J&J Snack Foods Corp. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended March 25, 2023; comparisons are with the periods ended March 26, 2022. Amounts below are in millions of dollars unless otherwise noted. The company manufactures snack foods and distributes frozen beverages through food service, retail supermarket, and frozen beverage segments.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $337.9 | $281.5 | $689.2 | $600.0 |
| Gross profit / margin | $90.4 / 26.8% | $65.3 / 23.2% | $181.2 / 26.3% | $144.7 / 24.1% |
| Operating income / margin | $10.2 / 3.0% | $4.1 / 1.5% | $19.5 / 2.8% | $18.9 / 3.2% |
| Net earnings / diluted EPS | $6.9 / $0.36 | $3.3 / $0.17 | $13.5 / $0.70 | $14.4 / $0.75 |
| Operating cash flow | — | $35.7 | $(26.4) | |
| Capital expenditures | — | $49.1 | $35.3 |
Q2 sales rose 20.0% and net earnings rose 110.1%. For the first six months, sales increased 14.9%, but net earnings declined 6.0%. Six-month operating cash flow improved substantially year over year; investing cash outflow was $43.0 million, primarily reflecting capital spending. Cash and cash equivalents were $43.3 million at March 25, 2023, with $4.4 million of marketable securities.
Segment results and material changes
- Food Service: Q2 sales increased 23.8% to $218.3 million and operating income rose to $5.1 million from $0.5 million. Six-month sales increased 17.7% to $456.6 million and operating income increased to $11.5 million. Growth included Dippin’ Dots and stronger pretzel and churro sales.
- Retail Supermarkets: Q2 sales increased 13.7% to $46.4 million, but operating income declined 55.4% to $0.5 million. Six-month sales rose 7.2% to $89.4 million while operating income fell 73.7% to $1.6 million, reflecting promotions and allowances, distribution costs, and margin pressure.
- Frozen Beverages: Q2 sales increased 13.7% to $73.2 million and operating income increased 85.8% to $4.6 million. Six-month sales rose 11.4% to $143.2 million and operating income increased 92.8% to $6.4 million. Management cited higher beverage gallons and improving activity at travel, sports, entertainment, and theater venues.
Margins, liquidity, debt, and outlook
- Gross margin improved year over year, supported by prior-year pricing actions, operating initiatives, cost management, and productivity. Management said key raw-material costs remained inflationary, up approximately 9% in Q2 and 15% for the six-month period versus comparable prior-year periods.
- Operating expenses increased 30.9% in Q2 and 28.6% year to date. Distribution costs rose with fuel and outbound freight inflation; administrative expenses also increased, in part due to Dippin’ Dots.
- Long-term debt was $92.0 million, compared with $55.0 million at September 24, 2022. The outstanding borrowings had a weighted-average interest rate of 5.50%. The company reported $123.2 million of additional borrowing capacity after letters of credit and compliance with financial covenants.
- Cash dividends paid during the six months were $26.9 million. Capital expenditures were $49.1 million, with increased spending on new production lines intended to add capacity.
- Management stated that operating cash flow, borrowing capacity, cash, and investments should be sufficient to meet requirements over the next twelve months and beyond and fund growth. No specific earnings or revenue guidance was provided. Frozen beverage and novelty sales are generally higher in the third and fourth fiscal quarters due to warmer weather.
Risks, contingencies, and unusual items
- The Dippin’ Dots acquisition, completed in June 2022 for approximately $223.6 million in cash, contributed $16.0 million of Q2 sales and a $0.2 million net loss; year-to-date it contributed $29.3 million of sales and a $0.8 million net loss. Purchase-price allocation remained preliminary, with a Q2 measurement-period adjustment that did not materially affect earnings.
- Management identifies raw-material and labor costs, insurance costs, customer consolidation, execution of manufacturing and distribution, acquisition integration, tax changes, and interest rates as factors that may affect results. Weather and venue attendance can also affect seasonal frozen beverage sales.
- Related-party distribution and shipping payments to NFI Industries, whose CEO and owner is a company director, were $13.3 million in Q2 and $27.6 million year to date; the filing says most amounts were passed through to third-party vendors and terms were considered consistent with arm’s-length arrangements.
- The company reported no expected material adverse effect from its pending legal proceedings and no material change to the risk factors in its FY2022 Form 10-K. Disclosure controls were deemed effective; Dippin’ Dots was excluded from the interim internal-control evaluation under SEC guidance for recently acquired businesses.
Key facts for investors to verify
- Whether gross-margin improvement can persist as input-cost inflation and distribution expenses continue to pressure costs.
- Whether Retail Supermarkets can restore segment profitability after significant year-to-date operating-income deterioration.
- How Dippin’ Dots performs and whether expected acquisition synergies offset its reported losses and added costs.
- Debt, borrowing availability, interest expense, and covenant compliance as the company funds elevated capital expenditures and dividends.
- Seasonal demand and venue trends, along with the company’s ability to convert sales growth into sustained earnings and cash flow.