Item 2. Managements 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 of fifty-two weeks (four thirteen week
quarters). Fiscal 2016 consisted of fifty-three weeks, with our fourth quarter containing fourteen weeks. Additional information on the comparability of the periods presented is as follows:
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References herein to fiscal 2017 and fiscal 2016 are to the fiscal year ending June 29, 2017 and the fiscal year ended June 30, 2016, respectively.
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References herein to the third quarter of fiscal 2017 and fiscal 2016 are to the quarters ended March 30, 2017 and March 24, 2016, respectively.
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References herein to the first three quarters or first thirty-nine weeks of fiscal 2017 and fiscal 2016 are to the thirty-nine weeks ended March 30, 2017 and March 24, 2016, respectively.
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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 subsidiaries, JBSS Ventures, LLC and Sanfilippo (Shanghai) Trading Co. Ltd. Our Companys 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 a variety of private brands and under the
Fisher, Orchard Valley Harvest,
and
Sunshine Country
brand names. 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, snacks and trail mixes, snack bites, sunflower kernels, dried fruit, corn snacks, sesame sticks and other
sesame snack products under private brands and brand names. We distribute our products in the consumer, commercial ingredients and contract packaging distribution channels.
The Companys long-term objective to drive profitable growth, as identified in our strategic plan (the Strategic Plan), includes continuing
to grow
Fisher
and
Orchard Valley Harvest
into leading nut brands by focusing on consumers demanding quality nuts in the snacking, recipe and produce categories and providing integrated nut solutions to grow non-branded
business at existing key customers in each distribution channel. We executed on our Strategic Plan during fiscal 2017 by expanding our distribution and product offerings for our
Fisher
recipe nuts and
Orchard Valley Harvest
produce
nuts and by expanding distribution of peanuts and trail mixes to contract packaging customers. In the third quarter of fiscal 2017, our Board of Directors adopted a dividend policy under which it intends to pay an annual cash dividend on its common
stock and Class A common stock. It is contemplated that this annual dividend would be declared around the conclusion of the Companys fiscal year and paid in the first quarter of each fiscal year. One of the key factors that will be taken
into account in determining the annual dividend amount (and whether any such dividend will be paid) will be the liquidity position of the Company, in particular the borrowing availability under our Credit Facility.
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 nut products. Acquisition costs for almonds declined significantly during the second half of fiscal 2016 which has resulted in lower selling prices for products that contain
almonds. Since sales of almonds comprise a significant percentage of our total net sales, we anticipate that lower selling prices will continue to result in a significant reduction in net sales in future comparisons until the impact of lower retail
prices ultimately drives increased sales volume for almonds.
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, sampling and advertising activity
for our
Fisher
and
Orchard Valley Harvest
brands. We will continue to face the ongoing challenges specific to our business, such as food safety and the maintenance and growth of our customer base. See the information referenced in Part
II, Item 1A Risk Factors of this report for additional information about our risks, challenges and uncertainties.
14
QUARTERLY HIGHLIGHTS
Our net sales of $173.4 million for the third quarter of fiscal 2017 decreased 19.6% from our net sales of $215.7 million for the third quarter of fiscal
2016. Net sales for the first thirty-nine weeks of fiscal 2017 decreased by $75.5 million, or 10.5%, to $645.0 million from net sales of $720.5 million for the first thirty-nine weeks of fiscal 2016.
Sales volume, measured as pounds sold to customers, decreased 6.8 million pounds, or 10.8%, in the third quarter of fiscal 2017, compared to the third
quarter of fiscal 2016. Sales volume decreased 3.8 million pounds, or 1.9%, compared to the first thirty-nine weeks of fiscal 2016.
Gross profit
increased by $2.8 million and our gross profit margin, as a percentage of net sales, increased to 16.4% for the third quarter of fiscal 2017 compared to 11.9% for the third quarter of fiscal 2016. Gross profit increased by $4.5 million in the first
thirty-nine weeks of fiscal 2017, and our gross profit margin increased to 16.8% from 14.4% compared to the first thirty-nine weeks of fiscal 2016.
