J & J Snack Foods(JJSF) - 2019 Q4 - Annual Report

Company Overview J&J Snack Foods Corp. operates in foodservice, frozen beverages, and retail, focusing on snack foods and achieving consistent revenue growth Company Profile J&J Snack Foods Corp. operates through three core business groups: foodservice, frozen beverages, and retail, with a growth strategy focused on new product innovation and market expansion - The company's product portfolio includes soft pretzels, frozen beverages, frozen juice treats, desserts, stuffed sandwiches, burritos, churros, and other bakery goods[6] - Growth is driven by a strategy of developing new products, increasing penetration in existing market channels, and expanding established products into new markets[6] Financial Highlights (2010-2019) (in thousands) | Indicator | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Sales | $1,186,487 | $1,138,265 | $1,084,224 | | Net Earnings | $94,819 | $103,596 | $79,174 | | Total Assets | $1,019,339 | $932,013 | $867,228 | | Stockholders' Equity | $833,751 | $759,091 | $682,322 | | EPS-Diluted | $5.00 | $5.51 | $4.21 | | Dividends/Share | $2.00 | $1.80 | $1.68 | President's Letter In fiscal year 2019, J&J Snack Foods Corp. achieved its 48th consecutive year of revenue growth, with sales increasing by 4% to $1.186 billion and operating income rising 6% to $117.0 million FY 2019 Performance Highlights | Metric | FY 2019 | Change | | :--- | :--- | :--- | | Sales | $1.186 Billion | +4% | | Operating Income | $117.0 Million | +6% | - Net earnings and EPS decreased in FY2019 as a result of benefits from the Tax Cuts and Jobs Act in the prior year[10] - The company's balance sheet remains strong, with over $343 million in cash, cash equivalents, and marketable securities at year-end[13] - Future strategy involves focusing on long-term investments to grow sales, add capabilities, and make operational improvements, while also searching for acquisitions[13] Part I Part I covers the company's business operations, key risk factors, property holdings, and legal proceedings Item 1. Business J&J Snack Foods Corp. manufactures and distributes snack foods and frozen beverages to foodservice and retail supermarket industries, operating in three segments with key products including soft pretzels, frozen treats, and bakery goods Business Segments The company operates through three business segments: Food Service, Retail Supermarkets, and Frozen Beverages, each focusing on distinct product distribution channels - The company operates in three business segments: Food Service, Retail Supermarkets, and Frozen Beverages[28] - Key performance variables monitored by management for each segment are sales and operating income, with depreciation, capital spending, and assets reviewed quarterly[29] Products The company's product portfolio is diverse, with bakery products being the largest contributor to revenue at 32% in FY2019, followed by soft pretzels at 21% and frozen beverages at 15% Product Sales as a Percentage of Total Revenue | Product Category | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Bakery Products | 32% | 33% | 32% | | Soft Pretzels | 21% | 21% | 20% | | Frozen Beverages | 15% | 15% | 15% | | Frozen Juice Treats & Desserts | 10% | 10% | 11% | | Churros | 6% | 6% | 6% | | Handheld Products | 4% | 5% | 5% | - The company provides managed service and/or products to approximately 145,000 company-owned and customer-owned frozen beverage dispensers[47] Customers The company has a concentrated customer base, with its top ten customers accounting for 43% of sales in fiscal year 2019, and sells to an estimated 85-90% of supermarkets in the United States Customer Concentration | Customer Group | % of Sales (FY 2019) | % of Sales (FY 2018) | % of Sales (FY 2017) | | :--- | :--- | :--- | :--- | | Top 10 Customers | 43% | 43% | 42% | | Largest Customer | 11% | 9.5% | 9.5% | - The company sells its products to an estimated 85-90% of supermarkets in the United States[53] Competition and Other Business Aspects The snack food and bakery markets are highly competitive, with J&J facing competition from larger and regional players, and its sales are seasonal with higher demand for frozen products in warmer months - The company's sales are seasonal, as frozen beverage and frozen juice treat sales are generally higher during warmer months[57] - The snack food and bakery markets are highly competitive, with competition based on product quality, customer service, taste, price, brand awareness, and distribution[62] - As of September 28, 2019, the company had about 4,600 full and part-time employees and approximately 1,500 workers from staffing agencies, with about 