What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-08-26 compared with 2020-08-27 · 170 added, 138 removed, 191 unchanged (62% of the section changed)

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Our discussion of results for 2021 compared to 2020 is included herein.

For discussion of results for 2019 compared to 2018 , see our 2019 Annual Report on Form 10-K.

For discussion of results for 2020 compared to 2019, see our 2020 Annual Report on Form 10-K except as included herein for operating results by segment.

Business Overview

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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.

Our Chief Operating Decision Maker (“CODM”), in order to drive enhanced accountability and transparency throughout our organization, initiated a review of functional costs that have historically been part of the indirect costs allocated to our two reportable segments.

This review was completed as part of our preparation for our upcoming enterprise resource planning system (“ERP”) implementation.

As a result of this review, our CODM identified certain support functions that would be more appropriately presented within corporate expenses to facilitate the management of the business, including assessing segment performance and allocating resources.

These changes were effective July 1, 2020.

All historical information has been retroactively conformed to the current presentation.

These changes had no effect on previously reported consolidated net sales, gross profit, operating income, net income or earnings per share.

As a result of these changes to historical information by segment, a discussion of segment results for 2020 compared to 2019 is provided in the “Results of Operations - Segments” section below.

Over 95% of our products are sold in the United States.

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With respect to long-term growth, we continually evaluate the future opportunities and needs for our business specific to our plant infrastructure, IT platforms and other initiatives to support and strengthen our operations.

Recent examples of resulting investments include a significant capacity expansion project for our Sister Schubert’s frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020;

Recent examples of resulting investments include:

• a significant capacity expansion project for our Marzetti dressing and sauce facility in Horse Cave, Kentucky that we expect to complete in the first quarter of fiscal 2023;

• a capacity expansion project for one of our Marzetti dressing and sauce facilities in Columbus, Ohio that we expect to complete in the second quarter of fiscal 2022;

• a significant infrastructure improvement and capacity expansion project for our frozen pasta facility in Altoona, Iowa that we expect to complete during the first half of fiscal 2022;

• a significant capacity expansion project for our Sister Schubert’s frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020;

• a new R&D center that was completed near the end of 2019;

and the establishment of a Transformation Program Office in 2019 that will serve to coordinate our various capital and integration efforts, including our enterprise resource planning system (“ERP”) project and related initiatives, Project Ascent, that is now underway.

The ERP implementation commenced in late 2019 and entails the replacement of our primary customer and manufacturing transactional systems, warehousing systems, and financial systems with an integrated SAP S/4HANA system.

• the establishment of a Transformation Program Office in 2019 that serves to coordinate our various capital and integration efforts, including our ERP project and related initiatives, Project Ascent, that is currently underway.

Project Ascent commenced in late 2019 and entails the replacement of our primary customer and manufacturing transactional systems, warehousing systems, and financial systems with an integrated SAP S/4HANA system.

Post implementation, Project Ascent will evolve into an on-going Center of Excellence (“COE”) that will provide oversight for all future upgrades of the S/4HANA environment, evaluation of future software needs to support the business, acquisition integration support and master data standards.

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Consistent with this acquisition strategy, on November 16, 2018, we acquired, using available cash on hand, substantially all of the assets of Omni Baking Company LLC (“Omni”), a long-time supplier of products to our frozen garlic bread operations.

On October 19, 2018, we acquired, using available cash on hand, all the assets of Bantam Bagels, LLC (“Bantam”), a producer and marketer of

frozen mini stuffed bagels and other frozen bread products sold to both the retail and foodservice channels.

On October 19, 2018, we acquired, using available cash on hand, all the assets of Bantam Bagels, LLC (“Bantam”), a producer and marketer of frozen mini stuffed bagels and other frozen bread products sold to both the retail and foodservice channels.

See further discussion of these acquisitions in Note 2 to the consolidated financial statements.

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On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic.

To date, COVID-19 has surfaced in nearly all regions around the world and resulted in business slowdowns or shutdowns in affected areas.

COVID-19 has surfaced in all regions around the world and resulted in business slowdowns or shutdowns.

In the U.S., state and local governments recommended or mandated actions to slow the transmission of COVID-19.

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to continue to play our part in the vital food supply chain by adequately supplying our customers while maintaining the financial strength of our business.

With respect to our efforts to ensure the health, safety and welfare of our employees, we are complying with all guidelines issued by the Centers for Disease Control and Prevention as well as state and local health departments.

We have also engaged a pulmonology and critical care physician to advise us on our employee safety protocols.

Based on the advice of these experts, we have put in place a range of safety modifications and guidelines in our factories, distribution centers and offices to ensure that we can operate safely, including but not limited to:

engaging a third party to conduct employee temperature checks prior to entering our production facilities;

conducting extensive cleaning and sanitation of workstations and common areas before, during, and after each shift;

employing social distancing guidelines and modifications at workspaces and in break areas;

staggering between shift changes and breaks;

relaxing attendance requirements and enhancing our paid leave policy;

implementing quarantine protocols in the event of confirmed or suspected cases of COVID-19;

providing a $300 bonus for each of our front-line employees in late March and temporarily increasing the wage rate for our hourly front-line employees by $2 per hour beginning in April;

establishing business travel restrictions;

working from home whenever possible, consistent with the applicable stay-at-home order.

