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J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

The accompanying notes are an integral part of these statements.

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands, except per share amounts)

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)

The allocation of the purchase price to major classes of assets and liabilities was completed as of September 28, 2024. The purchase price allocation includes $ million of Inventory acquired and $ million of Intangible assets. Intangible assets include an indefinite lived Trade name with a fair value of $ million, and an amortizing Customer relationship intangible asset with a fair value of $ million. The Customer relationship intangible asset will amortize over a useful life of years. The acquisition of Thinsters was accounted for using the acquisition method of accounting.

The financial results of Thinsters have been included in our consolidated financial statements since the date of the acquisition and are reported as part of our Food Service segment. Sales and net earnings of Thinsters were not deemed to be material for the three months ended December 28, 2024.

The singular performance obligation of our customer contracts for time and material repair and maintenance equipment service is the performance of the repair and maintenance with revenue being recognized at a point-in-time when the repair and maintenance is completed.

The singular performance obligation of our customer repair and maintenance equipment service contracts is the performance of the repair and maintenance with revenue being recognized over the time the service is expected to be performed. Our customers are billed for service contracts in advance of performance and therefore we have contract liability on our balance sheet.

Significant Payment Terms

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

Shipping

All amounts billed to customers related to shipping and handling are classified as revenues; therefore, we recognize revenue for shipping and handling fees at the time the products are shipped or when services are performed. The cost of shipping products to the customer is recognized at the time the products are shipped to the customer and our policy is to classify them as Distribution expenses.

Variable Consideration

In addition to fixed contract consideration, our contracts include some form of variable consideration, including sales discounts, trade promotions and certain other sales and consumer incentives, including rebates and coupon redemptions. In general, variable consideration is treated as a reduction in revenue when the related revenue is recognized. Depending on the specific type of variable consideration, we use the most likely amount method to determine the variable consideration. We believe there will be no significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. We review and update our estimates and related accruals of variable consideration each period based on historical experience. Our recorded liability for allowances, end-user pricing adjustments and trade spending was approximately $ million at December 28, 2024 and $ million at September 28, 2024.

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:

Additions to contract liability

Amounts recognized as revenue

Ending Balance

Disaggregation of Revenue

See Note 11 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 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 estimated credit losses was $ million and $ million on December 28, 2024 and September 28, 2024, 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 December 28, 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 December 30, 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

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 three months ended December 28, 2024, or during the three months ended December 30, 2023.

During the three months ended December 28, 2024, the Company issued service share units (“RSU”)’s. Each RSU entitles the awardee to one share of common stock upon vesting. During the three months ended December 30, 2023, the Company issued RSU’s. 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.

During the three months ended December 28, 2024, the Company also issued performance share units (“PSU”)’s. During the three months ended December 30, 2023, the Company issued 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.

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 for the three months ended December 28, 2024 was %, which is higher than the company’s % statutory tax rate primarily as a result of state income taxes, and the tax effect in foreign jurisdictions. Our effective tax rate was % in last fiscal year’s quarter, which is higher than the company’s % statutory tax rate primarily as a result of state income taxes, and the tax effect in foreign jurisdictions.

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 December 28, 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 December 28, 2024, and as of September 28, 2024, there was no outstanding balance under the Amended Credit Agreement. As of December 28, 2024, and as of September 28, 2024, the amount available under the Amended Credit Agreement was $ million, after giving effect to the outstanding letters of credit.

Raw materials

Packaging materials

Equipment parts and other

Total Inventories

Retail Supermarkets

The primary products sold to the retail supermarket channel are soft pretzel products – including SUPERPRETZEL and AUNTIE ANNE’S, frozen novelties including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, WHOLE FRUIT frozen fruit bars and sorbet, DOGSTERS ice cream style treats for dogs, 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

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

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 December 28, 2024 and December 30, 2023 was $ million and $ million, respectively.

Estimated amortization expense for the next five fiscal years is approximately $ million in 2025 (excluding the three months ended December 28, 2024), $ million in 2026, $ million in 2027, and $ million in both 2028 and 2029.

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.

