J&J Snack Foods Corp. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 28, 2013 (52 weeks), with fourth-quarter results included. The prior fiscal year ended September 29, 2012 and comprised 53 weeks. Unless noted, financial figures below are in millions of dollars.
Business context
The company manufactures and distributes snack foods and frozen beverages through Food Service, Retail Supermarkets, and Frozen Beverages segments. Key brands include SUPERPRETZEL, ICEE, LUIGI’S, WHOLE FRUIT, and TIO PEPE’S. Sales are seasonal, with demand for frozen beverages and frozen novelties generally higher in warmer months.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $867.7 | $830.8 |
| Gross profit / margin | $263.3 / 30.35% | $250.2 / 30.11% |
| Operating income / margin | $97.4 / 11.2% | $85.0 / 10.2% |
| Net earnings | $64.4 | $54.1 |
| Diluted EPS | $3.41 | $2.86 |
| Cash from operations | $86.5 | $89.4 |
| Capital expenditures | $35.8 | $42.8 |
| Cash and marketable securities | $207.3 | $180.4 |
| Long-term debt | $0 | $0 |
Sales rose 4% reported; management estimated growth of approximately 6.5% excluding the prior year’s extra week, and approximately 6% excluding both that week and post-acquisition Kim & Scott’s sales. Operating income increased 15% and net earnings increased 19%. Cash from operations declined mainly because receivables grew by $11.1 million. Cash from operations less capital expenditures was approximately $50.7 million.
Segment results: Food Service sales were $560.8 million and operating income $65.9 million; Retail Supermarkets sales were $102.3 million and operating income $8.6 million; Frozen Beverages sales were $204.6 million and operating income $22.9 million. Food Service and Frozen Beverages operating income improved; Retail Supermarkets weakened.
In the fourth quarter, sales were $237.9 million versus $242.2 million a year earlier; net earnings were $20.3 million versus $19.5 million, and diluted EPS was $1.08 versus $1.03.
Liquidity, capital, and material changes
Year-end current assets were $264.7 million and current liabilities $83.2 million. The company had a $50 million revolving credit facility, with no amount drawn at year-end, and reported compliance with its financial covenants. It repurchased and retired 204,397 shares for $14.5 million and declared $0.64 per share in dividends. Investments in marketable securities increased substantially, including $107.7 million of available-for-sale mutual funds; those securities recorded a $2.2 million unrealized holding loss in other comprehensive income.
Food Service soft-pretzel sales grew 23%; bakery sales rose 3%, while frozen juice and ices sales fell 9%. Retail Supermarkets sales declined 7%, including a 10% decline in frozen juices and ices; cold weather and higher trade spending hurt fourth-quarter results. Frozen Beverages sales increased 2%, supported by service revenue and machine sales, although beverage sales fell 2% and base ICEE gallon sales fell 4%.
Outlook, risks, and unusual items
The filing provides no quantified earnings or sales guidance. Management said operating cash flow, borrowing capacity, cash, and investment securities should be sufficient to fund future growth and expansion. Management believed the effect of changes to USDA school food programs on frozen juice and ices sales had bottomed out. The company also stated it was actively seeking acquisitions.
- Gross margin benefited from higher Food Service volume and approximately $2.3 million lower ingredient and packaging costs, but costs remain volatile and future effects are uncertain.
- Food Service operating income included approximately $2.1 million higher liability insurance expense and a $0.5 million product write-down for an unsuccessful new product. Consolidated other general income included $0.805 million of settlement income related to prior acquisitions.
- The top ten customers generated 43% of sales; the largest customer represented 8%. Customer contracts are generally not long term.
- Other stated risks include commodity and energy prices, competition, weather and seasonality, food-industry and product-liability risks, manufacturing or distribution disruptions, and foreign-operation risks.
- On October 14, 2013, the company acquired certain assets and assumed certain liabilities of New York Pretzel; management described the acquisition as not material to the financial statements.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether Retail Supermarkets frozen-novelty sales and margins recover after the weather-related decline and elevated trade spending.
- Whether Food Service growth—particularly pretzels and churros—can be sustained given customer concentration and the contribution of a small number of customers.
- Receivables and working-capital trends, as the $11.1 million receivables increase reduced operating cash flow.
- Investment portfolio composition, liquidity, valuation volatility, and management’s stated intention to hold the mutual funds for more than one year.
- Developments in insurance claims and reserves, commodity costs, and the returns from capital spending and acquisitions.