J&J Snack Foods Corp. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 29, 2012; comparison is the three months ended December 24, 2011. Dollar amounts below are in millions unless stated otherwise. The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets, and Frozen Beverages. The quarter is seasonal; frozen beverage and frozen juice sales generally rise in warmer third and fourth quarters.
Financial performance
| Metric | Q1 FY2013 | Prior period | Change |
|---|---|---|---|
| Net sales | $191.4 | $172.7 | +11% |
| Gross profit / margin | $54.1 / 28.28% | $46.4 / 26.87% | Margin +1.41 percentage points |
| Operating income / margin | $15.1 / 7.87% | $8.5 / 4.90% | +78% |
| Net earnings / diluted EPS | $10.2 / $0.54 | $5.5 / $0.29 | Net earnings +86% |
| Operating cash flow | $17.3 | $20.7 | Down $3.4 |
| Capital expenditures | $7.5 | $8.9 | Down $1.4 |
Cost of goods sold was $137.3 million. Operating expenses totaled $39.1 million, up $1.1 million but down as a share of sales, from approximately 22% to 20%. Investment income increased to $0.8 million from $0.4 million, primarily reflecting higher investments. The effective tax rate was 35% versus 38%; management cited a first-quarter benefit from revised prior-year tax estimates.
Segments and drivers
- Food Service: Sales rose 15% to $130.2 million (about 14% excluding Kim & Scott’s acquisition sales); operating income grew to $12.6 million from $7.3 million. Pretzel sales rose 27%, with two customers accounting for about half of the increase. Churro sales rose 33%, with one restaurant chain accounting for 85% of that increase. Bakery sales increased 12% to $68.3 million.
- Retail Supermarkets: Sales edged down to $20.7 million, while operating income fell to $1.6 million from $1.8 million. Frozen juices and ices sales decreased 9%; management cited lower sales, increased product-introduction allowances, and higher advertising costs.
- Frozen Beverages: Sales increased 4% to $40.5 million; operating income improved to $0.9 million from a $0.6 million loss. Management attributed the improvement to higher sales and lower expenses.
Management attributed the consolidated gross-margin improvement primarily to higher Food Service volume. Last year’s quarter included approximately $0.8 million of management and sales meeting expenses, which also benefited this quarter’s year-over-year expense comparison.
Cash, liquidity, debt, and capital allocation
Cash and cash equivalents were $80.2 million at quarter-end, down from $154.2 million at September 29, 2012. The principal cash movement was $80.0 million of purchases of available-for-sale mutual funds; investing cash outflow was $87.0 million. Operating cash flow was $17.3 million, including a $7.0 million inventory increase. Current assets were $231.7 million and current liabilities $78.0 million (approximately 3.0x current ratio). The company also held $1.0 million of current held-to-maturity securities and $25.0 million of long-term held-to-maturity securities.
No borrowings were outstanding under the $50 million revolving credit facility, which expires in December 2016. Capital lease obligations totaled approximately $0.6 million. The board declared a $0.16-per-share quarterly dividend, paid December 27, 2012. The company repurchased and retired 48,255 shares for approximately $2.8 million through October 31, 2012; on November 8 the board authorized repurchases of up to 500,000 additional shares. Management said cash, expected operating cash flows, and borrowing capacity were sufficient for future growth and expansion.
Outlook, risks, and notable items
- Management estimated a 36.5%–37% effective tax rate for the full fiscal year. It anticipated share-based compensation of no more than $1.2 million net of tax benefits, or approximately $0.06 per share, for FY2013.
- Management reported a significant increase in market costs of flour and packaging, along with increases in other ingredients, over the prior nine months. It expected higher costs over the balance of the fiscal year, though these increases had not affected Q1; it said future cost impacts could not be projected clearly.
- Management identified raw-material and labor costs, insurance, customer consolidation, sales factors, execution of manufacturing/marketing/distribution, acquisition integration, tax-law changes, and interest rates as factors that may affect results.
- Sales growth included approximately $3.0 million from price increases and $14.1 million from net volume increases, including new products and Kim & Scott’s acquisition sales. New products introduced in the prior 12 months contributed approximately $4.8 million in Food Service and $1.2 million in Retail Supermarkets.
- The filing states that quarterly results are not necessarily indicative of full-year results. It reported no material change in market-risk assessment; management judged disclosure controls effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Food Service growth and improved margins persist, especially given the contribution of a small number of customers to pretzel and churro sales increases.
- Whether anticipated flour, packaging, and other ingredient cost increases pressure margins, and the company’s ability to offset them through pricing or productivity.
- Whether Retail Supermarkets’ sales and operating income stabilize after declines in frozen juices and ices and higher promotional and advertising expenses.
- The performance, liquidity, and risk profile of the $80 million mutual-fund investment and its estimated yield of approximately 4%.
- How repurchases, dividends, seasonal working-capital needs, and capital spending affect cash balances; confirm actual borrowing and lease obligations in subsequent filings.
- The full-year effective tax rate and extent to which Q1 earnings benefited from the prior-year tax-estimate adjustment.