Summary of SANFILIPPO JOHN B & SON INC

Item 2. 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). References herein to fiscal 2009 are to the fiscal year ending June 25, 2009. References herein to fiscal 2008 are to the fiscal year ended June 26, 2008. References herein to the third quarter of fiscal 2009 are to the quarter ended March 26, 2009. References herein to the first thirty-nine weeks of fiscal 2009 are to the thirty-nine weeks ended March 26, 2009. References herein to the third quarter of fiscal 2008 are to the quarter ended March 27, 2008. References herein to the first thirty-nine weeks of fiscal 2008 are to the thirty-nine weeks ended March 27, 2008. As used herein, unless the context otherwise indicates, the terms "Company", "we", "us", "our" or "our Company" collectively refer to John B. Sanfilippo & Son, Inc. and JBSS Properties, LLC, a wholly-owned subsidiary of John B. Sanfilippo & Son, Inc. Our Company's Credit Facility and Mortgage Facility, as defined below, are sometimes collectively referred to as "our new financing arrangements."
We are one of the leading processors and marketers of peanuts, pecans, cashews, walnuts, almonds and other nuts in the United States. These nuts are sold under a variety of private labels and under the Fisher, Flavor Tree, Sunshine Country and Texas Pride 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, candy and confections, natural snacks and trail mixes, sunflower seeds, corn snacks, sesame sticks and other sesame snack products. We distribute our products in the consumer, industrial, food service, contract packaging and export distribution channels.
We face a number of challenges in the future. In addition to operating in a difficult economic environment, specific challenges, among others, include increasing our profitability, intensified competition, fluctuating commodity costs and our ability to achieve the anticipated benefits of the facility consolidation project. We will focus on seeking additional profitable business to utilize the additional production capacity at the New Site (as defined below). We expect to be able to devote more funds to promote and advertise our Fisher brand in order to attempt to regain market share that has been lost in recent years. However, this effort may be challenging because, among other things, consumer preferences have shifted towards lower-priced private label products from higher-priced branded products as a result of current economic conditions. In addition, private label products generally provide lower margins than branded products. Also, 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, and we will face the challenges presented by the current state of the domestic and global economy. See the information reference in Part II, Item 1A-"Risk Factors".
QUARTERLY HIGHLIGHTS Our net sales were $113.8 million for the third quarter of fiscal 2009, a $7.1 million, or 6.6%, increase over the third quarter of fiscal 2008. This increase is primarily due to a 9.2% increase in overall pounds shipped, which in turn is primarily due to a 20.6% volume increase in our consumer distribution channel through the addition of a major private label customer and increased business at our existing customer base. The increase in sales volume has allowed us to utilize the extra production capacity generated by our new production facility located in Elgin, Illinois. However, further increases in sales volume will be required in the future for us to realize the full extent of the planned benefits of our new production facility located in Elgin, Illinois. Our operating results were negatively impacted as a result of a product recall relating to pistachios. During the time period of March 31, 2009 through April 8, 2009, we voluntarily recalled roasted inshell pistachios, raw shelled pistachios and mixed nuts containing raw shelled pistachios. The recall was made as a precautionary measure because the product may be contaminated with salmonella. Our recall was a follow-up to the industry-wide voluntary recall of pistachios announced by Setton Pistachio of Terra Bella, Inc. ("Setton"), one of our pistachio suppliers. We do not anticipate any further recalls related to purchases of pistachios from Setton.
We anticipate that we will reimburse our customers at their retail price for any recalled products in their possession at the recall date and for any recalled products returned by end consumers. Additionally, we are responsible for any costs associated with the retrieval or destruction of the recalled products and for our customers' lost profits associated with the affected products. We currently estimate these total costs to be between $3.2 million and $4.4 million. In accordance with generally accepted accounting principles, the minimum amount was recorded because no amount in this range is a better estimate than any other amount in this range. Additionally, our estimated range could change as further information from our customers regarding their claims is determined in the future. This range does not include other aspects and consequences of the recall, including but not limited to (i) any future claims that may arise as a result of consumers ingesting the products that were recalled, or (ii) our Company's disposal costs of inventory not yet shipped to customers. We recorded a recall liability of $3.2 million as of March 26, 2009, $1.9 million of which was recorded as a reduction in net sales and $1.3 million of which was recorded as administrative expenses. We also were required to reduce our inventories and increase cost of sales by $0.3 million for the recalled inventory that was in our possession at the recall date. Therefore, the total amount recorded as a result of the pistachio recall was $3.5 million. Including the effect of the recall on our incentive compensation plan, the recall had a negative $2.4 million effect on our income from operations for the third quarter of fiscal 2009.
We currently expect to settle the majority of the recall costs with our customers during the fourth quarter of fiscal 2009. We currently intend to aggressively pursue the recovery of our recall costs from Setton, Setton's insurance and our own insurance; however, we can provide no assurance as to the likelihood, extent or timing of any such recovery. We have sufficient funds available under our Credit Facility to absorb expected costs related to the pistachio product recall.
Our loss before income taxes for the third quarter of fiscal 2009 was $2.8 million, which includes $2.4 million of costs related to the pistachio product recall. This result is an improvement over the loss before income taxes for the third quarter of fiscal 2008 of $9.4 million, which included $6.7 million of debt extinguishment costs.

