MARZETTI CO 10-K

Item 8. Financial Statements and Supplementary Data 27 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Lancaster Colony Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lancaster Colony Corporation and subsidiaries (the “Company”) as of June 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2021, and the related notes (collectively, referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 26, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 5 to the financial statements, the Company has changed its method of accounting for leases effective July 1, 2019, due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842). Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Fair Value - Bantam Bagels, LLC (“Bantam”) Contingent Consideration (Level 3 Liability) - Refer to Note 3 in the financial statements Critical Audit Matter Description The Company has a contingent consideration liability whose fair value is based on a complex model and unobservable inputs. The contingent consideration liability resulted from the earn-out provision associated with the Company’s October 19, 2018 acquisition of Bantam. The terms of this acquisition specify that the sellers may receive an earn-out payment as part of the overall consideration in the transaction based upon a predetermined contractual formula at a specified future date. Under accounting principles generally accepted in the United States of America, contingent consideration liabilities are generally classified as Level 3 liabilities and are marked to fair value on a recurring basis. 28 Table of Contents Unlike the fair value of other assets and liabilities that are readily observable, and therefore, more easily independently corroborated, the valuation of Level 3 liabilities is inherently subjective, and often involves the use of complex models and unobservable inputs. The fair value of the Bantam contingent consideration is measured on a recurring basis using a Monte Carlo simulation that randomly changes revenue growth, forecasted adjusted earnings before interest, taxes, depreciation, and amortization, as defined in the related acquisition agreement, and other uncertain variables to estimate an expected value, which is recorded at present value by applying a discount rate. We identified this Level 3 liability as a critical audit matter because of the complex model and unobservable inputs management uses to estimate fair value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists who possess significant quantitative and modeling expertise, to audit and evaluate the appropriateness of the model and inputs. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the complex model and unobservable inputs used by management to estimate the fair value of the Level 3 liability included the following, among others: • We tested the effectiveness of controls over management’s valuation of the contingent consideration, including those related to the complex proprietary model and the significant inputs that are not readily observable. • We evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates to subsequent results, taking into account changes in market conditions. • We compared management’s assumptions to external sources. These assumptions included discount rates, forecasted revenue growth rates, and operating margins used in the valuation models. • With the assistance of our fair value specialists, we evaluated the appropriateness of the valuation technique utilized, and assessed the reasonableness of the valuation inputs and discount rate assumptions used in the fair value analysis by developing a range of independent estimates and comparing those to inputs selected by management. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Columbus, Ohio August 26, 2021 We have served as the Company’s auditor since 1961. 29 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, (Amounts in thousands, except share data) 2021 2020 ASSETS Current Assets: Cash and equivalents $ 188,055 $ 198,273 Receivables 97,897 86,604 Inventories: Raw materials 48,895 34,374 Finished goods 72,980 50,674 Total inventories 121,875 85,048 Other current assets 15,654 15,687 Total current assets 423,481 385,612 Property, Plant and Equipment: Land, buildings and improvements 252,174 186,542 Machinery and equipment 424,015 388,929 Total cost 676,189 575,471 Less accumulated depreciation 311,567 282,183 Property, plant and equipment-net 364,622 293,288 Other Assets: Goodwill 208,371 208,371 Other intangible assets-net 58,766 65,216 Operating lease right-of-use assets 22,455 22,977 Other noncurrent assets 23,590 17,889 Total $ 1,101,285 $ 993,353 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 110,338 $ 71,433 Accrued liabilities 63,585 54,826 Total current liabilities 173,923 126,259 Noncurrent Operating Lease Liabilities 17,228 17,893 Other Noncurrent Liabilities 28,285 31,661 Deferred Income Taxes 38,702 34,240 Commitments and Contingencies Shareholders’ Equity: Preferred stock-authorized 3,050,000 shares; outstanding- none Common stock-authorized 75,000,000 shares; outstanding-2021- 27,531,040 shares; 2020- 27,523,935 shares 128,617 125,153 Retained earnings 1,482,220 1,421,121 Accumulated other comprehensive loss ( 8,253 ) ( 12,070 ) Common stock in treasury, at cost ( 759,437 ) ( 750,904 ) Total shareholders’ equity 843,147 783,300 Total $ 1,101,285 $ 993,353 See accompanying notes to consolidated financial statements. 30 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, (Amounts in thousands, except per share data) 2021 2020 2019 Net Sales $ 1,467,067 $ 1,334,388 $ 1,307,787 Cost of Sales 1,080,344 976,352 981,589 Gross Profit 386,723 358,036 326,198 Selling, General and Administrative Expenses 205,363 180,945 149,811 Change in Contingent Consideration ( 5,687 ) 257 ( 16,180 ) Restructuring and Impairment Charges 1,195 886 1,643 Operating Income 185,852 175,948 190,924 Other, Net ( 107 ) 3,129 4,618 Income Before Income Taxes 185,745 179,077 195,542 Taxes Based on Income 43,413 42,094 44,993 Net Income $ 142,332 $ 136,983 $ 150,549 Net Income Per Common Share: Basic $ 5.17 $ 4.98 $ 5.48 Diluted $ 5.16 $ 4.97 $ 5.46 Weighted Average Common Shares Outstanding: Basic 27,475 27,448 27,438 Diluted 27,518 27,496 27,537 See accompanying notes to consolidated financial statements. 31 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended June 30, (Amounts in thousands) 2021 2020 2019 Net Income $ 142,332 $ 136,983 $ 150,549 Other Comprehensive Income (Loss): Defined Benefit Pension and Postretirement Benefit Plans: Net gain (loss) arising during the period, before tax 4,490 ( 2,662 ) ( 2,902 ) Amortization of loss, before tax 672 546 410 Amortization of prior service credit, before tax ( 181 ) ( 182 ) ( 182 ) Total Other Comprehensive Income (Loss), Before Tax 4,981 ( 2,298 ) ( 2,674 ) Tax Attributes of Items in Other Comprehensive Income (Loss): Net gain (loss) arising during the period, tax ( 1,049 ) 622 678 Amortization of loss, tax ( 157 ) ( 128 ) ( 96 ) Amortization of prior service credit, tax 42 42 43 Total Tax (Expense) Benefit ( 1,164 ) 536 625 Other Comprehensive Income (Loss), Net of Tax 3,817 ( 1,762 ) ( 2,049 ) Comprehensive Income $ 146,149 $ 135,221 $ 148,500 See accompanying notes to consolidated financial statements. 32 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, (Amounts in thousands) 2021 2020 2019 Cash Flows From Operating Activities: Net income $ 142,332 $ 136,983 $ 150,549 Adjustments to reconcile net income to net cash provided by operating activities: Impacts of noncash items: Depreciation and amortization 44,509 37,963 31,848 Change in contingent consideration ( 5,687 ) 257 ( 16,180 ) Deferred income taxes and other changes 4,629 11,402 7,336 Stock-based compensation expense 7,126 6,115 5,972 Restructuring and impairment charges 1,195 ( 268 ) 1,643 Loss (gain) on sale of property 61 315 ( 13 ) Pension plan activity ( 149 ) ( 578 ) ( 749 ) Changes in operating assets and liabilities: Receivables ( 11,293 ) ( 10,913 ) ( 748 ) Inventories ( 36,827 ) 1,024 6,282 Other current assets ( 3,524 ) ( 14,267 ) ( 3,085 ) Accounts payable and accrued liabilities 31,817 2,736 14,743 Net cash provided by operating activities 174,189 170,769 197,598 Cash Flows From Investing Activities: Payments for property additions ( 87,865 ) ( 82,642 ) ( 70,880 ) Cash paid for acquisitions, net of cash acquired — — ( 55,364 ) Proceeds from sale of property 150 129 169 Other-net ( 1,262 ) ( 752 ) ( 786 ) Net cash used in investing activities ( 88,977 ) ( 83,265 ) ( 126,861 ) Cash Flows From Financing Activities: Payment of dividends ( 81,233 ) ( 75,644 ) ( 70,110 ) Purchase of treasury stock ( 8,533 ) ( 5,459 ) ( 7,411 ) Tax withholdings for stock-based compensation ( 3,662 ) ( 3,806 ) ( 2,360 ) Other-net ( 2,002 ) ( 610 ) ( 320 ) Net cash used in financing activities ( 95,430 ) ( 85,519 ) ( 80,201 ) Net change in cash and equivalents ( 10,218 ) 1,985 ( 9,464 ) Cash and equivalents at beginning of year 198,273 196,288 205,752 Cash and equivalents at end of year $ 188,055 $ 198,273 $ 196,288 See accompanying notes to consolidated financial statements. 