J&J Snack Foods Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 29, 2018 (52 weeks), compared with FY2017 (53 weeks). The filing also reports fourth-quarter results. The company manufactures snack foods and distributes frozen beverages across Food Service, Retail Supermarkets, and Frozen Beverages.
Key financial results
| Metric | FY2018 | FY2017 | Change/comment |
|---|---|---|---|
| Net sales | $1,138.3 million | $1,084.2 million | Up 5%; about 7% excluding FY2017’s extra week |
| Gross profit margin | 29.54% | 30.53% | Down 0.99 percentage points |
| Operating income | $110.8 million | $118.1 million | Down 6%; margin about 9.7% vs. 10.9% |
| Net earnings | $103.6 million | $79.2 million | Up 31%; significantly affected by tax items |
| Diluted EPS | $5.51 | $4.21 | Up 31% |
| Operating cash flow | $123.4 million | $125.3 million | Down $2.0 million |
| Capital expenditures | $60.0 million | $72.2 million | Lower year over year |
FY2018 fourth-quarter sales were $300.7 million versus $316.7 million; net earnings were $23.4 million versus $24.3 million, and diluted EPS was $1.24 versus $1.29.
Segments and material changes
- Food Service: Sales rose 6% to $745.9 million; excluding the extra FY2017 week, growth was about 9%. Operating income fell to $74.1 million from $81.2 million. Pretzel and bakery sales increased, while frozen juice treats and desserts declined 14% and churros declined 2%.
- Retail Supermarkets: Sales rose 1% to $120.9 million (about 3% excluding the extra week); operating income fell to $8.3 million from $10.6 million. Sour Patch Kids frozen novelties helped sales, while handheld products continued to decline.
- Frozen Beverages: Sales rose 3% to $271.4 million (about 5% excluding the extra week); operating income increased to $28.4 million from $26.3 million. Beverage and service revenue improved, while machine sales fell to $23.8 million from $27.1 million.
- After excluding acquired-business sales and FY2017’s extra week, management reported consolidated sales growth of about 4%. Acquisitions included Hill & Valley, an ICEE distributor, and Labriola Bakery.
Gross margin and operating income were pressured by higher payroll, insurance, ingredient and distribution costs; Labriola production inefficiencies; Chambersburg shutdown costs; idle overhead during a facility upgrade; and Mary B’s biscuit recall-related costs. Distribution expense increased, partly from higher fuel costs and electronic logging requirements.
Liquidity, debt and capital
- Cash and marketable securities totaled $276.0 million, up from $241.2 million. Cash and cash equivalents were $111.5 million; accounts receivable was $132.3 million and inventory was $112.9 million.
- Current assets were $382.8 million and current liabilities $117.9 million. Total assets were $932.0 million; stockholders’ equity was $759.1 million.
- No long-term debt or revolving-credit borrowings were outstanding. The company had an undrawn $50 million revolving facility available through November 2021 and reported covenant compliance. Capital lease obligations were $1.1 million.
- Investing activities used $73.1 million, including $60.0 million of capital expenditures. Financing activities used $27.3 million, including $33.1 million of cash dividends. The declared annual dividend was $1.80 per share.
Outlook, risks and unusual items
- Management estimated an FY2019 effective tax rate of 26%–27%. Distribution expenses were expected to remain elevated through at least FY2019’s first quarter. No detailed revenue or earnings guidance was provided.
- FY2018 net earnings included a $20.9 million deferred-tax remeasurement gain and an $8.8 million income-tax reduction primarily associated with the federal tax-rate change. They were partly offset by a $1.2 million one-time repatriation-tax provision and a $1.4 million expense from New Jersey tax changes. Management’s adjusted effective tax rate, excluding these items, was 27.8%, versus 35.2% in FY2017.
- Other reported items included a $520,000 gain on property sale, $869,000 reimbursement for business-interruption losses related to the Mary B’s recall, and about $500,000 of Hurricane Florence-related costs.
- Key risks include commodity, energy, labor and freight costs; food safety and product liability; intense competition; customer concentration (top ten customers generated 43% of sales, and the largest about 9.5%); seasonality and weather; manufacturing or distribution disruptions; foreign operations; and information-technology and cybersecurity failures. Forward-looking statements are subject to risks and are not guaranteed.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. The filing reports no material pending legal proceedings.
Important facts for investors to verify
- How much FY2018 earnings growth is sustainable after separating tax benefits and one-time items from operating performance.
- Whether Food Service margin and operating income recover from cost pressure, recall costs and production inefficiencies.
- Whether FY2019 distribution costs, commodity prices, wages and insurance costs continue to weigh on margins.
- Sales and profitability trends in acquired businesses, and the durability of growth from new products and licenses.
- Customer concentration, working-capital needs, planned capital spending, and the liquidity and market risks of the company’s investment portfolio.