With respect to our efforts to ensure the health, safety and welfare of our employees, we continue to monitor the latest guidance from authorities, including the Centers for Disease Control and Prevention and other federal, state and local public health departments, regarding COVID-19 and adopt the appropriate measures to ensure we continue to operate safely and support our employees.

We also engaged a pulmonology and critical care physician to advise us on our employee safety protocols.

Based on the advice of these experts and our commitment to the health, safety and welfare of our employees, we implemented some policy changes and put in place a range of safety modifications and guidelines in our factories, distribution centers and offices, including but not limited to:

• conducted extensive cleaning and sanitation of workstations and common areas before, during, and after each shift;

• employed social distancing guidelines and modifications at workspaces and in break areas;

• staggered the timing of shift changes and breaks;

• relaxed attendance requirements and enhanced our paid leave policy;

• provided every employee an extra vacation day in 2021 to allow flexibility with scheduling COVID-19 vaccination appointments.

After 16 months and once the vaccine became broadly available, we discontinued our temporary incentive pay compensation (“hero pay”) to our front-line employees at the end of fiscal 2021.

With respect to our second priority, as of the date of this filing, there has been no material adverse change in our ability to manufacture and distribute our products.

We have not experienced any significant disruptions to our shipping or warehousing operations or sourcing of raw materials.

We have also secured additional second-sourcing options as needed to help limit the risk of supply disruptions.

We continue to monitor the COVID-19 situation and related guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our plans.

As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future.

However, COVID-19 could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to higher-than-normal inventory levels, revised payment terms with certain of our customers, additional reserves for inventory and receivables, and higher plant operating costs.

During the three months ended June 30, 2020, the effects of COVID-19 and the related actions undertaken in the U.S.

to attempt to control its spread, specifically the restriction of restaurant dine-in purchases and imposition of stay-at-home orders, negatively impacted the operating results of our Foodservice segment.

Our Foodservice segment net sales for the fourth quarter declined 24% to $128.4 million while segment operating income fell 45% to $10.1 million .

After a very slow start in April, consumer demand at quick-service restaurants made a strong recovery in May and June, and sales for other restaurants also improved notably throughout the quarter.

With respect to our Retail segment, the impact of COVID-19 resulted in higher sales during the three months ended June 30, 2020 as consumer demand in the retail channel remained elevated.

We continue to operate from a position of financial strength and believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to our access to capital under our unsecured revolving credit facility, should be adequate to meet our liquidity needs over the next 12 months.

We have placed a greater emphasis on tracking the financial strength of our customers and suppliers and taking actions, where determined necessary, to limit our financial exposure and operational risks.

Additional details regarding our financial strength are provided in the “Financial Condition” section below.

We have also secured additional second-sourcing options to help limit the risk of supply disruptions.

The effects of COVID-19, including changes in consumer purchasing habits and actions undertaken in the U.S.

to attempt to control the spread of COVID-19, most notably the restriction of restaurant dine-in purchases, negatively impacted the operating results of our Foodservice segment, particularly in the first half of fiscal 2021.

Foodservice segment sales rebounded

in the second half of fiscal 2021 on increased consumer demand, as dine-in restrictions were lifted and COVID-19 cases declined.

With respect to our Retail segment, the impact of COVID-19 contributed to higher sales during the year ended June 30, 2021 as consumer demand in the retail channel was elevated due to increased at-home food consumption.

RESULTS OF CONSOLIDATED OPERATIONS

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except per share data)

Years Ended June 30,

Years Ended June 30, Change

2021 2020 2019 2021 vs.

2020 2020 vs.

Net Sales $ 1,467,067 $ 1,334,388 $ 1,307,787 $ 132,679 10 % $ 26,601 2 %

Cost of Sales 1,080,344 976,352 981,589 103,992 11 % (5,237) (1) %

Gross Profit 386,723 358,036 326,198 28,687 8 % 31,838 10 %

Gross Margin 26.4 % 26.8 % 24.9 %

Selling, General and Administrative Expenses 205,363 180,945 149,811 24,418 13 % 31,134 21 %

Change in Contingent Consideration

Change in Contingent Consideration (5,687) 257 (16,180) (5,944) N/M 16,437 (102) %

Restructuring and Impairment Charges 1,195 886 1,643 309 35 % (757) (46) %

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Operating Margin 12.7 % 13.2 % 14.6 %

Other, Net (107) 3,129 4,618 (3,236) (103) % (1,489) (32) %

Income Before Income Taxes 185,745 179,077 195,542 6,668 4 % (16,465) (8) %

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Effective Tax Rate 23.4 % 23.5 % 23.0 %

Net Income $ 142,332 $ 136,983 $ 150,549 $ 5,349 4 % $ (13,566) (9) %

Diluted Net Income Per Common Share $ 5.16 $ 4.97 $ 5.46 $ 0.19 4 % $ (0.49) (9) %

Consolidated net sales for the year ended June 30, 2021 increased 10% to a new record of $1,467 million from the prior-year record total of $1,334 million.

