J&J Snack Foods Corp: Form 10-Q for the period ended Dec 28, 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 (or the industries of our customers), the success of new product innovations, and the future impact of our supply chain efficiency projects, including 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 readers 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 28, 2024.

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, churros, 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.

Business Trends and Strategy

Our results are impacted by macroeconomic and demographic trends and changes in consumer behavior. The U.S. economy has experienced economic volatility and uncertainty in recent years, which has had, and we expect might continue to have, an impact on consumer behavior. Consumer spending may continue to be impacted by levels of discretionary income and the impact of that on the consumer’s decisions making around their purchases. In addition, inflation continues to impact our business and fluctuating raw material costs may continue to impact the costs of our products.

To help combat these potential headwinds, we strategically look to improve our operational efficiencies and margins, as well as expand our growth opportunities across our various channels and customers. Some recent examples of implementing these strategies include:

• Our recently completed strategic supply chain transformation in which we opened three regional distribution centers which is projected to drive significant cost reductions around warehousing and distribution costs.
• The recent addition of six new production lines which has significantly expanded upon our capacity and allowed us to meet growth opportunities across our core products such as pretzels, churros and frozen novelties.
• Implementation of a new ERP system in fiscal 2022 which has helped to create efficiencies and streamline processes.
• Many examples of successful cross-selling and leveraging our brands across customer channels, including our recent expansion of the breadth and depth of our Dippin’ Dots brand across the theater channel, as well as looking to penetrate that brand into the retail market.
• Further expansion of our SuperPretzel brand across the retail market through the launch of Bavarian Sticks.
• Our fiscal year 2023 rollout of our new Hola! Churros brand.
• Our fiscal year 2022 acquisition of Dippin’ Dots, and our fiscal year 2024 acquisition of Thinsters.

RESULTS OF OPERATIONS – Three months ended December 28, 2024

The following discussion provides a review of results for the three months ended December 28, 2024 as compared with the three months ended December 30, 2023.

(in thousands)

22

Net Sales

Net sales increased $14.3 million, or 4.1%, to $362.6 million for the three months ended December 28, 2024. Revenue increases were seen in each of the Company’s business segments. Organic sales growth was driven by growth within the Company’s Retail Supermarket and Frozen Beverages business segments. We also saw strong growth across most of our core products in the Food Service business segment, in addition to contractual pricing true-ups on costing of certain raw material ingredients, which more than offset some volume decreases in certain product categories.

Gross Profit

Gross Profit decreased by $0.7 million, or 0.7%, to $93.9 million for the three months ended December 28, 2024. As a percentage of sales, gross profit decreased from 27.2% to 25.9%. This decrease reflected negative margin impacts from comparatively rising raw material costs and other inflationary pressures that outweighed recent pricing actions. The cost of key ingredients including eggs, chocolates, and fruit fillings have experienced significant inflationary increases, with that headwind partially offset by inflationary declines in dairy, flour, and cheese costs. Additionally, mix changes within our bakery business, as well as the loss of some limited time offer churro volumes from prior year, and some hurricane related impacts, all negatively impacted current quarter gross profit when compared to prior year quarter.

Operating Expenses

Operating Expenses increased $2.8 million, or 3.3%, to $87.7 million for the three months ended December 28, 2024. As a percentage of sales, operating expenses decreased from 24.4% to 24.2%. As a percentage of sales, distribution expenses decreased from 11.6% to 10.9%, with the decrease driven by the benefits of our strategic initiatives to improve logistics management and increase efficiency across our distribution network and supply chain, combined with the impact of $2.2 million of non-recurring expenses in the prior year for start-up costs related to our regional distribution center supply chain transformation. As a percentage of sales, marketing expenses remained flat at 7.9%, and general and administrative expenses remained flat at 5.2%.

Other Income and Expense

Investment income increased $0.2 million or 30% to $1.0 million for the three months ended December 28, 2024 due to higher average cash balances and higher interest rates on foreign cash balances. Interest expense decreased by $0.3 million, or 62%, to $0.2 million for the three months ended December 28, 2024 due to the decrease in the Company’s average outstanding borrowings on the Amended Credit Agreement for the three months ended December 28, 2024, as compared to the prior year period.

Income Tax Expense

Our effective tax rate was 27% for the three months ended December 28, 2024, as well as for the three months ended December 30, 2023.

Net Earnings

Net earnings decreased by $2.1 million, or 29.4%, to $5.1 million for the three months ended December 28, 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.

(in thousands)

(in thousands)

Food Service Segment Results

(in thousands)

Sales to food service customers increased $10.3 million, or 4.5%, to $238.9 million for the three months ended December 28, 2024. Soft pretzels sales to food service customers increased 4.8% to $52.5 million, with the increase largely attributable to volume increases seen within the category on our key brands. Frozen novelties sales increased 9.8% to $23.1 million, with the increase largely attributable to strong Dippin’ Dots sales growth in the quarter compared with the prior year quarter. Churro sales decreased 9.2% to $25.5 million with the decrease largely driven by the lapping of the benefit of limited time offer churro volumes for a quick serve restaurant in prior year, partially offset by new business growth. Sales of bakery products increased by 6.6% to $108.7 million, with the increase largely attributable to contractual pricing true-ups on costing of certain raw material ingredients, as well as strong volume growth in our cookie portfolio, offset somewhat by volume declines in our pie portfolio related to the loss of some seasonal business with a declining margin profile that we bid on, but did not retain. Sales of handhelds increased 7.5% to $23.7 million, with the increase attributable to contractual pricing true-ups on costing of certain raw material ingredients, as well as some volume increases seen on our core handhelds.

