J&J SNACK FOODS CORP - Quarter Report: 2016 March (Form 10-Q)

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		March 26, 2016				September 26, 2015
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	89,337			$	133,689
Accounts receivable, net			102,943				102,649
Inventories			100,649				82,657
Prepaid expenses and other			7,602				6,557
Deferred income taxes			3,297				3,266
Total current assets			303,828				328,818
Property, plant and equipment, at cost
Land			2,496				2,496
Buildings			26,741				26,741
Plant machinery and equipment			220,979				210,728
Marketing equipment			270,966				266,047
Transportation equipment			7,473				6,866
Office equipment			21,208				20,586
Improvements			34,322				28,725
Construction in progress			6,099				9,486
Total Property, plant and equipment, at cost			590,284				571,675
Less accumulated depreciation and amortization			411,565				399,621
Property, plant and equipment, net			178,719				172,054
Other assets
Goodwill			86,442				86,442
Other intangible assets, net			43,162				45,819
Marketable securities held to maturity			96,649				66,660
Marketable securities available for sale			33,586				39,638
Other			2,721				3,504
Total other assets			262,560				242,063
Total Assets		$	745,107			$	742,935
Liabilities and Stockholder's Equity
Current Liabilities
Current obligations under capital leases		$	360			$	273
Accounts payable			58,928				59,206
Accrued insurance liability			11,461				10,231
Accrued income taxes			-				-
Accrued liabilities			6,043				5,365
Accrued compensation expense			11,677				15,318
Dividends payable			7,260				6,723
Total current liabilities			95,729				97,116
Long-term obligations under capital leases			1,418				1,196
Deferred income taxes			43,672				43,789
Other long-term liabilities			848				915
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 18,617,000 and 18,676,000 respectively			22,934				31,653
Accumulated other comprehensive loss			(12,679	)			(10,897	)
Retained Earnings			593,185				579,163
Total stockholders' equity			603,440				599,919
Total Liabilities and Stockholder's Equity		$	745,107			$	742,935

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		Three months ended								Six months ended
		March 26, 2016				March 28, 2015				March 26, 2016				March 28, 2015
Net Sales		$	229,710			$	225,008			$	452,560			$	437,760
Cost of goods sold(1)			160,961				158,058				319,976				309,709
Gross Profit			68,749				66,950				132,584				128,051
Operating expenses
Marketing (2)			20,364				19,986				39,993				39,473
Distribution (3)			17,522				17,633				35,778				35,154
Administrative (4)			7,637				7,462				15,327				14,987
Other general expense			(53	)			64				(153	)			22
Total Operating Expenses			45,470				45,145				90,945				89,636
Operating Income			23,279				21,805				41,639				38,415
Other income (expense)
Investment income			977				1,278				2,137				2,632
Interest expense & other			(31	)			(30	)			(63	)			(54	)
Earnings before income taxes			24,225				23,053				43,713				40,993
Income taxes			8,637				8,416				15,147				15,100
NET EARNINGS		$	15,588			$	14,637			$	28,566			$	25,893
Earnings per diluted share		$	0.83			$	0.78			$	1.52			$	1.38
Weighted average number of diluted shares			18,752				18,821				18,796				18,811
Earnings per basic share		$	0.84			$	0.78			$	1.53			$	1.39
Weighted average number of basic shares			18,637				18,689				18,662				18,679

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		Three months ended								Six months ended
		March 26, 2016				March 28, 2015				March 26, 2016				March 28, 2015
Net Earnings		$	15,588			$	14,637			$	28,566			$	25,893
Foreign currency translation adjustments			(40	)			(914	)			(680	)			(2,869	)
Unrealized holding gain(loss)on marketable securities			(280	)			533				(1,102	)			(1,389	)
Total Other Comprehensive Income, net of tax			(320	)			(381	)			(1,782	)			(4,258	)
Comprehensive Income		$	15,268			$	14,256			$	26,784			$	21,635

