J&J Snack Foods - 10-Q quarterly report FY2012 Q2

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

FORM 10-Q

(Mark One)

 

J & J SNACK FOODS CORP.

Telephone (856) 665-9533

 

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.

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).

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):

 

As April 16, 2012, there were 18,861,445 shares of the Registrant’s Common Stock outstanding.

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J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The results of operations for the three months and six months ended March 24, 2012 and March 26, 2011 are not necessarily indicative of results for the full year.  Sales of our frozen beverages and frozen juice bars and ices are generally higher in the third and fourth quarters due to warmer weather.

While we believe that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 24, 2011.

 

 

The Company anticipates that share-based compensation will not exceed $900,000 net of tax benefits, or approximately

$.05 per share for the fiscal year ending September 29, 2012.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in fiscal 2012 first six months: expected volatility of 28%; risk-free interest rate of 1.14%; dividend rate of 1.0% and expected lives ranging between 5 and 10 years.

 

 

During the 2012 six month period, the Company granted 1,500 stock options.  The weighted-average grant date fair value of these options was $11.62.  The Company did not grant any options in the 2011 six-month period.

Expected volatility is based on the historical volatility of the price of our common shares over the past 52 months for 5 year options and 10 years for 10 year options.  We use historical information to estimate expected life and forfeitures within the valuation model.  The expected term of awards represents the period of time that options granted are expected to be outstanding.  The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.  Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.

 

The total amount of gross unrecognized tax benefits is $930,000 and $973,000 on March 24, 2012 and September 24, 2011, respectively, all of which would impact our effective tax rate over time, if recognized.  We recognize interest and penalties related to income tax matters as a part of the provision for income taxes.  As of March 24, 2012 and September 24, 2011, respectively, the Company has $331,000 and $335,000 of accrued interest and penalties.

In addition to our federal tax return and tax returns for Mexico and Canada, we file tax returns in all states that have a corporate income tax with virtually all open for examination for three to four years.

 

 

 

 

 

 

 

 

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. 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

Retail Supermarkets

Frozen Beverages

We sell frozen beverages and related products to the food service industry primarily under the names ICEE, SLUSH PUPPIE, PARROT ICE and ARCTIC BLAST in the United States, Mexico and Canada.  We also provide repair and maintenance service to customers for customers’ owned equipment.

 

The Chief Operating Decision Maker for Food Service and Retail Supermarkets and the Chief Operating Decision Maker for Frozen Beverages monthly review detailed operating income statements and sales reports in order to assess performance and allocate resources to each individual segment.  In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment. Information regarding the operations in these three reportable segments is as follows:

 

 

 

The carrying amounts of acquired intangible assets for the Food Service, Retail Supermarkets and Frozen Beverage segments as of March 24, 2012 and September 24, 2011 are as follows:

 

Amortized intangible assets are being amortized by the straight-line method over periods ranging from 3 to 20 years and amortization expense is reflected throughout operating expenses. Intangible assets of $500,000 were acquired in the retail supermarkets segments in the six months ended March 24, 2012.  Aggregate amortization expense of intangible assets for the three months ended March 24, 2012 and March 26, 2011 was $1,114,000 and $1,256,000, respectively and for the six months ended March 24, 2012 and March 26, 2011 was $2,246,000 and $2,549,000, respectively.

Estimated amortization expense for the next five fiscal years is approximately $4,500,000 in 2012, $4,400,000 in 2013 and 2014, $4,300,000 in 2015 and $4,100,000 in 2016. The weighted average amortization period of the intangible assets is 10.1 years.

Goodwill

The carrying amounts of goodwill for the Food Service, Retail Supermarket and Frozen Beverage segments are as follows:

 

 

There were no changes in the carrying amounts of goodwill for the three months ended March 24, 2012.

 

 

 

 

 

 

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 March 24, 2012 are summarized as follows:

 

All of the certificates of deposit are within the FDIC limits for insurance coverage.  Included in the certificates of deposit are $1.2 million pledged as collateral to a municipal sewer district.

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 24, 2011 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 March 24, 2012 and September 24, 2011 are summarized as follows:

 

 

Proceeds from the redemption and sale of marketable securities were $26,713,000 and $60,023,000 in the three months and six months ended March 24, 2012, respectively; and $16,215,000 and $25,525,000 in the three and six months ended March 26, 2011, respectively, with no gain or loss recorded.  We use the specific identification method to determine the cost of securities sold.

