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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2019

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                                 TO                                

 

Commission File No. 000-14616

 

Registrant's telephone number, including area code: (856) 665-9533

J&J SNACK FOODS CORP.

(Exact name of registrant as specified in its charter)

 

New Jersey 22-1935537
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
6000 Central Highway 08109
Pennsauken, New Jersey (Zip Code)
(Address of principal executive offices)  

 

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbols(s) Name of Each Exchange on Which Registered
Common Stock, no par value JJSF The NASDAQ Global Select Market

 

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒  No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  ☒               No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

              

Large accelerated filer ☒

Non-accelerated filer ☐ 

    

Accelerated filer   ☐

Smaller reporting company  

Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No ☒

 

 

March 29, 2019 was the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of the registrant’s common stock held by non-affiliates was $2,393,370,414, based on the last sale price on March 29, 2019 of $158.54 per share. As of November 11, 2019, 18,898,529 shares of the registrant’s common stock were issued and outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement for its Annual Meeting of Shareholders scheduled for February 11, 2020 are incorporated by reference into Part III of this report.

 

 

 

 

 

J & J SNACK FOODS CORP.

2017 FORM 10-K ANNUAL REPORT

 

TABLE OF CONTENTS

 

Page
PART I  
Note About Forward-Looking Statements 1  
Item 1  Business 1  
Item 1A Risk Factors 6  
Item 1B Unresolved Staff Comments 10  
Item 2 Properties 10  
Item 3 Legal Proceedings 11  
Item 4 Mine Safety Disclosures 11  
       
PART II  
       
Item 5 Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities 12  
Item 6 Selected Financial Data 13  
Item 7 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 14  
Item 7A Quantitative And Qualitative Disclosures About Market Risk 26  
Item 8 Financial Statements And Supplementary Data 27  
Item 9 Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 27  
Item 9A Controls and Procedures 27  
Item 9B Other Information 28  
       
PART III  
       
Item 10 Directors, Executive Officers and Corporate Governance 29  
Item 11 Executive Compensation 30  
Item 12 Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters 30  
Item 13 Certain Relationships And Related Transactions, and Director Independence 30  
Item 14 Principal Accountant Fees and Service 30  
       
PART IV  
       
Item 15 Exhibits, Financial Statement Schedules 31  

 

 

 

 

 

Note About Forward-Looking Statements

 

In addition to historical information, this report 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.

 

Part I

 

Item 1.

Business

 

General

 

J & J Snack Foods Corp. (the “Company” or “J & J”) manufactures snack foods and distributes frozen beverages which it markets nationally to the food service and retail supermarket industries. The Company’s principal snack food products are soft pretzels marketed primarily under the brand names SUPERPRETZEL, BRAUHAUS, AUNTIE ANNE’S* and BAVARIAN BAKERY, frozen juice treats and desserts marketed primarily under the LUIGI’S, WHOLE FRUIT, ICEE, PHILLY SWIRL, SOUR PATCH** and MINUTE MAID*** brand names, churros marketed primarily under the TIO PEPE’S and CALIFORNIA CHURROS brand names and bakery products sold primarily under the READI-BAKE, COUNTRY HOME, MARY B’S, DADDY RAY’S and HILL & VALLEY brand names as well as for private label and contract packing. J & J believes it is the largest manufacturer of soft pretzels in the United States. Other snack food products include funnel cake sold under THE FUNNEL CAKE FACTORY brand and dough enrobed handheld products sold under the PATIO brand and other smaller brands as well. The Company’s principal frozen beverage products are the ICEE brand frozen carbonated beverage and the SLUSH PUPPIE brand frozen non-carbonated beverage.

 

The Company’s Food Service and Frozen Beverages sales are made primarily to food service customers including snack bar and food stand locations in leading chain, department, discount, warehouse club and convenience stores; malls and shopping centers; fast food and casual dining restaurants; stadiums and sports arenas; leisure and theme parks; movie theatres; independent retailers; and schools, colleges and other institutions. The Company’s retail supermarket customers are primarily supermarket chains.

 

The Company was incorporated in 1971 under the laws of the State of New Jersey.

 

The Company has made acquisitions as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto.

 

The Company operates in three business segments: Food Service, Retail Supermarkets and Frozen Beverages. These segments are described below.

 

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 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 (see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Financial Statements and Supplementary Data for financial information about segments).

 

 

* AUNTIE ANNE’S is a registered trademark of Auntie Anne’s LLC
** SOUR PATCH is a registered trademark of Mondelçz International Group
*** Minute Maid is a registered trademark of the Coca-Cola Company

 

1

 

 

Food Service

 

The primary products sold by the food service segment are soft pretzels, frozen juice treats and desserts, churros, dough enrobed handheld products and baked goods. Our customers in the food service segment include snack bars and food stands in chain, department and discount stores; malls and shopping centers; casual dining restaurants; fast food and casual dining restaurants; stadiums and sports arenas; leisure and theme parks; convenience stores; movie theatres; warehouse club stores; schools, colleges and other institutions. Within the food service industry, our products are purchased by the consumer primarily for consumption at the point-of-sale.

 

Retail Supermarkets

 

The primary products sold to the retail supermarket channel are soft pretzel products – including SUPERPRETZEL and AUNTIE ANNE’S, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, WHOLE FRUIT frozen fruit bars and sorbet, PHILLY SWIRL cups and sticks, SOUR PATCH sticks, ICEE Squeeze-Up Tubes and dough enrobed handheld products including PATIO burritos. Within the retail supermarket channel, our frozen and prepackaged products are purchased by the consumer for consumption at home.

 

Frozen Beverages

 

We sell frozen beverages to the food service industry primarily under the names ICEE, SLUSH PUPPIE and PARROT ICE in the United States, Mexico and Canada. We also provide repair and maintenance service to customers for customers’ owned equipment.

 

Products

 

Soft Pretzels

 

The Company’s soft pretzels are sold under many brand names; some of which are: SUPERPRETZEL, PRETZEL FILLERS, PRETZELFILS, GOURMET TWISTS, MR. TWISTER, SOFT PRETZEL BITES, SOFTSTIX, SOFT PRETZEL BUNS, TEXAS TWIST, BAVARIAN BAKERY, SUPERPRETZEL BAVARIAN, NEW YORK PRETZEL, KIM & SCOTT’S GOURMET PRETZELS, SERIOUSLY TWISTED!, BRAUHAUS, AUNTIE ANNE’S AND LABRIOLA; and, to a lesser extent, under private labels.

 

Soft pretzels are sold in the Food Service and Retail Supermarket segments. Soft pretzel sales amounted to 21% of the Company’s revenue in fiscal year 2019, 21% in 2018 and 20% in 2017

 

Certain of the Company’s soft pretzels qualify under USDA regulations as the nutritional equivalent of bread for purposes of the USDA school lunch program, thereby enabling a participating school to obtain partial reimbursement of the cost of the Company’s soft pretzels from the USDA.

 

The Company’s soft pretzels are manufactured according to a proprietary formula. Soft pretzels, ranging in size from one to twenty-four ounces in weight, are shaped and formed by the Company’s twister machines. These soft pretzel tying machines are automated, high-speed machines for twisting dough into the traditional pretzel shape. Additionally, we make soft pretzels which are extruded or shaped by hand. Soft pretzels, after processing, are primarily quick-frozen in either raw or baked form and packaged for delivery.

 

The Company’s principal marketing program in the Food Service segment includes supplying ovens, mobile merchandisers, display cases, warmers and similar merchandising equipment to the retailer to prepare and promote the sale of soft pretzels. Some of this equipment is proprietary, including combination warmer and display cases that reconstitute frozen soft pretzels while displaying them, thus eliminating the need for an oven. The Company retains ownership of the equipment placed in customer locations, and as a result, customers are not required to make an investment in equipment.

 

2

 

 

Frozen Juice Treats and Desserts

 

The Company’s frozen juice treats and desserts are marketed primarily under the LUIGI’S, WHOLE FRUIT, PHILLY SWIRL, SOUR PATCH, ICEE and MINUTE MAID brand names. Frozen juice treats and desserts are sold in the Food Service and Retail Supermarkets segments. Frozen juice treats and dessert sales were 10% of the Company’s revenue in fiscal year 2019, 10% in 2018 and 11% in 2017.

