J&J Snack Foods Corp. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended June 27, 2015, compared with periods ended June 28, 2014. Dollar amounts below are in millions unless stated otherwise. The company sells food-service and retail snack products and frozen beverages. It notes that frozen beverages, juice bars and ices generally have higher sales in the third and fourth quarters.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|
| Net sales | $278.7 | $257.1 | $716.5 | $666.0 |
| Gross profit | $90.4 | $84.4 | $218.4 | $205.4 |
| Gross margin | 32.43% | 32.81% | 30.49% | 30.84% |
| Operating income | $38.8 | $35.7 | $77.2 | $74.0 |
| Net earnings | $24.5 | $23.7 | $50.4 | $49.6 |
| Diluted EPS | $1.30 | $1.26 | $2.68 | $2.64 |
| Operating cash flow | Not presented for the quarter | $68.6 | $69.1 |
- Q3 sales and operating income each rose 8% and 9%, respectively; net earnings increased 3%. Nine-month sales grew 8%, while operating income increased 4% and net earnings increased 1%.
- For the nine months, accounts receivable increased $15.8 million and inventory increased $6.0 million, offset in part by an $9.0 million increase in accounts payable and accrued liabilities. Operating cash flow was slightly below the prior-year period.
- Cash and cash equivalents were $126.5 million at June 27, 2015, versus $91.8 million at September 27, 2014. Total assets were $742.9 million. The company had no borrowings on its $50 million revolving credit facility; capital-lease obligations totaled about $1.5 million.
- Capital expenditures were $36.2 million in the first nine months, up from $31.3 million. Cash dividends paid were $19.4 million, versus $14.9 million a year earlier; share repurchases totaled $2.1 million.
Segments and material changes
| Segment | Q3 sales (YoY) | Q3 operating income (YoY) | Nine-month sales (YoY) | Nine-month operating income (YoY) |
|---|
| Food Service | $167.2 (+6%) | $20.5 (down from $21.2) | $456.1 (+5%) | $51.6 (down from $54.0) |
| Retail Supermarkets | $41.1 (+18%) | $6.4 (up from $3.5) | $92.0 (+18%) | $9.6 (up from $8.1) |
| Frozen Beverages | $70.3 (+9%) | $11.9 (up from $10.9) | $168.4 (+10%) | $16.0 (up from $12.0) |
- Growth in retail frozen juices and ices and in frozen beverages supported results. Retail Supermarkets benefited from owning PHILLY SWIRL for the full third quarter, compared with only April in the prior-year quarter. Excluding PHILLY SWIRL through April, retail sales rose 12% in Q3 and 6% for the nine months.
- Food Service profit declined despite higher sales, reflecting manufacturing start-up inefficiencies, higher workers’ compensation and egg costs, lower handheld sales, and a sales mix shift toward lower-margin school business. Management reported higher sales of bakery products and soft pretzels, while one restaurant chain’s discontinued churro purchases weighed on comparisons.
- Consolidated gross margin declined year over year in both comparison periods. Operating expenses as a share of sales were slightly lower for Q3 and essentially flat for the nine months.
Outlook, risks and notable items
- Management expected egg and egg-product costs to run about $0.8–$1.0 million per month above the prior year for the remainder of FY2015 and well into FY2016, following avian flu-related cost increases. It raised selling prices intending to recover at least half of the increase; Q3 profit was affected by about $0.8 million because increases took effect late in June.
- Management estimated an effective tax rate of about 36.5% for FY2015. No company-wide revenue or earnings guidance was provided in the supplied filing text.
- Investment income was $2.6 million for the nine months, down from $3.3 million. Q3 investment results were a $53,000 loss, including a $1.4 million realized loss on mutual-fund sales. At quarter-end, available-for-sale securities were $103.4 million, including mutual funds with $2.5 million of unrealized losses. Subsequent to quarter-end, the company reported further portfolio changes, including mutual-fund sales, purchases of preferred stock and about $24 million of corporate bonds; these post-quarter amounts are as of the filing date.
- Management cited raw-material and labor costs, insurance, customer consolidation, sales trends, execution of manufacturing and distribution, acquisitions, tax laws and interest rates as factors that can affect earnings. It also noted customer concentration in some product sales and seasonal variation. The filing says results to date are not necessarily indicative of the full year.
- The company reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. It stated there was no material change in its market-risk assessment from its 2014 annual report.
Important facts for investors to verify
- Whether pricing offsets the anticipated egg-cost increase, and the resulting effect on Food Service margins.
- How much sales growth is organic versus attributable to PHILLY SWIRL and other product or customer concentration effects.
- Whether Food Service profit stabilizes and the recent Retail Supermarkets and Frozen Beverages improvements continue.
- The realized and unrealized performance, liquidity and risk profile of the investment portfolio, including the post-quarter reallocations.
- Cash generation relative to capital spending, dividends and other capital needs, as well as use of the undrawn credit facility.
