J&J Snack Foods Corp. — Form 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the three and six months ended March 28, 2015, compared with the periods ended March 29, 2014. The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets, and Frozen Beverages segments. Results are seasonal; frozen beverage and frozen juice product sales generally rise in the third and fourth quarters. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Three months ended March 28, 2015 | Six months ended March 28, 2015 |
|---|---|---|
| Net sales | $225.0; up 9.6% year over year | $437.8; up 7.1% |
| Gross profit / margin | $67.0 / 29.75%; prior-year margin 29.76% | $128.1 / 29.25%; prior-year margin 29.60% |
| Operating income | $21.8; up 7% | $38.4; up $0.1 |
| Net earnings | $14.6; up 8% | $25.9; down slightly from $25.9 |
| Diluted EPS | $0.78 versus $0.72 | $1.38, unchanged |
| Operating cash flow | Not provided for the quarter | $31.2 versus $39.1 |
Operating expenses rose to 20.06% of sales in the quarter from 19.86%, and to 20.5% in the first half from 20.2%. First-half net earnings were lower despite higher sales, reflecting lower operating performance in Food Service and Retail Supermarkets and a less favorable effective tax rate than in the prior period.
Segments
- Food Service: Sales increased 5% in the quarter to $145.3 and 4% for the half to $288.8. Operating income fell to $15.6 from $17.6 for the quarter and to $31.1 from $32.7 for the half. Management cited weaker handhelds, a shift toward lower-margin school sales, and higher manufacturing and operating costs relative to sales.
- Retail Supermarkets: Sales rose 24% in the quarter to $28.5 and 18% for the half to $50.9; excluding PHILLY SWIRL, growth was 4% and 2%, respectively. Segment operating income was $2.5 versus $2.6 in the quarter and $3.2 versus $4.6 for the half. The half-year result included a $0.7 operating loss at PHILLY SWIRL, attributed to seasonality, as well as higher coupon and advertising costs.
- Frozen Beverages: Sales rose 17% in the quarter to $51.2 and 11% for the half to $98.0. Operating income improved to $3.6 from $0.2 in the quarter and $4.1 from $1.0 for the half, mainly on higher sales. Prior-year second-quarter health costs were unusually high; costs were about $0.45 lower this quarter.
Liquidity, cash flow, and balance sheet
- Cash and cash equivalents were $88.6 at March 28, 2015, compared with $91.8 at September 27, 2014. Current assets were $281.3 and current liabilities $90.2.
- Six-month operating cash flow of $31.2 was below the prior-year $39.1, including a $10.4 inventory increase and a $6.4 decrease in accounts payable and accrued liabilities.
- Investing cash outflow was $19.4, including $20.6 of capital expenditures. Financing cash outflow was $12.8, including $12.7 of dividends and $2.1 of share repurchases.
- Marketable securities totaled $127.8, classified as long-term investments. Mutual funds had $3.1 of unrealized losses at quarter-end. The company reported $114.5 in mutual funds and $13.1 in preferred stock investments.
- No amounts were drawn on the $50.0 revolving credit facility, which expires in December 2016. Capital lease obligations totaled approximately $1.6. Management stated that cash, expected operating cash flow, and borrowing capacity were sufficient for future growth and expansion.
Material changes, outlook, and risks
- Excluding PHILLY SWIRL, acquired in fiscal 2014, consolidated sales increased 7.3% in the quarter and 5.4% in the first half. Management attributed growth to a mix of customer and product gains, including bakery, frozen beverage service, and retail frozen juice products.
- Price increases contributed about $1.2 of quarterly sales and $4.0 for the first half in Food Service. New products introduced within the prior 12 months generated about $5.1 of quarterly sales and $8.9 for the half in that segment.
- Management estimated a 36.5% effective tax rate for fiscal 2015; the first-half rate was 36.8%, versus 35.7% a year earlier. It anticipated share-based compensation, net of tax benefits, would not exceed $1.9 for fiscal 2015, or approximately $0.10 per share.
- No formal sales or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results because of seasonality.
- Risks identified include raw-material and labor supply and costs, insurance costs, customer consolidation, execution in manufacturing, marketing and distribution, acquisition integration, and changes in tax laws and interest rates. Sales growth also showed customer exposure: two customers accounted for about one-third of the quarterly increase in Food Service pretzel sales.
- Currency translation increased accumulated other comprehensive loss by $2.9 in the first half. The company also reported $0.3 of gross unrecognized tax benefits and $0.2 of accrued interest and penalties related to uncertain tax positions.
Important facts for investors to verify
- Whether Food Service margin pressures and declining handheld sales persist, and whether the segment’s operating income recovers.
- PHILLY SWIRL’s seasonal loss, contribution to reported sales growth, and expected profitability beyond the first half.
- Whether lower operating cash flow and the inventory build reverse as the year progresses.
- The performance and liquidity implications of the $127.8 investment portfolio, including unrealized losses and the company’s stated intent to hold investments long term.
- Customer concentration, the sustainability of recent segment growth, and full-year results given the company’s seasonal sales pattern.