Business context and reporting period
John B. Sanfilippo & Son, Inc. processes and distributes nuts and related foods through consumer, commercial-ingredient and contract-packaging channels. Its brands include Fisher, Orchard Valley Harvest, Squirrel Brand, Southern Style Nuts and Sunshine Country.
Period clarification: The supplied filing is the fiscal 2018 Form 10-K, for the year ended June 28, 2018—not a 2016 Q4 filing as indicated in the request metadata. Fiscal 2018 and 2017 each had 52 weeks; fiscal 2016 had 53 weeks.
Financial performance and condition
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net sales | $888.6 million | $846.6 million |
| Gross profit / margin | $138.8 million / 15.6% | $141.9 million / 16.8% |
| Operating income / margin | $56.1 million / 6.3% | $60.5 million / 7.1% |
| Net income | $32.4 million | $36.1 million |
| Diluted EPS | $2.83 | $3.17 |
| Operating cash flow | $66.2 million | $52.7 million |
| Capital expenditures | $13.2 million | $10.9 million |
| Working capital | $130.6 million | $143.5 million |
| Total debt | $65.8 million | $58.1 million |
Sales rose 5.0%, reflecting 3.4% higher volume and a 1.5% increase in weighted-average selling price. Gross profit declined 2.2% as higher walnut and pecan acquisition costs were not fully offset by prices, partly because holiday promotional commitments constrained pricing. Net income fell 10.3%; the effective tax rate was 34.2% versus 33.3%.
Consumer-channel sales increased 11.2% to $589.9 million, while commercial-ingredient sales declined 6.4% to $154.1 million and contract-packaging sales declined 4.6% to $144.6 million. Consumer growth included Orchard Valley Harvest produce products, private-label products and acquired Squirrel Brand sales. A lost bulk almond-butter customer weighed on commercial ingredients.
Cash and cash equivalents were $1.4 million; inventory was $174.6 million, down $7.8 million year over year. The company reported $31.3 million outstanding on its revolving facility and approximately $83.0 million of available credit. The revolving facility’s weighted-average rate was 3.90%; mortgage debt was fixed at 4.25% from March 2018. The company reported compliance with financing covenants.
Material changes, outlook and notable items
- In November 2017, the company acquired Squirrel Brand for an adjusted purchase price of $33.2 million, funded with $21.7 million net cash and an $11.5 million seller note. The acquisition added $9.7 million of goodwill and $17.7 million of net intangible assets at year-end.
- Operating cash flow improved primarily because inventories declined, compared with a substantial inventory build in fiscal 2017. Investing outflows increased to $35.0 million, including the acquisition payment.
- Fiscal 2018 dividends paid totaled $28.4 million, or $2.50 per share. After year-end, the board declared a $0.55 annual dividend and a $2.00 special dividend per share, paid in August 2018.
- Management expected approximately $15 million of fiscal 2019 capital expenditures and said operating cash flow and credit availability should fund operations for the next 12 months. No specific earnings or revenue guidance was provided.
- Management anticipated deflation in major tree-nut commodities other than almonds and intensified competition from branded and private-label products. It planned to expand Squirrel Brand and Southern Style Nuts awareness, continue Fisher and Orchard Valley Harvest promotion, and pursue profitable use of Elgin capacity.
- Tax reform reduced the federal corporate rate, but remeasurement of deferred tax assets produced a one-time, non-cash tax expense of approximately $3.1 million. The company also had a $1.2 million employment-related class-action settlement fully reserved, with final payment expected in fiscal 2019.
Principal risks and contingencies
- Commodity availability, crop yields and nut prices are exposed to weather, disease, trade policy and other factors. The company has no effective nut-commodity hedging market; a hypothetical 1% increase in material costs without price recovery would reduce fiscal 2018 gross profit by about $6.2 million.
- Customer concentration is significant: the five largest customers generated about 60% of fiscal 2018 sales; Walmart alone represented about 30%. Retailer pricing pressure, lost bids or customer losses could materially affect results.
- Food safety, contamination, allergens, product recalls, regulatory changes and disruptions at a limited number of production facilities could damage sales and operations.
- Seasonal inventory needs, fixed-price customer commitments, foreign sourcing and the company’s vertically integrated purchasing model can expose margins and cash flows to market-price changes.
- Class A shares carry ten votes per share on most matters. The filing says the Sanfilippo and Valentine groups together can direct election of a board majority; pledged Class A shares could also create control-related risks.
Key facts for investors to verify
- Confirm the intended period: the supplied document covers fiscal 2018, despite request metadata specifying 2016 Q4.
- Assess whether acquired Squirrel Brand sales and expected synergies can offset weaker margins and declines in commercial-ingredient and contract-packaging channels.
- Track commodity costs, inventory valuation and the company’s ability to pass cost changes through to customers.
- Review customer concentration, revolving-credit availability, covenant headroom and scheduled debt repayments.
- Monitor the fiscal 2019 capex plan, dividend capacity, and the resolution and payment of the reserved employment settlement.
The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of June 28, 2018.