J&J SNACK FOODS CORP - Quarter Report: 2021 December (Form 10-Q)

J&J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

The accompanying notes are an integral part of these statements.

J&J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands)

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)

The accompanying notes are an integral part of these statements.

J&J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(in thousands)

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)

The accompanying notes are an integral part of these statements.

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 25, 2021 and December 26, 2020 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 previously shut down or sharply curtailed their foodservice operations as a result of COVID-19. While the majority of these venues have reopened, the extent of the future impact of COVID-19 on our operations depends on future developments of the virus and its effects which are uncertain at this time.

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

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 recorded within Accrued liabilities on our balance sheet.

Significant Payment Terms

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

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 $13.9 million at December 25, 2021 and $14.6 million at September 25, 2021.

Warranties & Returns

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

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

Contract Balances

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

Disaggregation of Revenue

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

Allowance for Doubtful Receivables

We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors. On September 27, 2020, the Company adopted guidance issued by the FASB in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires companies to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the asset. Adoption of this new guidance did not have a material impact on the consolidated financial statements. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The allowance for doubtful accounts considers a number of factors including the age of receivable balances, the history of losses, expectations of future credit losses, and the customers’ ability to pay off obligations. The allowance for doubtful receivables was $1,377,000 and $1,405,000 on December 25, 2021 and September 25, 2021, respectively.

318,172 anti-dilutive shares have been excluded in the computation of EPS for the three months ended December 25, 2021.

187,722 anti-dilutive shares have been excluded in the computation of EPS for the three months ended December 26, 2020.

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 2022 and 2021 three-month periods, respectively.

During the fiscal year 2022 three-month period, the Company issued 8,873 service share unit’s (“RSU”)’s.  Each RSU entitles the awardee to one share of common stock upon vesting.  The fair value of the RSU’s was determined based upon the closing price of the Company’s common stock on the date of grant.  No such RSU’s were issued in the fiscal year 2021 three-month period.

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

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.

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 $343,000 on both December 25, 2021 and September 25, 2021, 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 25, 2021 and September 25, 2021, the Company has $267,000 of accrued interest and penalties.

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

Our effective tax rate for the three months ended December 25, 2021 was 27%. Our effective tax rate was 8% in last year’s quarter primarily due to a $420,000 tax benefit related to share based compensation.    

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.

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

Food Service

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

Retail Supermarkets

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

Frozen Beverages

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

The Chief Operating Decision Maker for Food Service, Retail Supermarkets and Frozen Beverages reviews monthly detailed operating income statements and sales reports in order to assess performance and allocate resources to each individual segment. Sales and operating income are key variables monitored by the Chief Operating Decision Maker and management when determining each segment’s and the Company’s financial condition and operating performance. In addition, the Chief Operating Decision Maker reviews and evaluates depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment. Information regarding the operations in these three reportable segments is as follows:

The carrying amounts of acquired intangible assets for the Food Service, Retail Supermarkets and Frozen Beverage segments as of December 25, 2021 and September 25, 2021 are as follows:

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 25, 2021 and December 26, 2020 was $588,000 and $679,000, respectively.

Estimated amortization expense for the next five fiscal years is approximately $2,300,000 in 2022, $2,300,000 in 2023, $2,000,000 in 2024, $1,400,000 in 2025 and $1,400,000 in 2026. The weighted amortization period of the intangible assets is 11.2 years.

Goodwill          

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

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 25, 2021 are summarized as follows:

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

The mutual funds seek current income with an emphasis on maintaining low volatility and overall moderate duration. The Fixed-to-Floating Perpetual Preferred Stock generate fixed income to call dates in 2025 and then income is based on a spread above LIBOR if the securities are not called. The mutual funds and Fixed-to-Floating Perpetual Preferred Stock do not have contractual maturities; however, we classify them as long-term assets as it is our intent to hold them for a period of over one year, although we may sell some or all of them depending on presently unanticipated needs for liquidity or market conditions. The corporate bonds generate fixed income to maturity dates in 2022 through 2023, with $8 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 25, 2021 are summarized as follows:

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

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

Proceeds from the redemption and sale of marketable securities were $7,200,000 in the three months ended December 25, 2021, and $26,148,000 in the three months ended December 26, 2020, respectively. Losses of $44,000 and $78,000 were recorded in the three months ended December 25, 2021 and December 26, 2020, respectively, which included an unrealized loss on marketable securities of $5,000 and an unrealized gain on marketable securities of $603,000 in the three months ended December 25, 2021 and December 26, 2020, respectively. We use the specific identification method to determine the cost of securities sold.

Total marketable securities held to maturity as of December 25, 2021 with credit ratings of BBB/BB/B had an amortized cost basis totaling $7,544,000. This rating information was obtained December 31, 2021.

Note 13 – Leases                                                                                 

General Lease Description

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

We have finance leases with initial noncancelable lease terms in excess of one year covering the rental of various equipment. These leases are generally for manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these finance leases range from 1 year to 6 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:                

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 25, 2021, the weighted-average discount rate of our operating and finance leases was 3.3% and 3.2%, 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:

Supplemental balance sheet information related to leases is as follows:

Supplemental cash flow information related to leases is as follows:

As of  December 25, 2021, the maturities of lease liabilities were as follows:

As of December 25, 2021 the weighted-average remaining term of our operating and finance leases was 6.4 years and 4.0 years, respectively.