 

The Company’s school food service LUIGI’S and WHOLE FRUIT frozen juice bars and cups contain three to four ounces of 100% apple or pineapple juice with no added sugar and 100% of the daily US FDA value of vitamin C.  The juice bars are produced in various flavors and are packaged in a sealed push-up paper container referred to as the Milliken M-pak, which the Company believes has certain sanitary and safety advantages.

 

The balance of the Company’s frozen juice treats and desserts products are manufactured from water, sweeteners and fruit juice concentrates in various flavors and packaging including cups, tubes, sticks, M-paks and pints. Several of the products contain ice cream and WHOLE FRUIT contains pieces of fruit.

 

Churros

 

The Company’s churros are sold primarily under the TIO PEPE’S and CALIFORNIA CHURROS brand names. Churros are sold to the Food Service and Retail Supermarkets segments. Churro sales were 6% of the Company’s sales in fiscal year 2019, 6% in 2018 and 6% in 2017. Churros are Hispanic pastries in stick form which the Company produces in several sizes according to a proprietary formula. The churros are deep fried, frozen and packaged. At food service point-of-sale they are reheated and topped with a cinnamon sugar mixture. The Company also sells fruit and crème-filled churros. The Company supplies churro merchandising equipment similar to that used for its soft pretzels.

 

Handheld Products

 

The Company's dough enrobed handheld products are marketed under the PATIO, SUPREME STUFFERS and SWEET STUFFERS brand names and under private labels. Handheld products are sold to the Food Service and Retail Supermarket segments. Handheld product sales amounted to 4% of the Company’s sales in fiscal year 2019, 5% in 2018 and 5% in 2017.

 

Bakery Products

 

The Company’s bakery products are marketed under the MRS. GOODCOOKIE, READI-BAKE, COUNTRY HOME, MARY B’S, DADDY RAY’S and HILL & VALLEY brand names, and under private labels. Bakery products include primarily biscuits, fig and fruit bars, cookies, breads, rolls, crumb, muffins and donuts. Bakery products are sold to the Food Service segment. Bakery products sales amounted to 32% of the Company’s sales in fiscal year 2019, 33% in 2018 and 32% in 2017.

 

Frozen Beverages

 

The Company markets frozen beverages primarily under the names ICEE, SLUSH PUPPIE and PARROT ICE which are sold primarily in the United States, Mexico and Canada. Frozen beverages are sold in the Frozen Beverages segment.

 

Frozen beverage sales amounted to 15% of the Company’s revenue in fiscal year 2019, 15% in 2018 and 15% in 2017.

 

Under the Company’s principal marketing program for frozen carbonated beverages, it installs frozen beverage dispensers for its ICEE brand at customer locations and thereafter services the machines, arranges to supply customers with ingredients required for production of the frozen beverages, and supports customer retail sales efforts with in-store promotions and point-of-sale materials. The Company sells frozen non-carbonated beverages under the SLUSH PUPPIE and PARROT ICE brands through a distributor network and through its own distribution network. The Company also provides repair and maintenance service to customers for customers’ owned equipment and sells equipment in its Frozen Beverages segment. Revenue from equipment sales and repair and maintenance services totaled 11% of the Company’s sales in fiscal year 2019, 10% in 2018 and 9% in 2017.

 

3

 

 

Each new frozen carbonated customer location requires a frozen beverage dispenser supplied by the Company or by the customer. Company-supplied frozen carbonated dispensers are purchased from outside vendors or rebuilt by the Company.

 

The Company provides managed service and/or products to approximately 145,000 Company-owned and customer-owned dispensers.

 

The Company has the rights to market and distribute frozen beverages under the name ICEE to the entire continental United States (except for portions of two states) as well as internationally.

 

Other Products

 

Other products sold by the Company include funnel cakes sold under the FUNNEL CAKE FACTORY brand name and smaller amounts of various other food products. These products are sold in the Food Service and Frozen Beverages segments.

 

Customers

 

The Company sells its products to two principal channels: food service and retail supermarkets. The primary products sold to the food service channel are soft pretzels, frozen beverages, frozen juice treats and desserts, churros, dough enrobed handheld products and baked goods. The primary products sold to the retail supermarket channel are soft pretzels, frozen juice treats and desserts and dough enrobed handheld products.

 

We have several large customers that account for a significant portion of our sales. Our top ten customers accounted for 43%, 43% and 42% of our sales during fiscal years 2019, 2018 and 2017, respectively, with our largest customer accounting for 11% of our sales in 2019, 9-1/2% of our sales in 2018 and 9-1/2% of our sales in 2017. Four of the ten customers are food distributors who sell our product to many end users. The loss of one or more of our large customers could adversely affect our results of operations. These customers typically do not enter into long-term contracts and make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance. If our sales to one or more of these customers are reduced, this reduction may adversely affect our business. If receivables from one or more of these customers become uncollectible, our operating income would be adversely impacted.

 

The Food Service and the Frozen Beverages segments sell primarily to food service channels. The Retail Supermarkets segment sells primarily to the retail supermarket channel.

 

The Company’s customers in the food service segment include snack bars and food stands in chain, department and mass merchandising stores, malls and shopping centers, fast food and casual dining restaurants, stadiums and sports arenas, leisure and theme parks, convenience stores, movie theatres, warehouse club stores, schools, colleges and other institutions, and independent retailers. Machines and machine parts are sold to other food and beverage companies. Within the food service industry, the Company’s products are purchased by the consumer primarily for consumption at the point-of-sale.

 

The Company sells its products to an estimated 85-90% of supermarkets in the United States. Products sold to retail supermarket customers are primarily soft pretzel products, including SUPERPRETZEL and AUNTIE ANNE’S, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, WHOLE FRUIT frozen fruit bars, WHOLE FRUIT Sorbet, PHILLY SWIRL cups and sticks, MARY B’S biscuits and dumplings, DADDY RAY’S fig and fruit bars, HILL & VALLEY baked goods, ICEE Squeeze-Up Tubes and PATIO burritos. Within the retail supermarket industry, the Company’s frozen and prepackaged products are purchased by the consumer for consumption at home.

 

Marketing and Distribution

 

The Company has developed a national marketing program for its products. For the Food Service and Frozen Beverages segments’ customers, this marketing program includes providing ovens, mobile merchandisers, display cases, warmers, frozen beverage dispensers and other merchandising equipment for the individual customer’s requirements and point-of-sale materials as well as participating in trade shows and in-store demonstrations. The Company’s ongoing advertising and promotional campaigns for its Retail Supermarket segment’s products include trade shows, newspaper advertisements with coupons and consumer advertising campaigns.

 

4

 

 

The Company develops and introduces new products on a routine basis. The Company evaluates the success of new product introductions on the basis of sales levels, which are reviewed no less frequently than monthly by the Company’s Chief Operating Decision Makers.

 

The Company’s products are sold through a network of about 100 food brokers, independent sales distributors and the Company’s own direct sales force. For its snack food products, the Company maintains warehouse and distribution facilities in Pennsauken, Bellmawr and Bridgeport, New Jersey; Vernon (Los Angeles) and Colton, California; Brooklyn, New York; Scranton, Pittsburgh, Hatfield and Lancaster, Pennsylvania; Carrollton (Dallas), Texas; Atlanta, Georgia; Moscow Mills (St. Louis), Missouri; Pensacola and Tampa, Florida; Solon, Ohio; Weston, Oregon; Holly Ridge, North Carolina; Alsip (Chicago) and Rock Island, Illinois. Frozen beverages and machine parts are distributed from 166 Company managed warehouse and distribution facilities located in 43 states, Mexico and Canada, which allow the Company to directly service its customers in the surrounding areas. The Company’s products are shipped in refrigerated and other vehicles from the Company’s manufacturing and warehouse facilities on a fleet of Company operated tractor-trailers, trucks and vans, as well as by independent carriers.

 

Seasonality

 

The Company’s sales are seasonal because frozen beverage sales and frozen juice treats and desserts sales are generally higher during the warmer months.

