# SANFILIPPO JOHN B & SON INC (JBSS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SANFILIPPO JOHN B & SON INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/880117/000119312521250438/d201943d10k.htm
Accession: 0001193125-21-250438
Filing date: 2021-08-18
Report date: 2021-06-24
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/
Next year: /company/JBSS/mda/fy2022/ (FY 2022)

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 2021 to fiscal 2020 and from fiscal 2020 to fiscal 2019.

[[GREPCENT_TABLE]]
[["","","Percentage of Net Sales","","","Percentage Change"],["","","Fiscal 2021","","","Fiscal 2020","","","Fiscal 2019","","","Fiscal 2021 vs. 2020","","","Fiscal 2020 vs. 2019"],["Net sales","","","100.0","%","","","100.0","%","","","100.0","%","","","(2.5",")%","","","0.4","%"],["Gross profit","","","21.5","","","","20.0","","","","18.1","","","","5.2","","","","11.1"],["Selling expenses","","","7.3","","","","6.7","","","","7.1","","","","6.3","","","","(4.0",")"],["Administrative expenses","","","4.3","","","","4.3","","","","4.3","","","","(3.0",")","","","(0.2",")"]]
[[/GREPCENT_TABLE]]

Fiscal 2021 Compared to Fiscal 2020

Net Sales

Our net sales decreased 2.5% to $858.5 million for fiscal 2021 from $880.1 million for fiscal 2020. The decrease in net sales was primarily due to a 4.0% decline in the weighted average selling price per pound, which was attributable to lower selling prices for tree nuts as a result of lower commodity acquisition costs. The decline in the weighted average selling price per pound was partially offset by a 1.6% increase in sales volume, which is defined as pounds sold to customers.

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 2021","","","Fiscal 2020"],["Peanuts","","","19.3","%","","","18.2","%"],["Pecans","","","10.0","","","","10.3"],["Cashews & Mixed Nuts","","","23.3","","","","23.2"],["Walnuts","","","6.2","","","","7.2"],["Almonds","","","10.8","","","","14.7"],["Trail & Snack Mixes","","","24.7","","","","21.1"],["Other","","","5.7","","","","5.3"],["Total","","","100.0","%","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["Distribution Channel","","Fiscal 2021","","","Fiscal 2021 Percent of Total","","","Fiscal 2020","","","Fiscal 2020 Percent of Total","","","$ Change","","","Fiscal 2021 to Fiscal 2020 Percent Change"],["Consumer (1)","","$","686,049","","","","79.9","%","","$","673,989","","","","76.6","%","","$","12,060","","","","1.8","%"],["Commercial Ingredients","","","92,911","","","","10.8","","","","118,464","","","","13.5","","","","(25,553",")","","","(21.6",")"],["Contract Packaging","","","79,522","","","","9.3","","","","87,639","","","","9.9","","","","(8,117",")","","","(9.3",")"],["Total","","$","858,482","","","","100.0","%","","$","880,092","","","","100.0","%","","$","(21,610",")","","","(2.5",")%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Sales of branded products were approximately 24% and 27% of total consumer channel sales during fiscal 2021 and 2020, respectively. Fisher branded products were approximately 66% and 68% of branded sales during fiscal 2021 and 2020 respectively, with Orchard Valley Harvest branded products accounting for the majority of the remaining branded product sales."]]
[[/GREPCENT_TABLE]]

Net sales in the consumer distribution channel increased 1.8% in dollars and 6.4% in sales volume in fiscal 2021 compared to fiscal 2020. The sales volume increase was driven by an 9.0% increase in sales volume for private brand products, specifically trail mixes, snack mixes and snack nuts, from new distribution at existing customers, a shift in consumer preferences to lower priced private brand products and growth in snacking as many consumers continue to purchase food for consumption at home. Sales volume for

Fisher

snack nuts increased 12.0% due to increased promotional activity and increased sales of inshell peanuts to a major customer in preparation for our discontinuance of that product line. Sales volume of

Fisher

recipe nuts decreased 19.4% from lost distribution at three customers. Sales volume

of

Orchard Valley Harvest

products decreased 10.3% due to lost distribution at two customers. Sales volume of

Southern Style Nuts

decreased 7.7% due to the discontinuance of an item at a major customer and a reduction in merchandising and promotional activity, which was offset in part by distribution gains with new customers.

