OVERVIEW
The following discussion and analysis should be read in conjunction with the unaudited 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 and fiscal 2019 are to the fiscal year
endingJune 25, 2020 and the fiscal year endedJune 27, 2019 , respectively.
• References herein to the second quarter of fiscal 2020 and fiscal 2019
are to the quarters ended
respectively. • References herein to the first half or first twenty-six weeks of fiscal
2020 and fiscal 2019 are to the twenty-six weeks ended
and
As used herein, unless the context otherwise indicates, the terms "we", "us", "our" or "Company" collectively refer toJohn B. Sanfilippo & Son, Inc. and our wholly-owned subsidiary,JBSS Ventures, LLC . Our Company's Credit Facility and Mortgage Facility, as defined below, are sometimes collectively referred to as "our financing arrangements." We are one of the leading processors and distributors of peanuts, pecans, cashews, walnuts, almonds and other nuts inthe 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 (the "Strategic Plan"), includes continuing to grow Fisher, Orchard Valley Harvest, Squirrel Brand and Southern Style Nuts into leading nut brands by focusing on consumers demanding quality nuts in the snacking, recipe, trail and snack mix and produce categories, providing integrated nut solutions to grow non-branded business at existing key customers in each distribution channel and expanding our offerings into alternative distribution channels. We are executing on our Strategic Plan by continuing to expand distribution of our Orchard Valley Harvest and Southern Style Nuts products, growing our consumer distribution channel with private brand products and expanding distribution with new foodservice customers. We face a number of challenges in the future which include, among others, potential acquisition cost volatility for almonds and increasing commodity costs for walnuts, 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 resulting in retail consolidation and Internet price competition for nut and nut-related products. 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 inElgin, Illinois (the "Elgin Site") and evaluate facility expansion to meet customer demand. We expect to maintain our current level of promotional and advertising activity for our Orchard Valley Harvest and Fisher snack brands. We continue to see significant domestic sales and volume growth in our Orchard Valley Harvest brand and will continue to focus on this portion of our branded business as well as our Squirrel Brand and Southern Style Nuts brands. 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 II, Item 1A - "Risk Factors" of this report for additional information about our risks, challenges and uncertainties. 19
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QUARTERLY HIGHLIGHTS Our net sales of$246.4 million for the second quarter of fiscal 2020 decreased 2.7% from our net sales of$253.3 million for the second quarter of fiscal 2019. Net sales for the first twenty-six weeks of fiscal 2020 increased by$6.7 million , or 1.5%, to$464.3 million from net sales of$457.6 million for the first twenty-six weeks of fiscal 2019.
Sales volume, measured as pounds sold to customers, increased 4.8% for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. Sales volume for the first twenty-six weeks of fiscal 2020 increased 6.8% compared to the first twenty-six weeks of fiscal 2019.
Gross profit increased by$7.1 million , and our gross profit margin, as a percentage of net sales, increased to 20.3% for the second quarter of fiscal 2020 compared to 16.9% for the second quarter of fiscal 2019. Gross profit increased by$16.4 million and our gross profit margin increased to 19.9% from 16.6% for the first twenty-six weeks of fiscal 2020 compared to the first twenty-six weeks of fiscal 2019.
