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 December 26, 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 January 19, 2021 there were 18,979,637 shares of the Registrant’s Common Stock outstanding.
INDEX
Page | ||
Number | ||
Part I. Financial Information | ||
Item l. | Consolidated Financial Statements | |
Consolidated Balance Sheets – December 26, 2020 (unaudited) and September 26, 2020 | 3 | |
Consolidated Statements of Earnings (unaudited) – Three months ended December 26, 2020 and December 28, 2019 | 4 | |
Consolidated Statements of Comprehensive Income (unaudited) – Three Months Ended December 26, 2020 and December 28, 2019 | 5 | |
Consolidated Statements of Changes In Stockholders’ Equity (unaudited) – Three Months Ended December 26, 2020 and December 28, 2019 | 6 | |
Consolidated Statements of Cash Flows (unaudited) – Three Months Ended December 26, 2020 and December 28, 2019 | 7 | |
Notes to the Consolidated Financial Statements (unaudited) | 8 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 25 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 |
Item 4. | Controls and Procedures | 28 |
Part II. Other Information | ||
Item 6. | Exhibits | 29 |
J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 26, | ||||||||
2020 | September 26, | |||||||
(unaudited) | 2020 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 228,335 | $ | 195,809 | ||||
Marketable securities held to maturity | 34,286 | 51,151 | ||||||
Accounts receivable, net | 113,210 | 126,587 | ||||||
Inventories | 114,882 | 108,923 | ||||||
Prepaid expenses and other | 17,942 | 17,087 | ||||||
Total current assets | 508,655 | 499,557 | ||||||
Property, plant and equipment, at cost | ||||||||
Land | 2,494 | 2,494 | ||||||
Buildings | 26,582 | 26,582 | ||||||
Plant machinery and equipment | 331,357 | 330,168 | ||||||
Marketing equipment | 249,440 | 250,914 | ||||||
Transportation equipment | 10,251 | 9,966 | ||||||
Office equipment | 34,095 | 33,878 | ||||||
Improvements | 43,994 | 43,264 | ||||||
Construction in progress | 23,874 | 19,995 | ||||||
Total Property, plant and equipment, at cost | 722,087 | 717,261 | ||||||
Less accumulated depreciation and amortization | 462,873 | 455,645 | ||||||
Property, plant and equipment, net | 259,214 | 261,616 | ||||||
Other assets | ||||||||
Goodwill | 121,833 | 121,833 | ||||||
Other intangible assets, net | 80,947 | 81,622 | ||||||
Marketable securities held to maturity | 8,595 | 16,927 | ||||||
Marketable securities available for sale | 13,734 | 13,976 | ||||||
Operating lease right-of-use assets | 55,989 | 58,110 | ||||||
Other | 2,876 | 2,912 | ||||||
Total other assets | 283,974 | 295,380 | ||||||
Total Assets | $ | 1,051,843 | $ | 1,056,553 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Current finance lease liabilities | $ | 332 | $ | 349 | ||||
Accounts payable | 76,325 | 73,135 | ||||||
Accrued insurance liability | 13,842 | 13,039 | ||||||
Accrued liabilities | 6,924 | 7,420 | ||||||
Current operating lease liabilities | 12,981 | 13,173 | ||||||
Accrued compensation expense | 11,387 | 16,134 | ||||||
Dividends payable | 10,900 | 10,876 | ||||||
Total current liabilities | 132,691 | 134,126 | ||||||
Noncurrent finance lease liabilities | 299 | 368 | ||||||
Noncurrent operating lease liabilities | 45,641 | 47,688 | ||||||
Deferred income taxes | 64,469 | 64,413 | ||||||
Other long-term liabilities | 454 | 460 | ||||||
Stockholders' Equity | ||||||||
Preferred stock, $1 par value; authorized 10,000,000 shares; none issued | 0 | 0 | ||||||
Common stock, no par value; authorized, 50,000,000 shares; issued and outstanding 18,956,000 and 18,915,000 respectively | 54,902 | 49,268 | ||||||
Accumulated other comprehensive loss | (13,308 | ) | (15,587 | ) | ||||
Retained Earnings | 766,695 | 775,817 | ||||||
Total stockholders' equity | 808,289 | 809,498 | ||||||
Total Liabilities and Stockholders' Equity | $ | 1,051,843 | $ | 1,056,553 | ||||
The accompanying notes are an integral part of these statements.
