J&J Snack Foods Corp: Form 10-Q for the period ended Mar 30, 2024

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 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 and sells 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 and six months ended March 30, 2024

The following discussion provides a review of results for the three and six months ended March 30, 2024 as compared with the three and six months ended March 25, 2023.

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Net Sales

Net sales increased by $21.9 million, or 6.5%, to $359.7 million for the three months ended March 30, 2024. Net sales increased by $18.8 million, or 2.7%, to $708.0 million for the six months ended March 30, 2024. Organic sales growth, across both the three months and six months ended March 30, 2024, was driven by growth across all three of the Company’s business segments.

Gross Profit

Gross Profit increased by $17.9 million, or 19.8%, to $108.2 million for the three months ended March 30, 2024. As a percentage of sales, gross profit increased from 26.8% to 30.1%. This increase reflected the impact of improved product and pricing mix along with ongoing productivity improvements and a stabilization of inflationary pressures across the majority of our input costs. Deflationary costs were seen in certain raw materials during the quarter, led by flour, oils, dairy and eggs, with this benefit being somewhat offset by double digit inflationary increases seen in chocolates, and to a lessor extent, inflationary increases seen in sugars/sweeteners, mixes, and meats.

Gross Profit increased by $21.6 million, or 11.9%, to $202.8 million for the six months ended March 30, 2024. As a percentage of sales, gross profit increased from 26.3% to 28.6%. This increase reflected the impact of improved product and pricing mix along with ongoing productivity improvements and a stabilization of inflationary pressures across the majority of our input costs. Deflationary costs were seen in certain raw materials, led by flour, oils, dairy and eggs, with this benefit being somewhat offset by double digit inflationary increases seen in chocolates, and to a lessor extent, inflationary increases seen in sugars/sweeteners, mixes, and meats.

Operating Expenses

Operating Expenses increased $10.1 million, or 12.7%, to $90.3 million for the three months ended March 30, 2024. As a percentage of sales, operating expenses increased from 23.7% to 25.1%. As a percentage of sales, distribution expenses increased from 11.3% to 12.3%, with the increase largely driven by $2.3 million of one-time transition expenses related to the opening of our regional distribution centers. As a percentage of sales, marketing expenses increased from 7.1% to 7.7%, with the increase largely driven by incremental licensing fees on new churro business and additional strategic promotional and marketing spend to support our core brands and new product launches. As a percentage of sales, general and administrative expenses remained relatively flat, slightly decreasing from 5.3% to 5.1%.

Operating Expenses increased $13.5 million, or 8.4%, to $175.2 million for the six months ended March 30, 2024. As a percentage of sales, operating expenses increased from 23.5% to 24.8%. As a percentage of sales, distribution expenses increased from 11.6% to 11.9%, with the increase largely driven by $4.5 million of one-time transition expenses related to the opening of our regional distribution centers. As a percentage of sales, marketing expenses increased from 6.9% to 7.8% with the increase largely driven by incremental licensing fees on new churro business and additional strategic promotional and marketing spend to support our core brands and new product launches. As a percentage of sales, general and administrative expenses remained relatively flat, slightly increasing from 5.0% to 5.2%.

Other Income and Expense

Investment income increased by $0.3 million to $0.7 million and by $0.4 million to $1.5 million for the three months and six months, ended March 30, 2024, respectively. The increases were primary due to the improving interest rate environment in fiscal 2024.

Interest expense decreased by $0.9 million to $0.4 million and by $1.4 million to $1.0 million for the three months and six months, ended March 30, 2024, respectively, due to the decrease in the Company’s average outstanding borrowings on the Amended Credit Agreement for the three and six month periods ended March 30, 2024, as compared to the prior year periods.

Income Tax Expense

Income tax expense increased by $2.4 million, or 102.2%, to $4.8 million for the three months ended March 30, 2024. The effective tax rate was 26.6% as compared with 25.8% in the prior year period.

Income tax expense increased by $2.7 million, or 58.2%, to $7.5 million for the six months ended March 30, 2024. The effective tax rate was 26.6% as compared with 25.9% in the prior year period.

Net Earnings

Net earnings increased by $6.5 million, or 94.0%, for the three months ended March 30, 2024, due to the aforementioned items.

Net earnings increased by $7.1 million, or 52.6%, for the six months ended March 30, 2024, 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.

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23

Food Service Segment Results

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Sales to food service customers increased $11.7 million, or 5.4%, to $230.0 million for the three months ended March 30, 2024. Soft pretzels sales to food service customers decreased 2.1% to $54.3 million, with the decrease largely due to soft consumer trends. Frozen novelties sales increased 4.2% to $27.7 million, led by an approximate 5% increase in Dippin’ Dots sales. Churro sales increased 23.7% to $30.8 million with the increase largely driven by new business growth with a major QSR customer. Sales of bakery products increased by 7.7% to $91.9 million with the growth largely attributable to strong unit volume growth in cookies. Sales of handhelds decreased by 4.0% to $19.5 million driven by softer consumer trends, although, volume sales of our core food service handhelds remained strong in the quarter.

Sales of new products in the first twelve months since their introduction were approximately $12.1 million for the three months ended March 30, 2024, driven primarily by the addition of churros to the menu of a major QSR customer. Sales in the quarter benefited minimally from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Food Service segment increased $2.8 million in the quarter to $7.9 million, driven by sales growth as well as improved product mix and gross margin performance.

