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Note A - Summary of Significant Accounting Policies | 12 Months Ended
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Sep. 24, 2016
Notes to Financial Statements |
Significant Accounting Policies [Text Block] | NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES J & J Snack Foods Corp. and Subsidiaries (the Company) manufactures, markets and distributes a variety of nutritional snack foods and beverages to the food service and retail supermarket industries. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. 1. Principles of Consolidation The consolidated financial statements were prepared in accordance with U.S. GAAP. These financial statements include the accounts of J & J Snack Foods Corp. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in the consolidated financial statements. 2. Revenue Recognition We recognize revenue from our products when the products are shipped to our customers. Repair and maintenance equipment service revenue is recorded when it is performed provided the customer terms are that the customer is to be charged on a time and material basis or on a straight-line basis over the term of the contract when the customer has signed a service contract. Revenue is recognized only where persuasive evidence of an arrangement exists, our price is fixed or estimable and collectability is reasonably assured. We record offsets to revenue for allowances, end-user pricing adjustments, trade spending, coupon redemption costs and returned product. Customers generally do not have the right to return product unless it is damaged or defective. Our recorded liability for allowances, end-user pricing adjustments and trade spending was approximately $14.3 million at September 24, 2016 and $11.7 million at September 26, 2015. All amounts billed to customers related to shipping and handling are classified as revenues. Our product costs include amounts for shipping and handling, therefore, we charge our customers 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. The cost of shipping products to the customer classified as Distribution expenses was $73,114,000, $74,158,000 and $71,159,000 for the fiscal years ended 2016, 2015 and 2014, respectively. During the years ended September 24, 2016, September 26, 2015 and September 27, 2014, we sold $24,664,000, $25,536,000 and $22,826,000, respectively, of repair and maintenance service contracts in our frozen beverage business. At September 24, 2016 and September 26, 2015, deferred income on repair and maintenance service contracts was $1,671,000 and $1,579,000, respectively, of which $145,000 and $70,000 is included in other long-term liabilities as of September 24, 2016 and September 26, 2015, respectively and the balance is reflected as short-term and included in accrued liabilities on the consolidated balance sheet. Repair and maintenance service contract income of $24,571,000, $25,534,000 and $22,748,000 was recognized for the fiscal years ended 2016, 2015 and 2014, respectively. 3. Foreign Currency Assets and liabilities in foreign currencies are translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date. Revenues and expenses are translated at the average rate of exchange for the period. The cumulative translation adjustment is recorded as a separate component of stockholders’ equity and changes to such are included in comprehensive income. 4. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 5. Cash Equivalents Cash equivalents are short-term, highly liquid investments with original maturities of three months or less. 6. Concentrations and related risks We maintain cash balances at financial institutions located in various states. We have cash balances at two banks totalling approximately $100 million that is in excess of FDIC insurance of $250,000 per bank. Financial instruments that could potentially subject us to concentrations of credit risk are trade accounts receivable; however, such risks are limited due to the large number of customers comprising our customer base and their dispersion across geographic regions. We usually have approximately 15 customers with accounts receivable balances of between $1 million and $10 million. We have several large customers that account for a significant portion of our sales. Our top ten customers accounted for 42%, 43% and 43% of our sales during fiscal years 2016, 2015 and 2014, respectively, with our largest customer accounting for 8% of our sales in 2016, 8% of our sales in 2015 and 8% of our sales in 2014. Three of the ten customers are food distributors who sell our product to many end users. About 30% of our employees are covered by collective bargaining agreements. None of our vendors supplied more than 10% of our ingredients and packaging in 2016, 2015 or 2014. The majority of our accounts receivable are due from trade customers. Credit is extended based on evaluation of our customers’ financial condition and collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. At September 24, 2016 and September 26, 2015, our accounts receivables were $98,325,000 and $102,649,000 net of an allowance for doubtful accounts of $571,000 and $304,000. Accounts receivable outstanding longer than the payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. 