J&J SNACK FOODS CORP - Quarter Report: 2014 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the period ended June 28, 2014

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)

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):

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

As July 22, 2014 there were 18,644,778 shares of the Registrant’s Common Stock outstanding.

INDEX

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

The accompanying notes are an integral part of these statements. 

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands, except per share amounts)

See accompanying notes to the consolidated financial statements 

J&J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

All amounts are net of tax.

J & J SNACK FOODS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (in thousands)

See accompanying notes to the consolidated financial statements.

J & J SNACK FOODS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The results of operations for the three and nine months ended June 28, 2014 and June 29, 2013 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 our 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 28, 2013.

The Company anticipates that share-based compensation will not exceed $1.8 million net of tax benefits, or approximately $.10 per share for the fiscal year ending September 27, 2014.

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 2014 first nine months: expected volatility of 20.6%; risk-free interest rate of 1.4%; dividend rate of .8% and expected lives of 5 years.

During the 2014 nine month period, the Company granted 101,572 stock options. The weighted-average grant date fair value of these options was $15.24. During the 2013 nine month period, the Company granted 1,600 stock options. The weighted-average grant date fair value of these options was $13.76.

Expected volatility is based on the historical volatility of the price of our common shares over the past 55 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.

Additionally, we recognize a liability for income taxes and associated penalties and interest for tax positions taken or expected to be taken in a tax return which are more likely than not to be overturned by taxing authorities (“uncertain tax positions”).  We have not recognized a tax benefit in our financial statements for these uncertain tax positions.  

The total amount of gross unrecognized tax benefits is $411,000 and $438,000 on June 28, 2014 and September 28, 2013, 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 June 28, 2014 and September 28, 2013, respectively, the Company has $221,000 and $224,000 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

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, PHILLY SWIRL stix and cups; 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

We sell frozen beverages and related products to the food service industry primarily under the names ICEE, ARCTIC BLAST, SLUSH PUPPIE and PARROT ICE 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 June 28, 2014 and September 29, 2013 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 $849,000 were acquired in the food service segment in the New York Pretzel acquisition in the three months ended December 28, 2013. Intangible assets of $11,060,000 were acquired in the retail supermarket segment in the PHILLY SWIRL acquisition in the three months ended June 28, 2014. Aggregate amortization expense of intangible assets for the three months ended June 28, 2014 and June 29, 2013 was $1,290,000 and $1,110,000, respectively and for the nine months ended June 28,2014 and June 29, 2013 was $3,576,000 and $3,342,000, respectively.

Estimated amortization expense for the next five fiscal years is approximately $4,900,000 in 2014, $5,400,000 in 2015 and $5,100,000 in 2016, $2,600,000 in 2017 and $1,800,000 in 2018. 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:

Goodwill of $7,716,000 was acquired in the New York Pretzel acquisition in the three months ended December 28, 2013, all of which was allocated to the food service segment. Goodwill of $1,650,000 was acquired in the PHILLY SWIRL acquisition in the three months ended June 28, 2014, all of which was allocated to the retail supermarket segment.

Marketable securities held to maturity and available for sale fair 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 28, 2014 are summarized as follows: 

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at June 28, 2014 are summarized as follows:

The mutual funds seek current income with an emphasis on maintaining low volatility and overall moderate duration. The funds do not have contractual maturities; however, we classify them as long term assets as it is our intent to hold them for a period of over one year, although we may sell some or all of them depending on presently unanticipated needs for liquidity or market conditions. The unrealized losses of $956,000 are spread over 20 funds with a total fair market value of $79.8 million.

