| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
29,
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulationand post such files). ☒ Yes ☐ No or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” inRuleLarge accelerated filer ☐☒ Accelerated filer ☒☐Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐ Emerging growth company ☐
Emerging growth company ☐
JOHN B. SANFILIPPO & SON, INC.
FORM10-Q
FOR THE QUARTER ENDED DECEMBER 28, 201729, 2022
| Page | ||||
| 3 | ||||
| 4 | ||||
| 6 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||||
Net sales Cost of sales Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Other expense: Interest expense including $245, $201, $439 and $391 to related parties Rental and miscellaneous expense, net Other expense Total other expense, net Income before income taxes Income tax expense Net income Other comprehensive income: Amortization of prior service cost and actuarial loss included in net periodic pension cost Income tax expense related to pension adjustments Other comprehensive income, net of tax Comprehensive income Net income per common share-basic Net income per common share-diluted Cash dividends declared per share ASSETS CURRENT ASSETS: Cash Accounts receivable, less allowance for doubtful accounts of $273, $263 and $306 Inventories Prepaid expenses and other current assets TOTAL CURRENT ASSETS PROPERTY, PLANT AND EQUIPMENT: Land Buildings Machinery and equipment Furniture and leasehold improvements Vehicles Construction in progress Less: Accumulated depreciation Rental investment property, less accumulated depreciation of $10,035, $9,639 and $9,244 TOTAL PROPERTY, PLANT AND EQUIPMENT Cash surrender value of officers’ life insurance and other assets Deferred income taxes Goodwill Intangible assets, net TOTAL ASSETS LIABILITIES & STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Revolving credit facility borrowings Current maturities of long-term debt, including related party debt of $4,324, $474 and $457 and net of unamortized debt issuance costs of $50, $55 and $60 Accounts payable, including related party payables of $0, $178 and $32 Bank overdraft Accrued payroll and related benefits Other accrued expenses TOTAL CURRENT LIABILITIES LONG-TERM LIABILITIES: Long-term debt, less current maturities, including related party debt of $17,682, $10,584 and $10,825 and net of unamortized debt issuance costs of $100, $124 and $150 Retirement plan Other TOTAL LONG-TERM LIABILITIES TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY: Class A Common Stock, convertible to Common Stock on a per share basis, cumulative voting rights of ten votes per share, $.01 par value; 10,000,000 shares authorized, 2,597,426 shares issued and outstanding Common Stock,non-cumulative voting rights of one vote per share, $.01 par value; 17,000,000 shares authorized, 8,859,097, 8,801,641 and 8,785,938 shares issued Capital in excess of par value Retained earnings Accumulated other comprehensive loss Treasury stock, at cost; 117,900 shares of Common Stock TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY CASH FLOWS FROM OPERATING ACTIVITIES: Net income Depreciation and amortization Loss on disposition of assets, net Deferred income tax expense Stock-based compensation expense Change in assets and liabilities, net of business acquired: Accounts receivable, net Inventories Prepaid expenses and other current assets Accounts payable Accrued expenses Income taxes payable Other long-term assets and liabilities Other, net Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment Acquisition of Squirrel Brand L.P. Other Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit facility Repayments of revolving credit borrowings Principal payments on long-term debt Increase in bank overdraft Dividends paid Issuance of Common Stock under equity award plans Taxes paid related to net share settlement of equity awards Net cash used in financing activities NET INCREASE (DECREASE) IN CASH Cash, beginning of period Cash, end of period Supplemental disclosure ofnon-cash investing activities: Acquisition of Squirrel Brand L.P. through note payable thousands, except share and per share amounts) 30, 2022. Raw material and supplies Work-in-process and finished goods Total Accounts receivable Inventories Other assets Identifiable intangible assets: Customer relationships Brand names Non-compete agreement Goodwill Accounts payable and accrued expenses Total Purchase Price Cheese name. Pro forma net sales Pro forma net income Pro forma diluted earnings per share presented. Customer relationships Brand names Non-compete agreement Less accumulated amortization: Customer relationships Brand names Non-compete agreement Net intangible assets following: Fiscal year ending June 27, 2019 June 25, 2020 June 24, 2021 June 30, 2022 June 29, 2023 Net balance at June 29, 2017 Goodwill acquired during the period Net balance at December 28, 2017 fixtures. Weighted average number of shares outstanding – basic Effect of dilutive securities: Stock options and restricted stock units Weighted average number of shares outstanding – diluted Restricted Stock Units Outstanding at June 29, 2017 Activity: Granted Vested Forfeited Outstanding at December 28, 2017 2023: Stock-based compensation expense Service cost Interest cost Amortization of prior service cost Amortization of loss Net periodic benefit cost Changes to AOCL(a) Balance at beginning of period Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive loss Tax effect Net current-period other comprehensive income Balance at end of period For the Quarter Ended For the Twenty-six Weeks Ended Reclassifications from AOCL to earnings(b) Amortization of defined benefit pension items: Unrecognized prior service cost Unrecognized net loss Total before tax Tax effect Amortization of defined pension items, net of tax Carrying value of long-term debt: Fair value of long-term debt: For the Quarter Ended For the Twenty-six Weeks Ended December 28,
2017 December 29,
2016 December 28,
2017 December 29,
2016 $ 259,118 $ 249,375 $ 473,909 $ 471,668 221,238 205,986 401,189 391,804 37,880 43,389 72,720 79,864 15,844 15,370 26,789 26,641 7,787 7,744 14,346 15,859 23,631 23,114 41,135 42,500 14,249 20,275 31,585 37,364 805 608 1,586 1,230 241 299 863 709 493 533 985 1,066 1,539 1,440 3,434 3,005 12,710 18,835 28,151 34,359 4,954 5,950 9,963 11,294 $ 7,756 $ 12,885 $ 18,188 $ 23,065 281 331 560 661 (111 ) (126 ) (219 ) (251 ) 170 205 341 410 $ 7,926 $ 13,090 $ 18,529 $ 23,475 $ 0.68 $ 1.14 $ 1.60 $ 2.04 $ 0.68 $ 1.13 $ 1.59 $ 2.03 $ — $ 2.50 $ 2.50 $ 5.00
Ended
2022 Net sales $ 274,328 $ 253,207 $ 526,929 $ 479,536 Cost of sales 217,826 200,977 419,784 375,503 Gross profit 56,502 52,230 107,145 104,033 Operating expenses: Selling expenses 21,830 23,567 39,812 41,312 Administrative expenses 10,208 10,401 20,455 19,470 Gain on sale of facility, net — — — (2,349 ) Total operating expenses 32,038 33,968 60,267 58,433 Income from operations 24,464 18,262 46,878 45,600 Other expense: Interest expense including $189, $203, $382 and $392 to related parties 615 420 1,276 791 Rental and miscellaneous expense, net 311 323 713 671 Pension expense (excluding service costs) 348 619 697 1,237 Total other expense, net 1,274 1,362 2,686 2,699 Income before income taxes 23,190 16,900 44,192 42,901 Income tax expense 6,283 3,653 11,740 10,405 Net income $ 16,907 $ 13,247 $ 32,452 $ 32,496 Other comprehensive income: Amortization of actuarial loss included in net periodic pension cost 7 364 14 728 Income tax expense related to pension adjustments (2 ) (95 ) (3 ) (190 ) Other comprehensive income, net of tax 5 269 11 538 Comprehensive income $ 16,912 $ 13,516 $ 32,463 $ 33,034 Net income per common share-basic $ 1.46 $ 1.15 $ 2.81 $ 2.82 Net income per common share-diluted $ 1.45 $ 1.14 $ 2.79 $ 2.81 December 28,
2017 June 29,
2017 December 29,
2016 $ 3,052 $ 1,955 $ 2,031 70,437 64,830 66,007 168,852 182,420 182,653 13,457 4,172 6,841 255,798 253,377 257,532 9,285 9,285 9,285 108,092 107,015 106,566 196,715 194,099 193,859 4,951 4,842 4,803 535 498 453 2,652 1,075 1,483 322,230 316,814 316,449 214,426 210,606 206,751 107,804 106,208 109,698 18,858 19,254 19,650 126,662 125,462 129,348 9,057 10,125 10,091 5,979 9,095 8,109 9,638 — — 19,341 — 611 $ 426,475 $ 398,059 $ 405,691 CURRENT ASSETS: Cash $ 620 $ 415 $ 1,027 Accounts receivable, less allowance for doubtful accounts of $318, $267 and $358 72,433 69,611 65,032 Inventories 173,075 204,855 178,741 Prepaid expenses and other current assets 11,693 8,283 12,764 TOTAL CURRENT ASSETS 257,821 283,164 257,564 PROPERTY, PLANT AND EQUIPMENT: Land 9,150 9,150 9,150 Buildings 102,840 102,810 102,801 Machinery and equipment 254,013 245,111 228,418 Furniture and leasehold improvements 5,312 5,296 5,296 Vehicles 614 614 614 Construction in progress 9,877 6,471 17,254 381,806 369,452 363,533 Less: Accumulated depreciation 259,597 252,371 245,607 122,209 117,081 117,926 Rental investment property, less accumulated depreciation of $14,036 $13,632 and $13,229 15,087 15,491 15,894 TOTAL PROPERTY, PLANT AND EQUIPMENT 137,296 132,572 133,820 Intangible assets, net 7,561 8,065 8,953 Life insurance and other assets 6,021 8,272 9,579 Deferred income taxes 2,608 3,236 4,304 Goodwill 12,030 9,650 9,650 2,593 2,303 2,852 TOTAL ASSETS $ 425,930 $ 447,262 $ 426,722 December 28,
2017 June 29,
2017 December 29,
2016 $ 30,000 $ 29,456 $ 12,427 7,274 3,418 3,397 84,834 50,047 90,787 2,894 932 2,652 6,333 15,958 10,609 9,387 10,062 9,966 140,722 109,873 129,838 30,832 25,211 26,925 21,396 20,994 22,532 7,084 6,513 6,695 59,312 52,718 56,152 200,034 162,591 185,990 26 26 26 89 88 88 118,585 117,772 116,676 113,008 123,190 110,130 (4,063 ) (4,404 ) (6,015 ) (1,204 ) (1,204 ) (1,204 ) 226,441 235,468 219,701 $ 426,475 $ 398,059 $ 405,691 $ 22,805 $ 40,439 $ 35,885 1,497 3,149 3,909 49,342 47,720 63,452 1,970 214 1,668 14,953 18,888 12,832 13,495 12,352 13,080 104,062 122,762 130,826 �� 7,446 7,774 8,943 29,132 28,886 35,596 1,472 1,076 1,504 8,155 7,943 8,050 46,205 45,679 54,093 150,267 168,441 184,919 26 26 26 91 90 90 130,731 128,800 127,080 148,488 153,589 124,298 (2,469 ) (2,480 ) (8,487 ) (1,204 ) (1,204 ) (1,204 ) 275,663 278,821 241,803 $ 425,930 $ 447,262 $ 426,722 CASH FLOWSthousands) For the Twenty-six Weeks Ended December 28,
