance Sheets – March 26, 2022 (unaudited) and September 25, 2021	3
Consolidated Statements of Earnings (unaudited) – Three and Six Months Ended March 26, 2022 and March 27, 2021	4
Consolidated Statements of Comprehensive Income (unaudited) – Three and Six Months Ended March 26, 2022 and March 27, 2021	5
Consolidated Statements of Changes In Stockholders’ Equity (unaudited) – Three and Six Months Ended March 26, 2022 and March 27, 2021	6
Consolidated Statements of Cash Flows (unaudited) – Six Months Ended March 26, 2022 and March 27, 2021	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	30
Item 4.   Controls and Procedures	30
Part II.   Other Information	31
Item 6.   Exhibits	31

2

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	March 26,
	2022			September 25,
	(unaudited)			2021
Assets
Current assets
Cash and cash equivalents	$	221,017		$	283,192
Marketable securities held to maturity		4,530			7,980
Accounts receivable, net		187,933			162,939
Inventories		158,991			123,160
Prepaid expenses and other		11,805			7,498
Total current assets		584,276			584,769
Property, plant and equipment, at cost
Land		2,494			2,494
Buildings		26,582			26,582
Plant machinery and equipment		340,534			343,716
Marketing equipment		263,494			258,624
Transportation equipment		10,912			10,315
Office equipment		44,641			34,648
Improvements		48,073			45,578
Construction in progress		45,418			35,285
Total Property, plant and equipment, at cost		782,148			757,242
Less accumulated depreciation and amortization		504,249			490,055
Property, plant and equipment, net		277,899			267,187
Other assets
Goodwill		121,833			121,833
Other intangible assets, net		76,599			77,776
Marketable securities held to maturity		-			4,047
Marketable securities available for sale		5,951			10,084
Operating lease right-of-use assets		53,892			54,555
Other		2,878			1,968
Total other assets		261,153			270,263
Total Assets	$	1,123,328		$	1,122,219
Liabilities and Stockholders' Equity
Current Liabilities
Current finance lease liabilities	$	127		$	182
Accounts payable		101,238			96,789
Accrued insurance liability		15,525			16,260
Accrued liabilities		6,456			10,955
Current operating lease liabilities		13,747			13,395
Accrued compensation expense		16,487			17,968
Dividends payable		12,136			12,080
Total current liabilities		165,716			167,629
Noncurrent finance lease liabilities		336			392
Noncurrent operating lease liabilities		45,501			46,557
Deferred income taxes		61,339			61,578
Other long-term liabilities		455			409
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 19,173,000 and 19,084,000 respectively		87,688			73,597
Accumulated other comprehensive loss		(13,281	)		(13,383	)
Retained Earnings		775,574			785,440
Total stockholders' equity		849,981			845,654
Total Liabilities and Stockholders' Equity	$	1,123,328		$	1,122,219

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 26,			March 27,			March 26,			March 27,
	2022			2021			2022			2021
Net sales	$	281,513		$	256,178		$	600,003		$	497,175
Cost of goods sold		216,165			195,282			455,280			386,154
Gross profit		65,348			60,896			144,723			111,021
Operating expenses
Marketing		21,036			19,192			41,943			36,493
Distribution		28,349			25,443			61,664			48,332
Administrative		11,719			9,216			22,088			18,656
Other general expense		156			(185	)		95			(268	)
Total operating expenses		61,260			53,666			125,790			103,213
Operating income		4,088			7,230			18,933			7,808
Other income (expense)
Investment income		160			579			431			1,949
Interest expense & other		(57	)		4			(75	)		(11	)
Earnings before income taxes		4,191			7,813			19,289			9,746
Income taxes		920			1,752			4,927			1,907
NET EARNINGS	$	3,271		$	6,061		$	14,362		$	7,839
Earnings per diluted share	$	0.17		$	0.32		$	0.75		$	0.41
Weighted average number of diluted shares		19,206			19,130			19,180			19,081
Earnings per basic share	$	0.17		$	0.32		$	0.75		$	0.41
Weighted average number of basic shares		19,134			19,006			19,110			18,971

