J&J SNACK FOODS CORP quarterly report, Q3 FY2018

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J&J Snack Foods Corp. — Form 10-Q Summary

Business context and period. The filing covers the fiscal third quarter and nine months ended June 30, 2018, compared with the periods ended June 24, 2017. J&J sells snack foods and bakery products through Food Service and Retail Supermarkets, and frozen beverages through its Frozen Beverages segment. Results are seasonal: frozen beverage and frozen juice sales generally increase in warmer-weather quarters. Unless otherwise noted, amounts below are in millions of dollars.

Financial performance

  • Revenue: Third-quarter net sales were $306.2 million, up 4%; nine-month sales were $837.6 million, up 9%. Excluding the first 12 months of sales from acquired businesses, management reported growth of 2% for the quarter and 5% for the nine months.
  • Profit and margins: Third-quarter gross profit was $94.5 million versus $94.8 million; gross margin was 30.85% versus 32.08%. Operating income fell 8% to $34.9 million, and operating margin was approximately 11.4% versus 12.8%. Net earnings rose 3% to $26.1 million; diluted EPS was $1.39 versus $1.34.
  • Nine-month results: Gross profit increased to $245.0 million from $233.5 million, while gross margin declined to 29.26% from 30.42%. Operating income decreased 2% to $79.6 million. Net earnings rose to $80.2 million from $54.8 million, and diluted EPS increased to $4.27 from $2.91; the increase was substantially affected by tax benefits described below.
  • Cash flow: Nine-month operating cash flow was $85.3 million versus $83.3 million. Capital expenditures were $43.3 million versus $57.2 million. Investing activities used $55.1 million, and financing activities used $22.2 million, including $24.7 million of dividends. Cash increased $4.7 million to $95.6 million.
  • Liquidity and debt: At June 30, cash and cash equivalents were $95.6 million and marketable securities totaled $162.7 million, including current and long-term securities. Current assets were $380.7 million and current liabilities $123.1 million. No borrowings were outstanding on the $50 million revolving credit facility, which expires in November 2021. Capital lease obligations totaled approximately $1.2 million.
  • Balance sheet: Total assets were $914.2 million, compared with $867.2 million at September 30, 2017; stockholders’ equity was $738.1 million. Inventories increased to $116.2 million from $103.3 million.

Material changes and management commentary

  • Segment trends: Third-quarter Food Service sales rose 5% to $191.7 million, but segment operating income fell to $19.7 million from $22.0 million. Retail Supermarket sales increased 1% to $38.5 million while operating income declined to $3.2 million from $4.9 million. Frozen Beverages sales rose 2% to $76.0 million and operating income increased to $12.0 million from $10.9 million.
  • Food Service growth included stronger soft pretzel, bakery and handheld sales; frozen juices and ices declined, principally due to lost or reduced warehouse-club promotions. Frozen beverage gallon sales increased 7% in both the quarter and nine-month period; machine sales declined.
  • Management attributed margin and operating-income pressure to higher fuel and distribution costs, including the electronic logging device mandate; higher payroll, insurance and ingredient costs; product mix and lower volume at certain facilities; and costs associated with the Mary B’s biscuit recall. Distribution expenses were expected to remain higher through at least the balance of fiscal 2018.
  • Prior-year gross profit included a $1.8 million insurance recovery related to earlier product-quality issues. Management said Labriola production inefficiencies and Chambersburg facility shutdown costs had little impact beyond the first quarter.

Taxes, outlook, risks and other notable items

  • Nine-month earnings benefited from a $20.9 million deferred-tax-liability remeasurement gain and a $7.4 million reduction in income taxes, primarily related to the Tax Cuts and Jobs Act. A $1.2 million provision for the one-time repatriation tax partly offset these benefits. The tax accounting amounts were provisional under SEC guidance and were expected to be finalized before December 22, 2018.
  • Excluding the deferred-tax gain and repatriation tax, management reported effective tax rates of 28.1% for the quarter and 28.4% for the nine months, versus 35.4% and 35.0%, respectively, in the prior-year periods. Management estimated a 28%–29% effective tax rate for fiscal Q4 2018 and 26%–27% for fiscal 2019.
  • The board declared a regular quarterly dividend of $0.45 per share, payable July 5, 2018. The company repurchased 20,604 shares for $2.8 million during the nine months; 384,446 shares remained under the repurchase authorization.
  • Management said cash, investments, expected operating cash flow and borrowing capacity should fund future growth and expansion. It identified raw-material and labor costs, insurance, customer consolidation, sales conditions, operating execution, acquisitions, tax law and interest rates as factors that can affect results.
  • The company expected adoption of the new lease standard in fiscal 2020 to increase reported assets and liabilities materially. It anticipated no material financial-statement impact from the new revenue-recognition standard planned for fiscal 2019.
  • Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • How much of the nine-month earnings and EPS increase is attributable to provisional tax-law benefits, and what final tax accounting adjustments were subsequently recorded.
  • Whether Food Service and Retail Supermarket margins recover, including the effects of distribution costs, product mix, facility utilization and the Mary B’s recall.
  • Whether frozen beverage growth and the anticipated seasonal sales pattern continue, and whether machine-sales volatility affects results.
  • Cash conversion and working-capital trends, particularly the increase in inventories and receivables, alongside planned capital spending and dividends.
  • The eventual balance-sheet and expense effects of lease-standard adoption, and the company’s capacity to meet growth plans without drawing on its revolving credit facility.