2017 December 29,
2016 $ 18,188 $ 23,065 7,064 7,973 319 53 3,116 481 1,429 1,428 (3,176 ) 12,067 15,525 (26,080 ) (5,111 ) (2,468 ) 34,014 46,925 (9,124 ) (4,672 ) (5,422 ) 2,928 694 (115 ) 915 845 58,431 62,430 (6,966 ) (6,672 ) (21,909 ) — 72 48 (28,803 ) (6,624 ) 226,985 166,816 (226,441 ) (166,473 ) (2,052 ) (1,758 ) 1,962 1,841 (28,370 ) (56,464 ) 16 43 (631 ) — (28,531 ) (55,995 ) 1,097 (189 ) 1,955 2,220 $ 3,052 $ 2,031 $ 11,500 $ — Balance, June 30, 2022 2,597,426 $ 26 9,047,359 $ 90 $ 128,800 $ 153,589 $ (2,480 ) $ (1,204 ) $ 278,821 Net income 15,545 15,545 Cash dividends ($2.25 per share) (25,981 ) (25,981 ) Pension liability amortization, net of income tax expense of $1 6 6 Stock-based compensation expense 772 772 Balance, September 29, 2022 2,597,426 $ 26 9,047,359 $ 90 $ 129,572 $ 143,153 $ (2,474 ) $ (1,204 ) $ 269,163 Net income 16,907 16,907 Cash dividends ($1.00 per share) (11,572 ) (11,572 ) Pension liability amortization, net of income tax expense of $2 5 5 Equity award exercises , net of shares withheld for
employee taxes 24,709 1 (356 ) (355 ) Stock-based compensation expense 1,515 1,515 Balance, December 29, 2022 2,597,426 $ 26 9,072,068 $ 91 $ 130,731 $ 148,488 $ (2,469 ) $ (1,204 ) $ 275,663 Balance, June 24, 2021 2,597,426 $ 26 8,988,812 $ 90 $ 126,271 $ 126,336 $ (9,025 ) $ (1,204 ) $ 242,494 Net income 19,249 19,249 Cash dividends ($3.00 per share) (34,534 ) (34,534 ) Pension liability amortization, net of income tax expense of $95 269 269 Equity award exercises , net of shares withheld for
employee taxes 1,168 — (16 ) (16 ) Stock-based compensation expense 703 703 Balance, September 23, 2021 2,597,426 $ 26 8,989,980 $ 90 $ 126,958 $ 111,051 $ (8,756 ) $ (1,204 ) $ 228,165 Net income 13,247 13,247 Pension liability amortization, net of income tax expense of $95 269 269 Equity award exercises , net of shares withheld for employee taxes 54,980 — (946 ) (946 ) Stock-based compensation expense 1,068 1,068 Balance, December 23, 2021 2,597,426 $ 26 9,044,960 $ 90 $ 127,080 $ 124,298 $ (8,487 ) $ (1,204 ) $ 241,803
2022
2021 $ 32,452 $ 32,496 10,099 9,143 19 (1,765 ) 628 1,783 2,287 1,771 (2,822 ) 1,302 32,020 (30,743 ) (1,885 ) (3,429 ) 1,492 16,244 (1,794 ) (8,971 ) (2,523 ) (3,606 ) 721 379 258 1,216 70,952 15,820 (11,420 ) (9,485 ) (3,500 ) — — 3,950 (56 ) (354 ) (14,976 ) (5,889 ) (17,634 ) 27,232 (1,984 ) (1,887 ) 1,756 575 (37,553 ) (34,534 ) (356 ) (962 ) (55,771 ) (9,576 ) 205 355 415 672 $ 620 $ 1,027 20182023 and fiscal 20172022 are to the 52 week fiscal year ending June 28, 201829, 2023 and the 53 week fiscal year ended June 29, 2017,30, 2022, respectively.20182023 and fiscal 20172022 are to the quarters ended December 28, 201729, 2022 and December 29, 2016,23, 2021, respectively.20182023 and fiscal 20172022 are to the28, 201729, 2022 and December 29, 2016,23, 2021, respectively.brands and under theFisher, Orchard Valley Harvest,Squirrel Brand, Southern Style Nuts,and Sunshine Countrybrand names.brands. We also market and distribute, and in most cases, manufacture or process, a diverse product line of food and snack products, including peanut butter, almond butter, cashew butter, candy and confections, snackssnack and trail mixes, snack bites, sunflower kernels, dried fruit, corn snacks, chickpea snacks, sesame sticks and other sesame snack products under our brand names and under private brandsbrands. In addition, with our acquisition of thebrand names. private label basis. to significant buyers of nuts, including food retailers in the consumer channel, commercial ingredient users and contract packaging customers.29, 201730, 2022 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, these unaudited financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 20172022 Annual Report onForm29, 2017.InventoriesInventories consist of the following: December 28,
2017 June 29,
2017 December 29,
2016 $ 80,867 $ 79,609 $ 107,735 87,985 102,811 74,918 $ 168,852 $ 182,420 $ 182,653 Note 3 – Acquisition of Squirrel L.P.November 30, 2017,December 16, 2022, we acquiredcompleted the acquisition of certain assets and assumed certain liabilities (the “Acquisition”) of Squirrel Brand L.P. (“Squirrel Brand”) for aSpecialty Cheese Company, Inc. The acquired assets are primarily related to the manufacturing and sale of baked cheese snack products, including those products sold under the $31,500, subject to a working capital adjustment. After giving effect to the initial working capital adjustment, the purchase price was $33,409, of which $21,909 $11,500 was financed by the seller through a three-year unsecured promissory note (the “Promissory Note”). The final working capital adjustment, if any, will be completed in our upcoming third quarter of fiscal 2018. The cash portion of the acquisition price was funded from our credit facility. The Promissory Note bears interest at 5.5% per annum and is payable in equal monthly principal payments of $319, plus interest, beginning in January 2018. The Promissory Note can be prepaid without penalty.The Squirrel Brand business Credit Facility (as defined below)suppliers of indulgentbaked cheese snacking brands and premium roasted nutsoffers 100% real cheese snack bars and snack mixes under itsSquirrel Brandcheese crisps.Southern Style Nuts brands. Prior is anticipated to the Acquisition, Squirrel Brand was a customer inaccelerate growth with our Contract Packaging sales channel for fourteen years.private brand and food service customers. The Acquisition has been accounted for as a business combination in accordance with ASC Topic 805, “Business Combinations”. As a result$33,409$3,500 has been allocated on a preliminary basis to the fair values of the assets acquired and liabilities assumed as follows: $ 2,446 1,957 75 10,500 8,900 270 9,638 (377 ) $ 33,409 $ 240 500 270 80 30 2,380 $ 3,500 the Squirrel Brand business has with its significant customers which we are amortizing over a weighted-average life of 7.5 years. The assets were valued using an income approach, specificallywho purchase“multi-period excess earnings” method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy.assets representasset represents the value of the establishedSquirrel Brand andSouthern Style Nuts names. We appliedincome approach through a relief from royalty method analysis to determine the preliminary fair value of the Cheesename assets. We are amortizing the brand name assets over a weighted-average life of 13.8 years. taxes, Squirrel Brand with the Company. There were no material contingencies recognized or unrecognized associated with the acquired business.especiallyspecifically amounts allocated to goodwill and intangiblefixed assets, are based on preliminary valuations and are subject to final adjustments to reflect the final net working capital adjustment and valuations.The following reflectsas(as if the Acquisition had taken place at the beginning of fiscal 2017. This pro forma information does2023) will not purport to represent what the Company’s actual results would have been if the Acquisition had occurred as of the date indicated or what such results would be for any future periods. Year-Ended
June 29,
2017 Twenty-six
weeks ended
December 28,
2017 $ 863,267 $ 479,054 36,723 18,762 $ 3.22 $ 1.64 These unaudited pro forma results have been calculated after applying our accounting policies and adjusting the results of the Squirrel Brand business to reflect elimination of transaction costs and to record additional amortization and interest expense that would have been charged, assuming the fair value adjustment to intangible assets since July 1, 2016, net of related income taxes in respect of pro forma net income and diluted earnings per share performance. Transaction costs of $500, already recorded in Administrative expenses, are excluded from the pro forma net income for thetwenty-six weeks ended December 28, 2017 stated above.Net sales of $3,976 resulting from the Acquisition are included in our consolidated financial results as of December 28, 2017 since the Acquisition closed on November 30, 2017. Consumer $ 224,513 $ 203,479 $ 421,060 $ 383,240 Commercial Ingredients 28,419 27,756 59,926 55,912 Contract Packaging 21,396 21,972 45,943 40,384 Total $ 274,328 $ 253,207 $ 526,929 $ 479,536
Consolidated Balance Sheet $ 2,593 $ 2,303 $ 2,852 $ 2,593 $ 2,303 $ 2,852 Current: Operating leases $ 1,166 $ 1,258 $ 1,392 Noncurrent: Operating leases 1,472 1,076 1,504 Total lease liabilities $ 2,638 $ 2,334 $ 2,896
2022 $ 541 $ 470 $ 1,015 $ 914 58 19 115 36 Total lease cost $ 599 $ 489 $ 1,130 $ 950
2022
2021 Cash paid for amounts included in measurements for lease liabilities $ 807 $ 794 $ 1,049 $ 89
2022
2021 Weighted average remaining lease term (in years) 3.0 2.3 2.5 Weighted average discount rate 5.2 % 4.3 % 4.2 % $ 738 June 27, 2024 936 June 26, 2025 560 June 25, 2026 372 June 24, 2027 192 June 29, 2028 65 Thereafter — Total lease payment 2,863 Less imputed interest (225 ) Present value of operating lease liabilities $ 2,638
2022
2021
2022
2021 Lease income related to lease payments $ 403 $ 408 $ 805 $ 818 $ 927 June 27, 2024 1,869 June 26, 2025 1,282 June 25, 2026 697 June 24, 2027 614 June 29, 2028 — $ 5,389 $ 75,002 $ 77,558 71,960 98,073 127,297 106,781 $ 173,075 $ 204,855 178,741 46 – Goodwill and Intangible Assetswhich resulted entirely from the Acquisition, are based on our preliminary purchase price allocation and consist of the following at December 28, 2017: December 28,
2017 Weighted-average
amortization
period (years) $ 10,500 7.5 8,900 13.8 270 5.0 19,670 11.3 (267 ) (58 ) (4 ) (329 ) $ 19,341 Gross intangible assets of $18,690 from previous acquisitions were fully amortized as of June 29, 2017.
