Item 7. Management’s Discussion and Analysis
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the 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). Additional information on the comparability of the periods presented is as follows:
•
References herein to fiscal 2020, fiscal 2019 and fiscal 2018 are to the fiscal years ended June 25, 2020, June 27, 2019 and June 28, 2018, respectively.
•
References herein to fiscal 2021 are to the fiscal year ending June 24, 2021.
As used herein, unless the context otherwise indicates, the terms “we”, “us”, “our” or “Company” collectively refer to John B. Sanfilippo & Son, Inc. and our wholly-owned subsidiary, JBSS Ventures, LLC.
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,
Squirrel Brand, Southern Style Nuts
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, chickpea 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 Company’s long-term objective to drive profitable growth, as identified in our Strategic Plan, includes continuing to grow Fisher,
Orchard Valley Harvest, Squirrel Brand
and Southern Style Nuts
into leading brands and providing integrated nut solutions to grow non-branded
business across key customers. We will execute on our Strategic Plan to grow our branded business by reaching new consumers via product and pack innovation, expanding distribution across current and alternative channels and focusing on new ways to buy, with an emphasis on e-commerce.
In addition, we intend to invest in our people and facilities in order to research, develop, market and sell new product offerings in fiscal 2021.
We face a number of challenges in the future which include, among others, changes in commodity acquisition costs, as well as intensified competition on pricing and for market share from both private brand and name brand nut products. Our Fisher
recipe nut sales have been negatively impacted recently due to this increased competition for market share. We also face changing industry trends as consumer preferences shift to shopping in smaller store formats like grocery and online. With restaurant closures, consumers are also doing more cooking and baking at home.
We will continue to face challenges in our fiscal 2021 as result of the COVID-19
pandemic and the uncertainty of future local and federal restrictions aimed to mitigate and control the pandemic. As these restrictions were loosened during the fourth quarter of fiscal 2020, we saw a gradual increase in demand from our foodservice, restaurant, convenience store and non-essential
retail customers. However, if conditions deteriorate in the future and consumers are limited in their ability to purchase meals outside their homes, it will have a negative impact on the above customers, including the collectability of accounts receivables from these customers. In our first quarter of fiscal 2021, we began to see signs of a shortage in capacity in the transportation industry, which our transportation service providers believe is due to driver concerns regarding health and safety from increasing COVID-19
cases and social unrest seen in certain large cities within the country. We believe this shortage in transportation capacity may continue in fiscal 2021 and may lead to increased transportation costs and disruptions in service to our customers and from our suppliers.
The Company’s COVID-19
crisis team, which was created in the third quarter of fiscal 2020, will continue to meet on a regular basis to discuss risks faced by the Company and mitigation strategies. We will continue to follow recommendations made by state and federal regulators and health agencies to ensure the safety and health of our employees. We have implemented a temporary work from home option for the majority of our office employees, staggered shifts and breaks, installed partitions on production lines and office space where social distancing could not be consistently maintained and installed thermal scanners to measure temperature for all employees upon arrival. We will update and enhance these measures as new guidance is provided. In addition, we have extended personal time off for those who are in self quarantine or ill and paid our essential production employees a 10% bi-weekly
bonus from the middle of March to the end of May. Despite the challenges faced in responding to the pandemic, the Company donated approximately $0.7 million of inventory to food banks in response to COVID-19.
We have worked closely with our domestic and global suppliers to source and maintain a consistent supply of raw materials, ingredients and packaging to provide a steady supply of our products and our customers and consumers. To date, none of our manufacturing facilities have been significantly impacted by this pandemic. We have contingency plans in place if a manufacturing facility encounters a partial or full shut down.
