John B. Sanfilippo & Son, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2016 Q2,” but the supplied filing covers the quarter and 26 weeks ended December 28, 2017 (fiscal 2018 Q2), compared with periods ended December 29, 2016. Figures below are unaudited and in millions of dollars unless stated otherwise.
Business context and reporting period
The company processes and distributes nuts and related food and snack products through consumer, commercial ingredients, and contract packaging channels. Its brands include Fisher, Orchard Valley Harvest, Squirrel Brand, and Southern Style Nuts. On November 30, 2017, it acquired Squirrel Brand, expanding its branded portfolio and reach into alternative distribution channels.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | 26 weeks FY2018 | 26 weeks FY2017 |
|---|---|---|---|---|
| Net sales | $259.1 | $249.4 | $473.9 | $471.7 |
| Gross profit / margin | $37.9 / 14.6% | $43.4 / 17.4% | $72.7 / 15.3% | $79.9 / 16.9% |
| Operating income / margin | $14.2 / 5.5% | $20.3 / 8.1% | $31.6 / 6.7% | $37.4 / 7.9% |
| Net income | $7.8 | $12.9 | $18.2 | $23.1 |
| Diluted EPS | $0.68 | $1.13 | $1.59 | $2.03 |
Q2 sales increased 3.9%, with sales volume up 0.9% and weighted-average selling price per pound up 2.9%. First-half sales rose 0.5%, while volume was relatively unchanged. Q2 consumer-channel sales rose 7.6%; commercial ingredients fell 11.8%, primarily following the loss of a bulk almond butter customer; contract packaging rose 4.3%. First-half channel sales changed by +4.5%, -20.9%, and +10.1%, respectively.
Gross profit fell mainly because higher walnut and pecan acquisition costs could not be offset by selling prices under prior holiday promotional commitments. Lower incentive compensation reduced first-half operating expenses, partially cushioning the gross-profit decline. Q2 net income also included a $2.4 million non-cash tax charge to remeasure deferred tax assets following U.S. tax reform; the company said the lower federal rate should favorably affect future effective tax rates and cash taxes.
Cash flow, balance sheet, and liquidity
- First-half cash from operations was $58.4 million, versus $62.4 million a year earlier. Capital expenditures were $7.0 million.
- Investing cash outflow was $28.8 million, including $21.9 million cash paid for Squirrel Brand. Financing cash outflow was $28.5 million, including $28.4 million of dividends paid.
- At December 28, 2017, cash was $3.1 million, inventory $168.9 million, and total assets $426.5 million. Inventory was down 7.6% from a year earlier.
- Revolving borrowings were $30.0 million; current and long-term debt totaled about $38.1 million on the balance sheet, for total reported borrowings of approximately $68.1 million. Available credit was $83.8 million, net of outstanding letters of credit. The company reported compliance with credit and mortgage covenants.
- Management expected operating cash flow and available credit to fund operations for the next 12 months. Fiscal 2018 capital expenditures were estimated at approximately $14 million.
Material developments, outlook, and risks
- Squirrel Brand’s purchase price was $33.4 million after an initial working-capital adjustment: $21.9 million cash and an $11.5 million, three-year unsecured seller note bearing 5.5% interest. The allocation to goodwill and intangible assets remained preliminary; final working-capital and valuation adjustments were pending.
- The company expected to maintain recent promotional and advertising activity for Fisher and Orchard Valley Harvest and highlighted continued Orchard Valley Harvest domestic growth. It provided no specific full-year revenue or earnings guidance.
- Walnut grower costs and inventory were estimated using available information; final pricing was to be determined in Q3 FY2018, with any difference recognized then. Commodity-price volatility, especially for tree nuts, and the ability to pass cost increases through to customers remain key risks.
- Other cited risks include competition and customer/product-mix changes, fixed-price customer commitments, food safety and regulatory matters, operational disruptions, and litigation. An employment-related class action had an agreed-in-principle $1.2 million settlement, fully reserved at June 29, 2017; non-monetary terms were still being finalized.
- The company reported effective disclosure controls and no significant changes to risk factors during the quarter. It noted that adopting the lease accounting standard was expected to significantly increase reported assets and liabilities.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is for Q2 FY2018, not Q2 2016.
- Track whether walnut and pecan costs can be recovered through pricing, and review the Q3 walnut grower settlement and any inventory-cost adjustment.
- Assess whether Squirrel Brand’s contribution, preliminary purchase accounting, and seller-financed debt develop as expected.
- Monitor commercial-ingredients sales, customer concentration, gross margins, and the company’s ability to fund dividends, capital spending, and debt obligations.
- Review the final terms and payment status of the employment settlement and the impact of tax-law changes on subsequent results.