J&J Snack Foods Corp: Form 10-Q for the period ended Dec 30, 2023

Statements made in this Form 10-Q that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on our current beliefs as well as assumptions made by us and information currently available to us. Forward-looking statements generally will be accompanied by words such as "anticipate," "if," "may," "believe," "plan,", "goals," "estimate," "expect," "project," "continue," "forecast," "intend," "may," "could," "should," "will," and other similar expressions. Statements addressing our future operating performance and statements addressing events and developments that we expect or anticipate will occur are also considered as forward-looking statements. This includes, without limitation, our statements and expectations regarding any current or future recovery in our industry, the success of new product innovations, and the future impact of our investments in additional production capacity and logistics and warehousing operations. Such forward-looking statements are inherently uncertain, and readers must recognize that actual results may differ materially from the expectations of management. We intend that such forward-looking statements be subject to the safe harbor provisions of the Securities Act and the Exchange Act.

We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties, and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise, update, add or to otherwise correct, any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

Objective

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative form from the perspective of our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and within the Company’s Annual Report on Form 10-K filed for the fiscal year ended September 30, 2023.

Business Overview

The Company manufactures snack foods and distributes frozen beverages which it markets nationally to the foodservice and retail supermarket industries. The Company’s principal snack food products are soft pretzels, frozen novelties, churros and bakery products. We believe we are the largest manufacturer of soft pretzels in the United States. Other snack food products include donuts, cookies, funnel cake and handheld products. The Company’s principal frozen beverage products are the ICEE brand frozen carbonated beverage and the SLUSH PUPPIE brand frozen non-carbonated beverage. The Company’s Food Service and Frozen Beverage sales are made principally to foodservice customers including snack bar and food stand locations in leading chain, department, discount, warehouse club and convenience stores; malls and shopping centers; fast food and casual dining restaurants; stadiums and sports arenas; leisure and theme parks; movie theaters; independent retailers; and schools, colleges and other institutions. The Company’s retail supermarket customers are primarily supermarket chains.

RESULTS OF OPERATIONS – Three months ended December 30, 2023

The following discussion provides a review of results for the three months ended December 30, 2023 as compared with the three months ended December 24, 2022.

(in thousands)

Net Sales

Net sales decreased $3.0 million, or 0.9%, to $348.3 million for the three months ended December 30, 2023. Declines in consumer traffic and consumption at many of our customers impacted our sales in the current fiscal quarter, compared with prior year. Revenue declines were seen in our Food Service segment, which were partially offset by increases seen in our Retail Supermarket and Frozen Beverages segments.

Gross Profit

Gross Profit increased by $3.7 million, or 4.1%, to $94.6 million for the three months ended December 30, 2023. As a percentage of sales, gross profit increased from 25.9% to 27.2%. This increase reflected the improved product mix, aligned pricing, productivity improvements, as well as the stabilization of inflationary pressures across the majority of our business. The cost of key ingredients including flour, oils, dairy and eggs have declined, though double-digit inflationary increases were seen in sugar/sweeteners, mixes, chocolates and meats.

Operating Expenses

Operating Expenses increased $3.4 million, or 4.1%, to $84.9 million for the three months ended December 30, 2023. As a percentage of sales, operating expenses increased from 23.2% to 24.4%. As a percentage of sales, distribution expenses decreased from 12.0% to 11.6%, with the decrease largely driven by an improved inflationary environment and the benefits of our strategic initiatives to improve logistics management and increase efficiency across our distribution network and supply chain. As a percentage of sales, marketing expenses increased from 6.7% to 7.9%, with the increase driven by the added promotional and marketing spend to support our core brands and new product launches, as well as higher trade show costs. As a percentage of sales, general and administrative expenses increased from 4.7% to 5.2% with the increase attributable to the investment in incremental resources, as well as costs incurred in the hosting of the Company’s National Sales meeting for the first time since the COVID-19 pandemic.