Goodwill

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

Retail Supermarket

Frozen Beverages

Total goodwill

We have a self-insured medical plan which covers approximately of our employees. We record a liability for incurred but not yet reported or paid claims based on our historical experience of claim payments and a calculated lag time period. Our recorded liability at December 28, 2024 and September 28, 2024 was $ million and $ million, respectively.

On August 19, 2024, we experienced a fire at our Holly Ridge plant in North Carolina. The building was damaged as a result of the fire, and plant operations were interrupted. We maintain property, general liability and business interruption insurance coverage. Based on the provisions of our insurance policies, we record estimated insurance recoveries for fire related costs for which recovery is deemed to be probable.

In the three months ended September 28, 2024, we recorded $ million of fire related costs, for all of which recovery was deemed to be probable, and we received $ million of insurance proceeds for inventory, fixed asset losses, and other fire related costs. Additionally, we recorded an insurance receivable, net of advance proceeds received, for other fire related costs for which recovery was deemed probable of $ million, which was recorded in prepaid expenses and other, in the Consolidated Balance Sheet as of September 28, 2024.

In the three months ended December 28, 2024, we recorded an additional $ million of fire related costs, for all of which recovery was deemed to be probable, and we received $ million of insurance proceeds for inventory and business interruption losses. Additionally, we recorded a gain of $ million in cost of goods sold in the Consolidated Statement of Earnings representing the proceeds received in excess of losses recognized and we recorded an insurance receivable, net of advance proceeds received, for other fire related costs for which recovery was deemed probable of $ million, which was recorded in prepaid expenses and other, in the Consolidated Balance Sheet as of December 28, 2024.

Ending balance

Accumulated other comprehensive loss

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 December 28, 2024, the weighted-average discount rate of our operating and finance leases was % and %, respectively. As of September 28, 2024, 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 December 28, 2024, the maturities of lease liabilities were as follows:

2026

2027

2028

2029

Thereafter

Total minimum payments

Less amount representing interest

Present value of lease obligations

As of December 28, 2024 the weighted-average remaining term of our operating and finance leases was years and years, respectively.

As of September 28, 2024 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 in the three months ended December 28, 2024 and $ million in the three months ended December 30, 2023.

Of the amounts paid to NFI, the amount related to labor management services performed by NFI was $ million in the three months ended December 28, 2024 and $ million in the three months ended December 30, 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 December 28, 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 28, 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. Of the amounts paid to NFI, the Company made lease payments totaling $ million in both of the three months ended December 28, 2024 and December 30, 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. In the three months ended December 28, 2024 and December 30, 2023, the Company made payments to NFI that were passed through to the third party distribution and shipping vendors totaling $ million and $ million, respectively.

As of December 28, 2024, and September 28, 2024, related party trade payables of approximately $ million and $ million, respectively, were recorded as accounts payable.

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.

AMC Global

We incur related party expenses for attitudinal and research services with AMC Global, a global marketing research company. The husband of our director, Marjorie Roshkoff, is CEO and owner of AMC Global. In the three months ended December 28, 2024, the Company did not incur any expenses with AMC Global, and in the three months ended December 30, 2023, the Company paid AMC Global $ for these expenses.

Additionally, the Company pays board advisory consulting fees to the husband of our director, Marjorie Roshkoff. In both the three months ended December 28, 2024 and December 30, 2023, the Company paid $ for these board advisory consulting fees.

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 supply chain efficiency projects, including 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 28, 2024.

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.

Business Trends and Strategy

Our results are impacted by macroeconomic and demographic trends and changes in consumer behavior. The U.S. economy has experienced economic volatility and uncertainty in recent years, which has had, and we expect might continue to have, an impact on consumer behavior. Consumer spending may continue to be impacted by levels of discretionary income and the impact of that on the consumer’s decisions making around their purchases. In addition, inflation continues to impact our business and fluctuating raw material costs may continue to impact the costs of our products.

To help combat these potential headwinds, we strategically look to improve our operational efficiencies and margins, as well as expand our growth opportunities across our various channels and customers. Some recent examples of implementing these strategies include:

RESULTS OF OPERATIONS – Three months ended December 28, 2024

The following discussion provides a review of results for the three months ended December 28, 2024 as compared with the three months ended December 30, 2023.