22
We will continue to focus on seeking profitable business opportunities to maximize the utilization of our production capacity at our primary manufacturing, processing and distribution facility located in Elgin, Illinois. We expect to maintain or exceed our current level of promotional and advertising activity for our brands while adjusting our focus to be more digital and e-commerce
driven to match consumer behavior. We continue to see strong e-commerce
and grocery performance across Orchard Valley Harvest
and Fisher
recipe and see additional opportunities to connect these brands to consumers’ desires for more functional snacking and baking and cooking ideas, respectively. We will continue to face the ongoing challenges specific to our business, such as food safety and regulatory issues and the maintenance and growth of our customer base for branded and private label products. See the information referenced in Part I, Item 1A — “Risk Factors” of this report for additional information about our risks, challenges and uncertainties.
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Annual Highlights
•
Our net sales for fiscal 2020 increased by $3.9 million, or 0.4%, to $880.1 million compared to fiscal 2019.
•
Gross profit increased by $17.5 million, and our gross profit margin, as a percentage of net sales, increased to 20.0% in fiscal 2020 from 18.1% in fiscal 2019.
•
Total operating expenses for fiscal 2020 decreased by $2.5 million, and our operating expenses, as a percentage of net sales, were 11.0% compared to 11.4% of net sales in fiscal 2019.
•
Diluted earnings per share increased approximately 36.7% compared to last fiscal year.
•
Our strong financial position allowed us to pay cash dividends of $68.7 million during fiscal 2020.
•
The total value of inventories on hand at the end of fiscal 2020 increased by $15.0 million, or 9.6%, in comparison to the total value of inventories on hand at the end of fiscal 2019.
We have seen acquisition costs for walnuts increase in the 2019 crop year (which falls into our current 2020 fiscal year). We also continue to see declining acquisition costs for pecans and cashews. While we completed our procurement of the current year crop of inshell walnuts during the second quarter of fiscal 2020, the total payments to our walnut growers were not determined until the third quarter of fiscal 2020, which is typical. The final prices paid to the walnut growers were based upon prevailing market prices and other factors, such as crop size and export demand. At June 25, 2020 there are no amounts due to walnut growers.
Results of Operations
The following table sets forth the percentage relationship of certain items to net sales for the periods indicated and the percentage increase or decrease of such items from fiscal 2020 to fiscal 2019 and from fiscal 2019 to fiscal 2018.
Percentage of Net Sales
Percentage Change
Fiscal
2020
Fiscal
2019
Fiscal
2018
Fiscal
2020
vs.
2019
Fiscal
2019
vs.
2018
Net sales
100.0
%
100.0
%
100.0
%
0.4
%
(1.4
)%
Gross profit
20.0
18.1
15.6
11.1
13.9
Selling expenses
6.7
7.1
6.0
(4.0
)
16.7
Administrative expenses
4.3
4.3
3.3
(0.2
)
27.5
Fiscal 2020 Compared to Fiscal 2019
Net Sales
Our net sales increased 0.4% to $880.1 million for fiscal 2020 from $876.2 million for fiscal 2019. Sales volume, measured as pounds sold to customers, increased by 6.1% for fiscal 2020 in comparison to sales volume for fiscal 2019. The increase in net sales from the sales volume increase was largely offset by a 5.3% decrease in weighted average selling price per pound, as the majority of the sales volume increase was driven by growth in lower priced trail and snack mixes and peanuts. Lower selling prices for pecans and cashews, which were due to lower commodity acquisition costs, also contributed to the decline in the weighted average selling price per pound.
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 from gross sales to net sales, such as promotional discounts, are not allocable to product type.
