John B. Sanfilippo & Son(JBSS) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for John B. Sanfilippo & Son, Inc Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for John B. Sanfilippo & Son, Inc., including comprehensive income, balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, revenue recognition, inventory, intangible assets, debt, equity, and recent accounting pronouncements Consolidated Statements of Comprehensive Income This section details the company's unaudited comprehensive income statements for the quarter and twenty-six weeks, highlighting key financial performance metrics Consolidated Statements of Comprehensive Income (Quarter Ended) | Metric | Dec 27, 2018 (Thousands) | Dec 28, 2017 (Thousands) | Change (YoY) | % Change (YoY) | | :----------------------------- | :----------------------- | :----------------------- | :----------- | :------------- | | Net sales | $253,317 | $258,805 | $(5,488) | -2.1% | | Gross profit | $42,883 | $37,733 | $5,150 | 13.6% | | Total operating expenses | $26,243 | $23,631 | $2,612 | 11.1% | | Income from operations | $16,640 | $14,102 | $2,538 | 18.0% | | Net income | $11,264 | $7,609 | $3,655 | 48.0% | | Net income per common share-basic | $0.99 | $0.67 | $0.32 | 47.8% | | Net income per common share-diluted | $0.98 | $0.67 | $0.31 | 46.3% | Consolidated Statements of Comprehensive Income (Twenty-six Weeks Ended) | Metric | Dec 27, 2018 (Thousands) | Dec 28, 2017 (Thousands) | Change (YoY) | % Change (YoY) | | :----------------------------- | :----------------------- | :----------------------- | :----------- | :------------- | | Net sales | $457,605 | $474,469 | $(16,864) | -3.6% | | Cost of sales | $381,768 | $401,617 | $(19,849) | -4.9% | | Gross profit | $75,837 | $72,852 | $2,985 | 4.1% | | Total operating expenses | $49,145 | $41,135 | $8,010 | 19.5% | | Income from operations | $26,692 | $31,717 | $(5,025) | -15.8% | | Net income | $17,870 | $18,320 | $(450) | -2.5% | | Net income per common share-basic | $1.57 | $1.61 | $(0.04) | -2.5% | | Net income per common share-diluted | $1.56 | $1.60 | $(0.04) | -2.5% | Consolidated Balance Sheets This section presents the company's consolidated balance sheets, providing a snapshot of assets, liabilities, and stockholders' equity at various reporting dates Consolidated Balance Sheet Highlights (Thousands) | Metric | Dec 27, 2018 | June 28, 2018 | Dec 28, 2017 | | :------------------------------------------ | :----------- | :------------ | :----------- | | Cash | $2,583 | $1,449 | $3,052 | | Accounts receivable, net | $62,580 | $65,426 | $70,437 | | Inventories | $171,708 | $174,362 | $168,424 | | Total Current Assets | $243,814 | $247,882 | $255,930 | | Total Property, Plant and Equipment, net | $128,661 | $125,078 | $126,662 | | Goodwill | $9,650 | $9,650 | $9,638 | | Intangible assets, net | $15,970 | $17,654 | $19,341 | | Total Assets | $411,429 | $415,853 | $426,607 | | Revolving credit facility borrowings | $24,541 | $31,278 | $30,000 | | Accounts payable | $69,732 | $60,340 | $84,834 | | Total Current Liabilities | $125,515 | $117,193 | $140,722 | | Total Long-Term Liabilities | $52,541 | $55,658 | $59,312 | | Total Liabilities | $178,056 | $172,851 | $200,034 | | Total Stockholders' Equity | $233,373 | $243,002 | $226,573 | Consolidated Statements of Stockholders' Equity This section outlines the changes in the company's stockholders' equity over the reporting periods, including net income, dividends, and other comprehensive income items Changes in Stockholders' Equity (June 28, 2018 to Dec 27, 2018) | Item | Amount (Thousands) | | :------------------------------------------ | :----------------- | | Balance, June 28, 2018 | $243,002 | | Net income (Q1 FY19) | $6,606 | | Cash dividends ($2.55 per share) | $(29,074) | | Pension liability amortization, net of tax | $197 | | Stock-based compensation expense (Q1 FY19) | $616 | | Balance, September 27, 2018 | $221,347 | | Net income (Q2 FY19) | $11,264 | | Pension liability amortization, net of tax | $197 | | Equity award exercises, net of taxes | $(335) | | Stock-based compensation expense (Q2 FY19) | $900 | | Balance, December 27, 2018 | $233,373 | Changes in Stockholders' Equity (June 29, 2017 to Dec 28, 2017) | Item | Amount (Thousands) | | :------------------------------------------ | :----------------- | | Balance, June 29, 2017 | $235,468 | | Net income (Q1 FY18) | $10,711 | | Cash dividends ($2.50 per share) | $(28,370) | | Pension liability amortization, net of tax | $171 | | Equity award exercises | $16 | | Stock-based compensation expense (Q1 FY18) | $538 | | Balance, September 28, 2017 | $218,534 | | Net income (Q2 FY18) | $7,609 | | Pension liability amortization, net of tax | $170 | | Equity award exercises, net of taxes | $(631) | | Stock-based compensation expense (Q2 FY18) | $891 | | Balance, December 28, 2017 | $226,573 | Consolidated Statements of Cash Flows This section presents the company's consolidated cash flow statements, categorizing cash movements from operating, investing, and financing activities Consolidated Statements of Cash Flows (Twenty-six