Total operating expenses for the second quarter of fiscal 2020 decreased by
The total value of inventories on hand at the end of the second quarter of
fiscal 2020 increased by
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. We completed procurement of inshell walnuts during the first half of fiscal 2020. During the third quarter, we will determine the final prices to be paid to the walnut growers based upon current market prices and other factors such as crop size and export demand. We have estimated the liability to our walnut growers and our walnut inventory costs using currently available information. Any difference between our estimated liability and the actual final liability will be determined during the third quarter of fiscal 2020 and will be recognized in our financial results at that time. 20
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Table of Contents RESULTS OF OPERATIONS Net Sales Our net sales decreased 2.7% to$246.4 million in the second quarter of fiscal 2020 compared to net sales of$253.3 million for the second quarter of fiscal 2019. The decrease in net sales was primarily attributable to lower selling prices, which resulted from a shift in sales volume from higher priced pecans and walnuts to lower priced trail and snack mixes, peanuts and cashews. Lower selling prices for pecans and cashews, which were due to lower commodity acquisition costs, also contributed to the overall reduction in selling prices. The decline in net sales from lower selling prices was largely offset by a 4.8% increase in sales volume, which is defined as pounds sold to customers. For the first twenty-six weeks of fiscal 2020 our net sales were$464.3 million , an increase of$6.7 million , or 1.5%, compared to the same period of fiscal 2019. The increase in net sales was due to a 6.8% increase in sales volume and was largely offset by lower selling prices resulting primarily for the same reasons cited in the quarterly comparison. The following table summarizes sales by product type as a percentage of total gross sales. The information is based upon gross sales, rather than net sales, because certain adjustments, such as promotional discounts, are not allocable to product type. For the Quarter Ended For the Twenty-six Weeks Ended December 26, December 27, December 26, December 27, Product Type 2019 2018 2019 2018 Peanuts 15.8 % 15.7 % 16.8 % 17.2 % Pecans 16.2 20.5 13.0 16.5 Cashews & Mixed Nuts 22.7 22.1 22.7 22.3 Walnuts 8.7 10.5 7.9 10.3 Almonds 13.2 11.8 14.8 12.8 Trail & Snack Mixes 18.3 14.5 19.3 15.6 Other 5.1 4.9 5.5 5.3 Total 100.0 % 100.0 % 100.0 % 100.0 % The following table shows a comparison of net sales by distribution channel (dollars in thousands): For the Quarter Ended December 26, December 27, Percent Distribution Channel 2019 2018 Change Change Consumer (1)$ 188,086 $ 195,478 $ (7,392 ) (3.8 )% Commercial Ingredients 34,247 31,454 2,793 8.9 Contract Packaging 24,090 26,385 (2,295 ) (8.7 ) Total$ 246,423 $ 253,317 $ (6,894 ) (2.7 )%
(1) Sales of branded products were approximately 33% and 45% of total consumer
sales during each of the second quarter of fiscal 2020 and fiscal 2019,
respectively. Fisher branded products were approximately 76% and 79% of
branded sales during the second quarter of fiscal 2020 and fiscal 2019,
respectively, with branded produce and Squirrel Brand products accounting for
most of the remaining branded product sales. 21
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The following table shows a comparison of net sales by distribution channel (dollars in thousands):
For the Twenty-six Weeks Ended December 26, December 27, Percent Distribution Channel 2019 2018 Change Change Consumer (1)$ 345,232 $ 334,922 $ 10,310 3.1 % Commercial Ingredients 71,135 68,656 2,479 3.6 Contract Packaging 47,902 54,027 (6,125 ) (11.3 ) Total$ 464,269 $ 457,605 $ 6,664 1.5 %
(1) Sales of branded products were approximately 31% and 43% of total consumer
sales during the first twenty-six weeks of fiscal 2020 and fiscal 2019,
respectively. Fisher branded products were approximately 71% and 75% of
branded sales during the first twenty-six weeks of fiscal 2020 and fiscal
2019, respectively, with branded produce and Squirrel Brand products
accounting for most of the remaining branded product sales.