Product Type
Fiscal
2020
Fiscal
2019
Peanuts
18.2
%
18.0
%
Pecans
10.3
12.9
Cashews & Mixed Nuts
23.2
23.0
Walnuts
7.2
8.9
Almonds
14.7
14.4
Trail & Snack Mixes
21.1
17.3
Other
5.3
5.5
Total
100.0
%
100.0
%
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The following table shows a comparison of net sales by distribution channel (dollars in thousands):
Distribution Channel
Fiscal
2020
Fiscal 2020
Percent of
Total
Fiscal
2019
Fiscal
2019 Percent
of Total
$ Change
Fiscal 2020 to
Fiscal 2019
Percent
Change
Consumer (1)
$
673,989
76.6
%
$
624,585
71.3
%
$
49,404
7.9
%
Commercial Ingredients
118,464
13.5
141,099
16.1
(22,635
)
(16.0
)
Contract Packaging
87,639
9.9
110,517
12.6
(22,878
)
(20.7
)
Total
$
880,092
100.0
%
$
876,201
100.0
%
$
3,891
0.4
%
(1)
Sales of branded products were approximately 27% and 37% of total consumer channel sales during fiscal 2020 and 2019, respectively. Fisher
branded products were approximately 68% and 69% of branded sales during fiscal 2020 and 2019 respectively, with branded produce products accounting for most of the remaining branded product sales.
Net sales in the consumer distribution channel increased by 7.9% in dollars and 13.7% in sales volume in fiscal 2020 compared to fiscal 2019. The sales volume increase was driven by increased sales of trail mixes and snack nuts with new and existing private brand customers. Sales volume for Fisher
snack nuts was down slightly, decreasing by 1.2% compared to fiscal 2019. Sales volume of Fisher
recipe nuts decreased 24.2% from lost distribution at a major customer in favor of private brand recipe nuts. Sales volume
of Orchard Valley Harvest
products decreased 5.7% due to an unfavorable change in merchandising display placement at a major customer. Sales volume of Southern Style Nuts
increased 28.1% due to distribution gains with new customers and increased promotional activity.
Net sales in the commercial ingredients distribution channel decreased by 16.0% in dollars and 6.9% in sales volume compared to fiscal 2019. The decrease in sales volume was primarily due to decreases in foodservice from restaurant closures, a decline in air travel and the various nationwide stay at home orders as a result of COVID-19.
This sales volume decrease was partially offset by increased sales of peanut crushing stock to peanut oil processors.
Net sales in the contract packaging distribution channel decreased by 20.7% in dollars and 13.8% in sales volume in fiscal 2020 compared to fiscal 2019. The decline in sales volume was primarily attributable to some lost business with one customer that increased its internal nut processing capacity, as well as the unfavorable impact of lower convenience store foot traffic due to the impact of COVID-19
on another customer’s purchasing activity in this channel.
Gross Profit
Gross profit increased 11.1% to $175.8 million in fiscal 2020 from $158.3 million in fiscal 2019. Our gross profit margin, as a percentage of sales, increased to 20.0% for fiscal 2020 from 18.1% for fiscal 2019.
The increases in gross profit and gross profit margin were mainly attributable to the sales volume increase discussed above, as well as reduced spending per produced pound due to manufacturing efficiencies. Lower commodity acquisition costs for cashews also contributed to the increase in gross profit.
Operating Expenses
Total operating expenses for fiscal 2020 decreased by $2.5 million to $97.2 million. Operating expenses as a percent of net sales were 11.0% for fiscal 2020 and 11.4% for fiscal 2019. Operating expenses as a percent of net sales decreased in fiscal 2020 as a result of lower total operating expenses. The decrease in total operating expenses was mainly due to decreases in advertising, freight, legal and consulting expenses, which were partially offset by an increase in payroll related and incentive compensation expense.
Selling expenses for fiscal 2020 were $59.3 million, a decrease of $2.4 million, or 4.0%, over the amount recorded for fiscal 2019. The decrease was primarily driven by a $2.9 million decrease in advertising expense primarily related to TV and magazine advertising and a $2.0 million decrease in freight expense driven by lower rates, combined with an increase in customers using their own freight carriers to pick up their orders. These decreases were partially offset by a $1.4 million increase in payroll related and incentive compensation expense and a $0.8 million increase in commission expense.
