Note
1
|
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form
10
-Q and Rule
10
-
01
of Regulation S-
X.
They do
not
include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been
no
material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form
10
-K for the year ended
September 29, 2018.
|
|
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows.
|
|
The results of operations for the
three
months ended
December 29, 2018
and
December 30, 2017
are
not
necessarily indicative of results for the full year. Sales of our frozen beverages and frozen juice bars and ices are generally higher in the
third
and
fourth
quarters due to warmer weather.
|
|
Certain prior year financial statement amounts have been reclassified to be consistent with the presentation for the current year.
|
|
While we believe that the disclosures presented are adequate to make the information
not
misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report on Form
10
-K for the fiscal year ended
September 29, 2018.
|
Note
2
Revenue Recognition
We adopted the new revenue recognition guidance on the
first
day of our fiscal
2019
year using a modified retrospective approach; however, we did
not
record a cumulative-effect adjustment from initially applying the standard as the adoption did
not
have a material impact on our financial position or results of operations. We completed a review of customer contracts and evaluated the impact of the new standard on certain common practices currently employed by us. We also finalized our assessment of the impact on our accounting policies, processes, system requirements, internal controls and disclosures.
When Performance Obligations Are Satisfied
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
The singular performance obligation of our customer contracts for product and machine sales is determined by each individual purchase order and the respective products ordered, with revenue being recognized at a point-in-time when the obligation under the terms of the agreement is satisfied and product control is transferred to our customer. Specifically, control transfers to our customers when the product is delivered to, installed or picked up by our customers based upon applicable shipping terms, as our customers can direct the use and obtain substantially all of the remaining benefits from the product at this point in time. The performance obligations in our customer contracts for product are generally satisfied within
30
days.
The singular performance obligation of our customer contracts for time and material repair and maintenance equipment service is the performance of the repair and maintenance with revenue being recognized at a point-in-time when the repair and maintenance is completed.
The singular performance obligation of our customer repair and maintenance equipment service contracts is the performance of the repair and maintenance with revenue being recognized over the time the service is expected to be performed. Our customers are billed for service contracts in advance of performance and therefore we have contract liability 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.
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:
|
|
(in thousands)
|
|
|
|
|
|
September 29, 2018
balance
|
|
$
|
1,999
|
|
Additions to contract liability
|
|
|
372
|
|
Amounts recognized as revenue
|
|
|
448
|
|
December 29, 2018
balance:
|
|
$
|
1,923
|
|
Disaggregation of Revenue
See Note
9
for disaggregation of our net sales by class of similar product and type of customer.
Allowance for Doubtful Receivables
We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors. The allowance for doubtful receivables was
$490,000
and
$400,000
at
December 29, 2018
and
September 29, 2018,
respectively.
Note
3
|
Depreciation of equipment and buildings is provided for by the straight-line method over the assets’ estimated useful lives. Amortization of improvements is provided for by the straight-line method over the term of the lease or the assets’ estimated useful lives, whichever is shorter. Licenses and rights, customer relationships and non-compete agreements arising from acquisitions are amortized by the straight-line method over periods ranging from
2
to
20
years. Depreciation expense was
$10,774,000
and
$11,152,000
for the
three
months ended
December 29, 2018
and
December 30, 2017,
respectively.
|
Note
4
|
Basic earnings per common share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into consideration the potential dilution that could occur if securities (stock options) or other contracts to issue common stock were exercised and converted into common stock. Our calculation of EPS is as follows:
|
|
|
Three Months Ended December 29, 2018
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings available to common stockholders
|
|
$
|
17,526
|
|
|
|
18,765
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
-
|
|
|
|
132
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings available to common stockholders plus assumed conversions
|
|
$
|
17,526
|
|
|
|
18,897
|
|
|
$
|
0.93
|
|
500
anti-dilutive shares have been excluded in the computation of EPS for the
three
months ended
December 29, 2018.
|
|
Three Months Ended December 30, 2017
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings available to common stockholders
|
|
$
|
36,249
|
|
|
|
18,666
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
-
|
|
|
|
112
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings available to common stockholders plus assumed conversions
|
|
$
|
36,249
|
|
|
|
18,778
|
|
|
$
|
1.93
|
|
1,000
anti-dilutive shares have been excluded in the computation of EPS for the
three
months ended
December 30, 2017.
