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 recognize revenue from our products when the products are shipped to our customers. Repair and maintenance equipment service revenue is recorded when it is performed provided the customer terms are that the customer is to be charged on a time and material basis or on a straight-line basis over the term of the contract when the customer has signed a service contract. Revenue is recognized only where persuasive evidence of an arrangement exists, our price is fixed or estimable and collectability is reasonably assured. We record offsets to revenue for allowances, end-user pricing adjustments, trade spending, coupon redemption costs and returned product. Customers generally do not have the right to return product unless it is damaged or defective. Off-invoice allowances are deducted directly from the amount invoiced to our customer when our products are shipped to the customer. Offsets to revenue for allowances, end-user pricing adjustments and trade spending are recorded primarily as a reduction of accounts receivable based on our estimates of liability which are based on customer programs and historical experience. These offsets to revenue are estimated primarily on the quantity of product purchased over specific time periods. For our Retail Supermarket and Frozen Beverages segments, we accrue for the liability based on products sold multiplied by per product offsets. Offsets to revenue for our Food Service segment are calculated in a similar manner for offsets owed to our direct customers; however, because shipments to end-users are unknown to us until reported by our direct customers or by the end-users, there is a greater degree of uncertainty as to the accuracy of the amounts accrued for end-user offsets. Additional uncertainty may occur as customers take deductions when they make payments to us. This creates complexities because our customers do not always provide reasons for the deductions taken. Additionally, customers may take deductions to which they are not entitled and the length of time customers take deductions to which they are entitled can vary from two weeks to well over a year. Because of the aforementioned uncertainties, the process to determine these estimates requires judgment. We feel that due to constant monitoring of the process, including but not limited to comparing actual results to estimates made on a monthly basis, these estimates are reasonable in all material respects. Our recorded liability for allowances, end-user pricing adjustments and trade spending was approximately $14.3 million at September 24, 2016 and $11.7 million at September 26, 2015.
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 $525,000, $310,000 and $161,000 for the fiscal years 2016, 2015 and 2014, respectively. At September 24, 2016 and September 26, 2015, our accounts receivables were $98,325,000 and $102,649,000 net of an allowance for doubtful accounts of $571,000 and $304,000.
Asset Impairment
– We have three reporting units with goodwill totaling $86,442,000 as of September 24, 2016. 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 24, 2016 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 3 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 1,500 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 24, 2016 and September 26, 2015 was $1,719,000 and $1,659,000, 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.
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 2016 and 2015 was $1,900,000 and $2,800,000 respectively. Our total recorded liability for all years’ claims incurred but not yet paid was $8,200,000 and $8,200,000 at September 24, 2016 and September 26, 2015, 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 September 24, 2016 and September 26, 2015, we had outstanding letters of credit totaling $8,675,000 and $9,075,000, respectively.
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
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Fiscal 2016 (52 weeks) Compared to Fiscal Year 2015 (52 weeks)
Net sales increased $16,525,000, or 2%, to $992,781,000 in fiscal 2016 from $976,256,000 in fiscal 2015.
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 is considered to be the one and only key variable 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 $4,894,000 or less than 1%, to $621,529,000 in fiscal 2016. Soft pretzel sales to the food service market increased 1% to $170,155,000 for the year with sales increases and decreases throughout our customer base. Soft pretzel sales to restaurant chains were about the same this year and last year. Frozen juice bar and ices sales decreased $2,656,000, or 5%, to $51,798,000 for the year due primarily to lower sales to two customers. Churro sales to food service customers were up 1% to $57,318,000 for the year with sales increases and decreases throughout our customer base. Sales of bakery products decreased $6,617,000, or 2%, for the year with sales to one customer down $7.0 million as the customer added a secondary supplier. Handheld sales to food service customers were up 26% to $27,427,000 in 2016 with sales increases to one customer accounting for about 80% of the increase. Sales of funnel cake increased $7,000,000, or 57% to $19,179,000 due primarily to increased sales to school food service and $4.0 million of sales to a new restaurant chain customer. Sales of new products in the first twelve months since their introduction were approximately $32 million for the year. Price increases accounted for approximately $5 million of sales for the year and net volume, including new product sales as defined above, was essentially unchanged from last year. Operating income in our Food Service segment increased from $75,286,000 in 2015 to $76,539,000 in 2016. Operating income for the year benefitted from lower marketing expenses, lower ingredient costs, significantly increased volume of our handhelds and funnel cake products, pricing and more favorable product mix and was hurt by higher group health insurance costs and lower volume of our frozen juices and ices and bakery products. However, operating income in the fourth quarter decreased from $23,665,000 in 2015 to $17,498,000 in 2016 primarily because of a 2% decline in sales and higher manufacturing expenses. We anticipate that these issues will continue to affect us into the first quarter of fiscal year 2017. Additionally, approximately 1/4 of the decrease of $6,167,000 in operating income resulted from costs related to certain bakery products that were withdrawn from the market due to quality issues.
