J&J Snack Foods Corp. — Form 10-Q Summary
Business context and period. The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages segments. This unaudited report covers the second fiscal quarter and six months ended March 26, 2016; comparisons are with the periods ended March 28, 2015. Results are seasonal: frozen beverages, frozen juice bars and ices generally sell more in the third and fourth quarters.
Financial performance
| Metric | Three months ended March 26, 2016 | Three months ended March 28, 2015 | Six months ended March 26, 2016 | Six months ended March 28, 2015 |
|---|---|---|---|---|
| Net sales | $229.7 million | $225.0 million | $452.6 million | $437.8 million |
| Gross profit | $68.7 million | $67.0 million | $132.6 million | $128.1 million |
| Gross margin | 29.93% | 29.75% | 29.30% | 29.25% |
| Operating income | $23.3 million | $21.8 million | $41.6 million | $38.4 million |
| Net earnings | $15.6 million | $14.6 million | $28.6 million | $25.9 million |
| Diluted EPS | $0.83 | $0.78 | $1.52 | $1.38 |
- Second-quarter sales rose 2%, operating income 7% and net earnings 6%. First-half sales rose 3%, operating income 8% and net earnings 10%.
- Operating cash flow was $28.3 million for the first half, versus $28.5 million a year earlier. Capital expenditures were $23.7 million versus $17.9 million.
- Cash and cash equivalents were $89.3 million at March 26, down from $133.7 million at September 26, 2015. The six-month cash decrease of $44.4 million reflected investing and financing outflows. Current assets were $303.8 million and current liabilities $95.7 million.
- Marketable securities totaled $130.2 million at carrying value ($96.6 million held to maturity and $33.6 million available for sale), compared with $106.3 million at fiscal year-end. Available-for-sale securities had $2.0 million of gross unrealized losses; held-to-maturity securities had $0.8 million of gross unrealized losses.
- No revolving-credit borrowings were outstanding. The company had a $50 million revolving facility expiring in December 2016. Capital lease obligations totaled $1.8 million; the filing reports no other conventional debt balance.
Segment and period changes
- Food Service: Sales increased 2% in the quarter and 2% for the half; operating income rose to $18.5 million and $34.4 million, respectively. Management cited lower marketing and ingredient costs, pricing, handheld growth and favorable mix. Handheld sales rose 42% in the quarter and 31% for the half, with approximately 90% of the increase attributable to one customer. Food-service soft pretzel sales to restaurant chains remained below the prior year.
- Retail Supermarkets: Sales declined 6% in both periods. Second-quarter operating income was $2.5 million, slightly below prior year; first-half operating income increased to $3.6 million, primarily on lower coupon expense. Pretzels, frozen juices and ices, and handhelds weakened; new-product trade spending also weighed on results.
- Frozen Beverages: Sales increased 6% in the quarter and 11% for the half, while operating income fell to $2.3 million and $3.7 million, respectively. Higher health-insurance costs of about $0.6 million and a $0.2 million bad-debt write-off contributed to the decline. Beverage gallon sales benefited primarily from movie theaters; machine sales fluctuate and have no specific trend, management said.
- Consolidated gross margin improved modestly. Lower ingredient costs, pricing and Food Service mix benefits were partly offset by higher Frozen Beverages costs and retail new-product trade spending. Investment income declined $0.3 million in the quarter and $0.5 million for the half, mainly from lower yields and losses on security sales.
Outlook, risks and notable items
- Management said cash, expected operating cash flow and borrowing capacity should be sufficient to fund future growth and expansion. No sales or earnings guidance was provided. The company estimated a full-year effective tax rate of approximately 35.25%–35.5%.
- The company declared a regular quarterly dividend of $0.39 per share, payable April 6, 2016. It repurchased 107,648 shares for $11.8 million during the first half; 81,827 shares remained under the cited authorization.
- The company early-adopted share-based-payment accounting guidance. This resulted in a $499,000 first-quarter tax benefit recorded as a reduction of amounts previously in additional paid-in capital; a further $89,000 tax benefit was realized in the current quarter. Management estimated 2016 share-based compensation would not exceed $800,000, net of tax benefits.
- Management identified raw-material and labor costs, insurance costs, customer consolidation, sales factors, execution of manufacturing/marketing/distribution, acquisitions, tax-law changes and interest rates as factors that may affect earnings. Foreign-currency translation reduced first-half comprehensive income by $0.7 million.
- A new lease-accounting standard effective for the company’s fiscal year ending September 2020 is expected to have a material financial-statement impact; the filing does not quantify it. Management expected no material impact from the pending revenue-recognition guidance.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter. The filing reports no material change in the company’s market-risk assessment.
Important facts for investors to verify
- Whether Food Service handheld growth and Frozen Beverages sales remain sustainable, given the disclosed customer concentration and seasonal pattern.
- Whether Retail Supermarkets can stabilize sales and manage the costs of new-product launches and trade spending.
- How higher health-insurance, ingredient and other operating costs affect segment margins, and whether the unusually weak Frozen Beverages operating income persists.
- The use and performance of the company’s substantial investment portfolio, including unrealized losses, liquidity needs and the planned holding periods for securities.
- The renewal or replacement of the $50 million credit facility before its December 2016 expiration, and the eventual balance-sheet effect of the new lease-accounting standard.