Net sales in the commercial ingredients distribution channel decreased 21.6% in dollars and 13.9% in sales volume compared to fiscal 2020. The decrease in sales volume was primarily due to a 13.6% decrease in sales volume in our foodservice business and a decline in sales of peanut crushing stock to peanut oil processors. The sales volume decline in our foodservice business, despite the 117.1% increase in fourth quarter sales volume, resulted from a decline in air travel and nationwide restrictions on indoor restaurant dining, which were attributable to
COVID-19.

Net sales in the contract packaging distribution channel decreased 9.3% in dollars and 8.2% in sales volume in fiscal 2021 compared to fiscal 2020. The decline in sales volume was primarily attributable to the unfavorable impact of lower convenience store foot traffic on one customer’s business as a result of
COVID-19.

Gross Profit

Gross profit increased 5.2% to $185.0 million in fiscal 2021 from $175.8 million in fiscal 2020. Our gross profit margin, as a percentage of sales, increased to 21.5% for fiscal 2021 from 20.0% for fiscal 2020. The increases in gross profit and gross profit margin were mainly attributable to lower commodity acquisition costs for all major tree nuts and increased sales volume.

Operating Expenses

Total operating expenses for fiscal 2021 increased $2.6 million to $99.8 million. Operating expenses as a percent of net sales were 11.6% for fiscal 2021 and 11.0% for fiscal 2020. Operating expenses as a percent of net sales increased in fiscal 2021 as a result of a lower net sales base and an increase in total operating expenses. The increase in total operating expenses was mainly due to increases in freight, research and consulting, and compensation related expenses, which were partially offset by an increase in the gain on asset disposals and decreases in advertising and travel expenses.

Selling expenses for fiscal 2021 were $63.0 million, an increase of $3.7 million, or 6.3%, over the amount recorded for fiscal 2020. The increase was primarily driven by a $4.2 million increase in freight expense due to significantly higher freight rates compared to fiscal 2020 and, to a lesser extent, an increase in sales volume for our sales made on a delivered basis to customers, and a $1.1 million increase in consumer insight research and related consulting expense. These increases were partially offset by a $1.3 million decrease in advertising expense primarily due to less radio advertising and a $0.4 million decrease in travel expense due to
COVID-19
travel restrictions.

Administrative expenses for fiscal 2021 were $36.8 million, a decrease of $1.1 million, or 3.0%, from the amount recorded for fiscal 2020. The decrease was due to a $1.9 million increase in the gain on asset disposals, mainly resulting from a $2.3 million gain from the final insurance recovery recognized in the second quarter of fiscal 2021 for the Garysburg facility fire. This decrease was partially offset by a $0.6 million increase in compensation related expenses.

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Income from Operations

Due to the factors discussed above, income from operations was $85.2 million, or 9.9% of net sales, for fiscal 2021, compared to $78.5 million, or 8.9% of net sales, for fiscal 2020.

Interest Expense

Interest expense was $1.4 million for fiscal 2021 compared to $2.0 million for fiscal 2020. The decrease in interest expense was due to lower average debt levels.

Rental and Miscellaneous Expense, Net

Net rental and miscellaneous expense was $1.4 million for fiscal 2021 compared to $1.6 million for fiscal 2020. The decrease during fiscal 2021 was due to less repair and maintenance expense.

Other Expense

Other expense consists of pension related expenses other than the service cost component and was $2.5 million and $2.3 million for fiscal 2021 and fiscal 2020, respectively.

Income Tax Expense

Income tax expense was $20.1 million, or 25.2% of income before income taxes, for fiscal 2021 compared to $18.6 million, or 25.6% of income before income taxes, for fiscal 2020.