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 26,		March 27,			March 26,		March 27,
	2022		2021			2022		2021
Net earnings	$	3,271	$	6,061		$	14,362	$	7,839
Foreign currency translation adjustments		546		(531	)		102		1,748
Total other comprehensive income (loss), net of tax		546		(531	)		102		1,748
Comprehensive income	$	3,817	$	5,530		$	14,464	$	9,587

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 as September 25, 2021		19,084	$	73,597	$	(13,383	)	$	785,440		$	845,654
Issuance of common stock upon exercise of stock options		5		706		-			-			706
Foreign currency translation adjustment		-		-		(444	)		-			(444	)
Dividends declared		-		-		-			(12,092	)		(12,092	)
Share-based compensation		-		1,083		-			-			1,083
Net earnings		-		-		-			11,091			11,091
Balance at December 25, 2021		19,089	$	75,386	$	(13,827	)	$	784,439		$	845,998
Issuance of common stock upon exercise of stock options		76		10,012		-			-			10,012
Issuance of common stock for employee stock purchase plan		8		1,023		-			-			1,023
Foreign currency translation adjustment		-		-		546			-			546
Dividends declared		-		-		-			(12,136	)		(12,136	)
Share-based compensation		-		1,267		-			-			1,267
Net earnings		-		-		-			3,271			3,271
Balance at March 26, 2022		19,173	$	87,688	$	(13,281	)	$	775,574		$	849,981

					Accumulated
					Other
	Common Stock				Comprehensive			Retained
	Shares		Amount		Loss			Earnings			Total
Balance as September 26, 2020		18,915	$	49,268	$	(15,587	)	$	775,817		$	809,498
Issuance of common stock upon exercise of stock options		41		4,390		-			-			4,390
Foreign currency translation adjustment		-		-		2,279			-			2,279
Dividends declared		-		-		-			(10,900	)		(10,900	)
Share-based compensation		-		1,244		-			-			1,244
Net earnings		-		-		-			1,778			1,778
Balance at December 26, 2020		18,956	$	54,902	$	(13,308	)	$	766,695		$	808,289
Issuance of common stock upon exercise of stock options		72		8,384		-			-			8,384
Issuance of common stock for employee stock purchase plan		6		714		-			-			714
Foreign currency translation adjustment		-		-		(531	)		-			(531	)
Dividends declared		-		-		-			(10,943	)		(10,943	)
Share-based compensation		-		1,026		-			-			1,026
Net earnings		-		-		-			6,061			6,061
Balance at March 27, 2021		19,034	$	65,026	$	(13,839	)	$	761,813		$	813,000

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 26,			March 27,
	2022			2021
Operating activities:
Net earnings	$	14,362		$	7,839
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation of fixed assets		23,868			24,253
Amortization of intangibles and deferred costs		1,183			1,457
Loss from disposals of property & equipment		100			-
Share-based compensation		2,350			2,270
Deferred income taxes		(251	)		(4	)
Loss (Gain) on marketable securities		69			(768	)
Other		(184	)		(163	)
Changes in assets and liabilities net of effects from purchase of companies
Increase in accounts receivable		(25,031	)		(10,884	)
Increase in inventories		(36,538	)		(6,432	)
Increase in prepaid expenses		(4,308	)		(118	)
(Decrease) increase in accounts payable and accrued liabilities		(2,055	)		9,331
Net cash (used in) provided by operating activities		(26,435	)		26,781
Investing activities:
Purchases of property, plant and equipment		(35,306	)		(18,829	)
Proceeds from redemption and sales of marketable securities		11,526			41,337
Proceeds from disposal of property and equipment		589			1,262
Other		-			18
Net cash (used in) provided by investing activities		(23,191	)		23,788
Financing activities:
Proceeds from issuance of stock		11,741			13,582
Payments on finance lease obligations		(111	)		(173	)
Payment of cash dividend		(24,163	)		(21,776	)
Net cash used in financing activities		(12,533	)		(8,367	)
Effect of exchange rate on cash and cash equivalents		(16	)		375
Net (decrease) increase in cash and cash equivalents		(62,175	)		42,577
Cash and cash equivalents at beginning of period		283,192			195,809
Cash and cash equivalents at end of period	$	221,017		$	238,386

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 25, 2021.

