J&J Snack Foods Corp. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 28, 2019; comparable period ended December 29, 2018. Amounts below are in millions unless otherwise noted. The company sells snack foods through Food Service and Retail Supermarkets and operates its ICEE, SLUSH PUPPIE and PARROT ICE frozen-beverage businesses. Results are seasonal; frozen-beverage and frozen-treat sales generally rise in warmer-weather quarters.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $282.9 | $271.6 | +$11.3; 4% reported growth, 3% excluding ICEE Distributors |
| Gross profit / margin | $77.9 / 27.52% | $76.9 / 28.30% | Margin down 0.78 percentage points |
| Operating income / margin | $21.7 / 7.67% | $22.1 / 8.13% | Down $0.4, or 2% |
| Net earnings | $17.1 | $17.5 | Down $0.5, or 3% |
| Diluted EPS | $0.89 | $0.93 | Down $0.04 |
| Cash from operating activities | $33.6 | $32.8 | Up $0.8 |
| Capital expenditures | $17.6 | $11.8 | Up $5.8 |
Gross margin pressure reflected lower volume in Food Service and Retail Supermarkets, product mix including higher frozen-beverage machine sales, and higher Frozen Beverages costs. Operating expenses rose $1.4 million but declined as a share of sales to 19.9% from 20.2%. Investment income increased $0.7 million, primarily due to a $71,000 unrealized gain versus a $1.027 million unrealized loss in the prior-year quarter.
Segments and material changes
- Food Service: Sales rose 2% to $183.4 million and operating income increased to $18.0 million from $17.7 million. Management cited higher volume and improved Hill & Valley bakery operations. Handheld sales fell 18%; churro sales rose 8%.
- Retail Supermarkets: Sales fell 6% to $29.4 million. Soft pretzel, frozen juice/ice and biscuit sales declined, which management attributed to lost volume and placements following price increases a year earlier. Operating income was essentially flat at $2.2 million.
- Frozen Beverages: Sales increased 16% to $70.0 million, or 12% excluding the acquisition. Operating income declined to $1.5 million from $2.2 million, amid generally higher costs and about $1.0 million of ICEE headquarters relocation costs.
Cash, liquidity, debt and balance sheet
- Cash and cash equivalents were $170.3 million at quarter-end, down $22.1 million from fiscal year-end. Operating cash flow was $33.6 million; investing cash outflow was $46.9 million, including $45.0 million for the ICEE Distributors acquisition; financing cash outflow was $9.1 million, including $9.4 million of dividends paid.
- Current assets were $495.1 million versus current liabilities of $134.3 million. Cash and current held-to-maturity securities totaled $233.9 million. The company stated that cash, investments, expected operating cash flow and borrowing capacity were sufficient to fund future growth and expansion.
- No balance was outstanding on the $50 million revolving credit facility, which expires in November 2021. Finance lease liabilities totaled $1.0 million; operating lease liabilities totaled $70.1 million. The filing reports no other funded borrowing balance.
- Total assets were $1.096 billion, up from $1.019 billion at September 28, 2019, with increases including acquisition-related goodwill and intangibles. Stockholders’ equity was $842.5 million.
Acquisition, outlook, risks and other notable items
- On October 1, 2019, the company acquired ICEE Distributors for $45.0 million. The acquired business reported approximately $2.5 million in sales and $0.5 million in operating income during the quarter. The purchase price allocation included $21.2 million of distribution rights and $17.0 million of goodwill; allocation was preliminary.
- Management expected Retail Supermarkets volumes to at least stabilize beginning in Q2 FY2020. It expected approximately $0.8 million of additional ICEE relocation costs in Q2. The filing provides no broader quantified earnings or sales guidance.
- The company adopted the new lease accounting standard on September 29, 2019, recognizing an initial right-of-use asset and lease liability of approximately $71 million and $72 million, respectively; adoption did not affect earnings or cash flows.
- Prior-year quarterly earnings benefited from an approximately $0.9 million reduction in the estimated one-time repatriation tax provision. The effective tax rate was 27.3% this quarter; the prior-year rate was 28.0% excluding that tax adjustment.
- Management identified raw-material and labor costs, insurance, customer consolidation, sales factors, execution of manufacturing/marketing/distribution activities, acquisition integration, tax-law changes and interest rates as factors that may affect results. Uncertain tax benefits were $0.414 million, with $0.279 million of accrued interest and penalties.
- The board declared a regular quarterly dividend of $0.575 per share, payable January 7, 2020. The filing states disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Retail Supermarkets volume stabilizes as management expected, and whether price increases continue to affect placements and demand.
- ICEE Distributors’ contribution to organic growth, acquisition integration, final purchase-price allocation and remaining relocation costs.
- Whether gross-margin pressure eases, particularly in Frozen Beverages and across product mix and input costs.
- Cash generation relative to acquisition spending, capital expenditures, dividends and lease obligations.
- Seasonality when interpreting this first-quarter performance; the filing cautions that interim results are not necessarily indicative of full-year results.