Administrative expenses for fiscal 2020 were $37.9 million, a decrease of $0.1 million, or 0.2%, from the amount recorded for fiscal 2019. A $2.2 million decrease in legal and consulting fees related to an acquisition opportunity that we explored in fiscal 2019 but ultimately decided not to pursue was largely offset by a $2.1 million increase in payroll related and incentive compensation expense.
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Income from Operations
Due to the factors discussed above, income from operations was $78.5 million, or 8.9% of net sales, for fiscal 2020, compared to $58.5 million, or 6.7% of net sales, for fiscal 2019.
Interest Expense
Interest expense was $2.0 million for fiscal 2020 compared to $3.1 million for fiscal 2019. The decrease in interest expense was due to lower average debt levels, as well as lower interest rates.
Rental and Miscellaneous Expense, Net
Net rental and miscellaneous expense was $1.6 million for fiscal 2020 compared to $1.1 million for fiscal 2019. The increase during fiscal 2020 was due to additional repair and maintenance expense.
Other Expense
Other expense consists of pension related expenses other than the service cost component and was $2.3 million and $1.9 million for fiscal 2020 and fiscal 2019, respectively.
Income Tax Expense
Income tax expense was $18.6 million, or 25.6% of income before income taxes (the “Effective Tax Rate”), for fiscal 2020 compared to $13.0 million, or 24.7% of income before income taxes, for fiscal 2019. Our fiscal 2020 Effective Tax Rate is greater than fiscal 2019 due to a larger state tax rate, as a result of the lower Federal benefit received since the corporate tax rate was reduced to a flat 21%.
Net Income
Net income was $54.1 million, or $4.72 basic and $4.69 diluted per common share, for fiscal 2020, compared to $39.5 million, or $3.45 basic and $3.43 diluted per common share, for fiscal 2019, due to the factors discussed above.
Fiscal 2019 Compared to Fiscal 2018
The discussion of our results of operations for the fiscal year ended June 27, 2019 compared to the fiscal year ended June 28, 2018 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K
for the year ended June 27, 2019 and such discussion is incorporated by reference herein.
Liquidity and Capital Resources
General
The primary uses of cash are to fund our current operations, fulfill contractual obligations, pursue our Strategic Plan through growing our branded and private label nut programs 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 and restated in March 2020 (as amended and restated, the “Credit Facility”), that provides a revolving loan commitment and letter of credit subfacility. Despite the current COVID-19
pandemic, 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. See Part I, Item 1A — “Risk Factors” above. 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), consummate strategic business acquisitions such as the 2018 acquisition of the Squirrel Brand business, reinvest in the Company through capital expenditures, develop new products, pay cash dividends the past seven years 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.
26
The following table sets forth certain cash flow information for the last two fiscal years (dollars in thousands):
June 25,
2020
June 27,
2019
2020 to
2019
$ Change
Operating activities
$
63,613
$
83,459
$
(19,846
)
Investing activities
(14,049
)
(14,614
)
565
Financing activities
(49,620
)
(68,703
)
19,083
Total change in cash
$
(56
)
$
142
$
(198
)
Operating Activities.
Net cash provided by operating activities was $63.6 million in fiscal 2020, a decrease of $19.8 million compared to fiscal 2019. The decrease in operating cash flow was due to an increased use of working capital for inventory, which was partially offset by a $14.6 million increase in net income driven by increased sales and improved profitability compared to fiscal 2019. Inventories increased $15.0 million in fiscal 2020 compared to a $17.3 million decrease in inventories in fiscal 2019 which resulted in a net unfavorable change in cash of $32.3 million.
Total inventories were $172.1 million at June 25, 2020, an increase of $15.0 million, or 9.6%, from the inventory balance at June 27, 2019. The increase was primarily due to increased quantities on hand for peanuts, cashews and almonds and higher acquisition costs for peanuts and walnuts, which was partially offset by lower acquisition costs for pecans.