Table of Contents

RESULTS OF OPERATIONS
Net Sales
Our net sales increased by 6.6% to $113.8 million for the third quarter of fiscal 2009 from $106.7 million for the third quarter of fiscal 2008. Our net sales increased by 2.4% to $426.4 million for the first thirty-nine weeks of fiscal 2009 from $416.5 million for the first thirty-nine weeks of fiscal 2008. The quarterly increase was achieved primarily through a 9.2% increase in sales volume. The year-to-date increase was achieved primarily through a weighted average increase of 8.3% in the selling price due to higher commodity costs for the first half of fiscal 2009. Total pounds of all products shipped to customers decreased by 5.3% for the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008.
The following table shows a comparison of sales by distribution channel (dollars in thousands):

                          For the Quarter Ended            For the Thirty-nine Weeks Ended
                        March 26,       March 27,         March 26,              March 27,
Distribution Channel       2009            2008              2009                   2008
Consumer               $     65,282     $   55,640     $        244,417       $        228,536
Industrial                   17,184         19,096               61,682                 73,823
Food Service                 12,851         14,928               48,823                 49,736
Contract Packaging           12,213         11,367               41,986                 33,825
Export                        6,259          5,685               29,460                 30,594

Total                  $    113,789     $  106,716     $        426,368       $        416,514

The following table shows a comparison of sales by product type as a percentage of total gross sales. The information is based on 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 Thirty-nine Weeks Ended
                         March 26,       March 27,         March 26,              March 27,
    Product Type           2009            2008              2009                   2008
Peanuts                      23.9 %          21.8 %              21.0 %                  19.2 %
Pecans                       15.4            19.9                20.4                    24.0
Cashews & Mixed Nuts         23.1            19.1                22.4                    20.6
Walnuts                      12.8            15.5                13.8                    15.2
Almonds                      12.2            13.2                10.9                    11.4
Other                        12.6            10.5                11.5                     9.6

Total                       100.0 %         100.0 %             100.0 %                 100.0 %

Net sales in the consumer distribution channel increased by 17.3% in dollars and 21.6% in volume in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. Private label consumer sales volume increased by 26.0% in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 primarily due to: (i) a significant new customer; (ii) expansion of business at an existing customer and (iii) a general increase in sales of private label products due to current economic conditions. Fisher brand sales volume increased 7.9% for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 primarily due to an increase in inshell peanut sales to a major customer partially offset by decreased sales to other customers. Net sales in the consumer distribution channel increased by 6.9% in dollars and 3.5% in volume in the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008. Private label consumer sales increased 6.3% in the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008 due to the significant increase in private label sales that occurred during the third quarter of fiscal 2009. Private label sales volume for the first half of fiscal 2009 was virtually unchanged from the sales volume for the first half of fiscal 2008. Fisher brand sales volume was virtually unchanged for the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008 primarily due to an increase in inshell peanut sales at a major customer offset by lower baking nut sales at a separate major customer. Net sales in the industrial distribution channel decreased by 10.0% in dollars and 12.8% in sales volume in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. Net sales in the industrial distribution channel decreased by 16.4% in dollars and 32.7% in sales volume in the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008. The sales volume decrease, for both the quarterly and thirty-nine week periods, is primarily due to: (i) lower raw peanut sales to other peanut processors and oil processors resulting, in part, from a planned reduction in peanuts shelled at our Bainbridge, Georgia facility; (ii) increased price competition from processors who are directly aligned with nut growers; (iii) a decrease in the availability of our supply of tree nuts for

