J&J Snack Foods Corp. — Q1 FY2012 10-Q
Reporting period: Three months ended December 24, 2011; comparisons are with the three months ended December 25, 2010. The company sells food-service, retail-supermarket and frozen-beverage products. Results are seasonal: frozen-beverage and frozen-juice-bar sales are generally higher in the third and fourth quarters.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $172.7 million | $155.6 million | +11% |
| Gross profit | $46.4 million | $46.1 million | +1% |
| Gross margin | 26.87% | 29.62% | Down 2.75 percentage points |
| Operating income | $8.5 million | $11.0 million | Down 23% |
| Net earnings | $5.5 million | $7.1 million | Down 23% |
| Diluted EPS | $0.29 | $0.38 | Down $0.09 |
| Operating cash flow | $20.7 million | $15.7 million | Up $5.0 million |
| Capital expenditures | $8.9 million | $5.1 million | Up $3.7 million |
Higher ingredient and packaging costs (approximately $5 million for the quarter) and the acquired handheld business, whose gross margin management described as mid-single-digit, weighed on gross margin. Cash from operations benefited substantially from a $19.1 million decrease in accounts receivable, partly offset by lower payables and accrued liabilities.
Segments and material changes
- Food Service: Sales rose 7% to $113.1 million; excluding handhelds, sales increased 1%. Segment operating income fell to $7.3 million from $11.1 million. Management cited higher ingredient and packaging costs, lower funnel-cake sales and meeting costs.
- Retail Supermarkets: Sales rose 48% to $20.8 million, largely reflecting handheld sales of $5.9 million; excluding handhelds, sales increased 6%. Operating income declined to $1.8 million from $2.1 million, with higher product costs and advertising cited.
- Frozen Beverages: Sales rose 7% to $38.8 million. Beverage-related sales increased 1%, while base ICEE gallon sales declined 4%; service revenue rose 18%. The operating loss narrowed to $0.6 million from $2.2 million.
- Overall sales increased $17.1 million, but excluding sales from the ConAgra frozen-handheld acquisition, sales grew 3%. Price increases contributed approximately $4.8 million across Food Service and Retail Supermarkets; management attributed additional growth to volume, new products and acquired handheld sales.
Liquidity, debt and financial position
- At December 24, 2011, cash and cash equivalents were $94.1 million; marketable securities were $8.7 million current and $63.0 million long-term. Total assets were $545.3 million and stockholders’ equity was $437.4 million.
- No borrowings were outstanding under the $50 million revolving credit facility, which expires in December 2016. Capital-lease obligations totaled approximately $0.7 million. The filing says cash, expected operating cash flow and borrowing capacity are sufficient to fund future growth and expansion.
- Cash increased $6.6 million during the quarter. Investing activities used $13.5 million, including $8.9 million of capital expenditures; financing activities used $0.4 million, including $2.2 million of dividend payments.
- The company declared a regular quarterly dividend of $0.13 per share, payable January 5, 2012. Held-to-maturity securities had amortized cost of $71.7 million and fair value of $71.8 million at quarter-end.
Outlook, risks and unusual items
- Management expects continued ingredient and packaging cost increases during the remaining nine months of FY2012. Despite price increases, those costs and other operating-cost increases may reduce net earnings versus FY2011. Management said future input-cost effects cannot be reliably projected.
- Management expects higher gasoline costs to affect Frozen Beverages operating income for at least the balance of FY2012; the amount is not estimable.
- Management expects sales to two funnel-cake customers to be approximately $3.5 million lower over the balance of FY2012, including about $2.2 million in Q2.
- Management estimated a 37.5%–38.5% effective tax rate for FY2012. Gross unrecognized tax benefits were $0.943 million at quarter-end; accrued tax interest and penalties were $0.330 million.
- Quarter results included approximately $0.8 million of costs for a management and sales meeting, historically held every five years. The filing also reports a $0.550 million meeting expense affecting Food Service.
- Other risks cited include raw-material and labor supply and costs, customer consolidation, execution in manufacturing/marketing/distribution, acquisition integration, and changes in tax laws and interest rates. Management cautioned that first-quarter results are not necessarily indicative of the full year.
Important facts for investors to verify
- Whether pricing can offset sustained ingredient, packaging and gasoline cost inflation without further margin pressure.
- Organic sales and profitability trends after separating the ConAgra handheld acquisition; the acquired business had relatively low gross margins.
- Whether the projected funnel-cake customer declines and lower base ICEE gallons persist, and whether Frozen Beverages’ loss continues to narrow.
- Cash conversion, planned capital spending, dividend coverage, and the composition and maturities of the company’s marketable securities.
- Progress on uncertain tax positions and the actual full-year effective tax rate.