This growth was driven by an increase in Retail net sales, particularly in the second half of the year, partially offset by a decline in Foodservice net sales.

This growth was driven by higher net sales for both the Retail and Foodservice segments.

Excluding all sales attributed to a temporary supply agreement resulting from the November 2018 acquisition of Omni, consolidated net sales for the year ended June 30, 2021 increased 12%.

The relative proportion of sales contributed by each of our business segments can impact a year-to-year comparison of the consolidated statements of income.

The following table summarizes the sales mix over each of the last three years:

2021 2020 2019

Segment Sales Mix:

Retail 57% 54% 50%

Foodservice 43% 46% 50%

See discussion of net sales by segment following the discussion of “Earnings Per Share” below.

Consolidated gross profit increased 10% to $358.0 million in 2020 compared to $326.2 million in 2019 driven by the higher sales volumes in Retail, our cost savings programs, including continued contributions from our strategic procurement and transportation management initiatives, improved net price realization and lower commodity costs.

Offsets to gross profit growth included higher manufacturing costs and other expenses resulting from the impacts of COVID-19.

Consolidated gross profit increased 8% to $386.7 million in 2021 compared to $358.0 million in 2020 driven by the strong sales growth, a more favorable sales mix, inflationary Foodservice pricing, our ongoing cost savings programs, a lower level of Retail trade spending and lower employee benefit costs, partially offset by higher manufacturing costs, commodity cost inflation and higher freight costs.

Manufacturing costs in the current year continued to reflect the impacts of COVID-19, including hero pay for our front-line employees, higher costs incurred to service the shifts and surges in demand for our products, increased expenditures for personal protective equipment and lower operating efficiencies.

The hero pay program was discontinued at the end of fiscal 2021.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased 13% to $205.4 million in 2021 as expenditures for Project Ascent increased $19.8 million to $37.9 million.

Investments in technology and IT infrastructure, a write-off of engineering costs for a dressing plant expansion project and other expenses attributed to the impacts of COVID-19, and a higher level of consumer promotional spending also contributed to the rise in SG&A expenses.

Shifts in demand between our Retail and Foodservice segments led us to cancel the plant expansion project.

Excluding Project Ascent, SG&A expenses were slightly higher than the prior year primarily due to increased investments in various initiatives to support future growth.

Project Ascent expenses are included within Corporate Expenses.

A portion of the costs classified as Project Ascent expenses represent ongoing costs that will continue subsequent to ERP implementation.

Year Ended June 30,

(Dollars in thousands)

A portion of the costs that have been classified as Project Ascent expenses represent ongoing costs that will continue subsequent to the ERP implementation.

Year Ended June 30, Change

(Dollars in thousands) 2021 2020 2019 2021 vs.

2020 2020 vs.

SG&A Expenses - Excluding Project Ascent $ 167,480 $ 162,910 $ 148,031 $ 4,570 3 % $ 14,879 10 %

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Change in Contingent Consideration

The change in contingent consideration resulted in expense of $0.3 million in 2020 compared to a net benefit of $16.2 million in 2019, which included a $17.1 million reduction in the fair value of the contingent consideration liability for Angelic Bakehouse, Inc.

(“Angelic”) as a result of our 2019 fair value measurements.

The change in contingent consideration resulted in a benefit of $5.7 million in 2021 compared to expense of $0.3 million in 2020.

The 2021 benefit included a reduction in the fair value of the contingent consideration liability for Bantam as a result of our 2021 fair value measurements.

As the fair value adjustment resulted from the impact of a SKU rationalization by a Foodservice customer, the entire adjustment related to Bantam’s contingent consideration was reflected within the Foodservice segment.

See further discussion in Note 3 to the consolidated financial statements.

Given the nature of Angelic’s sales and historical accounting treatment, the entire adjustment related to Angelic’s contingent consideration was recorded within the Retail segment.

Restructuring and Impairment Charges

In the fourth quarter of 2019, we committed to a plan to close our frozen bread manufacturing plant located in Saraland, Alabama.

This decision was intended to provide greater production efficiency by consolidating most of this facility’s operations into other existing plants, outsourcing certain requirements and discontinuing less profitable frozen bread products.

Production at the plant ceased in July 2019.

The operations of this plant have not been classified as discontinued operations as the closure did not represent a strategic shift that would have a major effect on our operations or financial results.

During 2020 and 2019, we recorded restructuring and impairment charges of $0.9 million and $1.6 million , respectively.

The restructuring and impairment charges, which consisted of one-time termination benefits, fixed asset impairment charges and other closing costs, were not allocated to our two reportable segments due to their unusual nature.

W e do not expect any additional charges attributed to this plant closure.

We recorded impairment charges of $1.2 million in 2021 related to certain tradename and technology / know-how intangible assets for Bantam as a result of the impact of a SKU rationalization by a Foodservice customer.

The impairment charges represent the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful lives of the intangible assets and were reflected within our Foodservice segment.

We recorded restructuring and impairment charges of $0.9 million in 2020, which primarily consisted of plant clean-up expenses and contract termination costs related to the closure of our frozen bread manufacturing plant located in Saraland, Alabama.

