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INDEX

PART I.         FINANCIAL INFORMATION

Item 1.         Consolidated Financial Statements

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements.

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 $ million at June 29, 2024 and $ million at September 30, 2023.

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

Contract liabilities consist of deferred revenue resulting from service contracts in our Frozen Beverages segment where our customers are billed for service in advance of performance. Contract liabilities also consist of deferred revenue in our Food Service segment resulting from initial franchise fees paid by franchisees, as well as renewal and transfer fees paid by franchisees and license fees paid by licensees which are generally recognized on a straight-line basis over the term of the underlying agreement. Therefore, we have contract liabilities on our balance sheet as follows:

Additions to contract liability

Amounts recognized as revenue

Ending Balance

Disaggregation of Revenue

See Note 10 for disaggregation of our net sales by class of similar product and type of customer.

Allowance for Estimated Credit Losses

The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The allowance for estimated credit losses considers numerous 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 estimated credit losses was $ million and $ million on June 29, 2024 and September 30, 2023, respectively.

Effect of dilutive securities

Diluted EPS

Net earnings available to common stockholders plus assumed conversions

anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 29, 2024.

Effect of dilutive securities

Diluted EPS

Net earnings available to common stockholders plus assumed conversions

anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 29, 2024.

Effect of dilutive securities

Diluted EPS

Net earnings available to common stockholders plus assumed conversions

anti-dilutive shares have been excluded in the computation of EPS for the three months ended June 24, 2023.

Effect of dilutive securities

Diluted EPS

Net earnings available to common stockholders plus assumed conversions

anti-dilutive shares have been excluded in the computation of EPS for the nine months ended June 24, 2023.

Stock purchase plan

Stock issued to outside directors

Service share units issued to employees

Performance share units issued to employees

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.

Expected volatility is based on the historical volatility of the price of our common shares over the past months for 5-year options and 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.

The Company did not grant any stock options during the nine months ended June 29, 2024 or during the nine months ended June 24, 2023.

During the three and nine months ended June 29, 2024, the Company issued and service share units (“RSU”)’s, respectively. During the three and nine months ended June 24, 2023, the Company issued and RSU’s, respectively. Each RSU entitles the awardee to one share of common stock upon vesting. The fair value of RSU’s was determined based upon the closing price of the Company’s common stock on the date of grant.

During the three and nine months ended June 29, 2024, the Company issued and performance share units (“PSU”)’s, respectively. During the three and nine months ended June 24, 2023, the Company issued and PSU’s, respectively. 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.

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. Virtually all the returns noted above are open for examination for three to four years.

Our effective tax rate was % for the three months ended June 29, 2024, as compared with % in the prior fiscal year period.

Our effective tax rate was % for the nine months ended June 29, 2024, as compared with % in the prior fiscal year period.

Interest accrues, at the Company’s election at (i) the BSBY Rate (as defined in the Credit Agreement), plus an applicable margin, based upon the Consolidated Net Leverage Ratio, as defined in the Credit Agreement, or (ii) the Alternate Base Rate (a rate based on the higher of (a) the prime rate announced from time-to-time by the Administrative Agent, (b) the Federal Reserve System’s federal funds rate, plus % or (c) the Daily BSBY Rate, plus an applicable margin). The Alternate Base Rate is defined in the Credit Agreement.

The Credit Agreement requires the Company to comply with various affirmative and negative covenants, including without limitation (i) covenants to maintain a minimum specified interest coverage ratio and maximum specified net leverage ratio, and (ii) subject to certain exceptions, covenants that prevent or restrict the Company’s ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, alter its capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates, or amend its organizational documents. As of June 29, 2024, the Company is in compliance with all financial covenants terms of the Credit Agreement.