Total
operating expenses for the third quarter of fiscal 2017 decreased by $2.1 million, or 10.6%, compared to the third quarter of fiscal 2016. As a percentage of net sales, total operating expenses in the third quarter of fiscal 2017 increased to 10.4%
from 9.3% for the third quarter of fiscal 2016. For the first thirty-nine weeks of fiscal 2017, total operating expenses decreased by $3.3 million, but increased to 9.5% of net sales compared to 9.0% for the first three quarters of fiscal 2016.
The total value of inventories on hand at the end of the third quarter of fiscal 2017 decreased by $5.9 million, or 2.9%, in comparison to the total value of
inventories on hand at the end of the third quarter of fiscal 2016.
We have seen a significant increase in acquisition cost for pecans in the 2016 crop
year (which falls into our current 2017 fiscal year), as well as an increase in cashew acquisition costs. Conversely, we have seen acquisition costs for domestic tree nuts such as almonds decrease in the 2016 crop year. We have completed procurement
of inshell walnuts during the first half of fiscal 2017, and the final total payments due to our walnut growers were determined in the current quarter. The final prices paid, and remaining to be paid to the walnut growers, were based upon current
market prices and other factors, such as crop size and export demand. A large majority of payments to walnut growers were completed in the third quarter of fiscal 2017. Remaining amounts to be paid to walnut growers as of March 30, 2017 are
final and are not subject to revision. We increased our walnut grower liability by approximately $2.5 million during the third quarter of fiscal 2017, as the final payments to walnut growers were slightly more than the amounts estimated at the end
of last quarter. This increase is insignificant compared to our total inshell walnut procurement costs for the year, and the adjustment to cost of sales was immaterial to our results of operations.
15
RESULTS OF OPERATIONS
Net Sales
Our net sales decreased 19.6% to $173.4
million in the third quarter of fiscal 2017 compared to net sales of $215.7 million for the third quarter of fiscal 2016. The decrease in net sales in the quarterly comparison was primarily due to a 10.8% decrease in sales volume, which is defined
as pounds sold to customers, and a 9.9% decline in the weighted average sales price per pound which was driven primarily by lower selling prices for almonds. Sales volume declined in all distribution channels.
For the first thirty-nine weeks of fiscal 2017 our net sales were $645.0 million, a decrease of $75.5 million, or 10.5%, compared to the same period of fiscal
2016. The decrease in net sales was primarily due to an 8.8% decrease in the weighted average sales price per pound, which primarily occurred as a result of lower selling prices for almonds and walnuts. The decrease in net sales was also partially
due to a 1.9% decrease in sales volume. Sales volume increased in the consumer and contract packaging distribution channels, and declined in the commercial ingredients distribution channel. The sales volume decline was mainly attributable to lower
sales volume for almonds and mixed nuts, which was offset in part by sales volume increases for peanuts, snack and trail mixes and walnuts.
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.
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For the Quarter Ended
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For the Thirty-Nine Weeks Ended
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Product Type
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|
March 30,
2017
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|
March 24,
2016
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March 30,
2017
|
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|
March 24,
2016
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Peanuts
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17.7
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%
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|
|
14.9
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%
|
|
|
15.2
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%
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|
|
13.5
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%
|
Pecans
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|
14.4
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|
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10.0
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|
|
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17.8
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|
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13.4
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Cashews & Mixed Nuts
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25.1
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|
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23.7
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|
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|
23.8
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|
|
|
23.4
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Walnuts
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7.6
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|
|
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8.1
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|
|
|
8.8
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|
|
|
9.7
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|
Almonds
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15.7
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25.1
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16.2
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22.7
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Trail & Snack Mixes
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14.0
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13.0
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13.2
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12.4
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Other
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5.5
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5.2
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5.0
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4.9
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|
|
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|
|
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|
|
|
|
|
|
|
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Total
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100.0
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%
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|
|
100.0
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%
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|
|
100.0
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%
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|
|
100.0
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%
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|
|
|
|
|
|
|
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The following table shows a comparison of net sales by distribution channel (dollars in thousands):
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For the Quarter Ended
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Distribution Channel
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March 30,
2017
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March 24,
2016
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Change
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Percent
Change
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|
Consumer
(1)
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$
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107,541
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|
$
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126,239
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|
$
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(18,698
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)
|
|
|
(14.8
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)%
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Commercial Ingredients
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33,912
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|
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|
55,498
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|
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(21,586
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)
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(38.9
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)
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Contract Packaging
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|
31,923
|
|
|
|
34,005
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|
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(2,082
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)
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|
|
(6.1
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
|
173,376
|
|
|
$
|
215,742
|
|
|
$
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(42,366
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)
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|
|
(19.6
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)%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
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Sales of branded products, primarily all
Fisher
brand, were approximately 34% and 33% of total consumer sales during the third quarter of fiscal 2017 and fiscal 2016, respectively.