Raw nut and dried fruit input stocks, some of which are classified as work in process, increased by 10.4 million pounds, or 22.9%, at June 25, 2020 compared to June 27, 2019. The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of fiscal 2020 fell by 7.0% compared to the end of fiscal 2019, primarily due to higher quantities of peanuts on hand compared to tree nuts, as well as lower commodity acquisition costs for cashews and pecans.
Investing Activities.
Cash used in investing activities was $14.0 million in fiscal 2020. Capital expenditures accounted for a $15.0 million use of cash in fiscal 2020, which was offset in part by $1.1 million of proceeds from insurance recoveries related to a fire in our Garysburg, North Carolina facility.
Cash used in investing activities was $14.6 million in fiscal 2019. Capital expenditures accounted for a $15.1 million use of cash in fiscal 2019.
We expect total capital expenditures for equipment purchases and upgrades, facility maintenance and food safety enhancements for fiscal 2021 to be approximately $23 million. The projected increase in capital expenditures from historical amounts is due to a strategic investment for a new product line. 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 capital expenditures.
Financing Activities.
Cash used in financing activities was $49.6 million during fiscal 2020. We paid dividends totaling $68.7 million in fiscal 2020. We repaid $7.7 million of long-term debt during fiscal 2020, $3.0 million of which was related to the Mortgage Facility (as defined below). There was a net increase in borrowings outstanding under our Credit Facility of $27.0 million during fiscal 2020 which occurred, in part, as a result of the increase in inventory.
Cash used in financing activities was $68.7 million during fiscal 2019. We paid dividends totaling $29.1 million in fiscal 2019. We repaid $6.9 million of long-term debt during fiscal 2019, $2.9 million of which was related to the Mortgage Facility. There was a net decrease in borrowings outstanding under our Credit Facility of $31.3 million during fiscal 2019 which occurred, in part, as a result of the decrease in inventory and increased profitability.
Financing Arrangements
On February 7, 2008, we entered into the Former Credit Agreement (as defined below) with a bank group (the “Bank Lenders”) providing a $117.5 million revolving loan commitment and letter of credit subfacility. Also on February 7, 2008, we entered into a Loan Agreement with an insurance company (the “Mortgage Lender”) providing us with two term loans, one in the amount of $36.0 million (“Tranche A”) and the other in the amount of $9.0 million (“Tranche B”), for an aggregate amount of $45.0 million (the “Mortgage Facility”).
27
Credit Facility
On March 5, 2020, we entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) which amended and restated our Credit Agreement dated as of February 7, 2008 (the “Former Credit Agreement”). The Amended and Restated Credit Agreement provides for a $117.5 million senior secured revolving credit facility with the same borrowing capacity, interest rates and applicable margin as the Former Credit Agreement and extends the term of the Former Credit Agreement from July 7, 2021 to March 5, 2025. See Note 6 — “Revolving Credit Facility” of the Notes to Consolidated Financial Statements for further details.
The Amended and Restated Credit Facility is secured by substantially all of our assets other than machinery and equipment, real property and fixtures and matures on March 5, 2025. 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”).
At June 25, 2020, the weighted average interest rate for the Credit Facility was 2.40%. 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 June 25, 2020, 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 June 25, 2020, we had $87.1 million of available credit under the Credit Facility. If this entire amount were borrowed at June 25, 2020, we would still be in compliance with all restrictive covenants under the Credit Facility.
Mortgage Facility
The Mortgage Facility matures on March 1, 2023. On March 1, 2018 the interest rate on the Mortgage Facility was fixed at 4.25% per annum. Monthly principal payments on the Mortgage Facility in the amount of $0.3 million commenced on June 1, 2008.
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 June 25, 2020, we were in compliance with all covenants under the Mortgage Facility and a total principal amount of $8.9 million was outstanding.
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 lessor 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. At June 25, 2020, $9.5 million of the debt obligation was outstanding.
