J&J SNACK FOODS CORP (JJSF) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Objective
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Form 10-K. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023 for additional information related to the discussion and analysis of our financial condition and results of operations for the fiscal year ended September 30, 2023 compared to the fiscal year ended September 24, 2022.
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Business Overview
The Company manufactures snack foods and distributes frozen beverages which it markets nationally to the foodservice and retail supermarket industries. The Company’s principal snack food products are soft pretzels, frozen novelties, churros and bakery products. We are the largest manufacturer of soft pretzels in the United States. Other snack food products include funnel cake and handheld products. 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 foodservice 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.
Business Trends and Strategy
Our results are impacted by macroeconomic and demographic trends and changes in consumer behavior. The U.S. economy has experienced economic volatility and uncertainty in recent years, which has had, and we expect might continue to have, an impact on consumer behavior. Consumer spending may continue to be impacted by levels of discretionary income and the impact of that on the consumer’s decision making around their purchases. In addition, inflation continues to impact our business, and fluctuating raw material input costs may continue to impact the costs of our products.
To help combat these potential headwinds, we strategically look to improve our operational efficiencies and margins, as well expand our growth opportunities across our various channels and customers. Some recent examples of implementing these strategies include:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Our recently completed strategic supply chain transformation in which we opened three regional distribution centers which is projected to drive significant cost reductions around warehousing and distribution costs. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The recent addition of six new production lines which has significantly expanded upon our capacity and allowed us to meet growth opportunities across our core products such as pretzels, churros and frozen novelties. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Implementation of a new ERP system in fiscal 2022 which has helped to create efficiencies and streamline internal processes. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Many examples of successful cross-selling and leveraging our brands across customer channels, including our recent expansion of the breadth and depth of our Dippin’ Dots brand across the theater channel, as well as looking to penetrate that brand into the retail market. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Further expansion of our SuperPretzel brand across the retail market through the launch of Bavarian Sticks. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Our fiscal year 2023 rollout of our new Hola! Churros brand. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Our recent fiscal year 2024 acquisition of Thinsters |
Fiscal Period
The Company’s fiscal year is the 52- or 53- week period that ends on the last Saturday of September. An additional week is included in the last fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters, which occurred in the Company’s fourth quarter of fiscal 2023. The Company’s fiscal years 2024 and 2022 spanned 52 weeks each, whereas fiscal year 2023 spanned 53 weeks.
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RESULTS OF OPERATIONS:
Fiscal Year 2024 (52 weeks) Compared to Fiscal Year 2023 (53 weeks)
Results of Consolidated Operations
The following discussion provides a review of results for the fiscal year ended September 28, 2024 as compared with the fiscal year ended September 30, 2023.
| Summary of Results | Fiscal year ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, | September 30, | |||||||||||
| 2024 | 2023 | |||||||||||
| (52 weeks) | (53 weeks) | % Change | ||||||||||
| (in thousands) | ||||||||||||
| Net Sales | $ | 1,574,755 | $ | 1,558,829 | 1.0 | % | ||||||
| Cost of goods sold | 1,088,630 | 1,088,964 | 0.0 | % | ||||||||
| Gross Profit | 486,125 | 469,865 | 3.5 | % | ||||||||
| Operating expenses | ||||||||||||
| Marketing | 118,805 | 110,258 | 7.8 | % | ||||||||
| Distribution | 175,601 | 172,804 | 1.6 | % | ||||||||
| Administrative | 74,771 | 75,425 | (0.9 | )% | ||||||||
| Intangible asset impairment charges | - | 1,678 | ||||||||||
| Other general expense | (597 | ) | 182 | (428.0 | )% | |||||||
| Total Operating Expenses | 368,580 | 360,347 | 2.3 | % | ||||||||
| Operating Income | 117,545 | 109,518 | 7.3 | % | ||||||||
| Other income (expense) | ||||||||||||
| Investment income | 3,228 | 2,743 | 17.7 | % | ||||||||
| Interest expense | (1,826 | ) | (4,747 | ) | (61.5 | )% | ||||||
| Earnings before income taxes | 118,947 | 107,514 | 10.6 | % | ||||||||
| Income tax expense | 32,396 | 28,608 | 13.2 | % | ||||||||
| NET EARNINGS | $ | 86,551 | $ | 78,906 | 9.7 | % |
| Comparisons as a Percentage of Net Sales | Fiscal year ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, | September 30, | |||||||||||
| 2024 | 2023 | Basis Pt Chg | ||||||||||
| Gross profit | 30.9 | % | 30.1 | % | 80 | |||||||
| Marketing | 7.5 | % | 7.1 | % | 40 | |||||||
| Distribution | 11.2 | % | 11.1 | % | 10 | |||||||
| Administrative | 4.7 | % | 4.8 | % | (10 | ) | ||||||
| Operating income | 7.5 | % | 7.0 | % | 50 | |||||||
| Earnings before income taxes | 7.6 | % | 6.9 | % | 70 | |||||||
| Net earnings | 5.5 | % | 5.1 | % | 40 |
NET SALES
Net sales increased by $15.9 million, or 1%, to $1,574.8 million in fiscal 2024. Despite the headwind of the comparative extra week in fiscal 2023, organic sales growth was driven by growth across all three of the Company’s business segments. The organic sales growth was largely driven by improved marketing, new customers, and additional product placement.
