J&J Snack Foods Corp. — Q3 FY2013 Form 10-Q
Business context and period: The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets, and Frozen Beverages segments. This unaudited filing covers the quarter and nine months ended June 29, 2013, compared with periods ended June 23, 2012. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $237.0 | $226.3 | $629.8 | $588.6 |
| Gross profit | $75.3 | $72.5 | $187.6 | $172.9 |
| Gross margin | 31.78% | 32.04% | 29.79% | 29.38% |
| Operating income | $32.4 | $29.9 | $66.6 | $54.6 |
| Net earnings | $21.2 | $18.7 | $44.1 | $34.6 |
| Diluted EPS | $1.12 | $0.99 | $2.33 | $1.83 |
| Cash from operating activities | Not provided by quarter | Not provided by quarter | $53.7 | $52.5 |
| Capital expenditures | Not provided by quarter | Not provided by quarter | $27.0 | $30.1 |
Financial position and liquidity
- At June 29, 2013, cash and cash equivalents were $79.3 million, down from $154.2 million at September 29, 2012. Current assets were $258.5 million and current liabilities $89.0 million.
- Marketable securities included $107.5 million available for sale and $5.5 million held to maturity. The available-for-sale mutual funds had $2.6 million of gross unrealized losses; an unrealized securities loss of $2.5 million was recorded in nine-month comprehensive income.
- The company had no balance outstanding on its $50 million revolving credit facility, which expires in December 2016. Capital lease obligations totaled approximately $0.4 million; the filing reports no material borrowings otherwise.
- Nine-month cash used in investing was $115.6 million, mainly reflecting $113.4 million of security purchases, partly offset by $24.0 million of security redemptions. Financing used $13.0 million, including $8.5 million of dividends and $7.2 million of share repurchases.
Changes versus comparable periods
- Sales rose 5% in Q3 and 7% for the nine months; excluding the Kim & Scott’s acquisition, management reported increases of approximately 4% and 6%, respectively. Net earnings increased 13% in Q3 and 27% for the nine months.
- Food Service sales increased 5% in Q3 and 9% year to date; segment operating income rose to $18.8 million and $46.8 million, respectively. Pretzels and churros drove growth, while frozen juices and ices declined.
- Retail Supermarkets sales increased 4% in Q3 and 2% year to date, but segment operating income fell to $2.9 million and $6.9 million, respectively, primarily due to higher trade spending and advertising.
- Frozen Beverages sales increased 5% in Q3 and 4% year to date. Segment operating income was nearly flat in Q3 and increased to $13.0 million year to date, with the year-to-date improvement attributed primarily to lower operating expenses.
- Q3 gross margin declined 0.26 percentage points, while the nine-month margin improved 0.41 points. Lower ingredient and packaging costs aided results, particularly year to date; higher sales volume in Food Service also supported the year-to-date margin.
Outlook, commentary, and risks
- No specific sales or earnings guidance was provided. Management estimated a fiscal-year effective tax rate of 36%–36.5% and expected fiscal-year share-based compensation not to exceed $1.4 million net of tax benefits.
- Management said cash, expected operating cash flows, and borrowing capacity should be sufficient to fund growth and expansion. A quarterly dividend of $0.16 per share was declared, payable July 3, 2013.
- Management cautioned that results are seasonal: frozen beverages and frozen juice bars and ices generally sell more in the third and fourth quarters, and interim results may not indicate full-year results. Retail frozen juice and ices sales were affected by unseasonably cold weather.
- Food Service Q3 operating income included a $0.5 million product write-down and approximately $1.2 million higher liability insurance expense year over year; insurance expense was about $1.8 million higher for the nine months, reflecting updated estimates for incurred claims not yet paid.
- Management highlighted risks including volatile raw-material and labor costs, insurance costs, customer consolidation, sales conditions, execution of manufacturing and distribution activities, acquisition integration, and changes in tax laws and interest rates. It stated ingredient and packaging costs could differ materially from expectations.
- The filing disclosed $0.425 million of gross unrecognized tax benefits and $0.271 million of accrued tax-related interest and penalties at June 29, 2013. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether Food Service growth—particularly pretzels and churros—can continue, given management’s disclosure that a small number of customers accounted for substantial portions of the increases.
- Whether higher insurance estimates, product write-downs, and increased retail trade spending persist or materially affect margins.
- The performance, liquidity, and valuation sensitivity of the $107.5 million available-for-sale mutual-fund portfolio and the effects of future unrealized losses.
- How seasonal demand and weather affect the remaining fiscal year, and whether management’s estimated tax rate and cost assumptions hold.
- The filing’s cash-flow and investment activity, including security purchases, capital spending, dividends, and authorized share repurchases.