7. Inventories Inventories are valued at the lower of cost (determined by the first-in, first-out method) or market. We recognize abnormal amounts of idle facilities, freight, handling costs, and spoilage as charges of the current period. Additionally, we allocate fixed production overhead to inventories based on the normal capacity of our production facilities. We calculate normal capacity as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. This requires us to use judgment to determine when production is outside the range of expected variation in production (either abnormally low or abnormally high). In periods of abnormally low production (for example, periods in which there is significantly lower demand, labor and material shortages exist, or there is unplanned equipment downtime) the amount of fixed overhead allocated to each unit of production is not increased. However, in periods of abnormally high production the amount of fixed overhead allocated to each unit of production is decreased to assure inventories are not measured above cost. 8. Investment Securities We classify our investment securities in one of three categories: held to maturity, trading, or available for sale. Our investment portfolio at September 24, 2016, consists of investments classified as held to maturity and available for sale. The securities that we have the positive intent and ability to hold to maturity are classified as held to maturity and are stated at amortized cost. Investments classified as available for sale are reported at fair market value with unrealized gains and losses related to the changes in fair value of the securities recognized in accumulated other comprehensive income (loss). The mutual funds and preferred stock in our available for sale portfolio 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. See Note C for further information on our holdings of investment securities. 9. Depreciation and Amortization Depreciation of equipment and buildings is provided for by the straight-line method over the assets’ estimated useful lives. We review our equipment and buildings to ensure that they provide economic benefit and are not impaired. 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 are being amortized by the straight-line method over periods ranging from 3 to 20 years and amortization expense is reflected throughout operating expenses. Long-lived assets, including fixed assets and amortizing intangibles, are reviewed for impairment as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. Indefinite lived intangibles are reviewed annually for impairment. Cash flow and sales analyses are used to assess impairment. The estimates of future cash flows and sales involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows and sales could differ from management’s estimates due to changes in business conditions, operating performance, economic conditions, competition and consumer preferences. 10. Fair Value of Financial Instruments The carrying value of our short-term financial instruments, such as accounts receivables and accounts payable, approximate their fair values, based on the short-term maturities of these instruments. 11. Income Taxes 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. As of September 24, 2016 and September 26, 2015, the total amount of gross unrecognized tax benefits is $354,000 and $334,000; respectively, all of which would impact our effective tax rate over time, if recognized. We recognize interest and penalties related to income tax matters as a part of the provision for income taxes. We had $219,000 of accrued interest and penalties as of September 24, 2016 and $199,000 as of September 26, 2015. We did not recognize any penalties and interest resulting from tax settlements in the years ended September 24, 2016 and September 26, 2015. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|  | (in thousands) |
Balance at September 26, 2015 |  | $ | 334 |
Additions based on tax positions related to the current year |  |  | 20 |
Reductions for tax positions of prior years |  |  | - |
Settlements |  |  | - |
Balance at September 24, 2016 |  | $ | 354 |
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. 12. Earnings Per Common Share 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:
|  | Fiscal Year Ended September 24, 2016 |
|  | Income |  |  | Shares |  |  | Per Share |
|  | (Numerator) |  |  | (Denominator) |  |  | Amount |
|  | (in thousands, except per share amounts) |
Earnings Per Basic Share |  |  |  |  |  |  |  |  |  |  |  |
Net Income available to common stockholders |  | $ | 75,975 |  |  |  | 18,649 |  |  | $ | 4.07 |
Effect of Dilutive Securities |  |  |  |  |  |  |  |  |  |  |  |
Options |  |  | - |  |  |  | 120 |  |  |  | (0.02 | )
Earnings Per Diluted Share |  |  |  |  |  |  |  |  |  |  |  |
Net Income available to common stockholders plus assumed conversions |  | $ | 75,975 |  |  |  | 18,769 |  |  | $ | 4.05 |
180,170 anti-dilutive shares have been excluded in the computation of 2016 diluted EPS.
|  | Fiscal Year Ended September 26, 2015 |
|  | Income |  |  | Shares |  |  | Per Share |
|  | (Numerator) |  |  | (Denominator) |  |  | Amount |
|  | (in thousands, except per share amounts) |
Earnings Per Basic Share |  |  |  |  |  |  |  |  |  |  |  |
Net Income available to common stockholders |  | $ | 70,183 |  |  |  | 18,685 |  |  | $ | 3.76 |
Effect of Dilutive Securities |  |  |  |  |  |  |  |  |  |  |  |
Options |  |  | - |  |  |  | 134 |  |  |  | (0.03 | )
Earnings Per Diluted Share |  |  |  |  |  |  |  |  |  |  |  |
Net Income available to common stockholders plus assumed conversions |  | $ | 70,183 |  |  |  | 18,819 |  |  | $ | 3.73 |
1,500 anti-dilutive shares have been excluded in the computation of 2015 diluted EPS.
