John B. Sanfilippo & Son, Inc. — FY2017 Form 10-K
Period clarification: The supplied filing is the annual report for the 52-week fiscal year ended June 29, 2017—not a 2015 fourth-quarter filing. Fiscal 2016, the prior comparable year, contained 53 weeks.
Business context and reporting period
The company processes and distributes nuts and nut-based foods through consumer, commercial ingredients, and contract packaging channels. Its principal brands include Fisher, Orchard Valley Harvest, and Sunshine Country. It reports one operating segment.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $846.6 million | $952.1 million |
| Gross profit / gross margin | $141.9 million / 16.8% | $137.5 million / 14.4% |
| Operating income / operating margin | $58.3 million / 6.9% | $51.3 million / 5.4% |
| Net income | $36.1 million | $30.4 million |
| Diluted earnings per share | $3.17 | $2.68 |
| Operating cash flow | $52.7 million | $89.2 million |
| Capital expenditures | $10.9 million | $15.0 million |
At June 29, 2017, working capital was $143.5 million, cash was $2.0 million, and inventories were $182.4 million. Total debt was approximately $58.1 million, comprising $29.5 million of revolving borrowings and $28.6 million of long-term debt before unamortized issuance costs. Revolver availability was $84.4 million; the company reported compliance with its financing covenants. Stockholders’ equity was $235.5 million. Interest expense was $2.9 million.
Material changes versus the prior year
- Sales fell 11.1%; pounds sold declined 3.7% and weighted-average selling price per pound declined 7.6%, primarily because of lower almond and walnut prices.
- Commercial ingredients sales dropped 32.6%, including lower volume after the loss of a bulk almond butter customer and reduced bulk inshell walnut sales. Consumer sales declined 6.4% in dollars, while volume rose 1.1%; contract packaging sales increased 7.5%.
- Gross profit rose $4.5 million and margin increased 2.4 percentage points, mainly from lower almond acquisition costs and improved alignment of pecan and walnut selling prices with acquisition costs.
- Operating cash flow decreased $36.6 million, principally because inventory increased $25.8 million; inventory had decreased $41.4 million in FY2016. Revolving borrowings increased $17.4 million during FY2017.
- Net income and diluted EPS increased despite lower sales. FY2016’s extra week limits direct year-over-year comparability.
Outlook, commentary, risks, and unusual items
- Management expects operating cash flow and available credit to fund operations for the next 12 months. FY2018 capital expenditures were estimated at approximately $14 million.
- Management cited volatile commodity costs, particularly cashews, and intensified competition from private-label and branded products. It anticipated that lower almond selling prices could continue to reduce reported sales until lower prices stimulate additional volume.
- The company plans to continue promotional and advertising activity for Fisher and Orchard Valley Harvest, pursue branded growth and profitable use of capacity at its Elgin site, and focus on food safety and customer-base growth. No earnings or revenue guidance was provided.
- Commodity price exposure is unhedged; management estimated that a 1% increase in material costs without corresponding price increases would reduce FY2017 gross profit by about $5.9 million. Approximately 41% of FY2017 nut purchases by dollar value came from foreign sources.
- Customer concentration is significant: the five largest customers represented about 60% of FY2017 sales; Walmart alone accounted for about 28%. Raw-material price and crop volatility, customer pricing pressure, food-safety and recall risks, and inventory measurement estimates are material risks.
- The company paid $56.5 million in special dividends during FY2017. After year-end, it declared a $0.50 regular and $2.00 special dividend per share, paid August 15, 2017, totaling approximately $28.4 million. The July 2017 credit amendment permits qualifying distributions up to $60 million per fiscal year, subject to availability and other conditions.
- An employment-related class action was agreed in principle to settle for $1.2 million; the amount was fully reserved at year-end, while non-monetary terms remained under finalization. Management said other legal matters were not expected to have a material adverse effect, while noting litigation uncertainty.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Most important facts for investors to verify
- Whether sales volumes and margins can hold up as almond prices remain lower and commodity acquisition costs fluctuate.
- Replacement or growth of commercial ingredients business after the loss of the large almond butter customer, and the effect on channel profitability.
- Inventory levels, crop-year valuation and yield adjustments, and resulting working-capital needs and revolver utilization.
- Customer concentration and the terms of major-customer relationships, particularly Walmart and other leading accounts.
- Dividend capacity under credit-facility availability and covenants, alongside debt maturities and the 2018 mortgage interest-rate reset.
- Final terms and payment implications of the employment settlement, and developments in food-safety, regulatory, or other litigation matters.