J&J Snack Foods Corp. — Fiscal 2019 First Quarter
Unaudited results cover the three months ended December 29, 2018, compared with the three months ended December 30, 2017. The company sells snack foods, bakery products, frozen treats and beverages through Food Service, Retail Supermarkets and Frozen Beverages segments. Amounts below are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $271.6 | $265.2 | +2% |
| Gross profit | $76.9 | $73.3 | +4.9% |
| Gross margin | 28.30% | 27.63% | +0.67 percentage points |
| Operating income | $22.1 | $21.2 | +4% |
| Net earnings | $17.5 | $36.2 | -52% |
| Diluted EPS | $0.93 | $1.93 | -52% |
| Cash from operations | $32.8 | $26.1 | +$6.7 |
Operating expenses rose to $54.8 million from $52.1 million; distribution expense increased, particularly from higher freight rates. Operating margin was approximately 8.1%, versus 8.0% a year earlier. Net margin was approximately 6.5%, versus 13.7%, with the comparison heavily affected by prior-year tax benefits.
Cash and cash equivalents were $124.7 million at December 29, 2018, up from $111.5 million at fiscal year-end. Current assets were $377.5 million and current liabilities $109.9 million. Marketable securities totaled $163.7 million, including $12.5 million current. The company had no borrowings under its $50 million revolving credit facility, which expires in November 2021; capital-lease obligations totaled about $1.0 million. Capital expenditures were $11.8 million. A regular quarterly dividend of $0.50 per share was declared.
Material changes and segment performance
- Food Service: Sales increased 3% to $187.9 million and operating income rose to $18.5 million from $15.9 million. Bakery sales increased 8%, while handheld sales declined 23%. Bakery growth, price increases and improved manufacturing operations helped results; higher distribution costs and about $0.5 million of impact from the MARY B’s biscuit recall were offsets.
- Retail Supermarkets: Sales increased 1% to $23.4 million, but operating income fell 43% to $1.4 million, reflecting higher product and distribution costs. Frozen juices and ices grew 13%; handheld sales continued a longer-term decline.
- Frozen Beverages: Sales increased 1% to $60.3 million, while operating income declined to $2.2 million from $2.8 million. Beverage sales fell 5%; machine revenue increased 19% and service revenue increased 4%.
Overall, gross margin improved on manufacturing efficiencies, pricing and the absence of prior-year shutdown costs related to the Chambersburg facility. Distribution expense increased to 8.82% of sales from 7.98%, primarily due to higher freight rates following implementation of the electronic logging device mandate.
Outlook, commentary and risks
The filing provides no quantified full-year guidance. Management said first-quarter results are not necessarily indicative of the full year; sales of frozen beverages, frozen juice bars and ices are generally higher in the third and fourth quarters due to warmer weather. Management believes cash, investments, future operating cash flows and borrowing capacity are adequate to fund growth and expansion.
Net earnings were down primarily because the prior-year quarter included a $20.9 million deferred-tax-liability remeasurement gain and a $1.2 million one-time repatriation-tax provision related to the Tax Cuts and Jobs Act. The current quarter benefited by approximately $0.9 million from a reduction in the estimated repatriation-tax provision. Excluding those tax items, the company reported effective tax rates of 28.0% for the current quarter and 28.6% for the prior-year quarter. Investment income declined partly due to $1.0 million of recognized unrealized losses on securities under newly adopted accounting guidance.
Risks identified include raw-material and labor costs, insurance costs, customer consolidation, sales conditions, manufacturing and distribution execution, acquisitions and integration, tax-law and interest-rate changes, and currency movements. The company also cited unsuccessful product launches affecting handheld sales. The adoption of the new revenue standard had no material impact. The company expects the lease-accounting standard, effective for its fiscal year ending September 2020, to materially increase reported assets and liabilities. Unrecognized tax benefits were $0.4 million, with accrued interest and penalties of $0.3 million.
Key facts for investors to verify
- Whether Food Service growth and manufacturing improvements continue to offset higher freight and distribution costs.
- Whether Retail Supermarkets’ and Frozen Beverages’ lower operating income stabilizes, and whether declining handheld and beverage sales persist.
- How much of the sharp year-over-year net-income decline reflects the prior-year tax benefit rather than underlying operating performance.
- Performance and valuation of the securities portfolio, including unrealized losses and expected maturities.
- The eventual balance-sheet effect of lease-accounting adoption and any developments in tax positions, currency exposure or the MARY B’s recall.