Net sales in the consumer distribution channel decreased$7.4 million , or 3.8%, and sales volume increased 4.2% in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. The sales volume increase was driven by increased sales of private brand snack nuts and trail and snack mixes from distribution gains with new and existing private brand customers. Sales volume for Fisher snack nuts decreased 6.4%, primarily as a result of reduced promotional activity for inshell peanuts. Sales volume of Fisher recipe nuts decreased 29.8% from lost holiday display distribution at a major customer in favor of their private brand recipe nuts. Sales volume of Orchard Valley Harvest products increased 6.5% due to distribution gains at new and existing customers and the introduction of new products. Sales volume of Southern Style Nutsincreased 42.9% due to increased promotional activity. In the first twenty-six weeks of fiscal 2020, net sales in the consumer distribution channel increased$10.3 million , or 3.1%, and sales volume increased 10.0% compared to the same period of fiscal 2019. The sales volume increase occurred for the same reason cited in the quarterly comparison. Increased sales for our Orchard Valley Harvest and Southern Style Nut brands also contributed to the sales volume increase in the consumer distribution channel. Sales volume for Fisher recipe nuts decreased 30.0% in the year to date comparison as a result of lost distribution at a major customer in favor of their private brand recipe nuts. Net sales in the commercial ingredients distribution channel increased by 8.9% in dollars and 14.5% in sales volume in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. In the first twenty-six weeks of fiscal 2020, net sales in the commercial ingredients distribution channel increased by 3.6% in dollars and 6.3% in sales volume compared to the same period of fiscal 2019. The sales volume increase, for both the quarterly and twenty-six week period, was primarily due to distribution gains with new food service customers and increased sales of peanut crushing stock to peanut oil processors. Net sales in the contract packaging distribution channel decreased by 8.7% in dollars and 2.5% in sales volume in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. The decline in sales volume primarily came from a reduction in promotional and merchandising activity by some customers in this channel. In the first twenty-six weeks of fiscal 2020, net sales in the contract packaging distribution channel decreased by 11.3% in dollars and 7.9% in sales volume compared to the first twenty-six weeks of fiscal 2019. The decline in sales volume occurred for the same reason cited in the quarterly comparison, as well as from a reduction in unit ounce weights implemented by a major contract packaging customer.
Gross Profit
Gross profit increased by$7.1 million , or 16.5%, to$50.0 million for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. Our gross profit margin, as a percentage of net sales, increased to 20.3% for the second quarter of fiscal 2020 compared to 16.9% for the second quarter of fiscal 2019. The increases in gross profit and gross profit margin were mainly attributable to the sales volume increase discussed above, as well as manufacturing efficiencies, reduced manufacturing spending and lower commodity acquisition costs for pecans and cashews. 22
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Gross profit increased by$16.4 million , or 21.6%, to$92.2 million for the first twenty-six weeks of fiscal 2020 compared to the first twenty-six weeks of fiscal 2019. Our gross profit margin increased to 19.9% for the first twenty-six weeks of fiscal 2020 compared to 16.6% for the first twenty-six weeks of fiscal 2019. The increases in gross profit and gross profit margin in the year to date comparison occurred primarily for the same reasons cited in the quarterly comparison.
Operating Expenses
Total operating expenses for the second quarter of fiscal 2020 decreased by
Selling expenses for the second quarter of fiscal 2020 were$16.1 million , a decrease of$2.1 million , or 11.5%, from the second quarter of fiscal 2019. The decrease was driven primarily by a$2.5 million decrease in advertising expense primarily related to TV and magazine advertising and a$0.9 million decrease in freight expense. Partially offsetting these decreases were a$0.7 million increase in payroll related and incentive compensation expense and a$0.4 million increase in commission expense. Administrative expenses for the second quarter of fiscal 2020 were$9.4 million compared to$8.1 million for the second quarter of fiscal 2019. The increase was primarily due to a$1.0 million increase in compensation related expenses, primarily incentive compensation, a$0.2 million increase in building repairs and maintenance expense. Total operating expenses for the first twenty-six weeks of fiscal 2020 decreased by$0.4 million , or 0.9%, to$48.7 million . Operating expenses decreased to 10.5% of net sales for the first half of fiscal 2020 compared to 10.7% of net sales for the first half of fiscal 2019. Selling expenses for the first twenty-six weeks of fiscal 2020 were$30.2 million , a decrease of$2.0 million , or 6.3%, from the amount recorded for the first twenty-six weeks of fiscal 2019. The decrease was driven primarily by a$2.9 million decrease in advertising expense and a$1.3 million decrease in freight expense. These decreases were partially offset by a$1.4 million increase in payroll related and incentive compensation expense and a$0.5 million increase in commission expense.