These charges were not allocated to our two reportable segments due to their unusual nature.

Operating Income

Operating income decreased 8% to $175.9 million in 2020 driven by the impact of the prior-year’s favorable adjustment related to Angelic’s contingent consideration, increased expenditures for Project Ascent, higher costs attributed to the impacts of COVID-19 and increased investments in technology and IT infrastructure.

These unfavorable factors were partially offset by the more favorable sales mix, our cost savings programs, improved net price realization and lower commodity costs.

Operating income increased 6% to $185.9 million in 2021 driven by the impact of the increased sales, a more favorable sales mix, the favorable adjustment related to Bantam’s contingent consideration and our ongoing cost savings programs, as partially offset by increased expenditures for Project Ascent, higher manufacturing costs attributed to the impacts of COVID-19, increased commodity costs and investments in various initiatives to support future growth.

See discussion of operating results by segment following the discussion of “Earnings Per Share” below.

Other, net resulted in expense of $0.1 million in 2021 compared to a benefit of $3.1 million in 2020.

This change primarily reflects lower interest rates for our cash holdings.

Taxes Based on Income

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We may experience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards.

For 2020 and 2019 , the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.8% .

For 2021 and 2020, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.6% and 0.8%, respectively.

Earnings Per Share

As influenced by the factors discussed above, particularly the increased expenditures for Project Ascent and costs attributed to the impacts of COVID-19 in 2020 and the reduction in fair value of Angelic’s contingent consideration in 2019, diluted net income per share totaled $4.97 in 2020 , a decrease from the 2019 total of $5.46 per diluted share.

As influenced by the factors discussed above, particularly the strong sales growth partially offset by the increased expenditures for Project Ascent and higher manufacturing costs, diluted net income per share totaled $5.16 in 2021, an increase from the 2020 total of $4.97 per diluted share.

Diluted weighted average common shares outstanding for each of the years ended June 30, 2021 and 2020 have remained relatively stable.

In 2020, expenditures for Project Ascent reduced diluted earnings per share by $0.50.

Certain costs attributed to the impacts of COVID-19, including the temporary increase in pay for our front-line employees, the write-off of engineering costs for a canceled dressing plant expansion project and an increase in the Foodservice inventory reserve, had an unfavorable impact of $0.28 per diluted share in 2020.

The restructuring and impairment charge also reduced diluted earnings per share in 2020 by $0.02.

In 2019, the after-tax benefit from the reduction in the fair value of Angelic’s contingent consideration liability was $0.48 per diluted share while Project Ascent expenditures reduced diluted earnings per share by $0.05 and the restructuring and impairment charge had an unfavorable impact of $0.05 per diluted share.

In 2021, expenditures for Project Ascent reduced diluted earnings per share by $1.05 compared to $0.50 in the prior year.

The favorable adjustment related to Bantam’s contingent consideration increased diluted earnings per share by $0.16 in 2021.

Restructuring and impairment charges had an unfavorable impact of $0.03 and $0.02 per diluted share in 2021 and 2020, respectively.

In 2020, the write-off of engineering costs for a canceled dressing plant expansion project and an increase in the Foodservice inventory reserve had an unfavorable impact of $0.09 and $0.08 per diluted share, respectively.

RESULTS OF OPERATIONS - SEGMENTS

Retail Segment

Year Ended June 30,

(Dollars in thousands)

Year Ended June 30, Change

(Dollars in thousands) 2021 2020 2019 2021 vs.

2020 2020 vs.

Net Sales $ 828,963 $ 714,127 $ 656,621 $ 114,836 16 % $ 57,506 9 %

Operating Income $ 188,403 $ 161,487 $ 149,019 $ 26,916 17 % $ 12,468 8 %

Operating Margin 22.7 % 22.6 % 22.7 %

In 2020 , net sales for the Retail segment reached a record $714.1 million , a 9% increase from the prior-year total of $656.6 million as higher retail channel demand attributed to the impacts of COVID-19 and contributions from shelf-stable dressings and sauces sold under license agreements, including new product introductions, drove Retail sales gains.

In 2021, net sales for the Retail segment reached a record $829.0 million, a 16% increase from the prior-year total of $714.1 million, due in part to the impacts of the COVID-19 outbreak, which drove higher demand for at-home food consumption.

The strength of our licensing program was also a significant contributor to the sales growth, led by Chick-fil-A ® sauces, Olive Garden ® dressings and Buffalo Wild Wings ® sauces.

Other products contributing to the growth in Retail net sales included frozen garlic bread, croutons and frozen dinner rolls.

The net sales increase also reflects a reduced level of Retail trade spending.

In 2021, Retail segment operating income increased $26.9 million, or 17%, to $188.4 million, reflecting the increase in sales, improved net price realization, reduced consumer spending and our ongoing cost savings programs, as partially offset by higher manufacturing costs, including expenses directly attributed to the impacts of COVID-19, and increased commodity and freight costs.