33 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Amounts in thousands, except per share data) Common Stock Outstanding Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Shareholders’ Equity Shares Amount Balance, June 30, 2018 27,488 $ 119,232 $ 1,279,343 $ ( 8,259 ) $ ( 738,034 ) $ 652,282 Net income 150,549 150,549 Net pension and postretirement benefit losses, net of $( 625 ) tax effect ( 2,049 ) ( 2,049 ) Cash dividends - common stock ($ 2.55 per share) ( 70,110 ) ( 70,110 ) Purchase of treasury stock ( 48 ) ( 7,411 ) ( 7,411 ) Stock-based plans 51 ( 2,360 ) ( 2,360 ) Stock-based compensation expense 5,972 5,972 Balance, June 30, 2019 27,491 122,844 1,359,782 ( 10,308 ) ( 745,445 ) 726,873 Net income 136,983 136,983 Net pension and postretirement benefit losses, net of $( 536 ) tax effect ( 1,762 ) ( 1,762 ) Cash dividends - common stock ($ 2.75 per share) ( 75,644 ) ( 75,644 ) Purchase of treasury stock ( 38 ) ( 5,459 ) ( 5,459 ) Stock-based plans 71 ( 3,806 ) ( 3,806 ) Stock-based compensation expense 6,115 6,115 Balance, June 30, 2020 27,524 125,153 1,421,121 ( 12,070 ) ( 750,904 ) 783,300 Net income 142,332 142,332 Net pension and postretirement benefit gains, net of $ 1,164 tax effect 3,817 3,817 Cash dividends - common stock ($ 2.95 per share) ( 81,233 ) ( 81,233 ) Purchase of treasury stock ( 46 ) ( 8,533 ) ( 8,533 ) Stock-based plans 53 ( 3,662 ) ( 3,662 ) Stock-based compensation expense 7,126 7,126 Balance, June 30, 2021 27,531 $ 128,617 $ 1,482,220 $ ( 8,253 ) $ ( 759,437 ) $ 843,147 See accompanying notes to consolidated financial statements. 34 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Note 1 – Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Lancaster Colony Corporation and our wholly-owned subsidiaries, collectively referred to as “we,” “us,” “our,” “registrant,” or the “Company.” Intercompany transactions and accounts have been eliminated in consolidation. 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. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires that we make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates included in these consolidated financial statements include allowances for customer deductions, net realizable value of inventories, useful lives for the calculation of depreciation and amortization, distribution accruals, pension and postretirement assumptions and self-insurance accruals. Actual results could differ from these estimates. Cash and Equivalents We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The carrying amounts of our cash and equivalents approximate fair value due to their short maturities and are considered level 1 investments, which have quoted market prices in active markets for identical assets. As a result of our cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. When such negative balances exist, they are included in Accrued Liabilities. Receivable 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. We also provide an allowance for doubtful accounts based on our estimate of expected credit losses, which considers the aging of accounts receivable balances, historical write-off experience and on-going reviews of our trade receivables. Measurement of expected credit losses requires credit review of existing customer relationships, consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the economic health of customers. Our allowance for doubtful accounts was immaterial for all periods presented. Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and equivalents and trade accounts receivable. By policy, we limit the amount of credit exposure to any one institution or issuer. Our concentration of credit risk with respect to trade accounts receivable is mitigated by our credit evaluation process and our broad Retail and Foodservice customer base. However, see Note 10 with respect to our accounts receivable with Walmart Inc. and McLane Company, Inc., a wholesale distribution subsidiary of Berkshire Hathaway, Inc. Inventories Inventories are valued at the lower of cost or net realizable value and are costed by various methods that approximate actual cost on a first-in, first-out basis. Due to the nature of our business, work in process inventory is not a material component of inventory. When necessary, we provide allowances to adjust the carrying value of our inventory to the lower of cost or net realizable value, including any costs to sell or dispose. The determination of whether inventory items are slow moving, obsolete or in excess of needs requires estimates about the future demand for our products. The estimates as to future demand used in the valuation of inventory are subject to the ongoing success of our products and may differ from actual due to factors such as changes in customer and consumer demand. 35 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Property, Plant and Equipment Property, plant and equipment are recorded at cost, except for those acquired as part of a business combination, which are recorded at fair value at the time of purchase. We use the straight-line method of computing depreciation for financial reporting purposes based on the estimated useful lives of the corresponding assets. Estimated useful lives for buildings and improvements range generally from 10 to 40 years, machinery and equipment, excluding technology-related equipment, range generally from 3 to 15 years and technology-related equipment range generally from 3 to 5 years. For tax purposes, we generally compute depreciation using accelerated methods. Purchases of property, plant and equipment included in Accounts Payable and excluded from the property additions and the change in accounts payable in the Consolidated Statements of Cash Flows at June 30 were as follows: 2021 2020 2019 Construction in progress in Accounts Payable $ 16,110 $ 2,909 $ 7,852 The following table sets forth depreciation expense, including finance lease amortization, in each of the years ended June 30: 2021 2020 2019 Depreciation expense $ 37,172 $ 31,604 $ 26,751 Deferred Software Costs We capitalize certain costs related to hosting arrangements that are service contracts (cloud computing arrangements). Capitalized costs are included in Other Current Assets or Other Noncurrent Assets and are amortized on a straight-line basis over the estimated useful life. In 2021, 2020 and 2019, we capitalized $ 3.5 million, $ 10.3 million and $ 1.7 million, respectively, of deferred software costs related to cloud computing arrangements. Long-Lived Assets We monitor the recoverability of the carrying value of our long-lived assets by periodically considering whether indicators of impairment are present. If such indicators are present, we determine if the assets are recoverable by comparing the sum of the undiscounted future cash flows to the assets’ carrying amounts. Our cash flows are based on historical results adjusted to reflect our best estimate of future market and operating conditions. If the carrying amounts are greater, then the assets are not recoverable. In that instance, we compare the carrying amounts to the fair value to determine the amount of the impairment to be recorded. 