J&J Snack Foods Corp. — Q3 FY2012 Form 10-Q
Business context and reporting period. The fiscal third quarter and nine-month periods ended June 23, 2012; comparisons are with periods ended June 25, 2011. J&J sells food-service and retail products, including pretzels, frozen juices and handheld foods, and frozen beverages. The company cautions that frozen beverage and frozen treat sales are generally higher in warmer-weather quarters, so interim results may not indicate full-year performance. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $226.3 | $206.3 | $588.6 | $524.7 |
| Gross profit | $72.5 | $67.5 | $172.9 | $162.7 |
| Gross margin | 32.0% | 32.7% | 29.4% | 31.0% |
| Operating income | $29.9 | $27.1 | $54.6 | $52.0 |
| Net earnings | $18.7 | $23.3 | $34.6 | $39.1 |
| Diluted EPS | $0.99 | $1.24 | $1.83 | $2.08 |
| Cash from operations | — | — | $52.5 | $51.3 |
Sales rose 10% in Q3 and 12% year to date; excluding post-acquisition sales from ConAgra’s handheld business and Kim & Scott’s, management reported growth of 6% for both periods. Q3 operating income increased 10%, while nine-month operating income rose 5%. Net earnings fell 20% in Q3 and 12% year to date, primarily because the prior-year periods included a $6.6 million bargain-purchase gain. Excluding that gain, prior-year net earnings were $16.7 million for Q3 and $32.5 million for nine months, below FY2012 results.
Gross margin declined as ingredient and packaging costs increased by about $1.5 million in Q3 and $10 million year to date, and handheld products carried lower gross margins. Management estimated margins excluding the handheld impact at approximately 32.6% for Q3 and 30.5% year to date.
Segments and material changes
- Food Service: Sales increased 14% in Q3 to $138.5 million and 12% year to date to $375.9 million. Segment operating income rose to $15.2 million in Q3 but declined to $35.2 million year to date, reflecting higher input costs and lower funnel-cake sales.
- Retail Supermarkets: Sales increased 7% in Q3 to $29.9 million and 25% year to date to $74.1 million, with handheld acquisition sales contributing. Segment operating income was $4.1 million in Q3 and $7.6 million year to date.
- Frozen Beverages: Sales rose 2% in Q3 to $58.0 million and 6% year to date to $138.6 million. Beverage gallon sales fell 5% in Q3 and 2% year to date; service revenue increased. Segment operating income increased to $10.6 million in Q3 and $11.8 million year to date.
- Kim & Scott’s Gourmet Pretzels was acquired in June 2012 for $7.9 million; its prior-twelve-month sales were approximately $8 million. The acquisition added $6.8 million of goodwill. The prior-year ConAgra handheld acquisition generated the $6.6 million bargain-purchase gain.
Cash, liquidity and capital
At June 23, 2012, cash and cash equivalents were $109.5 million, and held-to-maturity securities totaled $54.9 million ($15.5 million current and $39.5 million long term). Current assets were $288.6 million and current liabilities $87.5 million, a current ratio of approximately 3.3. Capital-lease obligations totaled $0.6 million; there were no borrowings on the $50 million revolving credit facility. Management said cash, expected operating cash flow and borrowing capacity should fund future growth and expansion.
Nine-month operating cash flow was $52.5 million. Capital expenditures were $30.1 million, leaving approximately $22.4 million of operating cash flow after capital spending. The company paid $7.1 million in cash dividends. Cash increased $22.0 million from fiscal year-end to $109.5 million. Capital spending was higher than the prior-year period, including facility and equipment investments.
Outlook, risks and other disclosures
- Management said volatile ingredient and packaging costs may continue to rise and could reduce net earnings in the remaining three months of FY2012 versus the prior-year period, despite price increases. The company did not provide earnings or revenue guidance.
- Management estimated a full-year effective tax rate of 37.5%–38.5%. Nine-month operating income included approximately $0.8 million for a management and sales meeting held in October.
- Building and production-line expansions completed in March 2012 cost approximately $12 million; management expects them to generate an additional $50–$60 million of net sales over time.
- Risks identified include raw-material and labor costs, customer consolidation, sales conditions, execution and integration of acquisitions, and changes in tax laws and interest rates. Management noted that one customer accounted for approximately 75% of the Q3 food-service pretzel sales increase.
- Gross unrecognized tax benefits were $0.9 million, with accrued tax interest and penalties of $0.3 million. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether price increases and product mix can offset continued ingredient and packaging inflation and protect margins.
- Verify the sustainability of reported growth after acquisition contributions, especially handheld sales, and monitor the integration and performance of Kim & Scott’s.
- Track frozen-beverage gallon trends, major-customer exposure, and whether service revenue growth offsets weaker beverage volumes.
- Review cash conversion, elevated capital spending, acquisition-related goodwill, and the company’s use of its credit facility and securities portfolio.
- Compare actual FY2012 earnings and tax rate with management’s warning of possible year-over-year earnings pressure in the final quarter.