The amortized cost, unrealized gains and losses, and fair market values of our investment securities held to maturity at September 28, 2013 are summarized as follows:

The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 28, 2013 are summarized as follows:

The amortized cost and fair value of the Company’s held to maturity securities by contractual maturity at June 28, 2014 and September 28, 2013 are summarized as follows:

Proceeds from the redemption and sale of marketable securities were $1,185,000 and $7,245,000 in the three and nine months ended June 28, 2014 respectively, and $480,000 and $23,958,000 in the three and nine months ended June 29, 2013, respectively. Losses of $65,000 and $361,000 were recorded in the three and nine months ended June 28, 2014, respectively, and none were recorded last year. We use the specific identification method to determine the cost of securities sold.

In October 2013, we acquired the assets of New York Pretzel, a manufacturer and distributor of soft pretzels selling primarily in the northeast to foodservice and retail locations.  Of the purchase price of $11.8 million, $849,000 was allocated to intangible assets, $7,716,000 was allocated to goodwill and $3,049,000 was allocated to property, plant and equipment.

In May 2014, we acquired the stock of Philly’s Famous Water Ice, Inc. (PHILLY SWIRL). PHILLY SWIRL, located in Tampa, FL, produces frozen novelty products sold primarily to retail supermarket locations throughout the United States and to Canada with annual sales approximating $25 million.  The preliminary allocation of the purchase price of $17.4 million is $4.0 million to working capital, $1.2 million to property, plant and equipment, $11.1 million to intangible assets, $1.6 million to goodwill, and $95,000 to other assets and $666,000 to deferred tax liabilities. Sales of PHILLY SWIRL from the acquisition date to June 28, 2014 were $6.3 million and are included in the retail supermarket segment.    

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).

Acquisition expense of $184,000 and $257,000 was recorded in other expense in the three and nine months ended June 28, 2014, respectively.

All amounts are net of tax.

All amounts are net of tax.      

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 11 to these financial statements for a discussion of our investment securities.

The Company’s Board of Directors declared a regular quarterly cash dividend of $.32 per share of its common stock payable on July 2, 2014, to shareholders of record as of the close of business on June 13, 2014.

In our fiscal year ended September 28, 2013, we purchased and retired 204,397 shares of our common stock at a cost of $14,500,215. In the three and nine months ended June 28, 2014, we purchased and retired 64,041 shares at a cost of $5,903,157. On November 8, 2012 the Company’s Board of Directors authorized the purchase and retirement of an additional 500,000 shares of the Company’s common stock; 279,817 shares remain to be purchased under this authorization.

In the three months ended June 28, 2014 and June 29, 2013 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 an decrease of $262,000 in accumulated other comprehensive loss in the 2014 third quarter and an increase of $947,000 in accumulated other comprehensive loss in the 2013 third quarter. In the nine month period, 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 an increase of $14,000 in accumulated other comprehensive loss in the 2014 nine month period and an increase of $500,000 in accumulated other comprehensive loss in the 2013 nine month period.

Our general-purpose bank credit line which expires in December 2016 provides for up to a $50,000,000 revolving credit facility. The agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. There were no outstanding balances under this facility at June 28, 2014.

Results of Operations

Net sales increased $20,077,000 or 8% to $257,113,000 for the three months and $36,187,000 or 6% to $665,957,000 for the nine months ended June 28, 2014 compared to the three and nine months ended June 29, 2013. Without sales from the acquisition of PHILLY SWIRL on May 1, 2014 and New York Pretzel in October 2013, sales increased 5% for the three months and 4% for the nine months.