1,200 employees covered by collective bargaining agreements[68] Item 1A. Risk Factors The company faces several risks, including volatility in raw material and energy costs, customer concentration, intense competition, potential manufacturing disruptions, rising transportation costs, labor shortages, and reliance on key leadership - The company is exposed to market risks from adverse changes in commodity prices for raw materials and energy, which could impact profitability if price increases cannot be passed on to customers[72] - Significant customer concentration exists, with the top ten customers accounting for 43% of sales in FY2019, and the loss of one or more of these customers could adversely affect results[78] - The company's performance is greatly impacted by its founder, President, CEO, and Chairman, Gerald B. Shreiber, who beneficially owns 19% of common stock and holds enhanced voting rights on the Board of Directors[86] - The company is in the late stages of a multi-year implementation of a new enterprise resource planning (ERP) system, which carries risks of delays, increased costs, and potential disruption to business operations[93] Item 2. Properties J&J Snack Foods Corp. owns and leases numerous manufacturing, warehouse, and distribution facilities across the United States, Mexico, and Canada, including its corporate headquarters in Pennsauken, NJ - The company's corporate headquarters and primary east coast manufacturing facility for soft pretzels, churros, and funnel cake is an owned 70,000 sq. ft. building in Pennsauken, New Jersey[98] - The primary west coast manufacturing facility is a leased 137,000 sq. ft. building in Vernon, California, producing soft pretzels, churros, and baked goods[100] - In addition to manufacturing plants, the company leases approximately 160 warehouse and distribution facilities in 44 states, Mexico, and Canada[107] Item 3. Legal Proceedings The company reports no material pending legal proceedings outside of ordinary routine litigation incidental to its business - The Company has no material pending legal proceedings, other than ordinary routine litigation incidental to the business[108] Part II Part II details the company's common stock market, selected financial data, management's discussion and analysis, and market risk disclosures Item 5. Market For Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities The company's common stock trades on the NASDAQ Global Select Market under "JJSF", with fiscal 2019 stock prices ranging from $138.40 to $196.84 and quarterly dividends of $0.50 per share Fiscal 2019 Stock Price and Dividend Information | Quarter | High Price | Low Price | Dividend Declared | | :--- | :--- | :--- | :--- | | First | $162.80 | $138.65 | $0.5000 | | Second | $162.84 | $138.40 | $0.5000 | | Third | $167.50 | $150.61 | $0.5000 | | Fourth | $196.84 | $159.63 | $0.5000 | - The company did not purchase any of its common stock in fiscal year 2019, leaving 384,506 shares available for purchase under a plan announced in August 2017[114] Item 6. Selected Financial Data This section provides a five-year summary of key financial data from fiscal 2015 to 2019, showing net sales growth from $976.3 million to $1.186 billion and diluted EPS rising from $3.73 to $5.00 Five-Year Selected Financial Data (In thousands except per share data) | Indicator | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,186,487 | $1,138,265 | $1,084,224 | $992,781 | $976,256 | | Net Earnings | $94,819 | $103,596 | $79,174 | $75,975 | $70,183 | | Total Assets | $1,019,339 | $932,013 | $867,228 | $790,487 | $739,669 | | Stockholders' Equity | $833,751 | $759,091 | $682,322 | $637,974 | $599,919 | | Earnings Per Diluted Share | $5.00 | $5.51 | $4.21 | $4.05 | $3.73 | | Cash Dividends Declared Per Common Share | $2.00 | $1.80 | $1.68 | $1.56 | $1.44 | Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations In fiscal 2019, net sales increased 4% to $1.186 billion, and operating income rose 6% to $117.0 million, while net earnings decreased 8% to $94.8 million due to prior-year tax benefits, with the company maintaining a strong liquidity position and investing in facilities Critical Accounting Policies The company's critical accounting policies involve significant judgments and estimates in revenue recognition, allowance for doubtful receivables, asset impairment testing for goodwill and other intangibles, and insurance reserves - The company adopted the new ASC 606 revenue recognition guidance in fiscal 2019 using a modified retrospective approach, which did not have a material impact on financial results[124] - Goodwill, totaling $102.5 million as of September 28, 2019, is