John B. Sanfilippo & Son(JBSS) - 2019 Q4 - Annual Report

Part I Business John B. Sanfilippo & Son, Inc. is a leading U.S. nut processor and distributor, operating a vertically integrated model and serving consumer, commercial, and contract packaging channels General Development of Business The company is a leading U.S. processor and distributor of various nuts and snack products under its own brands and private labels - The company is a major processor and distributor of peanuts, pecans, cashews, walnuts, and almonds in the U.S[13] - Key brands include Fisher, Orchard Valley Harvest, Squirrel Brand, Southern Style Nuts, and Sunshine Country[13] Narrative Description of Business The company leverages vertical integration for quality and cost, distributes diverse nut products across channels, relies on major customers, and sources raw materials globally - The company employs a generally vertically integrated model for pecans, peanuts, and walnuts, controlling the process from procurement to marketing, which is believed to enhance product quality and provide cost advantages[17] Principal Product Sales Contribution | Fiscal Year | Gross Sales from Principal Nut Products | | :--- | :--- | | 2019 | ~78% | | 2018 | ~79% | | 2017 | ~82% | Major Customer Sales Concentration (% of Net Sales) | Customer | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Wal-Mart Stores, Inc. | 33% | 30% | 28% | | Target Corporation | 10% | 13% | 14% | | PepsiCo, Inc. | N/A | 11% | 10% | - The business is seasonal, with highest demand in the last four months of the calendar year, leading to peak working capital needs in the third fiscal quarter due to procurement of peanuts, pecans, and walnuts mainly between September and February[40] - For fiscal 2019, approximately 35% of the dollar value of total nut purchases was from foreign sources, including cashews from Vietnam, India, Brazil, and West Africa, and some pecans from Mexico[33] Risk Factors The company faces significant risks related to raw material costs and availability, intense competition, customer dependency, operational challenges, and governance concentration - The availability and cost of raw nuts are subject to fluctuations from weather, disease, and global demand, and the company cannot hedge against these commodity price changes[45][46] - The company is dependent on a few significant customers, with the top five accounting for approximately 59% of net sales in fiscal 2019, making the loss of a major customer a material financial risk[60] - The vertically integrated model for pecans, peanuts, and walnuts exposes the company to the risk of purchasing these nuts at costs that may later prove to be above prevailing market prices, potentially leading to losses[58] - Food safety risks, including nut allergies, cross-contamination, and product recalls, could lead to loss of consumer confidence, liability claims, and decreased demand[64][65] - The Sanfilippo Group and Valentine Group collectively hold a majority voting interest (approximately 74.9% combined), allowing them to direct the election of the board and influence key corporate decisions[76] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[96] Properties The company owns or leases five principal production facilities in Illinois, Georgia, North Carolina, Texas, and California, with the primary processing and corporate headquarters in Elgin, Illinois Principal Facilities | Location | Square Footage | Interest | Principal Use | | :--- | :--- | :--- | :--- | | Bainbridge, Georgia | 300,000 | Owned and Leased | Peanut shelling, processing, packaging | | Garysburg, North Carolina | 160,000 | Owned | Peanut shelling, processing, packaging | | Selma, Texas | 300,000 | Leased | Pecan shelling, processing, packaging | | Gustine, California | 215,000 | Owned | Walnut shelling, processing, packaging | | Elgin, Illinois | 1,001,000 | Owned | Processing, packaging, distribution, corporate offices | FY 2019 Shelling Facility Utilization | Facility/Nut | Annual Capacity (inshell lbs) | Processed in FY 2019 (inshell lbs) | | :--- | :--- | :--- | | Selma (Pecans) | >90 million | ~39 million | | Bainbridge (Peanuts) | ~120 million | ~78 million | | Garysburg (Peanuts) | ~60 million | ~10 million | | Gustine (Walnuts) | >60 million | ~30 million | Legal Proceedings The company states that the ultimate resolution of current legal proceedings is not expected to have a material adverse effect on its business - Management believes that ongoing legal proceedings will not materially impact the company's financial condition or results[109] - A $1.2 million settlement for an employment-related class-action complaint was paid in the first quarter of fiscal 2019[110] Mine Safety Disclosures This item is not applicable to the company - Not applicable[112] Executive Officers of the Registrant This section provides biographical information for the company's executive officers as of August 21, 2019, highlighting long tenures and familial relationships among leadership - Key executive officers include Jeffrey T. Sanfilippo (CEO), Michael J. Valentine (CFO, Group President), and Jasper B. Sanfilippo, Jr. (COO, President)[115][116][117] - Significant familial relationships exist among the Sanfilippo and Valentine family members who serve as directors and executive