J&J Snack Foods Corp. — Q1 FY2016 10-Q
Reporting period: Three months ended December 26, 2015; comparisons are with the three months ended December 27, 2014. Amounts below are in millions unless noted. The filing cautions that first-quarter results are not necessarily indicative of the full year; frozen beverage and frozen juice products generally sell more in the third and fourth quarters.
Financial performance
- Revenue: $222.9 million, up 4.7% from $212.8 million.
- Gross profit and margin: $63.8 million, up from $61.1 million; gross margin was 28.64%, versus 28.72%.
- Operating expenses: $45.5 million, up $1.0 million; declined to 20.4% of sales from 20.9%.
- Operating income: $18.4 million, up 10.5% from $16.6 million.
- Net earnings: $12.5 million, up 10.9% from $11.3 million. Diluted EPS was $0.66, versus $0.60; basic EPS was $0.67, versus $0.60.
- Cash flow: Operating cash flow was $20.9 million, down from $23.9 million. Capital expenditures were $13.3 million, versus $9.7 million; operating cash flow less capital expenditures was $7.6 million. Investing activities used $32.9 million, including $21.3 million of marketable-security purchases. Financing activities used $9.3 million, including $6.7 million in dividends and $3.1 million to repurchase shares. Cash fell $21.8 million during the quarter to $111.9 million.
- Liquidity and debt: Current assets were $305.3 million and current liabilities $94.2 million. The company had no borrowings on its $50 million revolving credit facility, which expires in December 2016. Capital lease obligations totaled about $1.4 million. It held $125.3 million of marketable securities at amortized cost, classified as long-term; their reported fair value was $123.8 million.
- Balance sheet: Total assets were $741.6 million and stockholders’ equity $601.7 million. Cash declined from $133.7 million at fiscal year-end, while inventories rose from $82.7 million to $94.5 million.
Segment results and changes
- Food Service: Sales rose 2% to $146.8 million; operating income increased to $15.9 million from $15.5 million. Soft pretzel sales fell 5%, while bakery sales rose 3% and handheld sales rose 19%. Management attributed the segment’s operating-income improvement primarily to lower marketing expenses.
- Retail Supermarkets: Sales fell 5% to $21.3 million; operating income increased to $1.1 million from $0.7 million, primarily because coupon and advertising expenses were lower. Net volume declines outweighed price increases; the company cited discontinued product and lower handheld sales among the factors.
- Frozen Beverages: Sales rose 17% to $54.8 million; operating income increased to $1.4 million from $0.5 million. Beverage-related sales rose 10%, service revenue rose 16%, and machine sales were 52% higher. Management said higher sales across the business drove the operating-income improvement.
Outlook, risks, and notable items
- Management estimated an effective tax rate of approximately 36% for the fiscal year, compared with 36% in the quarter; it provided no overall revenue or earnings guidance.
- Management stated that cash, expected operating cash flow, and borrowing capacity should be sufficient to fund future growth and expansion. The board declared a regular quarterly dividend of $0.39 per share, payable January 7, 2016.
- Management identified raw-material and labor costs, insurance costs, sales factors, customer consolidation, execution in manufacturing, marketing and distribution, acquisitions and integration, tax-law changes, and interest rates as factors that can affect results.
- Quarterly comprehensive income was $11.0 million, including $1.5 million of other comprehensive loss, primarily foreign-currency translation and unrealized marketable-security losses. The filing reports $1.7 million of gross unrealized losses on available-for-sale securities and $1.5 million on held-to-maturity securities at quarter-end.
- The company repurchased and retired 27,083 shares for $3.1 million during the quarter; 162,392 shares remained under its repurchase authorization. It estimated share-based compensation would not exceed $1.8 million, net of tax benefits, for FY2016.
- Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the quarter. The filing reported no material change in its market-risk assessment.
Important facts for investors to verify
- Whether sales growth and segment operating-income gains persist, particularly in Frozen Beverages, given seasonality and the year-over-year increase in machine sales.
- Whether inventory growth and lower operating cash flow are temporary, and how planned capital spending affects cash generation.
- The credit quality, valuation, and liquidity of the marketable-security portfolio, including unrealized losses and management’s intent to hold securities.
- Whether the estimated 36% annual tax rate and management’s liquidity assessment remain appropriate as the year progresses.
- Exposure to customer concentration and the sales declines cited in Food Service and Retail Supermarkets.