# SANFILIPPO JOHN B & SON INC (JBSS) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SANFILIPPO JOHN B & SON INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/880117/000095017024099489/jbss-20240627.htm
Accession: 0000950170-24-099489
Filing date: 2024-08-21
Report date: 2024-06-27
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/JBSS/
All MD&A years: /company/JBSS/mda/
Previous year: /company/JBSS/mda/fy2023/ (FY 2023)
Next year: /company/JBSS/mda/fy2025/ (FY 2025)

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). However, the fiscal year ended June 30, 2022 consisted of fifty-three weeks with our fourth quarter containing fourteen weeks. Additional information on the comparability of the periods presented is as follows:

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References herein to fiscal 2025 are to the fiscal year ending June 26, 2025.

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References herein to fiscal 2024, fiscal 2023 and fiscal 2022 are to the fiscal years ended June 27, 2024, June 29, 2023 and June 30, 2022, respectively.

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 our Fisher, Orchard Valley Harvest, Squirrel Brand and Southern Style Nuts brand names and under a variety of private brands. Additionally, with our acquisition of certain snack bar assets in the second quarter of fiscal 2024, and our internally developed nutrition bar products, we offer our private brand customers a complete portfolio of snack bars. We market and distribute, and in most cases, manufacture or process, a diverse product line of food and snack products, including nutrition bars, snack bars, peanut butter, almond butter, cashew butter, candy and confections, snack and trail mixes, sunflower kernels, dried fruit, corn snacks, chickpea snacks, sesame sticks, other sesame snack products and baked cheese snack products under our brand names, including Just the Cheese, and under private brands. We distribute our products in the consumer, commercial ingredients and contract manufacturing distribution channels.

Our Long-Range Plan defines our future growth priorities. The Long-Range Plan focuses on growing our private brand business across key customers, as well as transforming Fisher, Orchard Valley Harvest and Squirrel Brand into leading brands while increasing distribution and diversifying our portfolio into high growth snacking segments. We will execute on our Long-Range Plan by providing private brand customer value-added solutions based on our extensive industry and consumer expertise with innovative products such as our newly developed product line of private brand nutrition bars which we introduced during fiscal 2023, and expanding our snack bar capabilities. We will grow our branded business by reaching new consumers via product expansion and packaging innovation, expanding distribution across current and alternative channels, diversifying our product offerings and focusing on new ways for consumers to buy our products, including sales via e-commerce platforms. Our Long-Range Plan also contemplates increasing our sales through product innovation and targeted, opportunistic acquisitions, such as our acquisition of the Just the Cheese brand completed during fiscal 2023 and our acquisition of certain snack bar assets from Seller in September 2023. The assets acquired from Seller included inventory, a manufacturing facility and related equipment located in Lakeville, Minnesota, and product formulas (the “Lakeville Acquisition”). The Lakeville Acquisition expanded our ability to produce private brand snack bars and allows us to provide our private brand customers with a complete snack bar portfolio.

We will continue to focus our promotional and advertising activity to invest in our brands to achieve growth. We intend to execute on an omnichannel approach to win in key categories including recipe nuts, snack nuts, trail mix, snack bars and other snacking categories. We continue to see e-commerce growth across our branded portfolio and anticipate taking various actions with the goal of maintaining that growth across a variety of established and emerging e-commerce platforms. We continue to face the ongoing challenges and/or regulations specific to our business, such as food safety and regulatory matters, the maintenance and growth of our customer base for branded and private brand products and varying consumer demand for nut and nut-related products and snack bars in a challenging snack food environment.

Inflation and Consumer Trends

We face changing industry trends as consumers' purchasing preferences evolve. Due to the continued inflationary environment, we have seen higher selling prices at retail which recently have started to moderate for some products and decrease for other products. These higher prices across our categories and the broader food market, coupled with an actual or potential economic downturn and tightening of consumer finances due to inflation, reduced government support through programs such as SNAP or a variety of other macroeconomic reasons, are causing consumers to purchase fewer snack products. We have seen this through the decline in the recipe, snack nut and snack bar categories since fiscal 2023 and during fiscal 2024, as consumers shift their preferences to private brands or lower priced nuts or snack bars or purchase snack products outside the snack nut, trail mix and snack bar categories. With the inflationary environment, we are also seeing signs of consumers shifting to more value-focused retailers, such as mass merchandising retailers, club stores and dollar stores, not all of which we distribute or sell to. We have responded by focusing on our strengths, including our knowledge of the snack and trail nut categories, product innovation and judicious use of trade spending and pricing actions.

