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 Form 10-K covers the 52-week fiscal year ended September 24, 2016; comparisons are with the 52-week year ended September 26, 2015. The filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $992.8 million | $976.3 million |
| Gross profit / margin | $304.5 million / 30.67% | $300.9 million / 30.82% |
| Operating income | $112.8 million | $110.9 million |
| Net earnings | $76.0 million | $70.2 million |
| Diluted EPS | $4.05 | $3.73 |
| Operating cash flow | $121.2 million | $103.9 million |
| Capital expenditures | $48.7 million | $48.6 million |
Revenue grew 2%; net earnings rose 8%. Gross margin eased 0.15 percentage points. Operating expenses were $191.7 million, or 19.31% of sales, versus 19.46%. The effective tax rate was 35.0%, compared with 37.3%.
By segment, Food Service sales were $621.5 million and operating income $76.5 million; Retail Supermarkets sales were $117.6 million and operating income $9.6 million; Frozen Beverages sales were $253.7 million and operating income $26.7 million. Segment sales increased in Food Service and Frozen Beverages, but declined 5% in Retail Supermarkets.
At year-end, cash and cash equivalents were $140.7 million and marketable securities totaled $133.7 million, for combined cash and securities of $274.4 million. Total assets were $790.5 million and stockholders’ equity was $638.0 million. The company had no long-term debt and $1.6 million of capital lease obligations. In November 2016, it amended its bank agreement to provide a $50 million revolving credit facility through November 2021; no amount was outstanding at fiscal year-end.
Material changes versus the prior year
- Frozen Beverages sales rose 7% and operating income rose to $26.7 million, supported by higher beverage, service and machine sales.
- Food Service sales increased less than 1%. Higher handheld and funnel-cake sales offset declines in frozen juice and bakery products; segment operating income increased modestly.
- Retail Supermarkets sales fell 5% and operating income declined to $9.6 million, reflecting lower sales volumes and higher trade spending for new products.
- Investment income increased to $4.1 million from $1.2 million, principally because realized losses on mutual-fund sales were lower than in 2015. Net cash used in investing activities rose to $74.6 million, including net purchases of marketable securities.
- Share repurchases were $15.3 million, versus $8.0 million, and declared dividends increased to $1.56 per share from $1.44.
Outlook, commentary and risks
Management expected the Food Service issues of lower fourth-quarter sales and higher manufacturing expenses to continue into fiscal 2017’s first quarter. It also identified costs associated with withdrawing certain bakery products over quality issues; these costs accounted for approximately one-quarter of the $6.2 million year-over-year decline in fourth-quarter Food Service operating income. Fiscal 2017’s expected effective tax rate was 35%–35.5%. The filing gives no broader quantified earnings or sales guidance.
Management said cash, investments, expected operating cash flow and borrowing capacity should be sufficient to fund growth and expansion. It continued to seek acquisitions and anticipated possible future share repurchases. Capital expenditures were approximately $48.7 million in FY2016.
Key risks include volatile commodity and energy costs, competition and pricing pressure, customer concentration (top ten customers generated 42% of sales; largest customer 8%), customer credit risk, seasonal demand, manufacturing or distribution disruption, product quality and consumer acceptance, foreign currency exposure, and integration of acquisitions. Management reported no material pending litigation apart from routine matters. Goodwill impairment tests found no impairment; the estimates depend on assumptions about future cash flows and operating performance.
Most important facts for investors to verify
- Whether the bakery-product quality withdrawal and related manufacturing issues continue to affect Food Service results in FY2017.
- Whether growth in Frozen Beverages can offset continued softness in Retail Supermarkets and parts of Food Service.
- The composition, liquidity, valuation and income contribution of the $133.7 million securities portfolio, alongside the company’s substantial cash balance.
- Customer concentration, receivables collectability and the increase in bad-debt expense to $525,000 from $310,000.
- Execution and returns on substantial capital spending, and compliance with the new $50 million revolving facility’s covenants.