2022
2022
2021 $ 21,370 $ 21,100 $ 21,100 17,070 16,990 16,990 300 270 270 38,740 38,360 38,360 (19,311 ) (18,795 ) (18,279 ) (11,598 ) (11,252 ) (10,908 ) (270 ) (248 ) (220 ) (31,179 ) (30,295 ) (29,407 ) $ 7,561 $ 8,065 $ 8,953 andSouthern Style Nutsa componentclassified in administrative expense in the Consolidated Statement of Administrative expense,Comprehensive Income, was $329$440 and $884 for the quarter and28, 2017.29, 2022, respectively. Amortization expense for the remainder of fiscal 2018, based on our preliminary purchase price allocation,2023 is expected to be approximately $1,685$913 and expected amortization expense the next five fiscal years is as follows: $ 3,028 2,500 2,162 1,894 1,659 $ 1,561 1,222 874 705 521 $9,638$9,650 that relates entirely to the Acquisition.Squirrel Brand acquisition completed in the second quarter of fiscal 2018 and $2,380 that relates to theduring thetwenty-six weeks ended December 28, 2017since June 25, 2021 are as follows: $ — 9,638 $ 9,638 The Company will perform a goodwill impairment test annually during the fourth quarterGross goodwill balance at June 25, 2021 $ 18,416 Accumulated impairment losses (8,766 ) Net balance at June 25, 2021 9,650 Goodwill acquired during the period 2,380 Net balance at December 29, 2022 $ 12,030 57 – Credit FacilityOn July 7, 2017, we entered into the Eighth Amendment to ourwhich eliminated the quarterly restriction on cash dividendsis secured by substantially all our assets other than machinery and distributionsequipment, real property and allows the Company to, without obtaining lender consent, make up to four cash dividends or distributions on our stock per fiscal year, or purchase, acquire, redeem or retire stock in any fiscal year, in an amount not to exceed $60,000 in the aggregate per fiscal year, as long as no default or event of default exists and the excess availability under the Credit Facility remains over $30,000 immediately before and after giving effect to any such dividend, distribution, purchase or redemption.On November 29, 2017, we entered into the Consent and Ninth Amendment to our Credit Agreement (the “Ninth Amendment”). The Ninth Amendment provides lender consent for us to incur unsecured debt (in particular, the Promissory Note) in connection with our acquisition of the Squirrel Brand business, and for: (i) the incurrence of unsecured debt in connection with the Acquisition and (ii) the Acquisition to constitute a “Permitted Acquisition” under the terms of the Credit Agreement. The Ninth Amendment also modified our collateral reporting requirements.28, 2017,29, 2022, we had $83,825$90,505 of available credit under the Credit Facility which reflects borrowings of $30,000$22,805 and reduced availability as a result of $3,675$4,190 in outstanding letters of credit. As of December 28, 2017,29, 2022, we were in compliance with all financial covenants under the Credit Facility and Mortgage Facility.68 – Earnings Per Common Share For the Quarter Ended For the Twenty-six Weeks Ended December 28,
2017 December 29,
2016 December 28,
2017 December 29,
2016 11,375,512 11,304,617 11,363,409 11,285,417 50,786 69,200 70,824 91,539 11,426,298 11,373,817 11,434,233 11,376,956
Ended 11,567,068 11,531,844 11,560,250 11,525,730 57,594 44,812 60,637 56,912 11,624,662 11,576,656 11,620,887 11,582,642 the current quarter andtwenty-six weekany periods presented.79 – Stock-Based Compensation Plans2018,2023, there were 60,58264,116 restricted stock units (“RSUs”) awarded to employees andStock option activity was insignificant during the first half of fiscal 2018.2018: Shares Weighted
Average Grant
Date Fair Value 201,858 $ 40.36 60,582 54.41 (55,956 ) 38.24 (11,038 ) 33.59 195,446 $ 45.70
Average Grant
Date Fair Value 142,239 $ 70.42 64,116 74.09 (29,349 ) 89.36 (2,020 ) 72.82 174,986 $ 68.56 (a) 28, 2017,29, 2022, there are 60,490were 27,727 RSUs outstanding that arewere vested but deferred. For the Quarter Ended For the Twenty-six Weeks Ended December 28,
2017 December 29,
2016 December 28,
2017 December 29,
2016 $ 891 $ 878 $ 1,429 $ 1,428
2022 Stock-based compensation expense $ 1,515 $ 1,068 $ 2,287 $ 1,771 28, 2017,29, 2022, there was $4,875$6,532 of total unrecognized compensation expense related to1.91.7 years.8 – DividendsOn July 11, 2017, our Board of Directors, after considering the financial position of our Company and other factors, declared a special cash dividend of $2.00 per share and a regular annual cash dividend of $0.50 per share on all issued and outstanding shares of Common Stock and Class A Stock of the Company (the “July 2017 Dividends”). The July 2017 Dividends of approximately $28,370 were paid on August 15, 2017 to stockholders of record as of the close of business on August 2, 2017.Note 910 – Retirement Plan For the Quarter Ended For the Twenty-six Weeks Ended December 28,
2017 December 29,
2016 December 28,
2017 December 29,
2016 $ 152 $ 158 $ 304 $ 316 212 202 425 405 240 240 479 479 41 91 81 182 $ 645 $ 691 $ 1,289 $ 1,382
2022 Service cost $ 201 $ 247 $ 401 $ 495 Interest cost 341 255 683 509 Amortization of loss 7 364 14 728 Net periodic benefit cost $ 549 $ 866 $ 1,098 $ 1,732 “Other expense”“Pension expense (excluding service costs)” in the Consolidated Statements of Comprehensive Income.1011 – Accumulated Other Comprehensive Loss28, 201729, 2022 and December 29, 2016.23, 2021.These changes are all related to our defined benefit pension plan. For the Twenty-six Weeks Ended December 28,
2017 December 29,
2016 $ (4,404 ) $ (6,425 ) — — 560 661 (219 ) (251 ) 341 410 $ (4,063 ) $ (6,015 ) (a)Amounts in parenthesis indicate debits/expense.
2022
2021 $ (2,480 ) $ (9,025 ) — — 14 728 (3 ) (190 ) 11 538 $ (2,469 ) $ (8,487 ) weeks ended December 28, 2017 and December 29, 2016 were as follows: Affected line
item in
the Consolidated
Statements of
Comprehensive
Income December 28,
2017 December 29,
2016 December 28,
2017 December 29,
2016 $ (240 ) $ (240 ) $ (479 ) $ (479 ) Other expense (41 ) (91 ) (81 ) (182 ) Other expense (281 ) (331 ) (560 ) (661 ) 111 126 219 251 Income tax expense $ (170 ) $ (205 ) $ (341 ) $ (410 ) (b)Amounts in parenthesis indicate debits to expense. See Note 9 – “Retirement Plan” above for additional details.Note 11 – Income TaxesIncome tax expense as a percent ofpre-tax income (the “Effective Tax Rate”) for the quarter ended December 28, 2017 was 39.0% compared to an Effective Tax Rate of 31.6% for the quarter ended December 29, 2016. The Effective Tax Rate for thetwenty-six weeks ended December 28, 2017 was 35.4% compared to an Effective Tax Rate of 32.9% for thetwenty-six2016. The increase2022
Ended
2022
2021
2022
2021 Amortization of defined benefit pension items: Unrecognized net loss (7 ) (364 ) (14 ) (728 ) Pension expense (excluding service costs) Tax effect 2 95 3 190 Income tax expense Amortization of defined pension items, net of tax $ (5 ) $ (269 ) $ (11 ) $ (538 ) the Effective Tax Rate for the quarter and six months ended December 28, 2017 was primarily relatedparenthesis indicate debits to the re-measurement of our net deferred tax assets incorporating the new federal income tax rate.H.R.1, originally known as the Tax Cuts and Jobs Act of 2017, was enacted on December 22, 2017, and includes, among other items,expense. See Note 10 – “Retirement Plan” above f reduction in the federal corporate income tax rate from 35% to 21%, which will have a material favorable impact on our effective income tax rate and cash income taxes paid going forward. Because we have a June fiscalyear-end, the lower corporate income tax rate will be phased in during the 2018 calendar year, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 28, 2018, and 21% for subsequent fiscal years. Our net deferred tax asset balances are recorded at the tax rate expected to be in effect during the period in which the related temporary differences reverse. Therefore, this reduction in the corporate federal income tax rate required anon-cash reduction of our net deferred tax asset balances and a corresponding increase in income tax expense of $2,408 during the quarter andtwenty-six weeks ended December 28, 2017. We scheduled out the expected reversal of temporary differences, including anticipated changes in our pension accrual and fixed asset acquisitions for the next six months, which required the use of reasonable estimates. Actual results could differ from those estimates, and thus further adjustment of our deferred tax asset balances are possible.Windfall tax benefits related to the excess tax deduction of share-based compensation of $332 and $446 for the quarter andtwenty-six weeks ended December 28, 2017 partially offset the impact of the reduction of the corporate tax rate.presentlypresWe are subject to a class-action complaint for an employment related matter. Mediation for this matter occurred in fiscal 2017. In August 2017, we agreed in principle to a $1,200 settlement for which we were fully reserved at June 29, 2017. Thenon-monetary components of the settlement are still being finalized.Authoritative guidance issued by the (“FASB”) defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:Level 1 – Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. Level 2 – Observable inputs other than quoted prices in active markets. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. Level 3 – Unobservable inputs for which there is little or no market data available. , and because of the short-term maturity and nature of this balance. In addition, there has been no significant change in our inherent credit risk. December 28,
2017 June 29,
2017 December 29,
2016 $ 38,256 $ 28,808 $ 30,532 38,584 29,316 31,124
2022
2021 Carrying value of current and long-term debt: $ 8,944 $ 10,927 $ 12,862 Fair value of current and long-term debt: 8,118 11,179 14,282 Related Party TransactionIn connection withGarysburg, North Carolina FacilityAcquisition on November 30, 2017, we incurred $11,500 of unsecured debt to the principal owner and seller of the Squirrel Brand business, who was subsequently appointed as an executive officer of the Company. The interest rate on the Promissory Note is 5.5% per annum and the outstanding balance at December 28, 2017 was $11,181. Interest paid on the Promissory Note during the secondfirst quarter of fiscal 2018 was immaterial.2022 we sold the Garysburg property and remaining equipment located at the property to a third party for $4,000, subject to customary adjustments to reflect closing costs, which resulted in a $2,349 gain.The following have been adopted in the current fiscal year:In March 2017, the FASB issued ASUNo. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The amendments in this update require the service cost component of pension expense to be disaggregated from the other components of net periodic benefit cost and be presented in the same line items as other employee compensation costs. All other components of net periodic benefit cost (interest cost, amortization of prior service cost and amortization of unrecognized loss) must be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). This update is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as long as it is early adopted in the first interim period of an annual year and financial statements have not been issued or made available for issuance prior to adoption. The amendments in this update should be applied using a retrospective transition method, however, a practical expedient is offered with regard to the prior comparative periods. The Company adopted ASU2017-07 in the first quarter of fiscal 2018. Service cost continues to be presented as a component of Administrative expense while the remaining components of net periodic benefit cost (interest cost, amortization of prior service cost and amortization of unrecognized loss)year.now presented below the caption Other expense on the Consolidated Statements of Comprehensive Income. Adoption of this update required a reclassification of $533 and $1,066 in the prior year second quarter andtwenty-six week period, respectively, from Administrative expense to Other expense.In October 2016, the FASB issued ASUNo. 2016-17 “Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control”. This update amends ASU2015-02 and affects reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. ASU2016-17 is effective for the Company in fiscal 2018 and requires retrospective application. The adoption of ASU2016-17 did not have any impact to the Consolidated Financial Statements.In July 2015, the FASB issued ASUNo. 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory”. This update applies to inventory measured usingfirst-in,first-out or average cost and requires inventory be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes. This update became effective for the Company beginning in fiscal year 2018 with prospective application required. The adoption of ASU2015-11 did not have any impact to the consolidated financial statements.The followingno recent accounting pronouncements that have been issued and not yet been adopted:In January 2017, the FASB issued ASC UpdateNo. 2017-04 “Intangibles—Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment”. The purpose of this update is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the impaired fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as ifadopted that reporting unit had been acquired in a business combination, commonly referred to as “Step 2”. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. This update is effective beginning in fiscal 2021. We do not expect this updateare expected to have a material impact on our Consolidated Financial Statements.
