Summary of SANFILIPPO JOHN B & SON INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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." 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 2010 are to the fiscal year ending June 24, 2010. References herein to fiscal 2009 are to the fiscal year ended June 25, 2009. References herein to the first quarter of fiscal 2010 are to the quarter ended September 24, 2009. References herein to the first quarter of fiscal 2009 are to the quarter ended September 25, 2008.
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 our 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 are devoting more funds to promote and advertise our Fisher brand 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 referenced in Part II, Item 1A
- "Risk Factors".
QUARTERLY HIGHLIGHTS Our net sales for the first quarter of fiscal 2010 decreased by $8.0 million, or 5.9%, to $126.8 million from $134.8 million for the first quarter of fiscal 2009. The decrease in net sales came mainly from price reductions on the sales of walnuts and almonds and a decline in sales volume for pecans due to a smaller 2008 pecan crop. Total pounds shipped to customers in the current first quarter increased by 0.9% in comparison to total pounds shipped to customers in the first quarter of fiscal 2009. Increases in pounds shipped to customers in the consumer, contract packaging and export distribution channels were offset in large part by volume declines in the industrial and food service distribution channels, which occurred primarily as a result of decreased pecan sales and the impact of the current economic environment in these two distribution channels. Our gross profit margin, as a percentage of net sales, increased from 10.5% for the first quarter of fiscal 2009 to 18.8% for the first quarter of fiscal 2010, and gross profit increased by $9.7 million. Gross profit margins improved on the sales of most major product types mainly due to lower acquisition costs for the primary commodities that we purchase. This was especially the case for products containing peanuts and cashews. The acquisition costs for peanuts and cashews were higher in the first quarter of fiscal 2009 because of temporary supply interruptions that did not recur in the first quarter of fiscal 2010. Similarly, the gross profit margin for the first quarter of fiscal 2009 was impacted negatively by a $3.0 million charge to reduce pecan inventory carrying value to market while no such material write downs were recorded in the first quarter of fiscal 2010. Improvements in manufacturing efficiencies throughout our Company also contributed significantly to the increase in gross profit margin. Our income before income taxes for the first quarter of fiscal 2010 was $7.8 million compared to a net loss of $0.4 million for the first quarter of fiscal 2009. The improvements in gross margin described above are primarily responsible for the significant increase in income before income taxes.
RESULTS OF OPERATIONS
Net Sales
Our net sales decreased by 5.9% to $126.8 million for the first quarter of fiscal 2010 from $134.8 million for the first quarter of fiscal 2009. The quarterly decrease was primarily due to lower average selling prices which were influenced by lower acquisition costs for our major commodities, especially peanuts and cashews. Our overall sales volume increased by 0.9%. Increases in pounds shipped to customers in the consumer, contract packaging and export distribution channels were offset in large part by volume declines in the industrial and food service distribution channels, which occurred primarily as a result of decreased pecan sales and the impact of the current economic environment in these two distribution channels.

Table of Contents

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

                                                Quarter Ended
                                      September 24,       September 25,
              Distribution Channel        2009                2008
              Consumer               $        74,295     $        75,110
              Industrial                      17,383              20,998
              Food Service                    14,668              18,012
              Contract Packaging              13,718              13,036
              Export                           6,748               7,668

              Total                  $       126,812     $       134,824

The following 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.

                                                 Quarter Ended
                                        September 24,     September 25,
                Product Type                2009              2008
                Peanuts                         22.0 %            21.8 %
                Pecans                          17.3              21.1
                Cashews & Mixed Nuts            22.1              21.2
                Walnuts                         11.3              12.5
                Almonds                         10.8              11.8
                Other                           16.5              11.6