Table of Contents

the industrial distribution channel and (iv) a decrease in demand in the industrial distribution channel for nuts, as fewer new products with nuts as ingredients are being developed.
Net sales in the food service distribution channel decreased by 13.9% in dollars and 6.9% in volume in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. This decrease is due to the effects of current economic conditions as consumers are spending less money at restaurants. Net sales in the food service distribution channel decreased by 1.8% in dollars and 3.0% in volume in the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008.
Net sales in the contract packaging distribution channel increased by 7.4% in dollars and 5.1% in volume in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. Net sales in the contract packaging distribution channel increased by 24.1% in dollars and 9.1% in volume in the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008. The significant sales volume increase, for both the quarterly and thirty-nine week periods, is due to increased business with a contract packaging customer.
Net sales in the export distribution channel increased by 10.1% in dollars and 31.9% in volume in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. Net sales in the export distribution channel decreased by 3.7% in dollars and 10.8% in volume in the first thirty-nine weeks of fiscal 2009 compared to the first thirty-nine weeks of fiscal 2008. The quarterly increase in volume is due to higher inshell walnut sales in the third quarter of fiscal 2009; however, the thirty-nine week decrease in volume is due to overall lower inshell walnut sales in the first half of fiscal 2009. Gross Profit
Gross profit for the third quarter of fiscal 2009 increased 2.9% to $13.2 million from $12.8 million for the third quarter of fiscal 2008. Gross margin decreased to 11.6% of net sales for the third quarter of fiscal 2009 from 12.0% for the third quarter of fiscal 2008. The pistachio recall had a 1.6% basis point effect on gross margin for the third quarter of fiscal 2008. Gross profit for the first thirty-nine weeks of fiscal 2009 increased 8.3% to $51.9 million from $48.0 million for the first thirty-nine weeks of fiscal 2008. Gross margin increased to 12.2% of net sales for the first thirty-nine weeks of fiscal 2009 from 11.5% for the first thirty-nine weeks of fiscal 2008. The pistachio recall had a 0.4% basis point effect on gross margin for the first thirty-nine weeks of fiscal 2008. The quarterly improvement in gross margin, excluding the pistachio recall effect, is primarily due to the increased absorption of fixed costs due to an increase in production volume. The improvement for the thirty-nine week period was achieved largely due to: (i) a decrease in redundant costs, as all Chicago area operations are now consolidated at the New Site (as defined below); (ii) a decrease in external contractor charges related to moving equipment from the previous Chicago area facilities to the New Site and (iii) improved efficiency variances. Gross profit margins, for both the quarterly and thirty-nine week periods, improved on sales of almonds and walnuts and declined on sales of cashew, peanut and mixed nut products as a result of significantly higher cashew and peanut costs. Temporary delays in supplier shipments of cashews and peanuts along with lower-priced purchase contracts resulted in limited opportunities for purchasing these commodities at low costs. In order to fulfill our obligations to our customers, we purchased these commodities in the high-priced spot market during the first half of fiscal 2009.
Operating Expenses
Selling and administrative expenses for the third quarter of fiscal 2009 increased to 12.2% of net sales from 11.6% of net sales for the third quarter of fiscal 2008. Selling expenses for the third quarter of fiscal 2009 were $7.7 million, a decrease of $0.1 million, or 1.8%, from the third quarter of fiscal 2008. The slight decrease is primarily due to a $0.6 million increase in advertising expenses offset by a $0.6 million decrease in freight expense. Administrative expenses for the third quarter of fiscal 2009 were $6.2 million, an increase of $1.7 million, or 36.9%, from the third quarter of fiscal 2008. The increase is primarily due to $1.3 million of expenses related to the pistachio product recall. Selling and administrative expenses for the first thirty-nine weeks of fiscal 2009 increased to 9.8% of net sales from 9.7% of net sales for the first thirty-nine weeks of fiscal 2008. Selling expenses for the first thirty-nine weeks of fiscal 2009 were $26.1 million, a decrease of $0.3 million, or 1.0%, from the first thirty-nine weeks of fiscal 2008. The decrease is primarily due to cost savings from the restructuring initiatives implemented at the end of the second quarter of fiscal 2008 and a $0.7 million decrease in freight expense partially offset by a $1.4 million increase in advertising expenses during the first thirty-nine weeks of fiscal 2008. Administrative expenses for the first thirty-nine weeks of fiscal 2009 were $15.9 million, an increase of $1.7 million, or 12.1%, from the first thirty-nine weeks of fiscal 2008. The increase is primarily due to $1.3 million of expenses related to the pistachio product recall. Operating expenses for the third quarter of fiscal 2008 included $0.4 million of restructuring expenses primarily related to severance expenses. Operating expenses for the first thirty-nine weeks of fiscal 2008 included $1.8 million of restructuring expenses, primarily related to the estimated cost of withdrawal from a multiemployer pension plan. Operating expenses were reduced by $0.3 million during the first quarter of fiscal 2009 for the difference between our previously estimated cost of withdrawal from the multiemployer pension plan and the actual cost determined by the multiemployer pension plan.