RETAIL SUPERMARKETS
Sales of products to retail supermarkets decreased $5,788,000 or 5% to $117,589,000 in fiscal year 2016. Soft pretzel sales to retail supermarkets were $33,279,000 compared to $35,727,000 in 2015, a decrease of 7%. About 1/2 of the pretzel sales decline was due to the discontinuance of SUPERPRETZEL BAVARIAN Soft Pretzel bread which was introduced in 2015. Sales of frozen juices and ices decreased $3,250,000 or 5% to $68,924,000. Increased trade spending to introduce WHOLE FRUIT Organic juice tubes and new PHILLY SWIRL products and general declines in sales of our existing PHILLY SWIRL products accounted for all of the sales decline in frozen juices and ices. PHILLY SWIRL sales were down primarily because of lower sales to a customer in Canada due to the stronger US dollar, lower sales to one warehouse club store which carried fewer SKUS this year and decreased sales to one retail supermarket customer of a product that is being discontinued. Although sales were down for the year, PHILLY SWIRL sales were marginally higher in the fourth quarter. Coupon redemption costs, a reduction of sales, which were higher in the first six months a year ago supporting the introduction of the SUPERPRETZEL BAVARIAN Soft Pretzel Bread, decreased 6% to $4,430,000 for the year. Handheld sales to retail supermarket customers decreased 19% to $15,347,000 for the year. Roughly 37% of the handhelds sales decline in the year resulted from increased trade spending to introduce PILLSBURY mini dessert pies. The balance of the sales decline was spread over our customer base. Sales of OREO churros, introduced this year, were approximately $4.0 million for the year, with about ½ of the sales coming in the fourth quarter.
Sales of new products in the first twelve months since their introduction were approximately $8 million in fiscal year 2016. Price increases accounted for approximately $2 million of sales for the year but higher trade spending of $6 million and volume decreases of $2 million resulted in an overall sales decline of $5.7 million. Operating income in our Retail Supermarkets segment decreased from $11,020,000 to $9,618,000 for the year primarily because of approximately $2 million of increased trade spending related to the introduction of WHOLE FRUIT Organic juice tubes, OREO churros, PILLSBURY mini dessert pies and other new products and lower soft pretzels and frozen juices and ices sales volume. However, operating income in the fourth quarter increased from $1,413,000 in 2015 to $1,793,000 in 2016 primarily because of a 4% increase in overall sales.
FROZEN BEVERAGES
Frozen beverage and related product sales increased 7% to $253,663,000 in fiscal 2016. Beverage sales alone increased 5% to $150,118,000 for the year with increases and decreases throughout our customer base. Gallon sales were up 6% in our base ICEE business, with sales to movie theaters accounting for about 3/4 of the increase. Service revenue increased 8% to $71,123,000 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, increased from $26,413,000 in 2015 to $31,155,000 in 2016. The estimated number of Company owned frozen beverage dispensers was 52,000 and 49,000 at September 24, 2016 and September 26, 2015, respectively. Operating income in our Frozen Beverage segment increased from $24,582,000 in 2015 to $26,653,000 in 2016 due primarily to higher sales in all areas of the business.
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 30.67% in 2016 from 30.82% in 2015. Gross profit percentage benefitted from lower ingredient costs, pricing and increased food service handhelds and funnel cake business which was more than offset by higher costs in our frozen beverages business and increased trade spending related to the introduction of WHOLE FRUIT Organic juice tubes, OREO churros, PILLSBURY mini dessert pies and new PHILLY SWIRL products in our retail supermarket business, as well as by lower volume in most of our food service segment and in our retail supermarket business and the product withdrawal in our food service segment mentioned previously.