Weeks Ended) | Cash Flow Activity | Dec 27, 2018 (Thousands) | Dec 28, 2017 (Thousands) | Change (YoY) | | :-------------------------------- | :----------------------- | :----------------------- | :----------- | | Net cash provided by operating activities | $48,366 | $58,431 | $(10,065) |\n| Net cash used in investing activities | $(9,323) | $(28,803) | $19,480 |\n| Net cash used in financing activities | $(37,909) | $(28,531) | $(9,378) |\n| NET INCREASE IN CASH | $1,134 | $1,097 | $37 |\n| Cash, end of period | $2,583 | $3,052 | $(469) | - Non-cash investing activities for the twenty-six weeks ended December 28, 2017, included the acquisition of Squirrel Brand L.P. through a note payable of $11.5 million[20] Notes to Consolidated Financial Statements This section provides detailed explanatory notes to the consolidated financial statements, covering accounting policies, specific accounts, and recent pronouncements Note 1 – Basis of Presentation and Description of Business John B. Sanfilippo & Son, Inc. is a leading processor and distributor of various nuts and snack products in the U.S., sold under private brands and proprietary brand names like Fisher, Orchard Valley Harvest, Squirrel Brand, Southern Style Nuts, and Sunshine Country. Products are distributed through consumer, commercial ingredients, and contract packaging channels. The fiscal year ends on the final Thursday of June - The Company is a leading processor and distributor of peanuts, pecans, cashews, walnuts, almonds, and other nuts in the United States[22] - Products are sold under private brands and proprietary brand names including Fisher, Orchard Valley Harvest, Squirrel Brand, Southern Style Nuts, and Sunshine Country[22] - Distribution channels include food retailers (consumer), commercial ingredient users, and contract packaging customers[22] Note 2 – Revenue Recognition The Company adopted ASU No. 2014-09 (Topic 606) on June 29, 2018, using the full retrospective method, which required recasting prior period comparative information. Revenue is generally recognized at a point in time when product control transfers to the customer (approximately 99% of revenues), with some contract packaging revenue recognized over time for customized products with no alternative use. The adoption had an immaterial impact on the comparative Consolidated Balance Sheet and Consolidated Statement of Cash Flows - Adopted ASU No. 2014-09 (Topic 606) on June 29, 2018, using the full retrospective method, recasting prior period comparative information[25][71] - Revenue recognition generally occurs at a point in time when product control is transferred to the customer (approximately 99% of revenues)[30] - Certain contract packaging sales for customized products with no alternative use are recognized over time, resulting in revenue recognition approximately one month earlier than previous guidance, though the amount is generally immaterial to total revenue[30] Revenue Disaggregated by Sales Channel (Thousands) | Distribution Channel | Dec 27, 2018 (Quarter) | Dec 28, 2017 (Quarter) | Dec 27, 2018 (26 Weeks) | Dec 28, 2017 (26 Weeks) | | :------------------- | :--------------------- | :--------------------- | :---------------------- | :---------------------- | | Consumer | $195,679 | $181,533 | $335,370 | $317,501 | | Commercial Ingredients | $31,253 | $35,578 | $68,208 | $71,987 | | Contract Packaging | $26,385 | $41,694 | $54,027 | $84,981 | | Total | $253,317 | $258,805 | $457,605 | $474,469 | Impact of Topic 606 Adoption on Financials (Quarter Ended Dec 28, 2017) | Metric | As Previously Reported (Thousands) | Impact of Adoption (Thousands) | As Adjusted (Thousands) | | :-------------------- | :--------------------------------- | :----------------------------- | :---------------------- | | Net sales | $259,118 | $(313) | $258,805 | | Gross profit | $37,880 | $(147) | $37,733 | | Income from operations | $14,249 | $(147) | $14,102 | | Net income | $7,756 | $(147) | $7,609 | | EPS-basic | $0.68 | $(0.01) | $0.67 | | EPS-diluted | $0.68 | $(0.01) | $0.67 | Note 3 – Inventories Inventories are primarily composed of raw materials and supplies, and work-in-process and finished goods. As of December 27, 2018, total inventories were $171.7 million Inventories (Thousands) | Category | Dec 27, 2018 | June 28, 2018 | Dec 28, 2017 | | :------------------------ | :----------- | :------------ | :----------- | | Raw material and supplies | $87,717 | $73,209 | $80,867 | | Work-in-process and finished goods | $83,991 | $101,153 | $87,557 | | Total | $171,708 | $174,362 | $168,424 | Note 4 – Goodwill and Intangible Assets The Company's identifiable intangible assets, subject to amortization, include customer relationships, brand names (Squirrel Brand and Southern Style Nuts), and a non-compete agreement. Goodwill of $9.65 million relates entirely to the Squirrel Brand acquisition in fiscal 2018, with no change in its carrying amount during the first twenty-six weeks of fiscal 2019 Net Intangible Assets (Thousands) | Category | Dec 27, 2018 | June 28, 2018 | Dec 28, 2017 | | :-------------------- | :----------- | :------------ | :----------- | | Customer relationships | $21,100 | $21,100 | $21,100 | | Brand names | $16,990 | $16,990 | $16,990 | | Non-compete agreement | $270 | $270 | $270 | | Less accumulated amortization | $(22,390) | $(20,706) | $(19,019) | | Net intangible assets | $15,970 | $17,654 | $19,341 | - Total amortization expense related to intangible assets was $842 thousand for the quarter and $1.7 million for the twenty-six weeks ended December 27, 2018[49] - Goodwill of $9.7 million relates entirely to the Squirrel Brand acquisition and remained unchanged during the twenty-six weeks ended December 27, 2018[49] Note 5 – Credit Facility The Company has a $117.5 million revolving loan commitment and letter of credit subfacility. As of December 27, 2018, $89.9 million of available credit remained, and the Company was in compliance with all financial covenants - The Credit Facility provides a $117.5 million revolving loan commitment[50] - As of December 27, 2018, available credit under the Credit Facility was $89.9 million, reflecting borrowings of $24.5 million and $3.1 million in outstanding letters of credit[51] - The Company was in compliance with all financial covenants under the Credit Facility and Mortgage Facility as of December 27, 2018[51] Note 6 – Earnings Per Common Share This section provides the reconciliation of weighted average shares outstanding used in computing basic and diluted earnings per share, including the effect of dilutive securities such as stock options and restricted stock units Weighted Average Shares Outstanding (Thousands) | Metric | Dec 27, 2018 (Quarter) | Dec 28, 2017 (Quarter) | Dec 27, 2018 (26 Weeks) | Dec 28, 2017 (26 Weeks) | | :------------------------------------ | :--------------------- | :--------------------- | :---------------------- | :---------------------- | | Weighted average shares outstanding – basic | 11,425,566 | 11,375,512 | 11,415,787 | 11,363,409 | | Effect of dilutive securities | 53,865 | 50,786 | 69,894 | 70,824 | | Weighted average shares outstanding – diluted | 11,479,431 | 11,426,298 | 11,485,681 | 11,434,233 | Note 7 – Stock-Based Compensation Plans During the second quarter of fiscal 2019, 56,700 restricted stock units (RSUs) were awarded to employees and non-employee directors. Total unrecognized compensation expense related to non-vested RSUs was $5.2 million as of December 27, 2018, expected to be recognized over a weighted average period of 1.9 years - 56,700 restricted stock units (RSUs) were awarded to employees and non-employee directors during the second quarter of fiscal 2019, with vesting periods generally three years for employees and one year for directors[53][56] Stock-Based Compensation Expense (Thousands) | Period | Dec 27, 2018 (Quarter) | Dec 28, 2017 (Quarter) | Dec 27, 2018 (26 Weeks) | Dec 28, 2017 (26 Weeks) | | :------------------------------ | :--------------------- | :--------------------- | :---------------------- | :---------------------- | | Stock-based compensation expense | $900 | $891 | $1,516 | $1,429 | - As of December 27, 2018, total unrecognized compensation expense for non-vested RSUs was $5.2 million, to be recognized over a weighted average period of 1.9 years[58] Note 8 – Retirement Plan The Company maintains an unfunded, non-qualified Supplemental Employee Retirement Plan. Net periodic benefit cost for the quarter ended December 27, 2018, was $639 thousand, and $1,278 thousand for the twenty-six weeks ended December 27, 2018 Net Periodic Benefit Cost (Thousands) | Component | Dec 27, 2018 (Quarter) | Dec 28, 2017 (Quarter) | Dec 27, 2018 (26 Weeks) | Dec 28, 2017 (26 Weeks) | | :-------------------------- | :--------------------- | :--------------------- | :---------------------- | :---------------------- | | Service cost | $153 | $152 | $305 | $304 | | Interest cost | $223 | $212 | $447 | $425 | | Amortization of prior service cost | $240 | $240 | $479 | $479 | | Amortization of loss | $23 | $41 | $47 | $81 | | Net periodic benefit cost | $639 | $645 | $1,278 | $1,289 | Note 9 – Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive loss (AOCL) are entirely related to the defined benefit pension plan. For the twenty-six weeks ended December 27, 2018, AOCL decreased from $(3,181) thousand to $(2,787) thousand, primarily due to reclassifications of pension items, net of tax Changes to Accumulated Other Comprehensive Loss (Thousands) | Item | Dec 27, 2018 (26 Weeks) | Dec 28, 2017 (26 Weeks) | | :------------------------------------------ | :---------------------- | :---------------------- | | Balance at beginning of period | $(3,181) | $(4,404) | | Amounts reclassified from AOCL | $526 | $560 | | Tax effect | $(132) | $(219) | | Net current-period other comprehensive income | $394 | $341 | | Balance at end of period | $(2,787) | $(4,063) | Note 10 – Commitments and Contingent Liabilities The Company is involved in various legal proceedings in the ordinary course of business. While management believes outcomes will not materially affect financial position, unfavorable outcomes could occur. A class-action