Note
5
|
At
December 29, 2018,
the Company has
three
stock-based employee compensation plans. Share-based compensation expense was recognized as follows:
|
|
|
Three months ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
629
|
|
|
$
|
615
|
|
Stock purchase plan
|
|
|
69
|
|
|
|
200
|
|
Restricted stock issued to an employee
|
|
|
-
|
|
|
|
1
|
|
Total share-based compensation
|
|
$
|
698
|
|
|
$
|
816
|
|
|
|
|
|
|
|
|
|
|
The above compensation is net of tax benefits
|
|
$
|
274
|
|
|
$
|
137
|
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in fiscal
2019
first
three
months: expected volatility of
16.8%;
risk-free interest rate of
3.0%;
dividend rate of
1.2%
and expected lives of
5
years.
During the fiscal year
2019
three
month period, the Company granted
1,000
stock options. The weighted-average grant date fair value of these options was
$27.09.
During the fiscal year
2018
three
month period, the Company granted
1,500
stock options. The weighted-average grant date fair value of these options was
$23.14.
Expected volatility is based on the historical volatility of the price of our common shares over the past
51
months for
5
year options and
10
years for
10
year options. We use historical information to estimate expected life and forfeitures within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.
Note
6
|
We account for our income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.
|
Additionally, we recognize a liability for income taxes and associated penalties and interest for tax positions taken or expected to be taken in a tax return which are more likely than
not
to be overturned by taxing authorities (“uncertain tax positions”). We have
not
recognized a tax benefit in our financial statements for these uncertain tax positions.
The total amount of gross unrecognized tax benefits is
$399,000
and
$394,000
on
December 29, 2018
and
September 29, 2018,
respectively, all of which would impact our effective tax rate over time, if recognized. We recognize interest and penalties related to uncertain tax positions as a part of the provision for income taxes. As of
December 29, 2018
and
September 29, 2018,
respectively, the Company has
$264,000
and
$259,000
of accrued interest and penalties.
In addition to our federal tax return and tax returns for Mexico and Canada, we file tax returns in all states that have a corporate income tax with virtually all open for examination for
three
to
four
years.
Net earnings for last year’s quarter benefited from a
$20.9
million gain on the remeasurement of deferred tax liabilities which was partially offset by a
$1.2
million provision for the
one
time repatriation tax, both of which resulted from the Tax Cuts and Jobs Act enacted in in
December 2017.
Excluding the deferred tax gain and the
one
time repatriation tax, our effective tax rate was
28.6%
in last year’s quarter. Net earnings in this year’s quarter benefitted by a reduction of approximately
$900,000
in tax as the provision for the
one
time repatriation tax was reduced as the amount recorded last year was an estimate. Excluding the reduction in the provision for the
one
time repatriation tax, our effective tax rate was
28.0%
in this year’s quarter.
Note
7
|
In
May
2014
and in subsequent updates, the FASB issued guidance on revenue recognition which requires that we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services. We performed a review of the requirements of the new revenue standard, including reviewing customer contracts and applying the
five
-step model of this new guidance to each contract category we identified. We adopted this guidance on the
first
day of our fiscal
2019
year using a modified retrospective approach; however, we did
not
record a cumulative-effect adjustment from initially applying the standard as the adoption did
not
have a material impact on our financial position or results of operations. See additional revenue recognition disclosures in Note
2.
|
In
January 2016,
the FASB issued guidance which requires an entity to measure equity investments at fair value with changes in fair value recognized in net income , to use the price that would be received by a seller when measuring the fair value of financial instruments for disclosure purposes, and which eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Under prior guidance, changes in fair value of equity investments available for sale were recognized in Stockholders’ Equity. We adopted this guidance on the
first
day of our
2019
fiscal year. The adoption of this guidance on our consolidated financial statements is
not
material.