Total operating expenses increased $1,655,000 to $191,657,000 in fiscal 2016 and as a percentage of sales decreased to 19.31% of sales from 19.46% in 2015. Marketing expenses were 8.66% and 8.72% of sales in 2016 and 2015, respectively. Distribution expenses as a percent of sales decreased to 7.36% from 7.60% in 2015 due in part to lower fuel costs and shipping efficiencies. Administrative expenses were 3.25% and 3.16% of sales in 2016 and 2015, respectively. Other general expense of $281,000 this year compared to other general income of $207,000 in 2015.
Operating income increased $1,922,000 or 2% to $112,810,000 in fiscal year 2016 as a result of the aforementioned items.
Our investments generated before tax income of $4.1 million this year, up from $1.2 million last year as sales of our mutual fund investments, net of capital gain distributions, generated a realized loss of $598,000 this year compared to a realized loss of $3.9 million last year. Although we recognized losses as we decreased our investments in mutual funds
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our overall return on the mutual funds has been positive since we first made the investments in October 2012. We have reduced our investments in mutual funds over the past year to $13 million at September 2016 from $19 million at September 2015 and $128 million at September 2014.
The remaining unrealized losses of $520,000 are spread over 4 funds with total fair market value of $12.5 million. The remaining mutual funds presently generate income of 4.9 % per year. We have invested $17 million in Fixed-to-Floating Perpetual Preferred Stock which generates fixed income to call dates in 2018, 2019 and 2025 and then income is based on a spread above LIBOR if the securities are not called. The annual yield from these investments is presently 5.5%, of which 70% is not subject to income tax. The mutual funds and the Fixed-to-Floating Perpetual Preferred Stock investment securities do not have contractual maturities; however, we classify them as long term assets as it is our intent to hold them for a period of over one year, although we may sell some or all of them depending on presently unanticipated needs for liquidity or market conditions. W
e have invested $103 million in corporate bonds which generate fixed income to maturity dates in 2017 through 2021, with $67 million maturing prior to the end of our fiscal year 2018. The bonds presently generate income of about 2.2% per year. Our expectation is that we will hold the corporate bonds to their maturity dates and redeem them at our amortized cost.
The effective income tax rate decreased to 35.0% from 37.3% last year because the realized losses on sales of our mutual fund investments in 2015 and 2016 are not deductible as we do not have capital gains to offset the losses and our income tax expense for 2016 benefitted by $885,000 related to share base compensation (see Note A13). We expect the effective income tax rate for 2017 to be between 35% and 35-1/2%.
Net investment after tax income for the year of $2.7 million, or $.14 per share, compared to last year’s net investment after tax loss of $516,000, or $.03 per share.
Net earnings increased $5,792,000 or 8%, in fiscal 2016 to $75,975,000, or $.32 per diluted share 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.
Fiscal 2015 (52 weeks) Compared to Fiscal Year 2014 (52 weeks)
Net sales increased $56,805,000, or 6%, to $976,256,000 in fiscal 2015 from $919,451,000 in fiscal 2014.
Excluding sales of PHILLY SWIRL, which was acquired in the third quarter of fiscal 2014, through April of this year, sales increased approximately 5% for the year
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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 is considered to be the one and only key variable 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 $24,737,000 or 4%, to $616,635,000 in fiscal 2015. Soft pretzel sales to the food service market increased 3% to $168,970,000 for the year aided primarily by increased sales to school food service and convenience stores. Increased sales to one customer accounted for approximately 3/4 of the pretzel sales increase. Soft pretzel sales to restaurant chains were down about 4% this year to about $40 million. Frozen juice bar and ices sales increased $566,000, or 1%, to $54,454,000 for the year due entirely to increased sales of WHOLEFRUIT Frozen Organic Juice Tubes to one customer; excluding these sales, frozen juices and ices sales were down 3%. Churro sales to food service customers were up 1% to $56,602,000 for the year which include a decline in sales of $6,469,000 to one restaurant chain that discontinued carrying churros in August 2014. Churro sales to other customers were up 15% for the year with sales to four customers accounting for about 1/2 of the increase. Sales of bakery products increased $19,579,000, or 7%, for the year as sales increases were concentrated in eight customers and to school food service. Handheld sales to food service customers were down 10% to $21,817,000 in 2015 as sales declines were spread throughout our customer base. Sales of new products in the first twelve months since their introduction were approximately $18 million for the year. Price increases accounted for approximately $9 million of sales for the year and net volume increases, including new product sales as defined above, accounted for approximately $16 million of sales for the year. Operating income in our Food Service segment increased from $73,731,000 in 2014 to $75,286,000 in 2015. Operating income benefited from lower distribution costs and improved performance at some of our smaller manufacturing facilities and was negatively impacted by continuing declines in sales of our handhelds business, higher manufacturing costs and higher costs of egg raw material. Additionally, operating income was impacted in 2014 by $973,000 of shutdown costs of our Norwalk, California, manufacturing facility.