In February 2016, the FASB issued ASUNo. 2016-02“Leases (Topic 842)”. The primary goal of this update is to require the lessee to recognize all lease commitments, both operating and finance, by initially recording a lease asset and liability on the balance sheet at the lease commencement date. Additionally, enhanced qualitative and quantitative disclosures will be required. ASUNo. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. This new guidance will be effective for the Company beginning in fiscal year 2020. This guidance must be adopted using a modified retrospective approach and early adoption is permitted. The Company expects this new guidance to have a significant impact on its total assets and total liabilities, and lead to increased financial statement disclosures.
In May 2014, the FASB issued ASUNo. 2014-09“Revenue from Contracts with Customers (Topic 606)” and created a new ASC Topic 606,Revenue from Contracts with Customers, and added ASC Subtopic340-40, Other Assets and Deferred Costs — Contracts with Customers. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605,Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Several other amendments have been subsequently released, each of which provide additional narrow scope clarifications or improvements. In August 2015, the FASB issued ASUNo. 2015-14“Revenue from Contracts with Customers, Deferral of the Effective Date” which deferred the effective date of ASU2014-09 for one year. Consequently, this new revenue recognition guidance will be effective for the Company beginning in fiscal year 2019, which is our anticipated adoption date. We have completed our initial analysis of this accounting standard update which included a review of all material customer contracts and currently do not anticipate any material changes to our revenue recognition compared to current GAAP. We are currently evaluating the method of adoption.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes to Consolidated Financial Statements.
Our fiscal year ends on the final Thursday of June each year, and typically consists offifty-two weeks (four thirteen-week quarters). Additional information on the comparability of the periods presented is as follows:
References herein to fiscal 20182023 and fiscal 20172022 are to the 52 week fiscal year ending June 28, 201829, 2023 and the 53 week fiscal year ended June 29, 2017,30, 2022, respectively.
References herein to the second quarter of fiscal 20182023 and fiscal 20172022 are to the quarters ended December 28, 201729, 2022 and December 29, 2016,23, 2021, respectively.
| • | References herein to the first half or first twenty-six weeks of fiscal 2023 and fiscal 2022 are to the twenty-six weeks ended December 29, 2022 and December 23, 2021, respectively. |
As used herein, unless the context otherwise indicates, the terms “we”, “us”, “our” or “Company” collectively refer to John B. Sanfilippo & Son, Inc. and our wholly-owned subsidiary, JBSS Ventures, LLC. Our Company’s Credit Facility and Mortgage Facility, as defined below, are sometimes collectively referred to as “our financing arrangements.”
We are one of the leading processors and distributors of peanuts, pecans, cashews, walnuts, almonds and other nuts in the United States. These nuts are sold under our Fisher, Orchard Valley Harvest, Squirrel Brand and Southern Style Nuts brand names and under a variety of private brands and under theFisher, Orchard Valley Harvest,Squirrel Brand, Southern Style Nuts,and Sunshine Countrybrand names.brands. We also market and distribute, and in most cases, manufacture or process, a diverse product line of food and snack products, including peanut butter, almond butter, cashew butter, candy and confections, snackssnack and trail mixes, snack bites, sunflower kernels, dried fruit, corn snacks, chickpea snacks, sesame sticks and other sesame snack products under our brand names and under private brandsbrands. In addition, with our acquisition of the Just the Cheese brand, we will now be able to expand our product offerings to include baked cheese snack products on a branded and brand names.private label basis. We distribute our products in the consumer, commercial ingredients and contract packaging distribution channels.
The Company’s long-term objectiveDuring fiscal 2022, we created a Long-Range Plan to drive profitabledefine our future growth as identified inpriorities. Our Long-Range Plan focuses on growing our strategic plan (the “Strategic Plan”), includes growingnon-branded business across key customers, transforming Fisher,, Orchard Valley Harvest,and Squirrel Brandand Southern Style Nuts into leading nut brands while increasing distribution and diversifying our portfolio into high growth snacking segments. We plan to execute on our Long-Range Plan by focusingproviding our non-branded customers with value-added solutions based on our extensive industry and consumer expertise. We will grow our branded business by reaching new consumers demanding quality nuts in the snacking, recipevia product expansion and produce categories, providing integrated nut solutions to grownon-branded business at existing key customers in eachpackaging innovation, expanding distribution channelacross current and increasing our consumer reach efforts, including by expandingalternative channels, diversifying our product offerings into alternative distribution channels. We executedand focusing on new ways for consumers to buy our Strategicproducts, including sales via e-commerce platforms. This Long-Range Plan inalso contemplates increasing our sales through product innovation and targeted, opportunistic acquisitions, such as the second quarter of fiscal 2018 by completing the strategic acquisition of Squirrel Brand, L.P. (“Squirrel Brand”), a former contract packaging customer. In addition, we managed to grow ourFisher recipe nut sales volume in the quarter by focusing on our promotional activity and expanding distribution, despite a majorFisher recipe nut customer transitioning to a private label program for certain package typesJust the Cheese brand completed during the current second quarter.
We face a number of challenges in the future which include, among others, volatile commodity costs for certain tree nuts, especially cashews, and intensified competition for market share from both private brand and name brand products. We also face changing industry trends resulting in retail consolidation and Internet price competition for nut and nut related products, as well as significant risks associated with increasing use of fixed price arrangements with certain of our customers. We will continue to focus on seeking profitable business opportunities to further utilize our additional production capacity at our primary manufacturing, processing and distribution facility located in Elgin, Illinois (the “Elgin Site”). We expect to maintain our recent level of promotional and advertising activity forto invest in ourFisher brands to achieve growth. We intend to execute an omnichannel approach to win in key categories including recipe nuts, snack nuts, trail mix andOrchard Valley Harvest brands. other snacking categories. We continue to see significant domestic sales and volume growth in ourOrchard Valley Harvest brand and expect to continue to focus on this portion ofstrong e-commerce performance across our branded business.portfolio and anticipate taking various actions with the goal of accelerating that growth across a variety of established and emerging platforms. We will continue to face the ongoing challenges specific to our business, such as food safety and regulatory issues and the maintenance and growth of our customer base.base for branded and private label products. See the information referenced in Part II, Item 1A — “Risk Factors” of this report for additional information about our risks, challenges and uncertainties.
We face a number of challenges in the future, which include significant inflation, potential for economic downturn, supply chain challenges and, to a lesser extent, the lingering impacts of COVID-19. We have also experienced a tightening in the labor market for those employed at our production facilities, which has led to increased labor costs.
18
Inflation and Consumer Trends
We face changing industry trends as consumer purchasing preferences evolve. Due to significant inflation, including higher commodity acquisition costs in fiscal 2022, we have seen higher selling prices at retail. With higher prices across our categories and the broader food market, and also due to any actual or potential economic downturn, consumers may purchase fewer snack products, as we have seen through the recent decline in the recipe and snack nut categories, shift their preferences to private brands or lower priced nuts or purchase snack products outside the nut and trail mix category. With the inflationary environment, we are also seeing signs of consumers shifting to more value-focused retailers, such as mass merchandising retailers, club stores and dollar stores. E-commerce platforms showed growth during the first half of fiscal 2023 but at a lower rate than we saw during the first half of fiscal 2022.
Supply Chain and Transportation
In recent quarters, we have faced challenges with shortages and cost increases for shipping pallets, packaging, imported ingredients, transportation and shipping availability. The conflict in Ukraine has further exacerbated supply chain disruptions, especially related to sunflower oil used in roasting our nut products. Overall packaging costs appear to be leveling off but remain well above pre-pandemic levels. In addition, we are seeing some relief in select ingredient categories with reformulations and substitutions, but lead-times remain long compared to pre-pandemic lead-times.
We have also experienced supply chain issues related to a shortage in capacity in the transportation industry. This tightening in transportation capacity began to ease during the third quarter of fiscal 2022 and has continued to ease into fiscal 2023 as inflation resulted in rising costs which decreased demand in the freight market. Although we have seen stabilization in truckload capacity and volume at U.S. ports, there is continued pressure on driver hiring and fuel and energy concerns due to continued unrest abroad. Fuel prices that were at record highs during spring and summer 2022 have begun to decrease, yet still remain volatile. While there are indicators of transportation cost improvement, and despite our mitigation of some of the transportation shortages and maintaining high service levels, we may continue to face an unpredictable transportation environment. There is no guarantee that our mitigation strategies will continue to be effective, that any transportation capacity easing will continue or that transportation prices will return to more normalized levels.