Net Sales

Net sales increased $14.3 million, or 4.1%, to $362.6 million for the three months ended December 28, 2024. Revenue increases were seen in each of the Company’s business segments. Organic sales growth was driven by growth within the Company’s Retail Supermarket and Frozen Beverages business segments. We also saw strong growth across most of our core products in the Food Service business segment, in addition to contractual pricing true-ups on costing of certain raw material ingredients, which more than offset some volume decreases in certain product categories.

Gross Profit

Gross Profit decreased by $0.7 million, or 0.7%, to $93.9 million for the three months ended December 28, 2024. As a percentage of sales, gross profit decreased from 27.2% to 25.9%. This decrease reflected negative margin impacts from comparatively rising raw material costs and other inflationary pressures that outweighed recent pricing actions. The cost of key ingredients including eggs, chocolates, and fruit fillings have experienced significant inflationary increases, with that headwind partially offset by inflationary declines in dairy, flour, and cheese costs. Additionally, mix changes within our bakery business, as well as the loss of some limited time offer churro volumes from prior year, and some hurricane related impacts, all negatively impacted current quarter gross profit when compared to prior year quarter.

Operating Expenses

Operating Expenses increased $2.8 million, or 3.3%, to $87.7 million for the three months ended December 28, 2024. As a percentage of sales, operating expenses decreased from 24.4% to 24.2%. As a percentage of sales, distribution expenses decreased from 11.6% to 10.9%, with the decrease driven by the benefits of our strategic initiatives to improve logistics management and increase efficiency across our distribution network and supply chain, combined with the impact of $2.2 million of non-recurring expenses in the prior year for start-up costs related to our regional distribution center supply chain transformation. As a percentage of sales, marketing expenses remained flat at 7.9%, and general and administrative expenses remained flat at 5.2%.

Other Income and Expense

Investment income increased $0.2 million or 30% to $1.0 million for the three months ended December 28, 2024 due to higher average cash balances and higher interest rates on foreign cash balances. Interest expense decreased by $0.3 million, or 62%, to $0.2 million for the three months ended December 28, 2024 due to the decrease in the Company’s average outstanding borrowings on the Amended Credit Agreement for the three months ended December 28, 2024, as compared to the prior year period.

Income Tax Expense

Our effective tax rate was 27% for the three months ended December 28, 2024, as well as for the three months ended December 30, 2023.

Net Earnings

Net earnings decreased by $2.1 million, or 29.4%, to $5.1 million for the three months ended December 28, 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 $10.3 million, or 4.5%, to $238.9 million for the three months ended December 28, 2024. Soft pretzels sales to food service customers increased 4.8% to $52.5 million, with the increase largely attributable to volume increases seen within the category on our key brands. Frozen novelties sales increased 9.8% to $23.1 million, with the increase largely attributable to strong Dippin’ Dots sales growth in the quarter compared with the prior year quarter. Churro sales decreased 9.2% to $25.5 million with the decrease largely driven by the lapping of the benefit of limited time offer churro volumes for a quick serve restaurant in prior year, partially offset by new business growth. Sales of bakery products increased by 6.6% to $108.7 million, with the increase largely attributable to contractual pricing true-ups on costing of certain raw material ingredients, as well as strong volume growth in our cookie portfolio, offset somewhat by volume declines in our pie portfolio related to the loss of some seasonal business with a declining margin profile that we bid on, but did not retain. Sales of handhelds increased 7.5% to $23.7 million, with the increase attributable to contractual pricing true-ups on costing of certain raw material ingredients, as well as some volume increases seen on our core handhelds.

Sales of new products in the first twelve months since their introduction were approximately $0.7 million in the three months ended December 28, 2024. Pricing increases, primarily contractual true-ups, had a modest impact on segment sales in the quarter, and more than offset a slight net volume decrease.

Operating income in our Food Service segment decreased $4.3 million in the quarter to $1.7 million, for the three months ended December 28, 2024, which reflected gross margin pressures due mostly to the rising raw material costs and other inflationary pressures, outweighing the benefit from price increases, as well as an unfavorable product mix. The unfavorable product mix reflected the loss of some seasonal business within bakery with a declining margin profile that we bid on, but did not retain, as well as lower churro volumes as we lapped the benefit from a limited time offer with a quick serve restaurant in the prior year quarter. The unfavorable gross margin pressures were slightly offset by a decrease in distribution expenses related to the benefits of our strategic initiatives to improve logistics management and increase efficiency across our distribution network and supply chain, combined with the impact of the non-recurring expenses in the prior year for start-up costs related to our regional distribution center supply chain transformation.

