Business context and reporting period
J&J Snack Foods Corp. manufactures and distributes snack foods and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages segments. This 10-K covers the fiscal year ended September 30, 2017, a 53-week year, compared with 52 weeks in fiscal 2016. Dollar amounts below are in millions unless stated otherwise.
Financial performance and key metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1,084.2 | $992.8 |
| Gross profit / margin | $331.0 / 30.53% | $304.5 / 30.67% |
| Operating income / margin | $118.1 / 10.89% | $112.8 / 11.36% |
| Net earnings / diluted EPS | $79.2 / $4.21 | $76.0 / $4.05 |
| Net cash from operating activities | $125.3 | $121.2 |
| Capital expenditures | $72.2 | $48.7 |
| Cash and marketable securities | $241.2 | $274.4 |
Quarter four sales were $316.7 million versus $262.2 million; net earnings were $24.3 million versus $20.6 million, and diluted EPS was $1.29 versus $1.10. Annual diluted EPS is reported as $4.21; quarterly EPS totals may differ because quarterly share counts are calculated separately.
At year-end, total assets were $867.2 million and stockholders’ equity was $682.3 million. The company had no long-term debt and no borrowings on its $50 million revolving credit facility, which matures in November 2021. Capital lease obligations were $1.2 million. Current assets were $381.8 million and current liabilities $119.0 million. The company reported $90.96 million in cash and $150.28 million in marketable securities. Operating cash flow exceeded net earnings, while investing and financing activities used $135.3 million and $42.2 million, respectively.
Material changes versus the prior comparable period
- Sales increased 9% as reported; excluding the extra week, growth was approximately 7%. Excluding the extra week and sales from acquisitions, management reported approximately 3% growth.
- Food Service sales rose 13% to $701.8 million; segment operating income rose to $81.2 million from $76.5 million. Retail Supermarkets sales increased 1% to $119.2 million and operating income rose to $10.6 million. Frozen Beverages sales increased 4% to $263.2 million, while operating income declined to $26.3 million from $26.7 million.
- Operating expenses increased to $212.9 million and rose to 19.64% of sales from 19.31%. Gross margin edged down, with higher payroll-related costs and distribution costs among the pressures.
- Net cash and marketable securities declined $33.1 million. Higher capital spending, acquisitions, share repurchases and dividends were significant uses of cash. Capital spending increased to $72.2 million, primarily for facility modernization, expansion and frozen beverage operations.
- The company acquired Hill & Valley, an ICEE distributor in Georgia and Tennessee, and Labriola Baking for approximately $31 million, $11 million and $6 million, respectively. Their reported FY 2017 sales were $35.8 million, $1.7 million and $2.1 million; Hill & Valley contributed $0.65 million of operating income.
Outlook, commentary, risks and unusual items
- Management estimated a fiscal 2018 effective tax rate of approximately 36%; the filing provides no specific sales or earnings guidance. Management said operating cash flow, borrowing capacity, cash and investments should be sufficient to fund future growth and expansion, while noting that acquisitions and investment needs may use substantial cash.
- FY 2017 results included a $1.8 million insurance recovery gain related to prior-year product quality issues. FY 2016 included approximately $1.5 million of costs related to bakery products withdrawn because of quality concerns. FY 2017 also included $1.07 million of acquisition expenses.
- Revenue growth included acquired businesses and an extra week; management said volume, including new products and acquisitions, drove most Food Service growth, while price increases had only a marginal impact. New products generated approximately $43 million of Food Service sales in their first 12 months.
- Key risks include raw-material and energy price or availability changes, intense competition, customer concentration, product safety and quality, seasonal demand, manufacturing or distribution disruptions, cybersecurity and IT failures, foreign currency and operating risks, and the company’s ability to integrate acquisitions. The top ten customers represented 42% of sales; the largest represented 9%. The founder and CEO beneficially owned 20% of shares and has enhanced voting rights on Board matters.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements and no impairment charges in FY 2017. Management and the independent auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of ongoing growth is organic, given the 53-week year and the contribution from acquisitions.
- Whether recent acquisitions, particularly Hill & Valley, improve operating margins as integration progresses.
- Whether the sharp rise in receivables—up 27% to $124.6 million, partly due to September sales timing—converts to cash as expected; inventories also rose 16% to $103.3 million.
- Returns and liquidity of the $150.3 million securities portfolio, including market-value and interest-rate exposure.
- Execution and returns on increased capital spending, alongside customer concentration, commodity-cost exposure and the $75 million of raw-material and packaging purchase commitments.