J&J Snack Foods Corp. — Form 10-Q Summary
Business context and period: The filing covers the fiscal third quarter and first nine months ended June 25, 2016; comparisons are to periods ended June 27, 2015. 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 products generally sell more in the third and fourth quarters.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $278.0 million | $278.7 million | $730.5 million | $716.5 million |
| Gross profit | $92.1 million | $90.4 million | $224.7 million | $218.4 million |
| Operating income | $40.4 million | $38.8 million | $82.1 million | $77.2 million |
| Net earnings | $26.8 million | $24.5 million | $55.4 million | $50.4 million |
| Diluted EPS | $1.43 | $1.30 | $2.95 | $2.68 |
| Operating cash flow | Not presented for the quarter | $71.3 million | $66.6 million |
Margins: Gross margin was 33.13% in Q3 versus 32.43% a year earlier, and 30.75% for nine months versus 30.49%. Operating expenses were $51.6 million for Q3 and $142.6 million year to date.
Liquidity and debt: At June 25, 2016, cash and cash equivalents were $104.3 million, marketable securities totaled $135.3 million (including $9.7 million current), and current assets were $331.9 million against current liabilities of $104.4 million. The company had no borrowings on its $50 million revolving credit facility, which expires in December 2016. Capital lease obligations totaled approximately $1.7 million. Nine-month capital expenditures were $37.2 million; cash dividends paid were $21.3 million and share repurchases were $15.3 million. Cash declined $29.4 million from fiscal year-end to $104.3 million.
Changes and segment results
- Food Service: Sales rose 1% in Q3 and 2% year to date; operating income increased to $24.6 million and $59.0 million, respectively. Pretzels, handhelds and funnel cake contributed to growth, while bakery sales fell 6% in Q3, partly because a customer added a secondary supplier.
- Retail Supermarkets: Sales declined 10% in Q3 and 8% year to date; operating income fell to $4.3 million and $7.8 million. Lower frozen juice/ice and handheld sales, product discontinuations, and increased launch-related trade spending weighed on results.
- Frozen Beverages: Sales increased 2% in Q3 and 7% year to date, while operating income declined to $11.6 million and $15.2 million. Higher health insurance costs and, year to date, a $0.2 million bad-debt write-off contributed to the profit decline.
- Consolidated sales were nearly flat in Q3 but increased 2% year to date. Net earnings rose 10% in both reported periods. Management attributed improved gross profit and operating income principally to lower ingredient costs, pricing, product mix, and Food Service handheld/funnel cake volume, partly offset by retail trade spending and lower retail volume.
Outlook, risks and unusual items
- No broad earnings or revenue guidance was provided. Management expected approximately $1 million per month of lower bakery sales to the affected customer through January 2017, and no further funnel cake sales to a new restaurant-chain customer until fiscal Q2 2017. It anticipated significant Q4 improvement in Philly Swirl sales and meaningful sales from new supermarket products, particularly OREO Churros and WHOLE FRUIT Organic juice tubes.
- Management estimated a full-year effective tax rate of approximately 35.25%–35.5%. It anticipated 2016 share-based compensation of no more than $0.8 million net of tax benefits.
- Management cited raw-material and labor costs, insurance, customer consolidation, sales trends, execution of manufacturing/marketing/distribution, acquisitions, tax-law changes, and interest rates as factors that could affect results. Foreign-currency translation reduced comprehensive income and increased accumulated other comprehensive loss.
- Unrecognized tax benefits were $0.349 million, with $0.214 million of accrued interest and penalties. The company stated that the forthcoming lease-accounting standard, effective for its fiscal year ending September 2020, is expected to have a material financial-statement impact; other identified accounting-standard changes were expected to be immaterial or inconsequential.
- The company early-adopted share-based-payment accounting guidance in fiscal Q2 2016, affecting tax-benefit presentation; management revised the prior-quarter tax-rate estimate accordingly. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether retail supermarket sales and profitability recover as management expected, and whether new-product launches generate sales sufficient to offset trade spending and declines in existing products.
- The duration and financial effect of the bakery customer’s secondary-supplier arrangement and the timing of the anticipated funnel cake sales.
- Renewal or replacement terms for the $50 million credit facility before its December 2016 expiration.
- Cash conversion and working-capital needs: receivables and inventories increased during the nine-month period, while cash declined despite higher operating cash flow.
- Investment portfolio composition, liquidity, and market-value exposure; the company reported unrealized losses on available-for-sale securities.