These shortages and related challenges have impacted our operations and resulted in increased expenses and manufacturing inefficiencies that have adversely impacted (and may continue to impact) our net income. We anticipate pricing relief in some of these areas in the coming quarters, if and as shortages decrease and supply chains normalize; however, we expect that some costs may remain elevated or unpredictable for a longer period of time, particularly as the conflict in Ukraine continues.
We are working, and will continue to work, with our vendors, customers and suppliers to source additional raw materials and packaging supplies and to remain flexible in obtaining the transportation and labor services we need. If these shortages and other supply chain issues continue and we cannot secure adequate supplies to fulfill customer orders or cannot obtain the transportation and labor services we need, such shortages and supply chain issues could have an unfavorable impact on net sales and our operations during the remainder of fiscal year 2023. In addition, as costs increase due to these issues or due to inflationary pressures in general, there is an additional risk of not being able to pass (in part or in full) such potential cost increases onto our customers or in a timely manner. If we cannot align costs with prices for our products, our operating performance could be adversely impacted.
COVID-19
During fiscal 2023, we may continue to face challenges as a result of the COVID-19 pandemic. During fiscal 2022, as various COVID-19 vaccines and therapeutic measures became more widely distributed and accepted by the public and indoor dining restrictions were again loosened, we saw a significant improvement in sales volume with our foodservice, restaurant, convenience store and non-essential retail customers.
19
QUARTERLY HIGHLIGHTS
Our net sales of $259.1$274.3 million for the second quarter of fiscal 20182023 increased 3.9%8.3% from our net sales of $249.4$253.2 million for the second quarter of fiscal 2017.2022. Net sales for the firsttwenty-six weeks of fiscal 20182023 increased by $2.2$47.4 million, or 0.5%9.9%, to $473.9$526.9 million from net sales of $471.7 million forcompared to the firsttwenty-six weeks of fiscal 2017.2022.
Sales volume, measured as pounds sold to customers, increased 0.7 million pounds, or 0.9% indecreased 3.8% for the second quarter of fiscal 2018,2023 compared to the second quarter of fiscal 2017.2022. Sales volume for the firsttwenty-six weeks of fiscal 2018 was relatively unchanged2023 decreased 1.1% compared to the firsttwenty-six weeks of fiscal 2017.2022.
Gross profit decreasedincreased by $5.5$4.3 million, and our gross profit margin, as a percentage of net sales, decreased to 14.6%was unchanged at 20.6% for both the second quarter of fiscal 2018 compared to 17.4% for the second quarter of2023 and fiscal 2017.2022. Gross profit decreased by $7.1increased $3.1 million, and our gross profit margin decreased to 15.3%20.3% from 16.9%21.7% for the firsttwenty-six weeks of fiscal 20182023 compared to the firsttwenty-six weeks of fiscal 2017.2022.
Total operating expenses for the second quarter of fiscal 2018 increased2023 decreased by $0.5$1.9 million, or 2.2%5.7%, compared to the second quarter of fiscal 2017.2022. As a percentage of net sales, total operating expenses in the second quarter of fiscal 20182023 decreased to 9.1%11.7% from 9.3%13.4% for the second quarter of fiscal 2017.2022. For the first half of fiscal 2018,2023, total operating expenses decreased by $1.4increased $1.8 million, to 8.7%and total operating expenses as a percentage of net sales decreased to 11.4% compared to 9.0%12.2% for the first half of fiscal 2017.2022.
The total value of inventories on hand at the end of the second quarter of fiscal 20182023 decreased by $13.8$5.7 million, or 7.6%3.2%, in comparison to the total value of inventories on hand at the end of the second quarter of fiscal 2017.
On November 30, 2017 we completed the acquisition of the Squirrel Brand business for a purchase price of $33.4 million (the “Acquisition”). Squirrel Brand is one of the nation’s leading suppliers of indulgent and premium roasted nuts and snack mixes under itsSquirrel Brand andSouthern Style Nuts brands. Prior to the Acquisition, Squirrel Brand was a customer in our Contract Packaging sales channel for fourteen years. Through this Acquisition, we increased our customer base and branded portfolio as part of our goal of expanding into alternative distribution channels.2022.
We have seen acquisition costs for walnuts,all major tree nuts decrease and acquisition costs for peanuts and cashews increase modestly in the 20172022 crop year (which falls into our current 20182023 fiscal year). We completed procurement of inshell walnuts during the first half of fiscal 2018.2023. During the third quarter, we will determine the final prices to be paid to the walnut growers based upon current market prices and other factors such as crop size and export demand. We have estimated the liability to our walnut growers and our walnut inventory costs using currently available information. Any difference between our estimated liability and the actual final liability will be determined during the third quarter of fiscal 20182023 and will be recognized in our financial results at that time.
20
RESULTS OF OPERATIONS
Net Sales
Our net sales increased 3.9%8.3% to $259.1$274.3 million in the second quarter of fiscal 20182023 compared to net sales of $249.4$253.2 million for the second quarter of fiscal 2017.2022. The increase in net sales was primarily dueattributable to increased sales of snack and trail mix products in our consumer distribution channel combined with a 2.9%12.7% increase in the weighted average sales price per pound. SalesThis increase was partially offset by a 3.8% decrease in sales volume, which is defined as pounds sold to customers, increased approximately 0.9%customers. The increase in the quarterly comparison.weighted average selling price per pound primarily resulted from higher commodity acquisition costs for pecans, cashews, peanuts and dried fruit. Sales volume for peanuts and all major tree nuts (except pecans) declined in the current quarter.
For the firsttwenty-six weeks of fiscal 20182023 our net sales were $473.9$526.9 million, an increase of $2.2$47.4 million, or 0.5%9.9%, compared to the same period of fiscal 2017.2022. The increase in net sales was primarily dueattributable to a slightan 11.1% increase in the weighted average selling price per pound, which was partially offset by a 1.1% decrease in sales volume. The increase in the weighted average selling price resulted from higher commodity acquisition costs for all major tree nuts (except walnuts), peanuts and dried fruit.
The following table summarizes sales by product type as a percentage of total gross sales. The information is based upon gross sales, rather than net sales, because certain adjustments, such as promotional discounts, are not allocable to product type.
| For the Quarter Ended | For the Twenty-six Weeks Ended | For the Quarter Ended | For the Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||
Product Type | December 28, 2017 | December 29, 2016 | December 28, 2017 | December 29, 2016 | December 29, 2022 | December 23, 2021 | December 29, 2022 | December 23, 2021 | ||||||||||||||||||||||||
Peanuts | 13.0 | % | 13.9 | % | 14.3 | % | 14.2 | % | 16.6 | % | 16.6 | % | 17.8 | % | 17.1 | % | ||||||||||||||||
Pecans | 20.5 | 22.5 | 17.4 | 19.0 | 17.5 | 15.7 | 14.1 | 12.4 | ||||||||||||||||||||||||
Cashews & Mixed Nuts | 26.0 | 23.1 | 25.4 | 23.3 | 20.6 | 20.9 | 20.4 | 21.6 | ||||||||||||||||||||||||
Walnuts | 9.8 | 9.6 | 9.2 | 9.2 | 6.8 | 7.0 | 6.3 | 6.4 | ||||||||||||||||||||||||
Almonds | 12.5 | 14.1 | 13.8 | 16.4 | 8.3 | 9.0 | 8.7 | 9.8 | ||||||||||||||||||||||||
Trail & Snack Mixes | 12.9 | 12.2 | 14.6 | 13.0 | 24.2 | 25.1 | 26.4 | 26.5 | ||||||||||||||||||||||||
Other | 5.3 | 4.6 | 5.3 | 4.9 | 6.0 | 5.7 | 6.3 | 6.2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
The following table shows a comparison of net sales by distribution channel (dollars in thousands):
| For the Quarter Ended | For the Quarter Ended | |||||||||||||||||||||||||||||||||||||||
Distribution Channel | December 28, 2017 | December 29, 2016 | Change | Percent Change | December 29, 2022 | Percentage of Total | December 23, 2021 | Percentage of Total | $ Change | % Change | ||||||||||||||||||||||||||||||
Consumer(1) | $ | 181,533 | $ | 168,778 | $ | 12,755 | 7.6 | % | $ | 224,513 | 81.8 | % | $ | 203,479 | 80.3 | % | $ | 21,034 | 10.3 | % | ||||||||||||||||||||
Commercial Ingredients | 35,578 | 40,325 | (4,747 | ) | (11.8 | ) | 28,419 | 10.4 | 27,756 | 11.0 | 663 | 2.4 | ||||||||||||||||||||||||||||
Contract Packaging | 42,007 | 40,272 | 1,735 | 4.3 | 21,396 | 7.8 | 21,972 | 8.7 | (576 | ) | (2.6 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | $ | 259,118 | $ | 249,375 | $ | 9,743 | 3.9 | % | $ | 274,328 | 100.0 | % | $ | 253,207 | 100.0 | % | $ | 21,121 | 8.3 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
| (1) | Sales of branded products were approximately |
21
The following table shows a comparison of net sales by distribution channel (dollars in thousands):
| For the Twenty-six Weeks Ended | For the Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||||||||||
Distribution Channel | December 28, 2017 | December 29, 2016 | Change | Percent Change | December 29, 2022 | Percentage of Total | December 23, 2021 | Percentage of Total | $ Change | % Change | ||||||||||||||||||||||||||||||
Consumer(1) | $ | 317,501 | $ | 303,945 | $ | 13,556 | 4.5 | % | $ | 421,060 | 79.9 | % | $ | 383,240 | 79.9 | % | $ | 37,820 | 9.9 | % | ||||||||||||||||||||
Commercial Ingredients | 71,987 | 91,045 | (19,058 | ) | (20.9 | ) | 59,926 | 11.4 | 55,912 | 11.7 | 4,014 | 7.2 | ||||||||||||||||||||||||||||
Contract Packaging | 84,421 | 76,678 | 7,743 | 10.1 | 45,943 | 8.7 | 40,384 | 8.4 | 5,559 | 13.8 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | $ | 473,909 | $ | 471,668 | $ | 2,241 | 0.5 | % | $ | 526,929 | 100.0 | % | $ | 479,536 | 100.0 | % | $ | 47,393 | 9.9 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
| (1) | Sales of branded products were approximately |
Net sales in the consumer distribution channel increased $21.0 million, or 10.3%, and sales volume decreased 2.0% in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. The sales volume decrease was driven by 7.6%lost private brand distribution at a grocery store retailer that occurred in the fourth quarter of fiscal 2022 and a 24.1% sales volume decrease for Fisher snack nuts primarily as a result of competitive pricing pressures at two grocery store retailers and lost distribution at another grocery store retailer. These decreases were partially offset by an increase in private brand sales volume due to new private brand peanut butter business at a mass merchandising retailer and increased seasonal distribution at another mass merchandising retailer. Sales volume of Fisher recipe nuts increased 2.8% as a result of increased distribution at a mass merchandising retailer and at a grocery store retailer. Sales volumeof Orchard Valley Harvest products decreased 14.5% due to the timing of sales to a major customer in the non-food sector who shifted their orders into the third quarter of fiscal 2023.