On June 21, 2022, the Company entered into an amendment to the Credit Agreement, the “Amended Credit Agreement” which provided for an incremental increase of $ million in available borrowings. The Amended Credit Agreement also includes an option to increase the size of the revolving credit facility by up to an amount not to exceed in the aggregate the greater of $ million or $ million, plus the Consolidated EBITDA of the Borrowers, subject to the satisfaction of certain terms and conditions.

As of June 29, 2024, $ million was outstanding under the Amended Credit Agreement with a weighted average interest rate of %. These borrowings have been classified as Long-Term Debt on the Company’s Balance Sheet. As of June 29, 2024, the amount available under the Amended Credit Agreement was $ million, after giving effect to the outstanding letters of credit. As of September 30, 2023, $ million was outstanding under the Credit Agreement. As of September 30, 2023, the amount available under the Amended Agreement was $ million, after giving effect to the outstanding letters of credit.

Raw materials

Packaging materials

Equipment parts and other

Total inventories

On April 8, 2024, the Company acquired the Thinsters cookie business from Hain Celestial Group. Under the Company’s framework for evaluating acquisitions and in accordance with Generally Accepted Accounting Principles, the Company is in process of evaluating whether the transaction will be accounted for as an asset acquisition or a business combination. The acquisition included inventory with a preliminary fair value of $ million.

Frozen Beverages

We sell frozen beverages to the foodservice industry primarily under the names ICEE, SLUSH PUPPIE and PARROT ICE in the United States, Mexico and Canada. We also provide repair and maintenance services to customers for customer-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:

Frozen novelties

Churros

Handhelds

Bakery

Other

Total Food Service

Retail Supermarket

Soft pretzels

Frozen novelties

Biscuits

Handhelds

Coupon redemption

Other

Total Retail Supermarket

Frozen Beverages

Beverages

Repair and maintenance service

Machines revenue

Other

Total Frozen Beverages

Consolidated sales

Depreciation and amortization:

Food Service

Retail Supermarket

Frozen Beverages

Total depreciation and amortization

Operating Income:

Food Service

Retail Supermarket

Frozen Beverages

Total operating income

Capital expenditures:

Food Service

Retail Supermarket

Frozen Beverages

Total capital expenditures

Assets:

Food Service

Retail Supermarket

Frozen Beverages

Total assets

Amortized intangible assets

Trade names

Franchise agreements

Customer relationships

Technology

License and rights

TOTAL FOOD SERVICE

RETAIL SUPERMARKETS

Indefinite lived intangible assets

Trade names

Amortized intangible assets

Customer relationships

TOTAL RETAIL SUPERMARKETS

FROZEN BEVERAGES

Indefinite lived intangible assets

Trade names

Distribution rights

Amortized intangible assets

Customer relationships

Licenses and rights

TOTAL FROZEN BEVERAGES

CONSOLIDATED

Amortizing intangible assets are being amortized by the straight-line method over periods ranging from to years and amortization expense is reflected throughout operating expenses. Aggregate amortization expense of intangible assets for the three months ended June 29, 2024 and June 24, 2023 was $ million and $ million, respectively. Aggregate amortization expense of intangible assets for the nine months ended June 29, 2024 and June 24, 2023 was $ million and $ million, respectively.

Estimated amortization expense for the next five fiscal years is approximately $ million in 2024 (excluding the nine months ended June 29, 2024), $ million in 2025, $ million in 2026, $ million in 2027, and $ million in 2028.

The weighted amortization period of the intangible assets, in total, is years. The weighted amortization period by intangible asset class is years for Technology, years for Customer relationships, years for Licenses & rights, years for Franchise agreements and years for Trade names.

On April 8, 2024, the Company acquired the Thinsters cookie business from Hain Celestial Group. Under the Company’s framework for evaluating acquisitions and in accordance with Generally Accepted Accounting Principles, the Company is in process of evaluating whether the transaction will be accounted for as an asset acquisition or a business combination. The acquisition included an indefinite lived Trade name intangible asset with a preliminary fair value of $ million, and an amortizing Customer relationship intangible asset with a preliminary fair value of $ million. The Customer relationship intangible asset will amortize over a useful life of years.