In
February 2016,
the FASB issued guidance on lease accounting which requires that an entity recognize most leases on its balance sheet. The guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as “capital” and “operating” leases for lessees. This guidance is effective for our fiscal year ended
September 2020.
While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities. We anticipate that the impact of this guidance on our financial statements will be material.
Note
8
|
Inventories consist of the following:
|
|
|
December 29,
|
|
|
September 29,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
55,703
|
|
|
$
|
52,221
|
|
Raw materials
|
|
|
23,733
|
|
|
|
23,173
|
|
Packaging materials
|
|
|
10,392
|
|
|
|
9,780
|
|
Equipment parts and other
|
|
|
28,014
|
|
|
|
27,710
|
|
Total Inventories
|
|
$
|
117,842
|
|
|
$
|
112,884
|
|
Note
9
|
We principally sell our products to the food service and retail supermarket industries. Sales and results of our frozen beverages business are monitored separately from the balance of our food service business because of different distribution and capital requirements. We maintain separate and discrete financial information for the
three
operating segments mentioned above which is available to our Chief Operating Decision Makers.
|
Our
three
reportable segments are Food Service, Retail Supermarkets and Frozen Beverages. All inter-segment net sales and expenses have been eliminated in computing net sales and operating income. These segments are described below.
Food Service
The primary products sold by the food service group are soft pretzels, frozen juice treats and desserts, churros, dough enrobed handheld products and baked goods. Our customers in the food service industry include snack bars and food stands in chain, department and discount stores; malls and shopping centers; fast food outlets; stadiums and sports arenas; leisure and
theme parks; convenience stores; movie theatres; warehouse club stores; schools, colleges and other institutions. Within the food service industry, our products are purchased by the consumer primarily for consumption at the point-of-sale.
Retail Supermarkets
The primary products sold to the retail supermarket channel are soft pretzel products – including SUPERPRETZEL, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, WHOLE FRUIT frozen fruit bars and sorbet, PHILLY SWIRL cups and sticks, ICEE Squeeze-Up Tubes and dough enrobed handheld products including PATIO burritos. Within the retail supermarket channel, our frozen and prepackaged products are purchased by the consumer for consumption at home.
Frozen Beverages
We sell frozen beverages and related products to the food service industry primarily under the names ICEE, SLUSH PUPPIE and PARROT ICE in the United States, Mexico and Canada. We also provide repair and maintenance service to customers for customers’ owned equipment.