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		Six Months Ended
		March 26, 2016				March 28, 2015
Operating activities:
Net earnings		$	28,566			$	25,893
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation of fixed assets			16,761				15,987
Amortization of intangibles and deferred costs			2,909				2,869
Share-based compensation			1,055				1,009
Deferred income taxes			(139	)			14
Loss on sale of marketable securities			406				509
Other			289				(199	)
Changes in assets and liabilities net of effects from purchase of companies
(Increase)decrease in accounts receivable			(285	)			3,885
Increase in inventories			(18,128	)			(13,158	)
Increase in prepaid expenses			(1,054	)			(1,918	)
Decrease in accounts payable and accrued liabilities			(2,079	)			(6,373	)
Net cash provided by operating activities			28,301				28,518
Investing activities:
Purchases of property, plant and equipment			(23,735	)			(17,933	)
Purchases of marketable securities			(31,286	)			(13,136	)
Proceeds from redemption and sales of marketable securities			5,384				13,601
Proceeds from disposal of property and equipment			835				862
Other			582				(56	)
Net cash used in investing activities			(48,220	)			(16,662	)
Financing activities:
Payments to repurchase common stock			(11,758	)			(2,114	)
Proceeds from issuance of stock			1,984				2,070
Payments on capitalized lease obligations			(176	)			(105	)
Payment of cash dividend			(14,006	)			(12,696	)
Net cash used in financing activities			(23,956	)			(12,845	)
Effect of exchange rate on cash and cash equivalents			(477	)			(2,156	)
Net decrease in cash and cash equivalents			(44,352	)			(3,145	)
Cash and cash equivalents at beginning of period			133,689				91,760
Cash and cash equivalents at end of period		$	89,337			$	88,615

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Note1

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, 2015.

 

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. Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported net earnings.

 

The results of operations for the three months ended March 26, 2016 and March 28, 2015 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.

 

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, 2015.

 

Note 2

We recognize revenue from our products when the products are shipped to our customers. Repair and maintenance equipment service revenue is recorded when it is performed provided the customer terms are that the customer is to be charged on a time and material basis or on a straight-line basis over the term of the contract when the customer has signed a service contract. Revenue is recognized only where persuasive evidence of an arrangement exists, our price is fixed or estimable and collectability is reasonably assured. We record offsets to revenue for allowances, end-user pricing adjustments, trade spending, coupon redemption costs and returned product. Customers generally do not have the right to return product unless it is damaged or defective. We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors. The allowance for doubtful receivables was $535,000 and $304,000 at March 26, 2016 and September 26, 2015, respectively.

 

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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 3 to 20 years. Depreciation expense was $8,591,000 and $8,006,000 for the three months ended March 26, 2016 and March 28, 2015, respectively, and for the six months ended March 26, 2016 and March 28, 2015 was $16,761,000 and $15,987,000, 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:

 

 

 

 

180,670 anti-dilutive shares have been excluded in the computation of EPS for the three months ended March 26, 2016.

 

 

 

 

180,670 anti-dilutive shares have been excluded in the computation of EPS for the six months ended March 26, 2016.

 

 

 

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Note 5

At March 26, 2016, the Company has three stock-based employee compensation plans. Share-based compensation expense (benefit) was recognized as follows:

 

 

 

Income tax benefit related to share-based compensation for the three months ended December 26, 2015 has been revised to $674,000 from $175,000 as a result of our early adoption this quarter of Accounting Standards Update NO. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this new standard, the $499,000 increase of first quarter income tax benefit was recognized via a reduction of amounts previously recorded as additional paid in capital upon exercise of stock options.   In the current fiscal quarter, we have realized a tax benefit of $89,000 upon similar exercises of stock options.

 

The Company anticipates that share-based compensation for 2016 will not exceed $800,000 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 2016 first six months: expected volatility of 15.9%; risk-free interest rate of 1.2%; dividend rate of 1.4% and expected lives of 5 years.

 

During the 2016 six month period, the Company granted 159,170 stock options. The weighted-average grant date fair value of these options was $13.94. During the 2015 six month period, the Company granted 148,840 stock options. The weighted-average grant date fair value of these options was $15.23.

 

Expected volatility is based on the historical volatility of the price of our common shares over the past 49 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.

 

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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 $344,000 and $334,000 on March 26, 2016 and September 26, 2015, respectively, all of which would impact our effective tax rate over time, if recognized. We recognize interest and penalties related to income tax matters as a part of the provision for income taxes. As of March 26, 2016 and September 26, 2015, respectively, the Company has $209,000 and $199,000 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.

 

Note 7

In May 2014, the FASB issued guidance on revenue recognition which says that we should 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.  This guidance is effective for our fiscal year ending September 2019.  Early application is permitted.  We anticipate that the impact of this guidance on our consolidated financial statements will not be material.