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 26, 2022 and March 27, 2021 are not necessarily indicative of results for the full year. Sales of our frozen beverages and frozen novelties are generally higher in the third and fourth quarters due to warmer weather. Also, approximately 2/3 of our sales are to venues and locations that previously shut down or sharply curtailed their foodservice operations as a result of COVID-19. While the majority of these venues have reopened, the extent of the future impact of COVID-19 on our operations depends on future developments of the virus and its effects which are uncertain at this time.

While we believe that the disclosures presented are adequate to make the information not misleading, we suggest 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 25, 2021.

8

 

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.

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 a contract liability recorded within Accrued liabilities 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.

9

 

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 $15.2 million at March 26, 2022 and $14.6 million at September 25, 2021.

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 liabilities on our balance sheet as follows:

	(in thousands)
	Three Months Ended						Six Months Ended
	March 26,			March 27,			March 26,			March 27,
	2022			2021			2022			2021
Beginning Balance	$	1,030		$	1,716		$	1,097		$	1,327
Additions to contract liability		1,374			1,201			2,573			2,945
Amounts recognized as revenue		(1,312	)		(1,827	)		(2,578	)		(3,182	)
Ending Balance	$	1,092		$	1,090		$	1,092		$	1,090

10

 

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. On September 27, 2020, the Company adopted guidance issued by the FASB in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires companies to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the asset. Adoption of this new guidance did not have a material impact on the consolidated financial statements. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The allowance for doubtful accounts considers a number of factors including the age of receivable balances, the history of losses, expectations of future credit losses and the customers’ ability to pay off obligations. The allowance for doubtful receivables was $1,564,000 and $1,405,000 on March 26, 2022 and September 25, 2021, 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 $11,945,000 and $11,984,000 for the three months ended March 26, 2022 and March 27, 2021, respectively and $23,868,000 and $24,253,000 for the six months ended March 26, 2022 and March 27, 2021, 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:

11

 

	Three Months Ended March 26, 2022
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands, except per share amounts)
Basic EPS
Net earnings available to common stockholders	$	3,271		19,134	$	0.17
Effect of dilutive securities
Options		-		72		-
Diluted EPS
Net earnings available to common stockholders plus assumed conversions	$	3,271		19,206	$	0.17

270,352 anti-dilutive shares have been excluded in the computation of EPS for the three months ended March 26, 2022.

	Six Months ended March 26, 2022
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands, except per share amounts)
Basic EPS
Net earnings available to common stockholders	$	14,362		19,110	$	0.75
Effect of dilutive securities
Options		-		70		-
Diluted EPS
Net earnings available to common stockholders plus assumed conversions	$	14,362		19,180	$	0.75

271,452 anti-dilutive shares have been excluded in the computation of EPS for the six months ended March 26, 2022.

12

 

	Three Months Ended March 27, 2021
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands, except per share amounts)
Basic EPS
Net earnings available to common stockholders	$	6,061		19,006	$	0.32
Effect of dilutive securities
Options		-		124		-
Diluted EPS
Net earnings available to common stockholders plus assumed conversions	$	6,061		19,130	$	0.32

163,072 anti-dilutive shares have been excluded in the computation of EPS for the three months ended March 27, 2021.

	Six Months Ended March 27, 2021
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands, except per share amounts)
Basic EPS
Net earnings available to common stockholders	$	7,839		18,971	$	0.41
Effect of dilutive securities
Options		-		110		-
Diluted EPS
Net earnings available to common stockholders plus assumed conversions	$	7,839		19,081	$	0.41

184,672 anti-dilutive shares have been excluded in the computation of EPS for the six months ended March 27, 2021.

Note 5 At March 26, 2022, the Company has three stock-based employee compensation plans. Share-based compensation expense was recognized as follows:

	Three Months Ended				Six Months Ended
	March 26,		March 27,		March 26,		March 27,
	2022		2021		2022		2021
Stock options	$	586	$	447	$	1,400	$	993
Stock purchase plan		90		64		150		342
Stock issued to an outside director		11		22		22		22
Restricted stock issued to an employee		152		47		224		47
Performance stock issued to employees		82		-		121		-
Total share-based compensation	$	921	$	580	$	1,917	$	1,404
The above compensation is net of tax benefits	$	346	$	446	$	433	$	866

13

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model.