In the first twenty-six weeks of fiscal 2023, net sales in the consumer distribution channel increased $37.8 million, or 9.9%, and sales volume decreased 1.4% compared to the same period of fiscal 2022. The sales volume decrease was driven by lost private brand distribution at the grocery store retailer cited in the quarterly comparison, which was partially offset by increased distribution at a mass merchandising retailer.
Net sales in the commercial ingredients distribution channel increased 2.4% in dollars and 6.6%decreased 7.7% in sales volume in the second quarter of fiscal 20182023 compared to the second quarter of fiscal 2017.2022. The decrease in sales volume increase was driven by increased sales of private brand andOrchard Valley Harvest trail mixes. Sales volume forFisher recipe nuts increased 3.4% due to distribution gains with new and existing customers, increased promotional activity, and a product line extension for raw peanuts. A 55.6%38.9% decrease in sales volume of bulk products to other food manufacturers as a result of reduced consumption from softened consumer spending. This was partially offset by a 2.9% increase in sales volume ofOrchard Valley Harvest produce products was driven byto foodservice customers due to new item introductions and distribution gains at new and existing customers. Sales volume forFisher snack nuts decreased 2.8% mainly from lower promotional activity.
In the firsttwenty-six weeks of fiscal 2018,2023, net sales in the consumercommercial ingredients distribution channel increased by 4.5%7.2% in dollars and increased 4.4%decreased 2.7% in sales volume compared to the same period of fiscal 2017.2022. The decrease in sales volume increase was driven by increaseddue to a 26.7% decrease in sales volume of bulk products to other food manufacturers for the reason cited in the quarterly comparison and a decrease in sales of private brandpeanut crushing stock to peanut oil processors. These decreases were largely offset by an 8.9% increase in sales volume to foodservice customers due to new distribution at existing customers andOrchard Valley Harvest trail mixes. the continued recovery in the restaurant industry from the impacts of COVID-19 restrictions.
Net sales in the commercial ingredientscontract packaging distribution channel decreased by 11.8%2.6% in dollars and 14.5%11.3% in sales volume in the second quarter of fiscal 20182023 compared to the second quarter of fiscal 2017. In the firsttwenty-six weeks of fiscal 2018, net sales in the commercial ingredients distribution channel decreased by 20.9% in dollars and 15.8%2022. The decrease in sales volume compared to the same period of fiscal 2017. The sales volume decrease for both the quarterly andtwenty-six week period was primarily due to the loss ofearlier timing for holiday shipments at a bulk almond buttermajor customer that occurred in the latter part of the fiscal 2017 second quarter.
Net sales in the contract packaging distribution channel increased by 4.3% in dollars and declined 1.9% in sales volume in the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017. The sales volume decrease was mainly due to our acquisition of the Squirrel Brand business at the end of November 2017. Squirrel Brand sales volume for December in the current quarter was included in the consumer and commercial ingredients channels, while Squirrel Brand sales volume for December in the fiscal 2017 second quarter was included in the contract packaging distribution channel because Squirrel Brand was a contract packaging customer during the second quarter of fiscal 2017.this channel.
In the firsttwenty-six weeks of fiscal 2018,2023, net sales in the contract packaging distribution channel increased by 10.1%13.8% in dollars and 5.7%sales volume increased 2.7% compared to the first twenty-six weeks of fiscal 2022. The increase in sales volume comparedwas primarily attributable to the firsttwenty-six weeks of fiscal 2017. Increased sales to an existing customer frombusiness with a new item introductions during the firsttwenty-six weeks of fiscal 2018 drove the increase in sales volume.customer.
22
Gross Profit
Gross profit decreasedincreased by $5.5$4.3 million, or 12.7%8.2%, to $37.9$56.5 million for the second quarter of fiscal 20182023 compared to the second quarter of fiscal 2017.2022. Our gross profit margin, as a percentage of net sales, decreased to 14.6%was unchanged at 20.6% for both the second quarter of fiscal 2018 compared2023 and fiscal 2022, primarily due to 17.4%lower acquisition costs for the second quarter of fiscal 2017.almonds and walnuts, which were offset by inflationary cost increases, including for labor and manufacturing supplies, increased depreciation expense and a decrease in sales volume. The decreasesincrease in gross profit and gross profit margin werewas mainly due to increased commodity acquisition costs for walnuts and pecans. We could not raise walnut and pecan selling prices to cover these acquisition cost increases due to prior holiday promotional pricing commitments that we made primarily to support newFisher recipe nut distribution.a higher net sales base.
Gross profit decreased by $7.1 million, or 8.9%, to $72.7was $107.1 million for the firsttwenty-six weeks of fiscal 20182023 compared to $104.0 million for the firsttwenty-six weeks of fiscal 2017.2022 primarily due to a higher net sales base. Our gross profit margin, as a percentage of sales, decreased to 15.3%20.3% for the firsttwenty-six weeks of fiscal 20182023 compared to 16.9%21.7% for the firsttwenty-six weeks of fiscal 2017.2022. The decreasesdecrease in gross profit and gross profit margin in the year to date comparison occurredwas primarily attributable to higher acquisition costs for the same reasonsall major tree nuts (except walnuts) and peanuts, other inflationary cost increases cited in the quarterly comparison.comparison and increased depreciation expense.
Operating Expenses
Total operating expenses for the second quarter of fiscal 2018 increased2023 decreased by $0.5$1.9 million, or 2.2%5.7%, to $23.6$32.0 million. Operating expenses for the second quarter of fiscal 2018 decreased to 9.1% of net sales from 9.3%11.7% of net sales for the second quarter of fiscal 2017.2023 compared to 13.4% of net sales for the second quarter of fiscal 2022.
Selling expenses for the second quarter of fiscal 20182023 were $15.8$21.8 million, an increasea decrease of $0.5$1.7 million, or 3.1%7.4%, from the second quarter of fiscal 2017.2022. The increasedecrease was driven primarily by a $0.5$1.5 million increasedecrease in compensation related expensesadvertising expense and a $0.4$0.8 million increasedecrease in freight expense. These expensesexpense primarily due to a decrease in freight rates, which were partially offset by a $0.7$0.3 million decreaseincrease in incentivebase compensation expense and $0.2 million increase in the current quarter.sales broker commission expense.
Administrative expenses for the second quarter of fiscal 20182023 were $7.8$10.2 million compared to $7.7$10.4 million for the second quarter of fiscal 2017. A $1.52022. The decrease was due to a $0.8 million decrease in compensation-related expenses, primarily incentive compensation expense wasand a $0.5 million decrease in the loss on asset disposals, which were largely offset by a $0.6$1.0 million increase of transactionin base and legal expenses, primarily due to the Acquisition , and an increase of $0.4 million of personnelequity compensation expense. The current quarter also included $0.3 million of amortization expense associated with the Acquisition.
Total operating expenses for the firsttwenty-six weeks of fiscal 2018 decreased2023 increased by $1.4$1.8 million, or 3.2%3.1%, to $41.1$60.3 million. Operating expenses decreased to 8.7%11.4% of net sales for the first half of fiscal 20182023 compared to 9.0%12.2% of net sales for the first half of fiscal 2017.2022.
Selling expenses for the firsttwenty-six weeks of fiscal 20182023 were $26.8$39.8 million, an increasea decrease of $0.1$1.5 million, or 0.6%3.6%, from the amount recorded for the firsttwenty-six weeks of fiscal 2017.2022. The decrease was driven primarily by a $2.0 million decrease in advertising expense and a $1.2 million decrease in freight expense due to a decrease in freight rates. These decreases were partially offset by a $0.6 million increase in base compensation expense and a $0.5 million increase in sales broker commission expense.
Administrative expenses for the firsttwenty-six weeks of fiscal 20182023 were $14.3$20.5 million, a decreasean increase of $1.5$1.0 million, or 9.5%5.1%, compared to the same period of fiscal 2017.2022. The decrease in administrative expensesincrease was primarily due to a $2.1$1.3 million decreaseincrease in incentivebase and equity compensation expense and a $0.6 million increase in audit and legal expenses primarily for Acquisition-related costs, which were partially offset by a $0.5$0.6 million increasedecrease in the loss on asset disposals.
The $2.3 million gain on sale of transaction expenses related tofacility in the Acquisition. The currentyear-to-date expenses also include $0.3 millionfirst half of amortization expense associated withfiscal 2022 was the Acquisition.result of the sale of our Garysburg, North Carolina facility.
Income from Operations
Due to the factors discussed above, income from operations was $14.2$24.5 million, or 5.5%8.9% of net sales, for the second quarter of fiscal 20182023 compared to $20.3$18.3 million, or 8.1%7.2% of net sales, for the second quarter of fiscal 2017.2022.
Due to the factors discussed above, income from operations was $31.6$46.9 million, or 6.7%8.9% of net sales, for the firsttwenty-six weeks of fiscal 20182023 compared to $37.4$45.6 million, or 7.9%9.5% of net sales, for the firsttwenty-six weeks of fiscal 2017.2022.
Interest Expense
Interest expense was $0.8$0.6 million for the second quarter of fiscal 20182023 compared to $0.6$0.4 million infor the second quarter of fiscal 2017.2022. Interest expense for the first two quarters of fiscal 2018 was $1.6 million compared to $1.2$1.3 million for the first two quarterstwenty-six weeks of fiscal 2017.2023 compared to $0.8 million for the first twenty-six weeks of fiscal 2022. The increase in interest expense for both the quarterly andtwenty-six week comparison year to date comparisons was due primarily to higher debt levels, which were mainly driven by the Acquisition.weighted average interest rates.
23
Rental and Miscellaneous Expense, Net
Net rental and miscellaneous expense was $0.2$0.3 million for both the second quarter of fiscal 2018 compared to2023 and fiscal 2022. Net rental and miscellaneous expense was $0.7 million for both the first twenty-six weeks of fiscal 2023 and fiscal 2022.
Pension Expense (Excluding Service Costs)
Pension expense (excluding service costs) was $0.3 million for the second quarter of fiscal 2017. Net rental and miscellaneous expense was $0.9 million for the firsttwenty-six weeks of fiscal 20182023 compared to $0.7 million for the firsttwenty-six weeks of fiscal 2017.