                Total                          100.0 %           100.0 %

Net sales in the consumer distribution channel decreased by 1.1% in dollars but increased by 2.6% in volume in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. Private label consumer sales volume increased by 12.9% in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 primarily due to (i) a significant new customer that was added during the last half of fiscal 2009 and (ii) a general increase in sales of private label products due to current economic conditions. Fisher brand sales volume decreased 15.3% for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 primarily due to a decrease in (i) baking nut sales to a major customer and (ii) peanut sales to a separate major customer. Net sales in the industrial distribution channel decreased by 17.2% in dollars and 4.0% in sales volume in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The sales volume decrease is primarily due to lower pecan sales mainly from a limited supply of pecans available for the industrial distribution channel.
Net sales in the food service distribution channel decreased by 18.6% in dollars and 9.4% in volume in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. This decrease is primarily due to the effects of current economic conditions as consumers are spending less money at restaurants. Net sales in the contract packaging distribution channel increased by 5.2% in dollars and 9.2% in volume in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The sales volume increase is due to increased business with our major contract packaging customer and a separate contract packaging customer.
Net sales in the export distribution channel decreased by 12.0% in dollars but increased 2.8% in volume in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The increase in volume is due to higher almond sales.
Gross Profit
Gross profit for the first quarter of fiscal 2010 increased 68.3% to $23.9 million from $14.2 million for the first quarter of fiscal 2009. Gross margin increased to 18.8% of net sales for the first quarter of fiscal 2010 from 10.5% for the first quarter of fiscal 2009. Gross profit margins improved on the sales of most major product types mainly due to lower acquisition costs for the primary commodities that we purchase. This was especially the case for products containing peanuts and cashews. The acquisition costs for peanuts and cashews were higher in the first quarter of fiscal 2009

Table of Contents

because of temporary supply interruptions that did not recur in the first quarter of fiscal 2010. Similarly, the gross profit margin for the first quarter of fiscal 2009 was impacted negatively by a $3.0 million charge to reduce pecan inventory carrying value to market while no such material write downs were recorded in the first quarter of fiscal 2010. Improvements in manufacturing efficiencies throughout our Company also contributed significantly to the increase in gross profit margin.
Operating Expenses
Selling and administrative expenses for the first quarter of fiscal 2010 increased to 11.2% of net sales from 9.3% of net sales for the first quarter of fiscal 2009. Selling expenses for the first quarter of fiscal 2010 were $8.7 million, an increase of $0.7 million, or 9.3%, from the first quarter of fiscal 2009. This increase is primarily due to a (i) $0.3 million increase in incentive compensation expense as a result of improved operating results and
(ii) $0.2 million increase in salaries. Administrative expenses for the first quarter of fiscal 2010 were $5.4 million, an increase of $0.8 million, or 17.9%, from the first quarter of fiscal 2009. This increase is primarily due to a $0.5 million increase in incentive compensation expense from improved operating results. 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. Income from Operations
Due to the factors discussed above, income from operations increased to $9.7 million, or 7.7% of net sales, for the first quarter of fiscal 2010 from income of $1.9 million, or 1.4% of net sales, for the first quarter of fiscal 2009.
Interest Expense
Interest expense for the first quarter of fiscal 2010 decreased to $1.4 million from $2.1 million for the first quarter of fiscal 2009. The decrease is primarily due to lower average debt levels. Rental and Miscellaneous Expense, Net
Net rental and miscellaneous expense was $0.4 million for the first quarter of fiscal 2010 compared to $0.2 million for the first quarter of fiscal 2009. The increase in net expense is due to lower rental income as a result of certain infrequent expenses such as parking lot maintenance expenses that were incurred during the first quarter of fiscal 2010. Income Tax Expense (Benefit)
Income tax expense was $3.1 million, or 39.3% of income before income taxes, for the first quarter of fiscal 2010 compared to a benefit of $0.0 million, or 7.9% of loss before income taxes, for the first quarter of fiscal 2009. We eliminated the valuation allowance related to the potential realization of net operating loss carryforwards during the fourth quarter of fiscal 2009. Income tax expense should be at a normal rate for the foreseeable future. Net Income (Loss)
Net income was $4.8 million, or $0.45 per common share (basic and diluted), for the first quarter of fiscal 2010, compared to a net loss of ($0.4) million, or ($0.04) per common share (basic and diluted), for the first quarter of fiscal 2009.