Goodwill

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

September 30, 2023

Ending Balance

Ending Balance

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 year to 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 June 29, 2024, the weighted-average discount rate of our operating and finance leases was % and %, respectively. As of September 30, 2023, the weighted-average discount rate of our operating and finance leases was % and %, 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:

Finance lease cost:

Amortization of assets in Cost of goods sold and Operating expenses

Interest on lease liabilities in Interest expense & other

Total finance lease cost

Short-term lease cost in Cost of goods sold and Operating expenses

Total net lease cost

Supplemental balance sheet information related to leases is as follows:

Current operating lease liabilities

Noncurrent operating lease liabilities

Total operating lease liabilities

Finance Leases

Finance lease right-of-use assets in Property, plant and equipment, net

Current finance lease liabilities

Noncurrent finance lease liabilities

Total finance lease liabilities

Supplemental cash flow information related to leases is as follows:

Operating cash flows from finance leases

Financing cash flows from finance leases

Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets

Supplemental noncash information on lease liabilities removed due to purchase of leased asset

As of June 29, 2024, the maturities of lease liabilities were as follows:

2025

2026

2027

2028

Thereafter

Total minimum payments

Less amount representing interest

Present value of lease obligations

As of June 29, 2024 the weighted-average remaining term of our operating and finance leases was  years and years, respectively. As of September 30, 2023, the weighted average remaining term of our operating and finance leases was years and years, respectively.

Of the amounts paid to NFI, the amount related to transportation management services performed by NFI was $ million and $ million in the three and nine months ended June 29, 2024, respectively, and $ million and $ million in the three and nine months ended June 24, 2023, respectively.

Of the amounts paid to NFI, the amount related to labor management services performed by NFI was $ million and $ million in the three and nine months ended June 29, 2024. No labor management services were performed by NFI in the three and nine months ended June 24, 2023.

In June 2023, the Company began leasing a regional distribution center in Terrell, Texas that was constructed by, and is owned by, a subsidiary of NFI. The distribution center is operated by NFI for the Company, pursuant to a Service Labor Management Agreement. Under the Service Labor Management Agreement, NFI provides logistics and warehouse management services. NFI continues to perform transportation-related management services for the Company as well. At the lease commencement date, $ million was recorded as an operating right-of-use asset, $ million was recorded as a current operating lease liability, and $ million was recorded as a non-current operating lease liability. As of June 29, 2024, $ million was recorded as an operating right-of-use asset, $ million was recorded as a current operating lease liability, and $ million was recorded as a non-current operating lease liability. As of September 30, 2023, $ million was recorded as an operating right-of-use asset, $ million was recorded as a current operating lease liability, and $ million was recorded as a non-current operating lease liability. Of the amounts paid to NFI, the Company made lease payments totaling $ million and $ million during the three- and nine-month periods ended June 29, 2024. No payments on the lease were made to NFI during the three- and nine-month periods ended June 24, 2023.

The remainder of the costs related to amounts that were passed through to the third-party distribution and shipping vendors that are being managed on the Company’s behalf by NFI. As of June 29, 2024 and September 30, 2023, related party trade payables of approximately $ million and $ million, respectively, were recorded as accounts payable.

In October 2023 and February 2024, the Company began leasing regional distribution centers in Woolwich Township, New Jersey, and Glendale, Arizona, respectively. The distribution centers are operated by NFI for the Company, pursuant to the Service Labor Management Agreement noted in the paragraph above.