Squirrel Brand Seller-Financed Note
In November 2017 we completed the Squirrel Brand
acquisition. The Acquisition was financed by a combination of cash (drawn under the Credit Facility) and a three-year seller-financed note of $11.5 million (“Promissory Note”). The principal owner and seller of the Squirrel Brand business was subsequently appointed as an executive officer of the Company and was considered a related party until the employment of this executive officer with the Company ceased during fiscal 2020. The Promissory Note is unsecured, bears interest at 5.5% per annum and is payable in equal monthly principal payments of $0.3 million, plus interest, which began in January 2018. Upon an event of default, as defined in the Promissory Note, the interest rate increases to 7.5% until such event of default is cured. We can pre-pay
the Promissory Note at any time during the three-year period without penalty. At June 25, 2020, the principal amount of $1.6 million of the Promissory Note was outstanding.
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Off-Balance
Sheet Arrangements
As of June 25, 2020, we were not involved in any off-balance
sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K
promulgated by the SEC.
Contractual Cash Obligations
At June 25, 2020, we had the following contractual cash obligations for long-term debt (including scheduled interest payments), operating leases, the Credit Facility, purchase obligations, retirement plans and other long-term liabilities (amounts in this subsection in thousands):
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
Long-term debt obligations (1)
$
24,882
$
6,304
$
8,508
$
2,477
$
7,593
Minimum operating lease commitments
4,688
1,534
2,493
659
2
Revolving credit facility borrowings
27,008
27,008
—
—
—
Purchase obligations (2)
216,334
216,334
—
—
—
Retirement plans (3)
32,383
729
1,543
1,907
28,204
Other
188
91
92
5
—
Total contractual cash obligations
$
305,483
$
252,000
$
12,636
$
5,048
$
35,799
(1)
See Note 7 — “Long-Term Debt” of the Notes to Consolidated Financial Statements for further detail on the Company’s long-term debt obligations.
(2)
The purchase obligations primarily represent inventory purchase commitments; however, these amounts exclude purchase commitments under walnut purchase agreements due to the uncertainty of pricing and quantity.
(3)
Represents projected retirement obligations. See Note 13 — “Employee Benefit Plans” and Note 14 — “Retirement Plan” of the Notes to Consolidated Financial Statements for further details.
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Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The accounting policies as disclosed in the Notes to Consolidated Financial Statements are applied in the preparation of our financial statements and accounting for the underlying transactions and balances. The policies discussed below are considered by our management to be critical for an understanding of our financial statements because the application of these policies places the most significant demands on management’s judgment, with financial reporting results relying on estimation regarding the effect of matters that are inherently uncertain. Specific risks, if applicable, for these critical accounting policies are described in the following paragraphs. For a detailed discussion on the application of these and other accounting policies, see Note 1 — “Significant Accounting Policies” of the Notes to Consolidated Financial Statements.
Preparation of this Annual Report on Form 10-K
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. See “Forward-Looking Statements” below.
Revenue Recognition
The Company records revenue based on a five-step model in accordance with Accounting Standards Codification (“ASC”) Topic 606. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services. We sell our products under some arrangements which include customer contracts that fix the sales price for periods, which typically can be up to one year for some commercial ingredient customers. We also sell our products through specific programs consisting of promotion allowances, volume and customer rebates and marketing allowances, among others, to consumer and some commercial ingredient users. We recognize revenue as performance obligations are fulfilled, which occurs when control passes to our customers. We report all amounts billed to a customer in a sale transaction as revenue, including those amounts related to shipping and handling. We reduce revenue for estimated promotion allowances, volume and customer rebates and marketing allowances, among others. These reductions in revenue are considered variable consideration and are recorded in the same period the related sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. See Note 2 — “Revenue Recognition” below for additional information on revenue recognition.