In 2020, net sales for the Retail segment reached a then record $714.1 million, a 9% increase from the 2019 total of $656.6 million as higher retail channel demand attributed to the impacts of COVID-19 and contributions from shelf-stable dressings and sauces sold under license agreements, including new product introductions, drove Retail sales gains.

Higher sales volumes for frozen garlic bread and frozen dinner rolls, along with some beneficial net price realization, also added to the growth in Retail net sales.

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Retail segment operating income benefited from the increase in sales, our ongoing cost savings programs, improved net price realization and lower commodity costs as partially offset by higher trade and consumer promotional spending.

The prior-year results were favorably impacted by the $17.1 million reduction in the fair value of Angelic’s contingent consideration liability.

Operating income for 2019 was favorably impacted by a $17.1 million reduction in the fair value of the contingent consideration liability for Angelic Bakehouse, Inc.

Foodservice Segment

Year Ended June 30,

(Dollars in thousands)

Year Ended June 30, Change

(Dollars in thousands) 2021 2020 2019 2021 vs.

2020 2020 vs.

Net Sales $ 638,104 $ 620,261 $ 651,166 $ 17,843 3 % $ (30,905) (5) %

Operating Income $ 89,048 $ 80,475 $ 86,177 $ 8,573 11 % $ (5,702) (7) %

Operating Margin 14.0 % 13.0 % 13.2 %

In 2021, Foodservice segment net sales increased 3% to $638.1 million from the 2020 total of $620.3 million driven by sales growth from quick-service restaurant and pizza chain customers in our mix of national chain restaurant accounts.

Foodservice segment net sales grew significantly in the last four months of 2021 as we began to lap the large declines in consumer demand in the prior year due to the impacts of COVID-19.

Inflationary pricing also contributed to the increase in Foodservice segment net sales.

Excluding all sales attributed to a temporary supply agreement resulting from the November 2018 acquisition of Omni, Foodservice segment net sales increased 6%.

These Omni sales totaled $3.7 million in the current fiscal year compared to $22.3 million last year.

The temporary supply agreement was terminated effective October 31, 2020.

In 2021, the $8.6 million increase in Foodservice segment operating income reflects the higher sales volume, a more favorable sales mix, inflationary pricing and the current-year $5.7 million favorable adjustment related to Bantam’s contingent consideration, which were partially offset by higher manufacturing costs, including expenses directly attributed to the impacts of COVID-19, increased commodity costs and the current-year Bantam impairment charges for certain intangible assets.

In 2020, Foodservice net sales decreased 5% to $620.3 million from the 2019 total of $651.2 million.

After growth of 7% in the first half of the fiscal year, Foodservice net sales declined 16% in the second half as consumer demand shifted away from the foodservice channel due to the impacts of COVID-19.

Excluding all sales resulting from the November 2018 acquisition of Omni, total Foodservice net sales declined 5%.

Omni sales attributed to a temporary supply agreement totaled $22.3 million in the current fiscal year compared to $19.4 million last year.

In 2020 , the $7.3 million decline in Foodservice segment operating income and decrease in operating margin was primarily due to the sales decline, reduced absorption of fixed production costs resulting from the lower sales volumes and other costs attributed to the impacts of COVID-19, including the cancelation of the dressing plant expansion project, an inventory write-down and the temporary increase in hourly wages for our front-line employees.

Excluding all sales attributed to a temporary supply agreement resulting from the November 2018 acquisition of Omni, Foodservice net sales declined 5%.

These Omni sales totaled $22.3 million in 2020 compared to $19.4 million in 2019.

In 2020, the $5.7 million decline in Foodservice segment operating income was primarily due to the sales decline, reduced absorption of fixed production costs resulting from the lower sales volumes and other costs attributed to the impacts of COVID-19, including the cancelation of the dressing plant expansion project, an inventory write-down and the temporary increase in hourly wages for our front-line employees.

Corporate Expenses

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In 2021, we also capitalized an additional $3.5 million of ERP-related expenditures for application development stage activities.

The 2020 corporate expenses totaled $65.1 million as compared to $42.6 million in 2019.

The increase was driven by expenditures for Project Ascent, which totaled $18.0 million in 2020 as compared to $1.8 million in 2019.

In 2020, we also capitalized an additional $8.9 million of ERP-related expenditures for application development stage activities.

LOOKING FORWARD

For 2021 , we expect Retail segment sales will continue to benefit from the growth in shelf-stable dressings and sauces sold under license agreements, including sales gains for Chick-fil-A ® sauces following a successful pilot test that was launched in March 2020, expanded geographic distribution of Buffalo Wild Wings ® sauces in single bottles and growth in the dollar and value channels for Olive Garden ® dressings.

We also anticipate both our Retail and Foodservice segment sales will continue to be impacted by the COVID-19 pandemic, which has caused shifts in consumer demand between the retail and foodservice channels.

The extent of this impact on our 2021 results is very difficult to predict due to ongoing regional ebbs and flows of COVID-19 cases and the associated loosening and tightening of stay-at-home orders and other restrictions and guidelines that create uncertainty for the restaurant industry and consumer behavior over an unpredictable timeline.

Based on current market conditions, following a year in which commodity costs were notably favorable, we expect commodity costs to increase in 2021.