All agreements with NFI include terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements made in this Form 10-Q that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on our current beliefs as well as assumptions made by us and information currently available to us. Forward-looking statements generally will be accompanied by words such as "anticipate," "if," "may," "believe," "plan,", "goals," "estimate," "expect," "project," "continue," "forecast," "intend," "may," "could," "should," "will," and other similar expressions. Statements addressing our future operating performance and statements addressing events and developments that we expect or anticipate will occur are also considered as forward-looking statements. This includes, without limitation, our statements and expectations regarding any current or future recovery in our industry (or the industries of our customers), the success of new product innovations, and the future impact of our investments in additional production capacity and logistics and warehousing operations. Such forward-looking statements are inherently uncertain, and readers must recognize that actual results may differ materially from the expectations of management. We intend that such forward-looking statements be subject to the safe harbor provisions of the Securities Act and the Exchange Act.

We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties, and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation to revise, update, add or to otherwise correct, any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

Objective

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide readers of our financial statements with a narrative form from the perspective of our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and within the Company’s Annual Report on Form 10-K filed for the fiscal year ended September 30, 2023.

Business Overview

The Company manufactures and sells snack foods and distributes frozen beverages which it markets nationally to the foodservice and retail supermarket industries. The Company’s principal snack food products are soft pretzels, frozen novelties, churros and bakery products. We believe we are the largest manufacturer of soft pretzels in the United States. Other snack food products include donuts, churros, cookies, funnel cake and handheld products. The Company’s principal frozen beverage products are the ICEE brand frozen carbonated beverage and the SLUSH PUPPIE brand frozen non-carbonated beverage. The Company’s Food Service and Frozen Beverage sales are made principally to foodservice customers including snack bar and food stand locations in leading chain, department, discount, warehouse club and convenience stores; malls and shopping centers; fast food and casual dining restaurants; stadiums and sports arenas; leisure and theme parks; movie theaters; independent retailers; and schools, colleges and other institutions. The Company’s Retail Supermarket customers are primarily supermarket chains.

RESULTS OF OPERATIONS – Three and nine months ended June 29, 2024

The following discussion provides a review of results for the three and nine months ended June 29, 2024 as compared with the three and nine months ended June 24, 2023.

Net Sales

Net sales increased by $14.2 million, or 3.3%, to $440.0 million for the three months ended June 29, 2024. Net sales increased by $33.0 million, or 3.0%, to $1,148.0 million for the nine months ended June 29, 2024. In the three months ended June 29, 2024, organic sales growth was primarily driven by growth in the Food Service and Retail Supermarket segments, partially offset by temporary challenges in the Frozen Beverages segment associated with our movie theater customer channel. In the nine months ended June 29, 2024, the increase in sales was driven by organic growth across all three of the Company’s business segments, led by our core products including churros, frozen novelties and frozen beverages.

Gross Profit

Gross Profit increased by $4.9 million, or 3.4%, to $147.8 million for the three months ended June 29, 2024. As a percentage of sales, gross profit remained flat at 33.6% for the three months ended June 29, 2024. Our continued success in improving operating efficiencies, as well as an improved product and pricing mix, contributed to the flat performance compared to prior year quarter, and primarily offset the impact of a slightly less favorable sales mix across our segments. Across our portfolio of raw materials, we saw net low-mid single-digit inflationary increases, with the net increase primarily driven by increases in the cost of cocoa/chocolate, and to a lesser extent, increases in the cost of sugar/sweeteners. Those increases were somewhat offset by deflationary trends seen in flour, cheese and dairy, mixes, and eggs. Pricing adjustments and contractual cost true-ups helped minimize the majority of the impact of the net inflationary increases in costs of raw materials on our gross margins in the quarter.

Gross Profit increased by $26.5 million, or 8.2%, to $350.6 million for the nine months ended June 29, 2024. As a percentage of sales, gross profit for the nine months ended June 29, 2024, increased from 29.1% to 30.5%. This increase, reflected the impact of improved product and pricing mix along with ongoing productivity improvements and a stabilization of inflationary pressures across the majority of our input costs.