Net Income

Net income was $59.7 million, or $5.19 basic and $5.17 diluted per common share, for fiscal 2021, compared to $54.1 million, or $4.72 basic and $4.69 diluted per common share, for fiscal 2020, due to the factors discussed above.

Fiscal 2020 Compared to Fiscal 2019

The discussion of our results of operations for the fiscal year ended June 25, 2020 compared to the fiscal year ended June 27, 2019 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 25, 2020 and such discussion is incorporated by reference herein.

Liquidity and Capital Resources

General

The primary uses of cash are to fund our current operations, fulfill contractual obligations, pursue our Strategic Plan through growing our branded and private label nut programs and repay indebtedness. Also, various uncertainties could result in additional uses of cash. The primary sources of cash are results of operations and availability under our Credit 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. See Part I, Item 1A — “Risk Factors” above. Our available credit under our Credit Facility has allowed us to devote more funds to promote our products, increase our consumer insight capabilities and efforts, consummate strategic investments and 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 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.

28

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

[[GREPCENT_TABLE]]
[["","","June 24, 2021","","","June 25, 2020","","","2021 to 2020 $ Change"],["Operating activities","","$","104,697","","","$","63,613","","","$","41,084"],["Investing activities","","","(22,950",")","","","(14,049",")","","","(8,901",")"],["Financing activities","","","(82,610",")","","","(49,620",")","","","(32,990",")"],["Total change in cash","","$","(863",")","","$","(56",")","","$","(807",")"]]
[[/GREPCENT_TABLE]]

Operating Activities.

Net cash provided by operating activities was $104.7 million in fiscal 2021, an increase of $41.1 million compared to fiscal 2020. The increase in operating cash flow was due to a decreased use of working capital for inventory, combined with a $5.6 million increase in net income driven by lower commodity acquisition costs for all major tree nuts compared to fiscal 2020. Inventories decreased $24.1 million in fiscal 2021 compared to a $15.0 million increase in inventories in fiscal 2020 which resulted in a net favorable change in cash of $39.1 million.

Total inventories were $148.0 million at June 24, 2021, a decrease of $24.1 million, or 14.0%, from the inventory balance at June 25, 2020. The decrease was primarily due to lower commodity acquisition costs for all major tree nuts and decreased quantities of peanuts, pecans and finished goods on hand, which was partially offset by increased quantities of walnuts on hand.

Raw nut and dried fruit input stocks, some of which are classified as work in process, decreased 8.6 million pounds, or 15.3%, at June 24, 2021 compared to June 25, 2020. The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of fiscal 2021 fell by 11.9% compared to the end of fiscal 2020, primarily due to lower commodity acquisition costs for all major tree nuts.

Investing Activities.

Cash used in investing activities was $23.0 million in fiscal 2021. Capital expenditures accounted for a $25.2 million use of cash in fiscal 2021, which was offset in part by $2.5 million of proceeds from insurance recoveries related to a fire in our Garysburg, North Carolina facility.

Cash used in investing activities was $14.0 million in fiscal 2020. Capital expenditures accounted for a $15.0 million use of cash in fiscal 2020, which was offset in part by $1.1 million of proceeds from insurance recoveries related to the fire noted above.

We expect total capital expenditures for equipment purchases and upgrades, facility maintenance and food safety enhancements for fiscal 2022 to be approximately $18.0 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 capital expenditures.

Financing Activities.

Cash used in financing activities was $82.6 million during fiscal 2021. We paid dividends totaling $57.5 million in fiscal 2021. We repaid $5.3 million of long-term debt during fiscal 2021, $3.1 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 $18.4 million during fiscal 2021 which occurred, in part, as a result of the decrease in inventory.

Cash used in financing activities was $49.6 million during fiscal 2020. We paid dividends totaling $68.7 million in fiscal 2020. We repaid $7.7 million of long-term debt during fiscal 2020, $3.0 million of which was related to the Mortgage Facility. There was a net increase in borrowings outstanding under our Credit Facility of $27.0 million during fiscal 2020 which occurred, in part, as a result of the increase in inventory.

