J&J Snack Foods Corp. — Q3 FY2021 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 26, 2021; comparisons are with the periods ended June 27, 2020. Dollar figures below are in millions unless stated otherwise.
Business context and reporting period
The company sells snack foods and frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages segments. Results are seasonal, with frozen beverages and frozen treats generally stronger in the third and fourth quarters. About two-thirds of sales are to venues that had shut down or curtailed foodservice operations during COVID-19. Management said most had reopened, but the pandemic’s future impact remained uncertain.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $324.3 | $214.6 | $821.5 | $769.5 |
| Gross profit | $96.2 | $37.2 | $207.2 | $184.5 |
| Operating income (loss) | $38.1 | $(19.4) | $46.0 | $13.3 |
| Net earnings (loss) | $28.9 | $(12.6) | $36.7 | $11.7 |
| Diluted EPS | $1.51 | $(0.67) | $1.92 | $0.62 |
- Sales rose 51% in the quarter and 7% year to date. Q3 gross margin was 29.7%, versus 17.3%; nine-month gross margin was 25.2%, versus 24.0%. Management attributed improvement primarily to higher sales, favorable mix and margin efficiencies.
- Q3 operating expenses increased 2.5% in dollars but fell to 17.9% of sales from 26.4%. Nine-month operating expenses declined 5.8% in dollars and were 19.6% of sales, versus 22.2%. Prior-year expenses included $5.1 million of plant-shutdown impairment costs.
- Q3 segment results: Food Service sales were $196.5 million and operating income $17.6 million; Retail Supermarkets sales were $53.9 million and operating income $9.1 million; Frozen Beverages sales were $74.0 million and operating income $11.4 million. Frozen Beverages had a $9.1 million operating loss in the prior-year quarter.
- Nine-month segment results: Food Service sales were $526.2 million and operating income $29.9 million; Retail Supermarkets sales were $136.9 million and operating income $20.2 million; Frozen Beverages sales were $158.4 million and an operating loss of $4.1 million.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $73.6 million, compared with $66.6 million. Capital expenditures were $34.5 million, compared with $47.6 million; operating cash flow less capital expenditures was approximately $39.1 million, versus $19.0 million.
- Cash and cash equivalents were $276.3 million at June 26, 2021, up from $195.8 million at September 26, 2020. Cash increased by $80.5 million during the nine months. Investing activities provided $21.9 million, including $54.2 million from securities redemptions and sales; financing activities used $15.6 million, including $32.7 million in dividends.
- Current assets were $567.4 million and current liabilities $159.9 million. Marketable securities totaled approximately $28.7 million across current and noncurrent classifications. Total assets were $1.102 billion and stockholders’ equity $835.0 million.
- The filing reports no outstanding borrowings under the company’s $50 million revolving credit facility at quarter-end; the facility was due to expire in November 2021 and includes restrictive covenants. Finance lease liabilities were $0.7 million and operating lease liabilities $54.4 million. Management said cash, investments, future operating cash flow and borrowing capacity were sufficient to fund growth and expansion.
Material changes, outlook and risks
- Food Service sales increased 68% in Q3 as venues approached pre-COVID capacity and consumer activity improved. Management cited strength in schools, amusement and recreation, restaurants, convenience stores and theaters. Retail Supermarkets sales declined 6% in Q3, which management attributed to unusually strong pandemic-related demand in the prior-year quarter. Frozen Beverages sales rose 83% in Q3 but fell 9% for the nine months.
- Management provided no quantified forward guidance. It noted that price increases had only a marginal or minimal effect on sales in the reported periods; volume and traffic were the main drivers discussed.
- Risks cited include ongoing COVID-19 uncertainty, raw-material and labor supply and costs, insurance costs, customer consolidation, the ability to manage manufacturing, marketing and distribution, acquisition integration, and changes in tax laws and interest rates. The filing also warns that interim and seasonal results are not necessarily indicative of full-year results.
- The quarterly dividend was increased 10%, from $0.575 to $0.633 per share, payable July 12, 2021. No shares were repurchased in the nine months.
- Gross unrecognized tax benefits were $0.343 million, with $0.267 million of accrued interest and penalties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the post-reopening recovery in Food Service and Frozen Beverages persists, and how much of the year-over-year rebound reflects comparison with pandemic-disrupted periods.
- Whether gross-margin gains and operating expense leverage continue as sales volumes, product mix and input costs change.
- The status and renewal terms of the $50 million credit facility due to expire in November 2021, including its covenants.
- Cash conversion, capital spending needs, lease commitments and the company’s ability to sustain the higher dividend.
- Exposure to raw-material and labor inflation, venue demand, customer concentration and continued COVID-19 effects.