J&J Snack Foods Corp. — Q3 FY2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended June 27, 2020; the filing also reports the first nine months of fiscal 2020 against the comparable 2019 periods. The company operates Food Service, Retail Supermarkets and Frozen Beverages. Management said approximately two-thirds of sales go to venues and locations that shut down or sharply curtailed foodservice operations because of COVID-19. Amounts below are in U.S. dollars; financial figures are shown in millions unless noted.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $214.6 | $326.7 | $769.5 | $874.6 |
| Gross profit | $37.2 | $101.3 | $184.5 | $257.5 |
| Gross margin | 17.34% | 31.02% | 23.98% | 29.44% |
| Operating income (loss) | ($19.4) | $39.0 | $13.3 | $85.9 |
| Net income (loss) | ($12.6) | $30.9 | $11.7 | $68.8 |
| Diluted EPS | ($0.67) | $1.63 | $0.62 | $3.64 |
- Q3 sales fell 34% year over year; nine-month sales declined 12%. Excluding the two acquisitions, sales declined 35% and approximately 13%, respectively.
- Q3 operating costs and expenses were $56.6 million, down $5.7 million, but rose to 26.4% of sales from 19.1% as sales fell faster than costs. Nine-month expenses were $171.2 million, approximately flat year over year, and 22.3% of sales versus 19.6%.
- For the first nine months, operating cash flow was $66.6 million versus $101.2 million; capital expenditures were $47.6 million. Cash and equivalents decreased $22.4 million to $170.0 million.
- At June 27, cash and marketable securities totaled approximately $270.3 million. Current assets were $478.9 million and current liabilities $127.8 million. The company had no borrowings on its $50 million revolving credit facility, which expires in November 2021. Reported finance-lease liabilities were $0.8 million and operating-lease liabilities $70.5 million.
Material changes and segment results
| Segment | Q3 sales, versus prior year | Q3 operating income (loss), versus prior year | Nine-month sales, versus prior year |
|---|---|---|---|
| Food Service | $116.6 million, down 40% | ($18.2) million, versus $21.0 million | $471.4 million, down 14% |
| Retail Supermarkets | $57.5 million, up 38% | $7.9 million, versus $3.8 million | $124.5 million, up 16% |
| Frozen Beverages | $40.4 million, down 56% | ($9.1) million, versus $14.2 million | $173.6 million, down 21% |
Food Service and Frozen Beverages were heavily affected by venue closures and lower volume; Retail Supermarkets benefited from higher supermarket demand during the pandemic. The company acquired ICEE Distributors and BAMA ICEE for a combined $57.2 million, funded through investing cash flows. Nine-month investment income fell to $2.7 million from $5.8 million, reflecting lower interest rates and investment losses.
Outlook, risks and unusual items
- Sales in the first four weeks of Q4 were down approximately 25% year over year. Management said results could be significantly better than Q3 if that trend continued, but would remain materially below the prior-year quarter. It cautioned that COVID-19’s effect would continue for an undetermined period.
- Management said it did not expect liquidity issues or material asset impairment, citing approximately $270 million of cash and marketable securities. This outlook is subject to the uncertain recovery of affected venues and locations.
- A pending Midwest manufacturing-plant closure resulted in $5.1 million of impairment costs, including $1.9 million of equipment impairment and $3.2 million of operating lease right-of-use asset impairment. Management expects annual manufacturing-overhead and distribution-cost reductions of approximately $7–8 million.
- Management cited approximately $5 million of employee-safety and increased COVID-related compensation costs. It also reported a $2.0 million inventory write-down in the quarter and approximately $1.5 million of inventory reserves as a factor in lower gross margin; the filing does not clearly explain the relationship between these amounts.
- Frozen Beverages’ nine-month results included $2.5 million of ICEE headquarters relocation costs. Nine-month earnings in the prior year included an approximately $0.9 million tax benefit from revising the estimated one-time repatriation tax provision.
- The company declared a regular quarterly dividend of $0.575 per share, payable July 7, 2020. It repurchased 65,648 shares for $9.0 million during the fiscal year through the quarter ended March 28, 2020.
Important facts for investors to verify
- Whether venue reopenings and the reported early-Q4 sales improvement persisted, especially across Food Service and Frozen Beverages.
- Whether the company can restore gross margins and achieve the expected $7–8 million annual savings from the plant closure, including the timing and further costs of the shutdown.
- Whether inventory write-downs, customer receivable collectability and marketable-security valuations require further charges; the allowance for doubtful receivables rose to $1.34 million from $0.57 million.
- How acquired distributor performance and purchase-price allocations develop; the acquisition allocations were preliminary at filing.
- The sustainability of dividends and liquidity under prolonged disruption, including obligations under operating leases and use of the undrawn credit facility.