Our cost savings programs and pricing initiatives will help to offset these increased costs.

Our 2021 SG&A expenses will continue to include Project Ascent expenses.

For 2022, we anticipate our Retail sales will continue to benefit from the growth of our licensing program while sales for the remainder of our Retail segment will have tough comparisons to the strong growth in 2021 as influenced by the higher demand for at-home food consumption due to the impacts of COVID-19.

In our Foodservice segment, we expect increased consumer demand for in-restaurant dining to drive Foodservice sales higher.

From a cost standpoint, we foresee significant inflation in 2022.

We expect notable increases in commodity costs, particularly soybean oil.

Packaging costs are also forecasted considerably higher, as are labor and freight expenses.

To help mitigate these rising costs, we have pricing initiatives in place for our Retail segment while our Foodservice segment will continue to realize offsets to increased commodity and freight costs through contractual-based inflationary pricing.

Note that the benefit of higher pricing will lag the unfavorable impact of inflationary costs in the coming year.

Our ongoing cost savings programs and other net price realization efforts will also help to partially offset the higher costs.

Our 2022 financial results will continue to be impacted by the COVID-19 pandemic, which has caused shifts in consumer demand between the retail and foodservice channels and resulted in higher costs to produce our products and service our customers.

The extent of this impact on our 2022 results is difficult to forecast due to ongoing regional ebbs and flows of COVID-19 cases and the associated changes to the COVID-19 guidelines provided or mandates imposed by health authorities and government agencies that create uncertainty for the restaurant industry and consumer behavior over an unpredictable timeline.

Implementation for Project Ascent, our ERP initiative, has been deferred to the start of fiscal 2023 as we have prioritized servicing the shifting demands and growth of our business over the implementation timeline.

We will continue to consider acquisition opportunities that represent good value and are consistent with our growth strategy or otherwise provide significant strategic benefits.

Our exposure to volatile swings in food commodity costs will continue to be managed and mitigated through a strategic forward purchasing program for certain key materials such as soybean oil and flour.

For a more-detailed discussion of the effect

of commodity costs, see the “Impact of Inflation” section of this MD&A below.

In addition to the above commentary specific to rising commodity costs, our exposure to volatile swings in food commodity costs will continue to be managed and mitigated through a strategic forward purchasing program for certain key materials such as soybean oil and flour.

For a more-detailed discussion of the effect of commodity costs, see the “Impact of Inflation” section of this MD&A below.

Changes in other notable recurring costs, such as marketing, transportation, production costs and introductory costs for new products, may also impact our overall results.

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We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments.

Based on our current plans and expectations, we believe our capital expenditures for 2021 could total between $65 and $85 million .

In addition, we will also continue to evaluate other potentially significant investments, such as a plant expansion, new plant construction or brownfield investment, to meet increasing demand for our dressing and sauce products.

If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations.

Year Ended June 30,

(Dollars in thousands)

Based on our current plans and expectations, we believe our capital expenditures for 2022 could total between $170 and $190 million, which includes approximately $105 million in expenditures attributed to a substantial investment for a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky that we expect to complete in the first quarter of fiscal 2023.

Beyond the next 12 months, we expect that cash provided by operating activities will continue to be the primary source of liquidity for the foreseeable future.

This source, combined with our existing balances in cash and equivalents and amounts available under the Facility, is expected to be sufficient to meet our overall cash requirements.

We have various contractual and other obligations that are appropriately recorded as liabilities in our consolidated financial statements, including finance lease obligations, operating lease obligations, contingent consideration payable, the underfunded defined benefit pension liability, other post-employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation.

See Note 3 to the consolidated financial statements for further information about our contingent consideration payable, which is due in fiscal 2024.

See Note 5 to the consolidated financial statements for further information about our lease obligations, including the maturities of minimum lease payments.

It is not certain when the liabilities for the underfunded defined benefit pension liability, other post-employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation will become due.

See Notes 9, 12 and 13 to the consolidated financial statements for further information about these liabilities.

Certain other contractual obligations are not recognized as liabilities in our consolidated financial statements.

Examples of such obligations are commitments to purchase raw materials or packaging inventory that has not yet been received as of June 30, 2021, as well as purchase orders and longer-term purchase arrangements related to the procurement of services, including IT service agreements, and property, plant and equipment.

The majority of these obligations is expected to be due within one year.

See further discussion below of our obligation related to the capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky.

In November 2020, T.

Marzetti Company (“T.

Marzetti”), a wholly-owned subsidiary of ours, entered into a Design/Build Agreement (the “Agreement”) with Gray Construction, Inc.

(“Gray”) under which Gray will design, coordinate and build additional dressing and sauce manufacturing and warehousing capacity for the T.

Marzetti facility in Horse Cave, Kentucky (the “Project”).

The Project will result in an expansion of the current facility footprint.

Subject to certain conditions in the Agreement, T.

Marzetti will pay Gray no more than the guaranteed maximum price of approximately $113 million for the Project.

The Agreement contains other terms and conditions that are customary for this type of project.