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Supply Chain and Transportation

In fiscal 2024 we faced periodic supply chain challenges related to certain raw material shortages, extended lead-times, supplier capacity constraints and inflationary pressures. While we do not have direct exposure to suppliers in Russia, Ukraine or Israel, the conflicts in these regions could continue to result in volatile commodity markets, supply chain disruptions and increased costs. Global supply chain pressures have eased compared to fiscal 2023, but we continue to see negative impacts related to macro-economics, geo-political unrest, growing political instability and climate-related events. Overall packaging and ingredient inflation appears to be leveling off compared to fiscal 2023 but is expected to remain above historical levels.

While we have seen stabilization in truckload capacity and volume at U.S. ports and improvements with driver hiring, there are still warehouse and dock staff shortages and fuel and energy concerns due to continued unrest abroad coupled with persistent inflation. Freight rates decreased in fiscal 2024 and fuel costs stabilized. We have seen continued trucking company bankruptcies which may cause continued instability in the transportation industry in fiscal 2025 as capacity outweighs demand. While there are indicators of transportation cost improvement, and despite our mitigation of some of the transportation shortages, we may continue to face an unpredictable transportation environment. There is no guarantee that our mitigation strategies will continue to be effective, that any transportation capacity easing will continue or that transportation prices will return to more normalized levels.

Our most significant ingredient requirements include cocoa products, dried fruits, sweeteners, vegetable oils, oats, flour and dairy. Many of these materials and costs are subject to price fluctuations from several factors, including fluctuating commodity markets, market conditions, demand for raw materials, weather, growing and harvesting conditions, climate change, energy costs, currency fluctuations, supplier capacities, governmental actions, import and export requirements (including tariffs), and on-going political instability and other factors beyond our control.

We have remained agile by proactively identifying risks, modifying inventory plans and diversifying our supplier base to mitigate risk of customer order shortages and maintain our supply chain. We continue to proactively manage our business in response to the evolving global economic environment and related uncertainty and intend to take steps to mitigate impacts to our supply chain. If these supply chain pressures continue, or we cannot obtain the transportation and labor services needed to fulfill customer orders, such shortages and supply chain issues could have an unfavorable impact on net sales and our operations in fiscal 2025. Furthermore, record cocoa prices have been fueled by speculation of a short crop in calendar 2024. Unprecedented high cocoa prices have led to a volatile market and will continue in fiscal 2025. Cocoa production was down significantly in Ghana and Ivory Coast due to a combination of inclement weather and crop disease. Despite higher cocoa prices, consumption remained strong, leading to predictions of a large production deficit. Additionally, as costs increase due to these issues or due to overall inflationary pressures, there is an additional risk of not being able to pass (in part or in full) such potential cost increases onto our customers or in a timely manner. If we cannot align costs with prices for our products, our operating performance could be adversely impacted.

Climate Change Impacts

Climate change may have a long-term adverse impact on our business and results of operations. Global average temperatures are gradually increasing due to increased concentration of carbon dioxide and other greenhouse gases, which is projected to contribute to significant changes in global weather patterns, an increase in severity of natural disasters, and changes in agricultural productivity adding to price volatility. Changing weather patterns may limit the availability or increase the cost of natural resources and commodities, including cocoa, grains, sweeteners, and vegetable oils used to manufacture our products.

Similar to other commodity dependent businesses, extreme weather events from climate change can have an unfavorable impact on our business. Floods, hurricanes, wildfires, tornadoes, blizzards, droughts, mudslides, poor air quality and extreme temperatures can affect our ability to obtain adequate (or acceptable quality) inputs, including fruit and nut materials, and our ability to manufacture products in our facilities. These extreme weather events can also have an adverse impact on the transportation industry and supply chains upon which we rely. Climate change can also result in unfavorable impacts that are unique to our business, especially for normal crop development. Below are some examples of essential weather conditions that must be present for normal development of the crops from which we derive the major raw materials we use in our products.

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Almonds, pecans and walnuts require a minimum of approximately 200, 250 and 700 chilling hours, respectively, during the winter to allow for an adequate amount of dormancy time so the trees can rest.

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Peanuts require adequate rainfall or access to water for irrigation for the period starting about 7 weeks after planting and ending about 15 weeks after planting.

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Cashews require a minimum of approximately 2,000 hours of sunlight per year. Sunlight is especially critical during the flowering period.

