J&J Snack Foods - 10-Q quarterly report FY2011 Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

X      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended June 25, 2011

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:                                                                0-14616

J & J SNACK FOODS CORP.

(Exact name of registrant as specified in its charter)

6000 Central Highway, Pennsauken, NJ 08109

(Address of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

X           Yes                                                                No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

X           Yes                                                                No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                                                      X           No

As of July 20, 2011, there were 18,673,848 shares of the Registrant’s Common Stock outstanding.

 

INDEX

 

 

 

See accompanying notes to the consolidated financial statements

 

See accompanying notes to the consolidated financial statements

 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  

 

 

 

Note 9    Inventories consist of the following:

 

We have applied no aggregation criteria to any of these operating segments in order to determine reportable segments.  Our three reportable segments are Food Service, Retail Supermarkets and Frozen Beverages. The Restaurant Group, operator of two BAVARIAN PRETZEL BAKERY retail stores with sales of $502,000 in the nine months ended June 25, 2011, has been included in Food Service because it no longer meets the quantitative thresholds under the guidance for reportable segments to be shown separately. All inter-segment net sales and expenses have been eliminated in computing net sales and operating income (loss). These segments are described below.

Food Service

The primary products sold by the food service group are soft pretzels, frozen juice treats and desserts, churros, dough enrobed handheld products and baked goods.  Our customers in the food service industry include snack bars and food stands in chain, department and discount stores; malls and shopping centers; fast food outlets; stadiums and sports arenas; leisure and theme parks; convenience stores; movie theatres; warehouse club stores; schools, colleges and other institutions.  Within the food service industry, our products are purchased by the consumer primarily for consumption at the point-of-sale.

Retail Supermarkets

The primary products sold by the retail supermarket segment are soft pretzel products – including SUPERPRETZEL, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, WHOLE FRUIT frozen fruit bars, WHOLE FRUIT Sorbet, ICEE Squeeze-Up Tubes, dough enrobed handheld products and TIO PEPE’S Churros.  Within the retail supermarket channel, our frozen and prepackaged products are purchased by the consumer for consumption at home.

 

Frozen Beverages

 

 
 

Goodwill

 

develop its own assumptions.

 

We have concluded that the carrying value of certificates of deposit placed through the Certificate of Deposit Account Registry Service equals fair market value.  Other marketable securities held to maturity values are derived solely from level 1 inputs.

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at June 25, 2011 are summarized as follows:

 

All of the certificates of deposit are within the FDIC limits for insurance coverage.

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 25, 2010 are summarized as follows:

All of the certificates of deposit are within the FDIC limits for insurance coverage.

The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at June 25, 2011 and September 25, 2010 are summarized as follows:

 

Proceeds from the redemption and sale of marketable securities were $2,022,000 and $27,547,000 in the three and nine months ended June 25, 2011, respectively; and $4,618,000 and $53,956,000 in the three and nine months ended June 26, 2010, respectively. A gain of $27,000 was recorded in the nine months ended June 25, 2011 with no gain recorded in the three months ended June 25, 2011.  We use the specific identification method to determine the cost of securities sold.

 

 

Acquisition costs of $184,000 for these acquisitions are included in administrative and other general expense for the three and nine months ended June 26, 2010.

The preliminary purchase price allocation for the handhelds acquisition is as follows:

The preliminary purchase price allocation resulted in the recognition of a gain on bargain purchase of approximately $6,580,000 which is included in other income in the consolidated statement of earnings for the three and nine months ended June 25, 2011.  The gain on bargain purchase resulted from the fair value of the identifiable net assets acquired exceeding the purchase price.

Acquisition costs of $464,000 and $534,000 for the handhelds acquisition are included in other general expense in the consolidated statements of earnings for the three and nine months ended June 25, 2011, respectively.

 

The goodwill and intangible assets acquired in the business combinations are recorded at fair value.  To measure fair value for such assets, we use techniques including discounted expected future cash flows (Level 3 input).

 

Liquidity and Capital Resources

Our current cash and cash equivalents balances and cash expected to be provided by future operations are our primary sources of liquidity.  We believe that these sources, along with our borrowing capacity, are sufficient to fund future growth and expansion.  See Note 12 to these financial statements for a discussion of our investment securities.

The Company’s Board of Directors declared a regular quarterly cash dividend of $.1175 per share of its common stock payable on July 6, 2011, to shareholders of record as of the close of business on June 15, 2011.

In the year ended September 25, 2010, we purchased and retired 203,507 shares of our common stock at a cost of $7,768,000 under a million share buyback authorization approved by the Company’s Board of Directors in February 2008 leaving 210,772 as the number of shares that may yet be purchased under the share buyback authorization.

