J&J Snack Foods Corp. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended June 24, 2023; comparisons are to periods ended June 25, 2022. Dollar figures below are in millions unless stated otherwise. The company manufactures snack foods and distributes frozen beverages through Food Service, Retail Supermarkets and Frozen Beverages. Results are unaudited; frozen beverage and novelty sales are generally seasonally stronger in the third and fourth quarters.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $425.8 | $380.2 | $1,115.0 | $980.2 |
| Gross profit | $142.9 | $109.1 | $324.1 | $253.8 |
| Gross margin | 33.6% | 28.7% | 29.1% | 25.9% |
| Operating income | $48.3 | $21.3 | $67.8 | $40.2 |
| Net earnings | $35.0 | $15.6 | $48.5 | $29.9 |
| Diluted EPS | $1.81 | $0.81 | $2.51 | $1.56 |
Q3 sales rose 12.0%, operating income 127.2% and net earnings 124.8%; nine-month sales rose 13.7%, operating income 68.7% and net earnings 62.0%. Gross margin improved substantially, while Q3 operating margin was 11.3% versus 5.6% and nine-month operating margin was 6.1% versus 4.1%. Q3 distribution costs fell to 10.4% of sales from 12.7%; marketing and administrative expense ratios increased. Interest expense rose to $1.3 million for the quarter and $3.7 million year to date, chiefly due to credit-facility borrowings.
Cash, debt and liquidity
- Nine-month operating cash flow was $105.9 million, compared with cash used of $29.6 million a year earlier. Capital spending was $76.5 million; operating cash flow less capital spending was approximately $29.5 million.
- Investing cash outflow was $70.4 million, primarily capital expenditures. Financing cash outflow was $6.3 million, including $40.4 million of dividends; the company borrowed $102.0 million and repaid $74.0 million under its credit facility.
- At June 24, 2023, cash was $65.6 million; marketable securities were $4.5 million. Current assets were $469.2 million and current liabilities $187.6 million.
- Long-term debt was $83.0 million, at a weighted-average rate of 6.12%; $132.2 million of additional capacity remained after letters of credit. The facility matures in December 2026. The company reported compliance with its financial covenants.
- Operating lease liabilities totaled $88.0 million and finance lease liabilities $0.8 million. Management said cash, operating cash flow, borrowing capacity and investments should be sufficient for requirements over the next 12 months and beyond.
Segments and material changes
| Segment | Q3 sales change | Q3 operating income | Nine-month sales change | Nine-month operating income |
|---|---|---|---|---|
| Food Service | +11.9% | $20.8 million (prior year $2.6 million) | +15.5% | $32.3 million (prior year $12.2 million) |
| Retail Supermarkets | +0.2% | $4.2 million (prior year $2.3 million) | +4.2% | $5.8 million (prior year $8.4 million) |
| Frozen Beverages | +20.0% | $23.3 million (prior year $16.3 million) | +15.0% | $29.7 million (prior year $19.6 million) |
Food Service growth included Dippin’ Dots, acquired in June 2022: it contributed $31.4 million of Q3 sales and $60.8 million of nine-month sales. The acquisition makes comparisons less directly comparable. Frozen Beverages benefited from stronger beverage sales, including gallon sales growth of 9% in Q3 and 8% year to date. Retail Supermarket nine-month operating income declined amid earlier-period promotional, allowance and raw-material cost pressures. Management attributed stronger gross margins to pricing, product mix and easing inflation versus the prior year’s historic highs.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management described liquidity as adequate to fund requirements and growth, but cautioned that interim results are not necessarily indicative of full-year results and noted seasonal strength in warmer months.
- Input-cost pressures were mixed: flour, oils, dairy and meat costs had declined, while sugar/sweeteners and mixes continued to face double-digit inflation, pressuring some frozen novelty and churro margins. Management also cited raw materials, labor, insurance, customer consolidation, execution, acquisitions, tax changes and interest rates as factors that could affect results.
- Capital expenditures increased to $76.5 million from $64.2 million, primarily reflecting investment in new production lines and capacity. Distribution-cost improvement in the quarter reflected supply-chain initiatives and lower diesel and carrier costs.
- In June 2023, the company began leasing a Texas distribution center constructed and owned by a subsidiary of NFI Industries, a related party whose CEO and owner is a company director. The lease created a $28.7 million right-of-use asset and $28.5 million noncurrent lease liability. The company paid NFI $41.1 million during the nine-month period, mainly for pass-through distribution and shipping costs; it stated that agreements were on arm’s-length terms.
- The company reported no expected material adverse effect from pending legal proceedings and no material change to previously disclosed risk factors. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth and Food Service profitability reflects Dippin’ Dots versus comparable organic volume, pricing and mix.
- Whether gross-margin improvement persists as ingredient inflation, especially sugar/sweeteners and mixes, evolves.
- Retail Supermarket trends, where nine-month segment operating income fell despite higher sales.
- Borrowing levels, interest costs, covenant headroom and remaining facility capacity as capital spending and dividends continue.
- Economics and governance oversight of the NFI distribution-center lease and related distribution arrangements.
- Seasonal performance in the remaining fiscal year; the filing supplies no formal numerical guidance.