FOOD SERVICE

Sales to food service customers increased $12,651,000 or 9% in the third quarter to $157,873,000 and increased $24,180,000 or 6% for the nine months. Excluding sales resulting from the acquisition of New York Pretzel in October 2013, food service sales increased approximately 8% for the third quarter and increased 5% for the nine months. Soft pretzel sales to the food service market increased 14% to $41,337,000 in the third quarter and increased 15% to $119,460,000 in the nine months due to increased sales to restaurant chains, warehouse club stores, school food service and throughout our customer base. Increased sales to one customer accounted for approximately 1/3 of the increase in pretzel sales in the quarter and in the nine months. Without New York Pretzel, pretzel sales increased about 11% for the third quarter and 12% for the nine months. Frozen juices and ices sales increased 11% to $18,215,000 in the three months with sales increases and decreases spread across our customer base and 12% to $38,301,000 in the nine months with about ½ of the sales increases for the nine months being to warehouse club stores. Churro sales to food service customers increased 6% to $15,622,000 in the third quarter and were up 1% to $43,003,000 for the nine months which was net of a decline in sales of $969,000 in the quarter and $2,239,000 in the nine months to one restaurant chain which rolled out a churros product in the first quarter of 2013. We believe that churro sales to this restaurant chain, which were $1,645,000 in the third quarter, will end during our fourth quarter.

Sales of bakery products increased $4,360,000 or 6% in the third quarter to $72,459,000 and increased 2% to $207,704,000 for the nine months as sales increases and decreases were spread throughout our customer base, but with one customer accounting for about 75% of the increase in both periods.

Sales of new products in the first twelve months since their introduction were approximately $3.2 million in this quarter and $7.8 million in the nine months. Price increases accounted for approximately $2.6 million of sales in the quarter and $4.9 million in the nine months and net volume increases, including new product sales as defined above and sales resulting from the acquisition of New York Pretzel, accounted for approximately $10.0 million of sales in the quarter and $19.3 million in the nine months.

Operating income in our Food Service segment increased from $18,822,000 to $21,245,000 in the quarter and increased from $46,782,000 to $53,958,000 in the nine months. Liability insurance costs were about $1.1 million lower in this year’s quarter and $1.6 million lower in this year’s nine months compared to last year; last year’s costs were higher than usual because of increases in insurance company estimates for actual claims incurred but not paid. Additionally, operating income for the quarter and nine months benefited from increased sales volume, price increases and lower ingredient costs. Last year’s third quarter was impacted by a $500,000 product write down.

RETAIL SUPERMARKETS

Sales of products to retail supermarkets increased $3,752,000 or 12% to $34,832,000 in the third quarter and increased $2,710,000 or 4% to $78,046,000 in the nine months. Without the sales of PHILLY SWIRL, sales were down $2,537,000 or 8% in the quarter and were down $3,579,000 or 5% for the nine months. Soft pretzel sales for the third quarter were down 17% to $7,090,000 and were down 3% to $26,314,000 for the nine months. Lower sales of sweet cinnamon pretzels and PRETZELDOGS accounted for about 60% of the lower soft pretzel sales and various other factors including general category weakness was responsible for the balance of the drop. Sales of frozen juices and ices increased $5,961,000 or 33% to $24,187,000 in the third quarter and were up 16% to $39,012,000 for the nine months. Without the sales of PHILLY SWIRL, sales of frozen juices and ices were down $943,000 or 5% in the quarter and were down $1,586,000 or 5% for the nine months with sales increases and decreases spread across our customer base. Coupon redemption costs, a reduction of sales, increased 42% or about $396,000 for the quarter and increased 9% to $2,719,000 for the nine months. Excluding PHILLY SWIRL, coupon redemption costs were down 23% in the quarter and 16% for the nine months. Handheld sales to retail supermarket customers decreased 7% to $4,661,000 in the quarter and decreased 10% to $14,763,000 for the nine months with sales increases and decreases throughout our customer base; however, lower sales to one customer accounted for 1/2 of the sales decrease in the nine month period.

Price increases accounted for less than $100,000 of sales in the quarter and $1.1 million in the nine months and net volume increases, net of increased coupon costs and including sales resulting from the acquisition of PHILLY SWIRL, accounted for approximately $3.7 million of the sales increase in this quarter and $1.6 million in the nine months.

Operating income in our Retail Supermarkets segment increased from $2,883,000 to $3,489,000 in the quarter and from $ 6,857,000 to $8,055,000 in the nine months primarily because of higher gross margins because of manufacturing cost savings and lower coupon expense excluding PHILLY SWIRL and because of operating income of about $350,000 generated by PHILLY SWIRL.