Retail Supermarket Segment Results

Sales of products to retail customers increased $1.0 million, or 2.2%, to $44.7 million for the three months ended December 28, 2024. Soft pretzel sales decreased 7.4% to $17.1 million with the decrease largely attributable to a temporary issue with a major retail customer’s ordering system which was resolved in December. Frozen novelties sales increased 25.3% to $16.1 million with the increase primarily tied to volume increases seen amongst the majority of our retail frozen novelty brands. Biscuit sales remained relatively flat at $7.0 million, and handheld sales decreased 6.8% to $5.1 million, with the decrease in handheld sales primarily attributable to the impact of the fire at our Holly Ridge location, and delays that were experienced in the production of our retail handhelds during the quarter. Sales of new products in retail supermarkets were minimal in the quarter. Price increases had a minimal impact on retail supermarket sales in the quarter.

Operating income in our Retail Supermarkets segment decreased slightly by $0.1 million in the quarter to $0.4 million.

Frozen Beverages Segment Results

Frozen beverage and related product sales increased $3.1 million, or 4.0%, in the three months ended December 28, 2024. Beverage sales increased 6.4% to $44.7 million in the three months ended December 28, 2024, with the increase driven primarily by a 10% increase in gallon sales over that period, offset slightly by a less favorable sales mix and some foreign exchange related headwinds. Service revenue decreased 3.7% to $23.6 million, and machine revenue (primarily sales of frozen beverage machines) increased 13.0% to $10.0 million driven by strong growth from theater and convenience customers.

Operating income in our Frozen Beverage segment increased $1.0 million in the quarter to $4.2 million as strong sales drove leverage across the business and operating expenses were well managed.

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, 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 December 28, 2024, we had $73.6 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 December 28, 2024, the Company is in compliance with all financial covenants of the Credit Agreement.

As of December 28, 2024, there was no outstanding balance under the Amended Credit Agreement. As of December 28, 2024, the amount available under the Amended Credit Agreement was $212.7 million, after giving effect to the $12.3 million of letters of credit outstanding.

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 28, 2024, as filed with the SEC on November 26, 2024.

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 28, 2024, as filed with the SEC on November 26, 2024.

Item 4.         Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15( e) and 15d-15( e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 28, 2024. The term “disclosure controls and procedures,” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosures. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of December 28, 2024 our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting described below.

Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weakness described below, management has concluded that the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.

Material Weakness in Internal Control Over Financial Reporting

As previously disclosed, management identified a material weakness related to ineffective information technology general controls (ITGCs), including certain controls over logical access and change management. As a result, certain business process controls that are dependent on the ineffective ITGCs, or rely on the data produced from systems impacted by the ineffective ITGCs, were also deemed ineffective.

Management’s Remediation Plan and Status

Our management is committed to maintaining a strong internal control environment. In response to the identified material weakness above, management has already taken steps to substantially remediate this material weakness and will continue to take further steps until such remediation is complete. Remediation efforts include ensuring that change management and user access controls are performed timely. Our remediation plan also includes: (i) enhancing processes around reviewing privileged access to key financial systems, (ii) strengthening change management procedures, (iii) expanding the management and governance over ITGCs, (iv) enhancing existing access management procedures and ownership.

As management continues to evaluate and work to improve our disclosure controls and procedures and internal control over financial reporting, we may take additional measures to address these control deficiencies or modify certain remediation measures described above. We anticipate that the foregoing efforts, when implemented and tested for a sufficient period of time, will remediate the material weakness described above.

Changes in Internal Control Over Financial Reporting

Other than continuing to make progress on the ongoing remediation efforts described above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 28, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s 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 28, 2024. 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 November 2024, we withheld 2,451 shares to cover taxes associated with the vesting of certain restricted stock units held by officers and employees.

Item 6.         Exhibits

Exhibit No.

* Compensatory Plan

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.