Operating Expenses

Operating Expenses increased $3.1 million, or 3.2%, to $97.7 million for the three months ended June 29, 2024. As a percentage of sales, operating expenses remained flat at 22.2%. As a percentage of sales, distribution expenses for the three months ended June 29, 2024, decreased from 10.4% to 10.2%, reflecting the benefits seen from our supply chain transformation initiatives. As a percentage of sales, marketing expenses for the three months ended June 29, 2024, remained flat at 7.4%. As a percentage of sales, general and administrative expenses for the three months ended June 29, 2024, increased slightly from 4.4% to 4.5%.

Operating Expenses increased $16.6 million, or 6.5%, to $272.9 million for the nine months ended June 29, 2024. As a percentage of sales, operating expenses increased from 23.0% to 23.8%. As a percentage of sales, distribution expenses for the nine months ended June 29, 2024, increased from 11.2% to 11.3%, with the increase driven by $4.8 million of one-time transition expenses related to the opening of our regional distribution centers, offset by the benefits seen from our supply chain transformation initiatives. As a percentage of sales, marketing expenses increased from 7.1% to 7.6%, with the increase largely driven by incremental licensing fees on new churro business and additional strategic promotional and marketing spend to support our core brands and new product launches. As a percentage of sales, general and administrative expenses increased slightly from 4.8% to 4.9%.

Other Income and Expense

Investment income increased by $0.2 million to $0.8 million and by $0.5 million to $2.3 million for the three and nine months, ended June 29, 2024, respectively. The increases were primary due to the improving interest rate environment in fiscal 2024.

Interest expense decreased by $0.8 million to $0.5 million and by $2.2 million to $1.5 million for the three months, and nine months, ended June 29, 2024, respectively, due to the decrease in the Company’s average outstanding borrowings on the Amended Credit Agreement for the three and nine-month periods ended June 29, 2024, as compared to the prior year periods.

Income Tax Expense

Income tax expense increased by $1.4 million, or 11.3%, to $14.1 million for the three months ended June 29, 2024. The effective tax rate was 27.9% as compared with 26.5% in the prior year period, with the slight increase largely attributable to the impact of a change in transfer pricing estimates and assumptions during the current year.

Income tax expense increased by $4.2 million, or 24.1%, to $21.5 million for the nine months ended June 29, 2024. The effective tax rate was 27.4% as compared with 26.4% in the prior year period with the slight increase largely attributable to the impact of a change in transfer pricing estimates and assumptions during the current year.

Net Earnings

Net earnings increased by $1.3 million, or 3.8%, for the three months ended June 29, 2024, due to the aforementioned items.

Net earnings increased by $8.4 million, or 17.4%, for the nine months ended June 29, 2024, due to the aforementioned items.

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.

Business Segment Discussion

We operate in three segments: Food Service, Retail Supermarket, and Frozen Beverages. The following table is a summary of sales and operating income, which is how we measure segment profit.

Food Service Segment Results

Sales to food service customers increased $9.5 million, or 3.7%, to $264.4 million for the three months ended June 29, 2024. Soft pretzels sales to food service customers decreased 6.3% to $59.5 million, with the decrease largely due to soft consumer trends, largely within the theater channel. Frozen novelties sales increased 9.1% to $51.7 million, led by an approximate 5% increase in Dippin’ Dots sales. Churro sales decreased 0.7% to $30.3 million reflecting lower theater and club channel sales, partially offset by new business growth with a major QSR customer. Sales of bakery products increased by 6.8% to $93.6 million, with the growth largely attributable to strong unit volume growth in cookies. Sales of handhelds increased by 25.3% to $21.3 million, with the increase attributable to strong volume increases with a core customer.

Sales of new products in the first twelve months since their introduction were $4.6 million in the quarter, driven primarily by the addition of churros to the menu of a major QSR customer. Sales in the quarter benefited minimally from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Food Service segment decreased $0.5 million in the quarter to $20.2 million, with the decrease primarily reflecting a slight shift in product mix.

