J&J Snack Foods Corp. — Q3 FY2022 Form 10-Q
Reporting period: Third quarter and first nine months ended June 25, 2022; comparable periods ended June 26, 2021. Financial amounts below are in U.S. dollars and millions unless stated otherwise.
Business context and reporting period
J&J Snack Foods makes and sells snack foods, frozen novelties and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages segments. Management said sales benefited from reopening and increased visitation at venues that had been closed or operating at reduced capacity during the prior year. Sales of frozen beverages and novelties are typically higher in the third and fourth quarters.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Net sales | $380.2 | $324.3 | $980.2 | $821.5 |
| Gross profit | $109.1 | $96.2 | $253.8 | $207.2 |
| Gross margin | 28.7% | 29.7% | 25.9% | 25.2% |
| Operating income | $21.3 | $38.1 | $40.2 | $46.0 |
| Net earnings | $15.6 | $28.9 | $29.9 | $36.7 |
| Diluted EPS | $0.81 | $1.51 | $1.56 | $1.92 |
| Operating cash flow | Not separately presented | Not separately presented | $(29.6) | $73.6 |
Quarterly sales rose 17% and nine-month sales rose 19%. Net earnings fell 46% and 19%, respectively. Operating margin was 5.6% in Q3 versus 11.8% a year earlier, and 4.1% for the nine months versus 5.6%. Operating expenses rose 51% in Q3 and 32% year to date; distribution costs increased notably, and Q3 administrative expense included $3.1 million of acquisition costs.
For the nine months, operating cash flow was negative $29.6 million, compared with positive $73.6 million a year earlier. The filing attributes significant cash use in part to increases in receivables ($78.1 million) and inventories ($42.8 million). Capital expenditures were $64.2 million, versus $34.5 million. Cash and cash equivalents were $81.3 million at June 25, down from $283.2 million at September 25, 2021.
At June 25, current assets were $523.7 million and current liabilities were $199.0 million (a current ratio of about 2.6). Long-term debt was $125.0 million; there was no credit-facility balance at the prior fiscal year-end. Operating lease liabilities totaled $60.1 million. Stockholders’ equity was $855.9 million.
Segment trends and material changes
- Food Service: Sales increased 16% in Q3 to $227.8 million and 17% for nine months to $615.9 million. Operating income fell 85% in Q3 to $2.6 million and 59% year to date to $12.2 million, reflecting higher ingredient, production and distribution costs.
- Retail Supermarkets: Sales increased 13% in Q3 to $61.0 million and 6% for nine months to $144.5 million. Operating income decreased 74% in Q3 to $2.3 million and 58% year to date to $8.4 million, primarily due to higher product and distribution costs.
- Frozen Beverages: Sales increased 23% in Q3 to $91.4 million and 39% year to date to $219.9 million. Operating income was $16.3 million in Q3 versus $11.4 million; nine-month operating income was $19.6 million versus a $4.1 million loss. Higher beverage volume and business leverage drove the improvement.
Inflation in ingredients, packaging and fuel pressured margins. Management cited price and cost initiatives, including a price increase early in Q3; pricing had a moderate impact on Food Service sales, while volume increases were marginal overall. Distribution expense also rose with driver wages, carrier, storage and fuel costs.
Acquisition, outlook and risks
On June 21, 2022, the company acquired Dippin’ Dots, including Doc Popcorn, for approximately $223.6 million in cash. The preliminary purchase allocation included $120.4 million of identifiable intangible assets and $66.6 million of goodwill, assigned to Food Service. Dippin’ Dots contributed $2.2 million of sales and $0.6 million of net earnings after acquisition. The purchase allocation remains preliminary, and acquired operations were included only from the closing date.
The acquisition was funded in part by credit-facility borrowings. An amendment increased available borrowing capacity by $175 million; $125 million was outstanding and $91.2 million remained available at quarter-end, after letters of credit. The company reported compliance with financial covenants. Management said cash, investments, expected operating cash flow and borrowing capacity should be sufficient for working capital, capital spending, debt service and growth for at least the next 12 months.
The board declared a regular quarterly dividend of $0.633 per share, payable July 11, 2022. The filing provides no quantitative earnings or revenue guidance. Management cautioned that results may be affected by raw-material and labor costs, insurance, customer consolidation, execution of manufacturing and distribution activities, acquisition integration, tax law and interest rates. It also noted uncertainty around future COVID-19 effects; approximately two-thirds of sales are to venues and locations previously disrupted by the pandemic. Management stated that results for the interim periods are not necessarily indicative of the full year.
Other items to note: the company reported $12.0 million of Q3 payments to NFI Industries, whose CEO is a company director; most related to third-party distribution and shipping costs. Related-party trade payables were approximately $3.3 million at quarter-end. Management concluded disclosure controls were effective; Dippin’ Dots was excluded from the interim internal-control assessment under the permitted acquisition transition period.
Most important facts for investors to verify
- Whether price increases and cost initiatives can offset continuing ingredient, packaging, fuel and distribution inflation, and restore segment operating margins.
- Whether negative year-to-date operating cash flow and higher receivables and inventories unwind, while funding ongoing capital spending and dividends.
- The final Dippin’ Dots purchase-price allocation, integration costs and realized growth or cost synergies; the reported allocation is preliminary.
- Credit-agreement terms, covenant headroom, borrowing costs and remaining availability after the acquisition-related debt draw.
- The scale and terms of NFI-related distribution arrangements and the related-party balance, given the director relationship and increase in payments.
- Recovery and seasonality in venue-based demand, including the continuing effects of COVID-19 and visitation trends.