Table of Contents

(Loss) Income from Operations Due to the factors discussed above, income from operations decreased to a loss of $0.7 million, or (0.6)% of net sales, for the third quarter of fiscal 2009 from income of $0.1 million, or 0.1% of net sales, for the third quarter of fiscal 2008. Also due to the factors discussed above, income from operations increased to $10.3 million, or 2.4% of net sales, for the first thirty-nine weeks of fiscal 2009 from $5.7 million, or 1.4% of net sales, for the first thirty-nine weeks of fiscal 2008. Interest Expense
Interest expense for the third quarter of fiscal 2009 decreased to $1.8 million from $2.7 million for the third quarter of fiscal 2008. Interest expense for the first thirty-nine weeks of fiscal 2009 decreased to $6.0 million from $8.0 million for the first thirty-nine weeks of fiscal 2008. The decrease, for both the quarterly and thirty-nine week periods, is primarily due to lower short-term interest rates on our Credit Facility compared to rates on our Prior Credit Facility (as defined below) which was in place during the first thirty-nine weeks of fiscal 2008 and also lower average debt levels. Debt Extinguishment Costs
As a result of our refinancing completed during the third quarter of fiscal 2008, we were required to pay debt extinguishment costs of $6.7 million during the third quarter of fiscal 2008.
Rental and Miscellaneous Expense, Net
Net rental and miscellaneous expense was $0.3 million for the third quarter of fiscal 2009 compared to $0.1 million for the third quarter of fiscal 2008. Net rental and miscellaneous expense was $0.9 million for the first thirty-nine weeks of fiscal 2009 compared to $0.0 million for the first thirty-nine weeks of fiscal 2008. The increase in net expense, for both the quarterly and thirty-nine week periods, is due to lower rental income as a result of a higher vacancy rate at the office building located at the New Site. Income Tax (Benefit) Expense
Income tax benefit was $0.3 million, or 10.3% of loss before income taxes, for the third quarter of fiscal 2009 compared to $0.6 million, or 6.5% of loss before income taxes, for the third quarter of fiscal 2008. Income tax expense was $0.4 million, or 11.7% of income before income taxes, for the first thirty-nine weeks of fiscal 2009 compared to income tax benefit of $0.5 million, or 5.4% of the loss before income taxes, for the first thirty-nine weeks of fiscal 2008. At the beginning of fiscal year 2009, we had $2.4 million of state and $3.3 million of federal net operating loss ("NOL") carryforwards for income tax purposes. The state NOL carryforward relates to losses generated during the years ended June 26, 2008, June 28, 2007 and June 29, 2006, which generally have a carryforward period of approximately 12 years before expiration. The federal NOL carryforward relates to losses generated during the year ended June 26, 2008, which generally have a carryforward period of 20 years before expiration. In our effective rate for the quarter and year-to-date period, based on our currently anticipated annual operating results we have estimated utilizing a portion of the NOL and the respective valuation allowanceduring fiscal 2009, which was the primary factor in our effective tax rate varying from the federal statutory rate. Due to our cumulative losses for the last three fiscal years, we believe it is currently more likely than not that we will be unable to utilize primarily state NOL carryforwards in periods subsequent to fiscal year 2009. Consequently, we have continued to provide a valuation allowance of $2.6 million primarily related to state jurisdiction NOL carryforwards as of March 26, 2009. We will consider the need for, and the amount of the valuation allowance in the future as actual operating results are achieved. Net (Loss) Income
Net loss was $2.5 million, or $0.23 per common share (basic and diluted), for the third quarter of fiscal 2009, compared to $8.8 million, or $0.82 per common share (basic and diluted), for the third quarter of fiscal 2008. Net income was $3.0 million, or $0.28 per common share (basic and diluted), for the first thirty-nine weeks of fiscal 2009, compared to a net loss of $8.6 million, or $0.81 per common share (basic and diluted), for the first thirty-nine weeks of fiscal 2008.

