Filing summary
Period clarification: The supplied filing is John B. Sanfilippo & Son, Inc.’s Form 10-Q for the quarter ended December 29, 2016—the second quarter and first 26 weeks of fiscal 2017. This does not match the request metadata’s “2015 Q2.” Dollar amounts below are in millions unless stated otherwise.
Business context
The company processes and distributes nuts and other snack and food products through consumer, commercial ingredients, and contract packaging channels. Its brands include Fisher and Orchard Valley Harvest. Fiscal 2017 comparisons are against the quarter ended December 24, 2015 and the 26 weeks ended on that date.
Financial performance
| Metric | Quarter ended Dec. 29, 2016 | Prior-year quarter | 26 weeks ended Dec. 29, 2016 | Prior-year 26 weeks |
|---|---|---|---|---|
| Net sales | $249.4 | $279.0 | $471.7 | $504.8 |
| Gross profit | $43.4 | $45.0 | $79.9 | $78.2 |
| Gross margin | 17.4% | 16.1% | 16.9% | 15.5% |
| Operating income | $19.7 | $19.7 | $36.3 | $33.4 |
| Net income | $12.9 | $12.1 | $23.1 | $20.0 |
| Diluted EPS | $1.13 | $1.07 | $2.03 | $1.77 |
- Quarterly sales fell 10.6%; first-half sales fell 6.6%. Lower average selling prices—principally for almonds and walnuts following lower acquisition costs—were the main factor. Sales volume declined 3.8% in the quarter but increased 2.2% for the first half.
- Quarterly gross profit declined 3.6% despite margin expansion; first-half gross profit rose 2.1%. Lower almond costs supported margins, partly offset by higher pecan and cashew costs.
- Commercial ingredients sales weakened sharply: down 36.2% in the quarter and 26.7% for the half. Consumer sales declined in dollars, while contract packaging sales rose 7.3% and 9.4%, respectively.
- Operating expenses declined in dollars but increased as a share of sales: 9.5% versus 9.1% quarterly and 9.2% versus 8.9% year to date. First-half effective tax rate was 32.9%, versus 35.0%; adoption of a stock-compensation accounting update and related excess tax benefits favorably affected the current-period rate.
Cash flow, liquidity and debt
- First-half operating cash flow was $62.4, down from $81.9. The company attributed the decline mainly to a $26.1 inventory build, compared with an inventory reduction of $12.7 in the prior-year period. Investing cash outflow was $6.6, primarily capital spending; financing cash outflow was $56.0.
- Cash was $2.0 at December 29, 2016. Current assets were $257.5 and current liabilities were $129.8. Inventory was $182.7, up $26.1 from fiscal year-end, mainly reflecting larger pecan and walnut quantities and higher acquisition costs.
- Revolving borrowings were $12.4; long-term debt was $26.9 and current maturities were $3.4. The company reported $101.4 of available credit, including the effect of $3.7 in letters of credit, and compliance with Credit Facility and Mortgage Facility covenants.
- The amended revolving facility matures July 7, 2021. Management expected operating cash flow and available credit to fund operations for the next 12 months. Fiscal 2017 capital expenditures were forecast at approximately $13.5.
Material changes, outlook and risks
- The board declared a $2.50-per-share special dividend, paid December 13, 2016, totaling approximately $28.3. Together with another $2.50-per-share special dividend paid in August, first-half dividends paid were $56.5, versus $22.5 a year earlier.
- Management cited continued lower selling prices for almond- and walnut-containing products, and anticipated those prices would weigh on sales comparisons until lower prices support increased volume. It also reported higher pecan and cashew acquisition costs and competitive pressure.
- The final amount owed to walnut growers for the 2016 crop was still being determined. The company estimated the liability and related inventory costs using available information; any difference from the final amount was expected to be recognized in the third quarter of fiscal 2017.
- Management planned to pursue profitable use of capacity at its Elgin facility and maintain recent promotional and advertising activity for Fisher and Orchard Valley Harvest. Approximately 69% of the Elgin office building was vacant; additional leasing and possible capital spending were uncertain.
- Risks include commodity-price and crop variability, customer or volume losses, competitive pricing, food safety and regulatory matters, facility disruptions, and litigation. Management said ordinary-course legal proceedings were not expected to materially affect results, but acknowledged unfavorable outcomes could have a material effect. It reported no significant change to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- Confirm the period intended: the source is fiscal 2017 Q2, not 2015 Q2.
- Track commercial ingredients volumes and customer losses alongside consumer-brand and contract-packaging growth.
- Review the third-quarter adjustment, if any, to the estimated walnut-grower liability and inventory valuation.
- Assess the cash and borrowing impact of special dividends, seasonal inventory requirements, and planned capital expenditures.
- Monitor nut acquisition costs, selling-price trends, credit-facility availability and covenant compliance, and food-safety or litigation developments.