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Almonds require bees for pollination. For bees to pollinate effectively during the bloom period, temperatures cannot be less than about 55 degrees Fahrenheit, winds cannot exceed about 15 MPH, and there must be little or no rainfall during that period.

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Cranberries require adequate snow and ice coverage during the winter to protect vines from freezing.

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Raisins require hot days (about 93 – 100 degrees Fahrenheit) and cool nights (about 55 – 65 degrees Fahrenheit) during the growing season for optimum quality and sugar levels.

The non-occurrence of these weather conditions and other essential weather conditions can result in smaller crops, crop failures, or quality failures, which can lead to increased acquisition costs and supply shortages. Should climate changes significantly alter weather patterns, some of these needed input products may not be available at all, which would have a material adverse impact on our business.

Annual Highlights

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Our net sales for fiscal 2024 increased $67.1 million, or 6.7%, to $1,066.8 million compared to fiscal 2023.

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Gross profit increased $2.5 million, while our gross profit margin, as a percentage of net sales, decreased to 20.1% in fiscal 2024 from 21.2% in fiscal 2023.

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Total operating expenses for fiscal 2024 increased $7.5 million, or 6.2%, to $129.0 million. Operating expenses, as a percentage of net sales, was 12.1% of net sales in both fiscal 2024 and fiscal 2023.

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Diluted earnings per share decreased approximately 4.6% compared to last fiscal 2023.

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Our strong financial position allowed us to pay cash dividends totaling $34.8 million during fiscal 2024.

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The total value of inventories on hand at the end of fiscal 2024 increased $23.6 million, or 13.7%, in comparison to the total value of inventories on hand at the end of fiscal 2023. This increase is primarily due to $21.8 million of additional inventory associated with the Lakeville acquisition. We have seen acquisition costs for all major tree nuts except walnuts decrease in the 2023 crop year (which falls into our 2024 fiscal year).

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 2024 to fiscal 2023 and from fiscal 2023 to fiscal 2022.

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[[/GREPCENT_TABLE]]

Fiscal 2024 Compared to Fiscal 2023

Net Sales

Our net sales increased 6.7% to $1,066.8 million for fiscal 2024 from $999.7 million for fiscal 2023. The increase in net sales was primarily due to the Lakeville Acquisition, which closed on the first day of our second quarter and increased net sales by approximately $119.8 million. Sales volume, which is defined as pounds sold to customers, increased 12.3%, also due to the Lakeville Acquisition. The Lakeville Acquisition increased our sales volume by 48.5 million pounds, or 15.7%, over fiscal 2023. Excluding the impact of the Lakeville Acquisition, net sales decreased 5.3% to $946.9 million, which was primarily attributable to a 3.3% decline in sales volume. In addition to the decline in sales volume, a 2.0% decrease in weighted average selling price per pound also contributed to the decline in net sales, primarily from decreased selling prices.

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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.

[[GREPCENT_TABLE]]
[["Product Type","","Fiscal 2024","","","Fiscal 2023"],["Peanuts & Peanut Butter","","","17.9","%","","","19.0","%"],["Pecans","","","9.1","","","","11.4"],["Cashews & Mixed Nuts","","","18.2","","","","20.7"],["Walnuts","","","4.4","","","","5.6"],["Almonds","","","7.8","","","","8.8"],["Trail & Snack Mixes","","","24.8","","","","27.2"],["Snack Bars","","","11.4","","","","0.4"],["Other","","","6.4","","","","6.9"],["Total","","","100.0","%","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The following table shows a comparison of net sales by distribution channel (dollars in thousands):

[[GREPCENT_TABLE]]
[["Distribution Channel","","Fiscal 2024","","","Fiscal 2024 Percent of Total","","","Fiscal 2023","","","Fiscal 2023 Percent of Total","","","$ Change","","","Fiscal 2024 to Fiscal 2023 Percent Change"],["Consumer (1)","","$","872,283","","","","81.7","%","","$","785,646","","","","78.6","%","","$","86,637","","","","11.0","%"],["Commercial Ingredients","","","110,483","","","","10.4","","","","123,094","","","","12.3","","","","(12,611",")","","","(10.2",")"],["Contract Manufacturing","","","84,017","","","","7.9","","","","90,946","","","","9.1","","","","(6,929",")","","","(7.6",")"],["Total","","$","1,066,783","","","","100.0","%","","$","999,686","","","","100.0","%","","$","67,097","","","","6.7","%"]]
[[/GREPCENT_TABLE]]

(1)
Sales of branded products were approximately 18% and 21% of total consumer channel sales during fiscal 2024 and 2023, respectively. Fisher branded products were approximately 62% and 64% of branded sales during fiscal 2024 and 2023, respectively, with Orchard Valley Harvest branded products accounting for the majority of the remaining branded product sales.