Expected to be completed in the first quarter of fiscal 2023, the Project is in its early stages, thus we are still obligated for the majority of the guaranteed maximum price.

Year Ended June 30, Change

(Dollars in thousands) 2021 2020 2019 2021 vs.

2020 2020 vs.

Provided By Operating Activities $ 174,189 $ 170,769 $ 197,598 $ 3,420 2 % $ (26,829) (14) %

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Cash provided by operating activities remains the primary source for funding our investing and financing activities, as well as financing our organic growth initiatives.

Cash provided by operating activities in 2020 totaled $170.8 million , a decrease of 14% as compared with the 2019 total of $197.6 million .

The 2020 decrease was due to the year-over-year change in net working capital and lower net income, as partially offset by the impact of the prior-year reduction in the fair value of Angelic’s contingent consideration.

Cash provided by operating activities in 2021 totaled $174.2 million, an increase of 2% as compared with the 2020 total of $170.8 million.

The 2021 increase was due to higher levels of net income and depreciation and amortization as well as the year-over-year change in net working capital offset by the year-over-year changes in contingent consideration and deferred income taxes.

Cash used in investing activities totaled $89.0 million in 2021 as compared to $83.3 million in 2020.

The 2020 decrease primarily reflects the impact of the prior-year second quarter acquisitions of Bantam and Omni as partially offset by a higher level of payments for property additions in the current year.

The year-over-year increase in our capital expenditures includes spending on a capacity expansion project at our frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020 and the purchase of the Omni manufacturing facility that was previously leased.

The 2021 increase primarily reflects a higher level of payments for property additions in the current year.

Capital expenditures in 2021 included spending on a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky that we expect to complete in the first quarter of fiscal 2023 along with infrastructure improvements and capacity expansion investments at our frozen pasta facility in Altoona, Iowa that we expect to complete in the first half of fiscal 2022.

Capital expenditures in 2020 included spending on a capacity expansion project at our frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020 as well as the purchase of the Omni manufacturing facility that was previously leased.

Payments for property additions totaled $87.9 million in 2021 compared to $82.6 million in 2020.

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In general, cash used in financing activities reflects the payment of dividends and share repurchases.

The 2020 increase was primarily due to higher dividend payments.

The 2021 increase was primarily due to higher dividend payments and increased share repurchases.

The regular dividend payout rate for 2021 was $2.95 per share, as compared to $2.75 per share in 2020.

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We do not have any related party transactions that materially affect our results of operations, cash flows or financial condition.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “Variable Interest Entities,” that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures.

We have various contractual obligations that are appropriately recorded as liabilities in our consolidated financial statements.

Certain other contractual obligations are not recognized as liabilities in our consolidated financial statements.

Examples of such items are commitments to purchase raw materials or packaging inventory that has not yet been received as of June 30, 2020 .

The following table summarizes our contractual obligations as of June 30, 2020 (dollars in thousands):

Payment Due by Period

Contractual Obligations

Less than 1 Year

More than 5 Years

Finance Lease Obligations (1)

Operating Lease Obligations (1)

Purchase Obligations (2)

Other Noncurrent Liabilities (as reflected on Consolidated Balance Sheet) (3)

Finance leases are primarily entered into for certain equipment and warehouse facilities.

Operating leases are primarily entered into for warehouse and office facilities and certain equipment.

See Note 5 to the consolidated financial statements for further information.

Purchase obligations represent purchase orders and longer-term purchase arrangements related to the procurement of raw materials, supplies, services, and property, plant and equipment.

This amount does not include $20.0 million of other noncurrent liabilities recorded on the balance sheet, which largely consist of the underfunded defined benefit pension liability, other post employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation.

These items are excluded, as it is not certain when these liabilities will become due.

See Notes 9, 12 and 13 to the consolidated financial statements for further information.

IMPACT OF INFLATION

Our business results can be influenced by significant changes in the costs of our raw materials, packaging and freight.

We attempt to mitigate the impact of inflation on our raw materials by entering into longer-term fixed-price contracts for a portion of our most significant commodities, soybean oil and flour.

We have also implemented a procurement strategy for a portion of our egg needs through the use of grain-based pricing contracts to reduce our exposure to egg market spot prices.

With regard to freight costs, during 2019 we added more dedicated carriers to our overall transportation network to help reduce our exposure to spot freight rates.

In 2019 we also implemented a transportation management system which improved the efficiency of our internal freight management processes and also allowed us to secure more competitive freight rates.

Nonetheless, we remain

exposed to events and trends in the marketplace for our other raw-material, packaging and freight costs.

While we attempt to pass through sustained increases in raw-material costs, any such price adjustments will often lag the changes in the related input costs.

In 2020, commodity costs were modestly favorable driven by lower costs for eggs, soybean oil and flour.

Packaging materials and freight costs were also favorable in 2020.

Our strategic procurement programs, transportation management system and other cost savings initiatives also helped to reduce our expenditures on commodities, packaging materials and freight in 2020.

In 2019, commodity cost inflation moderated to nearly flat compared to 2018 while packaging and freight costs were modestly inflationary.

Looking ahead to 2021, under current market conditions we foresee inflation in commodities.