Sales to food service customers increased $2.0 million, or 0.4%, to $458.6 million for the six months ended March 30, 2024. Soft pretzels sales to food service customers decreased 3.0% to $104.5 million with the decrease largely due to soft consumer trends. Frozen novelties sales increased 0.8% to $48.8 million with the increase driven by an increase in Dippin’ Dots sales mostly offset by some volume decreases seen within the category. Churro sales increased 16.2% to $58.9 million with the increase largely driven by new business growth with a major QSR customer. Sales of bakery products remained relatively flat, decreasing by 0.2% to $193.9 million, with a softer first fiscal quarter mostly offset by category growth seen in the second fiscal quarter that was primarily attributable to unit volume growth in cookies. Sales of handhelds decreased by 5.3% to $41.6 million with some of the decrease attributable to pricing declines related to the contractual pricing true-up of certain raw material ingredients seen in the first fiscal quarter.

Sales of new products in the first twelve months since their introduction were approximately $15.7 million for the six months ended March 30, 2024, driven primarily by the addition of churros to the menu of a major QSR customer. Sales in the six-month period benefited minimally from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Food Service segment increased $2.4 million in the six months ended March 30, 2024, to $13.9 million, driven by sales growth as well as improved product mix and gross margin performance.

Retail Supermarket Segment Results

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24

Sales of products to retail customers increased $6.5 million, or 14.1%, to $52.9 million for the three months ended March 30, 2024. Soft pretzel sales increased 2.7% to $16.5 million with the increase largely attributable to our continued expansion of our core brands into retail. Frozen novelties sales increased 14.0% to $23.7 million, with the increase largely attributable to growth within our Dogsters and ICEE novelties. Biscuit sales increased 6.0% to $6.2 million, and Handheld sales increased 75.5% to $7.2 million with the increase in handheld sales largely driven by expanded placement of product with a major retailer. Sales of new products in retail supermarkets were minimal in the quarter. Sales in the quarter benefited from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Retail Supermarkets segment increased $4.6 million in the quarter to $5.1 million, primarily driven by sales growth as well as improved product mix and gross margin performance.

Sales of products to retail customers increased $7.2 million, or 8.1%, to $96.6 million for the six months ended March 30, 2024. Soft pretzel sales increased 14.4% to $34.9 million with the increase largely attributable to the incremental distribution of our core soft pretzel brands. Frozen novelties sales decreased 5.7% to $36.5 million, with the decrease largely due to the decreases in the majority of our retail frozen novelty brands seen during our first fiscal quarter. Biscuit sales decreased 3.9% to $13.2 million, and handheld sales increased 81.7% to $12.7 million with the increase in handheld sales largely driven by expanded placement of product with a major retailer. Sales of new products in retail supermarkets were minimal in the six months ended March 30, 2024. Sales in the six-month period benefited minimally from the impact of the prior fiscal year’s price increases, along with modest increases in volume.

Operating income in our Retail Supermarkets segment increased $4.0 million in the six months ended March 30, 2024 to $5.6 million, primarily driven by sales growth as well as improved product mix and gross margin performance.

Frozen Beverages Segment Results

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Frozen beverage and related product sales increased $3.6 million, or 5.0%, in the three months ended March 30, 2024. Beverage-related sales increased 6.9% to $44.7 million, with the increase driven by consistent consumer trends across most customer channels. Gallon sales were up approximately 1% for the three months ended March 30, 2024. Service revenue increased 2.9% to $23.2 million and machine revenue (primarily sales of frozen beverage machines) remained relatively flat, decreasing by 0.4% to $8.2 million.

Operating income in our Frozen Beverage segment increased $0.3 million in the quarter to $4.9 million, as strong sales drove leverage across the business.

Frozen beverage and related product sales increased $9.6 million, or 6.7% in the six months ended March 30, 2024. Beverage-related sales increased 7.7% to $86.6 million. Gallon sales remained flat for the six months ended March 30, 2024. Service revenue increased 3.0% to $47.8 million. Machine revenue (primarily sales of frozen beverage machines) increased 12.1% to $17.1 million, primarily driven by the strong growth from new clients and convenience customers seen in the first fiscal quarter.

Operating income in our Frozen Beverage segment increased $1.7 million in the six months ended March 30, 2024 to $8.1 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 and our investment securities is sufficient to satisfy our cash requirements over the next twelve months and beyond, as well as to fund future growth and expansion.

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• The increase in depreciation of fixed assets was largely due to prior year purchases of property plant and equipment.
• The net cash inflow of $3.2 million in cash flows associated with changes in assets and liabilities, net of effects from purchase of companies, in the six months ended March 30, 2024, was primarily driven by a decrease in accounts receivable of $20.1 million, offset by a $17.0 million increase in inventories. In the prior year, the net cash outflow of $9.6 million was primarily driven by a decrease in accounts payable and accrued liabilities of $25.7 million, offset somewhat by a $10.5 million decrease in accounts receivable and a $4.8 million decrease in prepaid expenses.

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• 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.

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• Borrowings under credit facility and repayment of borrowings under credit facility relate to the Company’s cash draws and repayments made in the six months ended March 30, 2024 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 six months ended March 30, 2024.
• 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 March 30, 2024, we had $43.6 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 March 30, 2024, the Company is in compliance with all financial covenants of the Credit Agreement.

As of March 30, 2024, $17.0 million was outstanding under the Amended Credit Agreement. As of March 30, 2024, the amount available under the Amended Credit Agreement was $198.2 million, 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 our Annual Report on Form 10-K for the year ended September 30, 2023, as filed with the SEC on November 28, 2023.

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 March 30, 2024, 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 March 30, 2024, 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.