The Chief Operating Decision Maker for Food Service and Retail Supermarkets and the Chief Operating Decision Maker for Frozen Beverages monthly review detailed operating income statements and sales reports in order to assess performance and allocate resources to each individual segment. Sales and operating income are key variables monitored by the Chief Operating Decision Makers and management when determining each segment’s and the company’s financial condition and operating performance. In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment. Information regarding the operations in these
three
reportable segments is as follows:
|
|
Three months ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Sales to External Customers:
|
|
|
|
|
|
|
|
|
Food Service
|
|
|
|
|
|
|
|
|
Soft pretzels
|
|
$
|
48,991
|
|
|
$
|
49,021
|
|
Frozen juices and ices
|
|
|
7,527
|
|
|
|
7,184
|
|
Churros
|
|
|
15,135
|
|
|
|
14,592
|
|
Handhelds
|
|
|
8,802
|
|
|
|
11,362
|
|
Bakery
|
|
|
102,109
|
|
|
|
94,933
|
|
Other
|
|
|
5,326
|
|
|
|
5,172
|
|
Total Food Service
|
|
$
|
187,890
|
|
|
$
|
182,264
|
|
|
|
|
|
|
|
|
|
|
Retail Supermarket
|
|
|
|
|
|
|
|
|
Soft pretzels
|
|
$
|
10,186
|
|
|
$
|
10,512
|
|
Frozen juices and ices
|
|
|
10,996
|
|
|
|
9,727
|
|
Handhelds
|
|
|
2,568
|
|
|
|
3,026
|
|
Coupon redemption
|
|
|
(694
|
)
|
|
|
(751
|
)
|
Other
|
|
|
359
|
|
|
|
562
|
|
Total Retail Supermarket
|
|
$
|
23,415
|
|
|
$
|
23,076
|
|
|
|
|
|
|
|
|
|
|
Frozen Beverages
|
|
|
|
|
|
|
|
|
Beverages
|
|
$
|
31,436
|
|
|
$
|
33,143
|
|
Repair and maintenance service
|
|
|
19,743
|
|
|
|
19,004
|
|
Machines revenue
|
|
|
8,904
|
|
|
|
7,473
|
|
Other
|
|
|
224
|
|
|
|
250
|
|
Total Frozen Beverages
|
|
$
|
60,307
|
|
|
$
|
59,870
|
|
|
|
|
|
|
|
|
|
|
Consolidated Sales
|
|
$
|
271,612
|
|
|
$
|
265,210
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
Food Service
|
|
$
|
6,322
|
|
|
$
|
7,098
|
|
Retail Supermarket
|
|
|
335
|
|
|
|
290
|
|
Frozen Beverages
|
|
|
4,978
|
|
|
|
4,598
|
|
Total Depreciation and Amortization
|
|
$
|
11,635
|
|
|
$
|
11,986
|
|
|
|
|
|
|
|
|
|
|
Operating Income :
|
|
|
|
|
|
|
|
|
Food Service
|
|
$
|
18,461
|
|
|
$
|
15,900
|
|
Retail Supermarket
|
|
|
1,447
|
|
|
|
2,558
|
|
Frozen Beverages
|
|
|
2,174
|
|
|
|
2,770
|
|
Total Operating Income
|
|
$
|
22,082
|
|
|
$
|
21,228
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Food Service
|
|
$
|
6,278
|
|
|
$
|
9,441
|
|
Retail Supermarket
|
|
|
552
|
|
|
|
-
|
|
Frozen Beverages
|
|
|
5,007
|
|
|
|
5,182
|
|
Total Capital Expenditures
|
|
$
|
11,837
|
|
|
$
|
14,623
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Food Service
|
|
$
|
692,912
|
|
|
$
|
635,988
|
|
Retail Supermarket
|
|
|
21,380
|
|
|
|
21,531
|
|
Frozen Beverages
|
|
|
219,692
|
|
|
|
207,498
|
|
Total Assets
|
|
$
|
933,984
|
|
|
$
|
865,017
|
|
Note
10
|
Our
three
reporting units, which are also reportable segments, are Food Service, Retail Supermarkets and Frozen Beverages.