Net sales in the consumer distribution channel increased $86.6 million, or 11.0%, and sales volume increased 18.0% in fiscal 2024 compared to fiscal 2023 primarily due the Lakeville Acquisition. Excluding the Lakeville Acquisition, net sales decreased $29.7 million, or 3.8%, and sales volume decreased 1.7%. Private brand sales volume increased 22.0% driven by the Lakeville Acquisition. Excluding the Lakeville Acquisition, private brand sales volume decreased 1.4% due to decreased consumer spending at two mass merchandising retailers. These sales volume decreases were partially offset by increased distribution of seasonal items at a grocery store retailer. Sales volume of Fisher recipe nuts decreased 9.1% due to lower customer demand across mass merchandising and grocery store retailers and less merchandising activity at several grocery store retailers. Sales volume of Fisher snack nuts decreased 14.0% due to lost distribution as a mass merchandising retailer and decreased sales volume at several grocery store retailers which was partially offset by an increase in e-commerce sales volume. Sales volume of Southern Style Nuts decreased 20.2% due to reduced distribution and fewer promotional programs at a club store customer. The above decreases in sales volume were partially offset by a 9.0% increase in sales volume for Orchard Valley Harvest primarily due to enhanced distribution at a major customer in the non-food sector and new rotational distribution at a club store customer.

Net sales in the commercial ingredients distribution channel decreased 10.2% in dollars and sales volume decreased 1.9% in fiscal 2024 compared to fiscal 2023. Excluding the Lakeville Acquisition, sales volume decreased 3.2% due to competitive pricing pressure coupled with non-recurring peanut butter sales at a foodservice distributor that occurred in fiscal 2023 and a 5.8% decrease in sales volume of peanut crushing stock to peanut oil processors due to reduced peanut shelling.

Net sales in the contract manufacturing distribution channel decreased 7.6% in dollars and sales volume decreased 6.2% in fiscal 2024 compared to fiscal 2023 primarily due to decreased peanut distribution by a major customer due to decreased consumer demand. Partially offsetting the sales volume decrease was an increase in granola processed in our Lakeville facility for a major customer. Excluding this granola volume, net sales decreased 10.5% and sales volume decreased 15.1%.

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Gross Profit

Gross profit increased 1.2% to $214.1 million in fiscal 2024 from $211.6 million in fiscal 2023. Excluding the Lakeville Acquisition, gross profit decreased approximately 0.4%, or $0.9 million. The decrease in gross profit was mainly due to decreased selling prices and reduced sales volume. Our gross profit margin, as a percentage of sales, decreased to 20.1% for fiscal 2024 from 21.2% for fiscal 2023 due to the higher net sales base from the Lakeville Acquisition, which was partially offset by lower commodity acquisition costs for all major tree nuts.

Operating Expenses

Total operating expenses for fiscal 2024 increased $7.5 million to $129.0 million. Operating expenses as a percent of net sales were 12.1% for both fiscal 2024 and fiscal 2023. The increase is net of the $2.2 million net gain on bargain purchase that occurred in the second quarter of fiscal 2024 due to the Lakeville Acquisition.

Selling expenses for fiscal 2024 were $82.7 million, an increase of $5.9 million, or 7.7%, over the amount recorded for fiscal 2023. The increase was driven primarily by a $2.2 million increase in advertising and consumer insight research expense, a $2.1 million increase in compensation-related expenses, a $1.7 million increase in outside distribution expense, which was primarily due to the Lakeville Acquisition, and an increase in consulting expenses of $0.4 million. These increases were offset by a $0.5 million decrease in freight expense due to lower freight rates.

Administrative expenses for fiscal 2024 were $48.5 million, an increase of $3.9 million, or 8.7%, from the amount recorded for fiscal 2023. The increase was due to a $4.3 million increase in compensation-related expenses and an increase in charitable food donations of $0.8 million. These increases were partially offset by a $1.0 million loss on equity investment in fiscal 2023 that did not recur in fiscal 2024.

Income from Operations

Due to the factors discussed above, income from operations was $85.2 million, or 8.0% of net sales, for fiscal 2024, compared to $90.2 million, or 9.0% of net sales, for fiscal 2023.