|  | Fiscal Year Ended September 27, 2014 |
|  | Income |  |  | Shares |  |  | Per Share |
|  | (Numerator) |  |  | (Denominator) |  |  | Amount |
|  | (in thousands, except per share amounts) |
Earnings Per Basic Share |  |  |  |  |  |  |  |  |  |  |  |
Net Income available to common stockholders |  | $ | 71,814 |  |  |  | 18,677 |  |  | $ | 3.85 |
Effect of Dilutive Securities |  |  |  |  |  |  |  |  |  |  |  |
Options |  |  | - |  |  |  | 130 |  |  |  | (0.03 | )
Earnings Per Diluted Share |  |  |  |  |  |  |  |  |  |  |  |
Net Income available to common stockholders plus assumed conversions |  | $ | 71,814 |  |  |  | 18,807 |  |  | $ | 3.82 |
No anti-dilutive shares have been excluded in the computation of 2014 diluted EPS. 13. Accounting for Stock-Based Compensation At September 24, 2016, the Company has three stock-based employee compensation plans. Share-based compensation was recognized as follows:
|  | Fiscal year ended |
|  | September 24, |  |  | September 26, |  |  | September 27, |
|  | 2016 |  |  | 2015 |  |  | 2014 |
|  | (in thousands, except per share amounts) |
Stock options |  | $ | 86 |  |  | $ | 1,098 |  |  | $ | 1,262 |
Stock purchase plan |  |  | 305 |  |  |  | 328 |  |  |  | 329 |
Stock issued to employees |  |  | 4 |  |  |  | 6 |  |  |  | 17 |
Total share-based compensation |  | $ | 395 |  |  | $ | 1,432 |  |  | $ | 1,608 |
The above compensation is net of tax benefits |  | $ | 1,980 |  |  | $ | 734 |  |  | $ | 468 |
Income tax benefit related to share-based compensation for the year ended September 26, 2016 includes $885,000 as a result of our early adoption as of our fiscal March 2016 quarter of Accounting Standards Update No 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this new standard, income tax benefit is recognized rather than additional paid in capital upon the exercise of stock options. At September 24, 2016, the Company has unrecognized compensation expense of approximately $3.1 million to be recognized over the next three fiscal years. 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 2016, 2015 and 2014: expected volatility of 16.7% for fiscal year 2016, expected volatility of 18.4% for fiscal year 2015 and 21.2% for fiscal year 2014: weighted average risk-free interest rates of 1.3%, 1.7% and 1.6%; dividend rate of 1.4%, 1.4% and .9% and expected lives ranging between 5 and 10 years for all years. An expected forfeiture rate of 19% was used for 2016, 19% was used for 2015 and 20% was used for 2014. Expected volatility is based on the historical volatility of the price of our common shares over the past 49 to 55 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. 14. Advertising Costs Advertising costs are expensed as incurred. Total advertising expense was $4,870,000, $4,290,000 and $3,487,000 for the fiscal years 2016, 2015 and 2014, respectively. 15. Commodity Price Risk Management Our most significant raw material requirements include flour, packaging, shortening, corn syrup, sugar, juice, cheese, chocolate, and a variety of nuts. We attempt to minimize the effect of future price fluctuations related to the purchase of raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from 1 to 12 months. As of September 24, 2016, we have approximately $75 million of such commitments. Futures contracts are not used in combination with forward purchasing of these raw materials. Our procurement practices are intended to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases. Our policy is to recognize estimated losses on purchase commitments when they occur. At each of the last three fiscal year ends, we did not have any material losses on our purchase commitments. 16. Research and Development Costs Research and development costs are expensed as incurred. Total research and development expense was $525,000, $506,000 and $499,000 for the fiscal years 2016, 2015 and 2014, respectively. 17. Recent Accounting Pronouncements In May 2014, the FASB issued guidance on revenue recognition which says that we should 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. This guidance is effective for our fiscal year ending September 2019. Early application is permitted. We anticipate that the impact of this guidance on our consolidated financial statements will not be material. In July 2015, the FASB issued guidance which requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance will simplify the subsequent measurement of inventory, as current guidance requires an entity to measure inventory at the lower of cost or market. Under current guidance, market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. The adoption of this guidance in the December quarter did not have a material impact on our consolidated financial statements. In September 2015, the FASB issued guidance on accounting for business combinations which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance eliminates the requirement to retrospectively account for these adjustments. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. This guidance did not impact amounts and disclosures related to previous business combinations; therefore, the adoption of this guidance in the December quarter did not impact our consolidated financial statements. In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes which eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires entities to classify all deferred tax assets and liabilities as noncurrent. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. The adoption of this guidance in this Form 10-K did not have a material impact on our financial statements. 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 present guidance, changes in fair value of equity investments are recognized in Stockholders’ Equity. This guidance is effective for our fiscal year ended September 2019. Early adoption is not permitted. We anticipate that the adoption of this guidance on our consolidated financial statements will not be 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. We anticipate that the impact of this guidance on our financial statements will be material . In March 2016, the FASB issued guidance on share based compensation which requires that an entity recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Under current guidance, excess tax benefits are recognized in additional paid-in capital and tax deficiencies are recognized either as an offset to accumulated excess tax benefits, or in the income statement. This guidance is effective for our fiscal year ended September 2018. Early adoption is permitted. See Note A.13 to these financial statements for a discussion of the impact the adoption of this guidance in our March 2016 quarter had on our consolidated financial statements. 18. Reclassifications Certain prior year financial statement amounts have been reclassified to be consistent with the presentation for the current year.

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