 

Trademarks and Patents

 

The Company has numerous trademarks, the most important of which are SUPERPRETZEL, TEXAS TWIST, NEW YORK PRETZEL, BAVARIAN BAKERY, MR. TWISTER, SOFT PRETZEL BITES, SOFTSTIX, PRETZEL FILLERS, PRETZELFILS, BRAUHAUS and LABRIOLA for its pretzel products; SHAPE-UPS, WHOLE FRUIT, PHILLY SWIRL and LUIGI’S for its frozen juice treats and desserts; TIO PEPE’S and CALIFORNIA CHURROS for its churros; ARCTIC BLAST, SLUSH PUPPIE and PARROT ICE for its frozen beverages; FUNNEL CAKE FACTORY for its funnel cake products, PATIO for its handheld burritos and MRS. GOODCOOKIE, READI-BAKE, COUNTRY HOME, CAMDEN CREEK, MARY B’S, DADDY RAY’S and HILL & VALLEY for its bakery products.

 

The Company markets frozen beverages under a license to use the trademark ICEE in all of the continental United States, except for portions of four states, and in Mexico and Canada. Additionally, the Company has the international rights to the trademark ICEE.

 

The trademarks, when renewed and continuously used, have an indefinite term and are considered important to the Company as a means of identifying its products. The Company considers its trademarks important to the success of its business.

 

The Company has numerous patents related to the manufacturing and marketing of its product.

 

Supplies

 

The Company’s manufactured products are produced from raw materials which are readily available from numerous sources. With the exception of the Company’s churro production equipment, funnel cake production equipment and soft pretzel twisting equipment, all of which are made for J & J by independent third parties, and certain specialized packaging equipment, the Company’s manufacturing equipment is readily available from various sources. Syrup for frozen beverages is purchased primarily from The Coca-Cola Company, Dr Pepper Snapple Group, Inc., the Pepsi Cola Company, and Jogue, Inc. Cups, straws and lids are readily available from various suppliers. Parts for frozen beverage dispensing machines are purchased from several sources. Frozen beverage dispensers are purchased primarily from IMI Cornelius, Inc. and FBD Partnership.

 

Competition

 

Snack food and bakery products markets are highly competitive. The Company’s principal products compete against similar and different food products manufactured and sold by numerous other companies, some of which are substantially larger and have greater resources than the Company. As the soft pretzel, frozen juice treat and dessert, bakery products and related markets evolve, additional competitors and new competing products may enter the markets. Competitive factors in these markets include product quality, customer service, taste, price, identity and brand name awareness, method of distribution and sales promotions.

 

5

 

 

The Company believes it is the only national distributor of soft pretzels. However, there are numerous regional and local manufacturers of food service and retail supermarket soft pretzels as well as several chains of retail pretzel stores.

 

In Frozen Beverages the Company competes directly with other frozen beverage companies. These include several companies which have the right to use the ICEE name in portions of four states. There are many other regional frozen beverage competitors throughout the country and one large retail chain which uses its own frozen beverage brand.

 

The Company competes with large soft drink manufacturers for counter and floor space for its frozen beverage dispensing machines at retail locations and with products which are more widely known than the ICEE, SLUSH PUPPIE and PARROT ICE frozen beverages.

 

The Company competes with several other companies in the frozen juice treat and dessert and bakery products markets.

 

Risks Associated with Foreign Operations

 

Foreign operations generally involve greater risk than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States’ economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country’s currency and real property. Sales of our foreign operations were $33,906,000, $32,459,000 and $31,001,000 in fiscal years 2019, 2018 and 2017, respectively. At September 28, 2019, the total assets of our foreign operations were approximately $26 million or 2.6% of total assets which was significantly less than the prior year as we moved cash to the United States. At September 29, 2018, the total assets of our foreign operations were approximately $45 million or 4.8% of total assets.

 

Employees

 

The Company has about 4,600 full and part time employees and approximately 1,500 workers employed by staffing agencies as of September 28, 2019.  About 1,200 production and distribution employees throughout the Company are covered by collective bargaining agreements.

 

The Company considers its employee relations to be good.

 

Available Information

 

The Company’s internet address is www.jjsnack.com. On the investor relations section of its website, the Company provides free access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The information on the website listed above is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document.

 

Item 1A.

Risk Factors

 

You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem insignificant may also impair our business operations. Following is a discussion of known potentially significant risks which could result in harm to our business, financial condition or results of operations.

 

Risks of Shortages or Increased Cost of Raw Materials

 

We are exposed to the market risks arising from adverse changes in commodity prices, affecting the cost of our raw materials and energy. The raw materials and energy which we use for the production and distribution of our products are largely commodities that are subject to price volatility and fluctuations in availability caused by changes in global supply and demand, weather conditions, agricultural uncertainty or governmental controls. We purchase these materials and energy mainly in the open market. Our procurement practices are intended to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases. If commodity price changes result in increases in raw materials and energy costs, we may not be able to increase our prices to offset these increased costs without suffering reduced volume, revenue and operating income.

 

6

 

 

General Risks of the Food Industry

 

Food processors are subject to the risks of adverse changes in general economic conditions; evolving consumer preferences and nutritional and health-related concerns; changes in food distribution channels; federal, state and local food processing controls or other mandates; changes in federal, state, local and international laws and regulations, or in the application of such laws and regulations; consumer product liability claims; risks of product tampering and contamination; and negative publicity surrounding actual or perceived product safety deficiencies. The increased buying power of large supermarket chains, other retail outlets and wholesale food vendors could result in greater resistance to price increases and could alter the pattern of customer inventory levels and access to shelf space.

 

Risks of Shortages or Increased Costs of Labor

 

Our businesses operate in highly competitive markets.  The labor market in the United States is very competitive and the unemployment rate is at historic lows.  We depend on the skills, working relationships, and continued services of key personnel, including our experienced management team. We must hire, train and develop effective employees. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, train, and retain other talented personnel.   In addition, our ability to achieve our operating goals depends on our ability to identify, hire, train, and retain qualified individuals. Any such loss or failure could adversely affect our product sales, financial condition, and operating results.

 

Environmental Risks

 

The disposal of solid and liquid waste material resulting from the preparation and processing of foods is subject to various federal, state and local laws and regulations relating to the protection of the environment. Such laws and regulations have an important effect on the food processing industry as a whole, requiring substantially all firms in the industry to incur material expenditures for modification of existing processing facilities and for construction of upgraded or new waste treatment facilities.

 

We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may require additional expenditures by us, some of which could be material.

 

Risks Resulting from Customer Concentration

 

We have several large customers that account for a significant portion of our sales. Our top ten customers accounted for 43%, 43% and 42% of our sales during fiscal years 2019, 2018 and 2017, respectively, with our largest customer accounting for 11% of our sales in 2019, 9-1/2% of our sales in 2018 and 9-1/2% of our sales in 2017.

 

Four of the ten customers are food distributors who sell our product to many end users. The loss of one or more of our large customers could adversely affect our results of operations. These customers typically do not enter into long-term contracts and make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance. If our sales to one or more of these customers are reduced, this reduction may adversely affect our business. If receivables from one or more of these customers become uncollectible, our operating income would be adversely impacted.

 

Competition

 

Our businesses operate in highly competitive markets. We compete against national and regional manufacturers and distributors on the basis of price, quality, product variety and effective distribution. Many of our major competitors in the market are larger and have greater financial and marketing resources than we do. Increased competition and anticipated actions by our competitors could lead to downward pressure on prices and/or a decline in our market share, either of which could adversely affect our results. See “Competition” in Item 1 for more information about our competitors.

 

7

 

 

Risks Relating to Manufacturing and Distribution

 

Our ability to purchase, manufacture and distribute products is critical to our success. Because we source certain products from single manufacturing sites, it is possible that we could experience a production disruption that results in a reduction or elimination of the availability of some of our products. If we are not able to obtain alternate production capability in a timely manner, or on favorable terms, it could have a negative impact on our business, results of operations, financial condition and cash flows, including the potential for long-term loss of product placement with various customers. We are also subject to risks of other business disruptions associated with our dependence on production facilities and distribution systems. Natural disasters, terrorist activity, cyberattacks or other unforeseen events could interrupt production or distribution and have a material adverse effect on our business, results of operations, financial condition and cash flows, including the potential for long-term loss of product placement with our customers.