Sales to food service customers increased $11.5 million, or 1.6%, to $723.0 million for the nine months ended June 29, 2024. Soft pretzels sales to food service customers decreased 4.2% to $164.0 million, with the decrease attributable to soft consumer trends seen throughout the fiscal year. Frozen novelties sales increased 4.9% to $100.5 million, led by an approximate 4% increase in Dippin’ Dots sales. Churro sales increased 9.9% to $89.2 million, with the increase largely driven by new business growth with a major QSR customer, partially offset by the lower theater and club channel sales in the current fiscal quarter. Sales of bakery products increased by 2.0% to $287.5 million, with the growth attributable to strong unit volume growth in cookies. Sales of handhelds increased by 3.2% to $62.9 million, with the increase attributable to the strong volume increases with a core customer in the current fiscal quarter more than offsetting some pricing declines seen earlier in the fiscal year related to the contractual pricing true-up of certain raw material ingredients.

Sales of new products in the first twelve months since their introduction were approximately $20.3 million for the nine months ended June 29, 2024, driven primarily by the addition of churros to the menu of a major QSR customer. Sales in the nine-month period benefited minimally from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Food Service segment increased $1.9 million in the nine months ended June 29, 2024, to $34.2 million, driven by sales growth as well as improved product mix and gross margin performance.

Retail Supermarket Segment Results

Sales of products to retail customers increased $7.6 million, or 12.4%, to $68.7 million for the three months ended June 29, 2024. Soft pretzel sales increased 8.2% to $11.1 million, with the increase largely attributable to our continued expansion of our core brands into retail. Frozen novelties sales increased 10.9% to $46.2 million, with the increase largely attributable to growth within our Dogsters and ICEE novelties. Biscuit sales decreased 5.8% to $4.8 million, and Handheld sales increased 69.9% to $7.6 million, with the increase in handheld sales largely driven by expanded placement of product with a major retailer. Sales of new products in retail supermarkets were minimal in the quarter. Sales in the quarter benefited minimally from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Retail Supermarkets segment increased $3.6 million in the quarter to $7.8 million, primarily driven by sales growth as well as improved product mix and gross margin performance.

Sales of products to retail customers increased $14.8 million, or 9.8%, to $165.4 million for the nine months ended June 29, 2024. Soft pretzel sales increased 12.9% to $46.0 million with the increase largely attributable to the incremental distribution of our core soft pretzel brands. Frozen novelties sales increased 2.9% to $82.7 million with the strong second and third fiscal quarter net sales performances more than offsetting the weaker performance seen in the first fiscal quarter. Biscuit sales decreased 4.4% to $18.1 million, and handheld sales increased 77.1% to $20.3 million with the increase in handheld sales largely driven by expanded placements of product with a major retailer. Sales of new products in retail supermarkets were minimal in the nine months ended June 29, 2024. Sales in the nine-month period benefited minimally from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Retail Supermarkets segment increased $7.6 million in the nine months ended June 29, 2024 to $13.4 million, primarily driven by sales growth as well as improved gross margin performance.

Frozen Beverages Segment Results

Frozen beverage and related product sales decreased $2.9 million, or 2.6%, in the three months ended June 29, 2024. Beverage-related sales decreased 1.1% to $72.1 million, with the decrease attributable to weakness across the theater channel as the industry recovers from the impacts of the prior year’s actor strike which led to fewer strong releases and lower attendance. Gallon sales were down approximately 6% for the three months, reflecting the weaker theater performance. Service revenue decreased 1.6% to $23.7 million, and machine revenue (primarily sales of frozen beverage machines) decreased 15.4% to $9.8 million, with the decrease in machine revenue the result of the lapping of a significant QSR rollout in the prior year.

Operating income in our Frozen Beverage segment decreased $1.3 million in the quarter to $22.1 million, with the decrease primarily attributable to the impact of the weaker sales.

