J&J Snack Foods Corp. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended June 28, 2014. Amounts below are U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate. The filing cautions that results are seasonal, with frozen beverages and frozen juice products generally stronger in the third and fourth quarters.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $257.1m, up 8% | $666.0m, up 6% |
| Gross profit / margin | $84.4m / 32.81% (31.78% prior year) | $205.4m / 30.84% (29.79% prior year) |
| Operating income | $35.7m, up 10%; 13.9% sales margin | $74.0m per financial statements; 11.1% sales margin |
| Net earnings | $23.7m, up 12% | $49.6m, up 13% |
| Diluted EPS | $1.26, versus $1.12 | $2.64, versus $2.33 |
| Operating cash flow | Not presented quarterly | $69.1m, versus $53.7m |
| Capital expenditures | Not presented quarterly | $31.3m, versus $27.0m |
Nine-month operating cash flow less capital expenditures was approximately $37.8m, compared with $26.7m in the prior-year period. Investing cash flow included $28.5m for acquisitions. Cash declined to $67.8m from $97.3m at fiscal year-end, while total assets rose to $698.2m from $645.7m.
Liquidity, investments and debt
Current assets were $265.6m and current liabilities $103.9m at June 28, 2014 (current ratio approximately 2.6, versus 3.2 at September 28, 2013). The company held $129.6m of long-term mutual funds and $2.0m of held-to-maturity securities. Management estimates the mutual funds’ annual yield at 3.5%–3.75%; their value is exposed to market fluctuations. There were no borrowings under the $50m revolving credit facility, which expires in December 2016. Capital lease obligations totaled approximately $0.6m.
The company repurchased and retired 64,041 shares for $5.9m during the nine months; 279,817 shares remained authorized for repurchase. Cash dividends paid were $14.9m. A quarterly dividend of $0.32 per share was declared, payable July 2, 2014.
Segments and material changes
- Food Service: Sales rose 9% in the quarter and 6% year to date; segment operating income increased to $21.2m and $54.0m, respectively. Pretzel sales benefited from growth across customers, though one customer accounted for about one-third of the pretzel sales increase.
- Retail Supermarkets: Reported sales rose 12% in the quarter and 4% year to date, including PHILLY SWIRL. Excluding that acquisition, sales fell 8% and 5%, respectively. Segment operating income was $3.5m for the quarter and $8.1m year to date.
- Frozen Beverages: Sales increased 6% in both periods. Segment operating income rose to $10.9m for the quarter but fell to $12.0m year to date, principally reflecting higher health and liability insurance costs.
Excluding New York Pretzel and PHILLY SWIRL, consolidated sales increased 5% in the quarter and 4% year to date. Management attributed improved gross margins to lower liability insurance costs, higher Food Service volume and lower ingredient costs; the prior-year quarter also included a $0.5m product write-down. Nine-month operating expenses included $0.9m of Norwalk, California facility shutdown costs.
PHILLY SWIRL was acquired in May 2014 for approximately $17.4m; it contributed $6.3m of sales and about $0.35m of operating income from acquisition through quarter-end. New York Pretzel was acquired in October 2013 for $11.8m. Management reported approximately $0.26m of acquisition expense for the nine-month period.
Outlook, risks and unusual items
The filing provides no specific sales or earnings forecast. Management expects fiscal 2014 share-based compensation, net of tax benefits, not to exceed $1.8m (approximately $0.10 per share), and estimates an effective tax rate of approximately 36% for the year. Management states that cash, expected operating cash flow and borrowing capacity should be sufficient for future growth and expansion.
Management cites raw material and labor costs, insurance expense, customer consolidation, sales trends, execution of manufacturing and distribution activities, acquisition integration, tax law and interest rates as factors that may affect results. Sales growth in some categories depended on major customers; a restaurant-chain churro rollout was expected to end during the fourth quarter. Uncertain tax positions included $0.411m of gross unrecognized tax benefits, plus $0.221m of accrued interest and penalties.
Investor verification points
- Operating-income inconsistency: The statements of earnings and segment table report nine-month 2014 operating income of $73.966m, while MD&A says it increased by $7.362m “to $66.604m”—the latter is the prior-year statement amount. Confirm the correct figure in the filed financial statements and any subsequent company materials.
- Assess the extent to which reported growth and Retail Supermarkets’ improvement rely on the recent acquisitions, especially PHILLY SWIRL’s preliminary purchase-price allocation and integration.
- Monitor customer concentration, the expected end of one restaurant customer’s churro sales, and the Frozen Beverages segment’s higher insurance costs.
- Evaluate liquidity and investment risk, including the decline in cash, substantial mutual-fund holdings, and potential market-value changes.
- Consider seasonality when interpreting the quarter and nine-month results; the filing says these periods are not necessarily indicative of full-year performance.