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16
The following table shows a comparison of net sales by distribution channel (dollars in thousands):
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|
|
|
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|
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|
|
|
|
For the Thirty-Nine Weeks
Ended
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Distribution Channel
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March 30,
2017
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|
March 24,
2016
|
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Change
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|
Percent
Change
|
|
Consumer
(1)
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|
$
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411,486
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|
|
$
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436,783
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|
|
$
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(25,297
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)
|
|
|
(5.8
|
)%
|
Commercial Ingredients
|
|
|
124,957
|
|
|
|
179,655
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|
|
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(54,698
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)
|
|
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(30.4
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)
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Contract Packaging
|
|
|
108,601
|
|
|
|
104,083
|
|
|
|
4,518
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|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
645,044
|
|
|
$
|
720,521
|
|
|
$
|
(75,477
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)
|
|
|
(10.5
|
)%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
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Sales of branded products, primarily all
Fisher
brand, were approximately 41% and 36% of total consumer sales during the first thirty-nine weeks of fiscal 2017 and fiscal 2016, respectively.
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Net sales in the consumer distribution channel decreased by 14.8% in dollars and sales volume decreased 6.1% in the third quarter of fiscal 2017
compared to the third quarter of fiscal 2016. The sales volume decrease was driven by decreased sales of cashews and mixed nuts with private brand customers and decreased sales of our branded products. Sales volume for
Fisher
recipe nuts
decreased 3.2% due to inventory reduction initiatives implemented by some customers during the current third quarter. Sales volume for
Fisher
snack nuts decreased 9.4%, primarily as a result of decreased merchandising activity. A 5.5%
decrease in combined sales volume of
Orchard Valley Harvest
and
Sunshine Country
produce brands also contributed to the sales volume decrease. The decrease in sales volume for our produce brands resulted from a decline in sales volume
for
Sunshine Country
produce products due to lost distribution, which was partially offset by a 4.6% increase in sales volume for our
Orchard Valley Harvest
produce products due to increased merchandising activity.
In the first thirty-nine weeks of fiscal 2017, net sales in the consumer distribution channel decreased by 5.8% in dollars but increased 3.3% in sales volume,
compared to the same period of fiscal 2016. Sales volume for
Fisher
recipe nuts increased 17.8% due to distribution gains with new customers, the introduction of larger package sizes for walnuts, and increased promotional activity. Sales
volume of our branded produce products increased 38.8% in the first thirty-nine weeks of fiscal 2017 driven by increased merchandising activity. Private brand snack sales volume increased approximately 5.2% in the first thirty-nine weeks of fiscal
2017. Partially offsetting the above noted sales volume increases, sales volume for
Fisher
snack nuts decreased 3.5% primarily for the same reasons cited in the quarterly comparison.
