J&J Snack Foods Corp. — Q3 2019 Form 10-Q
Business context and reporting period. The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages segments. This unaudited report covers the three and nine months ended June 29, 2019, compared with the periods ended June 30, 2018. Frozen beverage and frozen treat sales are generally higher in the third and fourth quarters due to warmer weather.
Financial performance
Amounts below are in millions of dollars except per-share data. Figures may not sum due to rounding.
| Metric | Three months 2019 | Three months 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $326.7 | $306.2 | $874.6 | $837.6 |
| Gross profit / margin | $101.3 / 31.02% | $94.5 / 30.85% | $257.5 / 29.44% | $245.0 / 29.26% |
| Operating income | $39.0 | $34.9 | $85.9 | $79.6 |
| Net earnings | $30.9 | $26.1 | $68.8 | $80.2 |
| Diluted EPS | $1.63 | $1.39 | $3.64 | $4.27 |
| Operating cash flow | Not separately reported | Not separately reported | $101.2 | $85.3 |
| Capital expenditures | Not separately reported | Not separately reported | $42.1 | $43.3 |
- Q3 sales rose 7%, operating income 12%, and net earnings 18% year over year. Nine-month sales rose 4% and operating income 8%, while net earnings fell 14% and diluted EPS fell 15%.
- Nine-month operating cash flow exceeded capital expenditures by approximately $59.0 million. Cash and cash equivalents were $156.1 million at June 29, versus $111.5 million at fiscal year-end.
- Current assets were $466.8 million and current liabilities $130.5 million. Marketable securities totaled $157.9 million, including $40.8 million classified as current. The company had no borrowings on its $50 million revolving credit facility; capital-lease obligations totaled approximately $1.0 million.
- The board declared a regular quarterly dividend of $0.50 per share, payable July 3, 2019. No shares were repurchased during the reported three- or nine-month periods.
Segment results and material changes
| Segment | Q3 sales, year over year | Q3 operating income, year over year | Nine-month sales, year over year | Nine-month operating income, year over year |
|---|---|---|---|---|
| Food Service | $198.6m, +4% | $21.2m vs. $19.7m | $567.9m, +3% | $59.2m vs. $54.1m |
| Retail Supermarkets | $36.6m, -5% | $3.7m vs. $3.2m | $87.8m, -2% | $7.7m vs. $8.3m |
| Frozen Beverages | $91.6m, +20% | $14.2m vs. $12.0m | $219.0m, +13% | $19.0m vs. $17.2m |
- Management attributed improved gross margin to pricing, better manufacturing operations and comparison with prior-year costs from closing and transferring production at the Chambersburg facility. Operating expenses as a share of sales declined slightly in both comparison periods.
- Frozen Beverages growth included higher machine revenue and sales to a single distributor; management said the distributor’s increased sales did not benefit operating income and could remain elevated into Q4. Retail Supermarkets faced lower frozen juice and ice volumes and placements following price increases.
- Food Service handheld sales declined, primarily due to lower co-pack sales after unsuccessful product launches. Food Service operating income included about $0.6 million of prior-years’ recall costs; consolidated other general expense included $0.621 million of prior-years’ recall costs.
Outlook, commentary and risks
- The filing gives no formal earnings or revenue guidance. Management said cash, investments, expected operating cash flow and borrowing capacity should be sufficient to fund growth and expansion.
- Q3 other income included a $2.0 million customer payment for cancellation of production under a co-manufacturing agreement. The related product had no sales after June 30, 2018. Prior-year nine-month other income included a $0.52 million property-sale gain.
- The prior-year nine-month results included a $20.9 million deferred-tax remeasurement benefit and a $1.2 million one-time repatriation-tax provision related to the 2017 Tax Act. Current-year nine-month tax expense benefited by an approximately $0.9 million adjustment to the estimated repatriation-tax provision. Excluding these items, reported effective tax rates were 27.5% in the current nine months and 28.4% in the prior-year period.
- Management cited raw-material and labor costs, insurance, sales trends, customer consolidation, operational execution, acquisitions, tax-law changes and interest rates as factors that may affect results. The company expects the new lease standard, effective in fiscal 2020, to materially increase reported assets and liabilities. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Frozen Beverages’ growth, particularly distributor and machine sales, persists and translates into segment profit.
- Whether price increases stabilize Retail Supermarket volumes and whether Food Service handheld declines continue.
- The sustainability of margin gains, considering recall-related costs, freight trends and manufacturing improvements.
- The effect of the prior-year Tax Act benefit and current-year tax adjustments when comparing earnings across periods.
- Liquidity and investment-portfolio composition, customer concentration, and the eventual balance-sheet impact of lease accounting adoption.