J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
Three months ended | ||||||||
December 26, | December 28, | |||||||
2020 | 2019 | |||||||
Net Sales | $ | 240,997 | $ | 282,897 | ||||
Cost of goods sold | 190,872 | 205,036 | ||||||
Gross Profit | 50,125 | 77,861 | ||||||
Operating expenses | ||||||||
Marketing | 17,301 | 22,732 | ||||||
Distribution | 22,889 | 23,542 | ||||||
Administrative | 9,440 | 9,618 | ||||||
Other general expense | (83 | ) | 266 | |||||
Total Operating Expenses | 49,547 | 56,158 | ||||||
Operating Income | 578 | 21,703 | ||||||
Other income (expense) | ||||||||
Investment income | 1,370 | 1,786 | ||||||
Interest expense & other | (15 | ) | (26 | ) | ||||
Earnings before income taxes | 1,933 | 23,463 | ||||||
Income tax expense | 155 | 6,404 | ||||||
NET EARNINGS | $ | 1,778 | $ | 17,059 | ||||
Earnings per diluted share | $ | 0.09 | $ | 0.89 | ||||
Weighted average number of diluted shares | 19,031 | 19,144 | ||||||
Earnings per basic share | $ | 0.09 | $ | 0.90 | ||||
Weighted average number of basic shares | 18,935 | 18,898 | ||||||
The accompanying notes are an integral part of these statements.
J&J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Three months ended | ||||||||
December 26, | December 28, | |||||||
2020 | 2019 | |||||||
Net Earnings | $ | 1,778 | $ | 17,059 | ||||
Foreign currency translation adjustments | 2,279 | 810 | ||||||
Total Other Comprehensive Loss | 2,279 | 810 | ||||||
Comprehensive Income | $ | 4,057 | $ | 17,869 | ||||
The accompanying notes are an integral part of these statements.
J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
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 | 0 | 0 | 4,390 | |||||||||||||||
Foreign currency translation adjustment | - | 0 | 2,279 | 0 | 2,279 | |||||||||||||||
Dividends declared | - | 0 | 0 | (10,900 | ) | (10,900 | ) | |||||||||||||
Share-based compensation | - | 1,244 | 0 | 0 | 1,244 | |||||||||||||||
Net earnings | - | 0 | 0 | 1,778 | 1,778 | |||||||||||||||
Balance at December 26, 2020 | 18,956 | $ | 54,902 | $ | (13,308 | ) | $ | 766,695 | $ | 808,289 | ||||||||||
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 | 0 | 0 | 468 | |||||||||||||||
Foreign currency translation adjustment | - | 0 | 810 | 0 | 810 | |||||||||||||||
Dividends declared | - | 0 | 0 | (10,867 | ) | (10,867 | ) | |||||||||||||
Share-based compensation | - | 1,299 | 0 | 0 | 1,299 | |||||||||||||||
Net earnings | - | 0 | 0 | 17,059 | 17,059 | |||||||||||||||
Balance at December 28, 2019 | 18,900 | $ | 47,511 | $ | (12,178 | ) | $ | 807,187 | $ | 842,520 | ||||||||||
The accompanying notes are an integral part of these statements.
J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
Three months ended | ||||||||
December 26, | December 28, | |||||||
2020 | 2019 | |||||||
Operating activities: | ||||||||
Net earnings | $ | 1,778 | $ | 17,059 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation of fixed assets | 12,269 | 11,887 | ||||||
Amortization of intangibles and deferred costs | 679 | 843 | ||||||
Share-based compensation | 1,244 | 1,299 | ||||||
Deferred income taxes | (8 | ) | (231 | ) | ||||
Loss on marketable securities | (681 | ) | 9 | |||||
Other | (80 | ) | 14 | |||||
Changes in assets and liabilities net of effects from purchase of companies | ||||||||
Decrease in accounts receivable | 13,701 | 10,254 | ||||||
Increase in inventories | (5,641 | ) | (8,524 | ) | ||||
(Increase) decrease in prepaid expenses | (889 | ) | 1,922 | |||||
Decrease in accounts payable and accrued liabilities | (1,068 | ) | (963 | ) | ||||
Net cash provided by operating activities | 21,304 | 33,569 | ||||||
Investing activities: | ||||||||
Payments for purchases of companies, net of cash acquired | 0 | (44,970 | ) | |||||
Purchases of property, plant and equipment | (9,676 | ) | (17,605 | ) | ||||
Purchases of marketable securities | 0 | (4,000 | ) | |||||
Proceeds from redemption and sales of marketable securities | 26,148 | 18,782 | ||||||
Proceeds from disposal of property and equipment | 880 | 898 | ||||||
Other | 15 | 38 | ||||||
Net cash provided by (used in) investing activities | 17,367 | (46,857 | ) | |||||
Financing activities: | ||||||||
Proceeds from issuance of stock | 4,390 | 468 | ||||||
Payments on finance lease obligations | (86 | ) | (86 | ) | ||||
Payment of cash dividend | (10,876 | ) | (9,447 | ) | ||||
Net cash used in financing activities | (6,572 | ) | (9,065 | ) | ||||
Effect of exchange rate on cash and cash equivalents | 427 | 285 | ||||||
Net increase (decrease) in cash and cash equivalents | 32,526 | (22,068 | ) | |||||
Cash and cash equivalents at beginning of period | 195,809 | 192,395 | ||||||
Cash and cash equivalents at end of period | $ | 228,335 | $ | 170,327 | ||||
The accompanying notes are an integral part of these statements.
