John B. Sanfilippo & Son, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2016 Q3, but the supplied filing is for the quarter ended March 29, 2018 (fiscal 2018 Q3), with comparisons to March 30, 2017. Figures below reflect the filing provided. Dollar amounts are in millions unless noted.
Business context and reporting period
The company processes and distributes nuts and related snack products through consumer, commercial ingredients, and contract packaging channels. Its brands include Fisher, Orchard Valley Harvest, Squirrel Brand, Southern Style Nuts, and Sunshine Country. The filing reports the quarter and first 39 weeks of fiscal 2018.
Financial performance and liquidity
| Metric | Quarter ended Mar. 29, 2018 | Quarter ended Mar. 30, 2017 | 39 weeks ended Mar. 29, 2018 | 39 weeks ended Mar. 30, 2017 |
|---|---|---|---|---|
| Net sales | $203.2 | $173.4 | $677.1 | $645.0 |
| Gross profit / margin | $33.2 / 16.3% | $28.4 / 16.4% | $105.9 / 15.6% | $108.3 / 16.8% |
| Operating income / margin | $14.1 / 6.9% | $11.0 / 6.3% | $45.7 / 6.7% | $48.3 / 7.5% |
| Net income | $8.6 | $6.3 | $26.8 | $29.4 |
| Diluted EPS | $0.75 | $0.55 | $2.34 | $2.58 |
| Interest expense | $1.0 | $0.9 | $2.6 | $2.1 |
- Operating cash flow for the first 39 weeks was $33.1 million, versus $15.4 million a year earlier. Investing cash use was $30.9 million, including $21.7 million net cash paid for the Squirrel Brand acquisition and $9.1 million of capital expenditures. Financing cash use was $3.2 million; cash dividends paid were $28.4 million.
- At March 29, 2018, cash was $1.0 million, current assets $258.4 million, and current liabilities $132.4 million. Inventory was $184.9 million.
- Revolving credit borrowings were $56.6 million; current and long-term debt together were about $36.3 million, for approximately $92.9 million of reported borrowings before bank overdraft. The company reported $57.7 million of available credit and compliance with its credit and mortgage covenants.
- Credit Facility weighted-average interest rate was 3.42%. The seller-financed Squirrel Brand note had $10.2 million outstanding at 5.5% interest.
Material changes versus the prior comparable period
- Quarterly sales rose 17.2%, with sales volume up 12.5% and weighted-average selling price per pound up 4.2%. Year-to-date sales rose 5.0%, while volume increased 3.9%.
- Quarterly gross profit grew 16.7%, but year-to-date gross profit fell 2.2% and margin contracted 1.2 percentage points. Management attributed the year-to-date pressure mainly to higher walnut and pecan acquisition costs and promotional pricing commitments that limited price increases.
- Quarterly net income increased to $8.6 million; year-to-date net income declined to $26.8 million. The year-to-date comparison includes a $2.48 million non-cash tax charge from remeasuring deferred tax assets after U.S. corporate tax rate reductions.
- The Squirrel Brand acquisition closed November 30, 2017, for a final purchase price of $33.2 million: $21.7 million net cash and an $11.5 million seller note. Approximately $15.1 million of post-acquisition Squirrel Brand sales were included in results through March 29, 2018.
- Consumer-channel sales grew 25.5% in the quarter and 10.0% year to date. Year-to-date commercial ingredients sales declined 11.2%, largely reflecting the loss of a bulk almond butter customer. Contract packaging sales declined 8.4% in the quarter, partly because Squirrel Brand sales shifted to other channels after acquisition.
Outlook, commentary, and risks
- Management expected operating cash flow and credit availability to be sufficient for operations over the next 12 months. Fiscal 2018 capital expenditures were estimated at approximately $13 million.
- Management planned to maintain recent promotional and advertising activity for Fisher and Orchard Valley Harvest and continued to cite Orchard Valley Harvest domestic sales and volume growth. No earnings or revenue forecast was provided.
- Stated challenges include volatile tree-nut commodity costs, integrating Squirrel Brand, competition, retail consolidation, online price competition, customer fixed-price arrangements, food safety and regulatory requirements, and maintaining or expanding the customer base.
- The filing describes an employment-related class action settlement agreed in principle for $1.2 million, fully reserved at June 29, 2017; non-monetary terms remained under finalization. Management said ordinary-course legal proceedings were not expected to have a material effect, while noting the uncertainty of outcomes.
- The Tax Cuts and Jobs Act is expected by management to favorably affect future effective tax rates and cash taxes; the filing also notes estimates could require further deferred-tax adjustments. Adoption of lease accounting guidance was expected to significantly increase reported assets and liabilities. Management did not anticipate a material revenue-recognition impact from the upcoming standard.
- Disclosure controls were reported effective as of March 29, 2018, with no material changes to internal control over financial reporting during the quarter. The company reported no significant changes to its previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended reporting period: the provided filing covers fiscal 2018 Q3, not 2016 Q3.
- Assess whether commodity-cost pressure and fixed-price customer commitments continue to affect gross margin and the company’s ability to pass through price increases.
- Track Squirrel Brand integration, channel reporting shifts, acquisition-related amortization, and the final purchase-price allocation.
- Monitor revolving-credit availability, debt service, covenant compliance, and the related-party seller note.
- Review the final terms and status of the employment settlement and any subsequent changes to the company’s outlook or risks.