In addition to historical information, this document and analysis contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Critical Accounting Policies, Judgments and Estimates
We prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. The preparation of such
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of those financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company discloses its significant accounting policies in the accompanying
notes to its audited consolidated financial statements.
Judgments and estimates of uncertainties are required in applying the Company's
accounting policies in certain areas. Following are some of the areas requiring
significant judgments and estimates: revenue recognition, accounts receivable,
cash flow and valuation assumptions in performing asset impairment tests of
long-lived and intangible assets, estimates of the value and useful lives of
intangible assets, insurance reserves, inventories and income taxes.
There are numerous critical assumptions that may influence accounting estimates
in these and other areas. We base our critical assumptions on historical
experience, third-party data and various other estimates we believe to be
reasonable. A description of the aforementioned policies follows:
Revenue Recognition - We adopted the new revenue recognition guidance on the
first day of our fiscal 2019 year using a modified retrospective approach;
however, we did not record a cumulative-effect adjustment from initially
applying the standard as the adoption did not have a material impact on our
financial position or results of operations. We completed a review of customer
contracts and evaluated the impact of the new standard on certain common
practices currently employed by us. We also finalized our assessment of the
impact on our accounting policies, processes, system requirements, internal
controls and disclosures.
When Performance Obligations Are Satisfied
A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer and is the unit of account for revenue recognition. A
contract's transaction price is allocated to each distinct performance
obligation and recognized as revenue when, or as, the performance obligation is
satisfied.
The singular performance obligation of our customer contracts for product and
machine sales is determined by each individual purchase order and the respective
products ordered, with revenue being recognized at a point-in-time when the
obligation under the terms of the agreement is satisfied and product control is
transferred to our customer. Specifically, control transfers to our customers
when the product is delivered to, installed or picked up by our customers based
upon applicable shipping terms, as our customers can direct the use and obtain
substantially all of the remaining benefits from the product at this point in
time. The performance obligations in our customer contracts for product are
generally satisfied within 30 days.
The singular performance obligation of our customer contracts for time and
material repair and maintenance equipment service is the performance of the
repair and maintenance with revenue being recognized at a point-in-time when the
repair and maintenance is completed.
The singular performance obligation of our customer repair and maintenance
equipment service contracts is the performance of the repair and maintenance
with revenue being recognized over the time the service is expected to be
performed. Our customers are billed for service contracts in advance of
performance and therefore we have contract liability on our balance sheet.
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Significant Payment Terms
In general, within our customer contracts, the purchase order identifies the
product, quantity, price, pick-up allowances, payment terms and final delivery
terms. Although some payment terms may be more extended, presently the majority
of our payment terms are 30 days. As a result, we have used the available
practical expedient and, consequently, do not adjust our revenues for the
effects of a significant financing component.
Shipping
All amounts billed to customers related to shipping and handling are classified
as revenues; therefore, we recognize revenue for shipping and handling fees at
the time the products are shipped or when services are performed. The cost of
shipping products to the customer is recognized at the time the products are
shipped to the customer and our policy is to classify them as Distribution
expenses.
Variable Consideration
In addition to fixed contract consideration, our contracts include some form of
variable consideration, including sales discounts, trade promotions and certain
other sales and consumer incentives, including rebates and coupon redemptions.
In general, variable consideration is treated as a reduction in revenue when the
related revenue is recognized. Depending on the specific type of variable
consideration, we use the most likely amount method to determine the variable
consideration. We believe there will be no significant changes to our estimates
of variable consideration when any related uncertainties are resolved with our
customers. We review and update our estimates and related accruals of variable
consideration each period based on historical experience.
Warranties & Returns
We provide all customers with a standard or assurance type warranty. Either
stated or implied, we provide assurance the related products will comply with
all agreed-upon specifications and other warranties provided under the law. No
services beyond an assurance warranty are provided to our customers.
We do not grant a general right of return. However, customers may return
defective or non-conforming products. Customer remedies may include either a
cash refund or an exchange of the product. We do not estimate a right of return
and related refund liability as returns of our products are rare.
Contract Balances
Our customers are billed for service contracts in advance of performance and
therefore we have contract liability on our balance sheet as follows:
Fiscal Year Ended
September 28, September 29,
2019 2018
(in thousands)
Beginning Balance $ 1,865 $ 1,956
Additions to contract liability 6,308 6,887
Amounts recognized as revenue (6,839 ) (6,978 )
Ending Balance $ 1,334 $ 1,865
Disaggregation of Revenue
See Note O of the Notes to our Consolidated Financial Statements for
disaggregation of our net sales by class of similar product and type of
customer.
Allowance for Doubtful Receivables
We provide an allowance for doubtful receivables after taking into consideration
historical experience and other factors. The allowance for doubtful receivables
was $665,000 and $400,000 at June 29, 2019 and September 29, 2018, respectively.
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Accounts Receivable - We record accounts receivable at the time revenue is
recognized. Bad debt expense is recorded in marketing and administrative
expenses. The amount of the allowance for doubtful accounts is based on our
estimate of the accounts receivable amount that is uncollectable. It is
comprised of a general reserve based on historical experience and amounts for
specific customers' accounts receivable balances that we believe are at risk due
to our knowledge of facts regarding the customer(s). We continually monitor our
estimate of the allowance for doubtful accounts and adjust it monthly. We
usually have approximately 15 customers with accounts receivable balances of
between $1 million to $10 million. Failure of these customers, and others with
lesser balances, to pay us the amounts owed, could have a material impact on our
consolidated financial statements.
Accounts receivable due from any of our customers is subject to risk. Our total
bad debt expense was $389,000, $259,000 and $122,000 for the fiscal years 2019,
2018 and 2017, respectively. At September 28, 2019 and September 29, 2018, our
accounts receivables were $140,938,000 and $132,342,000 net of an allowance for
doubtful accounts of $572,000 and $400,000.
Asset Impairment - We have three reporting units with goodwill totaling
$102,511,000 as of September 28, 2019. Goodwill is evaluated annually by the
Company for impairment. We perform impairment tests at year end for our
reporting units, which is also the operating segment level, with recorded
goodwill utilizing primarily the discounted cash flow method. This methodology
used to estimate the fair value of the total Company and its reporting units
requires inputs and assumptions (i.e. revenue growth, operating profit margins,
capital spending requirements and discount rates) that reflect current market
conditions. The estimated fair value of each reporting unit is compared to the
carrying value of the reporting unit. If the carrying value of the reporting
unit exceeds its fair value, the goodwill of the reporting unit is potentially
impaired, and the Company then determines the implied fair value of goodwill,
which is compared to the carrying value of goodwill to determine if impairment
exists. Our tests at September 28, 2019 show that the fair value of each of our
reporting units with goodwill exceeded its carrying value. Therefore no further
analysis was required. The inputs and assumptions used involve considerable
management judgment and are based upon assumptions about expected future
operating performance. Assumptions used in these forecasts are consistent with
internal planning. The actual performance of the reporting units could differ
from management's estimates due to changes in business conditions, operating
performance, economic conditions, competition and consumer preferences.
Licenses and rights, customer relationships and non- compete agreements are
being amortized by the straight-line method over periods ranging from 2 to 20
years and amortization expense is reflected throughout operating expenses.
Long-lived assets, including fixed assets and amortizing intangibles, are
reviewed for impairment as events or changes in circumstances occur indicating
that the carrying amount of the asset may not be recoverable. Indefinite lived
intangibles are reviewed annually for impairment. Cash flow and sales analyses
are used to assess impairment. The estimates of future cash flows and sales
involve considerable management judgment and are based upon assumptions about
expected future operating performance. Assumptions used in these forecasts are
consistent with internal planning. The actual cash flows and sales could differ
from management's estimates due to changes in business conditions, operating
performance, economic conditions, competition and consumer preferences.
Useful Lives of Intangible Assets - Most of our trade names which have carrying
value have been assigned an indefinite life and are not amortized because we
plan to receive the benefit from them indefinitely. If we decide to curtail or
eliminate the use of any of the trade names or if sales that are generated from
any particular trade name do not support the carrying value of the trade name,
then we would record impairment or assign an estimated useful life and amortize
over the remaining useful life. Rights such as prepaid licenses and non-compete
agreements are amortized over contractual periods. The useful lives of customer
relationships are based on the discounted cash flows expected to be received
from sales to the customers adjusted for an attrition rate. The loss of a major
customer or declining sales in general could create an impairment charge.
Insurance Reserves - We have a self-insured medical plan which covers
approximately 1,700 of our employees. We record a liability for incurred but not
yet reported or paid claims based on our historical experience of claims
payments and a calculated lag time period. We maintain a spreadsheet that
includes claims payments made each month according to the date the claim was
incurred. This enables us to have an historical record of claims incurred but
not yet paid at any point in the past. We then compare our accrued liability to
the more recent claims incurred but not yet paid amounts and adjust our recorded
liability up or down accordingly. Our recorded liability at September 28, 2019
and September 29, 2018 was $1,392,000 and $2,058,000, respectively. Considering
that we have stop loss coverage of $200,000 for each individual plan subscriber,
the general consistency of claims payments and the short time lag, we believe
that there is not a material exposure for this liability. Because of the
foregoing, we do not engage a third party actuary to assist in this analysis.
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We self-insure, up to loss limits, worker's compensation and automobile
liability claims. Accruals for claims under our self-insurance program are
recorded on a claims-incurred basis. Under this program, the estimated liability
for claims incurred but unpaid in fiscal years 2019 and 2018 was $3,300,000 and
$4,100,000 respectively. Our total recorded liability for all years' claims
incurred but not yet paid was $8,700,000 and $9,200,000 at September 28, 2019
and September 29, 2018, respectively. We estimate the liability based on total
incurred claims and paid claims adjusting for loss development factors which
account for the development of open claims over time. We estimate the amounts we
expect to pay for some insurance years by multiplying incurred losses by a loss
development factor which is based on insurance industry averages and the age of
the incurred claims; our estimated liability is then the difference between the
amounts we expect to pay and the amounts we have already paid for those years.
Loss development factors that we use range from 1.0 to 2.0. However, for some
years, the estimated liability is the difference between the amounts we have
already paid for that year and the maximum we could pay under the program in
effect for that particular year because the calculated amount we expect to pay
is higher than the maximum. For other years, where there are few claims open,
the estimated liability we record is the amount the insurance company has
reserved for those claims. We evaluate our estimated liability on a continuing
basis and adjust it accordingly. Due to the multi-year length of these insurance
programs, there is exposure to claims coming in lower or higher than
anticipated; however, due to constant monitoring and stop loss coverage of
$350,000 on individual claims, we believe our exposure is not material. Because
of the foregoing, we do not engage a third party actuary to assist in this
analysis. In connection with these self-insurance agreements, we customarily
enter into letters of credit arrangements with our insurers. At both September
28, 2019 and September 29, 2018, we had outstanding letters of credit totaling
$9,275,000.
Inventories - Inventories are valued at the lower of cost (determined by the
first-in, first-out method) or market. We recognize abnormal amounts of idle
facilities, freight, handling costs, and spoilage as charges of the current
period. Additionally, we allocate fixed production overhead to
inventories based on the normal capacity of our production facilities. We
calculate normal capacity as the production expected to be achieved over a
number of periods or seasons under normal circumstances, taking into account the
loss of capacity resulting from planned maintenance. This requires us to use
judgment to determine when production is outside the range of expected variation
in production (either abnormally low or abnormally high). In periods of
abnormally low production (for example, periods in which there is significantly
lower demand, labor and material shortages exist, or there is unplanned
equipment downtime) the amount of fixed overhead allocated to each unit of
production is not increased. However, in periods of abnormally high production
the amount of fixed overhead allocated to each unit of production is decreased
to assure inventories are not measured above cost.
Income Taxes - We account for our income taxes under the liability method.
Under the liability method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates that will be in effect when
these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.
Refer to Note A to the accompanying consolidated financial statements for
additional information on our accounting policies.
RESULTS OF OPERATIONS:
Fiscal 2019 (52 weeks) Compared to Fiscal Year 2018 (52 weeks)
Net sales increased $48,222,000, or 4%, to $1,186,487,000 in fiscal 2019 from
$1,138,265,000 in fiscal 2018.
We have three reportable segments, as disclosed in the accompanying notes to the
consolidated financial statements: Food Service, Retail Supermarkets and Frozen
Beverages.
The Chief Operating Decision Maker for Food Service and Retail Supermarkets and
the Chief Operating Decision Maker for Frozen Beverages monthly review detailed
operating income statements and sales reports in order to assess performance and
allocate resources to each individual segment. Sales and operating income are
the key variables monitored by the Chief Operating Decision Makers and
management when determining each segment's and the Company's financial condition
and operating performance. In addition, the Chief Operating Decision Makers
review and evaluate depreciation, capital spending and assets of each segment on
a quarterly basis to monitor cash flow and asset needs of each segment.
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FOOD SERVICE
Sales to food service customers increased $15,659,000, or 2 percent, to
$761,603,000 in fiscal 2019. Soft pretzel sales to the food service market
increased about 1/3 of 1 percent to $209,227,000 for the year with higher sales
to convenience store chains offset by lower sales to restaurant chains and with
sales increases and decreases throughout our customer base. Our line of BRAUHAUS
pretzels contributed to the increased sales. Frozen juice bar and ices sales
increased $1,308,000, or 3%, to $43,672,000 for the year due primarily to higher
sales to warehouse club stores. Churro sales to food service customers were up
7% to $65,976,000 for the year with sales increases and decreases across our
customer base but with particularly strong sales to warehouse club stores. Sales
of bakery products increased $13,245,000, or 4%, to $384,636,000 for the year
with increased sales to one customer accounting for all of the increase.
Handheld sales to food service customers were down 19% to $31,685,000 in 2019
with sales decreases to three customers accounting for all of the decrease.
Sales of funnel cake increased $3,223,000, or 15% to $24,793,000 due primarily
to increased sales to a quick service restaurant under a limited time offer in
our second quarter. Overall food service sales to restaurant chains were down
about 2% for the year. Sales of new products in the first twelve months since
their introduction were approximately $13.5 million for the year. Price
increases accounted for approximately $15 million of sales for the year and net
volume including new product sales were essentially flat. Operating income in
our Food Service segment increased from $74,056,000 in 2018 to $78,130,000 in
2019 resulting from benefits of improved operations at several of our
manufacturing facilities and increased pricing.
RETAIL SUPERMARKETS
Sales of products to retail supermarkets decreased $1,663,000 or 1% to
$119,276,000 in fiscal year 2019. Soft pretzel sales to retail supermarkets were
$36,264,000 compared to $36,438,000 in 2018. Strong pretzel sales increases from
sales of AUNTIE ANNE'S products were offset by lower sales of our SUPER PRETZEL
products. Sales of frozen juices and ices decreased $684,000 or 1% to
$73,751,000 as we lost some volume and placements due to price increases. Coupon
redemption costs, a reduction of sales, decreased 19% to $3,596,000 for the
year. Handheld sales to retail supermarket customers decreased 12% to
$10,902,000 for the year as sales of this product line in retail supermarkets
continues its long-term decline.
Sales of new products in the first twelve months since their introduction were
approximately $1 million in fiscal year 2019. Price increases provided about $4
million of sales for the year and net volume decreased about $5.5 million for
the year. Operating income in our Retail Supermarkets segment increased from
$8,304,000 to $8,876,000 for the year. The primary contribution to the higher
operating income this year was increased pricing.
FROZEN BEVERAGES
Frozen beverage and related product sales increased 13% to $305,608,000 in
fiscal 2019. Beverage sales alone increased 7% or $10,883,000 for the year with
increases and decreases throughout our customer base. About one third of the
beverage sales increase was from increased flow through sales to one distributor
which did not benefit operating income. Gallon sales were up 3% in our base ICEE
business, with sales increases spread throughout our customer base. Service
revenue increased 8% to $85,103,000 for the year with sales increases and
decreases spread throughout our customer base. Machines revenue, primarily sales
of machines, increased from $28,652,000 in 2018 to $45,811,000 in 2019 with
sales to two customers accounting for most of the increase. The estimated number
of Company owned frozen beverage dispensers was 26,000 and 25,000 at September
28, 2019 and September 29, 2018, respectively. Operating income in our Frozen
Beverage segment increased from $28,415,000 in 2018 to $29,950,000 in 2019 as a
result of higher sales.
CONSOLIDATED
Other than as commented upon above by segment, there are no material specific
reasons for the reported sales increases or decreases. Sales levels can be
impacted by the appeal of our products to our customers and consumers and their
changing tastes, competitive and pricing pressures, sales execution, marketing
programs, seasonal weather, customer stability and general economic conditions.
Gross profit as a percentage of sales was essentially unchanged at 29.53% in
2019 and 29.54% in 2018 as the benefits of improved operations at several of our
manufacturing facilities and increased pricing were offset by increases in lower
margin sales of machines in our frozen beverages segment and increases in lower
margin sales of bakery products in our food service segment.
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Total operating expenses increased $7,934,000 to $233,445,000 in fiscal 2019 and
as a percentage of sales decreased to 19.68% of sales from 19.81% in 2018.
Marketing expenses decreased to 8.13% this year from 8.38% of sales in 2018
because of modest spending increases in all of our businesses. Distribution
expenses as a percent of sales decreased to 8.00% from 8.11% in 2018 because
freight rates have dropped from last year. Administrative expenses were 3.43%
and 3.32% of sales in 2019 and 2018, respectively.
Operating income increased $6,181,000 or 6% to $116,956,000 in fiscal year 2019
as a result of the aforementioned items.
Our investments generated before tax income of $7.7 million this year, up from
$6.3 million last year due to increases in the amount of investments and higher
interest rates.
Other income in 2019 includes a $2.0 million payment received from a customer
due to cancellation of production under a co-manufacturing agreement.
Other income in 2018 includes $520,000 gain on a sale of property and $869,000
reimbursement of business interruption losses due to the MARY B's biscuits
recall in January 2018.
Other expenses in 2017 include $1,070,000 of expenses incurred to acquire Hill &
Valley, the ICEE distributor and Labriola Bakery.
Net earnings for the year ended September 29, 2018 benefited from a $20.7
million gain, or $1.11 per diluted share, on the remeasurement of deferred tax
liabilities and a $8.8 million, or $0.47 per diluted share, reduction in income
taxes related primarily to the lower corporate tax rate enacted under the Tax
Cuts and Jobs Act in December 2017 which was partially offset by a $1.2 million,
or $.06 per diluted share, provision for the one time repatriation tax, both of
which resulted from the Tax Cuts and Jobs Act enacted in December 2017. Net
earnings for the year were also impacted by a $1.4 million, or $.07 per diluted
share, expense on the remeasurement of deferred tax liabilities due to changes
in New Jersey tax regulations effective July 2018. Excluding the deferred tax
gain, the deferred tax expense and the one-time repatriation tax, our effective
tax rate was 27.7% in the year ended September 29, 2018. Net earnings this year
benefitted by a reduction of approximately $900,000 in tax as the provision for
the one-time repatriation tax was reduced as the amount recorded last year was
an estimate. Excluding the reduction in the provision for the one-time
repatriation tax, our effective tax rate was 25.8% for this year.
Net earnings decreased $8,777,000 or 8%, in fiscal 2019 to $94,819,000, or $5.00
per diluted share, from $103,596,000, or $5.51 per diluted share, in fiscal 2018
as a result of the aforementioned items.
There are many factors which can impact our net earnings from year to year and
in the long run, among which are the supply and cost of raw materials and labor,
insurance costs, factors impacting sales as noted above, the continuing
consolidation of our customers, our ability to manage our manufacturing,
marketing and distribution activities, our ability to make and integrate
acquisitions and changes in tax laws and interest rates.
RESULTS OF OPERATIONS:
Fiscal 2018 (52 weeks) Compared to Fiscal Year 2017 (53 weeks)
Net sales increased $54,041,000, or 5%, to $1,138,265,000 in fiscal 2018 from
$1,084,224,000 in fiscal 2017. Excluding sales from the extra week in 2017,
sales increased approximately 7% from 2017 to 2018.
Excluding sales from Hill & Valley, Inc., acquired in January 2017, an ICEE
distributor located in the Southeast acquired in June 2017 and Labriola Bakery
which was acquired in August 2017 and the extra week in 2017, sales increased
approximately 4% for the year.
We have three reportable segments, as disclosed in the accompanying notes to the
consolidated financial statements: Food Service, Retail Supermarkets and Frozen
Beverages.
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The Chief Operating Decision Maker for Food Service and Retail Supermarkets and
the Chief Operating Decision Maker for Frozen Beverages monthly review detailed
operating income statements and sales reports in order to assess performance and
allocate resources to each individual segment. Sales and operating income are
the key variables monitored by the Chief Operating Decision Makers and
management when determining each segment's and the Company's financial condition
and operating performance. In addition, the Chief Operating Decision Makers
review and evaluate depreciation, capital spending and assets of each segment on
a quarterly basis to monitor cash flow and asset needs of each segment.
FOOD SERVICE
Sales to food service customers increased $44,150,000 or 6%, to $745,944,000 in
fiscal 2018. Excluding the extra week in 2017, sales increased approximately 9%
from 2017 to 2018. Excluding Hill & Valley and Labriola sales and the extra week
in 2017, sales increased approximately 4% for the year. Soft pretzel sales to
the food service market increased 16% to $208,544,000 for the year with strong
sales to restaurant chains and movie theatres and with sales increases and
decreases throughout our customer base. Our new line of BRAUHAUS pretzels
contributed to the increased sales. Excluding Labriola sales, soft pretzel sales
increased 10%. Frozen juice bar and ices sales decreased $7,105,000, or 14%, to
$42,364,000 for the year due primarily to lower sales to warehouse club stores
because of a loss of a promotion and because of reduced distribution. Churro
sales to food service customers were down 2% to $61,726,000 for the year with
sales increases and decreases across our customer base but with particularly low
sales to one warehouse club store which last year had sales of a new product
since discontinued. Sales of bakery products increased $20,034,000, or 6%, for
the year. Excluding Hill & Valley and Labriola sales, bakery sales were down
about 1/4 of 1% for the year with sales increases and decreases spread across
our customer base. Handheld sales to food service customers were up 5% to
$38,928,000 in 2018 with sales increases to two customers accounting all of the
increase. Sales of funnel cake increased $1,611,000, or 8% to $21,570,000 due
primarily to increased sales to school food service. Overall food service sales
to restaurant chains were strong for the year. Sales of new products in the
first twelve months since their introduction were approximately $20 million for
the year. Price increases accounted for approximately $8.5 million of sales for
the year and net volume increases including new product sales and sales of the
acquired businesses accounted for approximately $36 million of sales for the
year. Operating income in our Food Service segment decreased from $81,208,000 in
2017 to $74,056,000 in 2018. Operating income this year was impacted by
approximately $5.3 million of higher distribution expenses primarily due to
higher fuel costs and the January 2018 implementation of the electronic logging
device mandate. Additionally, lower sales of our MARY B's biscuits and related
costs due to our recall in early January impacted our operating income by
approximately $1.8 million for the year. Operating income was also impacted by
generally higher costs for payroll and insurance, added personnel in the selling
function, product mix changes and significantly lower volume concentrated in
specific facilities and higher cost of ingredients. Operating income in the
first quarter was impacted by inefficiencies at our Labriola production facility
which was acquired in the fourth quarter 2017 (compounded by the integration of
products previously manufactured at other facilities) and shutdown costs of our
Chambersburg facility. Operating income was also impacted by idle overhead
during an upgrade of one of our production facilities. Hill & Valley contributed
improved operating income of $1.7 million compared to last year. Last year's
operating income included a $1.8 million gain on an insurance recovery related
to product quality issues in our 2016 fiscal year which was recorded as a
reduction of cost of goods sold.
RETAIL SUPERMARKETS
Sales of products to retail supermarkets increased $1,692,000 or 1% to
$120,939,000 in fiscal year 2018. Excluding sales from the extra week in 2017,
sales increased approximately 3% from 2017 to 2018. Soft pretzel sales to retail
supermarkets were $36,438,000 compared to $35,081,000 in 2017, an increase of
4%. All of the pretzel sales increase was from sales of AUNTIE ANNE'S products,
under a license agreement entered into midway in our 2017 year. Sales of frozen
juices and ices increased $3,110,000 or 4% to $74,435,000 primarily because of
sales of SOUR PATCH KIDS frozen novelties under a new license agreement. Coupon
redemption costs, a reduction of sales, decreased 9% to $4,439,000 for the
year. Handheld sales to retail supermarket customers decreased 17% to
$12,419,060 for the year as sales of this product line in retail supermarkets
continues its long-term decline.
Sales of new products in the first twelve months since their introduction were
approximately $6 million in fiscal year 2018. Price increases were negligible in
2018. Operating income in our Retail Supermarkets segment decreased from
$10,627,000 to $8,304,000 for the year. The primary contributions to the lower
operating income this year were increases in trade spending, distribution costs
and product costs which offset a major contribution from the sales of SOUR PATCH
KIDS frozen novelties.
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FROZEN BEVERAGES
Frozen beverage and related product sales increased 3% to $271,382,000 in fiscal
2018. Excluding sales from the extra week in 2017, sales increased approximately
5% from 2017 to 2018. Excluding the acquired ICEE distributor and the extra week
in 2017, sales increased approximately 4% for the year. Beverage sales alone
increased 5% or $7,470,000 for the year with increases and decreases throughout
our customer base. Gallon sales were up 6% in our base ICEE business, with sales
increases spread throughout our customer base. Service revenue increased 6% to
$78,805,000 for the year with sales increases and decreases spread throughout
our customer base. Sales of beverage machines, which tend to fluctuate from year
to year while following no specific trend, decreased from $27,073,000 in 2017 to
$23,781,000 in 2018. The estimated number of Company owned frozen beverage
dispensers was 24,000 and 25,000 at September 28, 2019 and September 29, 2018,
respectively. Operating income in our Frozen Beverage segment increased from
$26,272,000 in 2017 to $28,415,000 in 2018 as a result of higher beverage sales
and service revenue.
CONSOLIDATED
Other than as commented upon above by segment, there are no material specific
reasons for the reported sales increases or decreases. Sales levels can be
impacted by the appeal of our products to our customers and consumers and their
changing tastes, competitive and pricing pressures, sales execution, marketing
programs, seasonal weather, customer stability and general economic conditions.
Gross profit as a percentage of sales decreased to 29.54% in 2018 from 30.53% in
2017. Although higher sales benefited our gross margin, the decrease in gross
profit margin was caused by a number of factors including higher costs for
payroll and workers compensation insurance, inefficiencies at our Labriola
production facility, shutdown costs of our Chambersburg facility, lower sales of
our MARY B'S biscuits and related costs, idle overhead during an upgrade of one
of our production facilities as well as by about $500,000 of costs related to
Hurricane Florence's impact on our North Carolina plant. Last year's gross
profit margin percentage benefitted from $1.8 million gain on an insurance
recovery related to product quality issues in our 2016 fiscal year which was
recorded as a reduction of cost of goods sold.
Total operating expenses increased $12,595,000 to $225,511,000 in fiscal 2018
and as a percentage of sales increased to 19.81% of sales from 19.64% in 2017.
Marketing expenses decreased to 8.38% this year from 8.71% of sales in 2017
primarily because of lower spending to support warehouse club store sales in our
foodservice business and lower marketing expenses of the acquired Hill & Valley
and Labriola businesses. Distribution expenses as a percent of sales increased
to 8.11% from 7.55% in 2018. Distribution expenses have increased due to higher
fuel costs and the recent implementation of the electronic logging device
mandate. We expect distribution expenses to remain higher through at least the
first quarter of our 2019 fiscal year. Administrative expenses were 3.32% and
3.40% of sales in 2018 and 2017, respectively.
Operating income decreased $7,332,000 or 6% to $110,775,000 in fiscal year 2018
as a result of the aforementioned items.
Our investments generated before tax income of $6.3 million this year, up from
$5.3 million last year due in increases in the amount of investments and higher
interest rates.
Other income this year includes $520,000 gain on a sale of property and $869,000
reimbursement of business interruption losses due to the MARY B's biscuits
recall.
Other expenses in 2017 include $1,070,000 of expenses incurred to acquire Hill &
Valley, the ICEE distributor and Labriola
Bakery.
Net earnings for the year ended September 28, 2019 benefited from a $20.7
million, or $1.11 per diluted share, gain on the remeasurement of deferred tax
liabilities and a $8.8 million, or $0.47 per diluted share, reduction in income
taxes related primarily to the lower corporate tax rate enacted under the Tax
Cuts and Jobs Act in December 2017. Net earnings for the year were impacted by
a $1.2 million, or $.06 per diluted share, provision for the one-time
repatriation tax required under the new federal tax law and by a $1.4 million,
or $.07 per diluted share, expense on the remeasurement of deferred tax
liabilities due to changes in New Jersey tax regulations effective July 2018.
Excluding the deferred tax gain, the deferred tax expense and the one-time
repatriation tax, our effective tax rate decreased to 27.7% from 35.2% in the
prior year reflecting the reduction in the federal statutory rate to 21% from
35% on January 1, 2018. Last year's effective tax rate benefited from an
unusually high tax benefit on share based compensation of $3,061,000 which
compares to this year's tax benefit of $1,935,000. We are presently estimating
an effective tax rate of 26-27% for our fiscal year 2019.
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Net earnings increased $24,422,000 or 31%, in the 52 weeks fiscal 2018 to
$103,596,000, or $5.51 per diluted share, from $79,174,000, or $4.21 per diluted
share, in the 53 weeks fiscal 2017 as a result of the aforementioned items.
There are many factors which can impact our net earnings from year to year and
in the long run, among which are the supply and cost of raw materials and labor,
insurance costs, factors impacting sales as noted above, the continuing
consolidation of our customers, our ability to manage our manufacturing,
marketing and distribution activities, our ability to make and integrate
acquisitions and changes in tax laws and interest rates.
RESULTS OF OPERATIONS
ACQUISITIONS
On December 30, 2016, we acquired Hill & Valley Inc., a premium bakery located
in Rock Island, Illinois, for approximately $31 million. Hill & Valley, with
sales of over $45 million annually, is a manufacturer of a variety of pre-baked
cakes, cookies, pies, muffins and other desserts selling to retail in-store
bakeries. Hill & Valley is a leading brand of Sugar Free and No Sugar Added
pre-baked in-store bakery items. Additionally, Hill & Valley sustains strategic
private labeling partnerships with retailers nationwide. Sales and operating
income of Hill & Valley included in our 2017 fiscal year operating results were
$35,770,000 and $653,000, respectively.
On May 22, 2017, we acquired an ICEE distributor doing business in Georgia and
Tennessee for approximately $11 million. Sales and operating income of the
acquired business included in our 2017 fiscal year operating results were
$1,689,000 and $395,000, respectively.
On August 16, 2017, we acquired Labriola Baking Company, a premium bakery of
breads and artisan soft pretzels located in Alsip, Illinois for approximately $6
million. Labriola Bakery, with sales of approximately $17 million annually, is a
manufacturer of pre-baked breads, rolls and soft pretzels for retail in-store
bakery and foodservice outlets nationwide. Sales of Labriola included in our
2017 fiscal year operating results were $2,061,000 with marginal operating
income.
These acquisitions were accounted for under the purchase method of accounting,
and their operations are included in the accompanying consolidated financial
statements from their respective acquisition dates.
LIQUIDITY AND CAPITAL RESOURCES
Although there are many factors that could impact our operating cash flow, most
notably net earnings, we believe that our future operating cash flow, along with
our borrowing capacity, our current cash and cash equivalent balances and our
investment securities is sufficient to fund future growth and expansion. See
Note C to our financial statements for a discussion of our investment
securities.
Fluctuations in the value of the Mexican and Canadian currencies and the
resulting translation of the net assets of our Mexican and Canadian subsidiaries
caused an increase of $909,000 in accumulated other comprehensive loss in 2019,
$2,738,000 in accumulated other comprehensive loss in 2018 and a decrease of
$3,745,000 in accumulated other comprehensive loss in 2017. In 2019, sales of
the two subsidiaries were $33,906,000 as compared to $32,459,000 in 2018 and
$31,001,000 in 2017.
In our fiscal year ended September 30, 2017, we purchased and retired 142,665
shares of our common stock at a cost of $18,228,763.
In our fiscal year ended September 29, 2018, we purchased and retired 20,604
shares of our common stock at a cost of $2,794,027.
We did not purchase any shares of our common stock in our fiscal year ended
September 28, 2019.
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In November 2016, we entered into an amendment and modification to an amended
and restated loan agreement with our existing banks which provides for up to a
$50,000,000 revolving credit facility repayable in November 2021. The agreement
contains restrictive covenants and requires commitment fees in accordance with
standard banking practice. There were no outstanding balances under the facility
at September 28, 2019 or at September 29, 2018. The significant financial
covenants are:
• Tangible net worth must initially be more than $465 million.
• Total funded indebtedness divided by earnings before interest expense, income
taxes, depreciation and amortization shall not be greater than 2.25 to 1.
We were in compliance with the financial covenants described above at September
28, 2019.
We self-insure, up to loss limits, certain insurable risks such as worker's
compensation and automobile liability claims. Accruals for claims under our
self-insurance program are recorded on a claims-incurred basis. Under this
program, the estimated liability for claims incurred but unpaid in fiscal years
2019 and 2018 was $3,300,000 and $4,100,000, respectively. In connection with
certain self-insurance agreements, we customarily enter into letters of credit
arrangements with our insurers. At both September 28, 2019 and September 29,
2018, we had outstanding letters of credit totaling $9,275,000.
The following table presents our contractual cash flow commitments on long-term
debt, operating leases and purchase commitments for raw materials and packaging.
See Notes to the consolidated financial statements for additional information on
our long-term debt and operating leases.
Payments Due by Period
(in thousands)
Less
Than 1-3 4-5 After
Total 1 Year Years Years 5 Years
Long-term debt, including
current maturities $ - $ - $ - $ - $ -
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 $ 25,588The purchase commitments do not exceed our projected requirements over the
related terms and are in the normal course of business.
Fiscal 2019 Compared to Fiscal 2018
Cash and cash equivalents and marketable securities held to maturity and
available for sale increased $66,714,000 or 24%, to $342,749,000 from a year ago
for reasons described below.
Accounts receivables, net increased $8,596,000, or 6%, to $140,938,000 in 2019
because of higher sales in this year's September month and timing of
collections. Inventories increased $3,281,000 or 3% to $116,165,000 in 2019 due
to higher sales this year and inventory build to support increased service
revenue in our frozen beverages business.
Prepaid expenses and other was $5,768,000 compared to $5,044,000 last year, as
prepaid income tax increased by $787,000.
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Net property, plant and equipment increased $10,775,000 to $253,448,000 because
purchases of property, plant and equipment for the improvement and expansion of
our manufacturing capabilities and frozen carbonated beverage business exceeded
depreciation on existing assets. Although purchases of property, plant and
equipment decreased to $57,128,000 in 2019 from $60,022,000 in 2018, we have
completed and have ongoing several large projects across our manufacturing base
to modernize our facilities to have state-of-the-art systems to produce high
quality products, increase capacity and move some production closer to our
customers. We are continually looking for opportunities to invest in projects at
our manufacturing facilities that have a financial payback on capital invested
with the goal of improving efficiency and reducing operating costs.
Goodwill was $102,511,000 for fiscal year 2019 and $102,511,000 in 2018.
Other intangible assets, less accumulated amortization decreased $2,840,000 to
$54,922,000 due to amortization during the year net of $480,000 of additions in
our frozen beverage segment.
Marketable securities available for sale and held to maturity decreased by
$14,202,000 to $150,354,000 as we decreased our holdings of corporate bonds and
available for sale securities.
Accounts Payables increased 4% to $72,029,000 from $69,592,000 in 2018.
Accrued insurance liability decreased 7% to $10,457,000 as our estimates for
incurred but not yet paid claims under our group insurance and insurance
liability programs decreased from a year ago.
Accrued compensation expense increased 4% to $21,154,000 due to an increase in
our bonus accrual.
Dividends payable increased to $9,447,000 as our quarterly dividend payment
increased to $.50/share from $.45/share.
Deferred income tax liabilities increased $9,598,000 to $61,920,000 from
$52,322,000 because of increased liabilities related to depreciation of property
and equipment.
Common stock increased $18,404,000 to $45,744,000 in 2019 because of proceeds
from the exercise of incentive and nonqualified stock options and stock issued
under our stock purchase plan for employees, stock issued under our deferred
stock plan and share-based compensation expense.
Net cash provided by operating activities increased $24,132,000 to $147,499,000
in 2019 primarily because of an increase of accounts payable and accrued
liabilities of $2,150,000 compared to an decrease of $1,736,000 in 2018, an
increase of $744,000 in prepaid expenses and other compared to an increase of
prepaid expenses and other in 2018 of $1,120,000, and an increase in inventories
of $3,231,000 compared to an increase of $9,639,000 in 2018.
Net cash used in investing activities decreased $29,776,000 to $43,363,000 in
2019 from $73,139,000 in 2018 primarily because proceeds, net of purchases, of
marketable securities of $13,067,000 in 2019 compared to purchases, net of
proceeds, of marketable securities of $15,810,000 in 2018.
Net cash used in financing activities of $27,336,000 in 2018 decreased to
$22,826,000 in 2019 primarily because we did not repurchase any common stock in
2019 and proceeds from the issuance of common stock for stock option exercises
was $5,288,000 higher in 2019 compared to 2018.
In 2019, the major variables in determining our net increase in cash and cash
equivalents and marketable securities were our net earnings, depreciation and
amortization of fixed assets, changes in accounts receivable, accounts payable
and accrued liabilities and changes in deferred tax liabilities, purchases of
property, plant and equipment and payments of cash dividends. Other variables
which in the past have had a significant impact on our change in cash and cash
equivalents and marketable securities are proceeds from borrowings, repurchases
of our common stock, payments of long-term debt and purchases of companies. As
discussed in results of operations, our net earnings may be influenced by many
factors. Depreciation and amortization of fixed assets is primarily determined
by past purchases of property, plant and equipment although it could be impacted
by a significant acquisition. Purchases of property, plant and equipment are
primarily determined by our ongoing normal manufacturing and marketing
requirements but could be increased significantly for manufacturing expansion
requirements or large frozen beverage customer needs. From time to time, we have
repurchased common stock and we anticipate that we will do so again in the
future. We are actively seeking acquisitions that could be a
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significant use of cash. Although we have no long-term debt at September 28,
2019, we may borrow in the future depending on our needs.
Fiscal 2018 Compared to Fiscal 2017
Cash and cash equivalents and marketable securities held to maturity and
available for sale increased $34,792,000 or 14%, to $276,035,000 from a year ago
for reasons described below.
Accounts receivables, net increased $7,789,000, or 6%, to $132,342,000 in 2018
because of higher weekly sales in this year's September month and timing of
collections. Inventories increased $9,616,000 or 9% to $112,884,000 in 2018 due
to higher sales this year and inventory build for specific first quarter 2019
sales.
Prepaid expenses and other was $5,044,000 compared to $3,936,000 last year.
Net property, plant and equipment increased $15,092,000 to $242,673,000 because
purchases of property, plant and equipment for the improvement and expansion of
our manufacturing capabilities and frozen carbonated beverage business exceeded
depreciation on existing assets. Although purchases of property, plant and
equipment decreased to $60,022,000 in 2018 from $72,180,000 in 2017, we have
completed and have ongoing several large projects across our manufacturing base
to modernize our facilities to have state-of-the-art systems to produce high
quality products, increase capacity and move some production closer to our
customers. We are continually looking for opportunities to invest in projects at
our manufacturing facilities that have a financial payback on capital invested
with the goal of improving efficiency and reducing operating costs.
Goodwill was $102,511,000 at both year ends.
Other intangible assets, less accumulated amortization decreased $3,510,000 to
$57,762,000 solely due to amortization during the year.
Marketable securities available for sale and held to maturity increased by
$14,275,000 to $164,556,000 as we increased our holdings of corporate bonds.
Accounts Payables decreased 4% to $69,592,000 from $72,729,000 in 2017.
Accrued insurance liability increased 6% to $11,217,000 as our estimates for
incurred but not yet paid claims under our group insurance and insurance
liability programs increased from a year ago.
Accrued compensation expense increased 2% to $20,297,000 due to an increase in
our employee base and a general increase in the level of pay rates net of a
reduced accrual because of the change in timing due to this year having 52 weeks
compared to 53 weeks last year.
Dividends payable increased to $8,438,000 as our quarterly dividend payment
increased to $.45/share from $.42/share.
Deferred income tax liabilities decreased $10,383,000 to $52,322,000 from
$62,705,000 because of the remeasurement of deferred tax liabilities due to the
lower corporate tax rate enacted under the Tax Cut and Jobs Act in December
2017, net of higher corporate taxes enacted by New Jersey effective July 1,2008
and net of further increased liabilities related to depreciation of property and
equipment.
Common stock increased $9,958,000 to $27,340,000 in 2018 because repurchases of
our common stock of $2,794,000 were less than increases totaling $12,752,000
from the exercise of incentive and nonqualified stock options, stock issued
under our stock purchase plan for employees, stock issued under our deferred
stock plan and share-based compensation expense.
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Net cash provided by operating activities decreased $1,982,000 to $123,367,000
in 2018 primarily because an increase in net earnings of $24,422,000, an
increase of accounts receivable, net of $7,917,000 in 2018 compared to an
increase of $20,370,000 in 2017 and higher depreciation of fixed assets of
$4,728,000 in 2018 did not offset a decrease in deferred tax liabilities of
$10,392,000 compared to an increase of $7,847,000 in 2017, a decrease of
accounts payable and accrued liabilities of $918,000 compared to an increase of
$9,521,000 in 2017, an increase of $1,120,000 in prepaid expenses and other
compared to a decrease of prepaid expenses and other in 2017 of $10,265,000, and
an increase in inventories of $9,639,000 compared to an increase of $7,410,000
in 2017.
Net cash used in investing activities decreased $62,180,000 to $73,139,000 in
2018 from $135,319,000 in 2017 because of payments for purchases of companies,
net of cash acquired of $0 in 2018 compared to $47,698,000 in 2017 and decreased
purchases of property, plant and equipment of $12,158,000 from 2017 to 2018.
Net cash used in financing activities of $42,213,000 in 2017 decreased to
$27,336,000 in 2018 primarily because of lower repurchases of common stock of
$15,435,000 in 2018 compared to 2017.
In 2018, the major variables in determining our net increase in cash and cash
equivalents and marketable securities were our net earnings, depreciation and
amortization of fixed assets, changes in accounts receivable, accounts payable
and accrued liabilities and changes in deferred tax liabilities, purchases of
property, plant and equipment, payments of cash dividend and the repurchase of
common stock. Other variables which in the past have had a significant impact on
our change in cash and cash equivalents and marketable securities are proceeds
from borrowings, payments of long-term debt and purchases of companies. As
discussed in results of operations, our net earnings may be influenced by many
factors. Depreciation and amortization of fixed assets is primarily determined
by past purchases of property, plant and equipment although it could be impacted
by a significant acquisition. Purchases of property, plant and equipment are
primarily determined by our ongoing normal manufacturing and marketing
requirements but could be increased significantly for manufacturing expansion
requirements or large frozen beverage customer needs. From time to time, we have
repurchased common stock and we anticipate that we will do so again in the
future. We are actively seeking acquisitions that could be a significant use of
cash. Although we have no long-term debt at September 28, 2019, we may borrow in
the future depending on our needs.
Off -Balance Sheet Arrangements
The Company has off-balance sheet arrangements for operating leases and purchase
commitments as of September 28, 2019.
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