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GROSS PROFIT
Gross profit increased by $16.3 million, or 4%, to $486.1 million in fiscal 2024. Gross profit as a percentage of sales increased to 30.9% in fiscal 2024 from 30.1% in fiscal 2023. The increase in gross profit as a percentage of sales was driven by enhanced production efficiencies and a better product mix, along with the continued stabilization of inflationary pressures. The cost of key ingredients including flour, oils, cheese and dairy, mixes and eggs either declined, or remained materially flat, though some increases were seen in certain ingredients, with the largest being cocoa, and to a lesser extent, sugar/sweeteners, and meats. The increases in cocoa negatively impact margins on certain products, the largest being baked goods.
OPERATING EXPENSES
Total operating expenses increased by $8.2 million, or 2%, to $368.6 million in fiscal 2024 and increased as a percentage of sales to 23.4% in fiscal 2024 compared with 23.1% in fiscal 2023. The slight increase was primarily related to the higher marketing expenses to support our new product launches, along with incremental licensing fees on new churro business during the fiscal year.
Operating expenses included intangible asset impairment charges of $1.7 million in fiscal 2023, with no such charges incurred in fiscal 2024. As a percentage of sales, marketing and selling expenses as a percentage of sales increased from 7.1% in fiscal 2023 to 7.5% in fiscal 2024, with the increase driven by the additional investment in marketing spend associated with new product launches and the promotion of our core brands, along with the incremental licensing fees on new churro business during the fiscal year. Distribution expenses as a percentage of sales increased slightly to 11.2% in fiscal 2024 from 11.1% in fiscal 2023. Some decreases in distribution expenses driven by the benefits of our strategic initiatives to improve logistics management and increase efficiency across our distribution network and supply chain were more than offset by approximately $5 million of non-recurring start-up costs related to the opening of two additional regional distribution centers in fiscal 2024. Administrative expenses as a percentage of sales decreased slightly from 4.8% in fiscal 2023 to 4.7% in fiscal 2024, with the decrease largely attributable to improved management of expenses, and leverage from higher sales.
OTHER INCOME AND EXPENSE
Investment income increased by $0.5 million, or 18%, to $3.2 million in fiscal 2024 due to higher average cash balances and higher interest rates on foreign cash balances.
Interest expense decreased by $2.9 million, or 62%, to $1.8 million in fiscal 2024 due to the reduction in the Company’s average outstanding borrowings under the Amended Credit Agreement throughout the fiscal year.
INCOME TAX EXPENSE
Our effective tax rate in fiscal 2024 was 27.2%. Our effective tax rate in fiscal 2023 was 26.6%. The slight increase between periods was primarily attributable to a slightly higher blended state tax rate.
NET EARNINGS
Net earnings increased $7.6 million, or 10%, in fiscal 2024 to $86.6 million, or $4.45 per diluted share, from $78.9 million or $4.08 per diluted share, in fiscal 2023 as a result of the aforementioned items.
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There are many factors which can impact our net earnings from year to year, 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 – Segments
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, Retail Supermarkets and Frozen Beverages reviews monthly 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 Maker and management when determining each segment’s and the Company’s financial condition and operating performance. In addition, the Chief Operating Decision Maker reviews and evaluates depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment.