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 (as defined below). 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 $24.0 million for the first quarter of fiscal 2010 compared to $5.3 million for the first quarter of fiscal 2009. This increase is primarily due to improved operating results and lower nut acquisition costs affecting our investment in inventories.
We repaid $0.9 million of long-term debt during the first quarter of fiscal 2010, $0.8 million of which was related to the Mortgage Facility. The net reduction in our Credit Facility was $18.2 million.
Total inventories were $99.5 million at September 24, 2009, a decrease of $6.8 million, or 6.4%, from the balance at June 25, 2009, and a decrease of $23.5 million, or 19.1%, from the balance at September 25, 2008. The decrease from June 25, 2009 to September 24, 2009 is primarily due to the timing of crop receipts. The decrease from September 25, 2008 to September 24, 2009 is primarily due to decreases in finished goods and work-in-process resulting from more effective inventory management and lower nut costs.
Net accounts receivable were $35.4 million at September 24, 2009, an increase of $0.6 million, or 1.8%, from the balance at June 25, 2009, and a decrease of $7.3 million, or 17.2%, from the balance at September 25, 2008. The increase in net accounts receivable from June 25, 2009 to September 24, 2009 is due primarily to higher sales in the month of September 2009 compared to June 2009. The decrease in net accounts receivable from September 25, 2008 to September 24, 2009 is due to lower sales in September 2009 compared to September 2008. Accounts receivable allowances were $2.9 million, $2.8 million and $2.7 million at September 24, 2009, June 25, 2009 and September 25, 2008, respectively. 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 in 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 City's remaining rights and obligations under a development agreement entered into by and among our Company, certain related party partnerships and the City (the "Development Agreement"). We subsequently entered into a sales contract with a potential buyer of the Original Site. The sales contract was recently terminated as the potential buyer was unable to secure financing. While we are currently actively searching for new potential buyers of the Original Site, we cannot ensure that a sale will occur in the next twelve months. We therefore reclassified $5.6 million from current assets to property, plant and equipment. The Mortgage Facility is secured, in part, by the Original Site. We must obtain the consent of the Mortgage Lender prior to the sale of the Original Site. A portion of the Original Site contains an office building (which we began renting during the third quarter of fiscal 2007) that may or may not be included in any future sale. Our total costs under the Development Agreement were $6.8 million as of September 24, 2009, June 25, 2009 and September 25, 2008, (i) $5.6 million of which is currently recorded as a component of "Property, Plant and Equipment" as of September 24, 2009 and June 25, 2009 and was previously recorded as an "Asset Held for Sale" as of September 25, 2008 and (ii)

