John B. Sanfilippo & Son, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended December 26, 2019 (the second quarter of fiscal 2020), and the 26 weeks ended that date. This does not match the request metadata of “2018 Q2.” Financial amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
The company processes, manufactures, markets and distributes nuts and snack products through consumer, commercial ingredients and contract packaging channels. Its brands include Fisher, Orchard Valley Harvest, Squirrel Brand and Southern Style Nuts. Results are unaudited; the company notes interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Quarter ended Dec. 26, 2019 | Prior-year quarter | 26 weeks ended Dec. 26, 2019 | Prior-year 26 weeks |
|---|---|---|---|---|
| Net sales | $246.4 | $253.3 | $464.3 | $457.6 |
| Gross profit | $50.0 | $42.9 | $92.2 | $75.8 |
| Gross margin | 20.3% | 16.9% | 19.9% | 16.6% |
| Operating expenses | $25.5 | $26.2 | $48.7 | $49.1 |
| Operating income | $24.5 | $16.6 | $43.5 | $26.7 |
| Net income | $17.5 | $11.3 | $30.4 | $17.9 |
| Diluted EPS | $1.52 | $0.98 | $2.64 | $1.56 |
Quarterly sales fell 2.7% despite a 4.8% increase in pounds sold; lower prices and a mix shift away from higher-priced pecans and walnuts were the main factors. First-half sales rose 1.5% as volume increased 6.8%. Profitability improved substantially, principally from higher volume, manufacturing efficiencies, lower manufacturing spending and lower pecan and cashew acquisition costs. Quarterly operating margin increased to 9.9% from 6.6%; first-half operating margin rose to 9.4% from 5.8%.
For the quarter, consumer-channel sales declined 3.8%, commercial ingredients rose 8.9%, and contract packaging declined 8.7%. First-half changes were +3.1%, +3.6% and −11.3%, respectively. Consumer branded products were a smaller share of consumer sales: 33% versus 45% in the quarter and 31% versus 43% for the first half.
Cash flow, debt and liquidity
- First-half cash from operations was $54.3, up from $48.4. Investing cash use was $6.1, including $6.5 of capital expenditure, partly offset by $0.2 of insurance proceeds. Financing cash use was $48.3; dividends paid were $57.3.
- Cash was $1.4 at December 26, 2019. Current assets were $232.4 and current liabilities $117.7 (working capital of approximately $114.6; current ratio approximately 2.0).
- Revolver borrowings were $13.5, with $100.8 of credit availability, including the impact of outstanding letters of credit. Long-term debt, including current maturities, was approximately $23.7; the filing reports total liabilities of $170.8. The company was in compliance with credit and mortgage covenants.
- The company paid $3.00 per share in first-quarter dividends and $2.00 per share in the second quarter, versus $2.55 per share for the comparable prior-year first half. Higher dividends contributed to $13.5 of net revolver borrowings in the first half.
Outlook, risks and unusual items
- Management expects operating cash flow and available credit to fund operations for the next 12 months, and estimates fiscal 2020 capital expenditures of $17–$20. It expects to maintain current promotional and advertising activity for Orchard Valley Harvest and Fisher snack brands.
- Management cites potential almond acquisition-cost volatility, rising walnut costs, competitive pricing and market-share pressure, including weaker Fisher recipe-nut sales. Consumer preferences, customer concentration, commodity prices, food safety and facility disruptions are also risks.
- Walnut grower prices for the crop procured in the first half were not final at the reporting date. The company estimated the related liability and inventory cost; any difference from final pricing was expected to be recognized in the third quarter.
- A fire at the Garysburg, North Carolina facility on October 7, 2019 destroyed roasting equipment and damaged packaging equipment and part of the roof. Third-party roasting was arranged. The company reported no expected material adverse effect on fiscal 2020 results or customer service, but is considering alternatives and plans to cease facility operations after shelling the current crop, estimated to take about 16 months. It received a $1.5 insurance advance; approximately $1.5 of cleanup and capital-asset damage costs had been incurred.
- The company was updating its revolving credit agreement and expected to extend its term by five years; this was an expectation, not a completed amendment in the filing. Legal proceedings are described as ordinary-course matters; management believed they would not materially affect results, while acknowledging uncertain outcomes.
- Lease accounting adoption added $4.8 of operating lease right-of-use assets and $4.8 of lease liabilities at December 26, 2019, with no material earnings or cash-flow impact. The company also reclassified $1.0 from accumulated other comprehensive loss to retained earnings under a new accounting standard.
Most important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2020 Q2, not 2018 Q2.
- Track whether walnut grower costs finalized in the third quarter materially differed from the estimates used in inventory and liabilities.
- Monitor commodity costs, product mix and whether strong volume and margin gains persist amid pricing and brand competition.
- Assess the Garysburg closure plan, insurance recovery and any effect on production, costs or customer service.
- Review cash use and borrowing after the $57.3 of first-half dividends, and confirm completion and terms of the expected credit-facility extension.