The following table is a summary of sales and operating income, which is how we measure segment profit.
| Fiscal year ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, | September 30, | |||||||||||
| 2024 | 2023 | |||||||||||
| (52 weeks) | (53 weeks) | % Change | ||||||||||
| (in thousands) | ||||||||||||
| Net Sales | ||||||||||||
| Food Service | $ | 985,195 | $ | 981,840 | 0.3 | % | ||||||
| Retail Supermarket | 221,308 | 215,428 | 2.7 | % | ||||||||
| Frozen Beverages | 368,252 | 361,561 | 1.9 | % | ||||||||
| Total Sales | $ | 1,574,755 | $ | 1,558,829 | 1.0 | % |
| Fiscal year ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, | September 30, | |||||||||||
| 2024 | 2023 | |||||||||||
| (52 weeks) | (53 weeks) | % Change | ||||||||||
| (in thousands) | ||||||||||||
| Operating Income | ||||||||||||
| Food Service | $ | 49,454 | $ | 49,778 | (0.7 | )% | ||||||
| Retail Supermarket | 16,632 | 9,375 | 77.4 | % | ||||||||
| Frozen Beverages | 51,459 | 50,365 | 2.2 | % | ||||||||
| Total Operating Income | $ | 117,545 | $ | 109,518 | 7.3 | % |
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FOOD SERVICE SEGMENT RESULTS
| Fiscal year ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, | September 30, | |||||||||||
| 2024 | 2023 | |||||||||||
| (52 weeks) | (53 weeks) | % Change | ||||||||||
| (in thousands) | ||||||||||||
| Food Service Sales to External Customers | ||||||||||||
| Soft pretzels | $ | 222,237 | $ | 235,572 | (5.7 | )% | ||||||
| Frozen novelties | 147,995 | 145,425 | 1.8 | % | ||||||||
| Churros | 114,306 | 108,927 | 4.9 | % | ||||||||
| Handhelds | 86,053 | 82,292 | 4.6 | % | ||||||||
| Bakery | 387,129 | 378,149 | 2.4 | % | ||||||||
| Other | 27,475 | 31,475 | (12.7 | )% | ||||||||
| Total Food Service | $ | 985,195 | $ | 981,840 | 0.3 | % | ||||||
| Food Service Operating Income | $ | 49,454 | $ | 49,778 | (0.7 | )% |
Sales to food service customers increased $3.4 million, or 0.3%, to $985.2 million in fiscal 2024. Soft pretzel sales to the food service market decreased 6% to $222.2 million for the year, with the decrease attributable to soft consumer spending in key channels, as well as the impact of the additional week in fiscal 2023. Frozen novelties sales increased $2.6 million, or 2%, to $148.0 million for the year, with a strong fiscal year performance seen across multiple brands within our frozen novelties portfolio despite the soft channel performance in amusement and convenience, which are key sales venues for Dippin’ Dots. Churro sales to food service customers were up 5% to $114.3 million for the year led by customer expansion and growing menu penetration. Sales of bakery products increased $9.0 million, or 2%, to $387.1 million for the year, with the increase attributable to contractual pricing true-up on costing on certain raw material ingredients, as well as, some volume increases amongst certain customers in the product category. Handheld sales to food service customers increased 5% to $86.1 million in fiscal 2024, with the increase largely attributable to pricing increases related to the contractual pricing true-up of costing on certain raw material ingredients, as well as some volume increases amongst certain customers in the product category.
Sales of new products in the first twelve months since their introduction were approximately $24.7 million for the fiscal year, driven primarily by the addition of churros to the menu of a major QSR customer. The benefit of the wrap of prior year price increases, as well as some current year contractual pricing true-up of costing on certain raw material ingredients had a slight favorable impact on sales in the fiscal year, and more than offset some very slight volume declines that were primarily attributable to the additional week in fiscal 2023.
Operating income in our Food Service segment remained relatively flat, with a slight decrease from $49.8 million in fiscal 2023 to $49.5 million in fiscal 2024, driven by the impact of the additional week in fiscal 2023 offsetting some slight improved gross margin performance.