Other Expense
Other expense consists of pension related expenses other than the service cost component and was $0.5$0.6 million for the second quarter of both fiscal 2018 and fiscal 2017. Other2022. Pension expense (excluding service costs) was $1.0 million and $1.1$0.7 million for the firsttwenty-six weeks of fiscal 20182023 compared to $1.2 million for the first twenty-six weeks of fiscal 2022. The decrease in pension expense (excluding service costs) for both the quarterly and 2017, respectively.year to date comparisons was primarily due to a decrease in the unrecognized net loss remaining to be amortized, which was a result of a large actuarial gain in the prior fiscal year.
Income Tax Expense
Income tax expense was $5.0$6.3 million, or 39.0%27.1% of income before income taxes (the “Effective Tax Rate”), for the second quarter of fiscal 20182023 compared to $6.0$3.7 million, or 31.6%21.6% of income before income taxes, for the second quarter of fiscal 2017.2022. For the firsttwenty-six weeks of fiscal 2018,2023, income tax expense was $10.0$11.7 million, or 35.4%26.6% of income before income taxes, compared to $11.3$10.4 million, or 32.9%24.3% of income before income taxes, for the comparable period last year. The net increase in the Effective Tax Rate for both the quarterly andtwenty-six week comparison was due to a $2.4 millionnon-cash charge to income tax expense to reduce our deferred tax assetsperiods is mainly due to the Tax Cuts and Jobs Actfavorable impact of 2017, which lowered$0.7 million of discrete tax benefits from share-based compensation recognized in the corporate income tax rate to twenty one percent, effective January 1, 2018.second quarter of fiscal 2022 that did not reoccur in the current quarter.
Net Income
Net income was $7.8$16.9 million, or $0.68$1.46 per common share basic and diluted, for the second quarter of fiscal 2018, compared to $12.9 million, or $1.14 per common share basic and $1.13$1.45 per common share diluted, for the second quarter of fiscal 2017.
Net income was $18.22023, compared to $13.2 million, or $1.60$1.15 per common share basic and $1.59$1.14 per common share diluted, for the second quarter of fiscal 2022.
Net income was $32.5 million, or $2.81 per common share basic and $2.79 per common share diluted, for the firsttwenty-six weeks of fiscal 2018,2023, compared to net income of $23.1$32.5 million, or $2.04$2.82 per common share basic and $2.03$2.81 per common share diluted, for the firsttwenty-six weeks of fiscal 2017.2022.
LIQUIDITY AND CAPITAL RESOURCES
General
The primary uses of cash are to fund our current operations, fulfill contractual obligations, pursue our StrategicLong-Range Plan through growing our branded and private label nut programs and repay indebtedness.indebtedness, including amounts payable under the Retirement Plan. Also, various uncertainties, including cost uncertainties, could result in additional uses of cash. The primary sources of cash are results of operations and availability under our Credit Agreement, dated February 7, 2008 and subsequently amended most recently in November 2017 (as amended, the “Credit Facility”), that provides a revolving loan commitment and letter of credit subfacility.Facility. We anticipate that expected net cash flow generated from operations and amounts available pursuant to the Credit Facility will be sufficient to fund our operations for the next twelve months. Our available credit under our Credit Facility has allowed us to devote more funds to promote our products, (especially ourFisherincrease consumer insight capabilities andOrchard Valley Harvest brands), consummate strategic business acquisitions such as the recent acquisition of Squirrel Brand, promotional efforts, reinvest in the Company through capital expenditures, develop new products, pay a special cash dividenddividends, consummate strategic investments and business acquisitions, such as the past six yearsAcquisition, and explore other growth strategies outlined in our StrategicLong-Range Plan.
Cash flows from operating activities have historically been driven by net income but are also significantly influenced by inventory requirements, which can change based upon fluctuations in both quantities and market prices of the various nuts and nut products we buy and sell. Current market trends in nut prices and crop estimates also impact nut procurement.
24
The following table sets forth certain cash flow information for the first half of fiscal 20182023 and 2017,2022, respectively (dollars in thousands):
| December 28, 2017 | December 29, 2016 | $ Change | ||||||||||
Operating activities | $ | 58,431 | $ | 62,430 | $ | (3,999 | ) | |||||
Investing activities | (28,803 | ) | (6,624 | ) | (22,179 | ) | ||||||
Financing activities | (28,531 | ) | (55,995 | ) | 27,464 | |||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash | $ | 1,097 | $ | (189 | ) | $ | 1,286 | |||||
|
|
|
|
|
| |||||||
| December 29, 2022 | December 23, 2021 | $ Change | ||||||||||
Operating activities | $ | 70,952 | $ | 15,820 | $ | 55,132 | ||||||
Investing activities | (14,976 | ) | (5,889 | ) | (9,087 | ) | ||||||
Financing activities | (55,771 | ) | (9,576 | ) | (46,195 | ) | ||||||
|
|
|
|
|
| |||||||
Net increase in cash | $ | 205 | $ | 355 | $ | (150 | ) | |||||
|
|
|
|
|
| |||||||
Operating ActivitiesNet cash provided by operating activities was $58.4$71.0 million for the firsttwenty-six weeks of fiscal 20182023 compared to $62.4$15.8 million for the comparative period of fiscal 2017.2022. The net decreaseincrease in operating cash flow was primarily due to a $4.9 million reduction in net income.decreased use of working capital for inventory compared to the first twenty-six weeks of fiscal 2022 as a result of decreasing commodity acquisition costs.
Total inventories were $168.9$173.1 million at December 28, 2017,29, 2022, a decrease of $13.6$31.8 million, or 7.4%15.5%, from the inventory balance at June 29, 2017,30, 2022, and a decrease of $13.8$5.7 million, or 7.6%3.2%, from the inventory balance at December 29, 2016.23, 2021. The decrease in inventories at December 28, 201729, 2022 compared to June 29, 201730, 2022 was primarily due to lower commodity acquisition costs for all major tree nuts and lower quantities of pecans and finished goods on hand, at a lower acquisition cost,which were partially offset by higher quantities of walnuts, cashews and other raw materials on hand at a higher acquisition cost.hand. The decrease in inventories at December 28, 201729, 2022 compared to December 29, 2016 was23, 2021 were primarily due to lower commodity acquisition costs for all major tree nuts and lower quantities of finished goods and pecans on hand, combined with lower pecan acquisition costs,which were partially offset by higher quantities of almondscashews, other raw materials, work-in-process and finished goods on hand.farmer stock peanuts.
Raw nut and dried fruit input stocks, some of which are classified as work in process, decreasedwork-in-process, increased by 11.37.4 million pounds, or 16.6%15.0%, at December 28, 201729, 2022 compared to December 29, 2016.23, 2021 due to higher quantities of farmer stock peanuts, inshell walnuts and cashews on hand, partially offset by lower quantities of inshell pecans. The weighted average cost per pound of raw nut input stocks on hand at the end of the second quarter of fiscal 20182023 decreased 3.4%24.2% compared to the end of the second quarter of fiscal 20172022 primarily due to lower quantities of pecans at lowercommodity acquisition costs than the prior year.for all major tree nuts.
Investing ActivitiesCash used in investing activities was $28.8$15.0 million during the firsttwenty-six weeks of fiscal 20182023 compared to $6.6$5.9 million for the same period last year. The $22.2 million increase in cash used in investing activities was duepartially attributable to paymentthe $3.9 million of net proceeds received from the disposition of the cash portionGarysburg, North Carolina facility, which occurred in the first quarter of fiscal 2022 and did not recur in the current fiscal year. The $3.5 million purchase price for the Squirrel Brand acquisition which was $21.9 million. Cash spent for capital expendituresof the Just the Cheese brand also contributed to the increase. Capital asset purchases were $11.4 million during the firsttwenty-six weeks half of fiscal 2018 was $0.32023 compared to $9.5 million more thanfor the same period last year.first half of fiscal 2022. We expect total capital expenditures for new equipment, facility upgrades, and food safety enhancements for fiscal 20182023 to be approximately $14.0$18.0 to 20.0 million. Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations and borrowings available under the Credit Facility, will be sufficient to meet the cash requirements for planned capital expenditures.
Financing ActivitiesCash used byin financing activities was $28.5$55.8 million during the firsttwenty-six weeks of fiscal 20182023 compared to $56.0$9.6 million for the same period last year. WeNet repayments under our Credit Facility were $17.6 million during the first half of fiscal 2023 compared to net borrowings of $27.2 million for the first half of fiscal 2022. The decrease in credit facility borrowings was primarily due to decreasing commodity acquisition costs. Dividends paid $28.4 million of dividends in the first half of fiscal 2018 compared to $56.52023 were approximately $3.0 million duringhigher than dividends paid in the same period last year.
Real Estate Matters
In August 2008, we completed the consolidation of our Chicago-based facilities into theour Elgin Site.headquarters (“Elgin Site”). The Elgin Site includes both an office building and a warehouse. We are currently attempting to find additional tenants for the available space in the office building at the Elgin Site. Until additional tenant(s) are found, we will not receive the benefit of rental income associated with such space. Approximately 62%69% of the rentable area in the office building is currently vacant,vacant. Approximately 29% of which approximately 29%the rentable area has not beenbuilt-out. There can be no assurance that we will be able to lease the unoccupied space and further capital expenditures maywill likely be necessary to lease the remaining space.
25
Financing Arrangements
On February 7, 2008, we entered into the Former Credit FacilityAgreement (as defined below) with a bank group (the “Bank Lenders”) providing a $117.5 million revolving loan commitment and letter of credit subfacility. Also on February 7, 2008, we entered into a Loan Agreement with an insurance company (the “Mortgage Lender”) providing us with two term loans, one in the amount of $36.0 million (“Tranche A”) and the other in the amount of $9.0 million (“Tranche B”), for an aggregate amount of $45.0 million (the(as amended, the “Mortgage Facility”).
On November 29, 2017,March 5, 2020, we entered into the Consentan Amended and Ninth Amendment toRestated Credit Agreement (the “Amended and Restated Credit Agreement”) which amended and restated our Credit Agreement which provided lender consent to incur unsecured debt in connectiondated as of February 7, 2008 (the “Former Credit Agreement”). The Amended and Restated Credit Agreement provides for a $117.5 million senior secured revolving credit facility with our acquisitionthe same borrowing capacity, interest rates and applicable margin as the Former Credit Agreement and extends the term of the assets of the Squirrel Brand business, and for the acquisition of the Squirrel Brand businessFormer Credit Agreement from July 7, 2021 to constitute a “Permitted Acquisition” under the terms of the Credit Facility. The Ninth Amendment also modified our collateral reporting requirements.March 5, 2025.