J & J SNACK FOODS CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 | The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended September 26, 2020. |
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 months ended December 26, 2020 and December 28, 2019 are not necessarily indicative of results for the full year. Sales of our frozen beverages and frozen juice bars 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 have shut down or sharply curtailed their foodservice operations as a result of COVID-19 resulting in a negative impact on our business. The extent of future impacts on our business from COVID-19 is dependent on developments to control the virus which is still uncertain at this point in time.
While we believe that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 2020.
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 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 $14.7 million at December 26, 2020 and $14.3 million at September 26, 2020.
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 | ||||||||
December 26, | December 28, | |||||||
2020 | 2019 | |||||||
(in thousands) | ||||||||
Beginning Balance | $ | 1,327 | $ | 1,334 | ||||
Additions to contract liability | 1,744 | 1,275 | ||||||
Amounts recognized as revenue | (1,355 | ) | (1,515 | ) | ||||
Ending Balance | $ | 1,716 | $ | 1,094 | ||||
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. For the first quarter ended December 26,2020, 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 for this quarter. 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 customer’s ability to pay off obligations. The allowance for doubtful receivables was $1,388,000 and $1,388,000 on December 26, 2020 and September 26, 2020, 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 $12,269,000 and $11,887,000 for the three months ended December 26, 2020 and December 28, 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 December 26, 2020 | ||||||||||||
Income | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
(in thousands, except per share amounts) | ||||||||||||
Basic EPS | ||||||||||||
Net Earnings available to common stockholders | $ | 1,778 | 18,935 | $ | 0.09 | |||||||
Effect of Dilutive Securities | ||||||||||||
Options | 0 | 96 | 0 | |||||||||
Diluted EPS | ||||||||||||
Net Earnings available to common stockholders plus assumed conversions | $ | 1,778 | 19,031 | $ | 0.09 | |||||||
187,722 anti-dilutive shares have been excluded in the computation of EPS for the three months ended December 26, 2020
Three Months Ended December 28, 2019 | ||||||||||||
Income | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
(in thousands, except per share amounts) | ||||||||||||
Basic EPS | ||||||||||||
Net Earnings available to common stockholders | $ | 17,059 | 18,898 | $ | 0.90 | |||||||
Effect of Dilutive Securities | ||||||||||||
Options | 0 | 246 | (0.01 | ) | ||||||||
Diluted EPS | ||||||||||||
Net Earnings available to common stockholders plus assumed conversions | $ | 17,059 | 19,144 | $ | 0.89 | |||||||
20,000 anti-dilutive shares have been excluded in the computation of EPS for the three months ended December 28, 2019
Note 5 | At December 26, 2020, the Company has three stock-based employee compensation plans. Share-based compensation expense was recognized as follows: |
Three months ended | ||||||||
December 26, | December 28, | |||||||
2020 | 2019 | |||||||
| (in thousands) | ||||||||
Stock Options | $ | 546 | $ | 965 | ||||
Stock purchase plan | 278 | 202 | ||||||
Total share-based compensation | $ | 824 | $ | 1,167 | ||||
The above compensation is net of tax benefits | $ | 420 | $ | 132 | ||||
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 years 2021 and 2020 three-month periods, respectively.
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 $360,000 on both December 26, 2020 and September 26, 2020, 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 December 26, 2020 and September 26, 2020, 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 three months ended December 26, 2020 was 8% primarily due to a $420,000 tax benefit related to share based compensation. Our effective tax rate was 28.0% in last year’s quarter.