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. See further discussion regarding goodwill and other intangible assets in Note 7. Accrued Distribution We incur various freight and other related costs associated with shipping products to our customers and warehouses. We provide accruals for unbilled shipments from carriers utilizing historical or projected freight rates and other relevant information. Accruals for Self-Insurance Self-insurance accruals are made for certain claims associated with employee health care, workers’ compensation and general liability insurance up to stop-loss coverage. These accruals include estimates that are primarily based on historical loss development factors. Shareholders’ Equity We are authorized to issue 3,050,000 shares of preferred stock consisting of 750,000 shares of Class A Participating Preferred Stock with $ 1.00 par value, 1,150,000 shares of Class B Voting Preferred Stock with no par value and 1,150,000 shares of Class C Nonvoting Preferred Stock with no par value. Our Board of Directors approved a share repurchase authorization of 2,000,000 common shares in November 2010. At June 30, 2021, 1,269,701 common shares remained authorized for future purchase. 36 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Revenue Recognition When Performance Obligations Are Satisfied A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The singular performance obligation of our customer contracts is determined by each individual purchase order and the respective food products ordered, with revenue being recognized at a point-in-time when the obligation under the terms of the agreement is satisfied and product control is transferred to our customer. Specifically, control transfers to our customers when the product is delivered to or picked up by our customers based upon applicable shipping terms, as our customers can direct the use and obtain substantially all of the remaining benefits from the asset at this point in time. The performance obligations in our customer contracts are generally satisfied within 30 days. As such, we have not disclosed the transaction price allocated to remaining performance obligations as of June 30, 2021. Significant Payment Terms In general, within our customer contracts, the purchase order identifies the product, quantity, price, pick-up allowances, payment terms and final delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, presently the majority of our payment terms are less than 60 days. As a result, we have used the available practical expedient and, consequently, do not adjust our revenues for the effects of a significant financing component. Distribution Distribution fees billed to customers are included in Net Sales. All distribution costs associated with outbound freight are accounted for as fulfillment costs and are included in Cost of Sales; this includes distribution costs incurred after control over a product has transferred to a customer, as we have chosen to use the available practical expedient to account for these costs within our cost of sales. Variable Consideration In addition to fixed contract consideration, our contracts include some form of variable consideration, including sales discounts, returns, trade promotions and certain other sales and consumer incentives, including rebates and coupon redemptions. In general, variable consideration is treated as a reduction in revenue when the related revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We believe there will be no significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. We review and update our estimates and related accruals of variable consideration each period based on historical experience and any recent changes in the market. Warranties & Returns We provide all customers with a standard or assurance type warranty. Either stated or implied, we provide assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No services beyond an assurance warranty are provided to our customers. We do not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Contract Balances We do not have deferred revenue or unbilled receivable balances and thus do not have any related contract asset and liability balances as of June 30, 2021. Contract Costs We have identified sales commissions as an incremental cost incurred to obtain a customer contract. These costs are required to be capitalized under the new revenue recognition standard. We have chosen to use the available practical expedient to continue to expense these costs as incurred as the amortization period for such costs is one year or less. We do not incur significant fulfillment costs related to customer contracts which would require capitalization. Disaggregation of Revenue See Note 10 for disaggregation of our net sales by class of similar product and type of customer. 37 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Advertising Expense We expense advertising as it is incurred. The following table summarizes advertising expense as a percentage of net sales in each of the years ended June 30: 2021 2020 2019 Advertising expense as a percentage of net sales 2 % 2 % 2 % Research and Development Costs We expense research and development costs as they are incurred. The estimated amount spent during each of the last three years on research and development activities was less than 1 % of net sales. Stock-Based Employee Compensation Plans We account for our stock-based employee compensation plans in accordance with GAAP for stock-based compensation, which requires the measurement and recognition of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of the employee services is recognized as compensation expense over the period that an employee provides service in exchange for the award, which is typically the vesting period. See further discussion and disclosure in Note 11. Income Taxes Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in numerous domestic jurisdictions. Our annual effective tax rate is determined based on our income, statutory tax rates and the permanent tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A change in tax rates may result in stranded tax effects when the effect of the change is required to be included in income even when the related income tax effects of items in accumulated other comprehensive income/loss were originally recognized in other comprehensive income rather than in income. Our accounting policy is to release stranded tax effects from accumulated other comprehensive loss. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not that our deferred tax assets will be realized and thus we have not recorded any valuation allowance for the years ended June 30, 2021 or 2020. In accordance with accounting literature related to uncertainty in income taxes, tax benefits and liabilities from uncertain tax positions that are recognized in the financial statements are measured based on the largest attribute that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position. See further discussion in Note 9. Earnings Per Share Earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock and common stock equivalents (restricted stock and stock-settled stock appreciation rights) outstanding during each period. Unvested shares of restricted stock granted to employees are considered participating securities since employees receive nonforfeitable dividends prior to vesting and, therefore, are included in the earnings allocation in computing EPS under the two-class method. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with nonparticipating restricted stock and stock-settled stock appreciation rights. 