UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended June 29, 2019
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-14616
J & J SNACK FOODS CORP.
(Exact name of registrant as specified in its charter)
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:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
X
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 152-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule bob-2 of the Exchange Act).
As July 25, 2019, there were 18,840,904 shares of the Registrant’s Common Stock outstanding.
INDEX
Page
Part I. Financial Information
Item l.
Consolidated Financial Statements
Consolidated Balance Sheets – June 29, 2019 (unaudited) and September 29, 2018
3
Consolidated Statements of Comprehensive Income (unaudited) – Three and nine months Ended June 29, 2019 and June 30, 2018
Consolidated Statements of Changes In Stockholders’ Equity (unaudited) – Nine months Ended June 29, 2019 and June 30, 2018
Consolidated Statements of Cash Flows (unaudited) – Nine months Ended June 29, 2019 and June 30, 2018
Notes to the Consolidated Financial Statements (unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
28
Part II. Other Information
29
J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 29,
September 29,
2019
2018
(unaudited)
Assets
Current assets
Cash and cash equivalents
Marketable securities held to maturity
Accounts receivable, net
Inventories
Prepaid expenses and other
Total current assets
Property, plant and equipment, at cost
Land
Buildings
Plant machinery and equipment
Marketing equipment
Transportation equipment
Office equipment
Improvements
Construction in progress
Total Property, plant and equipment, at cost
Less accumulated depreciation and amortization
Property, plant and equipment, net
Other assets
Goodwill
Other intangible assets, net
Marketable securities available for sale
Other
Total other assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Current obligations under capital leases
Accounts payable
Accrued insurance liability
Accrued liabilities
Accrued compensation expense
Dividends payable
Total current liabilities
Long-term obligations under capital leases
Deferred income taxes
Other long-term liabilities
Stockholders' Equity
Preferred stock, $1 par value; authorized 10,000,000 shares; none issued
Common stock, no par value; authorized, 50,000,000 shares; issued and outstanding 18,830,000 and 18,754,000 respectively
Accumulated other comprehensive loss
Retained Earnings
Total stockholders' equity
Total Liabilities and Stockholders' Equity
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
Three months ended
Nine months ended
June 30,
Net Sales
Cost of goods sold(1)
Gross Profit
Operating expenses
Marketing (2)
Distribution (3)
Administrative (4)
Other general expense (income)
Total operating expenses
Operating Income
Other income (expense)
Investment income
Interest expense & other
Earnings before income taxes
Income taxes
NET EARNINGS
Earnings per diluted share
Weighted average number of diluted shares
Earnings per basic share
Weighted average number of basic shares
Includes share-based compensation expense of $271 and $735 for the three months and nine months ended June 29, 2019, respectively and $225 and $642 for the three months and nine months ended June 30, 2018.
Includes share-based compensation expense of $391 and $1,061 for the three months and nine months ended June 29, 2019, respectively and $349 and $998 for the three months and nine months ended June 30, 2018.
Includes share-based compensation expense of $24 and $65 for the three months and nine months ended June 29, 2019,, respectively and $20 and $56 for the three months and nine months ended June 30, 2018.
Includes share-based compensation expense of $435 and $1,191 for the three months and nine months ended June 29, 2019, respectively and $412 and $1,178 for the three months and nine months ended June 30, 2018.
J&J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net Earnings
Foreign currency translation adjustments
Unrealized holding loss on marketable securities
Total Other Comprehensive Income(loss)
Comprehensive Income
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Common Stock
Comprehensive
Retained
Shares
Amount
Loss
Earnings
Total
Balance at September 29, 2018
Issuance of common stock upon exercise of stock options
Foreign currency translation adjustment
Reclass from accumulated other comprehensive gain
Dividends declared
Share-based compensation
Repurchase of common stock
Net earnings
Balance at December 29, 2018
Issuance of common stock for employee stock purchase plan
Issuance of common stock under deferred stock plan
Balance at March 30, 2019
Balance at June 29, 2019
Balance at September 30, 2017
Balance at December 30, 2017
Balance at March 31, 2018
Balance at June 30, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
Operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation of property, plant and equipment
Amortization of intangibles and deferred costs
Loss on marketable securities
Changes in assets and liabilities net of effects from purchase of companies
Increase in accounts receivable
Increase in inventories
Decrease (increase) in prepaid expenses
Increase in accounts payable and accrued liabilities
Net cash provided by operating activities
Investing activities:
Payment for purchases of companies, net of cash acquired
Purchases of property, plant and equipment
Purchases of marketable securities
Proceeds from redemption and sales of marketable securities
Proceeds from disposal of property, plant and equipment
Net cash used in investing activities
Financing activities:
Payments to repurchase common stock
Proceeds from issuance of stock
Payments on capitalized lease obligations
Payment of cash dividend
Net cash used in financing activities
Effect of exchange rate on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended September 29, 2018.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows.