Interest Expense

Interest expense was $2.5 million for fiscal 2024 compared to $2.2 million for fiscal 2023. The increase in interest expense was due to higher average debt levels, primarily due to the Lakeville Acquisition.

Rental and Miscellaneous Expense, Net

Net rental and miscellaneous expense was $1.3 million for both fiscal 2024 and fiscal 2023.

Pension Expense (Excluding Service Costs)

Pension expense (excluding service costs) was $1.4 million for both fiscal 2024 and fiscal 2023.

Income Tax Expense

Income tax expense was $19.7 million, or 24.6% of income before income taxes (the "Effective Tax Rate"), for fiscal 2024 compared to $22.5 million, or 26.4% of income before income taxes, for fiscal 2023 due to a decrease in state income tax expense.

Net Income

Net income was $60.2 million, or $5.19 per common share basic and $5.15 per common share diluted, for fiscal 2024, compared to $62.9 million, or $5.43 per common share basic and $5.40 per common share diluted, for fiscal 2023, due to the factors discussed above.

Fiscal 2023 Compared to Fiscal 2022

The discussion of our results of operations for the fiscal year ended June 29, 2023 compared to the fiscal year ended June 30, 2022 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 29, 2023 and such discussion is incorporated by reference herein.

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Liquidity and Capital Resources

General

The primary uses of cash are to fund our current operations, fulfill contractual obligations, pursue our Long-Range Plan through growing our branded and private brand programs, consummate and integrate business acquisitions, return cash to our stockholders through dividends, repay indebtedness and pay amounts owed under the Retirement Plan. Also, various uncertainties, including cost uncertainties, could result in additional uses of cash. The primary sources of cash are results of operations and availability under our Credit Facility. We anticipate that expected net cash flow generated from operations and amounts available pursuant to the Credit Facility will be sufficient to fund our operations for the next twelve months. Our available credit under our Credit Facility has allowed us to devote more funds to promote our products, increase consumer insight capabilities and promotional efforts, reinvest in the Company through capital expenditures, develop new products, pay cash dividends, consummate strategic investments and business acquisitions, such as the Lakeville Acquisition and the acquisition of the Just the Cheese brand in fiscal 2023, and explore other growth strategies outlined in our Long-Range Plan.

Cash flows from operating activities have historically been driven by net income but are also significantly influenced by inventory requirements, which can change based upon fluctuations in both quantities and market prices of the various nuts and nut products we buy and sell. Current market trends in nut prices and crop estimates also impact nut procurement.

The following table sets forth certain cash flow information for the last two fiscal years (dollars in thousands):

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[[/GREPCENT_TABLE]]

Operating Activities. Net cash provided by operating activities was $101.7 million in fiscal 2024, a decrease of $23.0 million compared to fiscal 2023. The decrease in operating cash flow was due to changes in working capital, primarily for inventory compared to fiscal 2023. Net of the Lakeville Acquisition, inventory decreased $11.9 million in fiscal 2024 compared to a $32.2 million decrease in inventories in fiscal 2023.

Total inventories were $196.6 million at June 27, 2024, an increase of $23.6 million, or 13.7%, from the inventory balance at June 29, 2023. The increase was primarily due to the $21.8 million of additional inventory associated with the Lakeville Acquisition, higher quantities of inshell pecans and walnuts on hand, and higher commodity acquisition costs for walnuts. This increase was partially offset by lower quantities of finished goods and pecan meats and lower quantities and commodity acquisition costs for peanuts and cashews.

Raw nut and dried fruit input stocks, some of which are classified as work in process, increased 9.6 million pounds, or 19.4%, at June 27, 2024 compared to June 29, 2023. This increase was due to higher quantities of walnuts and pecans on hand due to increased procurement from a larger crop combined with softness in demand. The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of fiscal 2024 decreased by 9.2% compared to the end of fiscal 2023, primarily due to higher quantities of inshell walnuts and pecans.

As of June 27, 2024, there are known purchase obligations of $256.3 million which are expected to be settled during fiscal 2025. These 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.

Additional contractual cash obligations include amounts owed for lease commitments and the payments to former officers under our Supplemental Employee Retirement Plan (“SERP”). We believe 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 all contractual cash obligations. See Note 4 — “Leases” and Note 15 — “Retirement Plan” of the Notes to Consolidated Financial Statements for additional information and future maturities.

