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J&J SNACK FOODS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 28, 2014

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.

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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 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.

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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.

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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%.

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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.


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Source: Edgar Glimpses


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