RETAIL SUPERMARKETS
Sales of products to retail supermarkets increased $10,733,000 or 10% to $123,377,000 in fiscal year 2015. Excluding sales of PHILLY SWIRL through April of this year, sales increased approximately 1% for the year, although sales in our fourth quarter were down 9% due to lower sales of handhelds and higher trade spending. Soft pretzel sales to retail supermarkets were $35,727,000 compared to $34,830,000 in 2014, an increase of 3%. Sales of frozen juices and ices increased $12,770,000 or 21% to $72,174,000. Without PHILLY SWIRL sales, sales of frozen juices and ices were up $3,669,000, or 6%, with sales increases and decreases spread across our customer base. Coupon redemption costs, a reduction of sales, increased 24% or about $918,000 for the year. Handheld sales to retail supermarket customers decreased 11% to $18,957,000 in 2015 as three customers accounted for about 3/4 of the decrease in sales. Sales of products in the first twelve months since their introduction were approximately $1.5 million in fiscal year 2015. Price increases accounted for approximately $2.7 million of sales for the year and net volume increases, including new product sales as defined above and PHILLY SWIRL’s sales and net of increased coupon costs, accounted for approximately $8 million in sales for the year. Operating income in our Retail Supermarkets segment decreased from $11,201,000 in 2014 to $11,020,000 in 2015 due primarily to higher coupon expense and advertising expenses to support our SUPERPRETZEL soft pretzel products. Additionally, in 2015, we were impacted by operating losses of PHILLY SWIRL during its off season while in 2014 we acquired PHILLY SWIRL after its off season.
FROZEN BEVERAGES
Frozen beverage and related product sales increased 10% to $236,244,000 in fiscal 2015. Beverage sales alone increased 7% to $142,705,000 for the year with increases and decreases throughout our customer base. Gallon sales were up 7% in our base ICEE business, with sales to movie theaters accounting for about half of the increase. Service revenue increased 10% to $65,765,000 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, increased from $20,224,000 in 2014 to $26,413,000 in 2015. The estimated number of Company owned frozen beverage dispensers was 53,000 and 49,000 at September 26, 2015 and September 27, 2014, respectively. Operating income in our Frozen Beverage segment increased from $21,916,000 in 2014 to $24,582,000 in 2015 due primarily to higher sales in all areas of the business and lower fuel costs.
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 30.82% in 2015 from 31.28% in 2014. Gross profit margins benefited from the improved performance of our frozen beverages business and from higher gross profit margins in our retail supermarket business. Gross profit margins in our food service segment were impacted by increased lower margin school food service sales, continuing decline in sales of our handhelds business, higher manufacturing costs, modest volume increases and higher egg raw material costs. We will continue to be impacted by higher egg raw material costs in our 2016 fiscal year resulting from the Avian Flu epidemic; however, we have increased our selling prices intending to recover a significant portion of the increased costs.
Total operating expenses increased $9,273,000 to $190,002,000 in fiscal 2015 and as a percentage of sales decreased to 19.46% of sales from 19.66% in 2014. Marketing expenses were 8.72% and 8.55% of sales in 2015 and 2014, respectively. Marketing expenses this year included additional spending to support our retail SUPERPRETZEL soft pretzel products. Distribution expenses as a percent of sales decreased to 7.60% from 7.74% in 2014 due in part to lower fuel costs. Administrative expenses were 3.16% and 3.24% of sales in 2015 and 2014, respectively. Other general income of $207,000 this year compared to other general expense of $1,154,000 in 2014. Included in other general expense in 2014 is $973,000 of shutdown costs of our Norwalk, CA manufacturing facility.
Operating income increased $4,040,000 or 4% to $110,888,000 in fiscal year 2015 as a result of the aforementioned items.
Our investments generated before tax income of $1.2 million this year, down from $4.5 million last year as sales of our mutual fund investments, net of capital gain distributions, generated a realized loss of $3.9 million this year. Although we recognized losses as we decreased our investments in mutual funds
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our overall return on the mutual funds has been positive since we first made the investments in October 2012. We have reduced our investments in mutual funds over the past year to $19 million at September 2015 from $128 million at September 2014.
