J&J Snack Foods Corp. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 29, 2014; unaudited. Comparisons are with the periods ended March 30, 2013, except balance-sheet comparisons, which are with September 28, 2013. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $205.3; up 2% from $201.3 | $408.8; up 4% from $392.7 |
| Gross profit / margin | $61.1 / 29.76%, versus $58.2 / 28.88% | $121.0 / 29.60%, versus $112.3 / 28.59% |
| Operating income | $20.3; up 6% from $19.2 | $38.3; up 12% from $34.2 |
| Net earnings | $13.5; up 7% from $12.7 | $25.9; up 13% from $22.9 |
| Diluted EPS | $0.72, versus $0.67 | $1.38, versus $1.21 |
For the six months, operating cash flow was $39.1, compared with $28.6 a year earlier. Investing cash outflow was $50.8, including $20.8 of capital expenditures and $11.0 paid for acquisitions; financing cash outflow was $8.1, including $9.0 of dividends paid. Cash declined $20.0 to $77.3.
At March 29, current assets were $249.5 and current liabilities were $86.0. The company reported no borrowings under its $50.0 revolving credit facility, which expires in December 2016; capital-lease obligations totaled $0.6. In addition to cash, it held $128.7 of long-term mutual funds and $2.0 of long-term held-to-maturity securities. Management said cash, expected operating cash flow and borrowing capacity were sufficient to fund future growth and expansion.
Segments and material changes
- Food Service: Second-quarter sales rose 2% to $138.3 and six-month sales rose 4% to $277.1. Segment operating income increased to $17.6 for the quarter and $32.7 for the half year. Pretzel and frozen juice/ice sales grew; bakery sales were slightly lower in the quarter, and churro sales declined.
- Retail Supermarkets: Sales declined 2% in both periods, to $23.1 for the quarter and $43.2 for six months. Operating income nevertheless rose to $2.6 and $4.6, respectively, primarily on improved product mix and lower coupon expense. Management cited weaker frozen-juice/ice and handheld sales, including disappointing products introduced in the prior year.
- Frozen Beverages: Sales rose 4% for the quarter to $43.9 and 7% for six months to $88.5. Operating income fell to $0.2 for the quarter and $1.0 for six months, versus $1.4 and $2.3, as higher operating expenses outweighed sales growth.
Management attributed improved consolidated gross margins mainly to lower ingredient costs in both periods and higher Food Service volume for the first half. Operating expenses rose; the six-month amount included $0.8 of Norwalk, California facility shutdown costs and about $0.5 of higher group health-insurance costs. Insurance costs were also elevated by unusually high medical claims under the self-insured plan. Severe weather affected sales and, to a lesser extent, costs, but management could not quantify its effect on operating income.
Outlook, risks and other items
- No formal sales or earnings forecast was provided. Management noted that frozen beverages, juice bars and ices generally have higher sales in the third and fourth quarters due to warmer weather, and cautioned that first-half results are not necessarily indicative of full-year results.
- Management estimated a roughly 36% effective tax rate for the fiscal year. It estimated fiscal-2014 share-based compensation would not exceed $1.7 net of tax benefits, or approximately $0.09 per share. The company estimated a 3.5%–3.75% annual yield on its mutual funds.
- In October 2013, the company acquired New York Pretzel for a stated purchase price of $11.8; $7.7 was allocated to goodwill, $0.8 to intangible assets and $3.0 to property, plant and equipment. Food Service results include the acquired business from the acquisition date.
- The company identified raw-material and labor costs, insurance, customer consolidation, sales conditions, execution of manufacturing/marketing/distribution, acquisition integration, tax-law changes and interest rates as factors that can affect earnings. The mutual-fund portfolio had $1.6 of unrealized losses across 22 funds; management said it may sell securities depending on liquidity needs or market conditions.
- The board declared a regular quarterly dividend of $0.32 per share, payable April 3, 2014. No shares were repurchased during the six-month period; 343,858 shares remained under the existing repurchase authorization.
- Gross unrecognized tax benefits were $0.42, with $0.22 of accrued tax-related interest and penalties. Disclosure controls were assessed as effective, and the filing reported 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 the New York Pretzel acquisition can sustain segment profit growth, including the contribution from a significant pretzel customer.
- Whether Retail Supermarket volume declines and weak handheld products persist, and whether Frozen Beverage operating income recovers from unusually high insurance and other expenses.
- The recurring effect of the Norwalk shutdown costs, medical claims and other insurance costs on future operating expenses and margins.
- The liquidity, valuation and risk profile of the $128.7 mutual-fund portfolio, and the company’s cash requirements for capital spending, acquisitions and dividends.
- Seasonal sales patterns and the unquantified effect of severe weather; the filing provides no clear quantified estimate of the weather impact on operating income.