employment-related settlement of $1.2 million was paid in the first quarter of fiscal 2019, for which the Company was fully reserved - The Company is a party to various legal proceedings in the ordinary course of business, with management believing ultimate outcomes will not materially affect financial position, results of operations, or cash flows[64] - A $1.2 million class-action settlement for an employment-related matter, fully reserved at June 29, 2017, was paid in the first quarter of fiscal 2019[66] Note 11 – Fair Value of Financial Instruments The fair value of cash, trade accounts receivable, accounts payable, and revolving credit facility borrowings approximates their carrying values due to short-term maturities and nature. The fair value of long-term debt is estimated using a market approach based on Level 2 observable inputs - Carrying values of cash, trade accounts receivable, accounts payable, and revolving credit facility borrowings approximate their fair values[67][68] Carrying Value and Fair Value of Long-Term Debt (Thousands) | Metric | Dec 27, 2018 | June 28, 2018 | Dec 28, 2017 | | :-------------------------- | :----------- | :------------ | :----------- | | Carrying value of long-term debt | $31,061 | $34,649 | $38,256 | | Fair value of long-term debt | $30,176 | $33,482 | $38,584 | - Fair value of long-term debt is determined using a market approach based on Level 2 observable inputs[69] Note 12 – Related Party Transaction In connection with the Squirrel Brand acquisition, the Company incurred $11.5 million in unsecured debt to the principal owner and seller, who is now a related party. The outstanding balance of this Promissory Note was $7.347 million as of December 27, 2018, bearing an interest rate of 5.5% per annum - Incurred $11.5 million of unsecured debt to the principal owner and seller of Squirrel Brand business (a related party) in connection with the acquisition[70] - The Promissory Note bears an interest rate of 5.5% per annum, and the outstanding balance was $7.3 million at December 27, 2018[70] - Interest paid on the Promissory Note was $110 thousand for the quarter and $233 thousand for the twenty-six weeks ended December 27, 2018[70] Note 13 – Recent Accounting Pronouncements The Company adopted ASU No. 2014-09 (Revenue from Contracts with Customers), ASU No. 2016-15 (Statement of Cash Flows), and ASU No. 2017-09 (Stock Compensation) in fiscal 2019. Only Topic 606 had a material impact on the income statement. Several other ASUs, including those related to Leases (Topic 842), Cloud Computing, Defined Benefit Plans, and Fair Value Measurement, are not yet adopted but are expected to be effective in fiscal 2020 or 2021. The Leases standard is expected to significantly increase total assets and liabilities - Adopted ASU No. 2014-09 (Topic 606) on June 29, 2018, using the full retrospective method, impacting revenue recognition[71] - Adopted ASU No. 2016-15 (Statement of Cash Flows) and ASU No. 2017-09 (Stock Compensation) in the first quarter of fiscal 2019, with no material impact on financial statements[72][73] - ASU No. 2016-02 (Leases, Topic 842) will be effective for the Company in fiscal year 2020 and is expected to significantly increase total assets and total liabilities[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the Company's business, strategic objectives, and challenges, followed by a detailed analysis of financial performance for the second quarter and first twenty-six weeks of fiscal 2019 compared to the prior year. It also discusses the Company's liquidity, capital resources, and financing arrangements OVERVIEW John B. Sanfilippo & Son, Inc. is a leading U.S. processor and distributor of nuts and snack products, sold under various brands and private labels across consumer, commercial ingredients, and contract packaging channels. The Company's strategic plan focuses on growing its branded nut business (Fisher, Orchard Valley Harvest, Squirrel Brand, Southern Style Nuts), expanding non-branded business, and entering alternative distribution channels. Key challenges include commodity cost deflation (except almonds), rising transportation costs, and intensified competition - The Company is a leading processor and distributor of peanuts, pecans, cashews, walnuts, almonds, and other nuts in the United States[82] - Strategic plan aims to grow Fisher, Orchard Valley Harvest, Squirrel Brand, and Southern Style Nuts into leading brands, expand non-branded business, and enter alternative distribution channels[83] - Challenges include commodity cost deflation (except almonds), rising transportation costs, intensified competition, retail consolidation, and Internet price competition[84] QUARTERLY HIGHLIGHTS For the second quarter of fiscal 2019, net sales decreased by 2.1% to $253.3 million, while gross profit increased by 13.6% to $42.9 million, with gross profit margin rising to 16.9%. Total operating expenses increased by 11.1% to $26.2 million. For the first twenty-six weeks, net sales decreased by 3.6% to $457.6 million, gross profit increased by 4.1% to $75.8 million, and total