J&J Snack Foods Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the fiscal second quarter and six months ended March 30, 2019; comparisons are with the periods ended March 31, 2018. The company reports Food Service, Retail Supermarkets and Frozen Beverages. It notes that frozen beverage and frozen treat sales are generally higher in the warmer third and fourth quarters.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $276.3 | $266.1 | $547.9 | $531.3 |
| Gross profit | $79.2 | $77.3 | $156.1 | $150.6 |
| Operating income | $24.8 | $23.5 | $46.9 | $44.8 |
| Net earnings | $20.4 | $17.8 | $37.9 | $54.1 |
| Diluted EPS | $1.08 | $0.95 | $2.00 | $2.88 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $50.3 | $41.9 |
- Q2 sales rose 4%, operating income rose 5%, and net earnings rose 14%. Gross margin was 28.68%, versus 29.04%.
- First-half sales rose 3%, operating income rose 5%, and gross margin improved to 28.49% from 28.34%. First-half net earnings declined 30% as the prior-year period included a substantial tax-related benefit.
- First-half operating cash flow increased to $50.3 million from $41.9 million. Capital expenditures were $26.4 million, compared with $26.3 million; cash dividends paid were $17.8 million.
- At March 30, cash and equivalents were $126.7 million, current assets $407.1 million and current liabilities $112.2 million. The current ratio was approximately 3.6. There were no borrowings under the $50 million revolving credit facility. Capital lease obligations totaled approximately $0.9 million.
- Total assets were $952.7 million and stockholders’ equity was $785.1 million. The company also held $160.3 million of marketable securities, including $22.2 million classified as current.
Material changes and segment performance
- Food Service: Sales grew 1% in Q2 and 2% in the first half; operating income increased to $19.6 million and $38.0 million, respectively. First-half bakery growth and pricing helped results, while handheld sales fell 19% in the first half, primarily because of lower co-pack sales following unsuccessful product launches. Higher freight costs also weighed on the first half.
- Retail Supermarkets: Q2 sales declined 1%; first-half sales were essentially flat. Operating income rose 4% in Q2 but fell to $4.1 million from $5.1 million for the first half, reflecting higher product and distribution costs without sales growth. Handheld sales continued a long-term decline.
- Frozen Beverages: Sales rose 15% in Q2 and 8% in the first half, helped by machine revenue, which increased $7.3 million in Q2 and $8.7 million in the first half. First-half operating income declined to $4.7 million from $5.2 million because of lower beverage sales and generally higher costs.
- Consolidated Q2 gross margin was pressured by the mix of lower-margin machine revenue. First-half margin benefited from improved manufacturing operations, pricing and the prior-year Chambersburg facility shutdown costs.
Outlook, commentary, risks and unusual items
- No specific financial guidance or quantified outlook is provided. Management said cash, investments, expected operating cash flow and borrowing capacity should be sufficient to fund future growth and expansion.
- Management identifies raw material and labor supply and costs, insurance costs, customer consolidation, sales trends, execution in manufacturing, marketing and distribution, acquisitions, tax-law changes and interest rates as factors that can affect results.
- The prior-year first-half results included a $20.9 million gain from remeasurement of deferred tax liabilities and a $1.2 million provision for the one-time repatriation tax under the Tax Cuts and Jobs Act. The current first half benefited from an approximately $0.9 million reduction in that repatriation-tax provision. Excluding the respective tax items, the company reported effective tax rates of 28.7% for the prior-year first half and 27.0% for the current first half.
- Investment income increased, reflecting higher invested balances and interest rates; Q2 also included $0.8 million of recognized unrealized gains, while the first half included $0.3 million of recognized unrealized losses. Prior-year first-half other income included a $0.5 million property-sale gain.
- The company expects the lease-accounting standard, effective for its fiscal year ending September 2020, to require recognition of right-of-use assets and lease liabilities and to have a material impact on its financial statements. The amount of that impact is not stated.
- Gross unrecognized tax benefits were $0.4 million, with accrued interest and penalties of $0.3 million at March 30, 2019. The filing also notes foreign-currency translation effects on accumulated other comprehensive loss.
- The company declared a regular quarterly cash dividend of $0.50 per share, payable April 4, 2019. It made no share repurchases during the six-month period; 384,506 shares remained under its repurchase authorization.
Important facts for investors to verify
- How much of sales and profit growth is sustainable, particularly the contribution of machine sales, pricing and seasonal demand.
- Whether freight costs, product costs and the continued decline in handheld products continue to pressure segment margins.
- The tax-adjusted interpretation of year-over-year earnings, given the prior-year Tax Act benefit and the current-year tax-provision reduction.
- The expected balance-sheet and expense effects of adopting lease accounting in fiscal 2020.
- Investment portfolio maturities, valuation exposure and availability for liquidity needs, alongside capital spending and dividend commitments.