J&J Snack Foods Corp. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 28, 2019 (52 weeks), compared with FY2018 (52 weeks). The filing also reports fourth-quarter FY2019 results; it is an annual report, not a standalone quarterly filing.
Business context and financial performance
J&J manufactures and distributes snack foods and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages. Products include soft pretzels, bakery goods, frozen treats and ICEE beverages.
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $1,186.5 million | $1,138.3 million | +4% |
| Gross profit / margin | $350.4 million / 29.53% | $336.3 million / 29.54% | Margin essentially flat |
| Operating income | $117.0 million | $110.8 million | +6% |
| Net earnings | $94.8 million | $103.6 million | -8% |
| Diluted EPS | $5.00 | $5.51 | -9% |
| Cash provided by operations | $147.5 million | $123.4 million | +$24.1 million |
| Capital expenditures | $57.1 million | $60.0 million | -$2.9 million |
Fourth-quarter FY2019 sales were $311.9 million, gross profit $92.9 million, net earnings $26.1 million and diluted EPS $1.36. The supplied filing text does not provide a clear comparable fourth-quarter FY2018 figure.
Segments
- Food Service: Sales rose 2% to $761.6 million; operating income increased to $78.1 million from $74.1 million. Pricing and improved manufacturing operations helped. Management said price increases contributed about $15 million of sales while net volume, including new products, was essentially flat. Bakery growth was concentrated in one customer; handheld sales fell 19%.
- Retail Supermarkets: Sales fell 1% to $119.3 million; operating income rose to $8.9 million from $8.3 million, primarily on pricing. Net volume declined about $5.5 million, with frozen-treat sales affected by lost volume and placements following price increases.
- Frozen Beverages: Sales increased 13% to $305.6 million; operating income rose to $30.0 million from $28.4 million. Machine revenue increased to $45.8 million from $28.7 million, mostly from two customers; management noted that some increased distributor flow-through sales did not benefit operating income.
Liquidity, debt and capital
- Cash and cash equivalents were $192.4 million. Cash plus marketable securities totaled $342.7 million, up $66.7 million year over year.
- Operating cash flow was $147.5 million; investing activities used $43.4 million and financing activities used $22.8 million. Capital spending was $57.1 million, mainly for manufacturing improvements, capacity and frozen-beverage operations.
- No long-term debt was outstanding. The company had an undrawn $50 million revolving credit facility due November 2021 and reported compliance with its covenants. Capital lease obligations were $1.1 million.
- Dividends declared were $2.00 per share, up from $1.80. No shares were repurchased during FY2019.
Changes, outlook, risks and unusual items
- Sales growth did not translate into net earnings growth. FY2018 included substantial Tax Act-related benefits: a $20.7 million deferred-tax remeasurement gain and an $8.8 million income-tax reduction. FY2019 earnings included a $0.9 million tax benefit from revising the prior-year repatriation-tax estimate; the filing attributes the annual earnings decline chiefly to these tax-period differences and other reported items.
- FY2019 gross margin was stable as pricing and operating improvements were offset by lower-margin machine sales and bakery mix. Operating expenses increased in dollars but declined as a share of sales.
- Other income included a $2.0 million customer payment for cancellation of production under a co-manufacturing agreement. The filing reports no material pending legal proceedings beyond routine litigation.
- Management said operating cash flow, borrowing capacity, cash and investments should be sufficient to fund growth and expansion, and that it was actively seeking acquisitions. No specific sales or earnings guidance for a subsequent period is provided.
- On October 1, 2019, the company acquired ICEE Distributors LLC for approximately $45 million. The distributor operates in Arkansas, Louisiana and Texas and has annual sales of about $13 million; purchase-price allocation was not yet complete.
- Key risks include customer concentration (top ten represented 43% of sales; largest customer 11%), commodity and labor costs, competition, transport costs, manufacturing capacity and disruption, food safety and recalls, seasonality, foreign currency exposure, and information-technology and ERP implementation risks. The company also self-insures certain claims.
- The company expected adoption of the new lease-accounting standard in FY2020 to materially increase reported assets and liabilities; the filing’s stated estimated range is unclear in the supplied text.
Important facts for investors to verify
- How much of sales growth is sustainable volume growth versus pricing, mix and machine sales, particularly in Frozen Beverages.
- The underlying earnings trend after adjusting for FY2018 Tax Act benefits and FY2019 tax adjustments.
- Customer concentration and the effect of the largest customer’s purchasing decisions on sales and receivables.
- The valuation, financing and integration results of the October 2019 ICEE distributor acquisition.
- Actual costs and balance-sheet effects from FY2020 lease-accounting adoption, and progress on ERP implementation and manufacturing investments.