operating expenses increased by 19.5% to $49.1 million Quarterly Financial Highlights (YoY Change) | Metric | Q2 FY19 (Millions) | Q2 FY18 (Millions) | Change (YoY) | % Change (YoY) | | :----------------------- | :----------------- | :----------------- | :----------- | :------------- | | Net sales | $253.3 | $258.8 | $(5.5) | -2.1% | | Sales volume (pounds) | Relatively unchanged | - | - | - | | Gross profit | $42.9 | $37.7 | $5.2 | 13.6% | | Gross profit margin | 16.9% | 14.6% | 2.3 pp | - | | Total operating expenses | $26.2 | $23.6 | $2.6 | 11.1% | | Operating expenses (% of net sales) | 10.4% | 9.1% | 1.3 pp | - | | Inventories | $171.7 | $168.4 | $3.3 | 1.9% | Twenty-Six Weeks Financial Highlights (YoY Change) | Metric | H1 FY19 (Millions) | H1 FY18 (Millions) | Change (YoY) | % Change (YoY) | | :----------------------- | :----------------- | :----------------- | :----------- | :------------- | | Net sales | $457.6 | $474.5 | $(16.9) | -3.6% | | Sales volume (pounds) | Decreased 1.9% | - | - | - | | Gross profit | $75.8 | $72.8 | $3.0 | 4.1% | | Gross profit margin | 16.6% | 15.4% | 1.2 pp | - | | Total operating expenses | $49.1 | $41.1 | $8.0 | 19.5% | | Operating expenses (% of net sales) | 10.7% | 8.7% | 2.0 pp | - | - Acquisition costs for walnuts, pecans, and cashews declined in the 2018 crop year (fiscal 2019)[92] RESULTS OF OPERATIONS Net sales decreased due to a shift from higher-priced tree nuts to lower-priced peanuts, despite relatively unchanged sales volume for the quarter. Gross profit and margin improved due to decreased commodity acquisition costs. Operating expenses increased significantly due to higher compensation, freight, and amortization expenses. Income from operations increased for the quarter but decreased for the twenty-six weeks. Net income increased for the quarter, driven by a lower effective tax rate, but slightly decreased for the twenty-six weeks Net Sales Net sales decreased by 2.1% for the quarter and 3.6% for the twenty-six weeks, primarily due to a shift in sales volume from higher-priced tree nuts to lower-priced peanuts. Sales volume in the consumer channel increased significantly, driven by private brand snack nuts, trail mixes, Orchard Valley Harvest, and Fisher snack nuts, partially offset by declines in Fisher recipe nuts and the commercial ingredients and contract packaging channels - Net sales decreased 2.1% to $253.3 million in Q2 FY19 (vs. $258.8 million in Q2 FY18) and 3.6% to $457.6 million for the first twenty-six weeks (vs. $474.5 million in H1 FY18)[95][96] - The decrease in net sales was primarily due to a shift in sales volume from higher-priced tree nuts to lower-priced peanuts[95] Sales by Product Type as % of Total Gross Sales | Product Type | Dec 27, 2018 (Quarter) | Dec 28, 2017 (Quarter) | Dec 27, 2018 (26 Weeks) | Dec 28, 2017 (26 Weeks) | | :---------------- | :--------------------- | :--------------------- | :---------------------- | :---------------------- | | Peanuts | 15.7% | 13.0% | 17.2% | 14.3% | | Pecans | 20.5% | 20.5% | 16.5% | 17.4% | | Cashews & Mixed Nuts | 22.1% | 26.0% | 22.3% | 25.4% | | Walnuts | 10.5% | 9.8% | 10.3% | 9.2% | | Almonds | 11.8% | 12.5% | 12.8% | 13.8% | | Trail & Snack Mixes | 14.5% | 12.9% | 15.6% | 14.6% | | Other | 4.9% | 5.3% | 5.3% | 5.3% | | Total | 100.0% | 100.0% | 100.0% | 100.0% | Net Sales by Distribution Channel (Quarter Ended, Thousands) | Distribution Channel | Dec 27, 2018 | Dec 28, 2017 | Change | % Change | | :------------------- | :----------- | :----------- | :----- | :------- | | Consumer | $195,679 | $181,533 | $14,146 | 7.8% | | Commercial Ingredients | $31,253 | $35,578 | $(4,325) | -12.2% | | Contract Packaging | $26,385 | $41,694 | $(15,309) | -36.7% | | Total | $253,317 | $258,805 | $(5,488) | -2.1% | Net Sales by Distribution Channel (Twenty-six Weeks Ended, Thousands) | Distribution Channel | Dec 27, 2018 | Dec 28, 2017 | Change | % Change | | :------------------- | :----------- | :----------- | :----- | :------- | | Consumer | $335,370 | $317,501 | $17,869 | 5.6% | | Commercial Ingredients | $68,208 | $71,987 | $(3,779) | -5.2% | | Contract Packaging | $54,027 | $84,981 | $(30,954) | -36.4% | | Total | $457,605 | $474,469 | $(16,864) | -3.6% | - Consumer channel sales volume increased 12.8% in Q2 FY19 and 10.1% in H1 FY19, driven by private brand snack nuts, trail mixes, Orchard Valley Harvest, and Fisher snack nuts[100][101] - Commercial ingredients sales volume decreased 13.9% in Q2 FY19 and 10.7% in H1 FY19, mainly due to a decline in peanut crushing stock and lack of excess walnut inventory for export[102] - Contract packaging sales volume decreased 33.6% in Q2 FY19 and 30.7% in H1 FY19, due to loss of bulk business, product line discontinuance, and the reclassification of Squirrel Brand sales post-acquisition[103] Gross Profit Gross profit increased by $5.2 million (13.6%) for the second quarter and $3.0 million (4.1%) for the first twenty-six weeks of fiscal 2019. Gross profit margin improved to 16.9% and 16.6% for the respective periods, primarily due to decreased commodity acquisition costs for