38 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Basic and diluted net income per common share were calculated as follows: 2021 2020 2019 Net income $ 142,332 $ 136,983 $ 150,549 Net income available to participating securities ( 285 ) ( 278 ) ( 259 ) Net income available to common shareholders $ 142,047 $ 136,705 $ 150,290 Weighted average common shares outstanding - basic 27,475 27,448 27,438 Incremental share effect from: Nonparticipating restricted stock 2 2 2 Stock-settled stock appreciation rights 41 46 97 Weighted average common shares outstanding - diluted 27,518 27,496 27,537 Net income per common share - basic $ 5.17 $ 4.98 $ 5.48 Net income per common share - diluted $ 5.16 $ 4.97 $ 5.46 Comprehensive Income and Accumulated Other Comprehensive Loss Comprehensive income includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income is composed of two subsets – net income and other comprehensive income (loss). Included in other comprehensive income (loss) are pension and postretirement benefits adjustments. The following table presents the amounts reclassified out of accumulated other comprehensive loss by component: 2021 2020 Accumulated other comprehensive loss at beginning of year $ ( 12,070 ) $ ( 10,308 ) Defined Benefit Pension Plan Items: Net gain (loss) arising during the period 4,340 ( 2,597 ) Amortization of unrecognized net loss (1) 692 572 Postretirement Benefit Plan Items: (2) Net gain (loss) arising during the period 150 ( 65 ) Amortization of unrecognized net gain ( 20 ) ( 26 ) Amortization of prior service credit ( 181 ) ( 182 ) Total other comprehensive income (loss), before tax 4,981 ( 2,298 ) Total tax (expense) benefit ( 1,164 ) 536 Other comprehensive income (loss), net of tax 3,817 ( 1,762 ) Accumulated other comprehensive loss at end of year $ ( 8,253 ) $ ( 12,070 ) (1) Included in the computation of net periodic benefit income/cost. See Note 12 for additional information. (2) Additional disclosures for postretirement benefits are not included as they are not considered material. Recently Issued Accounting Standards There were no recently issued accounting standards that will impact our consolidated financial statements. Recently Adopted Accounting Standards In August 2018, the Financial Accounting Standards Board issued new accounting guidance related to the disclosure requirements for fair value measurements. The guidance removes, modifies and adds disclosures related to fair value. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We adopted the new guidance on July 1, 2020. As the guidance only relates to disclosures, there was no impact on our financial position or results of operations. See fair value disclosures in Note 3. 39 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Note 2 – Acquisitions Omni Baking Company LLC On November 16, 2018, we acquired substantially all of the assets of Omni Baking Company LLC (“Omni”). Omni had been a long-time supplier of products to our frozen garlic bread operations and is based in Vineland, New Jersey. The purchase price of $ 22.3 million, which includes the post-closing working capital adjustment, was funded with cash on hand. These results have been included in our consolidated financial statements from the date of acquisition. Bantam Bagels, LLC On October 19, 2018, we acquired all the assets of Bantam Bagels, LLC (“Bantam”). Bantam, a producer and marketer of frozen mini stuffed bagels and other frozen bread products sold to both the retail and foodservice channels, is based in New York, New York. The base purchase price of $ 33.1 million, which includes the post-closing working capital adjustment, was funded with cash on hand. This purchase price excludes contingent consideration relating to an additional earn-out payment which is tied to performance-based conditions. In general, the terms of the acquisition specify that the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Bantam for the twelve months ending December 31, 2023. We are unable to provide a range for the amount of this earn-out because it is based on the future adjusted EBITDA of Bantam, and the earn-out does not contain a minimum or maximum value. See further discussion of the earn-out in Note 3. These results have been included in our consolidated financial statements from the date of acquisition. Note 3 – Fair Value Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows: Level 1 – defined as observable inputs, such as quoted market prices in active markets. Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions. Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and equivalents, accounts receivable, accounts payable, contingent consideration payable and defined benefit pension plan assets. The estimated fair value of cash and equivalents, accounts receivable and accounts payable approximates their carrying value. See Note 12 for fair value disclosures related to our defined benefit pension plan assets. Our contingent consideration, which resulted from the earn-out associated with our acquisition of Bantam, is measured at fair value on a recurring basis and is included in Other Noncurrent Liabilities on the Consolidated Balance Sheets. The following table summarizes our contingent consideration as of June 30: Fair Value Measurements at June 30, 2021 Level 1 Level 2 Level 3 Total Contingent consideration - Bantam $ — $ — $ 3,470 $ 3,470 Fair Value Measurements at June 30, 2020 Level 1 Level 2 Level 3 Total Contingent consideration - Bantam $ — $ — $ 9,157 $ 9,157 Bantam Contingent Consideration This contingent consideration resulted from the earn-out associated with our October 19, 2018 acquisition of Bantam. In general, the terms of the acquisition specify the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Bantam for the twelve months ending December 31, 2023. The initial fair value of the contingent consideration was determined to be $ 8.0 million. The fair value is measured on a recurring basis using a Monte Carlo simulation that randomly changes revenue growth, forecasted adjusted EBITDA and other uncertain variables to estimate an expected value. We record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy. Our 2021 fair value measurements resulted in a $ 5.7 million reduction in the fair value of Bantam’s contingent consideration based 40 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023. The changes in forecasted adjusted EBITDA primarily reflected the impact of a SKU rationalization by a Foodservice customer resulting in the loss of sales to that customer after November 30, 2020. This adjustment was recorded in our Foodservice segment. The following table represents our Level 3 fair value measurements using significant other unobservable inputs for Bantam’s contingent consideration: 2021 2020 Contingent consideration at beginning of year $ 9,157 $ 8,900 Change in contingent consideration included in operating income ( 5,687 ) 257 Contingent consideration at end of year $ 3,470 $ 9,157 Angelic Contingent Consideration The terms of our November 17, 2016 acquisition of Angelic Bakehouse, Inc. (“Angelic”) specified the sellers would receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021. Based on Angelic’s actual adjusted EBITDA for fiscal 2021, there will be no earn-out payment. No fair value adjustments were made during 2021 and 2020, and there was no liability recorded for Angelic’s contingent consideration at June 30, 2021 and 2020. Note 4 – Long-Term Debt At June 30, 2021 and 2020, we had an unsecured credit facility (“Facility”) under which we could borrow, on a revolving credit basis, up to a maximum of $ 150 million at any one time, with potential to expand the total credit availability to $ 225 million based on consent of the issuing banks and certain other conditions. The Facility expires on March 19, 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. In the event that LIBOR becomes unavailable or is no longer deemed an appropriate reference rate, the Facility allows for the use of a benchmark replacement rate. 