Net sales in the commercial ingredients distribution channel decreased by 38.9% in dollars and 26.3% in sales volume in the third quarter of fiscal 2017
compared to the third quarter of fiscal 2016 which resulted mainly from lost business with a bulk almond butter customer, which occurred in the second quarter of fiscal 2017. In the first thirty-nine weeks of fiscal 2017, net sales in the commercial
ingredients distribution channel decreased by 30.4% in dollars and 19.1% in sales volume compared to the same period of fiscal 2016. The sales volume decrease for the thirty-nine week period was primarily due to the loss of a bulk almond butter
customer and decreased sales of bulk inshell walnuts to international customers.
Net sales in the contract packaging distribution channel decreased by
6.1% in dollars and 3.9% in sales volume in the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016. The sales volume decrease for the quarterly period was primarily due to a reduction in merchandising activity implemented by
one customer in this channel. In the first thirty-nine weeks of fiscal 2017, net sales in the contract packaging distribution channel increased by 4.3% in dollars and 5.6% in sales volume compared to the first thirty-nine weeks of fiscal 2016. The
sales volume increase for the thirty-nine week period was primarily due to increased sales of snack and trail mixes, peanuts, cashews and almonds to existing customers.
17
Gross Profit
Gross profit increased by $2.8 million, or 11.1%, to $28.4 million for the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016. Our gross
profit margin, as a percentage of net sales, increased to 16.4% for the third quarter of fiscal 2017 compared to 11.9% for the third quarter of fiscal 2016. The increases in gross profit and gross profit margin were mainly attributable to lower
acquisition costs for almonds and improved alignment of selling prices and acquisition costs for pecans and walnuts.
Gross profit increased by $4.5
million, or 4.3%, to $108.3 million for the first thirty-nine weeks of fiscal 2017 compared to the first thirty-nine weeks of fiscal 2016. Our gross profit margin increased to 16.8% for the first thirty-nine weeks of fiscal 2017 compared to 14.4%
for the first thirty-nine weeks of fiscal 2016. The increases in gross profit and gross profit margin primarily occurred for the same reasons cited in the quarterly comparison.
Operating Expenses
Total operating expenses for
the third quarter of fiscal 2017 decreased by $2.1 million to $18.0 million. Total operating expenses for the third quarter of fiscal 2017 increased to 10.4% of net sales from 9.3% of net sales for the third quarter of fiscal 2016 as a result of a
lower sales base.
Selling expenses for the third quarter of fiscal 2017 were $10.3 million, a decrease of $1.1 million, or 9.3%, from the third quarter
of fiscal 2016. The decrease was driven primarily by a $1.0 million decrease in advertising expenses due to a later Easter holiday compared to fiscal 2016.
Administrative expenses for the third quarter of fiscal 2017 were $7.7 million, a decrease of $1.1 million, or 12.1%, from the third quarter of fiscal 2016.
The decrease was driven primarily by a $0.8 million decrease in compensation related expenses.
Total operating expenses for the first thirty-nine weeks
of fiscal 2017 decreased by $3.3 million, or 5.1%, to $61.6 million. Operating expenses increased to 9.5% of net sales for the first three quarters of fiscal 2017 compared to 9.0% of net sales for the first three quarters of fiscal 2016 as a result
of a lower sales base.
Selling expenses for the first thirty-nine weeks of fiscal 2017 were $36.9 million, a decrease of $2.2 million, or 5.6%, from the
amount recorded for the first thirty-nine weeks of fiscal 2016. The decrease was driven primarily by a $2.1 million decrease in sampling and advertising expense, a $0.9 million decrease in compensation related expenses, and a $0.8 million decrease
in sales commissions expense. Partially offsetting these decreases was a $1.4 million increase in shipping expense due to an increase in delivered sales pounds.
Administrative expenses for the first thirty-nine weeks of fiscal 2017 were $24.6 million, a decrease of $1.2 million, or 4.5%, compared to the same period of
fiscal 2016. The decrease was due primarily to a $1.0 million decrease in compensation related expenses.
Income from Operations
Due to the factors discussed above, income from operations was $10.4 million, or 6.0% of net sales, for the third quarter of fiscal 2017 compared to $5.5
million, or 2.5% of net sales, for the third quarter of fiscal 2016.