Our ongoing cost savings programs and pricing initiatives will help to offset these higher commodity costs.

We attempt to mitigate the impact of inflation on our raw-material costs via longer-term fixed-price contractual commitments for a portion of our most significant market-indexed commodities, most notably soybean oil and flour.

We have also implemented a procurement strategy for a portion of our egg needs using grain-based pricing contracts to reduce our exposure to egg market spot prices.

Specific to freight costs, our transportation network includes a mix of dedicated carriers, longer-term fixed-rate contracts and a small internal fleet that serve to reduce our exposure to spot freight rates.

We also have a transportation management system in place to support our freight management processes and help us to secure more competitive freight rates.

Nonetheless, we are subject to events and trends in the marketplace that will impact our costs for raw materials, packaging and freight.

While we attempt to pass through sustained increases in these costs, any such price adjustments can lag the changes in the related input costs.

Although typically less notable, we are also exposed to the unfavorable effects of general inflation beyond material and freight costs, especially in the areas of annual wage adjustments and benefit costs.

Over time, we attempt to minimize the exposure to such cost increases through ongoing improvements and greater efficiencies throughout our manufacturing operations, including benefits gained through our lean six sigma program and strategic investments in plant equipment.

With regard to the impact of commodity and freight costs on Foodservice segment operating income, most of our supply contracts with national chain restaurant accounts incorporate pricing adjustments to account for changes in ingredient and freight costs.

freight costs.

These supply contracts may vary by account with regard to the time lapse between the actual change in ingredient and freight costs we incur and the effective date of the associated price increase or decrease.

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In addition, the Foodservice segment has an inherently higher degree of margin volatility from changes in ingredient costs when compared to the Retail segment due to its overall lower margin profile and higher ratio of ingredient pounds to net sales.

In Retail, there is an opportunity to offset the impact of inflationary costs through net price realization actions including list price increases, decreased trade spending and packaging size changes.

Note that all these Retail cost-recovery options entail some inherent risks and uncertainties, and the implementation timeframe can lag the input cost changes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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While a summary of our significant accounting policies can be found in Note 1 to the consolidated financial statements, we believe the following critical accounting policies reflect those areas in which more significant judgments and estimates are used in the preparation of our consolidated financial statements.

Receivables and Related Allowances

We evaluate the adequacy of our allowances for customer deductions considering several factors including historical experience, specific trade programs and existing customer relationships.

Trade-Related Allowances

Our receivables balance is net of trade-related allowances, which consist of sales discounts, trade promotions and certain other sales incentives.

We evaluate the adequacy of these allowances considering several factors including historical experience, specific trade programs and existing customer relationships.

These allowances can fluctuate based on the level of sales and promotional programs as well as the timing of deductions.

Goodwill and Other Intangible Assets

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• significant shifts in consumer demand and disruptions to our employees, communities, customers, supply chains, operations, and production processes resulting from COVID-19 and other epidemics, pandemics or similar widespread public health concerns and disease outbreaks;

efficiencies in plant operations;

dependence on contract manufacturers, distributors and freight transporters, including their financial strength in continuing to support our business;

• fluctuations in the cost and availability of ingredients and packaging;

the potential for loss of larger programs or key customer relationships;

• capacity constraints that may affect our ability to meet demand or may increase our costs;

changes in demand for our products, which may result from loss of brand reputation or customer goodwill;

difficulties in designing and implementing our new enterprise resource planning system;

• dependence on contract manufacturers, distributors and freight transporters, including their financial strength in continuing to support our business;

• the reaction of customers or consumers to price increases we may implement;

• cyber-security incidents, information technology disruptions, and data breaches;

ability to successfully grow recently acquired businesses;

the extent to which recent and future business acquisitions are completed and acceptably integrated;

• complexities related to the design and implementation of our new enterprise resource planning system;

• adverse changes in freight, energy or other costs of producing, distributing or transporting our products;

• adequate supply of labor for our manufacturing facilities;

• efficiencies in plant operations;

• the potential for loss of larger programs, including licensing agreements, or key customer relationships;

• changes in demand for our products, which may result from loss of brand reputation or customer goodwill;

• price and product competition;

the lack of market acceptance of new products;

• the possible occurrence of product recalls or other defective or mislabeled product costs;

• the success and cost of new product development efforts;

• the lack of market acceptance of new products;

• the impact of customer store brands on our branded retail volumes;

the reaction of customers or consumers to price increases we may implement;

adverse changes in freight, energy or other costs of producing, distributing or transporting our products;

stability of labor relations;

• the extent to which recent and future business acquisitions are completed and acceptably integrated;

• the ability to successfully grow recently acquired businesses;

• dependence on key personnel and changes in key personnel;

• the effect of consolidation of customers within key market channels;

the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs;

the possible occurrence of product recalls or other defective or mislabeled product costs;

• maintenance of competitive position with respect to other manufacturers;

• stability of labor relations;

• changes in estimates in critical accounting judgments;

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• the outcome of any litigation or arbitration;

adequate supply of skilled labor;

• the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs;

• certain other risk factors, including those discussed in other filings we have submitted to the Securities and Exchange Commission.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis