J&J Snack Foods Corp. — Form 10-Q Summary
Business context and reporting period
Fiscal 2015 first quarter, the three months ended December 27, 2014, compared with the three months ended December 28, 2013. The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets, and Frozen Beverages segments. Management notes that frozen beverages, juice bars, and ices generally sell more in the third and fourth quarters, so first-quarter results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $212.8 million | $203.5 million |
| Gross profit | $61.1 million | $59.9 million |
| Gross margin | 28.72% | 29.43% |
| Operating income | $16.6 million | $18.0 million |
| Net earnings | $11.3 million | $12.4 million |
| Diluted EPS | $0.60 | $0.66 |
| Cash from operations | $25.1 million | $31.3 million |
At quarter-end, cash and cash equivalents were $98.1 million; current assets were $275.3 million and current liabilities were $93.5 million. The company had $125.7 million of available-for-sale securities and $2.0 million of held-to-maturity securities. It reported no balance on its $50 million revolving credit facility; capital lease obligations totaled $0.5 million. Stockholders’ equity was $563.3 million.
Capital expenditures were $10.9 million. Cash dividends paid were $6.0 million, and the company repurchased $1.7 million of stock. Cash increased $6.3 million during the quarter to $98.1 million.
Material changes versus the prior comparable period
- Sales grew 5% as reported; excluding PHILLY SWIRL, acquired in fiscal 2014, sales rose just under 3.5%.
- Operating income declined 8% and net earnings declined 9%. Gross margin fell 0.71 percentage points. Management attributed the pressure to PHILLY SWIRL’s seasonal loss, higher manufacturing costs, relatively low Food Service volume growth, and increased operating expenses.
- Food Service sales increased 3% to $143.6 million; operating income rose to $15.5 million from $15.2 million. Bakery sales grew 8%, while churro sales fell 7%, including a $2.1 million decline from a restaurant chain that stopped carrying the product.
- Retail Supermarkets sales increased 11% to $22.4 million, including PHILLY SWIRL; excluding it, sales declined less than 1%. Segment operating income fell to $0.7 million from $2.0 million, reflecting higher coupon and advertising costs and a $1.0 million PHILLY SWIRL operating loss in the seasonally low quarter.
- Frozen Beverages sales rose 5% to $46.8 million, but operating income fell to $0.5 million from $0.9 million as higher expenses offset sales growth.
- Operating cash flow decreased to $25.1 million from $31.3 million. Current-quarter investing outflows were lower than in the prior year, which included an $11.0 million acquisition payment.
Outlook, management commentary, risks, and unusual items
Management stated that cash, expected operating cash flow, and borrowing capacity should be sufficient to fund future growth and expansion. It estimated a 36.5% effective tax rate for the fiscal year, compared with 37% for the quarter. The filing provides no specific full-year revenue or earnings guidance.
The company estimated fiscal-year share-based compensation of no more than $2.1 million net of tax, or approximately $0.11 per share. Management estimated annual yields of approximately 3.5% on its mutual funds and 5.0% on fixed-to-floating preferred securities. It disclosed $3.7 million of unrealized losses on mutual funds, which may eventually be realized; the securities have no contractual maturities, and management may sell them if liquidity needs or market conditions warrant.
Approximately $2.2 million of inventory held at September 27, 2014 was written off during the quarter. Foreign currency translation and marketable-security valuation losses contributed to a $3.9 million other comprehensive loss, increasing accumulated other comprehensive loss to $9.9 million. Management identified raw-material and labor costs, insurance, customer consolidation, sales factors, execution of manufacturing and distribution, acquisitions and integration, tax-law changes, and interest rates as factors that can affect results. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How PHILLY SWIRL performs beyond its seasonally weak quarter, and whether its operating losses narrow.
- Whether Food Service volume and gross margins recover amid higher manufacturing expenses and customer concentration.
- The quality and liquidity of the investment portfolio, including unrealized losses and the company’s intent to hold securities classified as long term.
- Whether cash generation supports planned capital spending, dividends, and repurchases without use of the credit facility.
- Whether the estimated full-year tax rate and share-based compensation remain consistent with management’s stated estimates.