J&J Snack Foods Corp. — Q2 FY2022 Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 26, 2022; comparisons are with the periods ended March 27, 2021. Dollar amounts below are in millions unless stated otherwise. The filing is unaudited.
Business context
The company sells snack foods through Food Service and Retail Supermarkets and operates a Frozen Beverages segment, including beverage sales, equipment sales, and service. Management noted that results are seasonal, with frozen beverage and novelty sales generally stronger in the third and fourth quarters. Many foodservice venues that curtailed operations during COVID-19 had reopened, but future effects remained uncertain.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $281.5 | $256.2 | $600.0 | $497.2 |
| Gross profit | $65.3 | $60.9 | $144.7 | $111.0 |
| Gross margin | 23.2% | 23.8% | 24.1% | 22.3% |
| Operating income | $4.1 | $7.2 | $18.9 | $7.8 |
| Net earnings | $3.3 | $6.1 | $14.4 | $7.8 |
| Diluted EPS | $0.17 | $0.32 | $0.75 | $0.41 |
- Quarterly sales rose about 10%, but operating income fell 43% and net earnings fell 46%. Six-month sales rose 21%, operating income rose 142%, and net earnings rose 83%.
- Q2 segment sales and operating income: Food Service $176.3 and $0.5; Retail Supermarkets $40.8 and $1.1; Frozen Beverages $64.4 and $2.5. Frozen Beverages improved from a $5.2 operating loss in the prior-year quarter. For six months, its operating income was $3.3 versus a $15.5 loss.
- Six-month operating cash flow was negative $26.4, compared with positive $26.8 in the prior year. Capital expenditures were $35.3 versus $18.8; cash dividends paid were $24.2 versus $21.8.
- Cash and cash equivalents were $221.0 at March 26, down from $283.2 at fiscal year-end. Current assets were $584.3 and current liabilities $165.7. The company had no borrowings under its $50 million revolving credit facility. Operating lease liabilities totaled $59.2; finance lease liabilities were $0.5.
Material changes and management commentary
- A new ERP system implemented in early February caused operational and supply-chain challenges. Management estimated a one-time negative sales impact of approximately $20 million in Q2, all in Food Service and Retail. Management also cited volume decreases associated with the implementation.
- Food Service sales increased 4% in Q2 and 18% for six months, supported by reopened venues and higher foot traffic. Segment operating income fell 91% in Q2 and 22% for six months, reflecting higher ingredient, production, and shipping costs and ERP effects.
- Retail Supermarkets sales declined 7% in Q2 and rose 1% for six months. Segment operating income declined 83% in Q2 and 45% for six months, due primarily to higher cost of goods sold and ERP effects.
- Frozen Beverages sales increased 50% in Q2 and 52% for six months. Management attributed the improvement in segment earnings to higher beverage volumes and operating leverage; amusement-park visitation was reported above pre-COVID levels.
- Inflation pressured margins, especially for flour, eggs, dairy, chocolate, meat, packaging, and fuel. The company had pricing and cost initiatives underway but did not expect most gross-profit benefits until later in the fiscal year.
Outlook, risks, and unusual items
- No quantified full-year earnings or sales guidance was provided in the supplied filing text. Management said it believed cash, investments, expected operating cash, and borrowing capacity were sufficient to fund growth and expansion.
- Key uncertainties include inflation and the cost and availability of raw materials and labor, shipping and insurance costs, demand and customer consolidation, execution of manufacturing and distribution activities, acquisition integration, tax and interest-rate changes, COVID-19 developments, and ERP-related disruption.
- The board declared a regular quarterly dividend of $0.633 per share, payable April 12, 2022. The company had $50 million of revolving credit capacity, repayable in December 2026, subject to restrictive covenants; no balance was outstanding at quarter-end.
- The company disclosed related-party distribution and shipping expenses paid to NFI Industries of $2.9 million for Q2 and $4.0 million for six months; its director Sidney R. Brown is NFI’s CEO. Related-party trade payables were approximately $0.4 million at quarter-end.
- Disclosure controls were concluded effective, and the company reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether ERP implementation issues were temporary and whether the estimated $20 million sales impact and related volume losses fully reversed.
- Whether pricing and cost actions offset ongoing inflation, and how gross margins and segment operating income trend in subsequent quarters.
- Whether negative six-month operating cash flow reflects temporary working-capital investment—receivables and inventories increased—or persists; monitor cash and capital spending.
- Whether Frozen Beverages’ recovery and Food Service venue demand continue, while accounting for the company’s seasonal sales pattern and continuing COVID-19 uncertainty.
- The status of the undrawn credit facility, covenant compliance, dividend funding, and the disclosed NFI related-party arrangements.