Business context and reporting period
J&J Snack Foods Corp. filed this unaudited Form 10-Q for the quarter and six months ended March 27, 2021. The company reports Food Service, Retail Supermarkets and Frozen Beverages segments. Results are affected by seasonality, with frozen beverages and frozen novelties generally selling more in the third and fourth quarters.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Three months ended Mar. 27, 2021 | Prior-year quarter | Six months ended Mar. 27, 2021 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $256.2 | $272.0 | $497.2 | $554.9 |
| Gross profit | $60.9 | $69.4 | $111.0 | $147.3 |
| Gross margin | 23.8% | 25.5% | 22.3% | 26.5% |
| Operating income | $7.2 | $11.0 | $7.8 | $32.7 |
| Net earnings | $6.1 | $7.3 | $7.8 | $24.4 |
| Diluted EPS | $0.32 | $0.38 | $0.41 | $1.28 |
- Operating margin was approximately 2.8% for the quarter and 1.6% for the six-month period, versus 4.0% and 5.9% a year earlier.
- Six-month operating cash flow was $26.8 million, down from $42.3 million. Capital expenditures were $18.8 million versus $37.0 million; operating cash flow less capital expenditures was approximately $8.0 million versus $5.3 million.
- Cash and cash equivalents were $238.4 million at March 27, 2021. Current assets were $530.3 million and current liabilities $143.2 million. Current held-to-maturity securities were $21.4 million.
- The company reported no borrowings under its $50 million revolving credit facility. Lease liabilities included $56.6 million of operating leases and $0.5 million of finance leases. The credit facility expires in November 2021.
- Six-month effective tax rate was 20%, versus 28% a year earlier; management attributed the lower rate primarily to an $0.9 million share-based compensation tax benefit.
Material changes and segment results
- Consolidated sales fell 6% in the quarter and 10% for six months. Operating income fell 34% and 76%, respectively; net earnings fell 17% and 68%.
- Food Service: sales declined 1% in the quarter and 7% for six months; operating income declined 24% and 53%. Food-service soft pretzel and bakery sales remained pressured, while handheld sales rose sharply, led by a product for a wholesale-club customer.
- Retail Supermarkets: sales increased 17% in the quarter and 24% for six months; operating income increased 47% and 69%. Pretzels and frozen juices/ices contributed to sales growth.
- Frozen Beverages: sales declined 32% in the quarter and 37% for six months. The segment recorded operating losses of $5.2 million and $15.5 million, compared with losses of $1.3 million and income of $0.1 million in the respective prior-year periods.
- Lower volume and production reduced gross-margin efficiency and fixed-cost leverage. Distribution expense as a share of sales increased in both comparative periods, while marketing expense as a share of sales declined.
- Cash increased by $42.6 million during the six months. Investing activities provided $23.8 million, including $41.3 million in proceeds from marketable securities; financing activities used $8.4 million, including $21.8 million of dividends paid.
Outlook, risks and notable items
- The filing provides no quantitative earnings or sales guidance. Management said customer traffic was improving as theaters, schools, entertainment venues and restaurants reopened or increased capacity, but the extent of future COVID-19 effects remained uncertain.
- Management said approximately two-thirds of sales are to venues and locations that had shut down or sharply curtailed food-service operations because of COVID-19. Lower volumes continued to pressure food-service and frozen-beverage margins.
- Management believes cash, investments, expected operating cash flow and borrowing capacity are sufficient to fund growth and expansion. A quarterly dividend of $0.575 per share was declared, payable April 13, 2021.
- Risk factors cited include raw-material and labor supply and costs, insurance costs, customer consolidation, execution of manufacturing and distribution activities, acquisitions, tax-law changes and interest rates.
- Investment income improved with market conditions. At period-end, held-to-maturity corporate bonds had $29.0 million amortized cost; $21.0 million was rated BBB/BB/B, per ratings disclosed in the filing. The company expected to hold the bonds to maturity.
- Gross unrecognized tax benefits were $0.343 million, with $0.267 million of accrued interest and penalties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether reopening and venue capacity improvements translate into sustained recovery in Food Service and Frozen Beverages.
- Whether Retail Supermarkets growth and the wholesale-club handheld product remain durable, and how segment margins evolve as sales mix changes.
- Cash-flow conversion, inventory and receivables trends, and capital spending needs as volumes recover.
- Liquidity and investment portfolio quality, including lower-rated bond exposure, and the status or renewal of the revolving credit facility before its November 2021 expiry.
- Dividend sustainability and the effect of lease obligations and other fixed costs on cash available for investment and shareholder returns.