pecans, walnuts, and peanuts - Gross profit increased by $5.2 million (13.6%) to $42.9 million in Q2 FY19, and by $3.0 million (4.1%) to $75.8 million in H1 FY19[106][107] - Gross profit margin increased to 16.9% in Q2 FY19 (from 14.6%) and to 16.6% in H1 FY19 (from 15.4%)[106][107] - Increases in gross profit and margin were mainly due to decreased commodity acquisition costs for pecans, walnuts, and peanuts[106][107] Operating Expenses Total operating expenses increased by $2.6 million (11.1%) for the second quarter and $8.0 million (19.5%) for the first twenty-six weeks of fiscal 2019. This was driven by higher selling expenses (increased compensation, freight, and advertising) and administrative expenses (increased compensation and amortization related to the Squirrel Brand acquisition) - Total operating expenses increased by $2.6 million (11.1%) to $26.2 million in Q2 FY19 and by $8.0 million (19.5%) to $49.1 million in H1 FY19[108][111] - Selling expenses increased by $2.3 million (14.8%) in Q2 FY19 and $5.5 million (20.4%) in H1 FY19, primarily due to higher incentive and base compensation, rising freight costs, and increased advertising for the new Fisher snack line[109][112] - Administrative expenses increased in Q2 FY19 ($0.3 million) and H1 FY19 ($2.5 million), driven by higher incentive compensation and amortization expense related to the Squirrel Brand acquisition, partially offset by decreased acquisition-related transaction expenses and personnel expense[110][113] Income from Operations Income from operations increased to $16.6 million (6.6% of net sales) for the second quarter of fiscal 2019, up from $14.1 million (5.4% of net sales) in the prior year. However, for the first twenty-six weeks, income from operations decreased to $26.7 million (5.8% of net sales) from $31.7 million (6.7% of net sales) in the prior year - Income from operations was $16.6 million (6.6% of net sales) in Q2 FY19, up from $14.1 million (5.4% of net sales) in Q2 FY18[114] - Income from operations was $26.7 million (5.8% of net sales) in H1 FY19, down from $31.7 million (6.7% of net sales) in H1 FY18[114] Interest Expense Interest expense remained flat at $0.8 million for the second quarter of fiscal 2019 compared to the prior year. For the first twenty-six weeks, interest expense increased to $1.7 million from $1.6 million, primarily due to higher average debt levels and interest rates driven by the Squirrel Brand acquisition - Interest expense was $0.8 million for Q2 FY19 and Q2 FY18[116] - Interest expense for H1 FY19 was $1.7 million, up from $1.6 million in H1 FY18, primarily due to higher average debt levels and interest rates from the Squirrel Brand acquisition[116] Rental and Miscellaneous Expense, Net Net rental and miscellaneous expense was $0.3 million for the second quarter of fiscal 2019, up from $0.2 million in the prior year. For the first twenty-six weeks, it decreased to $0.6 million from $0.9 million - Net rental and miscellaneous expense was $0.3 million in Q2 FY19 (vs. $0.2 million in Q2 FY18) and $0.6 million in H1 FY19 (vs. $0.9 million in H1 FY18)[117] Other Expense Other expense, consisting of pension-related expenses (excluding service cost), remained consistent at $0.5 million for the second quarter and $1.0 million for the first twenty-six weeks of fiscal 2019 compared to the prior year - Other expense (pension-related, excluding service cost) was $0.5 million for Q2 FY19 and Q2 FY18, and $1.0 million for H1 FY19 and H1 FY18[118] Income Tax Expense Income tax expense decreased to $3.8 million (25.3% effective tax rate) for the second quarter and $5.6 million (23.9% effective tax rate) for the first twenty-six weeks of fiscal 2019. This reduction was primarily due to a $2.4 million non-cash charge in Q2 FY18 to reduce deferred tax assets following the Tax Cuts and Jobs Act of 2017 - Income tax expense was $3.8 million (25.3% effective tax rate) in Q2 FY19, down from $5.0 million (39.4% effective tax rate) in Q2 FY18[119] - Income tax expense was $5.6 million (23.9% effective tax rate) in H1 FY19, down from $10.0 million (35.2% effective tax rate) in H1 FY18[119] - The decrease in effective tax rate was due to a $2.4 million non-cash charge in Q2 FY18 to reduce deferred tax assets following the Tax Cuts and Jobs Act of 2017[119] Net Income Net income for the second quarter of fiscal 2019 increased to $11.3 million ($0.99 basic EPS) from $7.6 million ($0.67 basic EPS) in the prior year. For the first twenty-six weeks, net income slightly decreased to $17.9 million ($1.57 basic EPS) from $18.3 million ($1.61 basic EPS) in the prior year - Net income was $11.3 million ($0.99 basic EPS, $0.98 diluted EPS) in Q2 FY19, up from $7.6 million ($0.67 basic and diluted EPS) in Q2 FY18[120] - Net income was $17.9 million ($1.57 basic EPS, $1.56 diluted EPS) in H1 FY19, down from $18.3 million ($1.61 basic EPS, $1.60 diluted EPS) in H1 FY18[121] LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash uses are operations, contractual obligations, strategic plan initiatives, and debt repayment, funded by operations and its Credit