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 $.633 per share of its common stock payable on January 11, 2022, to shareholders of record as of the close of business on December 20, 2021.

We did not purchase any shares of our common stock in fiscal year 2021. 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 an increase of $444,000 in accumulated other comprehensive loss in the 2022 first quarter and a decrease of $2,279,000 in accumulated other comprehensive loss in the 2021 first quarter.

In December 2021, we entered into an amendment and modification to an amended and restated loan agreement with our existing banks which provides for up to a $50,000,000 revolving credit facility repayable in December 2026. 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 25, 2021 or at December 26, 2020.

Critical Accounting Policies, Judgments and Estimates

There have been no material changes to our critical accounting policies, judgments and estimates from the information provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Judgments and Estimates, in our Annual Report on Form 10-K for the year ended September 25, 2021, as filed with the SEC on November 23, 2021.

RESULTS OF OPERATIONS

Net sales increased $77,493,000 or 32% to $318,490,000 for the three months ended December 25, 2021. Operating income increased $14,267,000 or 2,468% for the quarter to $14,845,000.

FOOD SERVICE

Sales to food service customers increased $51,307,000 or 32% in the first quarter to $211,732,000. Sales were up across all product lines as many of the venues and locations where our products are sold that were previously shut down or operating at reduced capacity in the first quarter of 2021 have partially or fully re-opened since then. Customer venues across theaters, sports, amusement, convenience, schools and restaurants and strategic accounts are experiencing a surge of post pandemic demand which helped drive strong sales in our core products. Soft pretzel sales to food service increased 54% to $50,421,000. Frozen novelties sales increased 34% to $8,457,000. Churro sales were up 69% in the quarter to $19,489,000, led by customer expansion and growing menu penetration. Sales of funnel cake increased $3,713,000 or 112% in the quarter. Sales of bakery products increased $18,867,000 or 21% in the first quarter to $107,831,000. Sales of handhelds increased $884,000 or 5% 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 $2,000,000 in this quarter, driven primarily by new bakery items. Price increases had a marginal impact on results in the quarter as traffic and volume drove the large majority of the sales increase compared to last year.

Operating income in our Food Service segment increased $2,821,000 in the quarter to $9,001,000 primarily due to the increase in sales and improved product mix, as well as the benefits of expense leverage.

RETAIL SUPERMARKETS

Sales of products to retail supermarkets increased $3,601,000 or 9% to $42,695,000 in the first quarter. Our SUPERPRETZEL brand performed well in the quarter driving an increase in soft pretzel sales of 17% to $16,194,000. Sales of frozen novelties were up 16% to $17,802,000 in the first quarter and sales of biscuits were up 8% to 8,271,000. Handheld sales to retail supermarket customers decreased 54% in the quarter, driven by proactive discontinuations of margin dilutive products. Sales of new products in retail supermarkets were minimal in the quarter. Price increases and increased consumer traffic and volume in retail outlets contributed to the sales growth in the quarter compared to prior year.

Operating income in our Retail Supermarkets segment increased $261,000 or 6% to $4,984,000 in this year’s first quarter driven by sales increases and the benefits of expense leverage compared with prior year.

FROZEN BEVERAGES

Frozen beverage and related product sales increased $22,585,000 or 54% to $64,063,000 in the first quarter. Beverage related sales increased 113% to $33,763,000. Gallon sales were up 109% for the three months as we continue to see traffic improve and growing momentum across theater, amusement, convenience and restaurant channels. In the amusement channel, we continue to see strong growth in indoor focused venues where the Company is well positioned for growth. Service revenue increased 16% to $22,011,000 in the first quarter led by an acceleration in preventative maintenance calls. Machine revenue (primarily sales of frozen beverage machines) was $7,847,000, an increase of 21% driven mainly by growth from large quick service restaurants and convenience customers.

Our Frozen Beverage segment had operating income for the quarter of $860,000 compared to an operating loss of $10,325,000 last year primarily as a result of higher beverage sales volume which drove leverage across the business.

CONSOLIDATED

Gross profit as a percentage of sales was 24.9% in the three-month period this year and 20.8% last year.  The increase is largely attributable to the benefit of increased sales, favorable product mix and corresponding margin efficiencies.

Total operating expenses increased $14,983,000 in the first quarter but as a percentage of sales decreased to 20.3% from 20.6% last year. Marketing expenses decreased to 6.6% of sales in this year’s quarter from 7.2% last year. Distribution expenses were 10.5% of sales in this year’s quarter compared to 9.5% of sales last year. Administrative expenses were 3.3% of sales this quarter compared to 3.9% last year.

Operating income increased $14,267,000 or 2,468% to $14,845,000 in the first quarter as a result of the aforementioned items.          

Our investments generated before tax income of $271,000 this quarter, down from $1,370,000 last year due to decreases in the amount of investments and lower interest rates.

Net earnings increased $9,313,000, or 524%, in the current three-month period to $11,091,000. Our effective tax rate was 27% 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.

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 2021 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 December 25, 2021, 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 25, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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.