J&J Snack Foods Corp. — Q2 FY2013 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended March 30, 2013, compared with the periods ended March 24, 2012. J&J reports Food Service, Retail Supermarkets and Frozen Beverages. Figures below are in millions of dollars unless otherwise noted. The company cautions that interim results are not necessarily indicative of full-year performance; frozen beverages and frozen juice products are generally stronger in warmer-weather quarters.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $201.3, up 6% | $392.7, up 8% |
| Gross profit / gross margin | $58.2 / 28.88%, versus 28.48% | $112.3 / 28.59%, versus 27.71% |
| Operating income | $19.2, up 18% | $34.2, up 38% |
| Net earnings | $12.7, up 21% | $22.9, up 44% |
| Diluted earnings per share | $0.67, versus $0.55 | $1.21, versus $0.84 |
| Operating cash flow | Not separately reported | $28.6, versus $30.1 |
Segment results. For the quarter, Food Service sales were $135.4 and operating income $15.4; Retail Supermarkets sales were $23.6 and operating income $2.4; Frozen Beverages sales were $42.4 and operating income $1.4. Food Service and Retail operating income increased year over year, while Frozen Beverages quarterly operating income declined from $1.9. For the first six months, Food Service sales were $265.6 and operating income $28.0; Retail Supermarkets sales were $44.3 and operating income $4.0; Frozen Beverages sales were $82.9 and operating income $2.3.
Cash, liquidity and debt. Cash and cash equivalents were $102.3 at March 30, down from $154.2 at September 29, 2012. Current assets were $268.2 and current liabilities $80.0. The company had no balance drawn on its $50 million revolving credit facility, which expires in December 2016; capital lease obligations totaled approximately $0.5. Management said cash, expected operating cash flow and borrowing capacity should be sufficient for growth and expansion. Six-month investing cash outflow was $75.0, including $83.3 of marketable-security purchases and $15.6 of capital expenditures; financing cash outflow was $5.8, including $5.4 of dividends and $2.8 of share repurchases. Net cash declined $51.9.
Material changes and management commentary
- Management attributed stronger gross margin primarily to higher Food Service volume; second-quarter margin also benefited from about $0.7 million of lower ingredient and packaging costs. It warned that these costs are volatile and future effects cannot be projected.
- Food Service growth included strong soft pretzel and churro sales, partly offset by lower frozen juice and ices sales. Three customers accounted for about half of the quarter’s pretzel-sales increase; one restaurant chain generated over 90% of the churro-sales increase.
- Retail Supermarkets sales were essentially flat for the half year. Frozen juices and ices and handheld products were weaker; management cited lost distribution, cold weather and lower sales to one customer among contributing factors.
- Frozen beverage gallon sales declined 10% in the quarter and 4% in the half year, with more than two-thirds of the decline concentrated in four customers. Service and machine sales partly supported segment revenue.
- Operating expenses increased in dollars but declined as a share of sales. Management cited Food Service sales growth, lower Frozen Beverage expenses and the absence of approximately $0.8 million of prior-year first-quarter meeting costs.
- Investment income increased as the company invested $80 million in mutual funds during the first quarter. Management estimated their yield at approximately 3.5%–4.0%. Available-for-sale mutual funds had a reported fair value of $80.3 million, including net unrealized gains.
- The six-month effective tax rate benefited from a reduction in expense related to revised prior-year estimates. Management estimated a full-year rate of 36.5%–37%.
Outlook, risks and contingencies
The filing provides no sales or earnings guidance. Management expects share-based compensation, net of tax benefits, not to exceed $1.2 million (approximately $0.06 per share) for FY2013. Key risks discussed include raw-material and labor costs, insurance costs, customer consolidation and concentration, demand and weather effects, execution of manufacturing and distribution activities, integration of acquisitions, and changes in tax laws and interest rates. Gross unrecognized tax benefits were $0.445 million, with $0.266 million of accrued tax interest and penalties at March 30, 2013. The company reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Food Service growth—particularly pretzels and churros—is sustainable given customer concentration and acquisition contributions.
- Whether weak frozen juice, handheld and frozen beverage volumes recover, and the extent to which weather or lost distribution persists.
- Whether margin gains continue if ingredient and packaging costs rise or sales mix changes.
- The liquidity, risk profile and classification of the $80 million mutual-fund investment, alongside the substantial cash decline during the half year.
- The assumptions behind management’s full-year tax-rate and share-based compensation estimates; the filing provides no broader financial guidance.