The remaining unrealized losses of $827,000 are spread over 4 funds with total fair market value of $19.2 million. The remaining mutual funds presently generate income of 4.8 % per year. We invested $20 million this year in Fixed-to-Floating Perpetual Preferred Stock which generates fixed income to call dates in 2018, 2019 and 2025 and then income is based on a spread above LIBOR if the securities are not called. The annual yield from these investments is presently 5.5%, of which 70% is not subject to income tax. The mutual funds and the Fixed-to-Floating Perpetual Preferred Stock investment securities do not have contractual maturities; however, we classify them as long term assets as it is our intent to hold them for a period of over one year, although we may sell some or all of them depending on presently unanticipated needs for liquidity or market conditions.
In the fourth quarter we invested $67 million in corporate bonds which generate fixed income to maturity dates in 2017 through 2021, with $40 million maturing prior to the end of our fiscal year 2018. The bonds presently generate income of about 2.5% per year. Our expectation is that we will hold the corporate bonds to their maturity dates and redeem them at our amortized cost.
The effective income tax rate increased to 37.3% from 35.4% last year primarily because the realized losses on sales of our mutual fund investments in 2015 are not deductible as we do not have capital gains to offset the losses. We expect the effective income tax rate for 2016 to be between 36% and 36.5%.
Net investment after tax loss for the year of $516,000, or $.03 per share, compared to last year’s net investment after tax income of $2.8 million, or $.15 per share.
Net earnings decreased $1,631,000 or 2%, in fiscal 2015 to $70,183,000, or $.09 per diluted share 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
In June 2012, we acquired the assets of Kim & Scott’s Gourmet Pretzels, Inc., a manufacturer and seller of a premium brand soft pretzel. This business had sales of approximately $8 million over the prior twelve months to food service and retail supermarket customers, and had sales of approximately $1.8 million in our 2012 fiscal year from the acquisition date.
In October 2013, we acquired the assets of New York Pretzel, a manufacturer and distributor of soft pretzels selling primarily in the northeast to foodservice and retail locations. Of the purchase price of $11.8 million, $849,000 was allocated to intangible assets, $7,716,000 was allocated to goodwill and $3,049,000 was allocated to property, plant and equipment. This business had sales of about $4.3 million in our 2014 fiscal year included in the food service segment.
In May 2014, we acquired the stock of Philly’s Famous Water Ice, Inc. (PHILLY SWIRL). PHILLY SWIRL, located in Tampa, FL, produces frozen novelty products sold primarily to retail supermarket locations throughout the United States and to Canada with annual sales approximating $25 million. The allocation of the purchase price of $17.4 million is $4.0 million to working capital, $1.2 million to property, plant and equipment, $11.1 million to intangible assets, $1.8 million to goodwill, $4.0 million to deferred tax assets and $95,000 to other assets and $4.8 million to deferred tax liabilities. Sales of PHILLY SWIRL from the acquisition date to September 26, 2015 were $12.6 million and are included in the retail supermarket segment.
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 $3,065,000 in accumulated other comprehensive loss in 2016, an increase of $5,389,000 in accumulated other comprehensive loss in 2015 and an increase of $929,000 in accumulated other comprehensive loss in 2014. In 2016, sales of the two subsidiaries were $27,075,000 as compared to $25,313,000 in 2015 and $23,633,000 in 2014.
In our fiscal year ended September 24, 2016, we purchased and retired 141,700 shares of our common stock at a cost of $15,265,019. In our first quarter, we purchased and retired 27,083 shares at a cost of $3,115,439. In our second quarter, we purchased and retired 80,565 shares at a cost of $8,642,887. In our third quarter, we purchased and retired 34,052 shares at a cost of $3,506,693. We did not purchase and retire any shares in our fourth quarter.
In our fiscal year ended September 26, 2015, we purchased and retired 72,698 shares of our common stock at a cost of $8,011,118.
In our fiscal year ended September 27, 2014, we purchased and retired 81,685 shares of our common stock at a cost of $7,504,729.
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 24, 2016 or at September 26, 2015. The significant financial covenants are:
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Tangible net worth must initially be more than $465
million.
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Total funded indebtedness divided by earnings before
interest expense, income taxes, depreciation and
amortization shall not be greater than 2.25 to 1.
