J&J Snack Foods Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 24, 2017; comparisons are to the periods ended June 25, 2016. Dollar amounts below are in millions unless stated otherwise.
Business context
The company sells food-service and retail supermarket products, including pretzels, bakery goods, frozen treats and handheld foods, and operates a frozen-beverage business. Results are seasonal: frozen beverage and frozen treat sales are generally higher in the third and fourth quarters because of warmer weather. The filing states interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $295.4 | $278.0 | $767.5 | $730.5 |
| Gross profit | $94.8 | $92.1 | $233.5 | $224.7 |
| Gross margin | 32.08% | 33.13% | 30.42% | 30.75% |
| Operating income | $37.8 | $40.4 | $81.2 | $82.1 |
| Net earnings | $25.3 | $26.8 | $54.8 | $55.4 |
| Diluted EPS | $1.34 | $1.43 | $2.91 | $2.95 |
- Q3 sales rose 6%; nine-month sales rose 5%. Excluding Hill & Valley and the acquired ICEE distributor, management reported sales growth of 2% for both periods.
- Q3 operating income fell 7% and net earnings fell 6%; nine-month operating income fell 1% and net earnings fell 1%.
- Nine-month operating cash flow was $83.3, compared with $71.3 in the prior year. Investing cash flow was negative $110.8, including $42.1 for acquisitions and $57.2 for capital spending. Financing cash flow was negative $21.9, including $23.0 of dividends and $3.4 of share repurchases.
- Cash and cash equivalents were $92.6 at June 24, 2017, down from $140.7 at September 24, 2016. Current held-to-maturity securities were $50.9; long-term held-to-maturity securities were $65.1, and available-for-sale securities were $30.2.
- Current assets were $385.1 and current liabilities $128.3. Debt was limited to capital-lease obligations of $1.3 in total; the $50.0 revolving credit facility had no borrowings outstanding.
Material changes and segment results
- Food Service: Sales increased 8% in Q3 and 7% year to date, including Hill & Valley. Segment operating income declined to $22.0 from $24.6 in Q3 and was $58.7 versus $59.0 year to date. Bakery growth included the acquisition; frozen juice and ice sales declined, primarily due to lower warehouse-club sales.
- Retail Supermarkets: Sales rose 3% in Q3 and about 0.5% year to date. Operating income increased 15% in Q3 and 7% year to date. Handheld sales continued a longer-term decline.
- Frozen Beverages: Sales increased 3% in Q3 and 2% year to date, while operating income declined to $10.9 from $11.6 in Q3 and to $14.2 from $15.2 year to date. Lower machine sales and higher payroll-related costs weighed on results.
- Operating expenses rose faster than sales: Q3 expenses were 19.3% of sales versus 18.6%; nine-month expenses were 19.8% versus 19.5%. Management cited higher distribution wages, storage, pallet and freight costs, product mix, and increased frozen-beverage marketing spending.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or sales guidance. Management said it expects increased fourth-quarter sales to one warehouse-club customer following a timing-related Q3 decline in WHOLEFRUIT organic juice tubes.
- Management believes cash, investments, future operating cash flows and borrowing capacity are sufficient to support growth and expansion. It also identified raw-material and labor costs, insurance costs, customer consolidation, execution of manufacturing, marketing and distribution, acquisition integration, tax law and interest rates as factors that can affect earnings.
- Gross margin was affected by product mix, higher frozen-beverage costs and Hill & Valley’s lower gross margin. A $1.8 million insurance recovery related to 2016 product-quality issues benefited current-year operating results; management said gross margin excluding this recovery would have been 31.48% for Q3 and 30.19% for the nine months.
- The company acquired Hill & Valley for approximately $31.1 million in December 2016 and an ICEE distributor for approximately $10.9 million in May 2017. Acquisition-related costs were $0.6 million for the nine months. Hill & Valley reported $20.9 million in post-acquisition nine-month sales and $0.1 million in operating income.
- The company declared a quarterly dividend of $0.42 per share, payable July 6, 2017. It repurchased 25,930 shares for $3.4 million during the nine months.
- Management expected no material financial-statement impact from the new revenue-recognition standard, planned for adoption in fiscal 2019. It anticipates the new lease-accounting standard, effective in fiscal 2020, will have a material impact.
- Gross unrecognized tax benefits were $0.4 million; accrued interest and penalties on uncertain tax positions were $0.2 million. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether underlying sales and margins improve after separating acquisition contributions, the insurance recovery and seasonal sales timing.
- Integration and profitability progress at Hill & Valley and the ICEE distributor, including finalization of the ICEE purchase-price allocation.
- Drivers of higher distribution and labor costs, lower machine sales, and continued retail handheld declines.
- Cash conversion and liquidity as capital spending and acquisition activity continue; confirm maturities and liquidity of the investment portfolio.
- The potential balance-sheet effect of lease-accounting adoption and any developments in uncertain tax positions or product-quality contingencies.