|
The carrying amounts of acquired intangible assets for the Food Service, Retail Supermarkets and Frozen Beverage segments as of
December 29, 2018
and
September 29, 2018
are as follows:
|
|
December 29, 2018
|
|
|
September 29, 2018
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
FOOD SERVICE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
16,628
|
|
|
$
|
-
|
|
|
$
|
16,628
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non compete agreements
|
|
|
858
|
|
|
|
482
|
|
|
|
980
|
|
|
|
538
|
|
Customer relationships
|
|
|
19,900
|
|
|
|
8,502
|
|
|
|
20,510
|
|
|
|
8,600
|
|
License and rights
|
|
|
1,690
|
|
|
|
1,164
|
|
|
|
1,690
|
|
|
|
1,143
|
|
TOTAL FOOD SERVICE
|
|
$
|
39,076
|
|
|
$
|
10,148
|
|
|
$
|
39,808
|
|
|
$
|
10,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAIL SUPERMARKETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
6,557
|
|
|
$
|
-
|
|
|
$
|
6,557
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
649
|
|
|
|
292
|
|
|
|
649
|
|
|
|
260
|
|
Customer relationships
|
|
|
7,979
|
|
|
|
3,823
|
|
|
|
7,979
|
|
|
|
3,623
|
|
TOTAL RETAIL SUPERMARKETS
|
|
$
|
15,185
|
|
|
$
|
4,115
|
|
|
$
|
15,185
|
|
|
$
|
3,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FROZEN BEVERAGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
9,315
|
|
|
$
|
-
|
|
|
$
|
9,315
|
|
|
$
|
-
|
|
Distribution rights
|
|
|
6,900
|
|
|
|
-
|
|
|
|
6,900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
257
|
|
|
|
83
|
|
|
|
257
|
|
|
|
76
|
|
Licenses and rights
|
|
|
1,400
|
|
|
|
880
|
|
|
|
1,400
|
|
|
|
863
|
|
TOTAL FROZEN BEVERAGES
|
|
$
|
17,872
|
|
|
$
|
963
|
|
|
$
|
17,872
|
|
|
$
|
939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
$
|
72,133
|
|
|
$
|
15,226
|
|
|
$
|
72,865
|
|
|
$
|
15,103
|
|
Fully amortized intangible assets have been removed from the
December 29, 2018
amounts.
Amortizing intangible assets are being amortized by the straight-line method over periods ranging from
2
to
20
years and amortization expense is reflected throughout operating expenses. Aggregate amortization expense of intangible assets for the
three
months ended
December 29, 2018
and
December 30, 2017
was
$855,000
and
$819,000,
respectively.
Estimated amortization expense for the next
five
fiscal years is approximately
$3,300,000
in
2019,
$3,000,000
in
2020,
$2,400,000
in
2021,
and
$2,300,000
in
2022
and in
2023.
The weighted amortization period of the intangible assets is
10.7
years.
Goodwill
The carrying amounts of goodwill for the Food Service, Retail Supermarket and Frozen Beverage segments are as follows:
|
|
Food
Service
|
|
|
Retail
Supermarket
|
|
|
Frozen
Beverages
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2018
|
|
$
|
61,665
|
|
|
$
|
3,670
|
|
|
$
|
37,176
|
|
|
$
|
102,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 29, 2018
|
|
$
|
61,665
|
|
|
$
|
3,670
|
|
|
$
|
37,176
|
|
|
$
|
102,511
|
|
Note
11
|
We have classified our investment securities as marketable securities held to maturity and available for sale. The FASB defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the FASB has established
three
levels of inputs that
may
be used to measure fair value:
|
Level
1
|
Observable input such as quoted prices in active markets for identical assets or liabilities;
|
Level
2
|
Observable inputs, other than Level
1
inputs in active markets, that are observable either directly or indirectly; and
|
Level
3
|
Unobservable inputs for which there is little or
no
market data, which require the reporting entity to develop its own assumptions.
|
Marketable securities held to maturity and available for sale consist primarily of investments in mutual funds, preferred stock and corporate bonds. The fair values of mutual funds are based on quoted market prices in active markets and are classified within Level
1
of the fair value hierarchy. The fair values of preferred stock, corporate bonds and certificates of deposit are based on quoted prices for identical or similar instruments in markets that are
not
active. As a result, preferred stock, corporate bonds and certificates of deposit are classified within Level
2
of the fair value hierarchy.