In the three months ended June 25, 2011 and June 26, 2010, fluctuations in the valuation of the Mexican and Canadian currencies and the resulting translation of the net assets of our Mexican and Canadian subsidiaries caused a decrease of $29,000   and an increase of $98,000 respectively, in accumulated other comprehensive loss.  In the nine month periods, there was a decrease of $510,000 in fiscal year 2011 and a decrease of $453,000    in fiscal year 2010.

In February 2010, we acquired the assets of Parrot Ice, a manufacturer and distributor of a premium brand frozen beverage sold primarily in convenience stores.  Revenues from Parrot Ice were approximately $1.5 million for our 2010 fiscal year.

In June 2010, we acquired the assets of California Churros, a manufacturer and distributor of a premium brand churro. California Churros had revenue of approximately $2.5 million in our 2010 fiscal year.

In May 2011, we acquired the frozen handheld business of ConAgra Foods.  This business had sales of approximately $50 million over the prior twelve months to food service and retail supermarket customers.

 

Results of Operations

Net sales increased $16,599,000 or 9% for the three months to $206,328,000 and $28,499,000 or 6% to $524,691,000 for the nine months ended June 25, 2011 compared to the three and nine months ended June 26, 2010.

Excluding sales from the acquisition of Parrot Ice in February 2010, California Churros in June 2010 and the frozen handheld business of ConAgra Foods in May 2011, sales increased 4% for the three months and 3% for the nine months.

FOOD SERVICE

Sales to food service customers increased $8,740,000 or 8% in the third quarter to $121,379,000 and increased $14,910,000 or 5% for the nine months.  Excluding sales from the acquisition of California Churros and handheld sales, food service sales increased 2% for the quarter and were up 1% for the nine months. Soft pretzel sales to the food service market increased 5% to $26,686,000 in the third quarter and increased 2% to $76,342,000 in the nine months due primarily to increased sales to chain restaurants in the third quarter. Frozen juices and ices sales increased 8% to $17,176,000 in the three months and 8% to $35,904,000 in the nine months primarily as the result of higher sales to school food service accounts.  Churro sales to food service customers increased 37% to $11,004,000 in the third quarter and were up 42% to $31,258,000 in the nine months.  Without sales from California Churros, churros sales for the quarter were down about 5% and for the nine months were essentially unchanged.

Sales of bakery products, excluding biscuit and dumpling sales and fruit and fig bar sales, increased $1,485,000 or 4% in the third quarter to $43,342,000 and increased $4,229,000 or 3% for the nine months due primarily to increased sales to private label customers.  Biscuit and dumpling sales increased 7% to $7,119,000 in the quarter and were up 4% to $26,366,000 for the nine months. Sales of fig and fruit bars decreased 11% in the third quarter to $7,619,000 and decreased 13% in the nine months to $21,389,000 with lower sales spread across many customers for many reasons.  Handheld sales to food service customers were $2,835,000 in the quarter and year to date.

Funnel cake sales decreased by $788,000 to $5,153,000 in the quarter and by $3,346,000 to $13,609,000 in the nine months with sales to one customer down $3,021,000, or 100%, in the quarter and down $7,240,000 or 69%, in the nine months.  This one customer accounted for $12.7 million of funnel cake fries in our fiscal year 2010, of which $2.2 million were in the last three months.  We anticipate no sales to this customer in the last three months of fiscal year 2011.

Sales of new products in the first twelve months since their introduction were approximately $1.3 million in the June quarter and $9.1 million in the nine months. Price increases accounted for approximately $3.5 million of sales in the June quarter and $6.1 million of sales in the nine months and net volume increases, including new product sales as defined above and sales resulting from the acquisition of California Churros and handheld sales, accounted for approximately $5.2 million of sales in the June quarter and $8.8 million of sales in the nine months.

Operating income in our Food Service segment decreased from $14,610,000 to $13,875,000 in the quarter and from $37,941,000 to $36,795,000 for the nine months primarily as a result of higher ingredient and packaging costs of about $5.5 million in the quarter and about $10.0 million for the nine months partially offset by higher pricing and the benefit of increased volumes.

RETAIL SUPERMARKETS

Sales of products in the first twelve months since their introduction were approximately $1.6 million in the June quarter and $2.8 million in the nine months. Price increases accounted for approximately $1.3 million of sales in the June quarter and $1.8 million of sales in the nine months and net volume increases, including new product sales as defined above and handheld sales and net of decreased coupon costs, accounted for approximately $2.6 million of sales in the June quarter and $5.8 million of sales in the nine months.  Operating income in our Retail Supermarkets segment decreased from $3,809,000 to $3,545,000 in the quarter and increased to $7,677,000 from $7,467,000 in the nine months.  Operating income in the quarter was impacted by additional trade spending of about $450,000 related to the introduction of our SUPERPRETZEL PRETZELDOGS hot dog product and by higher product costs related to ingredient and packaging cost increases.  The increase in operating income for the year was primarily the result of higher volume.

