John B. Sanfilippo & Son, Inc. — Form 10-Q
Period: Quarter ended September 28, 2017 (first quarter of fiscal 2018), compared with the quarter ended September 29, 2016. The request metadata says 2016 Q1, but the filing itself covers fiscal 2018 Q1. The company processes and distributes nuts and other snack and food products through consumer, commercial ingredients and contract packaging channels. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $214.8 | $222.3 |
| Gross profit / margin | $34.8 / 16.2% | $36.5 / 16.4% |
| Operating income / margin | $17.3 / 8.1% | $17.1 / 7.7% |
| Net income | $10.4 | $10.2 |
| Diluted EPS | $0.91 | $0.89 |
| Operating cash flow | $23.4 | $41.6 |
| Capital expenditures | $2.9 | $3.7 |
- Sales fell 3.4%, while pounds sold were unchanged; lower average selling prices reflected a shift toward lower-priced peanuts and trail mixes.
- Gross profit declined 4.5%, primarily from higher pecan and cashew acquisition costs and product mix. Operating expenses declined 9.7% to $17.5 million, helping lift operating income despite lower sales.
- Net income rose 2.5%. The effective tax rate declined to 32.4% from 34.4%; a favorable deferred-tax effect from an Illinois tax-rate change contributed approximately 2.6 percentage points.
- Operating cash flow decreased by $18.2 million, which management attributed mainly to the timing of receivable collections and payables. Net cash decreased $1.1 million to $0.9 million.
- At September 28, 2017, cash was $0.9 million, current assets $242.9 million and current liabilities $119.0 million. Inventory was $165.9 million. Revolver borrowings were $36.5 million; current and long-term debt totaled approximately $27.8 million, or approximately $64.2 million including revolver borrowings. Available revolver credit was $77.4 million, net of outstanding letters of credit. The company reported compliance with credit and mortgage covenants.
- The company paid approximately $28.4 million in dividends, comprising a $2.00 special and $0.50 regular annual dividend per share. Retained earnings declined to $105.3 million from $123.2 million at June 29, 2017.
Changes, outlook and risks
- Consumer-channel sales were nearly flat; commercial ingredients sales fell 28.2%, including the continuing effect of losing a bulk almond-butter customer. Contract packaging sales grew 16.5%, led by trail mixes and snack-bite clusters.
- A major customer plans to shift small and some medium Fisher recipe-nut packages to its private brand beginning in November 2017. Management expects continued challenges growing Fisher recipe nuts during fiscal 2018 and is pursuing alternative channels to offset the impact.
- Management cited higher 2017-crop acquisition costs for domestic tree nuts and cashews. Hurricane-related flooding may reduce Georgia pecan supply and increase costs. Final walnut-grower payments and related inventory costs remained estimates, with differences expected to be recognized in Q2 or Q3 FY2018.
- No earnings or revenue forecast was provided. Management expects operating cash flow and available credit to fund operations for the next 12 months and projects approximately $14.0 million of FY2018 capital expenditures.
- The July 2017 credit amendment permits up to four annual dividends or stock repurchases, capped at $60 million in aggregate, subject to no default and minimum excess availability conditions. The lender may reset mortgage-loan interest rates on March 1, 2018.
- An employment-related class action had an agreed-in-principle $1.2 million settlement, fully reserved at June 29, 2017; non-monetary terms were still being finalized. Management cautioned that other ordinary-course legal matters involve uncertainty. The filing identified commodity-cost volatility, customer and product-mix changes, food safety, competition and supply risks as ongoing exposures.
- Accounting changes: the company early adopted pension-cost presentation guidance, reclassifying $0.533 million of prior-year expense from administrative expense to other expense. It expects lease accounting changes to materially increase reported assets and liabilities; it does not currently anticipate a material revenue-recognition impact.
Investor facts to verify
- Track the major customer’s Fisher-to-private-label transition and subsequent branded sales and volumes.
- Check actual pecan and cashew costs, Georgia crop availability, and final walnut-grower settlement and inventory-cost adjustments.
- Assess whether operating cash flow and working-capital requirements support the dividend, capital spending and debt levels; monitor revolver availability and covenant headroom.
- Confirm completion and final terms of the employment settlement, and monitor the March 2018 mortgage rate reset.
- Review the reported period carefully: this filing is for fiscal 2018 Q1, not 2016 Q1.