J&J Snack Foods Corp. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 25, 2011; comparisons are with the periods ended June 26, 2010. Unless stated otherwise, dollar amounts are in millions. The company makes and distributes snack foods, frozen juice treats, bakery products, churros, handheld foods, and frozen beverages through Food Service, Retail Supermarkets, and Frozen Beverages segments.
Financial performance
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $206.3 | $189.7 | $524.7 | $496.2 |
| Gross profit | $67.5 | $65.0 | $162.7 | $160.8 |
| Gross margin | 32.73% | 34.28% | 31.00% | 32.42% |
| Operating income | $27.1 | $26.1 | $52.0 | $52.4 |
| Net earnings | $23.3 | $15.9 | $39.1 | $32.0 |
| Diluted EPS | $1.24 | $0.85 | $2.08 | $1.71 |
- Quarterly sales grew 9% and nine-month sales grew 6%. Excluding the Parrot Ice, California Churros, and ConAgra handheld acquisitions, management reported sales growth of 4% for the quarter and 3% for the nine months.
- Quarterly net earnings included a $6.58 million bargain-purchase gain from the ConAgra frozen handheld acquisition. Excluding that gain, net earnings were $16.75 million for the quarter and $32.50 million year to date, versus $15.86 million and $31.95 million, respectively, in 2010.
- Higher ingredient and packaging costs—approximately $6 million for the quarter and $11 million for the nine months—were the principal reason gross margin declined. Nine-month operating income was slightly lower despite higher sales.
- Segment sales and operating income: Food Service sales were $121.4 million and operating income $13.9 million for the quarter; Retail Supermarkets sales were $27.8 million and operating income $3.5 million; Frozen Beverages sales were $57.1 million and operating income $9.6 million.
Cash, liquidity, and obligations
- Cash and cash equivalents were $79.6 million at June 25, 2011, compared with $74.7 million at September 25, 2010. Current marketable securities were $25.5 million; long-term held-to-maturity securities were $30.0 million.
- Operating cash flow for the nine months was $51.3 million, compared with $47.2 million a year earlier. Investing activities used $42.9 million and financing activities used $3.7 million. Capital expenditures were $20.1 million.
- There were no borrowings on the $50 million revolving credit facility at quarter-end; it expires in December 2011. Capital-lease obligations totaled approximately $0.7 million. Current liabilities were $84.5 million.
- The company stated that cash, expected operating cash flows, and borrowing capacity should be sufficient to fund future growth and expansion. The board declared a $0.1175-per-share quarterly dividend, paid July 6, 2011.
Outlook, risks, and unusual items
- Management anticipated higher ingredient and packaging costs through the remaining three months of fiscal 2011, citing a significant increase in flour prices since June 2010 and increases in other commodities. Price increases had been implemented, but management warned higher costs and operating expenses could reduce net earnings versus the comparable 2010 period. Commodity cost impacts were described as difficult to project.
- Higher gasoline costs affected Frozen Beverages operating income by approximately $0.5 million in the quarter and $0.9 million year to date; management expected this pressure to continue for at least the balance of the fiscal year.
- The company expected an adjusted effective tax rate of 38%–39% for fiscal 2011, excluding the bargain-purchase gain. The reported estimated rates were 31% for the quarter and 34% year to date, reflecting that gain.
- Funnel-cake sales were materially lower after one customer stopped buying; management anticipated no sales to that customer in the final three months of fiscal 2011. Fig and fruit bar sales also declined.
- The May 2011 ConAgra handheld acquisition had approximately $50 million in sales over the prior twelve months. Its preliminary purchase-price allocation recorded $15.4 million of net assets against an $8.8 million purchase price, producing the $6.58 million gain. Acquisition-related costs were $0.5 million year to date.
- Gross unrecognized tax benefits were $1.125 million, with $0.401 million of accrued interest and penalties at June 25, 2011. Management said uncertain tax positions had not been recognized as tax benefits.
- Frozen beverage and frozen juice sales are generally higher in the third and fourth quarters due to warmer weather; interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether pricing and other actions can offset elevated commodity, packaging, and fuel costs without materially weakening volume or margins.
- How much of reported sales and earnings growth reflects acquisitions, especially the ConAgra handheld business, versus underlying performance.
- The sustainability of segment trends, including weaker Food Service operating income and declining funnel-cake and fig/fruit bar sales.
- Whether the preliminary acquisition valuation and bargain-purchase gain remain appropriate as purchase accounting is finalized.
- The renewal or replacement of the $50 million credit facility before its December 2011 expiration, and developments in tax examinations or uncertain tax positions.