FROZEN BEVERAGES

Frozen beverage and related product sales increased 6% to $64,408,000 in the third quarter and increased 6% to $152,929,000 in the nine month period. Beverage related sales alone were up 2% to $41,762,000 in the third quarter and were up 2% to $93,664,000 in the nine month periods.    Gallon sales were up less than 1% for the three months and nine months. Service revenue increased 20% to $16,610,000 in the third quarter and increased 13% to $43,354,000 for the nine month period with sales increases and decreases spread throughout our customer base, but with one customer accounting for about 75% of the sales increase in the third quarter and 65% for the year.

Sales of beverage machines, which tend to fluctuate from year to year while following no specific trend, were $457,000 or 9% higher in the third quarter and were $2,746,000 or 23% higher in the nine month period. The approximate number of company owned frozen beverage dispensers was 47,500 and 44,700 at June 28, 2014 and September 28, 2013, respectively. Operating income in our Frozen Beverage segment increased from $10,679,000 to $10,929,000 in the quarter and for the nine months decreased from $12,965,000 to $11,953,000. Group health insurance and liability insurance costs were higher by about $1,000,000 in the nine months compared to last year due primarily to an unusually high level of medical claims under our self-insured group health insurance program.

CONSOLIDATED

Gross profit as a percentage of sales increased to 32.81% in the three month period from 31.78% last year and increased to 30.84% in the nine month period from 29.79% a year ago. This year’s gross profit benefitted from lower liability insurance costs of about $1.1 million for the quarter and $1.6 million for the nine months as last year’s costs were unusually high. Additionally, higher volume in our food service segment and lower ingredients costs were reasons for the improved gross profit margin in both periods as well as a $500,000 product write down in last year’s quarter.

Total operating expenses increased $5,767,000 in the third quarter and as a percentage of sales increased from 18.11% percent to 18.94%. About 1/3 of the increase in total operating expenses were PHILLY SWIRL. For the nine months, operating expenses increased $10,417,000, and as a percentage of sales increased from 19.21% to 19.73%. About 20% of the increase in total operating expenses were PHILLY SWIRL. Operating expenses in the nine months this year include $880,000 of other general expenses for shutdown costs of our Norwalk, CA manufacturing facility. Marketing expenses were about 8.25% in both years’ quarter and 8.5% in both years’ nine months. Distribution expenses were 7.5% of sales in this year’s quarter and were 7.1% of sales in last year’s quarter, and were 7.8% of sales in this years’ nine month period up from 7.6% last year. Administrative expenses were 3.1% of sales this quarter and 3.3% for the nine month period as compared to 3.0% of sales last year in the third quarter and 3.2% for the nine months.

Operating income increased $ 3,279,000 or 10% to $35,663,000 in the third quarter and increased $7,362,000 or 11% to $66,604,000 in the nine months as a result of the aforementioned items.      

Investment income increased by $255,000 and $697,000 in the third quarter and nine months, respectively, due primarily to increased investments of marketable securities. We have investments of $129.6 million in mutual funds that seek current income with an emphasis on maintaining low volatility and overall moderate duration. We estimate the annual yield from these funds to approximate 3.5 – 3.75%.

The effective income tax rate has been estimated at 36% for both years’ quarter and nine months. We are estimating an effective income tax rate of approximately 36% for the year. 

Net earnings increased $2,506,000 or 12% in the current three month period to $23,678,000 and increased 13% to $49,625,000 for the nine months this year from $44,058,000 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.

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth, in item 7a. “Quantitative and Qualitative Disclosures About Market Risk,” in its 2013 annual report on Form 10-K filed with the SEC.

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 28, 2014, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting during the quarter ended June 28, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 PART II. OTHER INFORMATION 

Exhibit No.

SIGNATURES

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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