Financing Arrangements

On February 7, 2008, we entered into the Former Credit Agreement (as defined below) with a bank group (the “Bank Lenders”) providing a $117.5 million revolving loan commitment and letter of credit subfacility. Also on February 7, 2008, we entered into a Loan Agreement with an insurance company (the “Mortgage Lender”) providing us with two term loans, one in the amount of $36.0 million (“Tranche A”) and the other in the amount of $9.0 million (“Tranche B”), for an aggregate amount of $45.0 million (the “Mortgage Facility”).

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Credit Facility

On March 5, 2020, we entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) which amended and restated our Credit Agreement dated as of February 7, 2008 (the “Former Credit Agreement”). The Amended and Restated Credit Agreement provides for a $117.5 million senior secured revolving credit facility with the same borrowing capacity, interest rates and applicable margin as the Former Credit Agreement and extends the term of the Former Credit Agreement from July 7, 2021 to March 5, 2025.

The Amended and Restated Credit Facility is secured by substantially all of our assets other than machinery and equipment, real property and fixtures and matures on March 5, 2025. The Mortgage Facility is secured by mortgages on essentially all of our owned real property located in Elgin, Illinois and Gustine, California (the “Encumbered Properties”).

At June 24, 2021, the interest rate for the Credit Facility was at the Base Rate of 3.5%. There were no borrowings under LIBOR contracts due to the low borrowing levels against the Credit Facility and projected positive cash flow for July. The terms of the Credit Facility contain covenants that, among other things, require us to restrict investments, indebtedness, acquisitions and certain sales of assets and limit annual cash dividends or distributions, transactions with affiliates, redemptions of capital stock and prepayment of indebtedness (if such prepayment, among other things, is of a subordinate debt). If loan availability under the borrowing base calculation falls below $25.0 million, we will be required to maintain a specified fixed charge coverage ratio, tested on a monthly basis, until loan availability equals or exceeds $25.0 million for three consecutive months. All cash received from customers is required to be applied against the Credit Facility. The Bank Lenders have the option to accelerate and demand immediate repayment of our obligations under the Credit Facility in the event of default on the payments required under the Credit Facility, a change in control in the ownership of the Company,
non-compliance
with the financial covenant or upon the occurrence of other defaults by us under the Credit Facility (including a default under the Mortgage Facility). As of June 24, 2021, 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 24, 2021, we had $104.6 million of available credit under the Credit Facility. If this entire amount were borrowed at June 24, 2021, we would still be in compliance with all restrictive covenants under the Credit Facility.

Mortgage Facility

The Mortgage Facility matures on March 1, 2023. On March 1, 2018 the interest rate on the Mortgage Facility was fixed at 4.25% per annum. Monthly principal payments on the Mortgage Facility in the amount of $0.3 million commenced on June 1, 2008.

The terms of the Mortgage Facility contain covenants that require us to maintain a specified net worth of $110.0 million and maintain the Encumbered Properties. The Mortgage Lender is entitled to require immediate repayment of our obligations under the Mortgage Facility in the event we default in the payments required under the Mortgage Facility,
non-compliance
with the covenants or upon the occurrence of certain other defaults by us under the Mortgage Facility. As of June 24, 2021, we were in compliance with all covenants under the Mortgage Facility and a total principal amount of $5.8 million was outstanding.

Selma Property

In September 2006, we sold our Selma, Texas properties (the “Selma Properties”) to two related party partnerships for $14.3 million and are leasing them back. The selling price was determined by an independent appraiser to be the fair market value which also approximated our carrying value. The 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. The lease for the Selma Properties had an initial
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, and the payments are reassessed at the end of each five-year renewal option. The monthly payments will increase, beginning in September 2021, based on the change in the consumer price index in accordance with the lease. One five-year renewal option remains. Also, we have an option to purchase the Selma Properties from the lessor at 95% (100% in certain circumstances) of the then fair market value, but not less than the original $14.3 million purchase price. At June 24, 2021, $8.9 million of the debt obligation was outstanding.

