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 $.575 per share of its common stock payable on January 12, 2021, to shareholders of record as of the close of business on December 21, 2020.

We purchased 65,648 shares of our common stock in fiscal year 2020, but did not purchase any shares in the three months ended December 26, 2020. 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; 318,858 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 a decrease of $2,279,000 in accumulated other comprehensive loss in the 2021 first quarter and a decrease of $810,000 in accumulated other comprehensive loss in the 2020 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 26, 2020.





RESULTS OF OPERATIONS

Net sales decreased $41,900,000 or 15% to $240,997,000 for the three months ended December 26, 2020. Operating income decreased $21,125,000 or 97% for the quarter to $578,000.







FOOD SERVICE

Sales to food service customers decreased $23,023,000 or 13% in the first quarter to $160,425,000. Key customer venues and channels like theme parks, schools and theaters continue to operate at limited capacity impacting food service sales. Soft pretzel sales to food service decreased 35% to $32,687,000. Frozen juices and ices sales decreased 11% to $6,295,000 and Churro sales were down 30% in the quarter to $11,542,000. Sales of funnel cake decreased $3,050,000 or 49% in the quarter.


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Sales of bakery products decreased $7,408,000 or 8% in the first quarter to $88,964,000, as the virus impacted traffic, purchase choices and frequency in this part of our business.

Sales of handhelds increased $10,422,000 or 145% in the quarter led by the continued success of a new product developed for one of our larger wholesale club customers.

Sales of new products in the first twelve months since their introduction were approximately $12,200,000 in this quarter led by the previously noted handheld item. Price increases had marginal impact on results in the quarter as traffic and volume drove almost all the sales decline compared to last year.

Operating income in our Food Service segment decreased $11,854,000 in the quarter to $6,180,000 primarily because of sales declines which impacted margin efficiencies and expense leverage.





RETAIL SUPERMARKETS

Sales of products to retail supermarkets increased $9,668,000 or 33% to $39,094,000 in the first quarter. Our SUPERPRETZEL brand performed well in the quarter driving an increase in soft pretzel sales of 41% to $13,888,000. Sales of frozen juices and ices were up 52% to $15,316,000 in the first quarter and sales of biscuits were up 10% to7,660,000. Handheld sales to retail supermarket customers increased 1% in the quarter. Sales from new products increased an estimated $400,000 in the quarter driven by frozen novelty items.

Price increases had minimum impact on growth in the quarter as sales were driven by increased consumer traffic and volume in retail outlets.

Operating income in our Retail Supermarkets segment increased $2,506,000 or 113% to $4,723,000 in this year's first quarter driven by sales increases and operating income margins of 12%, over 400 basis points better than last year.





FROZEN BEVERAGES

Frozen beverage and related product sales decreased $28,545,000 or 41% to $41,478,000 in the first quarter. Beverage related sales declined 55% to $15,855,000. Gallon sales were down 56% for the three months as we continue to see traffic impacted from Covid-19 related concerns in theaters, amusement venues and key retailers. These venues also rely on incremental seasonal sales in December that was impacted from reduced operating capacity and consumers staying home. Service revenue decreased 16% to $18,896,000 in the first quarter driven almost entirely from cancellation of a key customer's planned maintenance program. Machine revenue (primarily sales of frozen beverage machines) was $6,489,000, a decrease of 46% due mainly from lapping $5,000,000 in non-recurring sales in last year's quarter.


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Our Frozen Beverage segment incurred an operating loss for the quarter of $10,325,000 compared to operating income of $1,452,000 last year due to the challenging COVID-19 sales environment which also impacts our gross margin efficiency and ability to leverage fixed expenses.





CONSOLIDATED

Gross profit as a percentage of sales was 20.8% in the three-month period this year and 27.5% last year. Gross profit percentage decreased because of continued Covid-19 sales pressure from our food service and frozen beverages segments. This creates margin leverage challenges as we manage lower production volumes on businesses with large-fixed expense bases.

Total operating expenses decreased $6,611,000 in the first quarter but as a percentage of sales increased to 20.6% from 19.9% last year. Marketing expenses decreased to 7.2% of sales in this year's quarter from 8% last year. Distribution expenses were 9.5% of sales in this year's quarter compared to 8.3% of sales last year. Administrative expenses were 3.9% of sales this quarter compared to 3.4% last year.

Operating income decreased $21,125,000 or 97% to $578,000 in the first quarter as a result of the aforementioned items.

Our investments generated before tax income of $1,370,000 this quarter, down from $1,760,000 last year due to decreases in the amount of investments and lower interest rates.

Net earnings decreased $15,281,000, or 90%, in the current three-month period to $1,778,000. Our effective tax rate was 8% 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.


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