John B. Sanfilippo & Son, Inc. Reports Decline In Third Quarter Net

John B. Sanfilippo & Son, Inc. announced operating results for its fiscal 2011 third quarter. The net loss for the current quarter was $5.6 million, or $0.53 per share diluted, compared to a net loss of $1.9 million, or $0.18 per share diluted, for the third quarter of fiscal 2010. Net income for the first three quarters of fiscal 2011 was $0.6 million, or $0.06 per share diluted, compared to net income of $11.7 million, or $1.09 per share diluted, for the first three quarters of fiscal 2010.

Including the sales of products of Orchard Valley Harvest, Inc. (OVH), the acquisition of which was completed in the fourth quarter of fiscal 2010, net sales increased to $137.4 million for the third quarter of fiscal 2011 from $113.2 million for the third quarter of fiscal 2010. Including sales volume associated with OVH products, sales volume for the current quarter, measured as pounds shipped to customers, increased by 1.1 percent in comparison to sales volume for the third quarter of fiscal 2010. The increase in net sales was primarily attributable to price increases implemented in the first three quarters of the current fiscal year. The sales volume increase primarily was driven by a volume increase in the consumer distribution channel, which was attributable to sales of OVH products. Before considering the sales of OVH products, third quarter net sales would have increased by 10.8 percent, and sales volume would have declined by 5.9 percent in the quarterly comparison.

Including the sales of OVH products, net sales increased to $507.8 million for the first three quarters of fiscal 2011 from $420.1 million for the first three quarters of fiscal 2010. Including sales volume associated with OVH products, sales volume for the first three quarters of fiscal 2011 increased by 4.8 percent in comparison to sales volume for the first three quarters of fiscal 2010. The increase in net sales was attributable primarily to price increases. As was the case in the quarterly comparison, the sales volume increase in the year to date comparison primarily was driven by a volume increase in the consumer distribution channel. The increase in sales volume in the consumer channel was attributable to sales of OVH products and increases in sales of all other major products except peanut products. Before considering the sales of OVH products, net sales would have increased by 11.4 percent, and sales volume would have declined by 1.6 percent in the year to date comparison.

The gross profit margin, as a percentage of net sales, decreased from 12 percent for the third quarter of fiscal 2010 to 7.3 percent for the current quarter. The gross profit margin for the current quarter declined in the quarterly comparison primarily because the implementation of price increases was not completed until the end of February while acquisition costs of tree nuts were significantly higher throughout the entire current quarter. Increased global demand for tree nuts was the primary driver for the increase in acquisition costs. The current quarter's gross profit also was reduced by $0.7 million for the relocation of the OVH Modesto, Calif. facility to the Gustine, Calif. and Elgin, Ill. facilities while the gross profit for last year's third quarter was reduced by $0.4 million for a supplier recall related to black pepper.

The current year to date gross profit margin, as a percentage of net sales, decreased from 16.7 percent for the first three quarters of fiscal 2010 to 11.4 percent. The decrease in the gross profit margins was almost entirely attributable to significantly higher acquisition costs for tree nuts to the extent that they were not offset by price increases implemented during those periods.

Total operating expenses for the current quarter decreased to 12.8 percent of net sales from 13.2 percent of net sales for the third quarter of fiscal 2010. Total operating expenses for the current year to date period decreased to 10.2 percent of net sales from 11.1 percent of net sales for the same year to date period in fiscal 2010.

The decline in total operating expenses as a percentage of net sales in both comparisons was due mainly to a higher sales base. Total operating expenses increased by $2.6 million and by $5.5 million in the quarterly and year to date comparisons, respectively. The increases in total operating expenses in quarterly and the year to date comparisons were driven in part by increases in freight, base compensation, brand support and brokerage commission expenses.

The increases in total operating expenses were offset to a large extent by the reduction in incentive compensation expense under the company's economic value added incentive compensation plan. The reduction in incentive compensation expense includes the estimated forfeiture of previously accrued for incentive compensation due to current year performance.

Total operating expenses in the current quarter also included $1.5 million accrued for the cost of an anticipated settlement of a pending legal matter, $0.5 million related to amortization of OVH intangible assets and $0.3 million for the loss related to the write-off of certain OVH machinery and equipment resulting from the relocation of the OVH facility.

The increases in these total operating expenses for the current quarter were offset in part by $0.3 million reduction in the accrued liability for estimated costs related to the pistachio recall that occurred in the third quarter of fiscal 2009. For the current year to date period, total operating expenses also included $2.6 million accrued for the cost of an anticipated settlement of a pending legal matter, $1.5 million for an increase in the projected earn-out payments related to the OVH acquisition, $1.5 million related to amortization of OVH intangible assets and $0.7 million for the loss related to the write-off of certain OVH machinery and equipment resulting from the relocation of the OVH facility.

The increases in these total operating expenses for the current year to date period were offset in part by $1.4 million for a reduction in the liability related to the pistachio recall that occurred in the third quarter of fiscal 2009 and the receipt of compensation from the pistachio supplier for the costs associated with that recall.

Interest expense for the third quarter of fiscal 2011 increased to $1.7 million from $1.4 million for the third quarter of fiscal 2010. Interest expense for the current year to date period was $4.7 million compared to $4.2 million for the first three quarters of fiscal 2010. The increase in interest expense in the quarterly and year to date comparisons primarily resulted from higher average short-term debt levels during both periods, which were driven by significantly higher acquisition costs for tree nuts.

As a result of higher acquisition costs for tree nuts, the value of total inventories on hand at the end of the current third quarter increased by $33.5 million or 26.9 percent when compared to the value of total inventories on hand at the end of the third quarter of fiscal 2010. For the same reason, the weighted average cost per pound of raw nut input stocks on hand at the end of the current quarter increased by 46.3 percent compared to the weighted average cost per pound of raw nut input stocks on hand at the end of last year's third quarter. Pounds of raw nut input stocks at the end of the current quarter decreased by 7.9 million pounds or 12.3 percent when compared to the quantity of raw nut input stocks on hand at the end of the third quarter of fiscal 2010. The decrease in the quantity of raw nut input stocks occurred despite the need to carry additional raw nut input stocks to support the production of OVH products.

"As we noted above, acquisition costs for tree nuts throughout the entire current quarter were significantly higher than they were a year ago," stated Jeffrey T. Sanfilippo, chief executive officer in a prepared statement. "The decline in gross profit margin in the quarterly comparison occurred because the process of increasing prices in all distribution channels was not completed until the end of February," Sanfilippo noted. "March marked the first month since acquisition costs began to rise earlier in the current fiscal year where our sales prices and acquisition costs were better aligned, and consequently, March was a profitable month," Sanfilippo added. "Acquisition costs for pecans and cashews have continued to increase since our price increases were communicated to our customers in the second quarter of the current fiscal year. If price increases cannot be implemented to offset these additional cost increases, we anticipate that these higher costs could result in a corresponding negative impact on margins for products containing these commodities in the fourth quarter," Sanfilippo cautioned. "We continued to implement numerous cost savings initiatives throughout our entire organization during the third quarter, and we anticipate that these initiatives should offset some of the negative impact of high commodity costs on margins in the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. To assist our customers through this challenging time in our industry, we are aggressively managing product portfolios, pack sizes and promotional opportunities so they remain competitive in this environment."

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