Business context and reporting period
John B. Sanfilippo & Son, Inc. processes and distributes nuts and related snack products through consumer, commercial ingredients, contract packaging and export channels. This unaudited Form 10-Q covers the quarter and 26 weeks ended December 27, 2012 (fiscal 2013 second quarter and first half), compared with the periods ended December 29, 2011. Amounts below are in millions of dollars unless noted.
Financial performance
- Second quarter: Net sales were $215.6 million, down 3.4%; sales volume fell 9.2%, with higher selling prices only partly offsetting lower volume. Gross profit rose 3.5% to $36.7 million and gross margin improved to 17.0% from 15.9%. Operating expenses increased to $22.3 million, or 10.3% of sales versus 8.8%. Operating income declined to $14.4 million from $15.8 million; net income fell to $8.3 million from $9.4 million. Diluted EPS was $0.76 versus $0.87.
- First half: Net sales were $393.1 million, up 3.4%, despite a 5.4% decline in sales volume. Gross profit increased 17.6% to $67.2 million; gross margin rose to 17.1% from 15.1%. Operating income was $28.3 million versus $21.3 million, and net income was $15.8 million versus $11.8 million. Diluted EPS was $1.45 versus $1.09.
- Cash flow: First-half operating cash flow was $56.6 million, compared with $29.6 million. Investing activities used $4.3 million, including $5.2 million of capital expenditures. Financing activities used $39.5 million, including a $40.2 million net reduction in revolving borrowings. Cash increased $12.8 million to $15.3 million.
- Liquidity and debt: At December 27, cash was $15.3 million and current assets were $242.1 million against current liabilities of $147.0 million. Revolver borrowings were $5.6 million, with $97.5 million of stated available credit. Long-term debt, including current maturities, was $47.3 million; total borrowings including the revolver were approximately $53.0 million. The company reported compliance with credit and mortgage covenants.
- Other balance-sheet items: Inventory was $168.0 million, up 14.8% from June 28, 2012. Stockholders’ equity was $207.1 million. The company declared a $1.00-per-share special dividend totaling $10.9 million, paid December 28, 2012.
Material changes and drivers
- Quarterly revenue and volume weakened chiefly because high peanut prices reduced consumer demand. First-half revenue growth reflected higher selling prices, while sales volume still declined.
- Gross margin improved in both comparisons, driven by a greater contribution from higher-margin Fisher-branded sales and improved alignment of selling prices with acquisition costs. Fisher baking-nut volume rose 14.5% in the quarter and 20.8% in the first half.
- Marketing and advertising investment to grow the Fisher brand increased selling expenses by $2.8 million in the quarter and $3.1 million in the first half.
- Contract packaging sales grew, supported by new distribution and products for a major customer. Consumer sales declined in the quarter; private-brand volume was affected by a discontinued customer and lower sales to a major customer.
- A September property sale generated a reported pretax gain of $0.66 million, recorded in administrative expenses.
Outlook, commentary and risks
- Management expected operating cash flow and available credit to fund operations for the next 12 months and expected fiscal 2013 capital expenditures of approximately $10.5 million.
- Management expected most commodity costs, except almonds, to remain broadly consistent for the rest of fiscal 2013; it anticipated a modest overall commodity-price decrease for the year, while tree-nut prices would remain above historical averages. These are forward-looking expectations, not guarantees.
- The company cited commodity-price volatility and availability, customer and consumer demand, competition, ability to pass through cost increases, inventory valuation and estimation, food safety and regulatory matters, and execution of its growth strategy as significant risks.
- Final payments for inshell walnuts purchased during the first half had not yet been determined. The company estimated the related grower liability and inventory cost; any difference from actual payments was expected to be recognized in the third quarter.
- The company had an agreed-upon sales contract for the Old Elgin Site but noted that a sale depended on lender consent and a state repurchase-option waiver; timing or completion was not assured. The filing also describes potential future mortgage interest-rate resets and bond redemption requirements.
- Ordinary-course legal proceedings were disclosed; management believed their outcomes would not materially affect the company, while acknowledging that unfavorable outcomes could be material. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reported period: this filing is for the quarter ended December 27, 2012, not calendar-year 2011.
- Track whether lower commodity costs and pricing alignment persist, and whether improved branded sales offset weaker volume and increased marketing expense.
- Review final walnut grower payments and any resulting inventory-cost or earnings adjustment.
- Assess working-capital needs, inventory levels, borrowing-base availability, and the company’s ability to maintain covenant compliance.
- Monitor payment of the special dividend, the Old Elgin Site sale process, and the bond and mortgage obligations described in the filing.