J&J Snack Foods Corp. — Q1 FY2021 10-Q
Reporting period: Three months ended December 26, 2020; comparisons are with the three months ended December 28, 2019. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
The company sells snack foods through Food Service and Retail Supermarkets and operates a Frozen Beverages segment. Management said approximately two-thirds of sales are to venues and locations that had shut down or sharply curtailed foodservice operations due to COVID-19. Seasonal sales of frozen beverages and juice bars are generally higher in the third and fourth quarters.
Key financial results
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Net sales | $241.0 | $282.9 |
| Gross profit / margin | $50.1 / 20.8% | $77.9 / 27.5% |
| Operating income / margin | $0.6 / 0.2% | $21.7 / 7.7% |
| Net earnings | $1.8 | $17.1 |
| Diluted EPS | $0.09 | $0.89 |
| Cash from operations | $21.3 | $33.6 |
| Capital expenditures | $9.7 | $17.6 |
Sales fell 15%, operating income fell 97%, and net earnings fell 90% year over year. Gross margin contracted 6.7 percentage points. Operating expenses declined to $49.5 million from $56.2 million, but rose to 20.6% of sales from 19.9%. Investment income was $1.37 million, down from $1.79 million. The effective tax rate was 8%, versus 28% a year earlier; the current-quarter rate benefited in part from a $420,000 share-based compensation tax benefit.
Segments and material changes
- Food Service: Sales declined 13% to $160.4 million; operating income declined to $6.2 million from $18.0 million. Theme parks, schools, theaters, and other customer venues remained constrained. Soft pretzels fell 35%, churros fell 30%, and bakery sales fell 8%. Handheld sales rose 145%, led by a new product for a wholesale-club customer.
- Retail Supermarkets: Sales rose 33% to $39.1 million; operating income more than doubled to $4.7 million. Pretzels rose 41% and frozen juices and ices rose 52%, supported by consumer traffic and volume.
- Frozen Beverages: Sales fell 41% to $41.5 million, and the segment recorded a $10.3 million operating loss versus $1.5 million operating income. Beverage sales declined 55%; service revenue declined 16%, principally due to cancellation of a major customer’s planned maintenance program. Machine revenue fell 46%, partly because the prior-year quarter included $5.0 million of non-recurring sales.
Cash, liquidity, debt, and capital allocation
At December 26, 2020, cash and cash equivalents were $228.3 million and current held-to-maturity securities were $34.3 million; total current assets were $508.7 million versus current liabilities of $132.7 million. Cash increased $32.5 million during the quarter. Operating cash flow was $21.3 million; investing cash flow was a $17.4 million source, including $26.1 million of marketable-security redemptions and sales; financing used $6.6 million, including $10.9 million in dividends and $4.4 million in stock-option proceeds.
The company reported no borrowings on its $50 million revolving credit facility, which expires in November 2021. Lease liabilities totaled $59.3 million ($58.6 million operating and $0.6 million finance); these are obligations, not reported bank borrowings. The board declared a regular quarterly dividend of $0.575 per share, payable January 12, 2021. No shares were repurchased in the quarter.
Outlook, risks, and unusual items
The filing provides no quantified financial guidance. Management said liquidity, investments, expected operating cash flow, and borrowing capacity are believed sufficient to fund future growth and expansion. It cautioned that COVID-19’s future effects remained uncertain. Management cited raw-material and labor costs, insurance, customer consolidation, sales conditions, execution in manufacturing, marketing and distribution, acquisition integration, tax-law changes, and interest rates as factors that can affect results.
Held-to-maturity corporate bonds had $42.9 million amortized cost, including $26.0 million rated BBB/BB/B; the filing states $41 million matures within two years. Unrecognized tax benefits were $360,000, with $267,000 of accrued interest and penalties. Adoption of the new expected-credit-loss standard had no material impact. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether venue reopenings and capacity recovery improve Food Service and Frozen Beverages sales, volumes, and fixed-cost absorption.
- Whether retail growth and the new wholesale-club handheld product can offset continued weakness in venue-dependent channels.
- The duration and customer impact of the canceled maintenance program, and the extent to which prior-year machine sales distort comparisons.
- Cash generation and liquidity needs, including dividend commitments, lease payments, and the maturity and credit quality of investment securities.
- Whether the company’s COVID-19 exposure, tax uncertainties, and other cited cost and operating risks change materially after the quarter.