Other Income and Expense

Investment income increased $0.7 million to $0.8 million for the three months ended December 30, 2023. The increase was primary due to the improving interest rate environment. Interest expense decreased by $0.5 million for the three months ended December 30, 2023 due to the significant decrease in the Company’s average outstanding borrowings on the Amended Credit Agreement for the three months ended December 30, 2023, as compared to the prior year period.

Income Tax Expense

Income tax expense increased by $0.3 million, or 13.2%, to $2.6 million for the three months ended December 30, 2023. The effective tax rate was 26.6% for the three months ended December 30, 2023 as compared with 26.0% in the prior year period.

Net Earnings

Net earnings increased by $0.6 million, or 9.8%, to $7.3 million for the three months ended December 30, 2023, due to the aforementioned items.

There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.

Business Segment Discussion

We operate in three segments: Food Service, Retail Supermarket, and Frozen Beverages. The following table is a summary of sales and operating income, which is how we measure segment profit.

(in thousands)

(in thousands)

24

Food Service Segment Results

(in thousands)

Sales to food service customers decreased $9.7 million, or 4.1%, to $228.6 million for the three months ended December 30, 2023. Soft pretzels sales to food service customers decreased 4.0% to $50.1 million, with the decrease largely attributable to volume decreases driven by consumer pressures. Frozen novelties sales decreased 3.3% to $21.1 million with a slight increase in Dippin’ Dots sales more than offset by some volume decreases seen within the category. Churro sales increased 8.9% to $28.1 million with the increase largely driven by the volume increases seen within the category. Sales of bakery products decreased by 6.4% to $102.0 million, with the decrease primarily driven by reduced purchases from grocery in-store bakeries which faced a more challenging consumer environment. Sales of handhelds decreased 6.5% to $22.0 million, with the decrease entirely attributable to pricing declines related to the contractual pricing true-up of costing on certain raw material ingredients, and somewhat offset by volume increases seen on our core handhelds.

Sales of new products in the first twelve months since their introduction were approximately $3.6 million in the three months ended December 30, 2023. Price increases had a minimal impact on Food Service sales in the quarter, with the decreases in segment sales primarily due to some volume declines seen in certain product categories as noted above.

Operating income in our Food Service segment decreased $0.4 million to $6.0 million, for the three months ended December 30, 2023, which reflected the impact of the lower comparative sales in the quarter and the incremental costs incurred with the opening of a regional distribution center.

Retail Supermarket Segment Results

(in thousands)

Sales of products to retail customers increased $0.7 million, or 1.6%, to $43.8 million for the three months ended December 30, 2023. Soft pretzel sales increased 27.4% to $18.4 million with the increase primarily driven by the incremental distribution of our core soft pretzel brands. Frozen novelties sales decreased 28.4% to $12.9 million with the decrease primarily tied to volume decrease seen amongst the majority of our retail frozen novelty brands. Biscuit sales decreased 11.1% to $7.0 million, and handheld sales increased 90.5% to $5.5 million, with the increase in handheld sales primarily attributable to growth with a major retail customer. Sales of new products in retail supermarkets were minimal in the quarter. Price increases had a minimal impact on retail supermarket sales in the quarter.

Operating income in our Retail Supermarkets segment decreased $0.7 million in the quarter to $0.5 million with the decrease primary driven by a shift in product mix and the incremental costs incurred with the opening of a regional distribution center.

Frozen Beverages Segment Results

(in thousands)

Frozen beverage and related product sales increased $6.0 million, or 8.5%, in the three months ended December 30, 2023. Beverage sales increased 8.5% to $42.0 million. Gallon sales were down approximately 1% for the three months ended December 30, 2023, Service revenue increased 3.1% to $24.6 million reflecting strong maintenance call volumes. Machine revenue (primarily sales of frozen beverage machines) increased 26.8% to $8.9 million driven by strong growth from new clients and convenience customers.

Operating income in our Frozen Beverage segment increased $1.4 million in the quarter to $3.2 million as strong sales drove leverage across the business.

Liquidity and Capital Resources

Although there are many factors that could impact our operating cash flow, most notably net earnings, we believe that our future operating cash flow, along with our borrowing capacity, our current cash and cash equivalent balances is sufficient to satisfy our cash requirements over the next twelve months and beyond, as well as to fund future growth and expansion.