Due to the factors discussed above, income from operations increased to $46.7
million, or 7.2% of net sales, for the first thirty-nine weeks of fiscal 2017 from $38.9 million, or 5.4% of net sales, for the first thirty-nine weeks of fiscal 2016.
Interest Expense
Interest expense was $0.9
million for both the third quarter of fiscal 2017 and third quarter of fiscal 2016. Interest expense decreased 20.0% to $2.1 million for the first thirty-nine weeks of fiscal 2017 compared to the same period of fiscal 2016. The decrease in interest
expense for the thirty-nine week comparison was due primarily to lower debt levels during the first half of the current fiscal year.
18
Rental and Miscellaneous Expense, Net
Net rental and miscellaneous expense was $0.4 million for the third quarter of fiscal 2017 compared to $0.3 million for the third quarter of fiscal 2016. Net
rental and miscellaneous expense was $1.1 million for the first thirty-nine weeks of fiscal 2017 compared to $1.2 million for the first thirty-nine weeks of fiscal 2016.
Income Tax Expense
Income tax expense was $2.9
million, or 31.1% of income before income taxes (the Effective Tax Rate), for the third quarter of fiscal 2017 compared to $1.2 million, or 27.7% of income before income taxes, for the third quarter of fiscal 2016. For the first
thirty-nine weeks of fiscal 2017, income tax expense was $14.2 million, or 32.5% of income before income taxes, compared to $12.0 million, or 34.2% of income before income taxes, for the comparable period last year. The Effective Tax Rate for the
quarterly and thirty-nine week comparison was favorably impacted approximately 2.4% and 2.2%, respectively, by excess tax benefits that prior to the adoption of ASU 2016-09 were recorded in Capital in excess of par value on the Consolidated Balance
Sheets.
Net Income
Net income was $6.3
million, or $0.56 per common share basic and $0.55 per common share diluted, for the third quarter of fiscal 2017, compared to $3.1 million, or $0.27 per common share (basic and diluted), for the third quarter of fiscal 2016.
Net income was $29.4 million, or $2.60 per common share basic and $2.58 per share diluted, for the first thirty-nine weeks of fiscal 2017, compared to net
income of $23.1 million, or $2.06 per common share basic and $2.04 per share diluted, for the first thirty-nine weeks of fiscal 2016.
LIQUIDITY AND CAPITAL RESOURCES
General
The primary uses of cash are to fund our
current operations, fulfill contractual obligations, pursue our Strategic Plan and repay indebtedness. Also, various 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 July 2016 (as amended, the Credit Facility), that provides a revolving loan commitment and letter of credit subfacility. 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 our
Fisher
and
Orchard Valley Harvest
brands), reinvest in the Company through capital expenditures, develop new products, pay a special cash dividend the past five years, consummate business
acquisitions and explore other growth strategies outlined in our Strategic 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.
The following table sets forth certain cash flow information for the first three quarters of fiscal 2017 and
2016, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30,
2017
|
|
|
March 24,
2016
|
|
|
$ Change
|
|
Operating activities
|
|
$
|
15,355
|
|
|
$
|
41,003
|
|
|
$
|
(25,648
|
)
|
Investing activities
|
|
|
(8,128
|
)
|
|
|
(12,554
|
)
|
|
|
4,426
|
|
Financing activities
|
|
|
(7,599
|
)
|
|
|
(27,472
|
)
|
|
|
19,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
$
|
(372
|
)
|
|
$
|
977
|
|
|
$
|
(1,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Operating Activities
Net cash provided by operating activities was $15.4 million for the first
thirty-nine weeks of fiscal 2017 compared to $41.0 million for the comparative period of fiscal 2016. This decrease in cash was due primarily to a $44.8 million increase in inventories during the first three quarters of fiscal 2017 compared to a
$9.3 million increase in inventories during the same nine-month period last year.
