MARZETTI CO 10-K

Item 1. Business GENERAL Lancaster Colony Corporation, an Ohio corporation, is a manufacturer and marketer of specialty food products for the retail and foodservice channels. We began our operations in 1961 as a Delaware corporation. In 1992, we reincorporated as an Ohio corporation. Our principal executive offices are located at 380 Polaris Parkway, Suite 400, Westerville, Ohio 43082 and our telephone number is 614-224-7141. As used in this Annual Report on Form 10-K and except as the context otherwise may require, the terms “we,” “us,” “our,” “registrant,” or “the Company” mean Lancaster Colony Corporation and its consolidated subsidiaries, except where it is clear that the term only means the parent company. Unless otherwise noted, references to “year” pertain to our fiscal year which ends on June 30; for example, 2020 refers to fiscal 2020 , which is the period from July 1, 2019 to June 30, 2020 . Available Information Our Internet website address is http://www.lancastercolony.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The information contained on our website or connected to it is not incorporated into this Annual Report on Form 10-K. The SEC also maintains a website, http://www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. DESCRIPTION OF AND FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. The financial information relating to our business segments for the three years ended June 30, 2020 , 2019 and 2018 is included in Note 10 to the consolidated financial statements, and located in Part II, Item 8 of this Annual Report on Form 10-K. Further description of each business segment within which we operate is provided below. Retail Segment The following table presents the primary Retail products we manufacture and sell under our brand names: Products Brand Names Frozen Breads Frozen garlic breads New York BRAND Bakery Frozen Parkerhouse style yeast rolls and dinner rolls Sister Schubert’s Frozen mini stuffed bagels Bantam Bagels Refrigerated Dressings, Dips and Other Salad dressings Marzetti, Simply Dressed, Simply 60 Vegetable dips and fruit dips Marzetti Flatbread wraps and pizza crusts Flatout Sprouted grain bakery products Angelic Bakehouse Shelf-Stable Dressings and Croutons Salad dressings Marzetti, Tastefully Dressed, Cardini’s, Girard’s Croutons and salad toppings New York BRAND Bakery, Chatham Village, Marzetti We also manufacture and sell other shelf-stable products pursuant to brand license agreements including Olive Garden ® dressings, Buffalo Wild Wings ® sauces and Chick-fil-A ® sauces. Additionally, a small portion of our Retail sales are products sold under private label to retailers. 3 Table of Contents The vast majority of the products we sell in the Retail segment are sold through sales personnel, food brokers and distributors in the United States. We have placement of products in grocery produce departments through our refrigerated salad dressings, vegetable dips and fruit dips. Our flatbread products and sprouted grain bakery products are generally placed in the specialty bakery/deli section of the grocery store. We also have products typically marketed in the shelf-stable section of the grocery store, which include salad dressing, slaw dressing and croutons. Within the frozen food section of the grocery store, we sell yeast rolls, garlic breads and mini stuffed bagels. Our top five Retail customers accounted for 56% , 56% and 55% of this segment’s total net sales in 2020 , 2019 and 2018 , respectively. We continue to rely upon our strong retail brands, innovation expertise, geographic and channel expansion and customer relationships for future growth. Our category-leading retail brands and commitment to new product development help drive increased consumer demand in our Retail segment. Strategic acquisitions are also part of our future growth plans, with a focus on fit and value. Our quarterly Retail sales are affected by seasonal fluctuations, primarily in the fiscal second quarter and the Easter holiday season when sales of certain frozen retail products tend to be most pronounced. Our quarterly Retail sales can also be affected by the timing of seasonal shipments of certain fruit dips between the first and second quarters. The resulting impacts on working capital are not significant. We do not utilize any franchises or concessions. In addition to the owned and licensed trademarked brands discussed above, we also own and operate under innumerable other intellectual property rights, including patents, copyrights, formulas, proprietary trade secrets, technologies, know-how processes and other unregistered rights. We consider our owned and licensed intellectual property rights to be essential to our Retail business. Foodservice Segment The majority of our Foodservice sales are products sold under private label to restaurants. We also manufacture and sell various branded Foodservice products to distributors. The following table presents the primary Foodservice products we manufacture and sell under our brand names: Products Brand Names Dressings and Sauces Salad dressings Marzetti, Simply Dressed Frozen Breads and Other Frozen garlic breads New York BRAND Bakery Frozen Parkerhouse style yeast rolls and dinner rolls Sister Schubert’s Frozen pasta Marzetti Frozen Pasta The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors in the United States. Most of the products we sell in the Foodservice segment are custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls. Finally, within this segment, we sell other roll products under a transitional