Squirrel Brand Seller-Financed Note

In November 2017 we completed the

Squirrel Brand

acquisition. The Acquisition was financed by a combination of cash (drawn under the Credit Facility) and a three-year seller-financed note of $11.5 million, which was repaid in full during the second quarter of fiscal 2021.

30

Off-Balance
Sheet Arrangements

As of June 24, 2021, we were not involved in any
off-balance
sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K
promulgated by the SEC.

Contractual Cash Obligations

At June 24, 2021, we had the following contractual cash obligations for long-term debt (including scheduled interest payments), operating leases, the Credit Facility, purchase obligations, retirement plans and other long-term liabilities (amounts in this subsection in thousands):

[[GREPCENT_TABLE]]
[["","","Total","","","Less Than 1 Year","","","1-3 Years","","","3-5 Years","","","More Than 5 Years"],["Long-term debt obligations (1)","","$","19,831","","","$","4,793","","","$","5,312","","","$","2,727","","","$","6,999"],["Minimum operating lease commitments","","","3,739","","","","1,545","","","","1,865","","","","325","","","","4"],["Revolving credit facility borrowings","","","8,653","","","","8,653","","","","\u2014","","","","\u2014","","","","\u2014"],["Purchase obligations (2)","","","240,492","","","","240,492","","","","\u2014","","","","\u2014","","","","\u2014"],["Retirement plans (3)","","","35,628","","","","709","","","","1,465","","","","2,775","","","","30,679"],["Other","","","284","","","","94","","","","98","","","","52","","","","40"],["Total contractual cash obligations","","$","308,627","","","$","256,286","","","$","8,740","","","$","5,879","","","$","37,722"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","See Note 7 \u2014 \u201cLong-Term Debt\u201d of the Notes to Consolidated Financial Statements for further detail on the Company\u2019s long-term debt obligations."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","The purchase obligations primarily represent inventory purchase commitments; however, these amounts exclude purchase commitments under walnut purchase agreements due to the uncertainty of pricing and quantity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Represents projected retirement obligations. See Note 13 \u2014 \u201cEmployee Benefit Plans\u201d and Note 14 \u2014 \u201cRetirement Plan\u201d of the Notes to Consolidated Financial Statements for further details."]]
[[/GREPCENT_TABLE]]

31

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The accounting policies as disclosed in the Notes to Consolidated Financial Statements are applied in the preparation of our financial statements and accounting for the underlying transactions and balances. The policies discussed below are considered by our management to be critical for an understanding of our financial statements because the application of these policies places the most significant demands on management’s judgment, with financial reporting results relying on estimation regarding the effect of matters that are inherently uncertain. Specific risks, if applicable, for these critical accounting policies are described in the following paragraphs. For a detailed discussion on the application of these and other accounting policies, see Note 1 — “Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

Preparation of this Annual Report on Form
10-K
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. See “Forward-Looking Statements” below.

Revenue Recognition

The Company records revenue based on a five-step model in accordance with Accounting Standards Codification (“ASC”) Topic 606. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services. We sell our products under some arrangements which include customer contracts that fix the sales price for periods, which typically can be up to one year for some commercial ingredient customers. We also sell our products through specific programs consisting of promotion allowances, volume and customer rebates and marketing allowances, among others, to consumer and some commercial ingredient users. We recognize revenue as performance obligations are fulfilled, which occurs when control passes to our customers. We report all amounts billed to a customer in a sale transaction as revenue, including those amounts related to shipping and handling. We reduce revenue for estimated promotion allowances, volume and customer rebates and marketing allowances, among others. These reductions in revenue are considered variable consideration and are recorded in the same period the related sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. See Note 2 — “Revenue Recognition” below for additional information on revenue recognition.