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 for the three months ended December 26, 2020.
Note 8 | Inventories consist of the following: |
December 26, | September 26, | |||||||
2020 | 2020 | |||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
Finished goods | $ | 40,789 | $ | 40,184 | ||||
Raw materials | 28,645 | 24,550 | ||||||
Packaging materials | 11,749 | 10,545 | ||||||
Equipment parts and other | 33,699 | 33,644 | ||||||
Total Inventories | $ | 114,882 | $ | 108,923 | ||||
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.
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 | ||||||||
December 26, | December 28, | |||||||
2020 | 2019 | |||||||
| (unaudited) | ||||||||
| (in thousands) | ||||||||
Sales to External Customers: | ||||||||
Food Service | ||||||||
Soft pretzels | $ | 32,687 | $ | 49,941 | ||||
Frozen juices and ices | 6,295 | 7,043 | ||||||
Churros | 11,542 | 16,391 | ||||||
Handhelds | 17,611 | 7,189 | ||||||
Bakery | 88,964 | 96,372 | ||||||
Other | 3,326 | 6,512 | ||||||
Total Food Service | $ | 160,425 | $ | 183,448 | ||||
Retail Supermarket | ||||||||
Soft pretzels | $ | 13,888 | $ | 9,826 | ||||
Frozen juices and ices | 15,316 | 10,093 | ||||||
Biscuits | 7,660 | 6,978 | ||||||
Handhelds | 2,780 | 2,761 | ||||||
Coupon redemption | (1,075 | ) | (543 | ) | ||||
Other | 525 | 311 | ||||||
Total Retail Supermarket | $ | 39,094 | $ | 29,426 | ||||
Frozen Beverages | ||||||||
Beverages | $ | 15,855 | $ | 35,255 | ||||
Repair and maintenance service | 18,896 | 22,486 | ||||||
Machines revenue | 6,489 | 11,981 | ||||||
Other | 238 | 301 | ||||||
Total Frozen Beverages | $ | 41,478 | $ | 70,023 | ||||
Consolidated Sales | $ | 240,997 | $ | 282,897 | ||||
Depreciation and Amortization: | ||||||||
Food Service | $ | 6,786 | $ | 6,918 | ||||
Retail Supermarket | 386 | 359 | ||||||
Frozen Beverages | 5,776 | 5,453 | ||||||
Total Depreciation and Amortization | $ | 12,948 | $ | 12,730 | ||||
Operating Income : | ||||||||
Food Service | $ | 6,180 | $ | 18,034 | ||||
Retail Supermarket | 4,723 | 2,217 | ||||||
Frozen Beverages | (10,325 | ) | 1,452 | |||||
Total Operating Income | $ | 578 | $ | 21,703 | ||||
Capital Expenditures: | ||||||||
Food Service | $ | 8,286 | $ | 8,403 | ||||
Retail Supermarket | 21 | 960 | ||||||
Frozen Beverages | 1,369 | 8,242 | ||||||
Total Capital Expenditures | $ | 9,676 | $ | 17,605 | ||||
Assets: | ||||||||
Food Service | $ | 744,277 | $ | 760,852 | ||||
Retail Supermarket | 31,668 | 30,963 | ||||||
Frozen Beverages | 275,898 | 304,291 | ||||||
Total Assets | $ | 1,051,843 | $ | 1,096,106 | ||||
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 December 26, 2020 and September 26, 2020 are as follows:
December 26, 2020 | September 26, 2020 | |||||||||||||||
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 | 658 | 670 | 645 | ||||||||||||
Customer relationships | 13,000 | 5,213 | 19,737 | 11,595 | ||||||||||||
License and rights | 1,690 | 1,333 | 1,690 | 1,312 | ||||||||||||
TOTAL FOOD SERVICE | $ | 25,768 | $ | 7,204 | $ | 32,505 | $ | 13,552 | ||||||||
RETAIL SUPERMARKETS | ||||||||||||||||
Indefinite lived intangible assets | ||||||||||||||||
Trade names | $ | 12,750 | $ | - | $ | 12,750 | $ | - | ||||||||
Amortized Intangible Assets | ||||||||||||||||
Trade names | 676 | 554 | 676 | 519 | ||||||||||||
Customer relationships | 7,907 | 5,338 | 7,907 | 5,140 | ||||||||||||
TOTAL RETAIL SUPERMARKETS | $ | 21,333 | $ | 5,892 | $ | 21,333 | $ | 5,659 | ||||||||
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 | 293 | 1,439 | 257 | ||||||||||||
Licenses and rights | 1,400 | 1,019 | 1,400 | 1,002 | ||||||||||||
TOTAL FROZEN BEVERAGES | $ | 48,254 | $ | 1,312 | $ | 48,254 | $ | 1,259 | ||||||||
CONSOLIDATED | $ | 95,355 | $ | 14,408 | $ | 102,092 | $ | 20,470 | ||||||||
Fully amortized intangible assets have been removed from the December 26, 2020 amounts.