co-packing arrangement resulting from the November 2018 acquisition of Omni Baking Company LLC. Our top five Foodservice direct customers accounted for 59% , 59% and 64% of this segment’s total net sales in 2020 , 2019 and 2018 , respectively. Within our Foodservice segment, typically our largest direct customers are distributors that distribute our products primarily to foodservice national chain restaurant accounts. In the Foodservice segment, sales growth results from general volume gains or geographic expansion of our established customer base, and we also grow our business with existing and new customers by leveraging our culinary skills and experience to support the development of new products and menu offerings. The operations of this segment are not affected to any material extent by seasonal fluctuations. We do not utilize any franchises or concessions. We own and operate under innumerable intellectual property rights, including patents, copyrights, formulas, proprietary trade secrets, technologies, know-how processes and other unregistered rights. We consider our owned intellectual property rights to be essential to our Foodservice business. 4 Table of Contents NET SALES BY CLASS OF PRODUCTS The following table sets forth business segment information with respect to the percentage of net sales contributed by each class of similar products that account for at least 10% of our consolidated net sales in any year from 2018 through 2020 : 2020 2019 2018 Retail Segment: Frozen breads 22% 20% 21% Refrigerated dressings, dips and other 16% 17% 18% Shelf-stable dressings and croutons 16% 13% 14% Foodservice Segment: Dressings and sauces 33% 36% 35% Frozen breads and other 12% 13% 12% Net sales attributable to Walmart Inc. (“Walmart”) totaled 18% , 17% and 17% of consolidated net sales for 2020 , 2019 and 2018 , respectively. Net sales attributable to McLane Company, Inc. (“McLane”), a wholesale distribution subsidiary of Berkshire Hathaway, Inc., totaled 13% , 15% and 15% of consolidated net sales for 2020 , 2019 and 2018 , respectively. McLane is a large, national distributor that sells and distributes our products to several of our foodservice national chain restaurant accounts, principally in the quick service, fast casual and casual dining channels. In general, these national chain restaurants have direct relationships with us for culinary research and development, menu development and production needs, but choose to buy our products through McLane, who acts as their distributor. McLane orders our products on behalf of these national chain restaurants, and we invoice McLane for these sales. No other direct customer accounted for more than 10% of consolidated net sales during these years. MANUFACTURING As of June 30, 2020 , the majority of our products were manufactured and packaged at our 16 food plants located throughout the United States. Most of these plants produce products for both the Retail and Foodservice segments. Efficient and cost-effective production remains a key focus as evidenced by our lean six sigma initiative. Certain items are also manufactured and packaged by third parties located in the United States, Canada and Europe. BACKLOG Orders are generally filled in five to ten days. We do not view the amount of backlog at any particular point in time as a meaningful indicator of longer-term shipments. COMPETITION All of the markets in which we sell food products are highly competitive in the areas of price, quality and customer service. We face competition from a number of manufacturers of various sizes and capabilities. Our ability to compete depends upon a variety of factors, including the position of our branded goods within various categories, product quality, product innovation, promotional and marketing activity, pricing and our ability to service customers. ENVIRONMENTAL MATTERS Our operations are subject to various federal, state and local environmental protection laws. Based upon available information, compliance with these laws and regulations did not have a material effect upon the level of capital expenditures, earnings or our competitive position in 2020 and is not expected to have a material impact in 2021 . EMPLOYEES AND LABOR RELATIONS As of June 30, 2020 we had 3,200 employees, 25% of which are represented under various collective bargaining contracts. 6% of our employees are represented under a collective bargaining contract that will expire within one year. While we believe that labor relations with all our employees are satisfactory, a prolonged labor dispute or an organizing attempt could have a material adverse effect on our business and results of operations. RAW MATERIALS During 2020 , we obtained adequate supplies of raw materials and packaging. We rely on a variety of raw materials and packaging for the day-to-day production of our products, including soybean oil, various sweeteners, eggs, dairy-related products, flour, various films and plastic and paper packaging materials. 5 Table of Contents We purchase the majority of these materials on the open market to meet current requirements, but we also have some fixed-price contracts with terms generally one year or less. See further discussion in our “Risk Factors” section below and our contractual obligations disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). Although the availability and price of certain of these materials are influenced by weather, disease and the level of global demand, we anticipate that future sources of supply for 2021 will generally be available and adequate for our needs.