MARZETTI CO 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2021 refers to fiscal 2021, which is the period from July 1, 2020 to June 30, 2021. The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Forward-Looking Statements” and those set forth in Item 1A of this Annual Report on Form 10-K. Our discussion of results for 2021 compared to 2020 is included herein. 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. OVERVIEW Business Overview Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels. 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. 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. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States. Our business has the potential to achieve future growth in sales and profitability due to attributes such as: • leading Retail market positions in several product categories with a high-quality perception; • recognized innovation in Retail products; • a broad customer base in both Retail and Foodservice accounts; • well-regarded culinary expertise among Foodservice customers; • recognized leadership in Foodservice product development; • experience in integrating complementary business acquisitions; and • historically strong cash flow generation that supports growth opportunities. Our goal is to grow both Retail and Foodservice segment sales over time by: • introducing new products and expanding distribution; • leveraging the strength of our Retail brands to increase current product sales; • expanding Retail growth through strategic licensing agreements; • continuing to rely upon the strength of our reputation in Foodservice product development and quality; and • acquiring complementary businesses. 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 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; 18 Table of Contents • 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 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. Most of the on-going COE costs are expected to consist of annual software maintenance and support, consulting and professional fees and wages and benefits. We also continue to review potential acquisitions that we believe will complement our existing product lines, enhance our profitability and/or offer good expansion opportunities in a manner that fits our overall strategic goals. 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. See further discussion of these acquisitions in Note 2 to the consolidated financial statements. RECENT EVENTS A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. 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. These measures included limitations on public gatherings, social distancing requirements, travel restrictions, closures of bars and dine-in restaurants, stay-at-home orders, quarantines and restrictions that prohibited many non-essential employees from going to work. We have two major priorities while navigating through this period of volatility and uncertainty: 1. to ensure the health, safety and welfare of our employees; and 2. 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 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; and • 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 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 19 Table of Contents 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 (Dollars in thousands, except per share data) Years Ended June 30, Change 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 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 (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) % Operating Income 185,852 175,948 190,924 9,904 6 % (14,976) (8) % 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) % Taxes Based on Income 43,413 42,094 44,993 1,319 3 % (2,899) (6) % 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) % Net Sales 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 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. Gross Profit 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. 20 Table of Contents 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. 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 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. 2019 SG&A Expenses - Excluding Project Ascent $ 167,480 $ 162,910 $ 148,031 $ 4,570 3 % $ 14,879 10 % Project Ascent Expenses 37,883 18,035 1,780 19,848 110 % 16,255 913 % Total SG&A Expenses $ 205,363 $ 180,945 $ 149,811 $ 24,418 13 % $ 31,134 21 % Change in Contingent Consideration 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. Restructuring and Impairment Charges 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 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 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 Our effective tax rate was 23.4% and 23.5% in 2021 and 2020, respectively. See Note 9 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate. We include the tax consequences related to stock-based compensation within the computation of income tax expense. 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 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 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. 21 Table of Contents 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, Change (Dollars in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 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 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. In 2020, Retail segment operating income increased $12.5 million, or 8%, to $161.5 million. 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. 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, Change (Dollars in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 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. 22 Table of Contents 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 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 The 2021 corporate expenses totaled $91.6 million as compared to $65.1 million in 2020. The increase was driven by expenditures for Project Ascent, which totaled $37.9 million in 2021 as compared to $18.0 million in 2020. 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 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. 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. We will continue to periodically reassess our allocation of capital to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders. FINANCIAL CONDITION Liquidity and Capital Resources We maintain sufficient flexibility in our capital structure to ensure our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and opportunistic share repurchases. Our balance sheet maintained fundamental financial strength during 2021 as we ended the year with $188 million in cash and equivalents, along with shareholders’ equity of $843 million and no debt. 23 Table of Contents Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at June 30, 2021. At June 30, 2021, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires in March 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt. The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At June 30, 2021, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At June 30, 2021, there were no events that would constitute a default under this facility. We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due. 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. 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. 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. 24 Table of Contents Cash Flows Year Ended June 30, Change (Dollars in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Provided By Operating Activities $ 174,189 $ 170,769 $ 197,598 $ 3,420 2 % $ (26,829) (14) % Used In Investing Activities $ (88,977) $ (83,265) $ (126,861) $ (5,712) (7) % $ 43,596 34 % Used In Financing Activities $ (95,430) $ (85,519) $ (80,201) $ (9,911) (12) % $ (5,318) (7) % 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 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 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. Financing activities used net cash totaling $95.4 million and $85.5 million in 2021 and 2020, respectively. In general, cash used in financing activities reflects the payment of dividends and share repurchases. 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. This past fiscal year marked the 58 th consecutive year in which our dividend rate was increased. The future levels of share repurchases and declared dividends are subject to the periodic review of our Board of Directors and are generally determined after an assessment is made of various factors, such as anticipated earnings levels, cash flow requirements and general business conditions. Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are incurred pertaining to regulatory compliance and, upon occasion, remediation. Such costs have not been, and are not anticipated to become, material. We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. We do not have any related party transactions that materially affect our results of operations, cash flows or financial condition. 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-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 25 Table of Contents 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. As a result, the reported operating margins of the Foodservice segment are subject to increased volatility during periods of rapidly rising or falling ingredient and/or freight costs because at least some portion of the change in ingredient and/or freight costs is reflected in the segment’s results prior to the impact of any associated change in pricing. 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 This MD&A discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including, but not limited to, those related to accounts receivable allowances, distribution costs, asset impairments and self-insurance reserves. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated financial statements. 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. 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 Goodwill is not amortized. It is evaluated annually at April 30 by applying impairment testing procedures. Other intangible assets are amortized on a straight-line basis over their estimated useful lives to Selling, General and Administrative Expenses. We evaluate the future economic benefit of the recorded goodwill and other intangible assets when events or circumstances indicate potential recoverability concerns. Carrying amounts are adjusted appropriately when determined to have been impaired. RECENT ACCOUNTING PRONOUNCEMENTS Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 to the consolidated financial statements. FORWARD-LOOKING STATEMENTS We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below, many of which could be amplified by the COVID-19 pandemic. Management believes these forward-looking statements to be reasonable; however, one should not place undue reliance on such statements that are based on current expectations. 26 Table of Contents Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update such forward-looking statements, except as required by law. Items which could impact these forward-looking statements include, but are not limited to, those risk factors identified in Item 1A and: • 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; • fluctuations in the cost and availability of ingredients and packaging; • capacity constraints that may affect our ability to meet demand or may increase our costs; • 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; • 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 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 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; • maintenance of competitive position with respect to other manufacturers; • stability of labor relations; • changes in estimates in critical accounting judgments; • the impact of any regulatory matters affecting our food business, including any required labeling changes and their impact on consumer demand; • the outcome of any litigation or arbitration; • the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs; and • certain other risk factors, including those discussed in other filings we have submitted to the Securities and Exchange Commission.