The results of operations for the nine months ended June 29, 2019 and June 30, 2018 are not necessarily indicative of results for the full year. Sales of our frozen beverages and frozen juice bars and ices are generally higher in the third and fourth quarters due to warmer weather.
Certain prior year financial statement amounts have been reclassified to be consistent with the presentation for the current year.
While we believe that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2018.
Note 2
Revenue Recognition
We adopted the new revenue recognition guidance on the first day of our fiscal 2019 year using a modified retrospective approach; however, we did not record a cumulative-effect adjustment from initially applying the standard as the adoption did not have a material impact on our financial position or results of operations. We completed a review of customer contracts and evaluated the impact of the new standard on certain common practices currently employed by us. We also finalized our assessment of the impact on our accounting policies, processes, system requirements, internal controls and disclosures.
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.
Warranties & Returns
We provide all customers with a standard or assurance type warranty. Either stated or implied, we provide assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No services beyond an assurance warranty are provided to our customers.
We do not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. We do not estimate a right of return and related refund liability as returns of our products are rare.
Contract Balances
Our customers are billed for service contracts in advance of performance and therefore we have contract liability on our balance sheet as follows:
Three Months Ended
Nine Months Ended
June 29, 2019
Beginning Balance
Additions to contract liability
Amounts recognized as revenue
Ending Balance
Disaggregation of Revenue
See Note 9 for disaggregation of our net sales by class of similar product and type of customer.
Allowance for Doubtful Receivables
We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors. The allowance for doubtful receivables was $665,000 and $400,000 at June 29, 2019 and September 29, 2018, respectively.
Note 3
Depreciation of equipment and buildings is provided for by the straight-line method over the assets’ estimated useful lives. Amortization of improvements is provided for by the straight-line method over the term of the lease or the assets’ estimated useful lives, whichever is shorter. Licenses and rights, customer relationships and non-compete agreements arising from acquisitions are amortized by the straight-line method over periods ranging from 2 to 20 years. Depreciation expense was $11,484,000 and $10,569,000 for the three months ended June 29, 2019 and June 30, 2018, respectively and $33,374,000 and $31,929,000 for the nine months ended June 29, 2019 and June 30, 2018, respectively.
Note 4
Basic earnings per common share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into consideration the potential dilution that could occur if securities (stock options) or other contracts to issue common stock were exercised and converted into common stock. Our calculation of EPS is as follows:
Three Months Ended June 29, 2019
Income
Per Share
(Numerator)
(Denominator)
Basic EPS
Net Earnings available to common stockholders
Effect of Dilutive Securities
Options
Diluted EPS
Net Earnings available to common stockholders plus assumed conversions
163,170 anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 29, 2019.
Nine Months Ended June 29, 2019
163,670 anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 29, 2019.
Three Months Ended June 30, 2018
1,000 anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 30, 2018.
Nine Months Ended June 30, 2018
1,000 anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 30, 2018.
Note 5
At June 29, 2019, the Company has three stock-based employee compensation plans. Share-based compensation expense was recognized as follows:
Stock Options
Stock purchase plan
Stock issued to an outside director
Restricted stock issued to an employee
Total share-based compensation
The above compensation is net of tax benefits
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in fiscal 2019 nine months: expected volatility of 16.8%; risk-free interest rate of 2.2%; dividend rate of 1.2% and expected lives of 5 years.
During the fiscal year 2019 nine month period, the Company granted 165,170 stock options. The weighted-average grant date fair value of these options was $26.29.