 

In July 2015, the FASB issued guidance which requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance will simplify the subsequent measurement of inventory, as current guidance requires an entity to measure inventory at the lower of cost or market. Under current guidance, market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. The adoption of this guidance in the December quarter did not have a material impact on our consolidated financial statements.

 

 

In September 2015, the FASB issued guidance on accounting for business combinations which require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance eliminates the requirement to retrospectively account for these adjustments. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. This guidance did not impact amounts and disclosures related to previous business combinations; therefore, the adoption of this guidance in the December quarter did not impact our consolidated financial statements.

 

In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes which eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires entities to classify all deferred tax assets and liabilities as noncurrent. This guidance is effective for our fiscal year ended September 2018.  Early adoption is permitted.   We anticipate that the impact on our financial statements will be inconsequential.

 

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 present guidance, changes in fair value of equity investments are recognized in Stockholder’s Equity.   This guidance is effective for our fiscal year ended September 2019.  Early adoption is not permitted.  We do not anticipate that the adoption of this new guidance will have a material impact on our consolidated financial statements.

 

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.   We anticipate that the impact of this guidance on our financial statements will be material.

 

 

In March 2016, the FASB issued guidance on share based compensation which requires that an entity recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Under current guidance, excess tax benefits are recognized in additional paid-in capital and tax deficiencies are recognized either as an offset to accumulated excess tax benefits, or in the income statement.  This guidance is effective for our fiscal year ended September 2018.  Early adoption is permitted.  See Note 5 to these financial statements for a discussion of the impact the adoption of this guidance in our current quarter had on our consolidated financial statements.

 

Note 8

Inventories consist of the following:

 

 

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 (loss). 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. 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:

 

 

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Note 10

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

 

The carrying amounts of acquired intangible assets for the Food Service, Retail Supermarkets and Frozen Beverage segments as of March 26, 2016 and September 26, 2015 are as follows:

 

 

 

Amortized intangible assets are being amortized by the straight-line method over periods ranging from 3 to 20 years and amortization expense is reflected throughout operating expenses. There were no intangible assets acquired in the three and six months ended March 26, 2016. Aggregate amortization expense of intangible assets for the three months ended March 26, 2016 and March 28, 2015 was $1,328,000 and $1,352,000, respectively and for the six months ended March 26, 2016 and March 28, 2015 was $2,657,000 and $2,707,000, respectively.

 

Estimated amortization expense for the next five fiscal years is approximately $5,100,000 in 2016, $2,600,000 in 2017, $1,800,000 in 2018, $1,700,000 in 2019 and $1,400,000 in 2020. The weighted average amortization period of the intangible assets is 10.0 years.

 

Goodwill

 

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

 

 

 

There was no goodwill acquired in the three and six months ended March 26, 2016.

 

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 and corporate bonds are based on quoted prices for identical or similar instruments in markets that are not active.  As a result, preferred stock and corporate bonds are classified within Level 2 of the fair value hierarchy. 

 

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at March 26, 2016 are summarized as follows:

 

 

 

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at March 26, 2016 are summarized as follows:

 

 

 

The mutual funds seek current income with an emphasis on maintaining low volatility and overall moderate duration. The unrealized losses of $1.2 million are spread over 4 funds with total fair market value of $13.9 million. The Fixed-to-Floating Perpetual Preferred Stock generate fixed income to call dates in 2018, 2019 and 2025 and then income is based on a spread above LIBOR if the securities are not called. The unrealized losses of $748,000 on the Preferred Stock are spread over 16 holdings with fair market value of $19.7 million. 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 2017 through 2021, with $76 million maturing within 3 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, 2015 are summarized as follows:

 

 

 

 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 26, 2015 are summarized as follows:

 

 

 

The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at March 26, 2016 and September 26, 2015 are summarized as follows:

 

 

 

Proceeds from the redemption and sale of marketable securities were $4,186,000 and $5,384,000 in the three and six months ended March 26, 2016 and $2,000,000 and $13,601,000 in the three and six months ended March 28, 2015, respectively. Losses of $297,000 and $406,000 were recorded in the three and six months ended March 26, 2016 and $0 and $509,000 were recorded in the three and six months ended March 28, 2015, respectively. We use the specific identification method to determine the cost of securities sold.

 

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

 

 

 

 

 

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