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 December 26, 2020 and December 28, 2019 was $679,000 and $843,000, respectively.
Estimated amortization expense for the next five fiscal years is approximately $2,500,000 in 2021, $2,300,000 in 2022, $2,300,000 in 2023, $2,000,000 in 2024 and $1,400,000 in 2025. The weighted amortization period of the intangible assets is 10.9 years.
Goodwill
The carrying amounts of goodwill for the Food Service, Retail Supermarket and Frozen Beverage segments are as follows:
Food Service | Retail Supermarket | Frozen Beverages | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance at December 26, 2020 | $ | 61,189 | $ | 4,146 | $ | 56,498 | $ | 121,833 | ||||||||
| Balance at September 26, 2020 | $ | 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. |
Marketable securities held to maturity and available for sale consist primarily of investments in mutual funds, preferred stock and corporate bonds. The fair values of mutual funds are based on quoted market prices in active markets and are classified within Level 1 of the fair value hierarchy. The fair values of preferred stock, corporate bonds and certificates of deposit are based on quoted prices for identical or similar instruments in markets that are not active. As a result, preferred stock, corporate bonds and certificates of deposit are classified within Level 2 of the fair value hierarchy.
The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at December 26, 2020 are summarized as follows:
Gross | Gross | Fair | ||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(in thousands) | ||||||||||||||||
Corporate Bonds | 42,881 | 606 | 15 | 43,472 | ||||||||||||
Total marketable securities held to maturity | $ | 42,881 | $ | 606 | $ | 15 | $ | 43,472 | ||||||||
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at December 26, 2020 are summarized as follows:
Gross | Gross | Fair | ||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(in thousands) | ||||||||||||||||
Mutual Funds | $ | 3,588 | $ | 0 | $ | 672 | $ | 2,916 | ||||||||
Preferred Stock | 10,751 | 206 | 139 | 10,818 | ||||||||||||
Total marketable securities available for sale | $ | 14,339 | $ | 206 | $ | 811 | $ | 13,734 | ||||||||
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 2021 and 2025 and then income is based on a spread above LIBOR if the securities are not called. The mutual funds and Fixed-to-Floating Perpetual Preferred Stock do not have contractual maturities; however, we classify them as long-term assets as it is our intent to hold them for a period of over one year, although we may sell some or all of them depending on presently unanticipated needs for liquidity or market conditions. The corporate bonds generate fixed income to maturity dates in 2021 through 2023, with $41 million maturing within 2 years. Our expectation is that we will hold the corporate bonds to their maturity dates and redeem them at our amortized cost.
The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 26, 2020 are summarized as follows:
Gross | Gross | Fair | ||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(in thousands) | ||||||||||||||||
Corporate Bonds | 68,078 | 1,015 | 32 | 69,061 | ||||||||||||
Total marketable securities held to maturity | $ | 68,078 | $ | 1,015 | $ | 32 | $ | 69,061 | ||||||||
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 26, 2020 are summarized as follows:
Gross | Gross | Fair | ||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(in thousands) | ||||||||||||||||
Mutual Funds | $ | 3,588 | $ | 0 | $ | 738 | $ | 2,850 | ||||||||
Preferred Stock | 11,596 | 116 | 586 | 11,126 | ||||||||||||
Total marketable securities available for sale | $ | 15,184 | $ | 116 | $ | 1,324 | $ | 13,976 | ||||||||
The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at December 26, 2020 and September 26, 2020 are summarized as follows:
December 26, 2020 | September 26, 2020 | |||||||||||||||
Fair | Fair | |||||||||||||||
Amortized | Market | Amortized | Market | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
| (in thousands) | ||||||||||||||||
Due in one year or less | $ | 34,286 | $ | 34,745 | $ | 51,151 | $ | 51,815 | ||||||||
Due after one year through five years | 8,595 | 8,727 | 16,927 | 17,246 | ||||||||||||
Due after five years through ten years | 0 | 0 | 0 | 0 | ||||||||||||
Total held to maturity securities | $ | 42,881 | $ | 43,472 | $ | 68,078 | $ | 69,061 | ||||||||
Less current portion | 34,286 | 34,745 | 51,151 | 51,815 | ||||||||||||
Long term held to maturity securities | $ | 8,595 | $ | 8,727 | $ | 16,927 | $ | 17,246 | ||||||||
Proceeds from the redemption and sale of marketable securities were $26,148,000 in the three months ended December 26, 2020 and $18,782,000 in the three ended December 28, 2019, respectively. Losses of $78,000 and $11,000 were recorded in the three months ended December 26, 2020 and December 28, 2019, respectively, which included unrealized gains on marketable securities of $603,000 and $71,000 in the three months ended December 26, 2020 and December 28, 2019, respectively. We use the specific identification method to determine the cost of securities sold.