 

Risks Relating to the Availability and Costs of Transportation

 

Our ability to obtain adequate and reasonably priced methods of transportation to distribute our products, including refrigerated trailers for many of our products, is a key factor to our success. Delays in transportation, including weather-related delays, could have a material adverse effect on our business and results of operations. Further, higher fuel costs and increased line haul costs due to industry capacity constraints, customer delivery requirements and a more restrictive regulatory environment could also negatively impact our financial results. We pay fuel surcharges that fluctuate with the price of diesel fuel to third-party transporters of our products, and such surcharges can be substantial. Any sudden or dramatic increases in the price of diesel fuel would serve to increase our fuel surcharges and our cost of goods sold. If we were unable to pass higher freight costs to our customers in the form of price increases, those higher costs could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

Risks Relating to Manufacturing Capacity Constraints

 

Our current manufacturing resources may be inadequate to meet significantly increased demand for some of our food products. Our ability to increase our manufacturing capacity depends on many factors, including the equipment delivery, construction lead-times, installation, qualification, regulatory permitting and regulatory requirements. A lack of sufficient manufacturing capacity to meet demand could cause our customer service levels to decrease, which may negatively affect customer demand for our products and customer relations generally, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, operating facilities at or near capacity may also increase production and distribution costs and negatively affect relations with our employees or contractors, which could result in disruptions in our operations.

 

New Jersey Law and Provisions of Our Amended and Restated Certificate of Incorporation and Bylaws May Inhibit a Change In Control

 

The New Jersey Shareholders' Protection Act, N.J.S.A. 14A:10A-1, et seq., may delay, deter or prevent a change in control by prohibiting the Company from engaging in a business combination transaction with an interested shareholder for a period of five years after the person becomes an interested stockholder, even if a majority of our shareholders believe a change in control would be in the best interests of the Company and its shareholders. In addition, our Amended and Restated Certificate of Incorporation and Bylaws contain provisions that may delay, deter or prevent a future acquisition of J & J Snack Foods Corp. not approved by our Board of Directors. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions of our Amended and Restated Certificate of Incorporation and Bylaws that could delay, deter or prevent a future acquisition include the following:

 

--

a classified Board of Directors;

--

the requirement that our shareholders may only remove Directors for cause;

--

limitations on share holdings and voting of certain persons;

--

special Director voting rights;

--

the ability of the Board of Directors to consider the interests of various constituencies, including our employees, customers, suppliers, creditors and the local communities in which we operate;

--

shareholders do not generally have the right to call special meetings or to act by written consent;

--

our Bylaws contain advance notice procedures for nominations of Directors or submission of shareholder proposals at an annual meeting; and

--

our Bylaws contain a forum selection clause providing that certain litigation against the Company can only be brought in New Jersey state or federal courts.

 

8

 

 

Risks Relating to Gerald B. Shreiber

 

Gerald B. Shreiber is the founder, President, Chief Executive Officer and Chairman of the Board of Directors of the Company and the current beneficial owner of 19% of its outstanding common stock. Our Amended and Restated Certificate of Incorporation provides that Mr. Shreiber has three votes on any matter to be acted upon by the Board of Directors (subject to certain adjustments). Therefore, he and one other director would have the ability to approve any matter before the Board. The performance of the Company is greatly impacted by his leadership and decisions.

 

Risk Related to Increases in our Health Insurance Costs

 

The costs of employee health care insurance have been increasing in recent years due to rising health care costs, legislative changes, and general economic conditions.  Because of the breadth and complexity of health care regulations as well as other health care reform legislation considered by Congress and state legislatures, we cannot predict with certainty the future effect of these laws on us.  A continued increase in health care costs or additional costs incurred as a result of the Health Care Reform Laws or the enforcement of the Health Care Reform Laws or other future health care reform laws imposed by Congress or state legislations could have a negative impact on our financial position and results of operations.

 

Risk Related to Product Changes

 

There are risks in the marketplace related to trade and consumer acceptance of product improvements, packing initiatives and new product introductions.

 

Risks Related to Changes in the Business

 

Our ability to successfully manage changes to our business processes, including selling, distribution, product capacity, information management systems and the integration of acquisitions, will directly affect our results of operations.

 

Risks Associated with Foreign Operations

 

Foreign operations generally involve greater risk than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States’ economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country’s currency and real property. Further, there may be less government regulation in various countries, and difficulty in enforcing legal rights outside the United States. Additionally, in some foreign countries, there is the possibility of expropriation or confiscatory taxation limitations on the removal of property or other assets, political or social instability or diplomatic developments which could affect the operations and assets of U.S. companies doing business in that country. Sales of our foreign operations were $33,906,000, $32,459,000 and $31,001,000 in fiscal years 2019, 2018 and 2017, respectively. At September 28, 2019, the total assets of our foreign operations were approximately $26 million or 2.6% of total assets which was significantly less than the prior year as we moved cash to the United States. At September 29, 2018, the total assets of our foreign operations were approximately $45 million or 4.8% of total assets.

 

Risks Associated with our Information Technology Systems

 

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, communications, supply chain, manufacturing, order entry and fulfillment, and other business processes. The failure of our information technology systems (including those provided to us by third parties) to perform as we anticipate could disrupt our business and could result in billing, collecting, and ordering errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer.

 

Our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, security breaches or intrusions (including theft of customer, consumer or other confidential data), and viruses. If we are unable to prevent physical and electronic break-ins, cyber-attacks and other information security breaches, we may suffer financial and reputational damage, be subject to litigation or incur remediation costs or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, suppliers or employees.

 

9

 

 

We may experience difficulties in implementing the final phases of our new enterprise resource planning system. We are in the late stages of a multi-year implementation of a new enterprise resource planning system (“ERP”), which is replacing our existing financial and operating systems. The design and implementation of this new ERP has required an investment of significant personnel and financial resources, including substantial expenditures for outside consultants and software. We may not be able to implement the ERP successfully without experiencing delays, increased costs and other difficulties, including potential design defects, miscalculations, testing requirements, and the diversion of management’s attention from day-to-day business operations. If we are unable to implement the new ERP as planned, the effectiveness of our internal control over financial reporting could be adversely affected, our ability to assess those controls adequately could be delayed, and our business, results of operations, financial condition and cash flows could be negatively impacted.

 

Risks Associated with Real or Perceived Safety Issues Regarding our Food Products

 

We sell food products for human consumption, which involves risks such as product contamination or spoilage, product tampering, other adulteration of food products, mislabeling, and misbranding. We can be impacted by both real and unfounded claims regarding the safety of our operations, or concerns regarding mislabeled, adulterated, contaminated or spoiled food products. Any of these circumstances could necessitate a voluntary or mandatory recall due to a substantial product hazard, a need to change a product’s labeling or other consumer safety concerns. A pervasive product recall may result in significant loss due to the costs of a recall, related legal claims, including claims arising from bodily injury or illness caused by our products, the destruction of product inventory, or lost sales due to product unavailability. A highly publicized product recall, whether involving us or any related products made by third parties, also could result in a loss of customers or an unfavorable change in consumer sentiment regarding our products or any category in which we operate. In addition, an allegation of noncompliance with federal or state food laws and regulations could force us to cease production, stop selling our products or create significant adverse publicity that could harm our credibility and decrease market acceptance of our products. Any of these events could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

 

Seasonality and Quarterly Fluctuations

 

Our sales are affected by the seasonal demand for our products. Demand is greater during the summer months primarily as a result of the warm weather demand for our ICEE and frozen juice treats and desserts products. Because of seasonal fluctuations, there can be no assurance that the results of any particular quarter will be indicative of results for the full year or for future years.

 

Item 1B.

Unresolved Staff Comments

 

We have no unresolved SEC staff comments to report.

 

Item 2.

Properties

 

The Company’s primary east coast manufacturing facility is located in Pennsauken, New Jersey in a 70,000 square foot building on a two-acre lot. Soft pretzels, churros, and funnel cake are manufactured at this Company-owned facility which also serves as the Company’s corporate headquarters. The Company owns a 128,000 square foot building adjacent to this manufacturing facility which contains a large freezer for warehousing and distribution purposes. The Company leases, through January 2022, 16,000 square feet of office and warehouse space located next to the Pennsauken, New Jersey plant and owns a 43,000 square foot office and warehouse building in the same complex.