Administrative expenses for the first twenty-six weeks of fiscal 2020 were
Income from Operations
Due to the factors discussed above, income from operations was
Due to the factors discussed above, income from operations was$43.5 million , or 9.4% of net sales, for the first twenty-six weeks of fiscal 2020 compared to$26.7 million , or 5.8% of net sales, for the first twenty-sixweeks of fiscal 2019. Interest Expense Interest expense was$0.4 million for the second quarter of fiscal 2020 compared to$0.8 million in the second quarter of fiscal 2019. Interest expense for the first two quarters of fiscal 2020 was$1.0 million compared to$1.7 million for the first two quarters of fiscal 2019. The decrease in interest expense was due to lower average debt levels. 23
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Rental and Miscellaneous Expense, Net
Net rental and miscellaneous expense was
Other Expense
Other expense consists of pension related expenses other than the service cost component and was$0.6 million for the second quarter of fiscal 2020 compared to$0.5 million for the second quarter of fiscal 2019. Other expense was$1.1 million for the first twenty-six weeks of fiscal 2020 compared to$1.0 million for the first twenty-six weeks of fiscal 2019.
Income Tax Expense
Income tax expense was$5.7 million , or 24.7% of income before income taxes (the "Effective Tax Rate"), for the second quarter of fiscal 2020 compared to$3.8 million , or 25.3% of income before income taxes, for the second quarter of fiscal 2019. For the first twenty-six weeks of fiscal 2020, income tax expense was$10.4 million , or 25.5% of income before income taxes, compared to$5.6 million , or 23.9% of income before income taxes, for the comparable period last year. The Effective Tax Rate in the comparative twenty-six week period was reduced due to a change in the rate that our deferred tax assets are measured due to the impact of Tax Reform. This change increased our net deferred tax assets and reduced income tax expense in the comparative twenty-six week period.
Net Income
Net income was$17.5 million , or$1.52 per common share basic and diluted, for the second quarter of fiscal 2020, compared to$11.3 million , or$0.99 per common share basic and$0.98 per common share diluted, for the second quarter of fiscal 2019. Net income was$30.4 million , or$2.65 per common share basic and$2.64 per share diluted, for the first twenty-six weeks of fiscal 2020, compared to net income of$17.9 million , or$1.57 per common share basic and$1.56 per share diluted, for the first twenty-six weeks of fiscal 2019. 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, datedFebruary 7, 2008 and subsequently amended most recently inNovember 2017 (as amended, the "Credit Facility"), that provides a revolving loan commitment and letter of credit subfacility. 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 historically allowed us to promote our products and invest in our brands (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.
The following table sets forth certain cash flow information for the first half of fiscal 2020 and 2019, respectively (dollars in thousands):
December 26, December 27, 2019 2018 $ Change Operating activities$ 54,285 $ 48,366 $ 5,919 Investing activities (6,148 ) (9,323 ) 3,175 Financing activities (48,335 ) (37,909 ) (10,426 ) Net increase in cash $ (198 )$ 1,134 $ (1,332 ) 24
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Operating Activities Net cash provided by operating activities was$54.3 million for the first twenty-six weeks of fiscal 2020 compared to$48.4 million for the comparative period of fiscal 2019. The increase in operating cash flow was due primarily to a$12.5 million increase in net income driven by increased sales and improved profitability, which was partially offset due to an increased use of working capital for inventory compared to the first twenty-six weeks of fiscal 2019. Total inventories were$172.3 million atDecember 26, 2019 , an increase of$15.3 million , or 9.8%, from the inventory balance atJune 27, 2019 , and an increase of$0.6 million , or 0.4%, from the inventory balance atDecember 27, 2018 . The increase in inventory atDecember 26, 2019 compared toJune 27, 2019 was primarily due to greater quantities of walnuts on hand at a higher acquisition cost, 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, decreased by 9.8 million pounds, or 11.8%, atDecember 26, 2019 compared toDecember 27, 2018 due to lower quantities of peanuts and pecans on hand. The weighted average cost per pound of raw nut input stocks on hand at the end of the second quarter of fiscal 2020 increased 7.1% compared to the end of the second quarter of fiscal 2019 primarily due to a higher acquisition cost for walnuts, which was offset in part by lower acquisition costs for pecans, cashews and peanuts. Investing Activities Cash used in investing activities was$6.1 million during the first twenty-six weeks of fiscal 2020 compared to$9.3 million for the same period last year. We expect total capital expenditures for new equipment, facility upgrades, and food safety enhancements for fiscal 2020 to be approximately$17 to$20 million . 