Table of Contents

$1.2 million of which is recorded as "Rental Investment Property". We have reviewed the assets under the Development Agreement and concluded that no adjustment of the carrying value is required. Financing Arrangements
On February 7, 2008, we entered into a Credit Agreement with a bank group (the "Bank Lenders") providing a $117.5 million revolving loan commitment and letter of credit subfacility (the "Credit Facility"). Also on February 7, 2008, we entered into a Loan Agreement with an insurance company (the "Mortgage Lender") providing us with two term loans, one in the amount of $36.0 million ("Tranche A") and the other in the amount of $9.0 million ("Tranche B"), for an aggregate amount of $45.0 million (the "Mortgage Facility"). The Credit Facility and Mortgage Facility replaced our prior revolving credit facility (the "Prior Credit Facility") and long-term financing facility (the "Prior Note Agreement"). Our new financing arrangements were secured, in part, to generally obtain more flexible covenants than those associated with the Prior Note Agreement and Prior Credit Facility, which we were not in full compliance with during the first three quarters of fiscal 2008. We currently expect to be in compliance with all financial covenants under the Credit Facility and Mortgage Facility for the foreseeable future and we currently have full access to our new financing; however, it is possible that current economic and credit conditions could adversely impact our Bank Lenders' ability to honor their commitments to us under the Credit Facility. See Part II, Item 1A - "Risk Factors". The Credit Facility is secured by substantially all of our assets other than real property and fixtures. The Mortgage Facility is secured by mortgages on essentially all of our owned real property located in Elgin, Illinois, Gustine, California and Garysburg, North Carolina (the "Encumbered Properties"). The encumbered Elgin, Illinois real property includes almost all of the Original Site that was purchased prior to the New Site purchase.
The Credit Facility matures on February 7, 2013. At our election, borrowings under the Credit Facility accrue interest at either (i) a rate determined pursuant to the administrative agent's prime rate minus an applicable margin determined by reference to the amount of loans which may be advanced under a borrowing base calculation based upon accounts receivable, inventory and machinery and equipment (the "Borrowing Base Calculation"), ranging from 0.00% to 0.50% or (ii) a rate based upon the London interbank offered rate ("LIBOR") plus an applicable margin based upon the Borrowing Base Calculation, ranging from 2.00% to 2.50%. The face amount of undrawn letters of credit accrues interest at a rate of 1.50% to 2.00%, based upon the Borrowing Base Calculation. The portion of the Borrowing Base Calculation based upon machinery and equipment will decrease by $1.5 million per year for the first five years to coincide with amortization of the machinery and equipment collateral. As of September 24, 2009, the weighted average interest rate for the Credit Facility was 2.60%. The terms of the Credit Facility contain covenants that require us to restrict investments, indebtedness, capital expenditures, acquisitions and certain sales of assets, cash dividends, 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 $15.0 million, we will be required to maintain a specified fixed charge coverage ratio, tested on a monthly basis. All cash received from customers is required to be applied against the Credit Facility. The Credit Facility does not include, among other things, a working capital, EBITDA, net worth, excess availability, leverage or debt service coverage financial covenant. The Bank Lenders are entitled to require immediate repayment of our obligations under the Credit Facility in the event of default on the payments required under the Credit Facility, non-compliance with the financial covenants or upon the occurrence of certain other defaults by us under the Credit Facility (including a default under the Mortgage Facility). As of September 24, 2009, 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, but see Part II, Item 1A - "Risk Factors". As of September 24, 2009, we had $69.9 million of available credit under the Credit Facility. We would still be in compliance with all restrictive covenants under the Credit Facility if this entire amount were borrowed.
The Mortgage Facility matures on March 1, 2023. Tranche A under the Mortgage Facility accrues interest at a fixed interest rate of 7.63% per annum, payable monthly. Such interest rate may be reset by the Mortgage Lender on March 1, 2018 (the "Tranche A Reset Date"). Monthly principal payments in the amount of $0.2 million commenced on June 1, 2008. Tranche B under the Mortgage Facility accrues interest at a floating rate of one month LIBOR plus 5.50% per annum, payable monthly. The margin on such floating rate may be reset by the Mortgage Lender on March 1, 2010 and every two years thereafter (each, a "Tranche B Reset Date"); provided, however, that the Mortgage Lender may also change the underlying index on each Tranche B Reset Date occurring on or after March 1, 2016. Monthly principal payments in the amount of $0.1 million commenced on June 1, 2008.
On the Tranche A Reset Date and each Tranche B Reset Date, the Mortgage Lender may reset the interest rates for each of Tranche A and Tranche B, respectively, in its sole and absolute discretion. With respect to Tranche A, if we do not accept the reset rate, Tranche A will become due and payable on the Tranche A Reset Date, without prepayment penalty. With respect to Tranche B, if we do not accept the reset rate, Tranche B will be due and payable on the Tranche B Reset Date, without prepayment penalty. There can be no assurance that the reset interest rates for each of Tranche A and Tranche B will be acceptable to us. If the reset interest rate for either Tranche A or Tranche B is unacceptable to us and we (i) do not have sufficient funds to repay amounts due with respect to Tranche A or Tranche B, as applicable, on the Tranche A Reset Date or Tranche B Reset Date, as applicable or (ii) are unable to refinance amounts due with respect to Tranche A or Tranche B, as applicable, on the Tranche A Reset

Table of Contents

Date or Tranche B Reset Date, as applicable, on terms more favorable than the reset interest rates, then such reset interest rates could have an adverse effect on our financial condition, results of operations and financial results. The terms of the Mortgage Facility contain covenants that require us to maintain a specified net worth of $110.0 million and maintain the Encumbered Properties. The Mortgage Facility is secured, in part, by the Original Site. We must obtain the consent of the Mortgage Lender prior to the sale of the Original Site. A portion of the Original Site contains an office building (which we began renting during the third quarter of fiscal 2007) that may or may not be included in any future sale (assuming one were to occur). The Mortgage Facility does not include, among other things, a working capital, EBITDA, excess availability, fixed charge coverage, capital expenditure, leverage or debt service coverage financial covenant. The Mortgage Lender is entitled to require immediate repayment of our obligations under the Mortgage Facility in the event we default in the payments required under the Mortgage Facility, non-compliance with the covenants or upon the occurrence of certain other defaults by us under the Mortgage Facility. As of September 24, 2009, we were in compliance with all covenants under the Mortgage Facility. We currently believe that we will be in compliance with the financial covenant in the Mortgage Facility for the foreseeable future and therefore $30.4 million has been classified as long-term debt as of September 24, 2009, but see Part II, Item 1A - "Risk Factors". This $30.4 million represents scheduled principal payments due under Tranche A beyond . . .