 

The Company owns a 150,000 square foot building on eight acres in Bellmawr, New Jersey. The facility is used by the Company to manufacture soft pretzels.

 

The Company’s primary west coast manufacturing facility is located in Vernon (Los Angeles), California. It consists of a 137,000 square foot facility in which soft pretzels, churros and various lines of baked goods are produced and warehoused. Included in the 137,000 square foot facility is a 30,000 square foot freezer used for warehousing and distribution purposes. The facility is leased through November 2030. The Company leases an additional 80,000 square feet of office and warehouse space, adjacent to its manufacturing facility, through November 2030.

 

The Company leases a 22,000 square foot soft pretzel manufacturing facility located in Brooklyn, New York. The lease runs through August 2023.

 

10

 

 

The Company leases through June 2030 a 45,000 square foot churros and funnel cake manufacturing facility located in Colton, California.

 

The Company leases an 85,000 square foot bakery manufacturing facility located in Atlanta, Georgia. The lease runs through December 2020.      

 

The Company leases a 129,000 square foot bakery manufacturing facility located in Rock Island, Illinois. The lease runs through December 2034.      

 

The Company owns a 46,000 square foot frozen juice treat and dessert manufacturing facility and a 42,000 square foot dry storage warehouse located on six acres in Scranton, Pennsylvania.

 

The Company leases a 29,600 square foot soft pretzel manufacturing facility located in Hatfield, Pennsylvania. The lease runs through June 2032.

 

The Company leases a 48,000 square foot soft pretzel manufacturing facility located in Carrollton, Texas. The lease runs through April 2026. The Company leases an additional property containing a 6,500 square foot storage freezer across the street from the manufacturing facility, which lease expires May 2021.

 

The Company leases a 177,500 square foot soft pretzel manufacturing facility located in Alsip, Illinois. The lease runs through March 2030.

 

The Company’s fresh bakery products manufacturing facility and offices are located in Bridgeport, New Jersey in three buildings totaling 133,000 square feet. The buildings are leased through December 2025.

 

The Company owns a 165,000 square foot fig and fruit bar manufacturing facility located on 9-1/2 acres in Moscow Mills (St. Louis), Missouri.

 

The Company owns an 84,000 square foot handheld products manufacturing facility in Holly Ridge, North Carolina.

 

The Company leases a 70,000 square foot handheld products manufacturing facility in Weston, Oregon which is leased through May 13, 2021.

 

The Company leases a 39,000 square foot frozen juice treat and dessert manufacturing facility in Tampa, Florida which is leased through September 2023.

 

The Company also leases approximately 160 warehouse and distribution facilities in 44 states, Mexico and Canada.

 

Item 3.

Legal Proceedings

 

The Company has no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject.

 

Item 4.

Mine Safety Disclosures

 

Not Applicable

 

11

 

 

PART II

 

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities

 

The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “JJSF.” The following table sets forth the high and low sale price quotations as reported by NASDAQ and dividend information for the common stock for each quarter of the years ended September 29, 2018 and September 28, 2019.

 

    Common Stock Market Price          
                         
                   

Dividend

 
   

High

   

Low

   

Declared

 
                         
                         

Fiscal 2018

                       

First quarter

  $ 157.33     $ 127.00     $ 0.4500  

Second quarter

    153.99       128.53       0.4500  

Third quarter

    158.41       125.98       0.4500  

Fourth quarter

    159.05       139.90       0.4500  
                         

Fiscal 2019

                       

First quarter

  $ 162.80     $ 138.65     $ 0.5000  

Second quarter

    162.84       138.40       0.5000  

Third quarter

    167.50       150.61       0.5000  

Fourth quarter

    196.84       159.63       0.5000  

 

 

As of September 28, 2019, we had approximately 23,000 beneficial shareholders.

 

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.

 

A plan to purchase 500,000 shares was announced on November 8, 2012. 500,000 shares were purchased under this plan with the last purchase in August 2017. A plan to purchase 500,000 shares was announced on August 4, 2017 with no expiration date. 384,506 shares remain to be purchased under this plan.

 

For information on the Company’s Equity Compensation Plans, please see Item 12 herein.

 

12

 

 

Stock Performance Graph

 

 

Item 6.

Selected Financial Data

 

The selected financial data for the last five years was derived from our audited consolidated financial statements. The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, especially as the information pertains to fiscal 2017, 2018 and 2019.

 

   

Fiscal year ended in September

(In thousands except per share data)

 
                                         
                                         
   

2019

   

2018

   

2017

   

2016

   

2015

 
                                         

Net Sales

  $ 1,186,487     $ 1,138,265     $ 1,084,224     $ 992,781     $ 976,256  

Net Earnings

  $ 94,819     $ 103,596     $ 79,174     $ 75,975     $ 70,183  

Total Assets

  $ 1,019,339     $ 932,013     $ 867,228     $ 790,487     $ 739,669  

Long-Term Debt

  $ -     $ -     $ -     $ -     $ -  

Capital Lease Obligations

  $ 1,057     $ 1,077     $ 1,244     $ 1,600     $ 1,469  

Stockholders' Equity

  $ 833,751     $ 759,091     $ 682,322     $ 637,974     $ 599,919  

Common Share Data

                                       

Earnings Per Diluted Share

  $ 5.00     $ 5.51     $ 4.21     $ 4.05     $ 3.73  

Earnings Per Basic Share

  $ 5.04     $ 5.54     $ 4.23     $ 4.07     $ 3.76  

Common Shares Outstanding At Year End

    18,895       18,754       18,663       18,668       18,676  

Cash Dividends Declared Per Common Share

  $ 2.00     $ 1.80     $ 1.68     $ 1.56     $ 1.44  

 

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Item 7.

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

 

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.

 

14

 

 

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.

 

15

 

 

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.

 

16

 

 

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.

 

17

 

 

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.

 

18

 

 

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.

 

20

 

 

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     $ 25,588  

 

 

The 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

 

24

 

 

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.

 

25

 

 

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.

 

Item 7A.

Quantitative And Qualitative Disclosures About Market Risk

 

The following is the Company’s quantitative and qualitative analysis of its financial market risk:

 

Interest Rate Sensitivity

 

The Company has in the past entered into interest rate swaps to limit its exposure to interest rate risk and may do so in the future if the Board of Directors feels that such non-trading purpose is in the best interest of the Company and its shareholders. As of September 28, 2019, the Company had no interest rate swap contracts.

 

Interest Rate Risk

 

At September 28, 2019, the Company had no long-term debt obligations.

 

Purchasing Risk

 

The Company’s most significant raw material requirements include flour, shortening, corn syrup, sugar, juice, cheese, chocolate, and a variety of nuts. The Company attempts to minimize the effect of future price fluctuations related to the purchase of raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from 1 to 12 months. Future contracts are not used in combination with forward purchasing of these raw materials. The Company’s procurement practices are intended to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases.

 

26

 

 

Foreign Exchange Rate Risk

 

The Company has not entered into any forward exchange contracts to hedge its foreign currency rate risk as of September 28, 2019, because it does not believe its foreign exchange exposure is significant.

 

Item 8.

Financial Statements And Supplementary Data

 

The financial statements of the Company are filed under this Item 8, beginning on page F-1 of this report.     

 

Item 9.

Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

 

None.

 

Item 9A.

Controls And Procedures

 

Disclosure Controls and Procedures

 

We carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended for financial reporting, as of September 28, 2019. Based on that evaluation, our chief executive officer and chief financial officer concluded that these controls and procedures are effective at a reasonable assurance level.

 

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. These disclosure controls and procedures include, among other things, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: 

 

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and board of directors;

 

 

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of September 28, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework.

 

27

 

 

Based on our assessment, our management believes that, as of September 28, 2019, our internal control over financial reporting is effective. There have been no changes that occurred during our fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Our independent registered public accounting firm, Grant Thornton LLP, audited our internal control over financial reporting as of September 28, 2019.  Their report, dated November 27, 2019, expressed an unqualified opinion on our internal control over financial reporting.  That report appears in Item 15 of Part IV of this Annual Report on Form 10-K and is incorporated by reference to this Item 9A.