During the fiscal year 2018 nine month period, the Company granted 159,878 stock options. The weighted-average grant date fair value of these options was $23.67.
Expected volatility is based on the historical volatility of the price of our common shares over the past 51 months for 5 year options and 10 years for 10 year options. We use historical information to estimate expected life and forfeitures within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.
Note 6
We account for our income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.
Additionally, we recognize a liability for income taxes and associated penalties and interest for tax positions taken or expected to be taken in a tax return which are more likely than not to be overturned by taxing authorities (“uncertain tax positions”). We have not recognized a tax benefit in our financial statements for these uncertain tax positions.
The total amount of gross unrecognized tax benefits is $409,000 and $394,000 on June 29, 2019 and September 29, 2018, respectively, all of which would impact our effective tax rate over time, if recognized. We recognize interest and penalties related to uncertain tax positions as a part of the provision for income taxes. As of June 29, 2019, and September 29, 2018, respectively, the Company has $274,000 and $259,000 of accrued interest and penalties.
In addition to our federal tax return and tax returns for Mexico and Canada, we file tax returns in all states that have a corporate income tax with virtually all open for examination for three to four years.
Net earnings for last year’s nine months benefited from a $20.9 million gain on the remeasurement of deferred tax liabilities which was partially offset by a $1.2 million provision for the one time repatriation tax, both of which resulted from the Tax Cuts and Jobs Act enacted in December 2017. Excluding the deferred tax gain and the one time repatriation tax, our effective tax rate was 28.4% in last year’s nine months. Net earnings in this year’s nine months benefitted by a reduction of approximately $900,000 in tax as the provision for the one time repatriation tax was reduced as the amount recorded last year was an estimate. Excluding the reduction in the provision for the one time repatriation tax, our effective tax rate was 27.5% in this year’s nine months.
Note 7
In May 2014 and in subsequent updates, the FASB issued guidance on revenue recognition which requires that we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services. We performed a review of the requirements of the new revenue standard, including reviewing customer contracts and applying the five-step model of this new guidance to each contract category we identified. We adopted this guidance on the first day of our fiscal 2019 year using a modified retrospective approach; however, we did not record a cumulative-effect adjustment from initially applying the standard as the adoption did not have a material impact on our financial position or results of operations. See additional revenue recognition disclosures in Note 2.
In January 2016, the FASB issued guidance which requires an entity to measure equity investments at fair value with changes in fair value recognized in net income, to use the price that would be received by a seller when measuring the fair value of financial instruments for disclosure purposes, and which eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Under prior guidance, changes in fair value of equity investments available for sale were recognized in Stockholders’ Equity. We adopted this guidance on the first day of our 2019 fiscal year. The adoption of this guidance on our consolidated financial statements was not material.
In February 2016, the FASB issued guidance on lease accounting which requires that an entity recognize most leases on its balance sheet. The guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as “capital” and “operating” leases for lessees. This guidance is effective for our fiscal year ended September 2020. While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities. We anticipate that the impact of this guidance on our financial statements will be material.
Note 8 Inventories consist of the following:
Finished goods
Raw materials
Packaging materials
Equipment parts and other
Total Inventories
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:
Sales to External Customers:
Soft pretzels
Frozen juices and ices
Churros
Handhelds
Bakery
Total Food Service
Retail Supermarket
Coupon redemption
Total Retail Supermarket
Beverages
Repair and maintenance service
Machines revenue
Total Frozen Beverages
Consolidated Sales
Depreciation and Amortization:
Total Depreciation and Amortization
Operating Income:
Total Operating Income
Capital Expenditures:
Total Capital Expenditures
Assets:
Note 10
Our three reporting units, which are also reportable segments, are Food Service, Retail Supermarkets and Frozen Beverages.
The carrying amounts of acquired intangible assets for the Food Service, Retail Supermarkets and Frozen Beverage segments as of June 29, 2019 and September 29, 2018 are as follows:
September 29, 2018
Gross
Carrying
Amortization
FOOD SERVICE
Indefinite lived intangible assets
Trade names
Amortized intangible assets
Non-compete agreements
Customer relationships
Licenses and rights
TOTAL FOOD SERVICE
RETAIL SUPERMARKETS
Amortized Intangible Assets
TOTAL RETAIL SUPERMARKETS
FROZEN BEVERAGES
Distribution rights
TOTAL FROZEN BEVERAGES
CONSOLIDATED
Fully amortized intangible assets have been removed from the June 29, 2019 amounts. Intangible assets of $480,000 were acquired in the Frozen Beverages segment in the third quarter.
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 June 29, 2019 and June 30, 2018 was $836,000 and $876,000, respectively. Aggregate amortization expense of intangible assets for the nine months ended June 29, 2019 and June 30, 2018 was $2,521,000 and $2,626,000, respectively.
Estimated amortization expense for the next five fiscal years is approximately $3,300,000 in 2019, $3,000,000 in 2020, $2,400,000 in 2021, and $2,300,000 in 2022 and in 2023. The weighted amortization period of the intangible assets is 10.7 years.
The carrying amounts of goodwill for the Food Service, Retail Supermarket and Frozen Beverage segments are as follows:
Note 11
We have classified our investment securities as marketable securities held to maturity and available for sale. The FASB defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the FASB has established three levels of inputs that may be used to measure fair value:
Level 1
Observable input such as quoted prices in active markets for identical assets or liabilities;
Level 2
Observable inputs, other than Level 1 inputs in active markets, that are observable either directly or indirectly; and
Level 3
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
Marketable securities held to maturity and available for sale consist primarily of investments in mutual funds, preferred stock and corporate bonds. The fair values of mutual funds are based on quoted market prices in active markets and are classified within Level 1 of the fair value hierarchy. The fair values of preferred stock, corporate bonds and certificates of deposit are based on quoted prices for identical or similar instruments in markets that are not active. As a result, preferred stock, corporate bonds and certificates of deposit are classified within Level 2 of the fair value hierarchy.
The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at June 29, 2019 are summarized as follows:
Fair
Amortized
Unrealized
Market
Cost
Gains
Losses
Value
Corporate Bonds
Certificates of Deposit
Total marketable securities held to maturity
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at June 29, 2019 are summarized as follows:
Mutual Funds
Preferred Stock
Total marketable securities available for sale
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 2019, 2020 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 2019 through 2022, with $112 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 29, 2018 are summarized as follows:
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 29, 2018 are summarized as follows:
The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at June 29, 2019 and September 29, 2018 are summarized as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Total held to maturity securities
Less current portion
Long term held to maturity securities
Proceeds from the redemption and sale of marketable securities were $6,584,800 and $29,721,000 in the three and nine months ended June 29, 2019 and were $21,964,000 and $51,417,000 in the three and nine months ended June 30, 2018, respectively. Realized losses of $8,000 and $25,000 were recorded in the three and nine months ended June 29, 2019 and realized losses of $35,000 and $32,000 were recorded in the three and nine months ended June 30, 2018, respectively. We use the specific identification method to determine the cost of securities sold. Under new accounting guidance adopted on the first day of this fiscal year, recognized unrealized losses on marketable securities of $118,000 and $385,000 were recorded in the three months and nine months ended June 29, 2019, respectively.
Note 12 Changes to the components of accumulated other comprehensive loss are as follows:
Foreign Currency
Holding Gain
Translation
on Marketable
Adjustments
Securities
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Holding Gain (Loss)
Other comprehensive loss before reclassifications
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 $.50 per share of its common stock payable on July 3, 2019, to shareholders of record as of the close of business on June 12, 2019.
In our fiscal year ended September 29, 2018, we purchased and retired 20,604 shares of our common stock at a cost of $2,794,027. In the three months and nine months ended June 29, 2019 we did not purchase and retire any shares. 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; 384,506 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 $496,000 in accumulated other comprehensive loss in the 2019 third quarter and an increase of $2,359,000 in accumulated other comprehensive loss in the 2018 third quarter. In the nine-month period, 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 an increase of $469,000 in accumulated other comprehensive loss in the 2019 nine-month period and an increase of $4,348,000 in accumulated other comprehensive loss in the 2018 nine-month period.
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 June 29, 2019.
RESULTS OF OPERATIONS
Net sales increased $20,462,000 or 7% to $326,701,000 for the three months and $37,065,000 or 4% to $874,615,000 for the nine months ended June 29, 2019 compared to the three and nine months ended June 30, 2018, respectively.