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We were in compliance with the financial covenants described above at September 24, 2016.
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 2016 and 2015 was $1,900,000 and $2,800,000, respectively. In connection with certain self-insurance agreements, we customarily enter into letters of credit arrangements with our insurers. At September 24, 2016 and September 26, 2015, we had outstanding letters of credit totaling $8,575,000 and $9,075,000, respectively.
The following table presents our contractual cash flow commitments on long-term debt, operating leases and purchase commitments for raw materials and packaging. See Notes to the consolidated financial statements for additional information on our long-term debt and operating leases.
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Total
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Less
Than
1 Year
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1-3
Years
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4-5
Years
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After
5 Years
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Long-term debt,including
current maturities
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$
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-
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$
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-
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$
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-
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$
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-
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$
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-
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Capital lease obligations
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1,600
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365
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638
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528
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69
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Purchase commitments
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75,000
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73,500
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1,500
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-
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-
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Operating leases
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65,475
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13,351
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21,134
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11,744
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19,246
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Total
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$
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142,075
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$
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87,216
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$
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23,272
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$
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12,272
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$
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19,315
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The purchase commitments do not exceed our projected requirements over the related terms and are in the normal course of business.
Fiscal 2016 Compared to Fiscal 2015
Cash and cash equivalents and marketable securities held to maturity and available for sale increased $34,401,000, or 14%, to $274,388,000 from a year ago for reasons described below.
Accounts receivables, net decreased $4,324,000, or 4%, to $98,325,000 in 2016 because of lower sales in this year’s September month and timing of collections. Inventories increased $6,027,000 or 7% to $88,684,000 in 2016 due to sluggish September sales this year and changes in product mix.
Prepaid expenses and other increased to $13,904,000 from $6,557,000 last year due primarily to an increase in prepaid income taxes as a result of adopting bonus depreciation.
Net property, plant and equipment increased $12,159,000 to $184,213,000 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. Purchases of property, plant and equipment were $48,709,000 in 2016 and $48,641,000 in 2015.
Goodwill remained at $86,442,000 because there was no goodwill acquired in acquisitions and no impairment charges.
Other intangible assets, less accumulated amortization decreased $4,000,000 to $41,819,000 due to amortization of $5,078,000 during the year, offset by $1,078,000 paid for the acquisition of the HEARTBAR brand in the food service segment.
Marketable securities available for sale and held to maturity increased by $27,438,000 to $133,736,000 as we reinvested proceeds from the 2015 sales of our mutual funds investments.
Accounts Payables increased 5% to $62,026,000 from $59,206,000.
Accrued insurance liability was essentially unchanged at $10,119,000 as our estimates for incurred but not yet paid claims under our group insurance and insurance liability programs remained about the same as at September 2015.
Accrued compensation expense increased 7% to $16,340,000 due to an increase in our employee base and a general increase in the level of pay rates.
Dividends payable increased to $7,280,000 as our quarterly dividend payment increased to $.39/share from $.36/share.
Deferred income tax liabilities increased $7,663,000 to $48,186,000 from $40,523,000 because of increased liabilities related to depreciation of property and equipment.
Other long-term liabilities include $354,000 of gross unrecognized tax benefits at September 24, 2016 and $334,000 at September 26, 2015.
Common stock decreased $6,321,000 to $25,332,000 in 2016 because repurchases of our common stock of $15,265,000 exceeded increases totaling $8,945,000 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.
Net cash provided by operating activities increased $17,304,000 to $121,225,000 in 2016 primarily because of an increase in net earnings of $5,792,000, a reduction of accounts receivable of $3,571,000 in 2016 compared to an increase of $3,123,000 in 2015, an increase of accounts payable and accrued liabilities of $3,888,000 compared to $287,000 in 2015 and an increase in deferred income taxes of $7,700,000, as well as by higher depreciation of fixed assets of $2,180,000 in 2016.
Net cash used in investing activities increased $46,111,000 to $74,602,000 in 2016 from $28,491,000 in 2015 primarily because purchases of marketable securities, net of proceeds, was $28,562,000 in 2016 compared to proceeds from marketable securities, net of purchases, of $19,877,000, in 2015. We reduced our holdings of mutual funds in 2015 by $109 million.
Net cash used in financing activities of $29,745,000 in 2015 increased to $37,573,000 in 2016 primarily because of increased dividend payments of $2,369,000 and increased repurchases of common stock of $7,254,000.