The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at
December 29, 2018
are summarized as follows:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
140,442
|
|
|
$
|
37
|
|
|
$
|
1,404
|
|
|
$
|
139,075
|
|
Certificates of Deposit
|
|
|
2,880
|
|
|
|
-
|
|
|
|
8
|
|
|
|
2,872
|
|
Total marketable securities held to maturity
|
|
$
|
143,322
|
|
|
$
|
37
|
|
|
$
|
1,412
|
|
|
$
|
141,947
|
|
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at
December 29, 2018
are summarized as follows:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
$
|
5,552
|
|
|
$
|
-
|
|
|
$
|
485
|
|
|
$
|
5,067
|
|
Preferred Stock
|
|
|
15,681
|
|
|
|
21
|
|
|
|
375
|
|
|
|
15,327
|
|
Total marketable securities available for sale
|
|
$
|
21,233
|
|
|
$
|
21
|
|
|
$
|
860
|
|
|
$
|
20,394
|
|
The mutual funds seek current income with an emphasis on maintaining low volatility and overall moderate duration. The Fixed-to-Floating Perpetual Preferred Stock generate fixed income to call dates in
2019,
2020
and
2025
and then income is based on a spread above LIBOR if the securities are
not
called. The mutual funds and Fixed-to-Floating Perpetual Preferred Stock do
not
have contractual maturities; however, we classify them as long term assets as it is our intent to hold them for a period of over
one
year, although we
may
sell some or all of them depending on presently unanticipated needs for liquidity or market conditions. The corporate bonds generate fixed income to maturity dates in
2019
through
2021,
with
$91
million maturing within
2
years. Our expectation is that we will hold the corporate bonds to their maturity dates and redeem them at our amortized cost.
The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at
September 29, 2018
are summarized as follows:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
136,933
|
|
|
$
|
28
|
|
|
$
|
1,520
|
|
|
$
|
135,441
|
|
Certificates of Deposit
|
|
|
2,880
|
|
|
|
-
|
|
|
|
7
|
|
|
|
2,873
|
|
Total marketable securities held to maturity
|
|
$
|
139,813
|
|
|
$
|
28
|
|
|
$
|
1,527
|
|
|
$
|
138,314
|
|
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at
September 29, 2018
are summarized as follows:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
$
|
8,978
|
|
|
$
|
-
|
|
|
$
|
295
|
|
|
$
|
8,683
|
|
Preferred Stock
|
|
|
15,680
|
|
|
|
380
|
|
|
|
-
|
|
|
|
16,060
|
|
Total marketable securities available for sale
|
|
$
|
24,658
|
|
|
$
|
380
|
|
|
$
|
295
|
|
|
$
|
24,743
|
|
The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at
December 29, 2018
and
September 29, 2018
are summarized as follows:
|
|
December 29, 2018
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Market
|
|
|
Amortized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
12,465
|
|
|
$
|
12,399
|
|
|
$
|
21,048
|
|
|
$
|
21,001
|
|
Due after one year through five years
|
|
|
130,857
|
|
|
|
129,548
|
|
|
|
118,765
|
|
|
|
117,314
|
|
Due after five years through ten years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total held to maturity securities
|
|
$
|
143,322
|
|
|
$
|
141,947
|
|
|
$
|
139,813
|
|
|
$
|
138,315
|
|
Less current portion
|
|
|
12,465
|
|
|
|
12,399
|
|
|
|
21,048
|
|
|
|
21,001
|
|
Long term held to maturity securities
|
|
$
|
130,857
|
|
|
$
|
129,548
|
|
|
$
|
118,765
|
|
|
$
|
117,314
|
|
Proceeds from the redemption and sale of marketable securities were
$17,125,000
in the
three
months ended
December 29, 2018
and
$19,096,000
in the
three
months ended
December 30, 2017,
respectively. Realized gains of
$398
were recorded in the
three
months ended
December 29, 2018
and realized gains of
$7,558
were recorded in the
three
months ended
December 30, 2017.
We use the specific identification method to determine the cost of securities sold. Under new accounting guidance adopted on the
first
day of this fiscal year, recognized unrealized losses on marketable securities of
$1,027,000
were recorded in the
three
months ended
December 29, 2018.
