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 filing reports the unaudited third quarter and first 39 weeks of fiscal 2019, ended March 28, 2019, compared with the periods ended March 29, 2018. The request metadata says “2017 Q3,” but the filing itself is for fiscal 2019 Q3.
Unless otherwise noted, financial amounts below are in millions of dollars. The company adopted ASC 606 using the full retrospective method; comparative results were recast, with an immaterial effect on the periods shown.
Financial performance and position
| Metric | Q3 FY2019 | Q3 FY2018 | 39 weeks FY2019 | 39 weeks FY2018 |
|---|---|---|---|---|
| Net sales | $201.8 | $202.8 | $659.4 | $677.3 |
| Gross profit / margin | $38.8 / 19.2% | $33.1 / 16.3% | $114.7 / 17.4% | $106.0 / 15.6% |
| Operating income / margin | $15.4 / 7.6% | $14.0 / 6.9% | $42.1 / 6.4% | $45.7 / 6.8% |
| Net income | $10.3 | $8.6 | $28.2 | $26.9 |
| Diluted EPS | $0.90 | $0.75 | $2.45 | $2.35 |
- For the 39 weeks, operating cash flow was $42.8 million, versus $33.1 million a year earlier. Capital expenditures were $12.1 million; cash used in investing was $11.8 million. Cash used in financing was $31.3 million, including $29.1 million of dividends. Cash declined $0.4 million to $1.1 million.
- At March 28, 2019, current assets were $243.9 million and current liabilities $114.4 million. Inventory was $178.9 million.
- Debt included $35.1 million drawn on the revolving facility and $29.2 million of long-term debt, including current maturities. Revolver availability was $79.4 million after outstanding letters of credit. The company reported compliance with credit and mortgage facility covenants.
- Shareholders’ equity was $244.4 million; total liabilities were $165.3 million.
Material changes versus the prior comparable periods
- Quarterly sales fell 0.5%, while sales volume rose 3.0%. Lower weighted-average selling prices, including a mix shift toward lower-priced peanuts and commodity deflation, offset volume growth. Year-to-date sales declined 2.6%, with volume relatively unchanged.
- Consumer-channel sales grew 5.2% in the quarter and 5.5% year to date. Commercial ingredients declined 17.3% and 9.5%, respectively; contract packaging declined 4.3% and 28.3%.
- Gross profit and margin improved in both comparisons, primarily from lower acquisition costs for several nuts, including walnuts, peanuts, cashews, and pecans. Quarterly volume growth also contributed.
- Operating expenses rose 22.7% in the quarter and 20.5% year to date. Higher compensation and incentive costs, advertising, freight, legal and consulting costs, and acquisition-related amortization contributed. Consequently, year-to-date operating income fell 8.0% despite higher gross profit.
- Year-to-date net income increased despite lower operating income, helped by lower income tax expense. The prior-year comparison included a $2.4 million non-cash tax charge related to the Tax Cuts and Jobs Act.
- Year-to-date operating cash flow improved primarily because working-capital use for inventory was lower than in the prior-year period. Financing cash use rose substantially, mainly reflecting lower revolver borrowing compared with the prior year and dividend payments.
Outlook, commentary, risks, and unusual items
- Management expects operating cash flow and available credit to fund operations for the next 12 months. Fiscal 2019 capital expenditures are expected to be approximately $15 million.
- Management’s strategy emphasizes growth in branded and private-label consumer products, including Fisher, Orchard Valley Harvest, Squirrel Brand, and Southern Style Nuts. It expects to maintain recent promotional and advertising activity for Fisher and Orchard Valley Harvest.
- Management cites commodity-price deflation, competitive and pricing pressure, changing customer and consumer demand, retail consolidation, and online price competition as challenges. Other disclosed risks include raw-material availability and cost, food safety and regulation, key-customer dependence, operational disruptions, litigation, and execution of the growth strategy.
- Approximately 63% of rentable office space at the Elgin site was vacant; additional capital expenditures may be needed to lease the remaining space. A prior $1.2 million employment-related class-action settlement was paid in the first quarter of fiscal 2019. The company says other ordinary-course legal proceedings are not expected to have a material effect, while noting unfavorable outcomes remain possible.
- The company expects adoption of lease accounting standards in fiscal 2020 to significantly increase reported assets and liabilities. No significant changes to previously disclosed risk factors were reported for the quarter.
Important facts for investors to verify
- Whether consumer-channel growth can continue to offset declines in commercial ingredients and contract packaging, particularly the year-to-date contract packaging contraction.
- Whether gross-margin gains from lower nut acquisition costs are sustainable as commodity prices, product mix, and customer pricing change.
- Whether operating-expense growth, especially compensation, freight, advertising, legal, and consulting costs, moderates enough to support operating-profit recovery.
- Whether working-capital requirements, seasonal inventory, dividends, capital expenditures, and debt repayments remain supportable within available credit and covenant limits.
- The progress in leasing vacant Elgin office space, and the eventual balance-sheet effect of fiscal 2020 lease-standard adoption.