Business context and reporting period
John B. Sanfilippo & Son, Inc. processes and distributes nuts and related food and snack products through consumer, commercial ingredients, contract packaging and export channels. This filing covers the third quarter ended March 28, 2013 and the first 39 weeks of fiscal 2013. The request metadata says “2011 Q3,” but the filing itself is for fiscal 2013 Q3.
Financial performance
Amounts below are in millions of dollars unless noted.
| Metric | Quarter ended Mar. 28, 2013 | Prior-year quarter | 39 weeks ended Mar. 28, 2013 | Prior-year 39 weeks |
|---|---|---|---|---|
| Net sales | $163.8 | $153.8 | $556.9 | $533.9 |
| Gross profit / margin | $22.9 / 14.0% | $22.1 / 14.4% | $90.1 / 16.2% | $79.3 / 14.9% |
| Operating income | $3.3 | $4.0 | $31.6 | $25.3 |
| Net income | $0.3 | $1.4 | $16.2 | $13.2 |
| Diluted EPS | $0.03 | $0.13 | $1.47 | $1.23 |
| Operating cash flow | Not reported for the quarter | $14.0 | $(12.2) |
Quarterly sales rose 6.5%, with pounds sold up 15.6% as lower selling prices supported demand. Quarterly operating income and net income declined despite higher sales. The 39-week improvement in gross profit and earnings reflected better alignment of selling prices and input costs earlier in the year and a richer mix of Fisher branded sales. Gross margin weakened in the quarter due mainly to higher almond and trail-mix costs and lower-margin inshell walnut export sales.
Financial position and liquidity
- At March 28, 2013, cash was $1.5 million, current assets $236.3 million and current liabilities $131.4 million.
- Inventory was $166.8 million, up $20.4 million from fiscal year-end but down $10.1 million year over year.
- Revolving borrowings were $42.0 million; long-term debt and current maturities totaled $46.5 million. The company reported $67.9 million of available revolving credit after outstanding letters of credit.
- The company was in compliance with Credit Facility and Mortgage Facility covenants and stated it expected operating cash flow and available credit to fund operations for the next 12 months.
- Thirty-nine-week capital expenditures were $6.4 million; management estimated approximately $9.0 million for fiscal 2013.
- Operating cash flow improved to $14.0 million from cash use of $12.2 million, helped by improved results and lower inventory acquisition costs. Financing activities used $9.4 million, including $10.9 million for a special $1.00-per-share dividend paid in December 2012.
Material changes, outlook and risks
- Consumer-channel quarterly sales increased 4.2%; contract packaging sales increased 29.7%. Commercial ingredients sales rose 4.1%, while export sales declined 1.4%.
- The quarter’s effective tax rate was 80.9%, including approximately $0.8 million of discrete tax items, primarily a valuation allowance related to the ARMA investment and intellectual-property sale. The 39-week rate was 39.9%.
- The company sold ARMA brand intellectual-property rights for a secured $0.5 million note payable over five years and received approximately 71% of ARMA Energy, Inc.’s preferred stock. It accounts for the investment under the equity method; its recorded investment was zero at quarter-end.
- An agreed sale contract was reached for the Old Elgin Site, carried as a $6.2 million asset held for sale. Completion remained subject to the State of Illinois waiving its repurchase option and lender consent; proceeds may reduce Tranche B debt.
- Management expected most commodity costs, though above historical averages, to remain consistent for the rest of fiscal 2013; it cited lower prices for peanuts, pecans and cashews, and continued elevated tree-nut prices. Management anticipated continued consumer and contract-packaging volume gains in the fourth quarter and increased Orchard Valley Harvest sales in the next quarter. No quantitative earnings or sales guidance was given.
- Key risks include volatile nut commodity prices and procurement, customer concentration and demand, competition and pricing pressure, food safety and regulatory matters, execution of the growth strategy, and legal proceedings. The company also disclosed that $3.3 million of industrial development bonds could be payable at the June 1, 2013 interest reset; it intended to redeem them before that date depending on its financial condition.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Ordinary-course legal proceedings were not expected by management to be material, though unfavorable outcomes could have a material adverse effect.
Investor verification priorities
- Confirm the correct period: the filing is fiscal 2013 Q3, not 2011 Q3.
- Assess whether the lower quarterly margin and earnings rebound in the 39-week results persist as commodity costs and selling prices change.
- Verify the resolution and cash consequences of the Old Elgin Site sale, including state-option and mortgage-lender approvals.
- Track the June 2013 bond reset/redemption and any related effects on liquidity and debt classification.
- Review the discrete tax charge and ARMA transaction accounting, and monitor whether ARMA-related losses or support obligations arise.
- Evaluate working-capital demands, especially inventory levels, against the low cash balance and revolving-credit availability.