officers[126][127][128] Part II Market for Registrant's Common Equity and Related Stockholder Matters The company's common stock trades on NASDAQ, features two stock classes with differing voting rights, and maintains a dividend policy subject to financing limitations - The company has two classes of stock: Common Stock (Symbol: JBSS) and non-publicly traded Class A Stock, which has superior voting rights (10 votes per share vs. 1 for Common Stock)[132][133] Recent Cash Dividends Declared (per share) | Declaration Date | Type | Amount | Payment Date | | :--- | :--- | :--- | :--- | | July 10, 2018 | Annual & Special | $0.55 & $2.00 | August 17, 2018 | | July 11, 2017 | Annual & Special | $0.50 & $2.00 | August 15, 2017 | | July 10, 2019 (Subsequent) | Annual & Special | $0.60 & $2.40 | August 20, 2019 | Equity Compensation Plan Information (as of June 27, 2019) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities available for future issuance | | :--- | :--- | :--- | :--- | | Approved by stockholders - stock options | 500 | $8.71 | 726,248 | | Approved by stockholders - RSUs | 188,992 | — | 726,248 | | Not approved by stockholders | — | — | — | Selected Financial Data This section provides a five-year summary of the company's consolidated financial performance and position, including key income statement and balance sheet metrics Consolidated Statement of Comprehensive Income Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $876,201 | $888,931 | $846,635 | $952,059 | $887,245 | | Gross profit | $158,270 | $138,899 | $141,923 | $137,468 | $132,056 | | Income from operations | $58,524 | $56,189 | $60,477 | $53,162 | $53,478 | | Net income | $39,466 | $32,500 | $36,125 | $30,395 | $29,305 | | Diluted EPS | $3.43 | $2.84 | $3.17 | $2.68 | $2.61 | Consolidated Balance Sheet Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Working capital | $141,434 | $130,689 | $143,504 | $158,979 | $150,280 | | Total assets | $391,304 | $415,853 | $398,059 | $391,162 | $431,616 | | Total debt | $27,719 | $65,803 | $58,085 | $44,130 | $96,500 | | Stockholders' equity | $254,555 | $243,002 | $235,468 | $251,193 | $241,278 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Fiscal 2019 saw a slight net sales decrease offset by improved gross profit and net income due to lower commodity costs, while liquidity strengthened with reduced debt Results of Operations Fiscal 2019 net sales declined due to lower prices despite volume growth, while gross profit and net income improved from reduced commodity costs, despite higher operating expenses FY 2019 vs. FY 2018 Performance | Metric | FY 2019 | FY 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $876.2M | $888.9M | (1.4)% | | Gross Profit | $158.3M | $138.9M | 13.9% | | Gross Profit Margin | 18.1% | 15.6% | +2.5 p.p. | | Operating Expenses | $99.7M | $82.7M | 20.6% | | Net Income | $39.5M | $32.5M | 21.5% | Net Sales by Distribution Channel (in thousands) | Distribution Channel | FY 2019 | FY 2018 | % Change | | :--- | :--- | :--- | :--- | | Consumer | $625,581 | $589,867 | 6.1% | | Commercial Ingredients | $140,103 | $154,114 | (9.1)% | | Contract Packaging | $110,517 | $144,950 | (23.8)% | | Total | $876,201 | $888,931 | (1.4)% | - The increase in gross profit and margin was mainly attributable to lower commodity acquisition costs for walnuts, pecans, and cashews[166] - The increase in operating expenses was primarily due to higher incentive compensation, other compensation, shipping, and advertising expenses, along with costs related to a potential acquisition that was not pursued[167] Liquidity and Capital Resources The company's liquidity is strong, driven by increased operating cash flow and substantial debt reduction, supported by available credit facilities and covenant compliance Cash Flow Summary (in thousands) | Activity | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $83,459 | $66,154 | | Net cash used in investing activities | ($14,614) | ($34,968) | | Net cash used in financing activities | ($68,703) | ($31,692) | - Total inventories decreased by $17.3 million (9.9%) from fiscal 2018 to 2019, primarily due to lower quantities of peanuts and cashews and lower acquisition costs for cashews, walnuts, and pecans[181] - Total debt decreased from $65.8 million at the end of FY2018 to $27.7 million at the end of FY2019, largely due to a $31.3 million net paydown on the revolving credit facility[148][185] Contractual Cash Obligations (in thousands) | Obligation | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $34,051 | $8,738 | $11,316 | $5,062 | $8,935 | | Operating leases | $6,353 | $1,715 | $2,932 | $1,573 | $133 | | Purchase obligations | $202,184 | $202,184 | — | — | — | | Retirement plans | $25,719 | $803 | $1,679 | $1,373 | $21,864 | | Total | $268,307 | $213,440 | $15,927 | $8,008 | $30,932 | Critical Accounting Policies and Estimates Critical accounting policies involve significant judgments and estimates for revenue recognition, inventory valuation, asset impairment, income taxes, and retirement plan liabilities - Revenue Recognition: Revenue is recognized when control passes to the customer, with estimates for variable consideration (promotional allowances, rebates) recorded as a reduction to revenue[202] - Inventories: Valued at the lower of cost (FIFO) or net realizable