 

FROZEN BEVERAGES

Frozen beverage and related product sales increased 7% to $57,109,000 in the third quarter and increased $6,109,000 or 5% to $131,064,000 in the nine-month period.  Beverage sales alone increased 6% to $41,260,000 in the third quarter and were up 4% to $89,789,000 in the nine months. Gallon sales were up 2% for the three months and essentially unchanged for the nine months in our base ICEE business.  Service revenue increased 6% to $11,078,000   in the third quarter and 3% to $30,831,000 for the nine months.

Sales of beverage machines, which tend to fluctuate from year to year while following no specific trend, were $989,000 higher this year than last in the three month period and for the nine months, sales of machines were higher by $2,100,000. The estimated number of company owned frozen beverage dispensers was 39,300 and 37,600 at June 25, 2011 and September 25, 2010, respectively.  Operating income in our Frozen Beverage segment increased $1,998,000 to $9,641,000 in the quarter and for the nine months, operating income increased $551,000 primarily due to higher third quarter revenues combined with lower operating expenses in the quarter. Higher gasoline costs of approximately $475,000 and $900,000 impacted the June quarter and nine months, respectively.  We expect higher gasoline costs to impact operating income for at least the balance of our fiscal year.

CONSOLIDATED

Gross profit as a percentage of sales decreased to 32.73% in the three month period from 34.28% last year and decreased to 31.00% in the nine month period from 32.42% a year ago.  Higher ingredient and packaging costs compared to last year of approximately $6 million for the quarter and $11 million for the nine months was primarily responsible for the decreased gross profit percentages. Ingredient and packaging costs can be extremely volatile and may be significantly different from what we are presently expecting and therefore we cannot project the impact of ingredient and packaging costs on our business going forward; however, there has been a very significant increase in the market cost of flour since June 2010 and the cost of other commodities has increased as well over the past year.  We anticipate these market cost increases will result in higher costs to the company over the remaining three months of our fiscal year 2011.  Although we have implemented price increases to defray the impact of a portion or all of these cost increases, the impact of these higher costs and increased costs in operational areas may result in lower net earnings over the remaining three months of our fiscal year 2011 compared to our fiscal year 2010.

Total operating expenses increased $1,511,000 in the third quarter but as a percentage of sales decreased about one percent to 20% in this year.  For the nine months, operating expenses increased $2,202,000, but as a percentage of sales decreased about 3/4 of one percent to 21% of sales.  Marketing expenses decreased to 9% of sales in the quarter from 10% last year and to 10% of sales from 11% of sales for the nine months.  Moderate spending decreases throughout our business and higher sales accounted for the percent of sales decrease.  Distribution expenses were 7% in both years' quarter and 8% in both years' nine months.  Administrative expenses were 3% of sales in both years' third quarter and declined slightly to 3% of sales in the nine months from 4% last year.

Other general expenses this year included about $464,000 and $534,000 of costs related to the handhelds acquisition in the three and nine months, respectively.

Operating income increased $999,000 or 4% to $27,061,000 in the third quarter and decreased $385,000 or less than one percent to $51,988,000 in the nine months as a result of the aforementioned items.

Gain on the bargain purchase of a business of $6,580,000 in the third quarter resulted from the fair value of the identifiable assets acquired in the handhelds acquisition exceeding the purchase price.

Investment income decreased by $31,000 and $182,000 in the third quarter and nine months, respectively, due to a general decline in the level of interest rates.

The effective income tax rate has been estimated at 31%     and 40% for the quarter this year and last year respectively; and at 34% and 40% for the nine months this year and last year respectively. Adjusting out the effect of the gain on bargain purchase of a business, the effective income tax rate has been estimated at 39% and 38% for the quarter and nine months of this year, respectively. We are estimating an effective income tax rate of between 38% and 39% for the year after adjusting out the effect of the gain on bargain purchase of a business.

Net earnings increased $7,465,000 or 47% in the current three month period to $23,326,000 and increased 22% to $39,079,000 in the nine months this year from $31,952,000 last year as a result of the aforementioned items.  Without the benefit of the gain on bargain purchase of a business, net earnings were $16,746,000 in the quarter compared to $15,861,000 last year and were $32,499,000 in the nine months compared to $31,952,000 last year.

There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.

 

Item 4.     Controls and Procedures

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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