Sales of new products in the first twelve months since their introduction were approximately $0.7 million in the three months ended December 28, 2024. Pricing increases, primarily contractual true-ups, had a modest impact on segment sales in the quarter, and more than offset a slight net volume decrease.

Operating income in our Food Service segment decreased $4.3 million in the quarter to $1.7 million, for the three months ended December 28, 2024, which reflected gross margin pressures due mostly to the rising raw material costs and other inflationary pressures, outweighing the benefit from price increases, as well as an unfavorable product mix. The unfavorable product mix reflected the loss of some seasonal business within bakery with a declining margin profile that we bid on, but did not retain, as well as lower churro volumes as we lapped the benefit from a limited time offer with a quick serve restaurant in the prior year quarter. The unfavorable gross margin pressures were slightly offset by a decrease in distribution expenses related to the benefits of our strategic initiatives to improve logistics management and increase efficiency across our distribution network and supply chain, combined with the impact of the non-recurring expenses in the prior year for start-up costs related to our regional distribution center supply chain transformation.

Retail Supermarket Segment Results

(in thousands)

Sales of products to retail customers increased $1.0 million, or 2.2%, to $44.7 million for the three months ended December 28, 2024. Soft pretzel sales decreased 7.4% to $17.1 million with the decrease largely attributable to a temporary issue with a major retail customer’s ordering system which was resolved in December. Frozen novelties sales increased 25.3% to $16.1 million with the increase primarily tied to volume increases seen amongst the majority of our retail frozen novelty brands. Biscuit sales remained relatively flat at $7.0 million, and handheld sales decreased 6.8% to $5.1 million, with the decrease in handheld sales primarily attributable to the impact of the fire at our Holly Ridge location, and delays that were experienced in the production of our retail handhelds during the quarter. 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 slightly by $0.1 million in the quarter to $0.4 million.

Frozen Beverages Segment Results

(in thousands)

25

Frozen beverage and related product sales increased $3.1 million, or 4.0%, in the three months ended December 28, 2024. Beverage sales increased 6.4% to $44.7 million in the three months ended December 28, 2024, with the increase driven primarily by a 10% increase in gallon sales over that period, offset slightly by a less favorable sales mix and some foreign exchange related headwinds. Service revenue decreased 3.7% to $23.6 million, and machine revenue (primarily sales of frozen beverage machines) increased 13.0% to $10.0 million driven by strong growth from theater and convenience customers.

Operating income in our Frozen Beverage segment increased $1.0 million in the quarter to $4.2 million as strong sales drove leverage across the business and operating expenses were well managed.

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 was primarily due to prior year purchases of property, plant and equipment.
• Cash flows associated with changes in assets and liabilities, generated approximately $11.3 million of cash in the three months ended December 28, 2024 compared with $23.5 million in the three months ended December 30. 2023. The net inflow in the three months ended December 28, 2024 was driven primarily by decreases in accounts receivable of $25.0 million and inventory of $3.2 million, offset partially by a decrease in accounts payable and accrued liabilities of $11.1 million and an increase in prepaid expenses of $5.8 million. In the prior year period, the net inflow was 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 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 slight decrease over prior year period was primarily due to the timing of spend.

(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 and represent the net paydown of borrowings.
• The increase in payment of cash dividends from prior year period was due to the raising of our quarterly dividend during fiscal 2024.

Liquidity

As of December 28, 2024, we had $73.6 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 December 28, 2024, the Company is in compliance with all financial covenants of the Credit Agreement.

As of December 28, 2024, there was no outstanding balance under the Amended Credit Agreement. As of December 28, 2024, the amount available under the Amended Credit Agreement was $212.7 million, after giving effect to the $12.3 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 28, 2024, as filed with the SEC on November 26, 2024.

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 28, 2024, as filed with the SEC on November 26, 2024.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15( e) and 15d-15( e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 28, 2024. The term “disclosure controls and procedures,” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosures. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of December 28, 2024 our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting described below.

Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weakness described below, management has concluded that the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.

Material Weakness in Internal Control Over Financial Reporting

As previously disclosed, management identified a material weakness related to ineffective information technology general controls (ITGCs), including certain controls over logical access and change management. As a result, certain business process controls that are dependent on the ineffective ITGCs, or rely on the data produced from systems impacted by the ineffective ITGCs, were also deemed ineffective.

Management’s Remediation Plan and Status

Our management is committed to maintaining a strong internal control environment. In response to the identified material weakness above, management has already taken steps to substantially remediate this material weakness and will continue to take further steps until such remediation is complete. Remediation efforts include ensuring that change management and user access controls are performed timely. Our remediation plan also includes: (i) enhancing processes around reviewing privileged access to key financial systems, (ii) strengthening change management procedures, (iii) expanding the management and governance over ITGCs, (iv) enhancing existing access management procedures and ownership.

As management continues to evaluate and work to improve our disclosure controls and procedures and internal control over financial reporting, we may take additional measures to address these control deficiencies or modify certain remediation measures described above. We anticipate that the foregoing efforts, when implemented and tested for a sufficient period of time, will remediate the material weakness described above.

Changes in Internal Control Over Financial Reporting

Other than continuing to make progress on the ongoing remediation efforts described above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 28, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s 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 28, 2024. The risks identified in that report have not changed in any material respect.