Total inventories were $201.4 million at March 30, 2017, an
increase of $44.8 million, or 28.6%, from the inventory balance at June 30, 2016, and a decrease of $5.9 million, or 2.9%, from the inventory balance at March 24, 2016. The increase at March 30, 2017 compared to June 30, 2016 was
primarily due to larger quantities of pecans and walnuts on hand and higher acquisition costs for those commodities. The decrease in inventories at March 30, 2017 compared to March 24, 2016 was primarily driven by lower quantities of
finished goods combined with a lower weighted average cost per pound for finished goods.
Raw nut and dried fruit input stocks, some of which are
classified as work in process, decreased by 0.9 million pounds, or 1.2%, at March 30, 2017 compared to March 24, 2016. The weighted average cost per pound of raw nut input stocks on hand at the end of the third quarter of fiscal 2017
increased 1.4% compared to the end of the third quarter of fiscal 2016 due to higher acquisition costs for pecans, which were largely offset by lower acquisition costs for almonds.
Net accounts receivable were $59.4 million at March 30, 2017, a decrease of $18.7 million, or 23.9%, from the balance at June 30, 2016, and a
decrease of $12.1 million, or 16.9%, from the balance at March 24, 2016. The decrease in net accounts receivable from June 30, 2016 to March 30, 2017 is due primarily to lower dollar sales in March 2017 compared to June 2016.
Accounts payable were $40.2 million at March 30, 2017, a decrease of $3.5 million, or 8.1%, from the balance at June 30, 2016, and a decrease of
$19.1 million, or 32.3%, from the balance at March 24, 2016. The decrease in accounts payable at March 30, 2017 compared to March 24, 2016 is mainly due to the earlier receipt and subsequent payment of this years pecan crop
combined with fewer almond purchases at a lower cost compared to the thirty-nine weeks ended March 24, 2016.
Investing Activities
Cash
used in investing activities, primarily for capital expenditures, was $8.1 million during the first thirty-nine weeks of fiscal 2017 compared to $12.6 million for the same period last year. We expect total capital expenditures for new equipment,
facility upgrades, and food safety enhancements for fiscal 2017 to be approximately $10 to $12.5 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
Cash used by financing activities was $7.6 million during the first thirty-nine weeks of fiscal 2017 compared to $27.5 million for the
same period last year. Net short term borrowings under our Credit Facility provided $49.3 million during the first three quarters of fiscal 2017 compared to a usage of $6.0 million for repayments during the first three quarters of fiscal 2016. The
increase in borrowings during the first three quarters of fiscal 2017 was primarily due to increased inventory purchases compared to the first three quarters of fiscal 2016. Offsetting the above noted source of cash were $56.5 million of dividends
paid in the first three quarters of fiscal 2017 compared to $22.5 million during the same period last year.
Real Estate Matters
In August 2008, we completed the consolidation of our Chicago-based facilities into the 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 69% of the office building is currently vacant and approximately 75% of the office building has been built-out. There can be no assurance that we will be able to lease the unoccupied space and further capital expenditures may be
necessary to lease the remaining space.
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Financing Arrangements
On February 7, 2008, we entered into the Credit Facility 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 Mortgage Facility).
The Credit Facility, as most recently amended in July 2016, is secured by substantially all of our assets other than machinery and equipment, real property,
and fixtures and matures on July 7, 2021. The Mortgage Facility is secured by mortgages on essentially all of our owned real property located in Elgin, Illinois, 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 agents 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 March 30, 2017, the weighted average interest rate for the Credit Facility was 2.57%. 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 March 30, 2017, 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 March 30, 2017, we had $52.5 million of available credit under the Credit Facility. If this entire amount were borrowed at March 30, 2017, we
would still be in compliance with all restrictive covenants under the Credit Facility.
Mortgage Facility
We are subject to interest rate resets for each of Tranche A and Tranche B. Specifically, on March 1, 2018 (the Tranche A Reset Date and the
Tranche B reset Date) and every two years thereafter, the Mortgage Lender may reset the interest rates for each of Tranche A and Tranche B, respectively, in its sole and absolute discretion. If the reset interest rate for
Tranche A is unacceptable to us, and we (i) do not have sufficient funds to repay the amount due with respect to Tranche A on the Tranche A Reset Date, or (ii) are unable to refinance the amount due with respect to Tranche A on the Tranche
A Reset Date, on terms more favorable than the reset interest rate, then our interest expense would increase.