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. There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a consolidated leverage ratio not greater than 3.5 to 1, subject to certain exceptions. The interest coverage ratio is calculated by dividing Consolidated EBIT by Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Net Debt by Consolidated EBITDA. All financial terms used in the covenant calculations are defined more specifically in the Facility. At June 30, 2021 and 2020, we had no borrowings outstanding under the Facility. At June 30, 2021 and 2020, we had $ 2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. We paid no interest in 2021 and 2020. Note 5 – Leases On July 1, 2019, we adopted new lease accounting guidance, which requires a lessee to record right-of-use assets and lease liabilities based upon the present value of the lease payments for operating leases and finance leases. We used the alternate transition method whereby companies could recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than restating comparative periods, but we did not record a cumulative-effect adjustment from initially applying the standard. General Lease Description We have operating leases with initial noncancelable lease terms in excess of one year covering the rental of various facilities and equipment. Certain of these leases contain renewal options and some provide options to purchase during the lease term. Our operating leases include leases for real estate for some of our office and manufacturing facilities as well as manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these operating leases range from 1 year to 7 years. We have finance leases with initial noncancelable lease terms in excess of one year covering the rental of various facilities and equipment. These leases are generally for non-manufacturing equipment used in our business and warehouse facilities. The remaining lease terms for these finance leases range from 2 years to 4 years. 41 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Significant Assumptions and Judgments Contract Contains a Lease In evaluating our contracts to determine whether a contract is or contains a lease, we considered the following: • Whether explicitly or implicitly identified assets have been deployed in the contract; and • Whether we obtain substantially all of the economic benefits from the use of that underlying asset, and we can direct how and for what purpose the asset is used during the term of the contract. Allocation of Consideration In determining how to allocate consideration between lease and non-lease components in a contract that was deemed to contain a lease, we used judgment and consistent application of assumptions to reasonably allocate the consideration. Options to Extend or Terminate Leases We have leases which contain options to extend or terminate the leases. On a lease-by-lease basis, we have determined if the extension should be considered reasonably certain to be exercised and thus a right-of-use asset and a lease liability should be recorded. Discount Rate The discount rate for leases, if not explicitly stated in the lease, is the incremental borrowing rate, which is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We use a discount rate to calculate the present value of lease liabilities. In the development of the discount rate, we consider our internal borrowing rate, treasury security rates, collateral and credit risk specific to us, and our lease portfolio characteristics. As of June 30, 2021 and 2020, the weighted-average discount rate of our operating leases was 2.9 % and 3.0 %, respectively. As of June 30, 2021 and 2020, the weighted-average discount rate of our finance leases was 1.9 % and 3.6 %, respectively. Practical Expedients and Accounting Policy Elections We elected the package of practical expedients that permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs and made an accounting policy election to exclude short-term leases with an initial term of 12 months or less from our Consolidated Balance Sheets. Amounts Recognized in the Financial Statements The components of lease expense in each of the years ended June 30 have been provided as follows: 2021 2020 Operating lease cost in Cost of Sales and Selling, General and Administrative Expenses $ 8,300 $ 8,726 Finance lease cost: Amortization of assets in Cost of Sales $ 1,571 $ 335 Interest on lease liabilities in Other, Net 156 73 Total finance lease cost $ 1,727 $ 408 Short-term lease cost in Cost of Sales and Selling, General and Administrative Expenses 2,652 2,405 Total net lease cost $ 12,679 $ 11,539 42 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Supplemental balance sheet information related to leases at June 30 is as follows: 2021 2020 Operating Leases Operating Lease Right-Of-Use Assets $ 22,455 $ 22,977 Current operating lease liabilities in Accrued Liabilities $ 6,861 $ 6,766 Noncurrent Operating Lease Liabilities 17,228 17,893 Total operating lease liabilities $ 24,089 $ 24,659 Finance Leases Finance lease right-of-use assets in Property, Plant and Equipment-Net $ 9,212 $ 2,346 Current finance lease liabilities in Accrued Liabilities $ 2,517 $ 571 Noncurrent finance lease liabilities in Other Noncurrent Liabilities 6,667 1,580 Total finance lease liabilities $ 9,184 $ 2,151 Supplemental cash flow information related to leases in each of the years ended June 30 is as follows: 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 8,501 $ 8,923 Operating cash flows from finance leases $ 156 $ 73 Financing cash flows from finance leases $ 2,002 $ 432 Supplemental noncash information on operating lease liabilities arising from obtaining right-of-use assets $ 7,005 $ 5,611 Supplemental noncash information on operating lease liabilities removed due to purchase of leased asset $ — $ 5,765 Supplemental noncash information on finance lease liabilities arising from obtaining right-of-use assets $ 9,035 $ 631 As of June 30, 2021, the maturities of lease liabilities were as follows: Operating Leases Finance Leases 2022 $ 7,466 $ 2,666 2023 5,809 2,475 2024 4,943 2,095 2025 2,910 1,973 2026 2,654 306 Thereafter 1,949 — Total minimum payments $ 25,731 $ 9,515 Less amount representing interest ( 1,642 ) ( 331 ) Present value of lease obligations $ 24,089 $ 9,184 As of June 30, 2021 and 2020, the weighted-average remaining term of our operating leases was 4.4 years and 4.7 years, respectively. As of June 30, 2021 and 2020, the weighted-average remaining term of our finance leases was 4.0 years and 3.8 years, respectively. 43 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Note 6 – Commitments and Contingencies In addition to the items discussed below, at June 30, 2021, we were a party to various claims and litigation matters arising in the ordinary course of business. Such matters did not have a material effect on the current-year results of operations and, in our opinion, their ultimate disposition will not have a material effect on our consolidated financial statements. We have a significant remaining commitment of approximately $ 92 million related to a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky. Our acquisition of Bantam included a provision for contingent consideration for the earn-out associated with this transaction. See further discussion in Note 3. 24 % of our employees are represented under various collective bargaining contracts. The labor contract for our Milpitas, California plant facility, which produces various sauces and dressings, will expire on December 15, 2021, and the labor contract for one of our Columbus, Ohio plant facilities, which produces various sauces, dressings and dips, will expire on March 6, 2022. 12 % of our employees are represented under these collective bargaining contracts. None of our other collective bargaining contracts will expire within one year. Note 7 – Goodwill and Other Intangible Assets Goodwill attributable to the Retail and Foodservice segments was $ 157.4 million and $ 51.0 million, respectively, at June 30, 2021 and 2020. The following table summarizes our identifiable other intangible assets at June 30: 2021 2020 Tradenames ( 20 to 30 -year life) Gross carrying value $ 62,531 $ 63,121 Accumulated amortization ( 12,421 ) ( 9,925 ) Net carrying value $ 50,110 $ 53,196 Customer Relationships ( 2 to 15 -year life) Gross carrying value $ 17,507 $ 17,507 Accumulated amortization ( 12,912 ) ( 11,094 ) Net carrying value $ 4,595 $ 6,413 Technology / Know-how ( 10 -year life) Gross carrying value $ 8,020 $ 8,950 Accumulated amortization ( 3,973 ) ( 3,396 ) Net carrying value $ 4,047 $ 5,554 Non-compete Agreements ( 5 -year life) Gross carrying value $ 191 $ 791 Accumulated amortization ( 177 ) ( 738 ) Net carrying value $ 14 $ 53 Total net carrying value $ 58,766 $ 65,216 In 2021, we recorded impairment charges of $ 1.2 million related to certain tradename and technology / know-how intangible assets for Bantam, which reflect the impact of a SKU rationalization by a Foodservice customer resulting in the loss of sales to that customer after November 30, 2020. 