Note
12
Changes to the components of accumulated other comprehensive loss are as follows:
|
|
Three Months ended December 29, 2018
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Holding
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
Gain on
|
|
|
|
|
|
|
|
Translation Adjustments
|
|
|
Marketable Securities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
(12,079
|
)
|
|
$
|
85
|
|
|
$
|
(11,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
|
|
(1,359
|
)
|
|
|
-
|
|
|
$
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
(85
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(13,438
|
)
|
|
$
|
-
|
|
|
$
|
(13,438
|
)
|
|
|
Three Months ended December 30, 2017
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Holding
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
Gain on
|
|
|
|
|
|
|
|
Translation Adjustments
|
|
|
Marketable Securities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
(9,341
|
)
|
|
$
|
466
|
|
|
$
|
(8,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
|
|
(3,887
|
)
|
|
|
(110
|
)
|
|
$
|
(3,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(13,228
|
)
|
|
$
|
356
|
|
|
$
|
(12,872
|
)
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Our current cash and cash equivalents balances, investments and cash expected to be provided by future operations are our primary sources of liquidity. We believe that these sources, along with our borrowing capacity, are sufficient to fund future growth and expansion. See Note 11 to these financial statements for a discussion of our investment securities.
The Company’s Board of Directors declared a regular quarterly cash dividend of $.50 per share of its common stock payable on January 4, 2019, to shareholders of record as of the close of business on December 18, 2018.
In our fiscal year ended September 29, 2018, we purchased and retired 20,604 shares of our common stock at a cost of $2,794,027. In the three months ended December 29, 2018 we did not purchase and retire any shares. On August 4, 2017 the Company’s Board of Directors authorized the purchase and retirement of 500,000 shares of the Company’s common stock; 384,506 shares remain to be purchased under this authorization.
Fluctuations in the valuation of the Mexican and Canadian currencies and the resulting translation of the net assets of our Mexican and Canadian subsidiaries caused an increase of $1,359,000 in accumulated other comprehensive loss in the 2019 first quarter and an increase of $3,887,000 accumulated other comprehensive loss in the 2018 first quarter.
Our general-purpose bank credit line which expires in November 2021 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 December 29, 2018.
Results of Operations
Net sales increased $6,402,000 or 2% to $271,612,000 for the three months ended December 29, 2018 compared to the three months ended December 30, 2017.
FOOD SERVICE
Sales to food service customers increased $5,626,000 or 3% in the first quarter to $187,890,000. Soft pretzel sales to the food service market of $48,991,000 were roughly the same as last year. Although sales to restaurant chains and schools increased, sales to mass merchandising chains and warehouse club stores declined.
Frozen juices and ices sales increased 5% to $7,527,000 in the three months with sales increases and decreases across our customer base.
Churro sales to food service customers were up 4% in the quarter to $15,135,000 with sales increases and decreases across our customer base.
Sales of bakery products increased $7,176,000 or 8% in the first quarter to $102,109,000 with sales to one co-pack customer accounting for approximately 40% of the sales increase and increased sales to warehouse club stores in part due to a special promotion and increased sales to schools accounting for the balance.
Sales of handhelds decreased $2,560,000 or 23 % in the quarter with the decrease primarily coming from lower sales to co-pack customers because of unsuccessful product launches. Sales of funnel cake increased $166,000 or 3% in the quarter although sales to school food service were slightly lower this quarter.
Sales of new products in the first twelve months since their introduction were approximately $6 million in this quarter. Price increases were approximately $3 million for the quarter and net volume increases accounted for approximately $2.5 million of sales in the quarter.