 

Item 9B.

Other Information

 

There was no information required on Form 8-K during the quarter that was not reported.

 

28

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

The following is a list of the executive officers of the Company and their principal past occupations or employment. All such persons serve at the pleasure of the Board of Directors and have been elected to serve until the Annual Meeting of Shareholders on February 11, 2020 or until their successors are duly elected.

              

Name Age Position
     

Gerald B. Shreiber

77

Chairman of the Board, President, Chief Executive Officer and Director

Dennis G. Moore

63

Senior Vice President, Chief Financial Officer Treasurer and Director

Robert M. Radano

70

Senior Vice President,Sales and Chief Operating Officer

Dan Fachner

59

President of The ICEE Company Subsidiary

Gerard G. Law

45

Senior Vice President and Assistant to the President

Robert J. Pape

62

Senior Vice President Sales

 

Gerald B. Shreiber is the founder of the Company and has served as its Chairman of the Board, President, and Chief Executive Officer since its inception in 1971. His term as a director expires in 2020.

 

Dennis G. Moore joined the Company in 1984. He served in various controllership functions prior to becoming the Chief Financial Officer in June 1992. His term as a director expires in 2022.

 

Robert M. Radano joined the Company in 1972 and in May 1996 was named Chief Operating Officer of the Company. Prior to becoming Chief Operating Officer, he was Senior Vice President, Sales responsible for national food service sales of J & J.

 

 Dan Fachner has been an employee of ICEE-USA Corp., which was acquired by the Company in May 1987, since 1979. He was named Senior Vice President of The ICEE Company in April 1994 and became President in May 1997.

 

Gerard G. Law joined the Company in 1992.  He served in various manufacturing and sales management capacities prior to becoming Senior Vice President, Western Operations in 2009.  He was named to his present position in 2011 in which he has responsibility for marketing, research and development and overseeing a number of the manufacturing facilities of J & J. 

 

Robert J. Pape joined the Company in 1998. He served in various sales and sales management capacities prior to becoming Senior Vice President Sales in 2010.     

 

Portions of the information concerning directors and executive officers, appearing under the captions “Information Concerning Nominees For Election To Board” and “Information Concerning Continuing Directors And Executive Officers” and information concerning Section 16(a) Compliance appearing under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s Proxy Statement filed with the SEC in connection with the Annual Meeting of Shareholders to be held on February 11, 2020 (“2019 Proxy Statement”) is incorporated herein by reference.

 

Portions of the information concerning the Audit Committee, the requirement for an Audit Committee Financial Expert and the Nominating Committee in the Company’s 2019 Proxy Statement filed with the SEC in connection with the Annual Meeting of Shareholders to be held on February 11, 2020 is incorporated herein by reference.

 

The Company has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, which applies to the Company’s principal executive officer and senior financial officers. The Company has also adopted a Code of Business Conduct and Ethics which applies to all employees. The Company will furnish any person, without charge, a copy of the Code of Ethics upon written request to J & J Snack Foods Corp., 6000 Central Highway, Pennsauken, New Jersey 08109, Attn: Marjorie S. Roshkoff, Esq. A copy of the Code of Ethics can also be found on our website at www.jjsnack.com. Any waiver of any provision of the Code of Ethics granted to the principal executive officer or senior financial officer may only be granted by a majority of the Company’s disinterested directors. If a waiver is granted, information concerning the waiver will be posted on our website www.jjsnack.com for a period of 12 months.

 

29

 

 

Item 11.

Executive Compensation

 

Information concerning executive compensation appearing in the Company’s 2019 Proxy Statement under the caption “Management Remuneration” is incorporated herein by reference.

 

Item 12.

Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters

 

Information concerning the security ownership of certain beneficial owners and management appearing in the Company’s 2019 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference.

 

The following table details information regarding the Company’s existing equity compensation plans as of September 28, 2019.

 

   

( a )

   

( b )

   

( c )

 
                   

Number of

 
                   

Securities

 
                   

Remaining

 
                   

available for

 
                   

future

 
   

Number of

   

Weighted-

   

issuance under

 
   

securities to

   

average

   

equity

 
   

be issued upon

   

exercise

   

compensation

 
   

exercise of

   

price of

   

plans

 
   

outstanding

   

outstandng

   

(excluding

 
   

options,

   

options,

   

securities

 
   

warrants and

   

warrants and

   

reflected in

 

Plan Category

 

rights

   

rights

   

column (a) )

 
                         

Equity compensation plans approved by security holders

    802,000     $ 128.25       916,000  
                         

Equity compensation plans not approved by security holders

    -       -       -  
                         
                         

Total

    802,000     $ 128.25       916,000  

 

Column A includes 436,000 from stock option plans that were replaced subsequent to September 30, 2017. Those plans have been replaced by a plan, approved by shareholders in February 2018, that has 454,000 shares available for future issuance as of the date of this Form 10-K.

 

Item 13.

Certain Relationships And Related Transactions, and Director Independence

 

Information concerning the Certain Relationships and Related Transactions, and Director Independence in the Company’s 2019 Proxy Statement is incorporated herein by reference.

 

Item 14.

Principal Accountant Fees And Services

 

Information concerning the Principal Accountant Fees and Services in the Company’s 2019 Proxy Statement is incorporated herein by reference.

 

30

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

 

 

(a)

The following documents are filed as part of this Report:

 

 

(1)

Financial Statements

 

The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements and Financial Statements Schedule on page F-1.

 

 

(2)

Financial Statement Schedule – Page S-1

 

Schedule II – Valuation and Qualifying Accounts

 

All other schedules are omitted either because they are not applicable or because the information required is contained in the financial statements or notes thereto.

 

 

(b)

Exhibits

 

3.1

Amended and Restated Certificate of Incorporation filed February 28, 1990 (Incorporated by reference from the Company’s Form 10-Q dated May 4, 1990).


3.2

Revised Bylaws adopted November 19, 2013 (Incorporated by reference from the Company’s Form 10-K dated November 26, 2013).

 

4.3

Amended and Restated Loan Agreement dated December 1, 2006 by and among J & J Snack Foods Corp. and Certain of its Subsidiaries and Citizens Bank of Pennsylvania, as Agent (Incorporated by reference from the Company’s Form 10-K dated December 6, 2006).


4.4
First Amendment and Modification to Amendment and Restated Loan Agreement (Incorporated by reference from the Company’s Form 10-K dated December 7, 2011).

 

4.5
Fourth Amendment and Modification to Amendment and Restated Loan Agreement (Incorporated by reference from the Company’s Form 10-K dated November 21, 2016).

 

10.2*
J & J Snack Foods Corp. Stock Option Plan (Incorporated by reference from the Company’s Definitive Proxy Statement dated December 22, 2017).

 

10.8*
J & J Snack Foods Corp. Employee Stock Purchase Plan (Incorporated by reference from the Company’s Form S-8 dated May 16, 1996).

 

14.1
Code of Ethics Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 (Incorporated by reference from the Company’s 10-Q dated July 20, 2004).

 

21.1**

Subsidiaries of J & J Snack Foods Corp.

 

31

 

 

23.1**

Consent of Independent Registered Public Accounting Firm.

 

31.1**

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2**

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1**

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002.

 

32.2**

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002.

 

101**

The following financial information from J&J Snack Foods Corp.'s Form 10-K for the year ended September 28, 2019, formatted in Inline XBRL (eXtensible Business Reporting Language):

 

 

  (i)

Consolidated Balance Sheets,

 

 (ii)

Consolidated Statements of Earnings,

 

(iii)

Consolidated Statements of Comprehensive Income,

 

(iv)

Consolidated Statements of Cash Flows,

 

 (v)

Consolidated Statement of Changes in Stockholders' Equity and

 

(vi)

The Notes to the Consolidated Financial Statements

 

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

 

_____________

 

*Compensatory Plan

 

**Filed Herewith

 

32

 

 

SIGNATURES

 

 

Pursuant to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  J & J SNACK FOODS CORP.
     