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. The impairment charges are reflected in Restructuring and Impairment Charges in the Consolidated Statements of Income and were recorded in our Foodservice segment. We also reduced the remaining useful life for Bantam’s Foodservice customer relationship and have recorded accelerated amortization expense. Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses, was as follows in each of the years ended June 30: 2021 2020 2019 Amortization expense $ 5,255 $ 5,061 $ 4,599 44 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Total annual amortization expense for each of the next five years is estimated to be as follows: 2022 $ 4,739 2023 $ 4,180 2024 $ 4,180 2025 $ 3,920 2026 $ 3,290 Note 8 – Liabilities Accrued liabilities at June 30 were composed of: 2021 2020 Compensation and employee benefits $ 32,521 $ 32,818 Distribution 8,803 7,148 Operating leases 6,861 6,766 Royalties 5,783 1,659 Finance leases 2,517 571 Marketing 1,957 1,525 Other taxes 1,665 1,392 Other 3,478 2,947 Total accrued liabilities $ 63,585 $ 54,826 Other noncurrent liabilities at June 30 were composed of: 2021 2020 Workers compensation $ 8,777 $ 9,701 Finance leases 6,667 1,580 Deferred compensation and accrued interest 4,606 4,390 Contingent consideration 3,470 9,157 Pension benefit liability 1,675 3,540 Gross tax contingency reserve 1,253 968 Postretirement benefit liability 1,145 1,207 Other 692 1,118 Total other noncurrent liabilities $ 28,285 $ 31,661 Note 9 – Income Taxes We file a consolidated federal income tax return. Taxes based on income for the years ended June 30 have been provided as follows: 2021 2020 2019 Currently payable: Federal $ 32,655 $ 23,392 $ 30,220 State and local 7,460 6,808 8,070 Total current provision 40,115 30,200 38,290 Deferred federal, state and local provision 3,298 11,894 6,703 Total taxes based on income $ 43,413 $ 42,094 $ 44,993 45 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) For the years ended June 30, our effective tax rate varied from the statutory federal income tax rate as a result of the following factors: 2021 2020 2019 Statutory rate 21.0 % 21.0 % 21.0 % State and local income taxes 3.2 3.1 3.5 Net windfall tax benefits - stock-based compensation ( 0.6 ) ( 0.8 ) ( 0.8 ) Other ( 0.2 ) 0.2 ( 0.7 ) Effective rate 23.4 % 23.5 % 23.0 % Our net deferred tax liability for all periods presented in the Consolidated Balance Sheets has been classified as noncurrent. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30 were comprised of: 2021 2020 Deferred tax assets: Employee medical and other benefits $ 6,853 $ 8,384 Operating lease liabilities 5,181 5,713 Inventories 3,003 2,382 Receivables 2,175 2,371 Other accrued liabilities 1,719 1,938 Total deferred tax assets 18,931 20,788 Deferred tax liabilities: Property, plant and equipment ( 31,052 ) ( 30,036 ) Goodwill ( 14,174 ) ( 11,390 ) Intangible assets ( 7,076 ) ( 7,848 ) Operating lease right-of-use assets ( 5,298 ) ( 5,333 ) Other ( 33 ) ( 421 ) Total deferred tax liabilities ( 57,633 ) ( 55,028 ) Net deferred tax liability $ ( 38,702 ) $ ( 34,240 ) Prepaid federal income taxes of $ 5.1 million and $ 5.3 million were included in Other Current Assets at June 30, 2021 and 2020, respectively. Prepaid state and local income taxes of $ 1.1 million were included in Other Current Assets at June 30, 2021. Net cash payments for income taxes for each of the years ended June 30 were as follows: 2021 2020 2019 Net cash payments for income taxes $ 40,735 $ 30,958 $ 38,644 The gross tax contingency reserve at June 30, 2021 was $ 1.3 million and consisted of estimated tax liabilities of $ 0.8 million and interest and penalties of $ 0.5 million. The unrecognized tax benefits recorded as the gross tax contingency reserve noted in the following table for June 30, 2021 and 2020 would affect our effective tax rate, if recognized. 46 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) The following table sets forth changes in our total gross tax contingency reserve (including interest and penalties): 2021 2020 Balance, beginning of year $ 968 $ 1,670 Tax positions related to the current year: Additions — — Reductions — — Tax positions related to prior years: Additions 311 51 Reductions ( 26 ) ( 25 ) Settlements — ( 728 ) Balance, end of year $ 1,253 $ 968 We have not classified any of the gross tax contingency reserve at June 30, 2021 in Accrued Liabilities as none of these amounts are expected to be resolved within the next 12 months. Consequently, the entire liability of $ 1.3 million was included in Other Noncurrent Liabilities. We expect that the amount of these liabilities will change within the next 12 months; however, we do not expect the change to have a significant effect on our financial position or results of operations. We recognize interest and penalties related to these tax liabilities in income tax expense. For each of the years ended June 30, we recognized the change in the accrual for net tax-related interest and penalties as follows: 2021 2020 Expense (benefit) recognized for net tax-related interest and penalties $ 48 $ ( 188 ) We had accrued interest and penalties at June 30 as follows: 2021 2020 Accrued interest and penalties included in the gross tax contingency reserve $ 529 $ 481 We file federal and various state and local income tax returns in the United States. With limited exceptions, we are no longer subject to examination of U.S. federal or state and local income taxes for years prior to 2018. Note 10 – Business Segment Information 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. We evaluate our segments based on net sales and operating income. 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 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. Retail - The vast majority of the products we sell in the Retail segment are sold through sales personnel, food brokers and distributors in the United States. We have placement of products in grocery produce departments through our refrigerated salad dressings, vegetable dips and fruit dips. Our flatbread products and sprouted grain bakery products are generally placed in the specialty bakery/deli section of the grocery store. We also have products typically marketed in the shelf-stable section of the grocery store, which include salad dressings, slaw dressing, sauces and croutons. Within the frozen food section of the grocery store, we sell yeast rolls, garlic breads and mini stuffed bagels. 47 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Foodservice - The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors in the United States. Most of the products we sell in the Foodservice segment are custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls. The majority of our Foodservice sales are products sold under private label to restaurants. We also manufacture and sell various branded Foodservice products to distributors. Finally, within this segment, we sold other roll products under a temporary supply agreement resulting from the Omni acquisition. The temporary supply agreement was terminated effective October 31, 2020. As many of our products are similar between our two segments, our procurement, manufacturing, warehousing and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. Consequently, we do not prepare, and our CODM does not review, separate balance sheets for the reportable segments. As such, our external reporting does not include the presentation of identifiable assets, payments for property additions or depreciation and amortization by reportable segment. The following table sets forth net sales disaggregated by class of similar products for the Retail and Foodservice segments in each of the years ended June 30: 2021 2020 2019 Retail Frozen breads $ 308,482 $ 290,940 $ 259,290 Shelf-stable dressings, sauces and croutons 297,572 205,062 177,717 Refrigerated dressings, dips and other 222,909 218,125 219,614 Total Retail net sales $ 828,963 $ 714,127 $ 656,621 Foodservice Dressings and sauces $ 477,940 $ 436,909 $ 467,364 Frozen breads and other 156,457 161,093 164,438 Other roll products 3,707 22,259 19,364 Total Foodservice net sales $ 638,104 $ 620,261 $ 651,166 Total net sales $ 1,467,067 $ 1,334,388 $ 