Operating income in our Food Service segment increased from $15,900,000 to $18,461,000 in the quarter primarily because of increased bakery sales, price increases and improved operations at several of our manufacturing facilities, especially at our Labriola production facility, which was recently acquired at this time a year ago. Additionally, last year’s quarter had the burden of shutdown costs of our Chambersburg, PA production facility. However, this year’s quarter was impacted by approximately $2.0 million of higher distribution expenses primarily due to higher freight rates which increased with the implementation of the electronic logging device mandate in January 2018. Additionally, lower sales of our MARY B’s biscuits and related costs due to our recall in January 2018 impacted our operating income by approximately $500,000 in the quarter.
RETAIL SUPERMARKETS
Sales of products to retail supermarkets increased $339,000 or 1% to $23,415,000 in the first quarter. Soft pretzel sales for the first quarter were down 3% to $10,186,000. Sales of frozen juices and ices increased $1,269,000 or 13% to $10,996,000 in the first quarter due to increased customer promotional support . Handheld sales to retail supermarket customers decreased 15% to $2,568,000 in the quarter as the sales of this product line continue their long term decline.
Sales of new products in the first quarter were less than $400,000. Price increases provided about $600,000 of sales in the quarter and net volume decreased by about $300,000.
Operating income in our Retail Supermarkets segment was $1,447,000 in this year’s first quarter compared to $2,558,000 in last year’s quarter, a 43% decrease. Increased product and distribution costs along with just a modest sales increase were the primary drivers of the decrease in operating income.
FROZEN BEVERAGES
Frozen beverage and related product sales increased 1% to $60,307,000 in the first quarter. Beverage related sales were down 5% to $31,436,000, primarily because sales were up a very strong 21% last year compared to the prior year. Gallon sales were down 1% for the three months with lower sales across our customer base. Service revenue increased 4% to $19,743,000 in the first quarter with sales increases and decreases spread throughout our customer base.
Machines revenue (primarily sales of frozen beverage machines) were $8,904,000, an increase of 19%. Operating income in our Frozen Beverage segment decreased to $2,174,000 in this quarter compared to $2,770,000 last year as a result of lower beverage sales and generally higher costs.
CONSOLIDATED
Gross profit as a percentage of sales was 28.30% in the three month period this year and 27.63% last year. Gross profit percentage increased because of improved operations at several of our manufacturing facilities, especially at our Labriola production facility, price increases and because last year had the burden of shutting down our Chambersburg, PA production facility and moving its production to other facilities.
Total operating expenses increased $2,730,000 in the first quarter and as a percentage of sales increased to 20.2% from 19.6% last year. Marketing expenses decreased to 7.89% of sales in this year’s quarter from 8.14% last year primarily because of reduced spending in our frozen beverages segment. Distribution expenses were 8.82% of sales in this year’s quarter and 7.98% of sales in last year’s quarter primarily because of increased freight rates which increased with the implementation of the electronic logging device mandate in January 2018. Administrative expenses were 3.40% of sales this quarter compared to 3.53% of sales last year in the first quarter.
Operating income increased $854,000 or 4% to $22,082,000 in the first quarter as a result of the aforementioned items.
Investment income decreased by $449,000 in the first quarter because of recognized unrealized losses of $1,027,000 which were partially offset by higher interest income of $585,000.
Other income in last year’s quarter includes a $520,000 gain on a sale of property.
Net earnings decreased $18,723,000, or 52%, in the current three month period to $17,526,000. Net earnings for last year’s quarter benefited from a $20.9 million, or $1.11 per diluted share, gain on the remeasurement of deferred tax liabilities which was partially offset by a $1.2 million, or $.06 per diluted share, provision for the one time repatriation tax, both of which resulted from the Tax Cuts and Jobs Act enacted in in December 2017. Excluding the deferred tax gain and the one time repatriation tax, our effective tax rate in last year’s quarter was 28.6%. This year’s quarter benefitted by a reduction of approximately $900,000 in tax as the provision for the one time repatriation tax was reduced as the amount recorded last year was an estimate. Excluding the reduction in the one time repatriation tax, our effective tax rate was 28.0% in this year’s quarter.
There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.