In 2016, 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 and accounts payable, 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 purchases of companies and proceeds from borrowings and payments of long-term debt. As discussed in results of operations, our net earnings may be influenced by many factors. Depreciation and amortization of fixed assets is primarily determined by past purchases of property, plant and equipment although it could be impacted by a significant acquisition. Purchases of property, plant and equipment are primarily determined by our ongoing normal manufacturing and marketing requirements but could be increased significantly for manufacturing expansion requirements or large frozen beverage customer needs. 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 24, 2016, we may borrow in the future depending on our needs.
Fiscal 2015 Compared to Fiscal 2014
Cash and cash equivalents and marketable securities held to maturity and available for sale increased $18,110,000, or 8%, to $239,987,000 from a year ago for reasons described below.
Accounts receivables, net increased $2,677,000, or 3%, to $102,649,000 in 2015, generally in line with sales increases in our fourth quarter. Inventories increased $4,539,000 or 6% to $80,622,000 in 2015 due primarily to an increase in parts inventory to support our growing repair and maintenance service in our frozen beverages segment.
Prepaid expenses and other increased to $6,557,000 from $3,695,000 last year primarily because of an increase in prepaid income taxes of $2,314,000 this year compared to last year.
Net property, plant and equipment increased $16,560,000 to $174,089,000 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. Purchasing of property, plant and equipment were $11,265,000 higher in 2015 than in 2014 because of significant manufacturing improvements in pretzel production and growth of our frozen beverage customer base.
Goodwill remained at $86,442,000 because there was no goodwill acquired in acquisitions.
Other intangible assets, less accumulated amortization decreased $5,170,000 to $45,819,000 due almost entirely to amortization of $5,370,000 during the year.
Marketable securities available for sale and held to maturity decreased by $23,819,000 to $106,298,000 as we reduced our holdings of mutual funds from $128.1 million to $19.2 million during the year and invested $86.4 million in corporate bonds and preferred stocks.
Accounts Payables decreased less than 1% to $59,206,000 from $59,968,000.
Accrued insurance liability decreased $347,000, or 3% to $10,231,000 due to decreases in estimates for incurred but not yet paid claims under our group insurance and insurance liability programs.
Accrued compensation expense increased 7% to $15,318,000 due to an increase in our employee base and a general increase in the level of pay rates.
Dividends payable increased to $6,723,000 as our quarterly dividend payment increased to $.36/share from $.32/share.
Deferred income tax liabilities decreased $1,031,000 to $43,789,000 from $44,820,000.
Other long-term liabilities include $334,000 of gross unrecognized tax benefits at September 26, 2015 and $315,000 at September 27, 2014.
Common stock decreased $968,000 to $31,653,000 in 2015 because repurchases of our common stock of $8,011,000 exceeded increases totaling $6,625,000 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.
Net cash provided by operating activities decreased $1,269,000 to $105,273,000 in 2015 primarily because of a decrease in net earnings of $1,631,000, an increase of prepaid expenses of $2,871,000 in 2015 compared to $182,000 in 2014 and an increase of accounts payable and accrued liabilities of $287,000 compared to $6,831,000 in 2014 which were mainly offset by increased loss on sale of marketable securities of $3,958,000 and a decrease in accounts receivable of $3,123,000 in 2015 compared to $8,913,000 in 2014.
Net cash used in investing activities decreased $56,269,000 to $29,843,000 in 2015 from $86,112,000 in 2014 primarily because net proceeds from marketable securities of $19,980,000 in 2015 compared to net purchases of marketable securities of $19,687,000 in 2014 and a decline in payments for purchases of companies of $27,745,000 which were offset by increased purchases of property, plant and equipment of $11,265,000.
Net cash used in financing activities of $25,435,000 in 2014 increased to $29,745,000 in 2015 primarily because of increased dividend payments $5,230,000.
In 2015, 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, increase in accounts receivable and accounts payable, 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 purchases of companies and proceeds from borrowings and payments of long-term debt. As discussed in results of operations, our net earnings may be influenced by many factors. Depreciation and amortization of fixed assets is primarily determined by past purchases of property, plant and equipment although it could be impacted by a significant acquisition. Purchases of property, plant and equipment are primarily determined by our ongoing normal manufacturing and marketing requirements but could be increased significantly for manufacturing expansion requirements or large frozen beverage customer needs. 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 26, 2015, we may borrow in the future depending on our needs.