The Company did not grant any stock options during the fiscal year 2022 six-month period.

During the fiscal year 2021 six-month period, the Company granted 300 stock options. The weighted-average grant date fair value of these options was $29.54.

In November 2021, the Company issued 8,873 service share units (“RSU”)’s. Each RSU entitles the awardee to one share of common stock upon vesting. The fair value of RSU’s was determined based upon the closing price of the Company’s common stock on the date of grant. No such RSU’s were issued in the three-months ended March 26, 2022 or in the three or six-months ended March 27, 2021.

In November 2021, the Company also issued 8,868 performance share units (“PSU”)’s. Each PSU may result in the issuance of up to two shares of common stock upon vesting, dependent upon the level of achievement of the applicable Performance Goal. The fair value of the PSU’s was determined based upon the closing price of the Company’s common stock on the date of grant. Additionally, the Company applies a quarterly probability assessment in computing this non-cash compensation expense, and any change in estimate is reflected as a cumulative adjustment to expense in the quarter of the change. No such PSU’s were issued in the three months ended March 26, 2022 or in the three or six-months ended March 27, 2021.

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.  

14

 

The total amount of gross unrecognized tax benefits is $343,000 on both March 26, 2022 and September 25, 2021, 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 26, 2022, and September 25, 2021, the Company has $267,000 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.

Our effective tax rate for the six months ended March 26, 2022 was 26%. Our effective tax rate for the six months ended March 27, 2021 was 20%, and was favorably impacted by the tax benefits related to share-based compensation. Our effective tax rate was 22% for the three months ended March 26, 2022 and for the three months ended March 27, 2021 as both were favorably impacted by the tax benefits related to share-based compensation.

Note 7 In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the impairment model used to measure credit losses for most financial assets. We are required to recognize an allowance that reflects the Company’s current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables and held-to-maturity debt securities.

The Company adopted this guidance in the first quarter of Fiscal 2021 using the modified retrospective transition method. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements.

Note 8 Inventories consist of the following:

	March 26,		September 25,
	2022		2021
	(unaudited)
	(in thousands)
Finished goods	$	74,457	$	49,756
Raw materials		38,023		29,529
Packaging materials		13,130		11,168
Equipment parts and other		33,381		32,707
Total inventories	$	158,991	$	123,160

15

 

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 Maker.

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 segment are soft pretzels, frozen novelties, churros, handheld products and baked goods. Our customers in the food service segment include snack bars and food stands in chain, department and discount stores; malls and shopping centers; casual dining restaurants, 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 novelties 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 handheld products. Within the retail supermarket channel, our frozen and prepackaged products are purchased by the consumer for consumption at home.

Frozen Beverages

The Company markets frozen beverages primarily under the names ICEE, SLUSH PUPPIE and PARROT ICE which are sold primarily in the United States, Mexico and Canada. We also provide repair and maintenance service to customers for customers’ owned equipment.

16

 