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RETAIL SUPERMARKETS SEGMENT RESULTS
| Fiscal year ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, | September 30, | |||||||||||
| 2024 | 2023 | |||||||||||
| (52 weeks) | (53 weeks) | % Change | ||||||||||
| (in thousands) | ||||||||||||
| Retail Supermarket Sales to External Customers | ||||||||||||
| Soft pretzels | $ | 61,744 | $ | 60,272 | 2.4 | % | ||||||
| Frozen novelties | 112,192 | 115,807 | (3.1 | )% | ||||||||
| Biscuits | 24,229 | 25,074 | (3.4 | )% | ||||||||
| Handhelds | 26,253 | 16,655 | 57.6 | % | ||||||||
| Coupon redemption | (3,162 | ) | (2,561 | ) | 23.5 | % | ||||||
| Other | 52 | 181 | (71.3 | )% | ||||||||
| Total Retail Supermarket | $ | 221,308 | $ | 215,428 | 2.7 | % | ||||||
| Retail Supermarket Operating Income | $ | 16,632 | $ | 9,375 | 77.4 | % |
Sales of products to retail supermarkets increased $5.9 million, or 3%, to $221.3 million in fiscal year 2024. Soft pretzel sales to retail supermarkets were $61.7 million, an increase of $1.5 million, or 2%, from sales in fiscal 2023, with the increase largely attributable to the incremental distribution of our core soft pretzel brands. Sales of frozen novelties decreased $3.6 million, or 3%, to $112.2 million in fiscal 2024, with the decrease mostly attributable to the impact of the additional week in fiscal 2023. The favorable impact of very strong fiscal second and fiscal third quarters was mostly offset by a weaker fiscal fourth quarter for a majority of our frozen novelty brands. Sales of biscuits and dumplings decreased 3% to $24.2 million in fiscal 2024. Handheld sales to retail supermarket customers increased 58% to $26.3 million in fiscal 2024, with the increase largely driven by expanded placements of product with a major retailer.
Sales of new products in retail supermarkets were minimal in fiscal 2024. Sales in fiscal 2024 benefitted minimally from the impact of prior fiscal year’s price increases, and more than offset slight decreases in volume that were primarily attributable to the additional week in fiscal 2023.
Operating income in our Retail Supermarkets segment increased $7.3 million in fiscal 2024 to $16.6 million with the increase primarily driven by sales growth as well as improved gross margin performance in most of our retail product categories.
FROZEN BEVERAGES SEGMENT RESULTS
| Fiscal year ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, | September 30, | |||||||||||
| 2024 | 2023 | |||||||||||
| (52 weeks) | (53 weeks) | % Change | ||||||||||
| (in thousands) | ||||||||||||
| Frozen Beverages | ||||||||||||
| Beverages | $ | 230,030 | $ | 224,655 | 2.4 | % | ||||||
| Repair and maintenance service | 96,589 | 95,941 | 0.7 | % | ||||||||
| Machines revenue | 38,188 | 37,933 | 0.7 | % | ||||||||
| Other | 3,445 | 3,032 | 13.6 | % | ||||||||
| Total Frozen Beverages | $ | 368,252 | $ | 361,561 | 1.9 | % | ||||||
| Frozen Beverages Operating Income | $ | 51,459 | $ | 50,365 | 2.2 | % |
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Total frozen beverage segment sales increased $6.7 million or 2% to $368.3 million in fiscal 2024. Beverage-related sales increased 2%, or $5.4 million, in fiscal 2024. Gallon sales decreased 3% from the prior fiscal year, primarily reflecting a weaker theater performance as the prior year’s actors’ strike impacted the volume and quality of movie releases, although the weakness began to soften in Q4 as some stronger releases began to hit the market. Service revenue increased 1% to $96.6 million in fiscal 2024 and machines revenue, primarily sales of frozen beverage machines, increased 1% to $38.2 million in fiscal 2024.
The estimated number of Company-owned frozen beverage dispensers was 24,000 and 23,000 at September 28, 2024 and September 30, 2023, respectively. Operating income in our Frozen Beverage segment increased 2%, or $1.1 million, in fiscal 2024.
RESULTS OF OPERATIONS:
Fiscal Year 2023 (53 weeks) Compared to Fiscal Year 2022 (52 weeks)
The discussion of our results of operations for Fiscal Year 2023 (53 weeks) compared to Fiscal Year 2022 (52 weeks) can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023 and such discussion is incorporated by reference herein.