value, involving significant bulk-stored nut inventories and interim estimates for final walnut crop prices[203][204] - Goodwill: Tested annually for impairment, with a qualitative assessment in FY2019 indicating no impairment was more likely than not[207][208] - Retirement Plan (SERP): The plan's liability and expense are calculated using significant estimates for discount rates, compensation increases, and mortality rates, with the discount rate for pension expense at 4.14% in fiscal 2019[214][216] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to unhedged market risks from commodity price volatility, foreign exchange fluctuations, and interest rates, with commodity risk being the most significant - The company cannot hedge against nut commodity price fluctuations because no futures markets exist, and a hypothetical 1% increase in material costs would have reduced FY2019 gross profit by about $5.8 million[222] - Approximately 35% of the dollar value of total nut purchases in fiscal 2019 were from foreign countries, exposing the company to indirect foreign currency risk as underlying costs may fluctuate[223] - Interest rate risk is tied to the variable-rate Credit Facility, where a hypothetical 10% adverse change in weighted-average interest rates would have had an immaterial ($0.1 million) impact on FY2019 net income[224] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for fiscal years 2017-2019, along with PricewaterhouseCoopers LLP's unqualified audit opinion on both the financial statements and internal controls - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects and that the company maintained effective internal control over financial reporting as of June 27, 2019[227] - The company adopted the new revenue recognition standard (ASC 606) in fiscal 2019 using the full retrospective method, with prior periods adjusted accordingly[228][287] Product Sales Mix (% of Gross Sales) | Product Type | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Peanuts | 18.0% | 15.7% | 15.7% | | Pecans | 12.9% | 14.0% | 16.2% | | Cashews & Mixed Nuts | 23.0% | 24.6% | 24.3% | | Walnuts | 8.9% | 9.0% | 8.4% | | Almonds | 14.4% | 15.5% | 16.3% | | Trail & Snack Mixes | 17.3% | 15.5% | 13.9% | | Other | 5.5% | 5.7% | 5.2% | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[372] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and internal control over financial reporting were effective as of June 27, 2019, with no material changes reported in the fourth quarter - Management, including the CEO and CFO, concluded that as of June 27, 2019, the company's disclosure controls and procedures and its internal control over financial reporting were effective[373][374] - There were no changes in internal control over financial reporting during the fourth fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[376] Other Information This item is not applicable - Not applicable[378] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices, including audit committee details and Section 16(a) compliance, is incorporated by reference from the 2019 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Annual Meeting Proxy Statement[378] - The company has adopted a Code of Ethics and a Code of Conduct, available at www.jbssinc.com[380](index=380&type=chunk) Executive Compensation This section incorporates by reference the detailed information on executive and director compensation from the company's Proxy Statement for the 2019 Annual Meeting - Information regarding executive compensation, including the Compensation Discussion and Analysis, is incorporated by reference from the 2019 Annual Meeting Proxy Statement[381] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding the security ownership of certain beneficial owners and management is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting - Information on security ownership of beneficial owners and management is incorporated by reference from the 2019 Annual Meeting Proxy Statement[382] Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information concerning related party transactions and the independence of the Board of Directors from the company's Proxy Statement for the 2019 Annual Meeting - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Annual Meeting Proxy Statement[383] Principal Accounting Fees and Services Information regarding the fees paid to and services provided by the principal independent registered public accounting firm, PricewaterhouseCoopers LLP, is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting - Information on principal accounting fees and services is incorporated by reference from the 2019 Annual Meeting Proxy Statement[384] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, noting the omission of schedules where information is already provided elsewhere - The following financial statements are included in the report: Report of Independent Registered Public Accounting Firm, Consolidated Statements of Comprehensive Income, Consolidated Balance Sheets, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[385] - All financial statement schedules have been omitted because they are not applicable or the information is already provided in the financial statements or notes[386] Form 10-K Summary The company has not provided a summary for the Form 10-K - None[390]