J&J Snack Foods Corp. — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended March 25, 2017; comparisons are to periods ended March 26, 2016. Financial statement amounts below are in millions unless stated otherwise.
Business context and results
The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages segments. Sales of frozen beverages and frozen juice products are generally higher in the third and fourth quarters due to warmer weather.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $246.5 | $229.7 | $472.1 | $452.6 |
| Gross profit | $72.8 | $68.7 | $138.7 | $132.6 |
| Gross margin | 29.54% | 29.93% | 29.38% | 29.30% |
| Operating income | $24.1 | $23.3 | $43.4 | $41.6 |
| Net earnings | $16.0 | $15.6 | $29.5 | $28.6 |
| Diluted EPS | $0.85 | $0.83 | $1.57 | $1.52 |
Q2 sales rose 7% and first-half sales rose 4%. Excluding Hill & Valley, acquired in December 2016, sales grew 3% in Q2 and 2% in the first half. Operating income and net earnings each increased 4% and 3%, respectively, in Q2; first-half operating income increased 4% and net earnings increased 3%.
Segments and material changes
- Food Service: Sales increased 10% in Q2 and 6% in the first half; excluding Hill & Valley, growth was 4% and 3%. Segment operating income rose to $19.6 million in Q2 and $36.7 million for the first half. Bakery, churro and handheld sales contributed to growth; frozen juice and ices sales declined.
- Retail Supermarkets: Sales declined 4% in Q2 and 2% in the first half. Operating income was broadly flat: $2.5 million in Q2 and $3.5 million for the first half. Lower sales and higher coupon costs were partly offset by lower new-product trade spending.
- Frozen Beverages: Sales increased 5% in Q2 and 1% in the first half, while operating income declined to $2.0 million and $3.2 million, respectively. Management cited higher payroll and group health insurance costs, including increases of approximately $0.2 million in Q2 and $0.5 million for the first half.
Q2 gross margin declined from 29.93% to 29.54%, mainly due to Hill & Valley’s lower gross margin and higher Frozen Beverages costs. First-half margin improved slightly, as Food Service efficiencies and lower ingredient costs and Retail Supermarkets’ lower trade spending offset those pressures.
Cash flow, liquidity and debt
- Six-month operating cash flow was $40.8 million, versus $28.3 million a year earlier. Capital expenditures were $33.0 million, up from $23.7 million; the company also spent $31.1 million net on the Hill & Valley acquisition.
- Cash and cash equivalents were $86.3 million at March 25, 2017, down from $140.7 million at September 24, 2016. The company held $37.2 million of current and $85.1 million of long-term held-to-maturity securities, plus $30.0 million of available-for-sale securities.
- There were no borrowings under the $50 million revolving credit facility. Capital lease obligations totaled approximately $1.4 million, of which $0.4 million was current.
- The company reported current assets of $348.3 million and current liabilities of $106.3 million. It said cash, expected operating cash flow and borrowing capacity were sufficient to fund future growth and expansion.
- First-half financing cash outflow was $13.8 million, including $15.1 million of dividends and $1.7 million of share repurchases. The quarterly dividend was $0.42 per share.
Outlook, risks and unusual items
- Management expected Food Service frozen juice and ices sales to be about $3 million, or 16%, lower year over year in Q3, primarily due to one warehouse-club customer, followed by about $3 million, or 22%, higher sales in Q4, primarily from that same customer.
- Hill & Valley, acquired for approximately $31 million, contributed $9.5 million of sales and $0.14 million of operating income in the reported quarter and six-month period. The purchase price allocation was preliminary; acquisition costs of $0.514 million were included in other expense.
- Management identified raw-material and labor supply and costs, insurance costs, customer consolidation, execution of manufacturing, marketing and distribution, acquisition integration, tax-law changes and interest rates as factors that could affect results. No broader quantitative earnings guidance was provided.
- The company expects the new lease-accounting standard, effective for its fiscal year ending September 2020, to have a material impact on its financial statements. It expected no material impact from adopting the revenue-recognition and equity-investment accounting standards discussed in the filing.
- Uncertain tax benefits were $0.364 million, with $0.229 million of accrued interest and penalties. Management reported no material change in market-risk assessment and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Food Service growth excluding the acquisition continues and whether Hill & Valley’s preliminary valuation and integration assumptions change.
- Whether the anticipated Q3/Q4 frozen juice and ices sales shift occurs, given the concentration in one warehouse-club customer.
- Whether margin pressure in Hill & Valley and Frozen Beverages persists, and whether labor, health-insurance and ingredient costs affect profitability.
- How elevated capital spending and acquisition-related investment affect cash balances, and whether the company maintains its dividend and repurchase activity.
- The eventual balance-sheet effect of lease-accounting adoption and any changes to tax contingencies or investment-security values.