Facility. Operating cash flow decreased due to changes in accounts payable and inventory timing. Investing activities used less cash due to no major acquisitions in the current period. Financing activities used more cash due to higher dividend payments and increased long-term debt payments related to the Squirrel Brand acquisition General The Company's primary uses of cash are for operations, contractual obligations, strategic growth initiatives (branded and private label nuts), and debt repayment. Cash sources include operations and the Credit Facility. Management anticipates sufficient liquidity for the next twelve months, supported by cash flow from operations and available credit - Primary uses of cash are to fund current operations, fulfill contractual obligations, pursue the Strategic Plan (growing branded and private label nut programs), and repay indebtedness[123] - Primary sources of cash are results of operations and availability under the Credit Facility[123] - Expected net cash flow from operations and Credit Facility availability are anticipated to be sufficient for the next twelve months[123] Operating Activities Net cash provided by operating activities decreased by $10.1 million to $48.4 million for the first twenty-six weeks of fiscal 2019, primarily due to a reduction in accounts payable and accrued expenses, and the timing of cash paid for inventory. Inventories increased by $3.3 million YoY, driven by higher quantities of peanuts, pecans, and walnuts, partially offset by lower acquisition costs - Net cash provided by operating activities was $48.4 million for H1 FY19, a decrease of $10.1 million from $58.4 million in H1 FY18[126] - The decrease was primarily due to a reduction in accounts payable and accrued expenses (use of cash) and the timing of cash paid for inventory[126] - Total inventories increased by $3.3 million (1.9%) to $171.7 million at Dec 27, 2018, compared to Dec 28, 2017, mainly due to greater quantities of peanuts, pecans, and walnuts on hand, mostly offset by lower acquisition costs[127] Investing Activities Cash used in investing activities decreased significantly to $9.3 million for the first twenty-six weeks of fiscal 2019, compared to $28.8 million in the prior year. This reduction was mainly due to no business acquisitions in the current period, whereas the prior year included a $21.9 million cash portion for the Squirrel Brand acquisition. Capital expenditures increased by $2.4 million, primarily for upgrades at the Bainbridge, Georgia peanut shelling facility - Cash used in investing activities was $9.3 million in H1 FY19, a decrease of $19.5 million from $28.8 million in H1 FY18[130] - No cash was spent on business acquisitions in H1 FY19, compared to $21.9 million for the Squirrel Brand acquisition in H1 FY18[130] - Capital expenditures increased by $2.4 million in H1 FY19 compared to H1 FY18, primarily for upgrades at the Bainbridge, Georgia peanut shelling facility[130] Financing Activities Cash used in financing activities increased to $37.9 million for the first twenty-six weeks of fiscal 2019, up from $28.5 million in the prior year. This was driven by higher dividend payments ($29.1 million vs. $28.4 million) and increased principal payments on long-term debt related to the Squirrel Brand acquisition. Net repayments under the Credit Facility were $6.7 million, compared to net borrowings of $0.5 million in the prior year - Cash used in financing activities was $37.9 million in H1 FY19, an increase of $9.4 million from $28.5 million in H1 FY18[131] - Dividends paid were $29.1 million in H1 FY19, compared to $28.4 million in H1 FY18[131] - Net repayments under the Credit Facility were $6.7 million in H1 FY19, compared to net borrowings of $0.5 million in H1 FY18[132] - Payments on long-term debt increased by approximately $1.5 million in H1 FY19 due to debt incurred for the Squirrel Brand acquisition[132] Real Estate Matters The Company is seeking additional tenants for vacant office space at its Elgin Site, with approximately 63% of the rentable area currently vacant. Further capital expenditures may be needed to lease the remaining space - Approximately 63% of the rentable area in the office building at the Elgin Site is currently vacant, with 29% of that unbuilt[133] - Further capital expenditures will likely be necessary to lease the remaining space[133] Financing Arrangements The Company maintains a $117.5 million Credit Facility and a $45.0 million Mortgage Facility. The Credit Facility, secured by most assets (excluding real property), matures in July 2021 and had a weighted average interest rate of 5.03% at December 27, 2018. The Mortgage Facility, secured by owned real property, matures in March 2023 with a fixed interest rate of 4.25%. The Company also has a $10.3 million debt obligation related to a sale-leaseback of Selma Properties and a $7.3 million seller-financed Promissory Note from the Squirrel Brand acquisition Credit Facility This section details the Company's $117.5 million revolving Credit Facility, including its security, maturity, interest rates, and