J&J Snack Foods Corp. — Q1 FY2022 10-Q
Reporting period: Three months ended December 25, 2021; comparisons are with the three months ended December 26, 2020. Amounts below are in millions of dollars unless stated otherwise. The company sells food-service, retail supermarket and frozen-beverage products. Interim results are not necessarily indicative of full-year performance; frozen beverage and frozen juice bar sales are typically higher in warmer quarters.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $318.5 | $241.0 | +32% |
| Gross profit / margin | $79.4 / 24.9% | $50.1 / 20.8% | Margin +4.1 percentage points |
| Operating income / margin | $14.8 / 4.7% | $0.6 / 0.2% | +$14.3 |
| Net earnings / diluted EPS | $11.1 / $0.58 | $1.8 / $0.09 | Net earnings +524% |
| Operating cash flow | $5.5 | $21.3 | Down $15.9 |
| Capital expenditures | $16.1 | $9.7 | Up $6.4 |
Gross-margin improvement reflected higher sales, favorable product mix and margin efficiencies. Operating expenses rose to $64.5 million from $49.5 million, but declined as a share of sales to 20.3% from 20.6%. Distribution expense increased to 10.5% of sales from 9.5%, while marketing and administrative expenses declined as a share of sales.
Segments and drivers
- Food Service: Sales increased 32% to $211.7 million; operating income rose to $9.0 million from $6.2 million. Management attributed growth to reopened or higher-traffic customer venues, volume and product mix. Food-service soft pretzels rose 54%, churros 69%, and bakery sales 21%.
- Retail Supermarkets: Sales increased 9% to $42.7 million; operating income rose 6% to $5.0 million. Growth included soft pretzels, frozen novelties and biscuits. Handheld sales declined 54% following discontinuation of products management described as margin dilutive.
- Frozen Beverages: Sales increased 54% to $64.1 million; the segment recorded $0.9 million of operating income versus a $10.3 million loss. Beverage sales more than doubled, with gallon sales up 109%; service revenue rose 16% and machine revenue 21%.
Cash, liquidity and obligations
- Cash and cash equivalents were $268.5 million at December 25, 2021, down from $283.2 million at September 25, 2021. Net cash decreased $14.7 million during the quarter.
- Operating cash flow was $5.5 million, versus $21.3 million a year earlier. Higher inventory used $10.0 million of cash; lower accounts payable and accrued liabilities used $9.7 million. Investing activities used $8.7 million, including $16.1 million of capital spending; financing activities used $11.4 million, including $12.1 million of dividends paid.
- Current assets were $576.0 million and current liabilities $158.1 million. The company reported no outstanding borrowings under its bank credit facility. It amended its revolving credit agreement in December 2021, providing up to $50 million through December 2026, subject to restrictive covenants and commitment fees.
- Operating lease liabilities totaled $59.5 million; finance lease liabilities totaled $0.5 million. The filing reports no conventional funded bank debt outstanding at quarter-end.
- The Board declared a regular quarterly dividend of $0.633 per share, payable January 11, 2022. The company stated that cash, investments, expected operating cash flow and borrowing capacity were sufficient to fund future growth and expansion.
Outlook, risks and notable items
- No quantified earnings, sales or margin guidance was provided. Management noted that roughly two-thirds of sales are to venues and locations that had previously closed or curtailed food service due to COVID-19. Many had reopened, but future pandemic effects remained uncertain.
- Management cited risks including raw-material and labor availability and costs, insurance costs, customer consolidation, execution in manufacturing, marketing and distribution, acquisition integration, and changes in tax laws and interest rates.
- Management said traffic and volume drove most of food-service sales growth; price increases had only a marginal effect in that segment. New products generated approximately $2 million of food-service sales in their first 12 months since introduction.
- The effective tax rate was 27%, compared with 8% in the prior-year quarter, which benefited from a $0.42 million tax benefit related to share-based compensation. Investment income fell to $0.3 million from $1.4 million, primarily due to lower investment balances and lower interest rates.
- Foreign-currency translation reduced other comprehensive income by $0.4 million, versus a $2.3 million gain in the prior-year quarter. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether venue traffic and reopening trends persist, and how much reported growth reflects volume, product mix and pricing.
- Whether gross-margin gains can be sustained as distribution costs, labor and input costs evolve.
- Why operating cash flow lagged earnings and whether inventory and payables movements reverse in subsequent quarters.
- Execution and returns on the increased $16.1 million of quarterly capital expenditures, alongside the $50 million revolving facility’s covenant terms.
- Potential exposure to COVID-19, seasonality, foreign-currency movements, investment-security valuation and the disclosed operating risks.