Business context and reporting period
John B. Sanfilippo & Son, Inc. processes and distributes nuts and other snack foods through consumer, commercial ingredients, and contract packaging channels. This 10-Q reports the quarter ended September 27, 2018, the first quarter of fiscal 2019, compared with the quarter ended September 28, 2017. The requested metadata says “2017 Q1,” but the filing itself is for fiscal 2019 Q1.
Key financial metrics
Dollar amounts below are in millions, except per-share data and percentages.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $204.3 | $215.7 |
| Gross profit / margin | $33.0 / 16.1% | $35.1 / 16.3% |
| Operating expenses | $22.9 | $17.5 |
| Operating income / margin | $10.1 / 4.9% | $17.6 / 8.2% |
| Net income | $6.6 | $10.7 |
| Basic / diluted EPS | $0.58 / $0.57 | $0.94 / $0.94 |
| Operating cash flow | $15.7 | $23.4 |
| Capital expenditures | $4.8 | $2.9 |
At September 27, 2018, cash was $1.2 million, inventories were $181.0 million, and total assets were $415.4 million. Revolver borrowings were $51.9 million; current and long-term debt together were approximately $32.7 million, for total reported borrowings of approximately $84.7 million. The company had $62.3 million of available credit, including the effect of $3.25 million in letters of credit. It reported compliance with its Credit Facility and Mortgage Facility covenants. The quarterly cash dividend was $2.55 per share, or $29.1 million paid.
Material changes versus the prior comparable period
- Sales declined 5.3% and sales volume fell 3.4%. Contract packaging sales dropped 36.1% to $27.6 million, while consumer sales rose 2.7% and commercial ingredients sales rose 1.5%.
- Gross profit fell 6.2%; operating income declined about 43% as operating expenses increased 30.8%, including higher compensation, freight, advertising, acquisition-related amortization, and consulting and legal costs.
- Net income declined about 38%. The effective tax rate decreased to 21.3% from 31.9%, primarily reflecting the lower federal statutory rate enacted under the 2017 Tax Cuts and Jobs Act.
- Operating cash flow decreased $7.8 million, mainly due to working-capital investment, particularly inventory, and lower net income. Revolver borrowings increased $20.7 million during the quarter.
- Consumer-channel sales benefited from growth in Orchard Valley Harvest, private-brand products, and acquired Southern Style Nuts. The prior-year comparison is affected by Squirrel Brand’s acquisition in November 2017 and the resulting shift in channel classification.
Outlook, risks, contingencies, and unusual items
- Management expects operating cash flow and available Credit Facility capacity to fund operations for the next 12 months. Fiscal 2019 capital expenditures are projected at approximately $15 million.
- Management cited expected deflation in most major tree-nut commodities except almonds, rising transportation costs, competition, customer and retail consolidation, and risks from fixed-price customer arrangements. It intends to continue brand promotion and expand distribution and offerings for Orchard Valley Harvest, Squirrel Brand, and Southern Style Nuts.
- Walnut grower payments and related inventory costs were estimated using information available at quarter-end; final amounts are expected to be determined in the second and/or third quarters of fiscal 2019, with any difference reflected in results then.
- The company paid a previously reserved $1.2 million employment-related class-action settlement during the quarter. Other ordinary-course legal proceedings remain; management did not expect them to materially affect results, but noted unfavorable outcomes could be material.
- Approximately 63% of the Elgin office building’s rentable area was vacant. Management noted that leasing the remaining space is uncertain and may require additional capital expenditures.
- The company adopted revenue standard Topic 606 retrospectively. For the prior-year quarter, adoption increased reported sales by $0.9 million and net income by $0.3 million; most revenue recognition timing was unchanged. The company expects adoption of the new lease standard in fiscal 2020 to significantly increase reported assets and liabilities.
- Management reported effective disclosure controls and no significant change in risk factors during the quarter. Results are subject to commodity-price, inventory-estimation, food-safety, customer concentration, operating-cost, and execution risks.
Important facts for investors to verify
- Whether the sharp contract-packaging decline and lost customer business continue, and how the acquisition-related channel reclassification affects comparisons.
- Whether higher operating expenses, particularly compensation, freight, advertising, and acquisition amortization, moderate in subsequent quarters.
- Final walnut grower liabilities and inventory costs, and the impact of commodity-price changes on margins and working capital.
- Inventory levels, operating cash generation, revolver use, covenant headroom, and the company’s capacity to maintain dividends and fund planned capital expenditures.
- Progress leasing vacant Elgin office space and any further investment required, as well as the eventual balance-sheet effect of lease-standard adoption.