The Amended and Restated Credit Facility as most recently amended in November 2017, is secured by substantially all of our assets other than machinery and equipment, real property, and fixtures and matures on July 7, 2021.March 5, 2025. The Mortgage Facility is secured by mortgages on essentially all of our owned real property located in Elgin, Illinois and Gustine, California and Garysburg, North Carolina (the “Encumbered Properties”).
Credit Facility
At our election, borrowings under the Credit Facility currently accrue interest at either (i) a rate determined pursuant to the administrative agent’s prime rate plus an applicable margin determined by reference to the amount of loans which may be advanced under the borrowing base calculation, ranging from 0.25% to 0.75% or (ii) a rate based upon the London interbank offered rate (“LIBOR”) plus an applicable margin based upon the borrowing base calculation, ranging from 1.25% to 1.75%.
At December 28, 2017,29, 2022, the weighted average interest rate for the Credit Facility was 3.00%6.3%. The terms of the Credit Facility contain covenants that, among other things, require us to restrict investments, indebtedness, acquisitions and certain sales of assets and limit annual cash dividends or distributions, transactions with affiliates, redemptions of capital stock and prepayment of indebtedness (if such prepayment, among other things, is of a subordinate debt). If loan availability under the borrowing base calculation falls below $25.0 million, we will be required to maintain a specified fixed charge coverage ratio, tested on a monthly basis, until loan availability equals or exceeds $25.0 million for three consecutive months. All cash received from customers is required to be applied against the Credit Facility. The Bank Lenders have the option to accelerate and demand immediate repayment of our obligations under the Credit Facility in the event of default on the payments required under the Credit Facility, a change in control in the ownership of the Company,non-compliance with the financial covenant or upon the occurrence of other defaults by us under the Credit Facility (including a default under the Mortgage Facility). As of December 28, 2017,29, 2022, we were in compliance with all covenants under the Credit Facility and we currently expect to be in compliance with the financial covenant in the Credit Facility for the foreseeable future. At December 28, 2017,29, 2022, we had $83.8$90.5 million of available credit under the Credit Facility. If this entire amount were borrowed at December 28, 2017,29, 2022, we would still be in compliance with all restrictive covenants under the Credit Facility.
Mortgage Facility
The Mortgage Facility matures on March 1, 2023. Tranche A under2023, and the remaining balance of $0.9 million will be paid in full during our fiscal 2023 third quarter. On March 1, 2018 the interest rate on the Mortgage Facility currently accrues interestwas fixed at a fixed interest rate of 7.63%4.25% per annum, payable monthly.annum. Monthly principal payments on the Mortgage Facility in the amount of $0.2$0.3 million commenced on June 1, 2008. Tranche B under the Mortgage Facility currently accrues interest, as reset on March 1, 2016, at a floating rate of the greater of (i) one month LIBOR plus 3.50% per annum or (ii) 4.25%, payable monthly (the “Floating Rate”). Monthly principal payments in the amount of $0.1 million commenced on June 1, 2008.
In January 2018 we locked the interest rates for both Tranche A and Tranche B at 4.25% beginning March 1, 2018 through March 1, 2023.
The terms of the Mortgage Facility contain covenants that require us to maintain a specified net worth of $110.0 million and maintain the Encumbered Properties. The Mortgage Lender is entitled to require immediate repayment of our obligations under the Mortgage Facility in the event we default in the payments required under the Mortgage Facility,non-compliance with the covenants or upon the occurrence of certain other defaults by us under the Mortgage Facility. As of December 28, 2017, we were in compliance with all covenants under the Mortgage Facility.
Selma Property
In September 2006, we sold our Selma, Texas properties (the “Selma Properties”) to two related party partnerships for $14.3 million and are leasing them back. The selling price was determined by an independent appraiser to be the fair market value which also approximated our carrying value. The lease for the Selma Properties has aten-year term at a fair market value rent with threefive-year renewal options. In September 2015, we exercised two of the five-year renewal options which extended the lease term to September 2026. The lease extension also reduced the monthly lease payment on the Selma Properties, beginning in September 2016, to reflect then current market conditions. At the end of each five-year renewal option, the base monthly lease amounts are reassessed, and the monthly payments increased to $114 beginning in September 2021. One five-year renewal option remains. Also, we have an option to purchase the Selma Properties from the owner at 95% (100% in certain circumstances) of the then fair market value, but not less than the original $14.3 million purchase price. The provisions of the arrangement are not eligible for sale-leaseback accounting and the $14.3 million was recorded as a debt obligation. No gain or loss was recorded on the Selma Properties transaction. As of December 28, 2017, $10.829, 2022, $8.1 million of the debt obligation was outstanding.
Squirrel Brand Seller-Financed Note
In November 2017 we completed the Squirrel Brand acquisition. The acquisition was financed by a combination of cash (drawn under the Credit Facility) and a three-year seller-financed note for $11.5 million (“Promissory Note”). The Promissory Note is unsecured, bears interest at 5.5% per annum and is payable in equal monthly principal payments of $0.3 million, plus interest, beginning in January 2018. Upon an event of default, as defined in the Promissory Note, the interest rate increases to 7.5% until such event of default is cured. We have the ability topre-pay the Promissory Note at any time during the three-year period without penalty. At December 28, 2017, the principal amount of $11.2 million of the Promissory Note was outstanding.
26
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ourForm 10-K for the fiscal year ended June 29, 2017.30, 2022.
Recent Accounting Pronouncements
Refer to Note 15 – “Recent Accounting Pronouncements” of the Notes to Consolidated Financial Statements, contained in Part I, Item 1 of this form10-Q, for a discussion of recently issued and adopted accounting pronouncements.
27
FORWARD LOOKING STATEMENTS
Some of the statements in this report are forward-looking (including statements concerning our expectations regarding market risk and the impact of the purchasing decisions of major customers).forward-looking. These forward-looking statements may be generally identified by the use of forward-looking words and phrases such as “will”, “intends”, “may”, “believes”, “anticipates”, “should” and “expects” and are based on the Company’s current expectations or beliefs concerning future events and involve risks and uncertainties. Consequently, the Company’s actual results could differ materially. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events or other factors that affect the subject of these statements, except where expressly required to do so by law. Among the factors that could cause results to differ materially from current expectations are: (i) the risks associated with our vertically integrated model with respect to pecans, peanuts and walnuts; (ii) sales activity for the Company’s products, such as a decline in sales to one or more key customers (of branded products, private label products or otherwise), or to onecustomers generally, in some or more key customers,all channels, a change in product mix to lower price products, a decline in sales of private brand products or changing consumer preferences, including a shift from higher margin products to lower margin products; (iii)(ii) changes in the availability and costs of raw materials and ingredients and the impact of fixed price commitments with customers; (iv)(iii) the ability to pass on price increases to customers if commodity costs rise and the potential for a negative impact on demand for, and sales of, our products from price increases; (v)(iv) the ability to measure and estimate bulk inventory, fluctuations in the value and quantity of the Company’s nut inventories due to fluctuations in the market prices of nuts and bulk inventory estimation adjustments, respectively; (vi)(v) the Company’s ability to appropriately respond to, or lessen the negative impact of, competitive and pricing pressures; (vii)pressures, including competition in the recipe nut category; (vi) losses associated with product recalls, product contamination, food labeling or other food safety issues, or the potential for lost sales or product liability if customers lose confidence in the safety of the Company’s products or in nuts or nut products in general, or are harmed as a result of using the Company’s products; (viii)(vii) the ability of the Company to control expenses,costs (including inflationary costs) and manage shortages in areas such as compensation, medicalinputs, transportation and administrative expense; (ix) the potential negative impact of government regulations and laws and regulations pertaining to food safety, such as the Food Safety Modernization Act; (x)labor; (viii) uncertainty in economic conditions, including the potential for inflation or economic downturn; (xi)(ix) the timing and occurrence (or nonoccurrence) of other transactions and events which may be subject to circumstances beyond the Company’s control; (xii)(x) the adverse effect of labor unrest or disputes, litigation and/or legal settlements, including potential unfavorable outcomes exceeding any amounts accrued; (xiii)(xi) losses due to significant disruptions at any of our production or processing facilities; (xiv)facilities or employee unavailability due to labor shortages, illness or quarantine; (xii) the inabilityability to implement our StrategicLong-Range Plan, including growing our branded and private brand product sales, diversifying our product offerings and expanding into alternative sales channels; (xv)(xiii) technology disruptions or failures; (xvi)failures or the occurrence of cybersecurity incidents or breaches; (xiv) the inability to protect the Company’s brand value, intellectual property or avoid intellectual property disputes; (xvii) the Company’s(xv) our ability to manage successfully the price gap between its private brand productsimpacts of changing weather patterns on raw material availability due to climate change; and those of its branded competitors; and (xiii) potential increased industry-specific regulation pending(xvi) the U.S. Food and Drug Administration assessmentability of the riskCompany to respond to or manage the outbreak of Salmonella contamination associated with tree nuts.COVID-19 or other infectious diseases and the various implications thereof.
28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in our assessment of our sensitivity to market risk since our presentation set forth in Part I – I—Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form10-K for the fiscal year ended June 29, 2017.30, 2022.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule13a-15(e)) as of December 28, 2017.29, 2022. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 28, 2017,29, 2022, the Company’s disclosure controls and procedures were effective.
In connection with the evaluation by our management, including our Chief Executive Officer and Chief Financial Officer, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rule13a-15(f)) during the quarter ended December 28, 201729, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
For a discussion of legal proceedings, see Note 12 – “Commitments and Contingent Liabilities” in Part I, Item 1 of thisForm 10-Q.
In addition to the other information set forth in this report on Form10-Q, you should also consider the factors, risks and uncertainties which could materially affect our Company’s business, financial condition or future results as discussed in Part I, Item 1A – “Risk Factors” of our Annual Report on Form10-K for the fiscal year ended June 29, 2017.30, 2022. There were no significant changes to the risk factors identified on the Form10-K for the fiscal year ended June 29, 201730, 2022 during the second quarter of fiscal 2018.2023.
See Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in this Form10-Q, and see Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in the Company’s Annual Report on Form10-K for the fiscal year ended June 29, 2017.30, 2022.
The exhibits filed herewith are listed in the exhibit index below.
29
EXHIBIT INDEX
(Pursuant to Item 601 of RegulationS-K)
30
31
|
| |
31.2 | Certification of | |
32.1 | Certification of Jeffrey T. Sanfilippo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended | |
32.2 | Certification of | |
101.INS | Inline eXtensible Business Reporting Language (XBRL) Instance Document—the instance document does not appear in the Interactive Data File because its XBRL | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| * | Indicates a management contract or compensatory plan or arrangement. |
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 5, 2018.1, 2023.
| JOHN B. SANFILIPPO & SON, INC. | ||
| By | /s/ | |
| Chief Financial Officer, | ||
3533