 

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 and sales of $18.3 million in our 2011 fiscal year from the acquisition date.

 

  

The 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.

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 $.13 per share of its common stock payable on April 4, 2012, to shareholders of record as of the close of business on March 15, 2012.

 

We completed a building expansion of our St. Louis, Missouri, bakery and a line expansion at our Carrollton, Texas, facility during the March 2012 quarter at a combined cost of approximately $12 million.  Over time, we expect to generate an additional $50 - $60 million of net sales as a result of these expansions.

Results of Operations

Net sales increased $26,283,000 or 16% for the three months to $189,554,000 and $43,887,000 or 14% to $362,240,000 for the six months ended March 24, 2012 compared to the three and six months ended March 26, 2011.

Excluding sales resulting from the acquisition of the frozen handheld business of ConAgra Foods in May 2011, sales increased 8% for the three months and 6% for the six months.

 

FOOD SERVICE

Sales to food service customers increased $16,511,000 or 15% in the second quarter to $124,324,000 and increased $24,295,000 or 11% for the six months.  Excluding handheld sales, food service sales increased 8% for the quarter and increased 5% for six months.  Soft pretzel sales to the food service market increased 8% to $27,396,000 in the second quarter and increased 7% to $53,013,000 in the six months due to increased sales to restaurant chains and throughout our customer base. Frozen juices and ices sales increased 4% to $11,574,000 in the three months and 4% to $19,426,000 in the six months.  Churro sales to food service customers increased 14% to $11,547,000 in the second quarter and were up 8% to $21,933,000 in the six months with sales increasing generally throughout our customer base.

Sales of bakery products increased $7,447,000 or 13% in the second quarter to $64,364,000 and increased $10,055,000 or 9% for the six months as sales increases were spread throughout our customer base. Handheld sales to food service customers were $7,579,000 in the second quarter and $13,993,000 in the six months.

Funnel cake product sales decreased by $2,304,000 or 58% to $1,643,000 in the quarter and by $5,329,000 or 63% to $3,127,000 in the six months as sales to two customers decreased $2,160,000 in the quarter and $5,064,000 in the six months from last year.  We expect sales to these two customers to be down approximately $1.3 million the balance of our fiscal year 2012.

Sales of new products in the first twelve months since their introduction were approximately $3.9 million in this quarter and $5.1 million in the six months. Price increases accounted for approximately $4.1 million of sales in the March quarter and $8.1 million in the six months and net volume increases, including new product sales as defined above and sales resulting from the acquisition of the handheld business, accounted for approximately $12.4 million of sales in the March quarter and $16.2 million of sales in the six months.

Operating income in our Food Service segment increased from $11,777,000 to $12,748,000 in the quarter and decreased from $22,290,000 to $20,002,000 for the six months. Operating income for the quarter benefited from increased sales volume and price increases which offset higher ingredient and packaging costs of about $3.0 million and the negative impact of the sharp decline in funnel cake product sales.  For the six months, the decrease in operating income resulted from higher ingredient and packaging costs of about $7.0 million, the sharp decline in funnel cake product sales and a management and sales meeting expense of about $550,000, which were partially offset by price increases.

RETAIL SUPERMARKETS

Sales of products to retail supermarkets increased $6,246,000 or 36% to $23,434,000 in the second quarter and were up 41% to $44,268,000 in the first half. Excluding handheld sales, sales increased 3% for the second quarter and 4% for the six months. Soft pretzel sales for the second quarter were down 2% to $8,473,000 and were up 1% to $16,607,000 for the six months on a unit volume decrease of 3% for the quarter and 3% for the six months.  Sales of frozen juices and ices increased $520,000 or 6% to $9,495,000 in the second quarter and were up 7% to $16,575,000 in the first half on a unit volume increase of 4% in this quarter and 4% for the six months.  Sales increases in excess of volume changes were due to pricing and mix changes. Coupon redemption costs, a reduction of sales, decreased 9% or about $58,000 for the quarter and were essentially unchanged at $1,326,000 for the six months. Handheld sales to retail supermarket customers were $5,787,000 in the quarter and $11,668,000 for the six months.