November 27, 2019

By:

/s/ Gerald B. Shreiber

   

Gerald B. Shreiber,

   

Chairman of the Board,

   

President, Chief Executive

   

Officer and Director

   

(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

November 27, 2019

/s/ Gerald B. Shreiber

 

Gerald B. Shreiber,

 

Chairman of the Board,

 

President, Chief Executive

 

Officer and Director

 

(Principal Executive Officer)
   

November 27, 2019

/s/ Dennis G. Moore

 

Dennis G. Moore, Senior Vice

 

President, Chief Financial

 

Officer and Director

 

(Principal Financial Officer)

 

(Principal Accounting Officer)

   

November 27, 2019

/s/ Sidney R. Brown

 

Sidney R. Brown, Director

   

November 27, 2019

/s/ Peter G. Stanley

 

Peter G. Stanley, Director

   

November 27, 2019

/s/ Vincent A. Melchiorre

 

Vincent A. Melchiorre, Director

 

33

 

 

J & J SNACK FOODS CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

 

Financial Statements:

 
   

Report of Independent Registered Public Accounting Firm

F-2

   

Opinion of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

F-4
   

Consolidated Balance Sheets as of September 28, 2019 and September 29, 2018

F-5

   

Consolidated Statements of Earnings for the fiscal years ended September 28, 2019, September 29, 2018 and  September 30, 2017

F-6

   

Consolidated Statements of Comprehensive Income for the fiscal years ended September 28, 2019, September 29, 2018 and September 30, 2017

F-7

   

Consolidated Statement of Changes in Stockholders’ Equity for the fiscal years ended September 28, 2019, September 29, 2018 and September 30, 2017

F-8

   

Consolidated Statements of Cash Flows for the fiscal years ended September 28, 2019, September 29, 2018 and September 30, 2017

F-9

   

Notes to Consolidated Financial Statements

F-10

   

Financial Statement Schedule:

 
   

Schedule II – Valuation and Qualifying Accounts

S-1

 

F-1

 

 

Board of Directors and Shareholders

J&J Snack Foods Corp. and Subsidiaries

 

Opinion on the financial statements

 

We have audited the accompanying consolidated balance sheets of J&J Snack Foods Corp. (a New Jersey corporation) and subsidiaries (the “Company”) as of September 28, 2019 and September 29, 2018, the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for each of the three fiscal years in the period ended September 28, 2019 (52 weeks, 52 weeks and 53 weeks, respectively), and the related notes and financial statement schedule included under Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 28, 2019 and September 29, 2018, and the results of its operations and its cash flows for each of the three fiscal years in the period ended September 29, 2018 (52 weeks, 52 weeks and 53 weeks, respectively), in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 28, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 27, 2019 expressed an unqualified opinion.

 

Basis for opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical audit matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Net Revenue Adjustments

 

As described in Note A to the consolidated financial statements, contracts with customers include some form of variable consideration, including sales discounts, trade promotions and certain other sales and consumer incentives, including rebates and coupon redemption. Variable consideration is treated as a reduction in revenue when the related revenue is recognized, and is recorded using the most likely amount method, with updates to estimates and related accruals of variable consideration occurring each period based on historical experience and changes in circumstances.

 

We identified the estimation of the reserves for these net revenue adjustments by management as a critical audit matter because the inputs and assumptions utilized by management in estimating these reserves, including consistency of historical data and contract pricing, require significant judgment and create a high degree of estimation uncertainty. Consequently, auditing these assumptions requires subjective auditor judgment.

 

F-2

 

 

Our audit procedures related to the estimation of the reserves included the following, among others.

 

 

We obtained an understanding of management’s processes and controls over calculating the reserves for net revenue adjustments, including understanding relevant inputs and assumptions.

 

We tested the design and operating effectiveness of key controls relating to the calculation of the reserves for net revenue adjustments, including key management review controls over the period-end accrual of allowances, end-user pricing adjustments, trade spending, coupon redemption costs, returned product and other adjustments.

 

We re-performed management’s process for calculating the reserves for net revenue adjustments.

 

We evaluated key inputs and assumptions relevant to the net revenue adjustments, including contractual pricing and rebate arrangements with customers, historical allowance data and other contractual arrangements, which were compared to source documents.

 

We considered transactions subsequent to year end occurring up to the date of our auditor’s opinion, which involved inspecting customer contracts and relevant source documents submitted by customers in conjunction with the allowance, including end-user pricing adjustment, trade spending, coupon redemption, return or other adjustments.

 

 

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 1984.

 

Philadelphia, Pennsylvania

November 27, 2019

 

F-3

 

 

Board of Directors and Shareholders

J&J Snack Foods Corp. and Subsidiaries

 

Opinion on internal control over financial reporting

 

We have audited the internal control over financial reporting of J&J Snack Foods Corp. (a New Jersey corporation) and subsidiaries (the “Company”) as of September 28, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 28, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended September 28, 2019, and our report dated November 27, 2019 expressed an unqualified opinion on those financial statements.

 

Basis for opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and limitations of internal control over financial reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ GRANT THORNTON LLP

 

Philadelphia, Pennsylvania

November 27, 2019

 

F-4

 

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

   

September 28,

   

September 29,

 
   

2019

   

2018

 

Assets

               

Current assets

               

Cash and cash equivalents

  $ 192,395     $ 111,479  

Marketable securities held to maturity

    51,091       21,048  

Accounts receivable, net

    140,938       132,342  

Inventories

    116,165       112,884  

Prepaid expenses and other

    5,768       5,044  

Total current assets

    506,357       382,797  
                 

Property, plant and equipment, at cost

    676,724       570,295  

Less accumulated depreciation and amortization

    423,276       327,622  

Property, plant and equipment, net

    253,448       242,673  
                 

Other assets

               

Goodwill

    102,511       102,511  

Other intangible assets, net

    54,922       57,762  

Marketable securities held to maturity

    79,360       118,765  

Marketable securities available for sale

    19,903       24,743  

Other

    2,838       2,762  

Total other assets

    259,534       306,543  

Total Assets

  $ 1,019,339     $ 932,013  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Current obligations under capital leases

  $ 339     $ 324  

Accounts payable

    72,029       69,592  

Accrued insurance liability

    10,457       11,217  

Accrued liabilities

    7,808       8,031  

Accrued compensation expense

    21,154       20,297  

Dividends payable

    9,447       8,438  

Total current liabilities

    121,234       117,899  
                 

Long-term obligations under capital leases

    718       753  

Deferred income taxes

    61,920       52,322  

Other long-term liabilities

    1,716       1,948  
                 

Stockholders' Equity

               

Preferred stock, $1 par value; authorized 10,000,000 shares; none issued

    -       -  

Common stock, no par value; authorized, 50,000,000 shares; issued and outstanding 18,895,000 and 18,754,000 respectively

    45,744       27,340  

Accumulated other comprehensive loss

    (12,988 )     (11,994 )

Retained Earnings

    800,995       743,745  

Total stockholders' equity

    833,751       759,091  

Total Liabilities and Stockholders' Equity

  $ 1,019,339     $ 932,013  

 

The accompanying notes are an integral part of these statements.

 

F-5

 

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS 

(in thousands, except per share information)

 

   

Fiscal Year Ended

 
                         
   

September 28,

   

September 29,

   

September 30,

 
   

2019

   

2018

   

2017

 
   

(52 weeks)

   

(52 weeks)

   

(53 weeks)

 
                         

Net Sales

  $ 1,186,487     $ 1,138,265     $ 1,084,224  

Cost of goods sold

    836,086       801,979       753,201  

Gross Profit

    350,401       336,286       331,023  
                         

Operating expenses

                       

Marketing

    96,428       95,405       94,394  

Distribution

    94,888       92,281       81,824  

Administrative

    40,721       37,757       36,843  

Other expense (income)

    1,408       68       (145 )

Total operating expenses

    233,445       225,511       212,916  

Operating Income

    116,956       110,775       118,107  
                         

Other income (expenses)

                       

Investment income

    7,741       6,267       5,289  

Interest expense & other

    1,880       1,110       (1,196 )
                         

Earnings before income taxes

    126,577       118,152       122,200  
                         

Income taxes

    31,758       14,556       43,026  
                         

NET EARNINGS

  $ 94,819     $ 103,596     $ 79,174  
                         

Earnings per diluted share

  $ 5.00     $ 5.51     $ 4.21  
                         

Weighted average number of diluted shares

    18,959       18,817       18,816  
                         

Earnings per basic share

  $ 5.04     $ 5.54     $ 4.23  
                         

Weighted average number of basic shares

    18,812       18,694       18,707  

 

The accompanying notes are an integral part of these statements.

