J&J Snack Foods Corp. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 27, 2014 (52 weeks), compared with fiscal 2013 (52 weeks). The filing also reports fourth-quarter results; “2014 Q4” is not the full reporting period. J&J manufactures and distributes snack foods and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages segments.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $919.5 million | $867.7 million | +6% |
| Gross profit | $287.6 million | $263.3 million | +9% |
| Gross margin | 31.28% | 30.35% | +0.93 percentage points |
| Operating income | $106.8 million | $97.4 million | +10% |
| Net earnings | $71.8 million | $64.4 million | +12% |
| Diluted EPS | $3.82 | $3.41 | +12% |
| Operating cash flow | $106.5 million | $86.5 million | +$20.0 million |
Excluding New York Pretzel and PHILLY SWIRL acquisition sales, management said sales increased approximately 4%. Gross-margin improvement reflected higher Food Service volume, lower Retail trade spending and manufacturing costs, lower ingredient costs, and approximately $1.5 million lower liability-insurance costs.
Fourth quarter: Sales were $253.5 million versus $237.9 million, net earnings were $22.2 million versus $20.3 million, and diluted EPS was $1.18 versus $1.08.
Segment results
| Segment | FY2014 sales | FY2014 operating income | Change in operating income |
|---|---|---|---|
| Food Service | $591.9 million | $73.7 million | Up from $65.9 million |
| Retail Supermarkets | $112.6 million | $11.2 million | Up from $8.6 million |
| Frozen Beverages | $214.9 million | $21.9 million | Down from $22.9 million |
Food Service growth included a 14% increase in soft pretzel sales; one customer contributed about one-quarter of that increase. Frozen Beverages sales rose 5%, but base ICEE gallon sales fell 1% and segment operating income declined amid lower gallon sales and higher medical and insurance costs. Retail Supermarkets sales rose 10%, largely reflecting PHILLY SWIRL; excluding that acquisition, sales declined approximately 2%.
Cash, liquidity and capital
- Cash and cash equivalents were $91.8 million; cash plus marketable securities totaled $221.9 million at year-end. Current assets were $275.6 million and current liabilities were $96.0 million.
- No long-term debt was outstanding. A $50 million revolving credit facility, repayable in November 2016, was undrawn; the company reported covenant compliance. Capital lease obligations were approximately $0.5 million.
- Investing cash outflow was $86.1 million, including $28.4 million for acquisitions and $38.8 million of capital expenditures. Financing cash outflow was $25.4 million, including $20.9 million in dividends and $7.5 million in share repurchases.
- Dividends declared per share doubled to $1.28 from $0.64. Year-end stockholders’ equity was $562.5 million.
Material changes, outlook and risks
- Acquisitions: New York Pretzel was acquired in October 2013 for $11.8 million; PHILLY SWIRL was acquired in May 2014 for $17.4 million. Their reported FY2014 sales were $4.3 million and $12.6 million, respectively.
- The Norwalk, California manufacturing facility shutdown resulted in $973,000 of other general expense; Food Service also recorded $913,000 of shutdown costs. The filing reports $269,000 of acquisition costs and a $361,000 loss on marketable-security sales.
- Management expected a FY2015 effective tax rate of 36%–36.5%. It estimated an annual yield of 3.5%–3.75% on its income-oriented mutual funds. The filing provides no overall sales or earnings guidance.
- Management expected no 2015 sales to a restaurant chain that generated $6.8 million of FY2014 churro sales. It cited commodity and energy costs, customer consolidation, competition, consumer preferences, weather and seasonality, execution and acquisition integration as factors that could affect results.
- Top ten customers represented 41% of sales; the largest customer represented 8%. Raw-material forward-purchase commitments were approximately $60 million. Other risks include product liability and food safety, manufacturing or distribution disruption, foreign currency and operating risks, and the founder’s significant voting influence.
- The company reported no material pending legal proceedings beyond ordinary-course matters. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether underlying sales growth and margins remain strong after separating acquisition contributions, pricing, volume and insurance-cost effects.
- Customer-level concentration and sustainability of major pretzel, frozen-juice and service-revenue gains; also the expected effect of the lost churro customer.
- Performance and liquidity of the $128.1 million available-for-sale mutual-fund portfolio, including its unrealized losses and exposure to market and interest-rate changes.
- Integration and returns from New York Pretzel and PHILLY SWIRL, and whether acquisitions or capital spending materially affect cash balances.
- Commodity-cost pass-through, insurance claims, seasonal demand, and the impact of planned raw-material commitments and customer purchasing patterns.