Investing Activities. Cash used in investing activities was $87.3 million in fiscal 2024. The Lakeville Acquisition net purchase price was $59.0 million. Capital expenditures accounted for a $28.3 million use of cash in fiscal 2024.

Cash used in investing activities was $24.3 million in fiscal 2023. Capital expenditures accounted for a $20.7 million use of cash in fiscal 2023. The $3.5 million purchase price for the acquisition of the Just the Cheese brand also contributed to the increase in cash used for investing activities.

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We expect total capital expenditures for equipment purchases and upgrades for fiscal 2025 to be approximately $31.0 million. This includes all capital expenditures needed for our newly leased facility in Huntley, Illinois, facility maintenance, food safety enhancements and expansion needs for our snack bar business. 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 $15.8 million during fiscal 2024. We paid dividends totaling $34.8 million in fiscal 2024. We repaid $0.7 million of long-term debt during fiscal 2024. Partially offsetting this use of cash was a net increase in borrowings outstanding under our Credit Facility of $20.4 million during fiscal 2024 primarily due to the Lakeville Acquisition. See Note 7 — “Revolving Credit Facility” and Note 8 — “Long-Term Debt” of the Notes to Consolidated Financial Statements for additional information and future maturities.

Cash used in financing activities was $98.8 million during fiscal 2023. We paid dividends totaling $54.9 million in fiscal 2023. We repaid $3.2 million of long-term debt during fiscal 2023, $2.5 million of which was related to the Mortgage Facility (as defined below). There was a net decrease in borrowings outstanding under our Credit Facility of $40.4 million during fiscal 2023 primarily due to decreasing commodity acquisition costs and improved operating cash flows.

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 providing us with two term loans for an aggregate amount of $45.0 million (as amended, the “Mortgage Facility”). The Mortgage Facility was repaid in full in the third quarter of fiscal 2023 and the related mortgages on our owned real property located in Elgin, Illinois and Gustine, California have been released.

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 provided 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 extended the term of the Former Credit Agreement from July 7, 2021 to March 5, 2025.

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.

On May 8, 2023, we entered into the First Amendment to our Amended and Restated Credit Agreement (the “First Amendment”), which replaced the London interbank offered rate (“LIBOR”) interest rate option with the Secured Overnight Financing Rate (“SOFR”). The First Amendment updated the accrued interest rate to a rate based on SOFR plus an applicable margin based upon the borrowing base calculation, ranging from 1.35% to 1.85%.

On September 29, 2023, we entered into the Second Amendment to our Amended and Restated Credit Agreement (the “Second Amendment”), which (among other things) increased the amount available to borrow under the Credit Facility to $150.0 million extended the maturity date to September 29, 2028 and allows the Company to pay up to $100 million in dividends per year, subject to meeting availability tests.

At our election, borrowings under the Credit Facility currently accrue interest at either (i) a rate determined pursuant to the administrative agent’s prime rate plus an applicable margin determined by reference to the amount of loans which may be advanced under the borrowing base calculation, ranging from 0.25% to 0.75% or (ii) a rate based upon SOFR plus an applicable margin.

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. As of June 27, 2024, 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 27, 2024, we had $124.4 million of available credit under the Credit Facility. If this entire amount were borrowed at June 27, 2024, we would still be in compliance with all restrictive covenants under the Credit Facility.

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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. At the end of each five-year renewal option, the base monthly lease amounts are reassessed, and the monthly payments increased to $114 beginning in September 2021. One five-year renewal option remains. Also, we have an option to purchase the Selma Properties from the owner at 95% (100% in certain circumstances) of the then fair market value, but not less than the original $14.3 million purchase price. The provisions of the arrangement are not eligible for sale-leaseback accounting and the $14.3 million was recorded as a debt obligation. No gain or loss was recorded on the Selma Properties transaction. As of June 27, 2024, $7.1 million of the debt obligation was outstanding.

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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 3 — “Revenue Recognition” below for additional information on revenue recognition.

Retirement Plan

In order to measure the annual expense and calculate the liability associated with our SERP, 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 5.12% for fiscal 2024, 4.68% for fiscal 2023, and 2.89% for fiscal 2022. A 25-basis point increase or decrease in our discount rate assumption for fiscal 2024 would have resulted in an immaterial change in our pension expense for fiscal 2024. For our year end pension obligation determination, we selected discount rates of 5.45% and 5.12% for fiscal years 2024 and 2023, 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 further subject to circumstances beyond our control. Consequently, results actually achieved may differ materially from the expected results included in these statements.