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 planned capital expenditures. Financing Activities Cash used in financing activities was$48.3 million during the first twenty-six weeks of fiscal 2020 compared to$37.9 million for the same period last year. We paid$57.3 million of dividends in the first half of fiscal 2020 compared to$29.1 million during the same period last year. Net borrowings under our Credit Facility were$13.5 million during the first half of fiscal 2020 compared to net repayments of$6.7 million for the first half of fiscal 2019. The increase in short term borrowings under our Credit Facility was due to higher dividends paid in fiscal 2020 and was partially offset by an increased operating cash flows. Real Estate Matters InAugust 2008 , we completed the consolidation of ourChicago -based facilities into the Elgin Site. The Elgin Site includes both an office building and a warehouse. We are currently attempting to find additional tenants for the available space in the office building at the Elgin Site. Until additional tenant(s) are found, we will not receive the benefit of rental income associated with such space. Approximately 63% of the rentable area in the office building is currently vacant, of which approximately 29% has not been built-out. There can be no assurance that we will be able to lease the unoccupied space and further capital expenditures will likely be necessary to lease the remaining space. Financing Arrangements OnFebruary 7, 2008 , we entered into the Credit Facility with a bank group (the "Bank Lenders") providing a$117.5 million revolving loan commitment and letter of credit subfacility. Also onFebruary 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"). OnNovember 29, 2017 , we entered into the Consent and Ninth Amendment to our Credit Agreement (the "Ninth Amendment") which provided lender consent to incur unsecured debt in connection with our acquisition of the assets of the Squirrel Brand business, and for the acquisition of the Squirrel Brand business to constitute a "Permitted Acquisition" under the terms of the Credit Facility. The Ninth Amendment also modified our collateral reporting requirements. 25
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The Credit Facility, as most recently amended inNovember 2017 , is secured by substantially all of our assets other than machinery and equipment, real property, and fixtures and matures onJuly 7, 2021 . The Mortgage Facility is secured by mortgages on essentially all of our owned real property located inElgin, Illinois ,Gustine, California andGarysburg, North Carolina (the "Encumbered Properties ").
Credit Facility
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 theLondon interbank offered rate ("LIBOR") plus an applicable margin based upon the borrowing base calculation, ranging from 1.25% to 1.75%. AtDecember 26, 2019 , the weighted average interest rate for the Credit Facility was 3.8%. 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 ofDecember 26, 2019 , 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. AtDecember 26, 2019 , we had$100.8 million of available credit under the Credit Facility. If this entire amount were borrowed atDecember 26, 2019 , we would still be in compliance with all restrictive covenants under the Credit Facility.
We are currently updating the Credit Facility agreement and expect the term to extend another five years. The legal costs incurred to date have been capitalized and will be amortized over the length of the new agreement.
Mortgage Facility
The Mortgage Facility matures onMarch 1, 2023 . OnMarch 1, 2018 the interest rate on the Mortgage Facility was fixed at 4.25% per annum for the remainder of the term. Monthly principal payments on Tranche A in the amount of$0.2 million commenced onJune 1, 2008 . Monthly principal payments on Tranche B in the amount of$0.1 million commenced onJune 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 theEncumbered 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 ofDecember 26, 2019 , we were in compliance with all covenants under the Mortgage Facility.
