J&J Snack Foods Corp. — Q1 FY2017 Form 10-Q
Business context and period: The filing reports unaudited results for the three months ended December 24, 2016, compared with the three months ended December 26, 2015. The company sells food-service and retail food products and frozen beverages. Management cautions that first-quarter results are not necessarily indicative of the full year; frozen beverages and frozen juice bars and ices generally sell more in the third and fourth quarters.
Key financial metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $225.6 | $222.9 | +$2.7; about 1% |
| Gross profit / gross margin | $65.9 / 29.21% | $63.8 / 28.64% | Margin +0.57 percentage points |
| Operating income | $19.3 | $18.4 | +$1.0; 5% |
| Net earnings | $13.5 | $13.0 | +$0.6; 4% |
| Diluted and basic EPS | $0.72 | $0.69 | +$0.03 |
| Cash provided by operations | $26.4 | $20.9 | +$5.5 |
| Capital expenditures | $11.4 | $13.3 | -$1.9 |
Gross-margin improvement reflected a stronger mix of non-bakery food-service products, lower ingredient costs and improved operating efficiencies. Operating expenses rose $1.1 million, to 20.6% of sales from 20.4%. The estimated effective tax rate was 34%, versus 33%; management estimated about 35.5% for the full fiscal year.
Segment performance
| Segment | Sales | Year-over-year change | Operating income |
|---|---|---|---|
| Food Service | $150.3 million | +$3.5 million; +2% | $17.1 million, up from $15.9 million |
| Retail Supermarkets | $21.6 million | +$0.4 million; +2% | $1.0 million, down from $1.1 million |
| Frozen Beverages | $53.7 million | -$1.2 million; -2% | $1.2 million, down from $1.4 million |
Food Service growth included higher soft pretzel, churro, handheld and funnel-cake sales; bakery sales declined 2%. Retail Supermarkets’ higher coupon redemption costs weighed on results, and handheld sales continued a long-term decline. Frozen beverage gallon sales were essentially flat; lower machine sales contributed to the segment’s revenue decline.
Financial position and liquidity
At December 24, 2016, cash and cash equivalents were $141.0 million, current assets $362.9 million and current liabilities $100.0 million. Marketable securities totaled $141.4 million: $112.0 million held to maturity and $29.4 million available for sale. Total assets were $794.2 million and stockholders’ equity was $644.2 million. Capital-lease obligations totaled about $1.5 million; no balance was outstanding on the company’s $50 million revolving credit facility. Management said cash, expected operating cash flows and borrowing capacity were sufficient to fund future growth and expansion.
Investing activities used $18.8 million, including $11.4 million of capital expenditures and net purchases of marketable securities. Financing activities used $6.4 million, including $7.3 million in dividend payments. Cash increased $0.3 million during the quarter to $141.0 million. The board declared a regular quarterly dividend of $0.42 per share, payable January 11, 2017.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expected sales to one school district to resume in Q2 and said sales to two bakery customers could level off or begin to increase in Q2.
- Management cited raw-material and labor costs, insurance, customer consolidation, sales trends, execution in manufacturing, marketing and distribution, acquisition integration, tax-law changes and interest rates as factors that could affect earnings.
- On January 3, 2017, after quarter-end, the company acquired Hill & Valley Inc. for approximately $31 million. The bakery reportedly generates more than $45 million in annual sales and supplies retail in-store bakeries. The filing does not provide a complete purchase-price allocation or acquisition financing details.
- The company expected adoption of the new lease-accounting standard, effective for its fiscal year ending September 2020, to have a material impact on its financial statements. It expected the cited revenue-recognition and financial-instrument accounting standards to have no material impact.
- Foreign-currency translation reduced other comprehensive income by $1.1 million in the quarter. The filing reported gross unrecognized tax benefits of $0.359 million and accrued tax interest and penalties of $0.224 million.
Most important facts for investors to verify
- Whether the anticipated Q2 school-district and bakery-customer sales recoveries occurred, and whether first-quarter growth persisted across segments.
- How couponing, marketing costs, product mix and ingredient costs affect Retail Supermarkets and consolidated margins.
- Hill & Valley’s final purchase accounting, funding, integration costs and contribution to results.
- The composition, maturities and liquidity of the securities portfolio, and any changes in capital-lease obligations or revolver availability.
- Whether the full-year tax-rate estimate and seasonal sales pattern develop as management expected.