Item 2.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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Liquidity and Capital Resources
Our current cash and cash equivalents balances 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 $.39 per share of its common stock payable on April 6, 2016, to shareholders of record as of the close of business on March 15, 2016.
In our fiscal year ended September 26, 2015, we purchased and retired 72,698 shares of our common stock at a cost of $8,011,118. In the three months ended March 26, 2016 we purchased and retired 80,565 shares at a cost of $8,642,887 and in the six months ended March 26, 2016, we purchased and retired 107,648 shares at a cost of $11,758,326. On November 8, 2012 the Company’s Board of Directors authorized the purchase and retirement of an additional 500,000 shares of the Company’s common stock; 81,827 shares remain to be purchased under this authorization.
In the three months ended March 26, 2016 and March 28, 2015 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 $40,000 in accumulated other comprehensive loss in the 2016 second quarter and an increase of $914,000 accumulated other comprehensive loss in the 2015 second quarter. In the six month period, fluctuations in the valuation of the Mexican and Canadian currencies and the resulting translation of the net assets of our Mexican and Canadian subsidiaries caused an increase of $680,000 in accumulated other comprehensive loss in the 2016 six month period and an increase of $2,869,000 in accumulated other comprehensive loss in the 2015 six month period.
Our general-purpose bank credit line which expires in December 2016 provides for up to a $50,000,000 revolving credit facility. The agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. There were no outstanding balances under this facility at March 26, 2016.
Results of Operations
Net sales increased $4,702,000 or 2% to $229,710,000 for the three months and $14,800,000 or 3% to $452,560,000 for the six months ended March 26, 2016 compared to the three and six months ended March 28, 2015.
FOOD SERVICE
Sales to food service customers increased $3,461,000 or 2% in the second quarter to $148,723,000 and increased $6,652,000 or 2% for the six months. Soft pretzel sales to the food service market increased 4% to $42,834,000 in the second quarter and were essentially unchanged at $81,533,000 in the six months with sales increases and decreases in the second quarter spread among our customers. Soft pretzel sales to restaurant chains were marginally lower compared to last year’s quarter; for the prior two quarters, soft pretzel sales to restaurant chains were down about 10% compared to the prior year.
Frozen juices and ices sales decreased 1% to $10,971,000 in the three months and were essentially unchanged at $19,286,000 in the six months. Churro sales to food service customers decreased 6% to $13,697,000 in the second quarter with about 55% of the decline coming from lower sales to one customer and were essentially unchanged at $27,633,000 for the six months.
Sales of bakery products decreased $367,000 or about 1/2 of 1% in the second quarter to $70,424,000 and increased $1,803,000 or 1% for the six months with increases and decreases spread across our customer base.
Sales of handhelds increased $2,134,000 or 42% in the quarter and $3,122,000 or 31% for the six months with 90% of the increase coming from sales to one customer. Sales of funnel cake increased $1,087,000 or 48% in the quarter and $2,096,000 or 53% for the six months primarily due to increased sales to school food service.
Sales of new products in the first twelve months since their introduction were approximately $4.7 million in this quarter and $6.9 million in the six months. Price increases accounted for approximately $1.9 million of sales in the quarter and $5.9 million in the six months and net volume increases, including new product sales as defined above, accounted for approximately $1.6 million of sales in the quarter and $800,000 in the six months.
Operating income in our Food Service segment increased from $15,649,000 to $18,520,000 in the quarter and increased from $31,142,000 to $34,422,000 in the six months. Operating income for both periods benefitted from lower marketing expenses, lower ingredient costs, increased volume in our handhelds business, pricing and more favorable product mix.
RETAIL SUPERMARKETS
Sales of products to retail supermarkets decreased $1,833,000 or 6% to $26,700,000 in the second quarter and decreased $2,960,000 or 6% to $47,960,000 in the six months. Soft pretzel sales for the second quarter were down 10% to $9,735,000 and were down 8% to $18,475,000 for the six months. About one quarter of the pretzel sales decline in both periods was due to the discontinuance of SUPERPRETZEL BAVARIAN Soft Pretzel Bread and lower sales to one customer accounted for roughly 90% of the balance of the decline in both periods. Sales of frozen juices and ices decreased $815,000 or 6% to $12,907,000 in the second quarter and were down 4% to $21,971,000 for the six months. Increased trade spending to introduce new PHILLY SWIRL products and general declines in sales of our existing PHILLY SWIRL products accounted for all of the sales decline in frozen juices and ices. Coupon redemption costs, a reduction of sales, which were higher a year ago supporting the introduction of the SUPERPRETZEL BAVARIAN Soft Pretzel Bread, decreased 45% or about $416,000 for the quarter and decreased 46% to $1,085,000 for the six months. Handheld sales to retail supermarket customers decreased 25% to $3,433,000 in the quarter and decreased 23% to $7,308,000 for the six months. Roughly 1/2 of the handhelds sales decline in the quarter and six months was lower sales of previously existing products and 1/2 resulted from increased trade spending to introduce PILLSBURY mini dessert pies.