evaluated annually for impairment at the reporting unit level using a discounted cash flow method, with no impairment found in the latest test[140] - The company self-insures for its medical plan and, up to loss limits, for worker's compensation and automobile liability, with recorded liabilities of $1.4 million for medical claims and $8.7 million for worker's comp/auto at the end of fiscal 2019[143][144] Results of Operations: Fiscal 2019 vs. 2018 In fiscal 2019, net sales grew 4% to $1.186 billion, driven by increases in Food Service and Frozen Beverages sales, while net earnings fell 8% to $94.8 million due to prior-year tax benefits FY 2019 vs. FY 2018 Performance (in millions) | Metric | FY 2019 | FY 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,186.5M | $1,138.3M | +4% | | Operating Income | $117.0M | $110.8M | +6% | | Net Earnings | $94.8M | $103.6M | -8% | | Diluted EPS | $5.00 | $5.51 | -9% | - Food Service sales rose 2% to $761.6 million, with churro sales up 7% and bakery sales up 4%, while handheld sales declined 19%[151] - Frozen Beverages sales increased 13% to $305.6 million, with machine revenue growing significantly from $28.7 million in 2018 to $45.8 million in 2019[154] - The decrease in net earnings was primarily due to a $20.7 million gain on the remeasurement of deferred tax liabilities in FY2018 following the Tax Cuts and Jobs Act[161] Results of Operations: Fiscal 2018 vs. 2017 Fiscal 2018 net sales increased 5% to $1.138 billion, driven by growth across segments, but operating income decreased 6% to $110.8 million due to higher costs, while net earnings surged 31% to $103.6 million due to tax benefits FY 2018 vs. FY 2017 Performance (in millions) | Metric | FY 2018 (52 wks) | FY 2017 (53 wks) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,138.3M | $1,084.2M | +5% | | Operating Income | $110.8M | $118.1M | -6% | | Net Earnings | $103.6M | $79.2M | +31% | | Diluted EPS | $5.51 | $4.21 | +31% | - Operating income in 2018 was negatively impacted by approximately $5.3 million in higher distribution costs and $1.8 million from the MARY B's biscuits recall[168] - The significant increase in net earnings was driven by a $20.7 million gain on remeasurement of deferred tax liabilities and an $8.8 million reduction in income taxes due to the Tax Cuts and Jobs Act[177] Liquidity and Capital Resources The company's liquidity position strengthened in fiscal 2019, with cash and marketable securities increasing by $66.7 million to $342.7 million, supported by strong operating cash flow and a $50 million undrawn revolving credit facility Cash Flow Summary (FY 2019 vs. FY 2018) (in millions) | Cash Flow Activity (in millions) | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $147.5 | $123.4 | | Net cash used in investing activities | ($43.4) | ($73.1) | | Net cash used in financing activities | ($22.8) | ($27.3) | - Cash and marketable securities increased by $66.7 million (24%) to $342.7 million at the end of fiscal 2019[193] - The company has a $50 million revolving credit facility that was undrawn at the end of fiscal 2019 and 2018[188] Contractual Cash Flow Commitments (in thousands) | Commitment | Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Capital lease obligations | $1,057 | $339 | $505 | $213 | $ - | | Purchase commitments | $100,000 | $97,000 | $3,000 | $ - | $ - | | Operating leases | $79,538 | $14,814 | $23,177 | $15,959 | $25,588 | | Total | $180,595 | $112,153 | $26,682 | $16,172 | $25,588 | Item 7A. Quantitative And Qualitative Disclosures About Market Risk The company's primary market risk stems from commodity price volatility for raw materials, mitigated by forward purchasing contracts, with no significant interest rate or foreign exchange rate risk due to the absence of long-term debt or hedging contracts - The company's primary market risk is from commodity price volatility for its raw materials, mitigated through forward purchasing contracts, generally for 1 to 12 months[225] - As of September 28, 2019, the company had no long-term debt obligations, minimizing its exposure to interest rate risk[224] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of September 28, 2019, with an unqualified opinion from Grant Thornton LLP - Management concluded that the company's disclosure controls and procedures were effective as of the fiscal year-end, September 28, 2019[229] - Based on an assessment using the COSO 2013 framework, management believes the company's internal control over financial reporting was effective as of September 28, 2019[234] Part III Part III outlines the company's directors, executive officers, corporate governance practices, and security ownership