ACQUISITIONS
Dippin’ Dots Acquisition
On June 21, 2022, J & J Snack Foods Corp. and its wholly-owned subsidiary, DD Acquisition Holdings, LLC, completed the acquisition of one hundred percent (100%) of the equity interests of Dippin’ Dots Holding, L.L.C. (“Dippin’ Dots”) which, through its wholly-owned subsidiaries, owns and operates the Dippin’ Dots and Doc Popcorn businesses. The purchase price was approximately $223.6 million, consisting entirely of cash.
Dippin’ Dots is a leading producer of flash-frozen beaded ice cream treats, and the acquisition will leverage synergies in entertainment and amusement locations, theaters, and convenience to continue to expand our business. The acquisition also includes the Doc Popcorn business operated by Dippin’ Dots.
The acquisition was accounted for under the purchase method of accounting, and its operations are included in the accompanying consolidated financial statements from their respective acquisition dates.
Thinsters Acquisition
On April 8, 2024, J & J Snack Foods Corp. completed the acquisition of the Thinsters cookie business from Hain Celestial Group. The purchase price was approximately $7.0 million, consisting entirely of cash.
The acquisition was accounted for under the purchase method of accounting, and its 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 satisfy our cash requirements over the next twelve months and beyond, as well as fund future growth and expansion.
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Fiscal 2024 Compared to Fiscal 2023
| September 28, | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Cash flows from operating activities | ||||||||
| Net earnings | $ | 86,551 | $ | 78,906 | ||||
| Non-cash items in net income: | ||||||||
| Depreciation of fixed assets | 63,411 | 56,616 | ||||||
| Amortization of intangibles and deferred costs | 7,190 | 6,525 | ||||||
| Intangible asset impairment charges | - | 1,678 | ||||||
| Losses (Gains) from disposals of property & equipment | 11 | (409 | ) | |||||
| Share-based compensation | 6,220 | 5,318 | ||||||
| Deferred income taxes | 6,434 | 10,935 | ||||||
| (Gain) on marketable securities | - | (8 | ) | |||||
| Other | (199 | ) | 323 | |||||
| Changes in assets and liabilities, net of effects from purchase of companies | 3,448 | 12,395 | ||||||
| Net cash provided by operating activities | $ | 173,066 | $ | 172,279 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The increase in depreciation of fixed assets was largely due to prior year purchases of property, plant and equipment. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The decrease in deferred income taxes was primarily related to higher increased deferred tax liabilities in the prior year which arose in connection with overall depreciation related temporary differences in fiscal year 2023. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Cash flows associated with changes in assets and liabilities, net effects from purchase of companies, generated approximately $3.4 million of cash in fiscal 2024 compared with $12.4 million of cash in fiscal 2023. The higher generation of cash in fiscal 2023 was largely the result of an improved collections environment in fiscal 2023 as compared with fiscal 2022, as well as a strategic push to lower our investment in inventory related working capital balances. In fiscal 2024, $7.9 million of cash was generated through a decrease in accounts receivable, and a continued improving collections environment, with the cash generation partially offset by a $3.0 million increase in prepaid expenses, a $1.0 million increase in inventory and a $0.5 million decrease in accounts payable and accrued liabilities. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Proceeds from insurance for fixed assets related to proceeds received in connection with losses incurred related to the fire at our Holly Ridge plant. |
| September 28, | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Cash flows from investing activities | ||||||||
| Payments for purchases of companies, net of cash acquired | (7,014 | ) | - | |||||
| Purchases of property, plant and equipment | (73,569 | ) | (104,737 | ) | ||||
| Proceeds from redemption and sales of marketable securities | - | 9,716 | ||||||
| Proceeds from disposal of property and equipment | 699 | 1,781 | ||||||
| Proceeds from insurance for fixed assets | 2,218 | - | ||||||
| Net cash (used in) investing activities | $ | (77,666 | ) | $ | (93,240 | ) |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The payments for purchases of companies, net of cash acquired, in fiscal 2024 related to the Thinsters acquisition. |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Purchases of property, plant and equipment include spending for production growth, in addition to acquiring new equipment, infrastructure replacements, and upgrades to maintain competitive standing and position us for future opportunities. The decrease in fiscal 2024 was primarily due to increased spend for new lines at various plants aimed at increasing capacity that had occurred in fiscal 2023. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Proceeds from redemption and sales of marketable securities decreased in fiscal 2024 as in prior years, we strategically chose to no longer re-invest redeemed proceeds into marketable securities given the low interest rate environment. |
| September 28, | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of stock | 15,740 | 15,212 | ||||||
| Borrowings under credit facility | 71,000 | 114,000 | ||||||
| Repayment of borrowings under credit facility | (98,000 | ) | (142,000 | ) | ||||
| Payments on finance lease obligations | (151 | ) | (180 | ) | ||||
| Payment of cash dividends | (56,957 | ) | (53,877 | ) | ||||
| Net cash (used in) financing activities | $ | (68,368 | ) | $ | (66,845 | ) |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Borrowings under credit facility and repayment of borrowings under credit facility relate to the Company’s cash draws and repayments made to primarily fund working capital needs and represent the continued net pay-down of borrowings outstanding across both fiscal periods. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Dividends paid during fiscal 2024 increased as our quarterly dividend was raised during fiscal 2024. |
Liquidity
As of September 28, 2024, we had $73.4 million of cash and cash equivalents.