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES General
The primary uses of cash are to fund our current operations, fulfill contractual obligations 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 Facility. We have intensified our management of working capital as a result of the current economic situation. 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. However, in the current economic environment no assurance can be given. See Part II, Item 1A - "Risk Factors." 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 we buy and sell. Current market trends in nut prices and crop estimates also impact nut procurement.
Net cash provided by operating activities was $18.0 million for the first thirty-nine weeks of fiscal 2009 compared to $11.6 million for the first thirty-nine weeks of fiscal 2008. The increase is primarily due to an $11.6 million increase in net income partially offset by a $6.6 million federal tax refund received during the first thirty-nine weeks of fiscal 2008. We repaid $2.6 million of long-term debt during the first thirty-nine weeks of fiscal 2009, $2.2 million of which related to the Mortgage Facility. Total inventories were $125.7 million at March 26, 2009, a decrease of $1.3 million, or 1.0%, from the balance at June 26, 2008, and a decrease of $16.0 million, or 11.3%, from the balance at March 27, 2008. The decrease from June 26, 2008 to March 26, 2009 is primarily due to decreases in finished goods and work-in-process due to more effective inventory management partially offset by the increases in inventory that are a result of the seasonality of purchasing nuts at harvest time. The decrease from March 27, 2008 to March 26, 2009 is primarily due to improved inventory management practices, which enabled the value of finished goods inventory on hand to decline by 19.5% and the pounds of finished goods on hand to decline by 20.2%.
Net accounts receivable were $36.6 million at March 26, 2009, an increase of $2.1 million, or 6.2%, from the balance at June 26, 2008, and an increase of $1.9 million, or 5.4%, from the balance at March 27, 2008. The increase from June 26, 2008 to March 26, 2009 is due to higher monthly sales in March 2009 than in June 2008. The increase from March 27, 2008 to March 26, 2009 is primarily due to higher sales in March 2009 than March 2008. Accounts receivable allowances were $2.5 million at March 26, 2009, an increase of $0.3 million from the amount at June 26, 2008 and a decrease of $0.6 million from the amount at March 27, 2008. The primary reason for the increase in accounts receivable allowances from June 26, 2008 to March 26, 2009 is due to the seasonality of the business. The primary reason for the decrease from March 27, 2008 to March 26, 2009 is due to our efforts to accelerate our process to resolve customer deductions.
Current economic and credit conditions have adversely impacted demand for consumer products and the credit markets. These conditions could, among other things, have a material adverse effect on the cash received from our operations and the availability and cost of capital. See Part II, Item 1A - "Risk Factors." Real Estate Matters
In August 2008, we completed the consolidation of our Chicago-based facilities into a single facility in Elgin, Illinois (the "New Site"). As part of the facility consolidation project, on April 15, 2005, we closed on the $48.0 million purchase of the New Site. The New Site includes both an office building and a warehouse. We leased 41.5% of the office building back to the seller for a three year period ending April 2008. The seller did not exercise its option to renew its lease and vacated the office building. Accordingly, we are currently attempting to find replacement tenant(s) for the space that was rented by the seller of the New Site. Until replacement tenant(s) are found, we will not receive the benefit of rental income associated with such space. Approximately 80% of the office building is currently vacant. There can be no assurance that we will be able to lease the unoccupied space and further capital expenditures may be necessary to lease the remaining space, including the space previously rented by the seller of the New Site.
On March 28, 2006, JBSS Properties, LLC acquired title by quitclaim deed to the site that was originally purchased in Elgin, Illinois (the "Original Site") for our facility consolidation project and JBSS Properties LLC entered into an Assignment and Assumption Agreement (the "Agreement") with the City of Elgin (the "City"). Under the terms of the Agreement, the City assigned to us the . . .