J&J Snack Foods Corp. — Q1 FY2018 Form 10-Q
Period: Three months ended December 30, 2017, compared with the three months ended December 24, 2016. Unless noted otherwise, financial amounts below are in millions. The company sells food-service, retail supermarket and frozen-beverage products. It notes that frozen-beverage and frozen-treat sales are generally higher in the warmer third and fourth fiscal quarters, so first-quarter results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $265.2 | $225.6 | Up 18%; approximately 7% growth excluding acquired businesses. |
| Gross profit / margin | $73.3 / 27.63% | $65.9 / 29.21% | Gross margin declined 1.58 percentage points. |
| Operating income / margin | $21.2 / 8.0% | $19.3 / 8.6% | Operating income up 10%, while margin declined. |
| Net earnings | $36.2 | $13.5 | Up 168%; current-quarter results include significant tax-law benefits. |
| Diluted EPS | $1.93 | $0.72 | Increase substantially reflects tax items. |
| Operating cash flow | $26.1 | $26.4 | Nearly unchanged; capital expenditures were $14.6 versus $11.4. |
Q1 tax expense was a benefit of $13.0, versus tax expense of $7.0 in the prior-year quarter. Management reported a provisional $20.9 tax benefit from remeasuring deferred tax liabilities and a further $2.0 reduction in taxes, partly offset by a $1.2 provision for the one-time repatriation tax. Excluding the deferred-tax remeasurement and repatriation provision, the effective tax rate was 28.6%, versus 34.0% a year earlier. These items make reported earnings growth an imperfect measure of underlying operating progress.
Segments and material changes
- Food Service: Sales were $182.3, up 21%; excluding Hill & Valley and Labriola, sales rose 6%. Operating income declined to $15.9 from $17.1. Pretzel and handheld sales increased, while bakery sales excluding Hill & Valley were essentially flat. Management cited higher payroll, insurance and ingredient costs; Labriola production inefficiencies and integration work; unfavorable mix and facility-level volume; and costs from shutting the Chambersburg facility. Hill & Valley contributed $1.4 of segment operating income.
- Retail Supermarkets: Sales increased 7% to $23.1; operating income rose to $2.6 from $1.0. Higher soft-pretzel sales, lower coupon expense and lower media spending supported the improvement. Handheld sales continued their longer-term decline.
- Frozen Beverages: Sales increased 12% to $59.9, or about 10% excluding the acquired distributor; operating income rose to $2.8 from $1.2. Beverage sales increased 21%, with gallon sales up 15%; machine sales decreased 10%.
Consolidated gross margin pressure reflected higher labor and insurance costs, acquired-business and facility inefficiencies, product mix, lower volume concentrated in certain facilities, shutdown costs and higher ingredient costs. Management said price increases did not contribute to sales in the quarter and did not offset these costs. New products generated approximately $8.0 in Food Service sales and $1.9 in Retail Supermarkets sales.
Cash, liquidity and balance sheet
- At December 30, 2017, cash and cash equivalents were $81.1, current marketable securities $49.4, long-term held-to-maturity securities $82.1 and available-for-sale securities $30.2. Cash plus these investments totaled approximately $242.8.
- Current assets were $357.1 and current liabilities $110.2. Cash declined $9.9 during the quarter, from $91.0; foreign-exchange effects reduced cash by $3.0.
- Total assets were $865.0 and stockholders’ equity $707.4. Capital-lease obligations totaled approximately $1.2; the company reported no borrowings under its $50.0 revolving credit facility, which expires in November 2021.
- Investing cash outflow was $25.3, including $14.6 of capital expenditures and net purchases of marketable securities. Financing cash outflow was $7.7, including a $7.8 dividend payment. The board declared a regular quarterly dividend of $0.45 per share.
Outlook, risks and unusual items
- Management estimated an effective tax rate of 28%–29% for the remaining three quarters of FY2018 and 26%–27% for FY2019. The Tax Cuts and Jobs Act calculations were provisional under SEC Staff Accounting Bulletin No. 118; the company expected to finalize them before December 22, 2018.
- No sales or earnings guidance was provided in the supplied filing text. Management identified raw-material and labor availability and costs, insurance, customer consolidation, execution in manufacturing and distribution, acquisition integration, tax-law changes and interest rates as factors that can affect results.
- On January 8, 2018, the company’s subsidiary issued a recall notification for certain MARY B’s biscuits potentially contaminated with Listeria. Flowers Foods manufactured the products. J&J Snack Foods said it believed Flowers was contractually obligated to indemnify recall costs, expected no material financial impact and anticipated reimbursement, but could not yet estimate costs and expected product-supply and sales disruption.
- The company expected adoption of the new lease-accounting standard to materially increase reported assets and liabilities. It did not expect the upcoming revenue-recognition standard to have a material financial-statement impact.
- Other unusual items included a $0.5 gain on sale of property and a $3.9 foreign-currency translation loss in other comprehensive income. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Key facts for investors to verify
- Whether the provisional tax-law accounting is finalized as estimated, and how tax benefits affect comparisons of earnings and EPS.
- Whether margin pressure in Food Service eases as Labriola integration and production inefficiencies are addressed, and whether cost inflation persists.
- The extent and duration of biscuit-recall supply disruption, related costs, and Flowers Foods’ reimbursement under the indemnity.
- Whether acquired-business contributions, new-product sales and organic growth continue, particularly given seasonal sales patterns.
- The eventual balance-sheet impact of lease-standard adoption and the company’s use of cash for investment, dividends and capital spending.