Item 10. Directors, Executive Officers and Corporate Governance This section lists the company's executive officers, including founder Gerald B. Shreiber as Chairman, President, and CEO, with further details on directors and governance incorporated by reference from the proxy statement Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Gerald B. Shreiber | 77 | Chairman of the Board, President, Chief Executive Officer and Director | | Dennis G. Moore | 63 | Senior Vice President, Chief Financial Officer Treasurer and Director | | Robert M. Radano | 70 | Senior Vice President,Sales and Chief Operating Officer | | Dan Fachner | 59 | President of The ICEE Company Subsidiary | | Gerard G. Law | 45 | Senior Vice President and Assistant to the President | | Robert J. Pape | 62 | Senior Vice President Sales | Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters As of September 28, 2019, 802,000 securities were to be issued upon the exercise of outstanding options under equity compensation plans, with a weighted-average exercise price of $128.25, and 916,000 additional securities remained available for future issuance Equity Compensation Plan Information (as of September 28, 2019) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 802,000 | $128.25 | 916,000 | Part IV Part IV lists the exhibits and financial statement schedules, including the consolidated financial statements and notes Item 15. Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including consolidated financial statements, schedules, and various exhibits - This section provides a list of all financial statements, schedules, and exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications[254][256] Financial Statements and Notes The audited consolidated financial statements for fiscal years 2017-2019 are presented, showing total assets grew to $1.019 billion in 2019 from $932 million in 2018, with detailed disclosures on accounting policies and segment performance Consolidated Balance Sheets As of September 28, 2019, total assets were $1.019 billion, driven by a significant increase in cash and cash equivalents to $192.4 million, with total liabilities at $185.6 million and stockholders' equity at $833.8 million Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 28, 2019 | Sep 29, 2018 | | :--- | :--- | :--- | | Total Current Assets | $506,357 | $382,797 | | Cash and cash equivalents | $192,395 | $111,479 | | Total Assets | $1,019,339 | $932,013 | | Total Current Liabilities | $121,234 | $117,899 | | Total Liabilities | $185,618 | $172,922 | | Total Stockholders' Equity | $833,751 | $759,091 | Consolidated Statements of Earnings For fiscal year 2019, net sales were $1.186 billion, with operating income rising to $117.0 million, but net earnings decreased to $94.8 million or $5.00 per diluted share, primarily due to differences in income tax provisions Consolidated Statement of Earnings (in thousands, except per share) | Metric | FY 2019 (52 wks) | FY 2018 (52 wks) | FY 2017 (53 wks) | | :--- | :--- | :--- | :--- | | Net Sales | $1,186,487 | $1,138,265 | $1,084,224 | | Gross Profit | $350,401 | $336,286 | $331,023 | | Operating Income | $116,956 | $110,775 | $118,107 | | Net Earnings | $94,819 | $103,596 | $79,174 | | Earnings per diluted share | $5.00 | $5.51 | $4.21 | Consolidated Statements of Cash Flows For fiscal year 2019, net cash provided by operating activities was $147.5 million, with net cash used in investing activities at $43.4 million and financing activities at $22.8 million, resulting in an $80.9 million net increase in cash and cash equivalents Consolidated Statement of Cash Flows (in thousands) | Cash Flow Activity | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $147,499 | $123,367 | $125,349 | | Net cash used in investing activities | ($43,363) | ($73,139) | ($135,319) | | Net cash used in financing activities | ($22,826) | ($27,336) | ($42,213) | | Net increase (decrease) in cash | $80,916 | $20,517 | ($49,690) | | Cash at end of year | $192,395 | $111,479 | $90,962 | Note O – Segment Reporting In fiscal 2019, the Food Service segment was the largest contributor to sales with $761.6 million and operating income at $78.1 million, followed by Frozen Beverages and Retail Supermarket segments Segment Performance for Fiscal Year 2019 (in thousands) | Segment | Sales to External Customers | Operating Income | Capital Expenditures | Total Assets | | :--- | :--- | :--- | :--- | :--- | | Food Service | $761,603 | $78,130 | $29,197 | $772,777 | | Retail Supermarket | $119,276 | $8,876 | $1,979 | $22,673 | | Frozen Beverages | $305,608 | $29,950 | $25,952 | $223,889 | | Total | $1,186,487 | $116,956 | $57,128 | $1,019,339 |