In December 2021, the Company entered into an amended and restated loan agreement (the “Credit Agreement”) with our existing banks which provided for up to a $50 million revolving credit facility repayable in December 2026.
On June 21, 2022, the Company entered into an amendment to the Credit Agreement, the “Amended Credit Agreement” which provided for an incremental increase of $175 million in available borrowings. The Amended Credit Agreement also includes an option to increase the size of the revolving credit facility by up to an amount not to exceed in the aggregate the greater of $225 million or, $50 million plus the Consolidated EBITDA of the Borrowers, subject to the satisfaction of certain terms and conditions.
Interest accrues, at the Company’s election at (i) the BSBY Rate (as defined in the Credit Agreement), plus an applicable margin, based upon the Consolidated Net Leverage Ratio, as defined in the Credit Agreement, or (ii) the Alternate Base Rate (a rate based on the higher of (a) the prime rate announced from time-to-time by the Administrative Agent, (b) the Federal Reserve System’s federal funds rate, plus 0.50% or (c) the Daily BSBY Rate, plus an applicable margin). The Alternate Base Rate is defined in the Credit Agreement.
The Credit Agreement requires the Company to comply with various affirmative and negative covenants, including without limitation (i) covenants to maintain a minimum specified interest coverage ratio and maximum specified net leverage ratio, and (ii) subject to certain exceptions, covenants that prevent or restrict the Company’s ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, alter its capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates, or amend its organizational documents. As of September 28, 2024, the Company is in compliance with all financial covenants of the Credit Agreement.
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As of September 28, 2024, we had no outstanding borrowings drawn on the Amended Credit Agreement. As of September 28, 2024, we had $212.7 million of additional borrowing capacity, after giving effect to the $12.3 million of letters of credit outstanding.
The Company’s material cash requirements include the following contractual and other obligations:
Purchase Commitments
Our most significant raw material requirements include flour, packaging, shortening, corn syrup, sugar, juice, cheese, chocolate, and a variety of nuts. We attempt 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. As of September 28, 2024, we have approximately $122 million of such commitments. The purchase commitments do not exceed our projected requirements over the related terms and are in the normal course of business.
Leases
We have operating leases with initial noncancelable lease terms in excess of one year covering the rental of various facilities and equipment. Our operating leases include leases for real estate from some of our office, distribution and manufacturing facilities as well as manufacturing and non-manufacturing equipment used in our business. As of September 28, 2024, we have operating lease payment obligations of $159.8 million, with $19.1 million payable within 12 months.
Off –Balance Sheet Arrangements
The Company has off-balance sheet arrangements for purchase commitments as of September 28, 2024.
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, allowance for estimated credit losses, valuation of goodwill and long-lived and intangible assets, insurance reserves, and income taxes and business combinations.
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Revenue Recognition
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.
Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for satisfying the performance obligations noted above. The transaction price is adjusted for estimates of known or expected variable consideration which includes sales discounts, trade promotions and certain other sales and customer incentives, including rebates and coupon redemptions. Variable consideration related to these programs is recorded as a reduction to 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, changes in circumstances and other factors, including review of contractual pricing and rebate arrangements with customers.
We do not believe that there is a reasonable likelihood that there will be material change in the estimates or assumptions used to recognize revenue. As noted above, estimates are made based on historical experience and other factors. However, if the level of redemption rates or performance was to vary significantly from estimates, we may be exposed to gains or losses that could be material. We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years.