compliance status - The Credit Facility provides a $117.5 million revolving loan commitment and letter of credit subfacility, secured by substantially all assets (excluding real property and fixtures), maturing on July 7, 2021[134][136] - Interest accrues at either prime rate plus 0.25%-0.75% or LIBOR plus 1.25%-1.75%; weighted average interest rate was 5.03% at December 27, 2018[137][138] - As of December 27, 2018, the Company had $89.9 million of available credit and was in compliance with all covenants[138] Mortgage Facility This section describes the Company's $45.0 million Mortgage Facility, outlining its structure, collateral, maturity, and fixed interest rate - The Mortgage Facility provides $45.0 million in term loans (Tranche A: $36.0 million, Tranche B: $9.0 million), secured by owned real property in Elgin, Illinois, Gustine, California, and Garysburg, North Carolina[134][136] - Matures on March 1, 2023, with the interest rate fixed at 4.25% per annum from March 1, 2018[140] - The Company was in compliance with all covenants under the Mortgage Facility as of December 27, 2018[141] Selma Property This section explains the Company's sale-leaseback arrangement for its Selma, Texas properties, including the associated debt obligation and lease term - The Company sold its Selma, Texas properties to related party partnerships for $14.3 million in 2006 and leases them back[142] - The lease term was extended to September 2026, and a $10.3 million debt obligation related to this transaction was outstanding as of December 27, 2018[142] Squirrel Brand Seller-Financed Note This section details the $11.5 million unsecured seller-financed Promissory Note incurred during the Squirrel Brand acquisition, including its interest rate and outstanding balance - The Squirrel Brand acquisition in November 2017 included a three-year seller-financed Promissory Note for $11.5 million to a related party[143] - The note is unsecured, bears 5.5% interest per annum, and had a principal amount of $7.3 million outstanding at December 27, 2018[143] Critical Accounting Policies and Estimates This section refers to the 'Critical Accounting Policies and Estimates' section in the Company's Form 10-K for the fiscal year ended June 28, 2018, for detailed information - Refer to the 'Critical Accounting Policies and Estimates' section of 'Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations' in the 2018 Annual Report on Form 10-K for detailed information[144] Recent Accounting Pronouncements This section refers to Note 13 – 'Recent Accounting Pronouncements' in Part I, Item 1 of this Form 10-Q for a discussion of recently issued and adopted accounting pronouncements Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in the Company's assessment of its sensitivity to market risk since the presentation in its Annual Report on Form 10-K for the fiscal year ended June 28, 2018 - No material change in the assessment of sensitivity to market risk since the Annual Report on Form 10-K for the fiscal year ended June 28, 2018[150] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of December 27, 2018, concluding they were effective. There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of December 27, 2018[152] - No material changes in internal control over financial reporting occurred during the quarter ended December 27, 2018[153] PART II. OTHER INFORMATION This section includes information on legal proceedings, risk factors, exhibits, and the official signature for the report Item 1. Legal Proceedings For a discussion of legal proceedings, refer to Note 10 – 'Commitments and Contingent Liabilities' in Part I, Item 1 of this Form 10-Q - Refer to Note 10 – 'Commitments and Contingent Liabilities' for details on legal proceedings[155] Item 1A. Risk Factors There were no significant changes to the risk factors identified in the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2018, during the second quarter of fiscal 2019 - No significant changes to the risk factors identified in the Annual Report on Form 10-K for the fiscal year ended June 28, 2018, during the second quarter of fiscal 2019[157] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, equity incentive plans, various amendments to credit and security agreements, and certifications - The exhibit index includes the Restated Certificate of Incorporation, Amended and Restated Bylaws, various Equity Incentive Plans (1998, 2008, 2014 Omnibus), and related award agreements[163][164] - Key financing documents such as the Credit Agreement (and its nine amendments), Security Agreement, and Loan Agreement with Transamerica Financial Life Insurance Company are listed[164][165][166][167] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[167][168] SIGNATURE This section contains the signature of Michael J. Valentine, Chief Financial Officer, Group President, and Secretary, certifying the filing of the report on behalf of John B. Sanfilippo & Son, Inc. on January 30, 2019 - The report was signed by Michael J. Valentine, Chief Financial Officer, Group President and Secretary, on January 30, 2019[171][173]