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The Mortgage Facility matures on March 1, 2023. Tranche A under the Mortgage Facility accrues interest at a
fixed interest rate of 7.63% per annum, payable monthly. As mentioned above, such interest rate may be reset by the Mortgage Lender on the Tranche A Reset Date. Monthly principal payments in the amount of $0.2 million commenced on June 1,
2008. Tranche B under the Mortgage Facility 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). The margin on such Floating Rate may be reset by the Mortgage Lender on each Tranche B Reset Date; provided, however, that the Mortgage Lender may also change the underlying index on each Tranche B Reset Date occurring on or after
March 1, 2018. Monthly principal payments in the amount of $0.1 million commenced on June 1, 2008. We do not currently anticipate that any change in the Floating Rate or the underlying index will have a material adverse effect upon our
business, financial condition or results of operations.
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 March 30, 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 a ten-year term at a fair market value rent with three five-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. 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 March 30, 2017, $11.2 million of the debt obligation was outstanding.
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 Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Form 10-K for the fiscal year ended June 30, 2016.
Recent Accounting Pronouncements
Refer to Note 12 Recent Accounting Pronouncements of the Notes to Consolidated Financial Statements, contained in Part I, Item 1 of
this form 10-Q, for a discussion of recently issued and adopted accounting pronouncements.
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FORWARD LOOKING STATEMENTS
The statements contained in this report that are not historical (including statements concerning our expectations regarding market risk) are forward
looking statements. These forward-looking statements may be generally identified by the use of forward-looking words and phrases such as will, anticipates, intends, may, believes,
should and expects and are based on our current expectations or beliefs concerning future events and involve risks and uncertainties. We caution that such statements are qualified by important factors, including the factors
referred to in Part II, Item 1A Risk Factors, and other factors, risks and uncertainties that are beyond our control. Consequently, our actual results could differ materially. We undertake 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 our products, such as a decline in sales to one
or more key customers, a decline in sales of private brand products or changing consumer preferences; (iii) changes in the availability and costs of raw materials and the impact of fixed price commitments with customers; (iv) 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) the ability to measure and estimate bulk inventory and fluctuations in
the value and quantity of our nut inventories due to fluctuations in the market prices of nuts and bulk inventory estimation adjustments, respectively, (vi) our ability to appropriately respond to, or lessen the negative impact of, competitive
and pricing pressures; (vii) 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 our
products or in nuts or nut products in general, or are harmed as a result of using our products; (viii) our ability to retain key personnel; (ix) the effect of the actions and decisions of the group that has the majority of the voting
power with regard to our outstanding common equity (which may make a takeover or change in control more difficult), including the effect of any agreements pursuant to which such group has pledged a substantial amount of its securities of the
Company; (x) the potential negative impact of government regulations and laws and regulations pertaining to food safety, such as the Food Safety Modernization Act; (xi) uncertainty in economic conditions, including the potential for
economic downturn; (xii) the timing and occurrence (or nonoccurrence) of other transactions and events which may be subject to circumstances beyond our control; (xiii) the adverse effect of labor unrest or disputes, litigation and/or legal
settlements, including potential unfavorable outcomes exceeding any amounts accrued; (xiv) losses due to significant disruptions at any of our production or processing facilities; (xv) the inability to implement our Strategic Plan or
realize efficiency measures including controlling medical and personnel costs; (xvi) technology disruptions or failures; (xvii) the inability to protect our intellectual property or avoid intellectual property disputes; (xviii) our
ability to manage successfully the price gap between our private brand products and those of our branded competitors; and (xix) potential increased industry-specific regulation pending the U.S. Food and Drug Administration assessment of the
risk of Salmonella contamination associated with tree nuts.
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