Selma Property
InSeptember 2006 , we sold ourSelma, 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 theSelma Properties has a ten-year term at a fair market value rent with three five-year renewal options. InSeptember 2015 , we exercised two of the five-year renewal options which extended the lease term toSeptember 2026 . The lease extension also reduced the monthly lease payment on theSelma Properties , beginning inSeptember 2016 , to reflect then current market conditions. One five-year renewal option remains. Also, we have an option to purchase theSelma 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 theSelma Properties transaction. As ofDecember 26, 2019 ,$9.8 million of the debt obligation was outstanding. 26
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Squirrel Brand Seller-Financed Note
InNovember 2017 we completed the Acquisition. The Acquisition was financed by a combination of cash (drawn under the Credit Facility) and a three-year seller-financed note for$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 late in the second quarter of 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 inJanuary 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. AtDecember 26, 2019 , the principal amount of$3.5 million of the Promissory Note was outstanding.
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Policies and Estimates, see
the "Critical Accounting Policies and Estimates" section of "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Form 10-K for the fiscal year ended
Recent Accounting Pronouncements
Refer to Note 15 - "Recent Accounting Pronouncements" of the Notes to Consolidated Financial Statements, contained in Part I, Item 1 of this form 10-Q, for a discussion of recently issued and adopted accounting pronouncements
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FORWARD LOOKING STATEMENTS Some of the statements in this report are forward-looking (including statements concerning our expectations regarding market risk and the impact of the purchasing decisions of major customers). These forward-looking statements may be generally identified by the use of forward-looking words and phrases such as "will", "intends", "may", "believes", "anticipates", "should" and "expects" and are based on the Company's current expectations or beliefs concerning future events and involve risks and uncertainties. Consequently, the Company's actual results could differ materially. The Company undertakes 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. Among the factors that could cause results to differ materially from current expectations are: (i) the risks associated with our vertically integrated model with respect to pecans, peanuts and walnuts; (ii) sales activity for the Company's products, such as a decline in sales (of branded products, private label products or otherwise) to one or more key customers, a change in product mix to lower price products, a decline in sales of private brand products or changing consumer preferences, including a shift from higher margin products to lower margin products; (iii) changes in the availability and costs of raw materials and the impact of fixed price commitments with customers; (iv) the ability to pass on price increases to customers if commodity costs rise and the potential for a negative impact on demand for, and sales of, our products from price increases; (v) the ability to measure and estimate bulk inventory, fluctuations in the value and quantity of the Company's nut inventories due to fluctuations in the market prices of nuts and bulk inventory estimation adjustments, respectively; (vi) the Company's ability to appropriately respond to, or lessen the negative impact of, competitive and pricing pressures, including competition in the recipe nut category; (vii) losses associated with product recalls, product contamination, food labeling or other food safety issues, or the potential for lost sales or product liability if customers lose confidence in the safety of the Company's products or in nuts or nut products in general, or are harmed as a result of using the Company's products; (viii) the ability of the Company to control expenses, such as compensation, medical and administrative expense; (ix) the potential negative impact of government regulations and laws and regulations pertaining to food safety, such as the Food Safety Modernization Act; (x) uncertainty in economic conditions, including the potential for economic downturn; (xi) the timing and occurrence (or nonoccurrence) of other transactions and events which may be subject to circumstances beyond the Company's control; (xii) the adverse effect of labor unrest or disputes, litigation and/or legal settlements, including potential unfavorable outcomes exceeding any amounts accrued; (xiii) losses due to significant disruptions at any of our production or processing facilities; (xiv) the inability to implement our Strategic Plan, including growing our branded and private brand product sales and expanding into alternative sales channels; (xv) technology disruptions or failures; (xvi) the inability to protect the Company's brand value, intellectual property or avoid intellectual property disputes; and (xvii) the Company's ability to manage successfully the price gap between its private brand products and those of its branded competitors. 28
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