J&J Snack Foods Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and six months ended March 28, 2020, compared with the periods ended March 30, 2019. The company reports Food Service, Retail Supermarkets and Frozen Beverages segments. COVID-19 disrupted sales late in the quarter, particularly in food-service venues; the filing notes that results are seasonal, with frozen products generally stronger in warmer-weather quarters. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter ended March 28, 2020 | Prior-year quarter | Six months ended March 28, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $272.0 | $276.3 | $554.9 | $547.9 |
| Gross profit | $69.4 | $79.2 | $147.3 | $156.1 |
| Gross margin | 25.53% | 28.68% | 26.54% | 28.49% |
| Operating income | $11.0 | $24.8 | $32.7 | $46.9 |
| Net earnings | $7.3 | $20.4 | $24.4 | $37.9 |
| Diluted EPS | $0.38 | $1.08 | $1.28 | $2.00 |
- Operating cash flow for the six months was $42.3, versus $50.3 a year earlier. Capital expenditures were $37.0; acquisitions used $57.2 in cash. Cash and cash equivalents fell to $143.0 from $192.4 at fiscal year-end.
- At March 28, cash plus marketable securities totaled approximately $266.3 by balance-sheet carrying amounts; management described this as $267 million. Current assets were $482.5 and current liabilities $128.1. The $50 million revolving credit facility was undrawn.
- The company reported no outstanding borrowings under the credit facility. Operating lease liabilities were $67.4 and finance lease liabilities $0.9; these are lease obligations, not reported bank borrowings.
Material changes versus prior periods
- Quarterly sales declined 2%, while six-month sales grew 1%. Excluding the two ICEE distributor acquisitions, sales declined 2% for the quarter and rose about 0.3% for the half-year.
- Quarterly operating income fell 56% and net earnings fell 64%; six-month operating income fell 30% and net earnings fell 36%. Lower gross margin, higher operating expenses and reduced volume weighed on results.
- Food Service quarterly sales decreased 2% and operating income fell to $8.0 from $19.2. Frozen Beverages sales decreased 6%, and the segment recorded a $1.3 operating loss versus $2.6 operating income. Retail Supermarkets sales rose 10%, and operating income increased to $4.3 from $3.0.
- Retail supermarket sales accelerated in the quarter’s final two weeks, while Food Service and Frozen Beverages sales fell sharply. For the first 11 weeks, consolidated sales were up about 2%; in the last two weeks they declined about 20% year over year.
- Investment results shifted to a $0.4 quarterly loss from $2.8 income, including substantial unrealized marketable-securities losses. Six-month investment income declined to $1.4 from $3.8.
Outlook, commentary, risks and unusual items
- As a subsequent event, management reported that sales in the first four weeks of the third quarter were down approximately 45% year over year. If sales remained down at that rate, the company estimated it might record an operating loss for the quarter, versus $39 million of operating income in the prior-year June quarter. This was a conditional estimate, not firm guidance.
- Approximately two-thirds of sales were to venues and locations that had shut down or sharply curtailed food-service operations. Management expected COVID-19 to continue negatively affecting the business, but did not expect liquidity problems or material asset impairment, citing approximately $267 million of cash and marketable securities.
- Management attributed weaker margins to lower volume, product mix and production disruption from COVID-19; it also cited higher freight and storage costs and increased marketing spending. Frozen Beverages included ICEE headquarters relocation costs of about $1.5 million in the quarter and $2.3 million for six months.
- The company acquired ICEE Distributors in October 2019 and BAMA ICEE in February 2020 for a combined $57.2 million. The acquisitions added goodwill and intangible assets; purchase-price allocations were preliminary.
- The company declared a regular quarterly dividend of $0.575 per share, payable April 8, 2020. It repurchased and retired 65,648 shares for approximately $9.0 million during the six-month period.
- Other stated risks include raw-material and labor costs, insurance, customer consolidation, execution and integration of acquisitions, and changes in tax laws and interest rates. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the reported third-quarter sales decline persisted, and how it affected operating income, cash generation and segment performance.
- How much of the sales and earnings trends reflected COVID-19 versus pre-existing volume, product-mix, cost and investment-market effects.
- The company’s available liquidity, marketable-securities values and maturities, and compliance with the revolving-credit-facility covenants.
- Whether acquisition purchase-price allocations changed, and the acquired businesses’ ongoing contribution relative to integration and relocation costs.
- The sustainability of the dividend and repurchases if cash flow and earnings weaken; also note the quarter’s reported basic EPS was $0.39 versus diluted EPS of $0.38.