1,307,787 The following table provides an additional disaggregation of Foodservice net sales by type of customer in each of the years ended June 30: 2021 2020 2019 Foodservice National accounts $ 494,874 $ 459,880 $ 480,249 Branded and other 139,523 138,122 151,553 Other roll products 3,707 22,259 19,364 Total Foodservice net sales $ 638,104 $ 620,261 $ 651,166 48 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) The following sets forth certain additional financial information attributable to our reportable segments, certain amounts not allocated among our reportable segments and amounts retained at the corporate level for the years ended June 30: 2021 2020 2019 Net Sales (1) (2) Retail $ 828,963 $ 714,127 $ 656,621 Foodservice 638,104 620,261 651,166 Total $ 1,467,067 $ 1,334,388 $ 1,307,787 Operating Income (2) (3) Retail $ 188,403 $ 161,487 $ 149,019 Foodservice 89,048 80,475 86,177 Nonallocated Restructuring and Impairment Charges (4) — ( 886 ) ( 1,643 ) Corporate Expenses (5) ( 91,599 ) ( 65,128 ) ( 42,629 ) Total $ 185,852 $ 175,948 $ 190,924 Identifiable Assets (1) (6) Retail & Foodservice (7) $ 878,389 $ 771,270 $ 695,872 Corporate 222,896 222,083 209,527 Total $ 1,101,285 $ 993,353 $ 905,399 Payments for Property Additions (3) Retail & Foodservice (7) $ 86,792 $ 81,067 $ 70,415 Corporate 1,073 1,575 465 Total $ 87,865 $ 82,642 $ 70,880 Depreciation and Amortization (3) Retail & Foodservice (7) $ 41,356 $ 35,790 $ 30,896 Corporate 3,153 2,173 952 Total $ 44,509 $ 37,963 $ 31,848 (1) Net sales and long-lived assets are predominately domestic. (2) All intercompany transactions have been eliminated. (3) As discussed above, all historical information for operating income, payments for property additions and depreciation and amortization has been retroactively conformed to the current presentation. These changes had no effect on previously reported consolidated totals. (4) Reflects restructuring and impairment charges related to a plant closure that were not allocated to our two reportable segments due to their unusual nature. (5) Our Corporate Expenses include various expenses of a general corporate nature, expenditures for Project Ascent and costs related to certain divested or closed nonfood operations. These costs have not been allocated to the Retail and Foodservice segments. (6) Retail and Foodservice identifiable assets include those assets used in our operations and other intangible assets allocated to purchased businesses. Corporate assets consist principally of cash and equivalents. The increase in Retail and Foodservice identifiable assets from June 30, 2020 to June 30, 2021 reflected property additions, largely due to several capacity expansion projects that are currently underway, and higher inventory levels due to increased commodity costs. The increase in Retail and Foodservice identifiable assets from June 30, 2019 to June 30, 2020 reflected property additions, notably a capacity expansion project at our frozen dinner roll facility in Horse Cave, Kentucky, as well as operating lease right-of-use assets recorded in 2020 due to the adoption of new accounting guidance. (7) As discussed above, we do not present identifiable assets, payments for property additions or depreciation and amortization by reportable segment. 49 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Retail segment net sales attributable to Walmart Inc. (“Walmart”) and Foodservice segment net sales attributable to McLane Company, Inc. (“McLane”), a wholesale distribution subsidiary of Berkshire Hathaway, Inc., for each of the years ended June 30 were as follows: 2021 2020 2019 Net sales to Walmart $ 267,090 $ 241,699 $ 222,171 As a percentage of consolidated net sales 18 % 18 % 17 % Net sales to McLane $ 184,021 $ 174,242 $ 195,907 As a percentage of consolidated net sales 13 % 13 % 15 % Accounts receivable attributable to Walmart and McLane at June 30 as a percentage of consolidated accounts receivable were as follows: 2021 2020 Walmart 27 % 30 % McLane 9 % 10 % Note 11 – Stock-Based Compensation Our shareholders previously approved the Lancaster Colony Corporation 2015 Omnibus Incentive Plan (the “2015 Plan”). The 2015 Plan reserved 1,500,000 common shares for issuance to our employees and directors. All awards granted under this plan will be exercisable at prices not less than fair market value as of the date of the grant. The vesting period for awards granted under this plan varies as to the type of award granted, and the maximum term of these awards is seven years . We recognize compensation expense over the requisite service period of the grant. Compensation expense is reflected in Cost of Sales or Selling, General and Administrative Expenses based on the grantees’ salaries expense classification. We record tax benefits and excess tax benefits related to stock-settled stock appreciation rights (“SSSARs”) and restricted stock awards. These excess tax benefits are included in the operating section of the Consolidated Statements of Cash Flows. We estimate a forfeiture rate for our SSSARs and restricted stock grants based on historical experience. Stock-Settled Stock Appreciation Rights We use periodic grants of SSSARs as a vehicle for rewarding certain employees with long-term incentives for their efforts in helping to create long-term shareholder value. We calculate the fair value of SSSARs grants using the Black-Scholes option-pricing model. Our policy is to issue shares upon SSSARs exercise from new shares that had been previously authorized. In 2021, 2020 and 2019, we granted SSSARs to various employees under the terms of the plan. The following table summarizes information relating to these grants: 2021 2020 2019 SSSARs granted 124 180 157 Weighted average grant date fair value per right $ 36.24 $ 24.06 $ 23.55 Weighted average assumptions used in fair value calculations: Risk-free interest rate 0.51 % 1.17 % 2.43 % Dividend yield 1.69 % 1.81 % 1.68 % Volatility factor of the expected market price of our common stock 28.63 % 22.57 % 21.77 % Expected life in years 4.55 4.01 3.04 For these grants, the volatility factor was estimated based on actual historical volatility of our stock for a time period equal to the term of the SSSARs. The expected average life was determined based on historical exercise experience for this type of grant. The SSSARs we grant generally vest over a 3 -year period whereby one-third vests on the first anniversary of the grant date, one-third vests on the second anniversary of the grant date and one-third vests on the third anniversary of the grant date. The following table summarizes our SSSARs compensation expense and tax benefits recorded for each of the years ended June 30: 2021 2020 2019 Compensation expense $ 3,568 $ 3,049 $ 3,074 Tax benefits $ 749 $ 640 $ 646 Intrinsic value of exercises $ 6,187 $ 6,693 $ 6,008 50 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) The total fair values of SSSARs vested for each of the years ended June 30 were as follows: 2021 2020 2019 Fair value of vested rights $ 3,404 $ 2,972 $ 3,143 The following table summarizes the activity relating to SSSARs granted under the plan for the year ended June 30, 2021: Number of Rights Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value Outstanding at beginning of year 539 $ 142.16 Exercised ( 203 ) $ 131.76 Granted 124 $ 177.87 Forfeited ( 6 ) $ 147.72 Outstanding at end of year 454 $ 156.49 3.34 $ 16,806 Exercisable and vested at end of year 160 $ 142.58 2.33 $ 8,155 Vested and expected to vest at end of year 439 $ 156.18 3.32 $ 16,392 The following table summarizes information about the SSSARs outstanding by grant year at June 30, 2021: Outstanding Exercisable Weighted Average Grant Years Range of Exercise Prices Number Outstanding Remaining Contractual Life in Years Exercise Price Number Exercisable Weighted Average Exercise Price 2021 $ 167.18 -$ 187.30 124 4.65 $ 177.87 — $ — 2020 $ 153.71 -$ 154.44 165 3.64 $ 153.74 47 $ 153.73 2019 $ 148.18 -$ 180.60 96 2.66 $ 154.82 44 $ 155.03 2018 $ 121.09 -$ 124.29 40 1.65 $ 121.17 40 $ 121.17 2017 $ 135.06 29 0.65 $ 135.06 29 $ 135.06 At June 30, 2021, there was $ 6.7 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of 2 years. Restricted