Allowance for Estimated Credit Losses
We provide an allowance for estimated credit losses after taking into consideration historical experience and other factors. On September 27, 2020, the Company adopted guidance issued by the FASB in ASU 2016-13 Measurement of Credit Losses on Financial Instruments, which requires companies to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the asset. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The allowance for estimated credit losses considers a number of factors including the age of receivable balances, the history of losses, expectations of future credit losses and the customers’ ability to pay off obligations.
We do not believe that there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to value our accounts receivable. Since adoption of the new guidance on September 27, 2020, we have not made any material changes in the accounting methodology used to value accounts receivable.
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Valuation of Goodwill
We have three reporting units with goodwill. Goodwill is evaluated annually by the Company for impairment. We perform impairment tests at year end for our reporting units, which are also the operating segment levels 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, 2024 show that the fair value of each of our reporting units with goodwill exceeded its carrying value by at least 50%. 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. We have not made any material changes in the accounting methodology used to value goodwill during the past three fiscal years.
Valuation of Long-Lived Assets and Other Intangible Assets
We record an impairment charge to property, plant and equipment and amortizing intangible assets in accordance with the applicable accounting standards, when, based on certain indicators of impairment, we believe such assets have experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of these underlying assets could result in losses or an inability to recover the carrying value of the asset that may not be reflected in the asset’s current carrying value, thereby possibly requiring impairment charges in the future.
Indefinite lived intangibles are reviewed annually for impairment. The fair value of our indefinite lived intangible assets is calculated using either a relief from royalty valuation approach, or the excess earnings method. We are required to make estimates and assumptions about sales growth, royalty rates, and discount rates based on budgets, business plans, economic projections, and marketplace data. Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the future economic and operating conditions.
We have not made any material changes in the accounting methodology used to evaluate impairment of long-lived assets and other intangibles during the last three fiscal years. While we believe we have made reasonable estimates and assumptions to calculate fair value of these assets, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in a material impairment of our long-lived assets and other intangibles.
Insurance Reserves
We have a self-insured medical plan which covers approximately 1,800 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. Considering that we have stop loss coverage of $225,000 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.
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We self-insure, up to loss limits, workers’ compensation, automobile and general liability claims. Insurance reserves are calculated on a combination of an undiscounted basis based on actual claims data and estimates of incurred but not reported claims developed utilizing historical claims trends. Projected settlements of incurred but not reported claims are estimated based on pending claims, historical trends, industry trends related to expected losses and actual reported losses, and key assumptions, including loss development factors and expected loss rates.
We have not made any material changes in the accounting methodology used to establish our self-insurance liability during the past three fiscal years. We do not believe that there is a reasonable likelihood that there will be a material change in the estimate or assumptions used to calculate our self-insurance liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
Income Taxes
The annual tax rate is based on our income and statutory tax rates. Changes in statutory rates and tax laws in jurisdictions in which we operate may have a material effect on our annual tax rate. The effect of these changes, if any, would be recognized as a discrete item upon enactment.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid.
We have not made any material changes in the accounting methodology used to account for income taxes during the past three fiscal years. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. Other than those potential impacts, we do not believe there is a reasonable likelihood that there will be a material change in tax related balances.
Business Combinations
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. We use various models to value assets acquired and liabilities assumed, such as the net realizable value method to value inventory, and the cost method and market approach to value property, plant and equipment. The determination of the fair value of intangible assets, which can represent a significant portion of the purchase price of our acquisitions, requires the use of significant judgement with regard to the fair value, and whether such intangibles are amortizable or non-amortizable and, if the former, the period and method by which the intangible will be amortized. We estimate the fair value of acquisition-related intangibles either through the relief of royalty method or multi-period excess earnings method, or based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses, which includes estimate of customer attrition. The projected cash flows are discounted to determine the present value of the assets at the date of acquisition. For significant acquisitions, we may use independent third-party valuation specialists to assist us in determining the fair value of assets acquired and liabilities assumed.
We have not made any material changes in the accounting methodology used to account for business combinations during the past three fiscal years. We do not believe that there is a reasonable likelihood that there will be a material change in the estimate or assumptions used to determine the fair value of assets acquired or liabilities assumed in a business combination. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to impairment charges that could be material.
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