Sales of new products in the second quarter were approximately $1.7 million and were $2.0 million for the six months. Price increases accounted for approximately $600,000 of sales in the quarter and $1.3 million in the six months and net volume decreases including new product sales as defined above and net of decreased coupon costs, lowered sales by approximately $1.8 million in this quarter and $4.0 million in the six months. Operating income in our Retail Supermarkets segment decreased from $2,535,000 to $2,469,000 in the quarter primarily because of approximately $1 million of added increased trade spending related to the introduction of OREO churros, PILLSBURY mini dessert pies and new PHILLY SWIRL products and increased from $3,201,000 to $3,559,000 in the six months primarily because of lower coupon expenses.
FROZEN BEVERAGES
Frozen beverage and related product sales increased 6% to $54,287,000 in the second quarter and increased 11% to $109,125,000 in the six month period. Beverage related sales alone were up 6% to $30,544,000 in the second quarter and were up 8% to $58,614,000 in the six month period. Gallon sales were up 6% for the three months and were up 8% for the six month period primarily due to higher sales to movie theaters. Service revenue increased 8% to $16,944,000 in the second quarter and increased 12% to $34,707,000 for the six month period with sales increases and decreases spread throughout our customer base.
Sales of beverage machines, which tend to fluctuate from year to year while following no specific trend, were $6,237,000, a decrease of 1% from last year’s second quarter and were $14,969,000, or 24% higher than last year, in the six month period. The approximate number of company owned frozen beverage dispensers was 54,500 and 53,100 at March 26, 2016 and September 26, 2015, respectively. Operating income in our Frozen Beverage segment decreased to $2,290,000 in this quarter and $3,658,000 for the six months compared to $3,621,000 and $4,072,000 in last years’ periods, respectively. Higher group health insurance costs of about $600,000 and a bad debt write off of $200,000 contributed to the lower operating income in both periods.
CONSOLIDATED
Gross profit as a percentage of sales was 29.93% in the three month period this year and 29.75% last year. For the six month period, gross profit as a percentage of sales was 29.30% this year and 29.25% a year ago. Gross profit percentage benefitted from lower ingredient costs, pricing, increased handhelds business and more favorable product mix in our food service business offset by higher costs in our frozen beverages business and increased trade spending related to the introduction of OREO churros, PILLSBURY mini dessert pies and new PHILLY SWIRL products in our retail supermarket business.
Total operating expenses increased $325,000 in the second quarter and as a percentage of sales decreased from 20.06% percent to 19.79%. For the first half, operating expenses increased $1,309,000, and as a percentage of sales decreased from 20.47% to 20.10%. Marketing expenses were 8.9% of sales in both year’s quarter and decreased from 9.0% to 8.8% of sales in the six months. Distribution expenses were 7.6% of sales in this year’s quarter and were 7.8% of sales in last year’s quarter, and were 7.9% in this year’s six month period and 8.0% of sales last years’ six month period. Administrative expenses were 3.3% of sales this quarter and 3.4% for the six month period as compared to 3.3% of sales last year in the second quarter and 3.4% for the six months.
Operating income increased $1,474,000 or 7% to $23,279,000 in the second quarter and increased $3,224,000 or 8% to $41,639,000 in the first half as a result of the aforementioned items.
Investment income decreased by $301,000 and $495,000 in the second quarter and six months, respectively, due primarily to lower yields on our investments and losses on sales as we have decreased our holdings of mutual funds and reinvested the proceeds into corporate bonds.
The effective income tax rate has been estimated at 35.7% and 36.5% for the quarter this year and last year, respectively and 34.7% and 36.8% for the six months this year and last year, respectively. The effective income tax rate for the three months ended December 26, 2015 has been revised to 33.4% as a result of our early adoption this quarter of
Accounting Standards Update NO. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this new standard, $499,000 of first quarter income tax benefit was recognized via a reduction of amounts previously recorded as additional paid in capital upon exercise of stock options. In the current fiscal quarter, we have realized a tax benefit of $89,000 upon similar exercises of stock options. We are estimating an effective income tax rate of approximately 35 1/4-35 1/2% for the year, which includes approximately 3/4 of 1 percentage point decrease because of the above referenced change in accounting.
Net earnings increased $951,000 or 6% in the current three month period to $15,588,000 and were $28,566,000 for the six months this year compared to $25,893,000 for the six month period last year, an increase of 10%.
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.