Sales of new products in the first twelve months since their introduction were approximately $1.6 million in the second quarter and $3.0 million in the six months. Price increases accounted for approximately $1.2 million of sales in the quarter and $2.0 million in the six months and net volume increases, including new product sales as defined above and handheld sales and net of increased coupon costs, accounted for approximately $5.1 million of sales in this quarter and $11.0 million of sales in the six months. Operating income in our Retail Supermarkets segment decreased from $2,081,000 to $1,658,000 in the quarter and from $4,132,000 to $3,482,000 in the six months primarily as a result higher trade spending for the introduction of new products and higher products costs related to ingredient and packaging cost increases.
 

FROZEN BEVERAGES

Frozen beverage and related product sales increased 11% to $41,796,000 in the second quarter and increased $6,624,000 or 9% to $80,579,000 in the six month period.  Beverage related sales alone increased 6% to $26,397,000 in the second quarter and were up 4% to $50,378,000 in the six months.   Gallon sales were up 5% for the three months as volume increased among existing customers and 1% for the six months in our base ICEE business.  Service revenue increased 20% to $11,946,000 in the second quarter and 19% to $23,489,000 for the six months with about 2/3 of the increase coming from three new service customers.

Sales of beverage machines, which tend to fluctuate from year to year while following no specific trend, were $628,000 higher this year than last in the three month period and $1,194,000 higher in the six months. The approximate number of company owned frozen beverage dispensers was 41,600 and 39,900 at March 24, 2012 and September 24, 2011, respectively.  Operating income in our Frozen Beverage segment increased $1,771,000 to $1,867,000 in the second quarter and operating income of $1,252,000 in the six months compared to an operating loss of $2,125,000 in last year’s six months as a result of increased sales as discussed above and controlled expenses. Higher gasoline costs of approximately $186,000 and $492,000 impacted the March quarter and six months, respectively. We expect higher gasoline costs to impact operating income for at least the balance of our fiscal year although the extent of the impact is not estimable.

 

CONSOLIDATED

Gross profit as a percentage of sales decreased to 28.48% in the three month period from 30.12% last year and decreased to 27.71% in the six month period from 29.88% a year ago.  Higher ingredient and packaging costs compared to last year of approximately $4 million for the quarter and $8.5 million for the six months and the lower gross margin percentage of handhelds sales was primarily responsible for the decreased gross profit percentage. Without the handhelds impact, gross profit as a percentage of sales would have been about 29.8% in the quarter and 29.2% in the six months.  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 ingredient and packaging over the past 21 months. We anticipate these continuing market cost increases will result in higher costs to the company over the remaining six months of our fiscal year 2012.  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 six months of our fiscal year 2012 compared to our fiscal year 2011.

Total operating expenses increased $2,646,000 in the second quarter but as a percentage of sales decreased from 22% percent to 20%.  For the first half, operating expenses increased $5,461,000, but as a percentage of sales decreased from 22% to 21% of sales.   Marketing expenses decreased from 10% to 9% of sales in the quarter and decreased about 2/3 of one percent in the six months, but was at 10% of sales in both years. Distribution expenses decreased about 1/3 of one percent of sales from 8% in last year’s quarter to 7% in this year’s quarter and were 8% of sales in both years’ six months.   Administrative expenses decreased about 1/3 of one percent of sales in the quarter and about 1/4 of one percent of sales in the six months to 3% of sales from 4% of sales in both the quarter and six months.  The drops in percentages listed above were generally because of increased sales.

Operating income increased $2,319,000 or 17% to $16,273,000 in the second quarter and decreased $191,000 or less than 1% to $24,736,000 in the first half as a result of the aforementioned items.  Additionally, for the six months of this year operating income was impacted by approximately $800,000 of costs of a management and sales meeting held in October, which historically has been held every five years.

 

Investment income increased by $173,000 and $292,000 in the second quarter and six months, respectively, due primarily to increased investments of marketable securities.

Net earnings increased $1,764,000 or 20% in the current three month period to $10,423,000 and increased 1% to $15,908,000 for the six months this year from $15,753,000 last year as a result of the aforementioned items.
 

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.

 

The results of voting at the Annual Meeting of Shareholders held on February 8, 2012 is as follows:

 

Based upon review of the above results of voting, the Board of Directors plans to submit Proposal Three for a shareholder vote at its Annual Meeting of Shareholders to be held in February 2013.

The Company had 18,751,328 shares outstanding on December 12, 2011 the record date.

 

 

 

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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