Sales to food service customers increased $6,870,000 or 4% in the third quarter to $198,571,000 and increased $14,456,000 or 3% to $567,886,000 for the nine months. Soft pretzel sales to the food service market increased 4% to $55,867,000 in the three months and 2% to $154,670,000 in the nine months due primarily to higher sales to convenience store chains. Two chains accounted for about 3/4 of the sales increase in the third quarter and about 1/2 of the increase in the nine months.
Frozen juices and ices sales increased 8% to $13,862,000 in the three months and 3% to $30,336,000 in the nine months as sales to warehouse club stores accounted for over 60% of the increase in the third quarter and all of the increase in the nine months.
Churro sales to food service customers were up 13% in the quarter to $18,888,000 and up 7% to $49,793,000 in the nine months with strong sales to warehouse club stores and general increases and decreases across our customer base.
Sales of bakery products increased $2,217,000 or 2% to $95,299,000 in the third quarter and increased $9,344,000 or 3% to $288,172,000 for the nine months as sales were higher to school foodservice and were up and down across our customer base.
Sales of handhelds decreased $1,424,000 or 14% in the quarter and $5,328,000 or 17% in the nine months with the decrease primarily coming from lower sales to co-pack customers because of unsuccessful product launches. Sales of funnel cake increased $522,000 or, 10%, to $5,616,000 in the quarter and $2,873,000, or 19%, to $18,308,000 in the nine months. The nine months sales increase was primarily sales to a quick service restaurant under a limited time offer program which ended in the second quarter.
Sales of new products in the first twelve months since their introduction were approximately $4 million in this quarter and $11 million in the nine months. Price increases were approximately $4 million for the quarter and $11 million for the nine months and net volume increases were approximately $3 million of sales in the quarter and in the nine months.
Operating income in our Food Service segment increased from $19,663,000 to $21,154,000 in the quarter and increased from $54,098,000 to $59,195,000 in the nine months. For the quarter, operating income increased primarily because of increased volume, lower distribution expenses and increased pricing but was impacted by approximately $600,000 of costs related to prior years’ product recalls. For the nine months, operating income improved primarily because of increased volume, price increases, lower marketing expenses and improved operations at several of our manufacturing facilities. Additionally, last year’s first quarter included shutdown costs of our Chambersburg, PA production facility. However, this year’s nine months, all in the first quarter, was impacted by approximately $900,000 of higher distribution expenses primarily due to higher freight rates which increased with the implementation of the electronic logging device mandate in January 2018. Additionally, lower sales of our MARY B’s biscuits and related costs due to our recall in January 2018 impacted our operating income by approximately $500,000 in last year’s first quarter.
Sales of products to retail supermarkets decreased $1,980,000 or 5% to $36,552,000 in the third quarter and decreased $1,916,000 or 2% to $87,776,000 for the nine months. Soft pretzel sales for the third quarter were down less than 1% to $7,294,000 and up 1% to $28,309,000 for the nine months. Sales of frozen juices and ices decreased $2,270,000 or 8% to $26,515,000 in the third quarter and decreased $1,771,000 or 3% in the nine months as we lost some volume and placements due to price increases. Handheld sales to retail supermarket customers increased 3% to $3,063,000 in the quarter and were down 7% to $8,110,000 in the nine months as the sales of this product line continue their long-term decline.
Sales of new products in the third quarter were approximately $200,000 and were approximately $1 million for the nine months. Price increases provided about $1.1 million of sales in the quarter and $2.0 million of sales in the nine months and net volume decreased by about $3.1 million for the quarter and $4.0 million for the nine months.
Operating income in our Retail Supermarkets segment increased to $3,651,000 in this year’s third quarter from $3,203,000 in last year’s quarter, a 14% increase and decreased to $7,739,000 in this year’s nine months compared to $8,295,000 in last year’s nine months. For the quarter, operating income benefited from lower marketing and distribution costs and increased pricing. For the nine months, increased product costs combined with lower volume were the primary drivers of the decrease in operating income.