Frozen beverage and related product sales increased $6.8 million, or 2.7%, in the nine months ended June 29, 2024. Beverage-related sales increased 3.5% to $158.7 million. Gallon sales were down approximately 3% for the nine months ended June 29, 2024, reflecting the weaker theater performance. Service revenue increased 1.4% to $71.5 million. Machine revenue (primarily sales of frozen beverage machines) increased 0.2% to $26.9 million with the machine revenue performance in the first fiscal quarter offsetting the comparative decrease noted in the current fiscal quarter.

Operating income in our Frozen Beverage segment increased $0.4 million in the nine months ended June 29, 2024 to $30.1 million.

Liquidity and Capital Resources

Although there are many factors that could impact our operating cash flow, most notably net earnings, we believe that our future operating cash flow, along with our borrowing capacity and our current cash and cash equivalent balances is sufficient to satisfy our cash requirements over the next twelve months and beyond, as well as to fund future growth and expansion.

Liquidity

As of June 29, 2024, we had $64.0 million of Cash and Cash Equivalents.

In December 2021, the Company entered into an amended and restated loan agreement (the “Credit Agreement”) with our existing banks which provided for up to a $50 million revolving credit facility repayable in December 2026.

On June 21, 2022, the Company entered into an amendment to the Credit Agreement, the “Amended Credit Agreement” which provided for an incremental increase of $175 million in available borrowings. The Amended Credit Agreement also includes an option to increase the size of the revolving credit facility by up to an amount not to exceed in the aggregate the greater of $225 million or $50 million, plus the Consolidated EBITDA of the Borrowers, subject to the satisfaction of certain terms and conditions.

Interest accrues, at the Company’s election at (i) the BSBY Rate (as defined in the Credit Agreement), plus an applicable margin, based upon the Consolidated Net Leverage Ratio, as defined in the Credit Agreement, or (ii) the Alternate Base Rate (a rate based on the higher of (a) the prime rate announced from time-to-time by the Administrative Agent, (b) the Federal Reserve System’s federal funds rate, plus 0.50% or (c) the Daily BSBY Rate, plus an applicable margin). The Alternate Base Rate is defined in the Credit Agreement.

The Credit Agreement requires the Company to comply with various affirmative and negative covenants, including without limitation (i) covenants to maintain a minimum specified interest coverage ratio and maximum specified net leverage ratio, and (ii) subject to certain exceptions, covenants that prevent or restrict the Company’s ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, alter its capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates, or amend its organizational documents. As of June 29, 2024, the Company is in compliance with all financial covenant terms of the Credit Agreement.

As of June 29, 2024, $12.0 million was outstanding under the Amended Credit Agreement with a weighted average interest rate of 6.34%. As of June 29, 2024, the amount available under the Amended Credit Agreement was $203.2 million, after giving effect to the outstanding letters of credit.

Recently Issued and Adopted Accounting Pronouncements

See Note 7 to the condensed consolidated financial statements included in this Form 10-Q for a discussion of recently adopted accounting guidance and other new accounting guidance.

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 30, 2023, as filed with the SEC on November 28, 2023.

Item 3.         Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth, in item 7a. “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended September 30, 2023, as filed with the SEC on November 28, 2023.

Item 4.         Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 29, 2024, 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, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject, from time to time, to certain legal proceedings and claims that arise from our business. As of the date of this Quarterly Report on Form 10-Q, the Company does not expect that any such proceedings will have a material adverse effect on the Company’s financial position or results of operations.

Item 1A. Risk Factors

For information on risk factors, please refer to “Risk Factors” in Part I, Item 1A of the Company’s Form 10-K for the fiscal year ended September 30, 2023. The risks identified in that report have not changed in any material respect.

Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds

In April 2024, we withheld 36 shares to cover taxes associated with the vesting of certain restricted stock units held by officers and employees.

Item 6. Exhibits

Exhibit No.

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.