J&J Snack Foods Corp. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 28, 2013; comparable period ended December 29, 2012. The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets, and Frozen Beverages segments. Results are unaudited. Management notes that frozen beverage and frozen juice products are generally more seasonal, with higher sales in the third and fourth quarters.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $203.5 million | $191.4 million | Up 6% |
| Gross profit / margin | $59.9 million / 29.43% | $54.1 million / 28.28% | Margin up 1.15 percentage points |
| Operating income / margin | $18.0 million / 8.8% | $15.1 million / 7.9% | Up 19% |
| Net earnings | $12.4 million | $10.2 million | Up 22% per MD&A |
| Diluted EPS | $0.66 | $0.54 | Up $0.12 |
| Cash from operations | $31.3 million | $17.3 million | Up $14.0 million |
Gross margin improvement was attributed primarily to higher Food Service volume. Operating expenses rose $2.9 million and were 20.6% of sales versus 20.4%; the current quarter included approximately $0.8 million in Norwalk, California facility shutdown costs. Net earnings in the financial statements are $12.426 million; the MD&A also cites $12.246 million, an apparent inconsistency to verify.
Segments and material changes
- Food Service: Sales rose 7% to $138.8 million; operating income increased to $15.2 million from $12.6 million. Pretzel sales increased 21%, including the New York Pretzel acquisition and higher sales to a customer that accounted for about one-third of the increase. Management cited higher volume, price increases, and lower ingredient costs as operating-income benefits.
- Retail Supermarkets: Sales declined 3% to $20.2 million, while operating income increased to $2.0 million from $1.6 million, primarily due to lower coupon and advertising expense. Handheld product sales fell 16%, including a $1.1 million decline at one customer.
- Frozen Beverages: Sales rose 10% to $44.6 million, mainly from higher service revenue and machine sales; beverage-related sales were down slightly and gallon sales fell 3%. Operating income decreased to $0.9 million from $0.9 million (reported amounts: $856,000 versus $894,000), as higher expenses offset sales benefits.
- Acquisition: The company acquired New York Pretzel in October 2013. The disclosed purchase price was $11.8 million; $11.0 million was paid net of cash acquired during the quarter. The allocation included $7.7 million of goodwill, $0.849 million of intangible assets, and $3.049 million of property and equipment.
Cash, liquidity, debt, and other metrics
- Cash and cash equivalents were $105.7 million at December 28, up from $97.3 million at September 28, 2013. Current assets were $265.3 million and current liabilities $88.9 million.
- Operating cash flow was $31.3 million; capital expenditures were $9.3 million and acquisition payments were $11.0 million. Investing activities used $19.8 million. The company paid $3.0 million in dividends.
- There were no borrowings under the $50 million revolving credit facility, which expires in December 2016. Capital lease obligations totaled approximately $0.7 million; the filing reports no material conventional debt balance.
- Marketable securities included $107.9 million of available-for-sale mutual funds and $2.0 million of held-to-maturity securities. Management estimates a 3.5%–3.75% annual yield on the mutual funds, which it describes as seeking current income with low volatility and moderate duration. A $260,000 loss on securities sales was recorded.
- The board declared a regular quarterly dividend of $0.32 per share, payable January 7, 2014. No shares were repurchased during the quarter; 343,858 shares remained authorized for repurchase.
Outlook, risks, and unusual items
No specific revenue or earnings guidance was provided. Management stated that cash, expected operating cash flow, and available borrowing capacity should be sufficient to fund future growth and expansion. It estimated a roughly 36% effective tax rate for FY2014; the quarter’s estimated rate was 35% and benefited from prior-year tax estimate changes. Expected FY2014 share-based compensation was not to exceed $1.7 million net of tax benefits, or approximately $0.09 per share.
Management identified raw-material and labor costs, insurance, customer consolidation, sales trends, the ability to manage manufacturing, marketing and distribution, acquisition execution and integration, tax-law changes, and interest rates as factors that could affect results. The quarter also included facility shutdown costs, an acquisition, and a securities sale loss. Management said the quarter’s results are not necessarily indicative of the full year because of seasonality. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the MD&A net earnings figure of $12.246 million with the financial statements’ $12.426 million.
- Assess whether Food Service growth—particularly pretzels and the New York Pretzel acquisition—is sustainable and sufficiently diversified across customers.
- Monitor Retail Supermarket handheld declines and Frozen Beverage gallon sales, as well as the seasonal pattern in beverage results.
- Review the acquisition’s final purchase-price allocation, integration performance, and goodwill impairment exposure.
- Evaluate the composition, liquidity, valuation changes, and realized losses of the company’s substantial mutual-fund investments, alongside the stated yield estimate.
- Consider whether the estimated FY2014 tax rate, prior-year tax adjustments, and Norwalk shutdown costs affect comparability of future results.