Impairment of Long-Lived Assets

We review held and used long-lived assets, including our rental investment property and amortizable identifiable intangible assets (e.g., customer relationships and brand names), to assess recoverability from projected undiscounted cash flows whenever events or changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates there is an impairment, the carrying value of the asset is reduced to its estimated fair value. We also evaluate the amortization periods assigned to our intangible assets to determine whether events or changes in circumstances require a revised estimate of useful lives. We did not record any impairment of long-lived assets or amortizable identifiable intangible assets in any of the last three fiscal years.

Goodwill

Goodwill is not amortized, but is tested annually for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, adverse changes in the markets in which we operate, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.

In testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of our single reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform a quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.

32

Under the goodwill qualitative assessment, various events and circumstances that would affect the estimated fair value of our single reporting unit are identified (similar to impairment indicators above).

Under the goodwill quantitative impairment test, the evaluation of impairment involves comparing the current fair value of our single reporting unit to its carrying value, including goodwill. We estimate the fair value using level 3 inputs as defined by the fair value hierarchy. The inputs used to estimate fair value include several subjective factors, such as estimates of future cash flows, estimates of our future cost structure, discount rates for our estimated cash flows, required level of working capital, assumed terminal value, and time horizon of cash flow forecasts. Our market capitalization is also an estimate of fair value that is considered in our qualitative impairment analysis which is a level 1 input in the fair value hierarchy. If the carrying value of our single reporting unit exceeds its fair value, we recognize an impairment loss equal to the difference between the carrying value and estimated fair value.

Retirement Plan

In order to measure the annual expense and calculate the liability associated with our retirement plan, management must make a variety of estimates including, but not limited to, discount rates, compensation increases and anticipated mortality rates. The estimates used by management are based on our historical experience as well as current facts and circumstances. We use a third-party specialist to assist management in appropriately measuring the expense associated with this employment-related benefit. Different estimates used by management could result in us recognizing different amounts of expense over different periods of time.

We recognize net actuarial gains or losses in excess of 10% of the plan’s projected benefit obligation into current period expense over the average remaining expected service period of active participants.

The most significant assumption for pension plan accounting is the discount rate. We select a discount rate each year (as of our fiscal
year-end
measurement date) for our plan based upon a hypothetical corporate bond portfolio for which the cash flows match the
year-by-year
projected benefit cash flows for our pension plan. The hypothetical bond portfolio is comprised of high-quality fixed income debt securities (usually Moody’s Aa3 or higher) available at the measurement date. Based on this information, the discount rate selected by us for determination of pension expense was 2.69% for fiscal 2021, 3.56% for fiscal 2020, and 4.14% for fiscal 2019. A
25-basis
point increase or decrease in our discount rate assumption for fiscal 2021 would have resulted in an immaterial change in our pension expense for fiscal 2021. For our
year-end
pension obligation determination, we selected discount rates of 2.89% and 2.69% for fiscal years 2021 and 2020, respectively.

33

Recent Accounting Pronouncements

Refer to Note 1 — “Significant Accounting Policies” of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Forward-Looking Statements

The statements contained in this Annual Report on Form
10-K,
and in the Chief Executive Officer’s letter to stockholders accompanying the Annual Report on Form
10-K
delivered to stockholders, that are not historical (including statements concerning our expectations regarding market risk) are “forward-looking statements.” These forward-looking statements may be followed (and therefore identified) by a cross reference to Part I, Item 1A — “Risk Factors” or may be otherwise identified by the use of forward-looking words and phrases such as “will”, “anticipates”, “intends”, “may”, “believes”, “should” and “expects”, and they are based on our current expectations or beliefs concerning future events and involve risks and uncertainties. We undertake no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events or other factors that affect the subject of these statements, except where expressly required to do so by law. We caution that such statements are qualified by important factors, including the factors described in Part I, Item 1A — “Risk Factors” and other factors, risks and uncertainties that are beyond our control, that could cause results to differ materially from our current expectations and/or those in the forward-looking statements, as well as the timing and occurrence (or nonoccurrence) of transactions and other factors, risk, uncertainties and events which may be subject to circumstances beyond our control. Consequently, results actually achieved may differ materially from the expected results included in these statements.