 

F-6

 

 

 

J&J SNACK FOODS CORP. AND SUBSIDIARIES   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

    Fiscal Year Ended  
                         
   

September 28,

   

September 29,

   

September 30,

 
   

2019

   

2018

   

2017

 
   

(52 weeks)

   

(52 weeks)

   

(53 weeks)

 
                         

Net Earnings

  $ 94,819     $ 103,596     $ 79,174  
                         

Foreign currency translation adjustments

    (909 )     (2,738 )     3,745  

Unrealized holding (loss) gain on marketable securities

    -       (455 )     795  

Amount reclassified from accumulated other comprehensive income

    -       74       -  

Total Other Comprehensive (Loss) income, net of tax

    (909 )     (3,119 )     4,540  
                         

Comprehensive Income

  $ 93,910     $ 100,477     $ 83,714  

 

The accompanying notes are an integral part of these statements.

 

F-7

 

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands)

 

                   

Accumulated

                 
                   

Other

                 
   

Common Stock

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Loss

   

Earnings

   

Total

 

Balance at September 24, 2016

    18,668     $ 25,332     $ (13,415 )   $ 626,057     $ 637,974  

Issuance of common stock upon exercise of stock options

    124       5,826       -       -       5,826  

Issuance of common stock for employee stock purchase plan

    13       1,405       -       -       1,405  

Foreign currency translation adjustment

    -       -       3,745       -       3,745  

Unrealized holding gain on marketable securities

    -       -       795       -       795  

Issuance of common stock under deferred stock plan

    1       94       -       -       94  

Dividends declared

    -       -       -       (31,416 )     (31,416 )

Share-based compensation

    -       2,954       -       -       2,954  

Repurchase of common stock

    (143 )     (18,229 )     -       -       (18,229 )

Net earnings

    -       -       -       79,174       79,174  
                                         

Balance at September 30, 2017

    18,663     $ 17,382     $ (8,875 )   $ 673,815     $ 682,322  

Issuance of common stock upon exercise of stock options

    98       7,371       -       -       7,371  

Issuance of common stock for employee stock purchase plan

    13       1,523       -       -       1,523  

Foreign currency translation adjustment

    -       -       (2,738 )     -       (2,738 )

Unrealized holding gain on marketable securities

    -       -       (381 )     -       (381 )

Issuance of common stock under deferred stock plan

    1       97       -       -       97  

Dividends declared

    -       -       -       (33,666 )     (33,666 )

Share-based compensation

    -       3,761       -       -       3,761  

Repurchase of common stock

    (21 )     (2,794 )     -       -       (2,794 )

Net earnings

    -       -       -       103,596       103,596  
                                         

Balance at September 29, 2018

    18,754     $ 27,340     $ (11,994 )   $ 743,745     $ 759,091  

Issuance of common stock upon exercise of stock options

    128       12,658       -       -       12,658  

Issuance of common stock for employee stock purchase plan

    12       1,516       -       -       1,516  

Foreign currency translation adjustment

    -       -       (909 )     -       (909 )

Reclass from accumulated other comprehensive gain

    -       -       (85 )     85       -  

Issuance of common stock under deferred stock plan

    1       91       -       -       91  

Dividends declared

    -       -       -       (37,654 )     (37,654 )

Share-based compensation

    -       4,139       -       -       4,139  

Net earnings

    -       -       -       94,819       94,819  

Balance at September 28, 2019

    18,895     $ 45,744     $ (12,988 )   $ 800,995     $ 833,751  

 

The accompanying notes are an integral part of these statements.

 

F-8

 

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES          

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(in thousands)

 

   

Fiscal Year Ended

 
                         
   

September 28,

   

September 29,

   

September 30,

 
   

2019

   

2018

   

2017

 
   

(52 weeks)

   

(52 weeks)

   

(53 weeks)

 
                         

Operating activities:

                       

Net earnings

  $ 94,819     $ 103,596     $ 79,174  

Adjustments to reconcile net earnings to net cash provided by operating activities:

                       

Depreciation of fixed assets

    45,225       42,939       38,211  

Amortization of intangibles and deferred costs

    3,385       3,538       4,234  

Gains from disposals of property & equipment

    (347 )     (912 )     (346 )

Amortization of bond premiums

    730       1,012       1,189  

Share-based compensation

    4,230       3,858       3,048  

Deferred income taxes

    9,637       (10,392 )     7,847  

Loss (gain) on sale of marketable securities

    404       140       (14 )

Changes in assets and liabilities, net of effects from purchase of companies:

                       

Increase in accounts receivable, net

    (8,759 )     (7,917 )     (20,370 )

Increase in inventories

    (3,231 )     (9,639 )     (7,410 )

(Increase) decrease in prepaid expenses and other

    (744 )     (1,120 )     10,265  

Increase (decrease) in accounts payable and accrued liabilities

    2,150       (1,736 )     9,521  

Net cash provided by operating activities

    147,499       123,367       125,349  

Investing activities:

                       

Payments for purchases of companies, net of cash acquired

    (1,156 )     -       (47,698 )

Purchases of property, plant and equipment

    (57,128 )     (60,022 )     (72,180 )

Purchases of marketable securities

    (26,091 )     (91,112 )     (39,923 )

Proceeds from redemption and sales of marketable securities

    39,158       75,302       22,997  

Proceeds from disposal of property, plant and equipment

    2,050       2,639       1,935  

Other

    (196 )     54       (450 )

Net cash used in investing activities

    (43,363 )     (73,139 )     (135,319 )

Financing activities:

                       

Payments to repurchase common stock

    -       (2,794 )     (18,229 )

Proceeds from issuance of common stock

    14,174       8,894       7,231  

Payments on capitalized lease obligations

    (356 )     (370 )     (356 )

Payment of cash dividend

    (36,644 )     (33,066 )     (30,859 )

Net cash used in financing activities

    (22,826 )     (27,336 )     (42,213 )

Effect of exchange rates on cash and cash equivalents

    (394 )     (2,375 )     2,493  

Net increase (decrease) in cash and cash equivalents

    80,916       20,517       (49,690 )

Cash and cash equivalents at beginning of year

    111,479       90,962       140,652  

Cash and cash equivalents at end of year

  $ 192,395     $ 111,479     $ 90,962  

 

The accompanying notes are an integral part of these statements.

 

F-9

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

J & J Snack Foods Corp. and Subsidiaries (the Company) manufactures, markets and distributes a variety of nutritional snack foods and beverages to the food service and retail supermarket industries. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Our fiscal years 2019 and 2018 comprise 52 weeks. Our 2017 fiscal year comprised 53 weeks. All references to 2017 fiscal year refer to that 53 week period.

 

1.

Principles of Consolidation

 

The consolidated financial statements were prepared in accordance with U.S. GAAP. These financial statements include the accounts of J & J Snack Foods Corp. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

2.

Revenue Recognition

 

On  September 30, 2018, we adopted ASC 606, “Revenue from Contracts with Customers” and all the related amendments to ASC 606 in relation to all contracts that were not completed or expired as of September 30, 2018, using the modified retrospective method. There was no adjustment made to the opening balance of retained earnings as a result of applying ASC 606. Results for reporting periods beginning September 30, 2018 are presented under ASC 606, while the comparative information is not restated and will continue to be reported under the accounting standards in effect for those periods.

 

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.

 

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.

 

F-10

 

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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. Our recorded liability for allowances, end-user pricing adjustments and trade spending was approximately $14.8 million at September 28, 2019 and $13.6 million at September 29, 2018.

 

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 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.

 

3.

Foreign Currency

 

Assets and liabilities in foreign currencies are translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date. Revenues and expenses are translated at the average rate of exchange for the period. The cumulative translation adjustment is recorded as a separate component of stockholders’ equity and changes to such are included in comprehensive income.

 

4.

Use of Estimates

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

F-11