The Chief Operating Decision Maker for Food Service, Retail Supermarkets and Frozen Beverages reviews monthly 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 Maker and management when determining each segment’s, and the Company’s, financial condition and operating performance. In addition, the Chief Operating Decision Maker reviews and evaluates 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						Six Months Ended
	March 26,			March 27,			March 26,			March 27,
	2022			2021			2022			2021
Sales to external customers:
Food Service
Soft pretzels	$	43,261		$	36,776		$	93,682		$	69,463
Frozen novelties		7,305			10,590			15,762			16,885
Churros		17,447			14,720			36,936			26,262
Handhelds		20,506			19,992			39,001			37,603
Bakery		83,967			82,910			191,798			171,874
Other		3,854			4,336			10,893			7,662
Total Food Service	$	176,340		$	169,324		$	388,072		$	329,749
Retail Supermarket
Soft pretzels	$	15,752		$	15,789		$	31,946		$	29,677
Frozen novelties		18,919			19,386			36,721			34,702
Biscuits		5,687			6,495			13,958			14,155
Handhelds		1,069			2,243			2,345			5,023
Coupon redemption		(726	)		(608	)		(1,622	)		(1,683	)
Other		56			601			104			1,126
Total Retail Supermarket	$	40,757		$	43,906		$	83,452		$	83,000
Frozen Beverages
Beverages	$	35,365		$	18,529		$	69,128		$	34,384
Repair and maintenance service		21,000			18,218			43,011			37,114
Machines revenue		7,542			5,663			15,389			12,152
Other		509			538			951			776
Total Frozen Beverages	$	64,416		$	42,948		$	128,479		$	84,426
Consolidated sales	$	281,513		$	256,178		$	600,003		$	497,175
Depreciation and amortization:
Food Service	$	6,670		$	7,116		$	13,339		$	13,902
Retail Supermarket		386			384			752			770
Frozen Beverages		5,484			5,648			10,960			11,424
Total depreciation and amortization	$	12,540		$	13,148		$	25,051		$	26,096
Operating income:
Food Service	$	536		$	6,055		$	9,537		$	12,235
Retail Supermarket		1,091			6,364			6,075			11,087
Frozen Beverages		2,461			(5,189	)		3,321			(15,514	)
Total operating income	$	4,088		$	7,230		$	18,933		$	7,808
Capital expenditures:
Food Service	$	13,851		$	7,246		$	24,084		$	15,532
Retail Supermarket		1,094			80			3,623			101
Frozen Beverages		4,261			1,827			7,599			3,196
Total capital expenditures	$	19,206		$	9,153		$	35,306		$	18,829
Assets:
Food Service	$	799,710		$	760,557		$	799,710		$	760,557
Retail Supermarket		33,206			33,395			33,206			33,395
Frozen Beverages		290,412			270,963			290,412			270,963
Total assets	$	1,123,328		$	1,064,915		$	1,123,328		$	1,064,915

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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 26, 2022 and September 25, 2021 are as follows:

	March 26, 2022				September 25, 2021
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
	(in thousands)
FOOD SERVICE
Indefinite lived intangible assets
Trade names	$	9,596	$	-	$	10,408	$	812
Amortized intangible assets
Non compete agreements		670		670		670		670
Customer relationships		13,000		6,838		13,000		6,188
License and rights		1,690		1,438		1,690		1,396
TOTAL FOOD SERVICE	$	24,956	$	8,946	$	25,768	$	9,066
RETAIL SUPERMARKETS
Indefinite lived intangible assets
Trade names	$	12,316	$	-	$	12,777	$	461
Amortized intangible Assets
Trade names		649		649		649		649
Customer relationships		7,907		6,308		7,907		5,931
TOTAL RETAIL SUPERMARKETS	$	20,872	$	6,957	$	21,333	$	7,041
FROZEN BEVERAGES
Indefinite lived intangible assets
Trade names	$	9,315	$	-	$	9,315	$	-
Distribution rights		36,100		-		36,100		-
Amortized intangible assets
Customer relationships		1,439		473		1,439		400
Licenses and rights		1,400		1,107		1,400		1,072
TOTAL FROZEN BEVERAGES	$	48,254	$	1,580	$	48,254	$	1,472
CONSOLIDATED	$	94,082	$	17,483	$	95,355	$	17,579

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 26, 2022 and March 27, 2021 was $594,000 and $777,000, respectively. Aggregate amortization expense of intangible assets for the six months ended March 26, 2022 and March 27, 2021 was $1,174,000 and $1,457,000, respectively.

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Estimated amortization expense for the next five fiscal years is approximately $2,300,000 in 2022, $2,300,000 in 2023, $2,000,000 in 2024, $1,400,000 in 2025, and $1,400,000 in 2026.

The weighted amortization period of the intangible assets, in total, is 11.2 years. The weighted amortization period by intangible asset class is 10.0 years for Customer relationships and 20.0 years for Licenses & rights.

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 26, 2022	$	61,189	$	4,146	$	56,498	$	121,833
Balance at September 25, 2021	$	61,189	$	4,146	$	56,498	$	121,833

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.

