J&J Snack Foods Corp. — Q1 FY2023 10-Q
Business context and reporting period: The filing covers the three months ended December 24, 2022, compared with the three months ended December 25, 2021. The company sells food-service, retail supermarket and frozen-beverage products. Results are unaudited; frozen-beverage and novelty sales are generally higher in the warmer third and fourth fiscal quarters.
Key financial results
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $351.3 million | $318.5 million | +10.3% |
| Gross profit / margin | $90.9 million / 25.9% | $79.4 million / 24.9% | Margin +1.0 percentage point |
| Operating income / margin | $9.3 million / 2.7% | $14.8 million / 4.7% | -37.2% |
| Net earnings / diluted EPS | $6.6 million / $0.34 | $11.1 million / $0.58 | Net earnings -40.2% |
| Operating cash flow | $21.4 million | $5.5 million | Increased |
| Capital expenditures | $30.9 million | $16.1 million | Increased |
Cash flow after capital expenditures was approximately negative $9.5 million. Cash and cash equivalents were $54.9 million at quarter-end, versus $35.2 million at September 24, 2022. Marketable securities totaled $6.4 million. Current assets were $441.3 million and current liabilities were $160.2 million.
Long-term debt was $92.0 million, up from $55.0 million at fiscal year-end. The company reported a 4.84% weighted-average borrowing rate and $123.2 million of available capacity under its amended credit agreement, net of outstanding letters of credit. It was in compliance with its financial covenants. Operating lease liabilities totaled $55.1 million.
Material changes and segment performance
- Food Service sales rose 12.5% to $238.3 million, including $13.4 million from acquired Dippin’ Dots. Segment operating income fell 29.0% to $6.4 million.
- Retail Supermarket sales increased 0.9% to $43.1 million; segment operating income declined 77.7% to $1.1 million.
- Frozen Beverages sales increased 9.2% to $70.0 million; segment operating income rose to $1.8 million from $0.9 million.
- Gross margin improved as fiscal 2022 pricing actions and product mix partly offset inflation. Management reported average raw-material costs were approximately 20% higher year over year.
- Operating expenses rose 26.3% to $81.5 million, faster than sales. Distribution and administrative costs increased; administrative expense also included Dippin’ Dots costs. Higher input, production and distribution costs reduced Food Service and Retail Supermarket operating income.
Outlook, risks and other disclosures
Management said cash, investments, expected operating cash flow and borrowing capacity should be sufficient to meet cash needs over the next twelve months and beyond and to fund growth. The filing provides no specific sales or earnings guidance.
Management cited raw-material and labor costs, insurance, customer consolidation, execution in manufacturing and distribution, acquisition integration, tax-law changes and interest rates as factors that could affect results. Some product categories experienced volume declines despite price increases. Higher freight and fuel costs pressured distribution expense. Capital spending increased, primarily for plant capacity expansion and production lines.
Dippin’ Dots, acquired in June 2022 for approximately $223.6 million in cash, contributed $13.4 million of sales and a $0.7 million net loss in the quarter. Its purchase-price allocation remained preliminary; no measurement-period adjustments were recorded in this quarter. Management reported effective disclosure controls and no material change in internal controls. Dippin’ Dots was excluded from the interim internal-control evaluation under the permitted acquisition transition period. The company said it did not expect current legal proceedings to materially affect its financial position or results.
Important facts for investors to verify
- How much of reported sales growth reflects organic volume, pricing and the Dippin’ Dots acquisition, and whether volume trends improve.
- Whether pricing and mix continue to offset raw-material, labor, freight and other cost inflation, particularly given the sharp operating-income declines in Food Service and Retail Supermarkets.
- How elevated capital expenditures, working-capital needs, dividends and borrowing affect free cash flow, debt and remaining credit availability.
- Progress integrating Dippin’ Dots, its subsequent profitability, and any revisions to the preliminary purchase-price allocation.
- Whether seasonal demand and the reported improvement in Frozen Beverages persist through the warmer fiscal quarters.