Total marketable securities held to maturity as of December 26, 2020 with credit ratings of AAA/AA/A had an amortized cost basis totaling $16,866,000 and those with credit ratings of BBB/BB/B had an amortized cost basis totaling $26,015,000. This rating information was obtained December 31, 2020.
Note 12 | Changes to the components of accumulated other comprehensive loss are as follows: |
| Three Months ended December 26, 2020 | ||||||||
| (unaudited) | ||||||||
| (in thousands) | ||||||||
Foreign Currency | ||||||||
Translation Adjustments | Total | |||||||
Beginning Balance | $ | (15,587 | ) | $ | (15,587 | ) | ||
Other comprehensive income | 2,279 | 2,279 | ||||||
Ending Balance | $ | (13,308 | ) | $ | (13,308 | ) | ||
| Three Months ended December 28, 2019 | ||||||||
| (unaudited) | ||||||||
| (in thousands) | ||||||||
Foreign Currency | ||||||||
Translation Adjustments | Total | |||||||
Beginning Balance | $ | (12,988 | ) | $ | (12,988 | ) | ||
Other comprehensive income | 810 | 810 | ||||||
Ending Balance | $ | (12,178 | ) | $ | (12,178 | ) | ||
Note 13 | On October 1, 2019, we acquired the assets of ICEE Distributors LLC, based in Bossier City, Louisiana. ICEE Distributors does business in Arkansas, Louisiana and Texas with annual sales of approximately $13 million. Sales and operating income of ICEE Distributors were $2.1 million and $0.3 million for the three months ended December 26, 2020. Sales and operating income of ICEE Distributors were $2.5 million and $0.5 million for the three months ended December 28, 2019. |
On February 4, 2020, we acquired the assets of BAMA ICEE, based in Birmingham, Alabama. BAMA ICEE does business in Alabama and Georgia with annual sales of approximately $3.5 million. Sales and operating income of BAMA ICEE were $400,000 and $75,000 for the three months ended December 26, 2020.
The purchase price allocations for the acquisitions are as follows:
(in thousands) | ||||||||||||
ICEE | ||||||||||||
Distributors | BAMA ICEE | Total | ||||||||||
Accounts Receivable, net | $ | 721 | $ | 71 | $ | 792 | ||||||
Inventories | 866 | 77 | 943 | |||||||||
Property, plant & equipment, net | 4,851 | 1,722 | 6,573 | |||||||||
Customer Relationships | 569 | 133 | 702 | |||||||||
Distribution Rights | 22,400 | 6,800 | 29,200 | |||||||||
Goodwill | 15,773 | 3,549 | 19,322 | |||||||||
Accounts Payable | (210 | ) | (110 | ) | (320 | ) | ||||||
Purchase Price | $ | 44,970 | $ | 12,242 | $ | 57,212 | ||||||
The goodwill recognized is attributable to the assembled workforce of ICEE Distributors and certain other strategic intangible assets that do not meet the requirements for recognition separate and apart from goodwill.
Acquisition costs of $0 and $36,000 are included in other general expense for the three months ended December 26, 2020 and December 28, 2019, respectively.
Note 14 – 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 14 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.
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 December 26, 2020, the weighted-average discount rate of our operating and finance leases was 3.3% and 3.1%, respectively.
Practical Expedients and Accounting Policy Elections
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.
