Filing and period
John B. Sanfilippo & Son, Inc. Form 10-Q, filed for the quarter ended December 24, 2015 (fiscal 2016 second quarter) and the 26 weeks then ended. The request metadata says 2014 Q2, but the filing covers fiscal 2016 Q2; comparisons below are with the quarter and first half ended December 25, 2014. The company processes and distributes nuts and other snack and food products. Fiscal 2016 has 53 weeks, including a 14-week fourth quarter.
Financial performance
Amounts are in millions of dollars except per-share data. Percentages and dollar changes are versus the comparable prior-year period.
| Metric | Quarter | 26 weeks |
|---|---|---|
| Net sales | $279.0; up 11.0% | $504.8; up 10.6% |
| Gross profit / margin | $45.0 / 16.1%, versus $37.2 / 14.8% | $78.2 / 15.5%, versus $67.9 / 14.9% |
| Operating income / margin | $19.7 / 7.1%, versus $14.7 / 5.8% | $33.4 / 6.6%, versus $26.7 / 5.8% |
| Net income | $12.1, versus $8.4 | $20.0, versus $14.3 |
| Diluted EPS | $1.07, versus $0.75 | $1.77, versus $1.28 |
| Interest expense | $0.8, versus $0.9 | $1.7, versus $1.9 |
Quarterly sales volume rose 9.4%; first-half volume rose 5.0%, with a 5.4% increase in weighted average selling price. Better alignment of selling prices and commodity acquisition costs primarily drove improved gross margins. First-half operating expenses rose to $44.8 million, but declined as a share of sales to 8.9% from 9.0%; compensation costs were the main driver of the increase.
Cash flow, liquidity and debt
- First-half operating cash flow was $81.9 million, compared with $38.0 million a year earlier. The company attributed the increase primarily to lower working-capital needs, particularly inventory.
- Investing cash outflow was $10.4 million, primarily capital expenditures; financing cash outflow was $70.4 million. Cash increased $1.1 million to $3.0 million.
- Cash dividends paid were $22.5 million, including a special $2.00-per-share dividend paid December 11, 2015. The prior-year first-half dividend payments were $16.8 million.
- At December 24, 2015, revolving-credit borrowings were $13.9 million and available credit was $99.0 million, after accounting for letters of credit. Long-term debt, including current maturities, was $34.0 million; total revolving and long-term borrowings were approximately $47.9 million.
- Current assets were $267.3 million and current liabilities $122.4 million. Inventories were $185.3 million, down 16.5% from a year earlier. The company reported compliance with credit and mortgage covenants and expects operating cash flow and credit availability to fund the next 12 months.
- Planned fiscal 2016 capital expenditures were approximately $15 million. The Credit Facility weighted-average interest rate was 2.68%. The lender reset the Mortgage Facility Tranche B rate in January 2016, lowering it by 25 basis points effective March 1, 2016.
Changes, outlook and risks
- Quarterly growth included higher sales in consumer, commercial ingredients and contract packaging; contract packaging sales rose 23.5%. Consumer branded Fisher snack-nut volume fell 10.3% in the quarter, partly due to promotional timing. First-half consumer sales volume was relatively unchanged, with higher almond prices weighing on demand.
- Management expected almond and walnut acquisition costs to decline significantly for the rest of fiscal 2016 and the first two quarters of fiscal 2017. Lower costs could reduce selling prices and reported sales until lower retail prices lead to higher volume.
- Walnut grower payments and inventory costs were estimated at quarter-end; final prices were to be determined during fiscal third quarter. Any difference from the estimate would be recognized then.
- The company plans continued promotion and advertising for Fisher, Orchard Valley Harvest and Fisher Nut Exactly, and seeks to grow brands, international business and existing customer relationships. Management cited commodity-price volatility, competition, food safety and regulation, customer retention, and the challenge of passing cost changes through to customers as key risks.
- Approximately 71% of the Elgin office building was vacant; additional tenants had not been secured, and further leasing-related capital expenditures might be needed. Ordinary-course legal proceedings could have adverse outcomes, although management did not expect them to materially affect the company; it cautioned that unfavorable outcomes could exceed accruals.
- The company early adopted deferred-tax balance-sheet classification guidance prospectively, reclassifying $4.3 million of net current deferred tax assets as non-current, with no effect on results or financial position. Management was assessing the impact of the new revenue-recognition standard, effective for the company beginning fiscal 2019.
- No specific earnings or sales guidance was provided. Management reported effective disclosure controls, no material change in internal control during the quarter, and no significant changes to previously disclosed risk factors.
Investor verification points
- Confirm the intended reporting period: the supplied filing is fiscal 2016 Q2, not 2014 Q2.
- Track whether lower almond and walnut costs translate into stronger volume, and how selling-price reductions affect revenue and margins.
- Review the fiscal third-quarter final walnut grower liability and any resulting inventory or earnings adjustment.
- Assess working-capital and operating cash-flow sustainability, planned capital spending, dividend capacity, and remaining credit availability.
- Monitor the Tranche B rate change, debt covenants, Elgin office occupancy, and developments in legal proceedings and food-safety risks.