(in thousands)

• The increase in depreciation of fixed assets over prior year period was largely due to prior year purchases of property, plant, and equipment.
• Cash flows associated with changes in assets and liabilities were a net inflow in the three months ended December 30, 2023, and were driven primarily by a decrease in accounts receivable of $32.4 million offset slightly by a decrease in accounts payable and accrued liabilities of $10.6 million. In the prior year period, the slight net outflow was primarily attributable to largely offsetting decreases in accounts receivable of $21.2 million and in accounts payable and accrued liabilities of $21.7 million.

(in thousands)

• Purchases of property, plant and equipment include spending for production growth, in addition to acquiring new equipment, infrastructure replacements, and upgrades to maintain competitive standing and position us for future opportunities. The decrease over prior year period was primarily due to the higher rate of strategic spending in the prior year period for new lines at various plants aimed at increasing capacity.
• The decrease in proceeds from redemption and sales of marketable securities from prior year period was due to a strategic decision in prior years to no longer re-invest redeemed proceeds into marketable securities given the low interest rate environment that existed in those years.

(in thousands)

• Borrowings under credit facility and repayment of borrowings under credit facility relate to the Company’s cash draws and repayments made to primarily fund working capital needs. The decrease in borrowings from prior year was due to the Company’s increase in cash provided by operations, which lowered its borrowing needs in the three months ended December 30, 2023.
• The increase in payment of cash dividends from prior year period was due to the raising of our quarterly dividend during fiscal 2023.

Liquidity

As of December 30, 2023, we had $50.0 million of Cash and Cash Equivalents.

In December 2021, the Company entered into an amended and restated loan agreement (the “Credit Agreement”) with our existing banks which provided for up to a $50 million revolving credit facility repayable in December 2026.

On June 21, 2022, the Company entered into an amendment to the Credit Agreement, the “Amended Credit Agreement” which provided for an incremental increase of $175 million in available borrowings. The Amended Credit Agreement also includes an option to increase the size of the revolving credit facility by up to an amount not to exceed in the aggregate the greater of $225 million or, $50 million plus the Consolidated EBITDA of the Borrowers, subject to the satisfaction of certain terms and conditions.

Interest accrues, at the Company’s election at (i) the BSBY Rate (as defined in the Credit Agreement), plus an applicable margin, based upon the Consolidated Net Leverage Ratio, as defined in the Credit Agreement, or (ii) the Alternate Base Rate (a rate based on the higher of (a) the prime rate announced from time-to-time by the Administrative Agent, (b) the Federal Reserve System’s federal funds rate, plus 0.50% or (c) the Daily BSBY Rate, plus an applicable margin). The Alternate Base Rate is defined in the Credit Agreement.

The Credit Agreement requires the Company to comply with various affirmative and negative covenants, including without limitation (i) covenants to maintain a minimum specified interest coverage ratio and maximum specified net leverage ratio, and (ii) subject to certain exceptions, covenants that prevent or restrict the Company’s ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, alter its capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates, or amend its organizational documents. As of December 30, 2023, the Company is in compliance with all financial covenants of the Credit Agreement.

As of December 30, 2023, we had $7.0 million of outstanding borrowings drawn on the Amended Credit Agreement. As of December 30, 2023, we had $208.2 million of additional borrowing capacity, after giving effect to the $9.8 million of letters of credit outstanding.

Critical Accounting Policies, Judgments and Estimates

There have been no material changes to our critical accounting policies, judgments and estimates from the information provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Judgments and Estimates, in our Annual Report on Form 10-K for the year ended September 30, 2023, as filed with the SEC on November 28, 2023.

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth, in item 7a. “Quantitative and Qualitative Disclosures About Market Risk,” in its 2023 annual report on Form 10-K filed with the SEC.

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of December 30, 2023, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting during the quarter ended December 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

For information on risk factors, please refer to “Risk Factors” in Part I, Item 1A of the Company’s Form 10-K for the fiscal year ended September 30, 2023. The risks identified in that report have not changed in any material respect.