Amounts Recognized in the Financial Statements
The components of lease expense were as follows:
Three Months Ended | ||||
December 26, 2020 | ||||
(in thousands) | ||||
Operating lease cost in Cost of goods sold and Operating Expenses | $ | 1,356 | ||
Finance lease cost: | ||||
Amortization of assets in Cost of goods sold and Operating Expenses | 412 | |||
Interest on lease liabilities in Interest expense & other | 14 | |||
Total finance lease cost | 426 | |||
Short-term lease cost in Cost of goods sold and Operating Expenses | 0 | |||
| Total net lease cost | $ | 1,782 | ||
Supplemental balance sheet information related to leases is as follows:
December 26, 2020 | ||||
(in thousands) | ||||
Operating Leases | ||||
Operating lease right-of-use assets | $ | 55,989 | ||
Current operating lease liabilities | $ | 12,981 | ||
Noncurrent operating lease liabilities | 45,641 | |||
Total operating lease liabilities | $ | 58,622 | ||
Finance Leases | ||||
Finance lease right-of-use assets in Property, plant and equipment, net | $ | 600 | ||
Current finance lease liabilities | $ | 332 | ||
Noncurrent finance lease liabilities | 299 | |||
Total finance lease liabilities | $ | 631 | ||
Supplemental cash flow information related to leases is as follows:
Three Months Ended | ||||
December 26, 2020 | ||||
(in thousands) | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 1,427 | ||
Operating cash flows from finance leases | $ | 86 | ||
Financing cash flows from finance leases | $ | 14 | ||
Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets | $ | 776 | ||
Supplemental noncash information on lease liabilities removed due to purchase of leased asset | $ | 0 | ||
As of December 26, 2020, the maturities of lease liabilities were as follows:
| (in thousands) | ||||||||
Operating Leases | Finance Leases | |||||||
Nine months ending June 30, 2020 | ||||||||
2021 | 14,484 | 280 | ||||||
2022 | 12,205 | 168 | ||||||
2023 | 10,362 | 98 | ||||||
2024 | 8,093 | 98 | ||||||
2025 | 5,217 | 26 | ||||||
Thereafter | 16,172 | 0 | ||||||
Total minimum payments | $ | 66,533 | $ | 670 | ||||
Less amount representing interest | (7,911 | ) | (39 | ) | ||||
Present value of lease obligations | $ | 58,622 | $ | 631 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Our current cash and cash equivalents balances, investments and cash expected to be provided by future operations are our primary sources of liquidity. We believe that these sources, along with our borrowing capacity, are sufficient to fund future growth and expansion. See Note 11 to these financial statements for a discussion of our investment securities.
The Company’s Board of Directors declared a regular quarterly cash dividend of $.575 per share of its common stock payable on January 12, 2021, to shareholders of record as of the close of business on December 21, 2020.
We purchased 65,648 shares of our common stock in fiscal year 2020, but did not purchase any shares in the three months ended December 26, 2020. On August 4, 2017, the Company’s Board of Directors authorized the purchase and retirement of 500,000 shares of the Company’s common stock; 318,858 shares remain to be purchased under this authorization.
Fluctuations in the valuation of the Mexican and Canadian currencies and the resulting translation of the net assets of our Mexican and Canadian subsidiaries caused a decrease of $2,279,000 in accumulated other comprehensive loss in the 2021 first quarter and a decrease of $810,000 in accumulated other comprehensive loss in the 2020 first quarter.
Our general-purpose bank credit line which expires in November 2021 provides for up to a $50,000,000 revolving credit facility. The agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. There were no outstanding balances under this facility at December 26, 2020.
RESULTS OF OPERATIONS
Net sales decreased $41,900,000 or 15% to $240,997,000 for the three months ended December 26, 2020. Operating income decreased $21,125,000 or 97% for the quarter to $578,000.
FOOD SERVICE
Sales to food service customers decreased $23,023,000 or 13% in the first quarter to $160,425,000. Key customer venues and channels like theme parks, schools and theaters continue to operate at limited capacity impacting food service sales. Soft pretzel sales to food service decreased 35% to $32,687,000. Frozen juices and ices sales decreased 11% to $6,295,000 and Churro sales were down 30% in the quarter to $11,542,000. Sales of funnel cake decreased $3,050,000 or 49% in the quarter.
Sales of bakery products decreased $7,408,000 or 8% in the first quarter to $88,964,000, as the virus impacted traffic, purchase choices and frequency in this part of our business.
Sales of handhelds increased $10,422,000 or 145% in the quarter led by the continued success of a new product developed for one of our larger wholesale club customers.
Sales of new products in the first twelve months since their introduction were approximately $12,200,000 in this quarter led by the previously noted handheld item. Price increases had marginal impact on results in the quarter as traffic and volume drove almost all the sales decline compared to last year.
Operating income in our Food Service segment decreased $11,854,000 in the quarter to $6,180,000 primarily because of sales declines which impacted margin efficiencies and expense leverage.
RETAIL SUPERMARKETS
Sales of products to retail supermarkets increased $9,668,000 or 33% to $39,094,000 in the first quarter. Our SUPERPRETZEL brand performed well in the quarter driving an increase in soft pretzel sales of 41% to $13,888,000. Sales of frozen juices and ices were up 52% to $15,316,000 in the first quarter and sales of biscuits were up 10% to7,660,000. Handheld sales to retail supermarket customers increased 1% in the quarter. Sales from new products increased an estimated $400,000 in the quarter driven by frozen novelty items.
Price increases had minimum impact on growth in the quarter as sales were driven by increased consumer traffic and volume in retail outlets.
Operating income in our Retail Supermarkets segment increased $2,506,000 or 113% to $4,723,000 in this year’s first quarter driven by sales increases and operating income margins of 12%, over 400 basis points better than last year.
FROZEN BEVERAGES
Frozen beverage and related product sales decreased $28,545,000 or 41% to $41,478,000 in the first quarter. Beverage related sales declined 55% to $15,855,000. Gallon sales were down 56% for the three months as we continue to see traffic impacted from Covid-19 related concerns in theaters, amusement venues and key retailers. These venues also rely on incremental seasonal sales in December that was impacted from reduced operating capacity and consumers staying home. Service revenue decreased 16% to $18,896,000 in the first quarter driven almost entirely from cancellation of a key customer’s planned maintenance program. Machine revenue (primarily sales of frozen beverage machines) was $6,489,000, a decrease of 46% due mainly from lapping $5,000,000 in non-recurring sales in last year's quarter.
Our Frozen Beverage segment incurred an operating loss for the quarter of $10,325,000 compared to operating income of $1,452,000 last year due to the challenging COVID-19 sales environment which also impacts our gross margin efficiency and ability to leverage fixed expenses.
CONSOLIDATED
Gross profit as a percentage of sales was 20.8% in the three-month period this year and 27.5% last year. Gross profit percentage decreased because of continued Covid-19 sales pressure from our food service and frozen beverages segments. This creates margin leverage challenges as we manage lower production volumes on businesses with large-fixed expense bases.
Total operating expenses decreased $6,611,000 in the first quarter but as a percentage of sales increased to 20.6% from 19.9% last year. Marketing expenses decreased to 7.2% of sales in this year’s quarter from 8% last year. Distribution expenses were 9.5% of sales in this year’s quarter compared to 8.3% of sales last year. Administrative expenses were 3.9% of sales this quarter compared to 3.4% last year.
Operating income decreased $21,125,000 or 97% to $578,000 in the first quarter as a result of the aforementioned items.
Our investments generated before tax income of $1,370,000 this quarter, down from $1,760,000 last year due to decreases in the amount of investments and lower interest rates.
Net earnings decreased $15,281,000, or 90%, in the current three-month period to $1,778,000. Our effective tax rate was 8% in this year’s quarter.
There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth, in item 7a. “Quantitative and Qualitative Disclosures About Market Risk,” in its 2020 annual report on Form 10-K filed with the SEC.
Item 4. | Controls and Procedures |
The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of December 26, 2020, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting during the quarter ended December 26, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. | Exhibits |
Exhibit No.
31.1 & | Certification Pursuant to Section 302 of |
the Sarbanes-Oxley Act of 2002 | ||
| 31.3 |
99.5 & | Certification Pursuant to the 18 U.S.C. |
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 99.7 |
| 101.1 | The following financial information from J&J Snack Foods Corp.'s Quarterly Report on Form 10-Q for the quarter ended December 26, 2020, formatted in iXBRL (Inline extensible Business Reporting Language): |
(i) Consolidated Balance Sheets,
(ii) Consolidated Statements of Earnings,
(iii) Consolidated Statements of Comprehensive Income,
(iv) Consolidated Statements of Cash Flows and
(v) the Notes to the Consolidated Financial Statements
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| J & J SNACK FOODS CORP. | |
| Dated: January 28, 2021 | /s/ Gerald B. Shreiber |
Gerald B. Shreiber Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) |
| Dated: January 28, 2021 | /s/ Ken A. Plunk |
Ken A. Plunk, Senior Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) |
| Dated: January 28, 2021 | /s/ Dan Fachner |
Dan Fachner President (Principal Executive Officer) |