19

 

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

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at March 26, 2022 are summarized as follows:

			Gross		Gross		Fair
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(in thousands)
Corporate bonds	$	4,530	$	2	$	59	$	4,473
Total marketable securities held to maturity	$	4,530	$	2	$	59	$	4,473

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at March 26, 2022 are summarized as follows:

			Gross		Gross		Fair
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(in thousands)
Mutual funds	$	3,588	$	-	$	549	$	3,039
Preferred stock		2,816		96		-		2,912
Total marketable securities available for sale	$	6,404	$	96	$	549	$	5,951

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 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 2022 through 2023, with $4.5 million maturing within the next 12 months. Our expectation is that we will hold the corporate bonds to their maturity dates and redeem them at our amortized cost.

20

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 25, 2021 are summarized as follows:

			Gross		Gross		Fair
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(in thousands)
Corporate bonds		12,027		123		18		12,132
Total marketable securities held to maturity	$	12,027	$	123	$	18	$	12,132

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 25, 2021 are summarized as follows:

			Gross		Gross		Fair
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(in thousands)
Mutual funds	$	3,588	$	-	$	536	$	3,052
Preferred stock		6,892		175		35		7,032
Total marketable securities available for sale	$	10,480	$	175	$	571	$	10,084

The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at March 26, 2022 and September 25, 2021 are summarized as follows:

	March 26, 2022				September 25, 2021
			Fair				Fair
	Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value
	(in thousands)
Due in one year or less	$	4,530	$	4,473	$	7,980	$	8,080
Due after one year through five years		-		-		4,047		4,052
Total held to maturity securities	$	4,530	$	4,473	$	12,027	$	12,132
Less current portion		4,530		4,473		7,980		8,080
Long term held to maturity securities	$	-	$	-	$	4,047	$	4,052

Proceeds from the redemption and sale of marketable securities were $4,326,000 and $11,526,000 in the three and six months ended March 26, 2022 and were $15,189,000 and $41,337,000 in the three and six months ended March 27, 2021, respectively. Losses of $25,000 and $69,000 were recorded in the three and six months ended March 26, 2022, and a gain of $41,000 and $119,000 were recorded in the three and six months ended March 27, 2021. Included in the gains and losses were unrealized losses of $58,000 and unrealized gains of $649,000 in the six months ended March 26, 2022 and March 27, 2021, respectively. Unrealized losses of $53,000 and $46,000 were recorded in the three months ended March 26, 2022, and March 27, 2021, respectively. We use the specific identification method to determine the cost of securities sold.

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Total marketable securities held to maturity as of March 26, 2022, with credit ratings of BBB/BB/B had an amortized cost basis totaling $4,530,000. This rating information was obtained March 31, 2022.

Note 12 Changes to the components of accumulated other comprehensive loss are as follows:

	Three Months Ended			Six Months Ended
	March 26, 2022			March 26, 2022
	Foreign Currency			Foreign Currency
	Translation			Translation
	Adjustments			Adjustments
		(unaudited) (in thousands)			(unaudited) (in thousands)
Beginning balance	$	(13,827	)	$	(13,383	)
Other comprehensive income		546			102
Ending balance	$	(13,281	)	$	(13,281	)

	Three Months Ended			Six Months Ended
	March 27, 2021			March 27, 2021
	Foreign Currency			Foreign Currency
	Translation			Translation
	Adjustments			Adjustments
		(unaudited) (in thousands)			(unaudited) (in thousands)
Beginning balance	$	(13,308	)	$	(15,587	)
Other comprehensive (loss) income		(531	)		1,748
Ending balance	$	(13,839	)	$	(13,839	)

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Note 13 – Leases                                                                                 

General Lease Description   

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

We have finance leases with initial noncancelable lease terms in excess of one year covering the rental of various equipment. These leases are generally for manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these finance leases range from 1 year to 5 years.

Significant Assumptions and Judgments

Contract Contains a Lease                                                                        

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

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

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

Allocation of Consideration                                                                        

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

Options to Extend or Terminate Leases                                                                        

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

Discount Rate         

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

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

As of  March 26, 2022, the weighted-average discount rate of our operating and finance leases was 3.3% and