Frozen beverage and related product sales increased 20% to $91,578,000 in the third quarter and increased 13% to $218,953,000 in the nine months. Beverage related sales were up 16% to $56,937,000 in the quarter due in large part to increased sales to one distributor of about $4 million and up 6% to $121,976,000 in the nine months. The increased sales to this one distributor did not benefit operating income. Sales to this distributor may continue to be higher into our fourth quarter. Gallon sales were up 2% for the three months. Service revenue increased 14% to $22,514,000 in the third quarter and increased 7% to $62,291,000 in the nine months with sales increases and decreases spread throughout our customer base, but with significant increases in sales to two customers.
Machines revenue (primarily sales of frozen beverage machines) was $11,810,000, an increase of $4,954,000, in the quarter and $33,875,000, an increase of $13,692,000, in the nine months. Increases in sales to three customers accounted for the higher revenue in the quarter. Operating income in our Frozen Beverages segment increased to $14,237,000, or 19%, in this quarter and was up $1,716,000, or 10%, to $18,961,000 in the nine months primarily as a result of the increases in sales.
Gross profit as a percentage of sales was 31.02% in the third quarter and 30.85% last year. Gross profit as a percentage of sales was 29.44% in the nine month period this year and 29.26% last year. Gross profit percentage for the quarter and nine months increased because of improved operations at several of our manufacturing facilities, price increases and because last year had the burden of shutting down our Chambersburg, PA production facility and moving its production to other facilities.
Total operating expenses increased $2,701,000 in the third quarter and as a percentage of sales decreased to 19.1% from 19.5% last year. For the nine months, operating expenses increased $6,171,000 and as a percentage of sales decreased to 19.6% from 19.7% last year. Marketing expenses decreased to 8.1% of sales in this year’s quarter from 8.4% last year and were 8.0% in the nine months compared to 8.3% of sales in last year’s nine months primarily because of controlled spending across all of our segments. Distribution expenses were 7.5% of sales in the third quarter and 7.9% of sales in last year’s quarter and were 8.1% in both year’s nine months. Distribution expenses as a percentage of sales were lower in the third quarter primarily because freight rates have dropped compared to last year. Administrative expenses were 3.3% of sales in the third quarter compared to 3.2% of sales last year in the third quarter and were 3.4% in this year’s nine months compared to 3.3% of sales in last year’s nine months. Other general operating expense in this year’s quarter includes $621,000 of costs related to prior years’ product recalls.
Operating income increased $4,173,000 or 12% to $39,042,000 in the three months and increased $6,257,000 or 8% to $85,895,000 the first nine months as a result of the aforementioned items.
Investment income increased by $248,000 and $1,088,000 in the third quarter and nine months, respectively, resulting from higher amounts invested and higher interest rates. Additionally, the third quarter and nine months were impacted by $118,000 and $385,000 of recognized unrealized losses.
This year’s other income in the third quarter includes a $2.0 million payment received from a customer due to cancellation of production under a co-manufacturing agreement. Our sales of the product line cancelled were $121,000 and $1.2 million in the three and nine months ended June 30, 2018 and we have not had any sales since June 30, 2018. Other income for last year’s nine months includes a $520,000 gain on a sale of property.
Net earnings increased $4,743,000, or 18%, in the current three month period to $30,872,000 and were $68,752,000 for the nine month period this year compared to $80,211,000 for the nine month period last year.
Net earnings for last year’s nine months benefited from a $20.9 million gain, or $1.11 per diluted share, on the remeasurement of deferred tax liabilities which was partially offset by a $1.2 million, or $.06 per diluted share, provision for the one time repatriation tax, both of which resulted from the Tax Cuts and Jobs Act enacted in December 2017. Excluding the deferred tax gain and the one time repatriation tax, our effective tax rate was 28.4% in last year’s nine months. Net earnings in this year’s nine months benefitted by a reduction of approximately $900,000 in tax as the provision for the one time repatriation tax was reduced as the amount recorded last year was an estimate. Excluding the reduction in the provision for the one time repatriation tax, our effective tax rate was 27.5% in this year’s nine months. Our effective tax rate for the third quarter this year was 28.1% and 28.1% for last year’s third quarter, as this year benefitted from tax credits on returns filed this year and a lower federal tax rate.
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.
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 2017 annual report on Form 10-K filed with the SEC.
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 June 29, 2019, 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 June 29, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 6.
Exhibits
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.