J&J SNACK FOODS CORP. 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 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 26, September 28,
2020 2019
(in thousands)
Beginning Balance $ 1,334 $ 1,865
Additions to contract liability 5,526 6,308
Amounts recognized as revenue (5,533 ) (6,839 )
Ending Balance $ 1,327 $ 1,334
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
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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 have
approximately 15 customers with accounts receivable balances of between
Accounts receivable due from any of our customers is subject to risk. Our total
bad debt expense was
Asset Impairment - We have three reporting units with goodwill totaling
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 1,600 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
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We self-insure, up to loss limits, worker's compensation, automobile and general
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 2020 and 2019 was
Inventories - Inventories are valued at the lower of cost (determined by the first-in, first-out method) or net realizable value. 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 Year 2020 (52 weeks) Compared to Fiscal Year 2019 (52 weeks)
Net sales decreased
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 decreased
Sales of new products in the first twelve months since their introduction were
approximately
RETAIL SUPERMARKETS
Sales of products to retail supermarkets increased
Sales of new products in the first twelve months since their introduction were
approximately
FROZEN BEVERAGES
Total frozen beverage segment sales decreased 26% to
The estimated number of Company owned frozen beverage dispensers was 27,000 and
26,000 at
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.
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Gross profit as a percentage of sales decreased to 23.33% in 2020 from 29.53% in
2019. Gross profit percentage decreased because of lower volume in our food
service and frozen beverages segments, higher costs related to production
disruptions due to volume mix changes, expenses related to employee safety and
increased COVID-19 compensation and increased cost compared to last year of
about
Total operating expenses decreased
Operating income decreased
Our investments generated before tax income of
Other income in 2019 includes a
Other income in 2018 includes
Net earnings in 2019 benefitted by a reduction of approximately
Excluding the reduction in the provision for the one-time repatriation tax, our
effective tax rate was 25.8% for 2019. Net earnings for the 2020 year benefited
from a reduction in income tax expense related to state taxes of approximately
Net earnings decreased
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 2019 (52 weeks) Compared to Fiscal Year 2018 (52 weeks)
In fiscal 2020, due to a change in management and the reporting of our MARY B's
biscuit operations, which had sales and operating income of
Net sales increased
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
RETAIL SUPERMARKETS
Sales of products to retail supermarkets decreased
Sales of new products in the first twelve months since their introduction were
approximately
FROZEN BEVERAGES
Frozen beverage and related product sales increased 13% to
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
Operating income increased
Our investments generated before tax income of
Other income in 2019 includes a
Other income in 2018 includes
Other expenses in 2017 include
Net earnings for the year ended
Net earnings decreased
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
On
On
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On
On
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
In our fiscal year ended
We did not purchase any shares of our common stock in our fiscal year ended
In our fiscal year ended
In
• 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
We self-insure, up to loss limits, certain insurable risks such as worker's
compensation, automobile and general 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
2020 and 2019 was
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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 $ - $ - $ - $ - $ -
Finance lease liabilities 717 349 247 121 -
Purchase commitments 75,000 75,000 - - -
Operating lease liabilities 68,560 13,906 22,412 12,713 19,529
Total $ 144,277 $ 89,255 $ 22,659 $ 12,834 $ 19,529 The purchase commitments do not exceed our projected requirements over the related terms and are in the normal course of business.
Fiscal 2020 Compared to Fiscal 2019
Cash and cash equivalents and marketable securities held to maturity and
available for sale decreased
Accounts receivables, net decreased
Prepaid expenses and other was
Net property, plant and equipment increased
Other intangible assets, less accumulated amortization increased
Marketable securities available for sale and held to maturity decreased by
Accounts Payables increased 2% to
Accrued insurance liability increased 25% to
Accrued compensation expense decreased 24% to
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Dividends payable increased to
Deferred income tax liabilities increased
Common stock increased
Net cash provided by operating activities decreased
Net cash used in investing activities increased
Net cash used in financing activities of
In 2020, the major variables in determining our net increase in cash and cash
equivalents and marketable securities were our decrease in 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 for purchases
of companies and payments of cash dividends and repurchases 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
and payments of long-term debt. 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. We are actively seeking acquisitions that could be a significant use of
cash. Although we have no long-term debt at
Fiscal 2019 Compared to Fiscal 2018
Cash and cash equivalents and marketable securities held to maturity and
available for sale increased
Accounts receivables, net increased
Prepaid expenses and other was
Net property, plant and equipment increased
Other intangible assets, less accumulated amortization decreased
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Marketable securities available for sale and held to maturity decreased by
Accounts Payables increased 4% to
Accrued insurance liability decreased 7% to
Accrued compensation expense increased 4% to
Dividends payable increased to
Deferred income tax liabilities increased
Common stock increased
Net cash provided by operating activities increased
Net cash used in investing activities decreased
Net cash used in financing activities of
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 significant use of
cash. Although we have no long-term debt at
Off -Balance Sheet Arrangements
The Company has off-balance sheet arrangements for operating leases and purchase
commitments as of
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