Impairment of Long-Lived Assets
We review held and used long-lived assets, including our rental investment property and amortizable identifiable intangible assets (e.g., customer relationships and brand names), to assess recoverability from projected undiscounted cash flows whenever events or changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates there is an impairment, the carrying value of the asset is reduced to its estimated fair value. We also evaluate the amortization periods assigned to our intangible assets to determine whether events or changes in circumstances require a revised estimate of useful lives. We did not record any impairment of long-lived assets or amortizable identifiable intangible assets in any of the last three fiscal years.
Goodwill
Goodwill is not amortized, but is tested annually for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, adverse changes in the markets in which we operate, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.
In testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of our single reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform a quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
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Under the goodwill qualitative assessment, various events and circumstances that would affect the estimated fair value of our single reporting unit are identified (similar to impairment indicators above).
Under the goodwill quantitative impairment test, the evaluation of impairment involves comparing the current fair value of our single reporting unit to its carrying value, including goodwill. We estimate the fair value using level 3 inputs as defined by the fair value hierarchy. The inputs used to estimate fair value include several subjective factors, such as estimates of future cash flows, estimates of our future cost structure, discount rates for our estimated cash flows, required level of working capital, assumed terminal value, and time horizon of cash flow forecasts. Our market capitalization is also an estimate of fair value that is considered in our qualitative impairment analysis which is a level 1 input in the fair value hierarchy. If the carrying value of our single reporting unit exceeds its fair value, we recognize an impairment loss equal to the difference between the carrying value and estimated fair value.
Retirement Plan
In order to measure the annual expense and calculate the liability associated with our retirement plan, management must make a variety of estimates including, but not limited to, discount rates, compensation increases and anticipated mortality rates. The estimates used by management are based on our historical experience as well as current facts and circumstances. We use a third-party specialist to assist management in appropriately measuring the expense associated with this employment-related benefit. Different estimates used by management could result in us recognizing different amounts of expense over different periods of time.
We recognize net actuarial gains or losses in excess of 10% of the plan’s projected benefit obligation into current period expense over the average remaining expected service period of active participants.
The most significant assumption for pension plan accounting is the discount rate. We select a discount rate each year (as of our fiscal year-end
measurement date) for our plan based upon a hypothetical corporate bond portfolio for which the cash flows match the year-by-year
projected benefit cash flows for our pension plan. The hypothetical bond portfolio is comprised of high-quality fixed income debt securities (usually Moody’s Aa3 or higher) available at the measurement date. Based on this information, the discount rate selected by us for determination of pension expense was 3.56% for fiscal 2020, 4.14% for fiscal 2019, and 3.99% for fiscal 2018. A 25-basis
point increase or decrease in our discount rate assumption for fiscal 2020 would have resulted in an immaterial change in our pension expense for fiscal 2020. For our year-end
pension obligation determination, we selected discount rates of 2.69% and 3.56% for fiscal years 2020 and 2019, respectively.
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Recent Accounting Pronouncements
Refer to Note 1 — “Significant Accounting Policies” of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Forward-Looking Statements
The statements contained in this Annual Report on Form 10-K,
and in the Chief Executive Officer’s letter to stockholders accompanying the Annual Report on Form 10-K
delivered to stockholders, that are not historical (including statements concerning our expectations regarding market risk) are “forward-looking statements.” These forward-looking statements may be followed (and therefore identified) by a cross reference to Part I, Item 1A — “Risk Factors” or may be otherwise identified by the use of forward-looking words and phrases such as “will”, “anticipates”, “intends”, “may”, “believes”, “should” and “expects”, and they are based on our current expectations or beliefs concerning future events and involve risks and uncertainties. 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. We caution that such statements are qualified by important factors, including the factors described in Part I, Item 1A — “Risk Factors” and other factors, risks and uncertainties that are beyond our control, that could cause results to differ materially from our current expectations and/or those in the forward-looking statements, as well as the timing and occurrence (or nonoccurrence) of transactions and other factors, risk, uncertainties and events which may be subject to circumstances beyond our control. Consequently, results actually achieved may differ materially from the expected results included in these statements.