Stock We use periodic grants of restricted stock as a vehicle for rewarding our nonemployee directors and certain employees with long-term incentives for their efforts in helping to create long-term shareholder value. In 2021, 2020 and 2019, we granted shares of restricted stock to various employees under the terms of the plan. The following table summarizes information relating to these grants: 2021 2020 2019 Employees Restricted stock granted 17 31 13 Grant date fair value $ 2,918 $ 4,813 $ 2,030 Weighted average grant date fair value per award $ 177.89 $ 153.72 $ 154.66 The restricted stock under these employee grants vests 3 years after the grant date. Under the terms of our grants, employees receive dividends on unforfeited restricted stock regardless of their vesting status. In 2021, 2020 and 2019, we also granted shares of restricted stock to our nonemployee directors under the terms of the plan. The following table summarizes information relating to each of these grants: 2021 2020 2019 Nonemployee directors Restricted stock granted 4 5 4 Grant date fair value $ 774 $ 760 $ 760 Weighted average grant date fair value per award $ 172.89 $ 155.70 $ 180.16 51 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) The restricted stock under these nonemployee director grants generally vests 1 year after the grant date. All of the shares granted during 2021 are expected to vest. Dividends earned on the stock during the vesting period will be paid to the directors at the time the stock vests. The following table summarizes our restricted stock compensation expense and tax benefits recorded for each of the years ended June 30: 2021 2020 2019 Compensation expense $ 3,558 $ 3,066 $ 2,898 Tax benefits $ 747 $ 644 $ 609 The total fair values of restricted stock vested for each of the years ended June 30 were as follows: 2021 2020 2019 Fair value of vested shares $ 3,148 $ 2,284 $ 3,537 The following table summarizes the activity relating to restricted stock granted under the plan for the year ended June 30, 2021: Number of Shares Weighted Average Grant Date Fair Value Unvested restricted stock at beginning of year 69 $ 144.27 Granted 21 $ 176.82 Vested ( 25 ) $ 128.03 Forfeited ( 3 ) $ 142.45 Unvested restricted stock at end of year 62 $ 161.35 At June 30, 2021, there was $ 5.2 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of 2 years. Note 12 – Pension Benefits Defined Benefit Pension Plans We sponsor multiple defined benefit pension plans that covered certain workers under collective bargaining contracts. However, as a result of prior-years’ restructuring activities, for all periods presented, we no longer have any active employees continuing to accrue service cost or otherwise eligible to receive plan benefits. Benefits being paid under the plans are primarily based on negotiated rates and years of service. We contribute to these plans at least the minimum amount required by regulation. At the end of the year, we discount our plan liabilities using an assumed discount rate. In estimating this rate, we, along with our third-party actuaries, review the timing of future benefit payments, bond indices, yield curve analysis results and the past history of discount rates. The actuarial present value of benefit obligations summarized below was based on the following assumption: 2021 2020 Weighted-average assumption as of June 30 Discount rate 2.58 % 2.49 % The net periodic benefit costs were determined utilizing the following beginning-of-the-year assumptions: 2021 2020 2019 Discount rate 2.49 % 3.35 % 4.07 % Expected long-term return on plan assets 5.00 % 6.50 % 7.00 % In determining the long-term expected return on plan assets, we consider our related investment guidelines, our expectations of long-term rates of return by asset category, our target asset allocation weighting and historical rates of return and volatility for equity and fixed income investments. The investment strategy for plan assets is to control and manage investment risk through diversification among asset classes, investment managers/funds and investment styles. The plans’ investment guidelines have been designed to meet the intended objective that plan assets earn at least nominal returns equal to 52 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) or more than the plans’ liability growth rate. In consideration of the current average age of the plans’ participants, the investment guidelines are based upon an investment horizon of at least 10 years. We completed an evaluation of the plans’ asset allocation and liabilities with assistance from an independent outside consultant. As a result, with the plans well-funded and no active employees continuing to accrue service cost or otherwise eligible to receive plan benefits, we reallocated the plan assets to better match the plan liabilities. Accordingly, we allocated a higher percentage of the plan assets to long-duration fixed income investments, thereby reducing equity exposure risk and mitigating the unfavorable impacts of interest rate volatility. This reallocation resulted in a reduction to the expected long-term return on plan assets. The target and actual asset allocations for our plans at June 30 by asset category were as follows: Target Percentage of Plan Assets at June 30 Actual Percentage of Plan Assets 2021 2021 2020 Equity securities 20 %- 80 % 27 36 Fixed income, including cash 20 %- 80 % 73 64 Total 100 % 100 % Our target asset allocations are maintained through ongoing review and periodic rebalancing of equity and fixed income investments with assistance from an independent outside investment consultant. Also, the plan assets are diversified among asset classes, asset managers or funds and investment styles to avoid concentrations of risk. As noted above, the increase in the allocation of plan assets to fixed income investments over the past two years reflects the decision to better match the invested assets with the plans’ liabilities. We continue to allocate a modest amount of plan assets to cash to cover near-term expenses. We categorize our plan assets within a three-level fair value hierarchy, as previously defined in Note 3. The following table summarizes the fair values and levels, within the fair value hierarchy, for our plan assets at June 30: June 30, 2021 Asset Category Level 1 Level 2 Level 3 Total Cash and equivalents $ 577 $ — $ — $ 577 Money market funds 1,140 — — 1,140 U.S. government obligations — — — — Municipal obligations — — — — Corporate obligations — — — — Mortgage obligations — — — — Mutual funds fixed income 27,044 — — 27,044 Mutual funds equity 10,658 — — 10,658 Total $ 39,419 $ — $ — $ 39,419 June 30, 2020 Asset Category Level 1 Level 2 Level 3 Total Cash and equivalents $ 367 $ — $ — $ 367 Money market funds 1,046 — — 1,046 U.S. government obligations — 1,261 — 1,261 Municipal obligations — 264 — 264 Corporate obligations — 1,303 — 1,303 Mortgage obligations — 1,836 — 1,836 Mutual funds fixed income 17,326 — — 17,326 Mutual funds equity 13,365 — — 13,365 Total $ 32,104 $ 4,664 $ — $ 36,768 The plan assets classified at Level 1 include money market funds and mutual funds. Quoted market prices in active markets for identical assets are available for investments in this category. 53 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) The plan assets classified at Level 2 include fixed income securities consisting of government securities, municipal obligations, corporate obligations and mortgage obligations. For these types of securities, market prices are observable for identical or similar investment securities but not readily accessible for each of those investments individually at the measurement date. For these assets, we obtain pricing information from an independent pricing service. The pricing service uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing service are derived from market observable sources including as applicable: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. Relevant information with respect to our pension benefits as of June 30 can be summarized as follows: 2021 2020 Change in benefit obligation Benefit obligation at beginning of year $ 39,969 $ 38,382 Interest cost 965 1,246 Actuarial (gain) loss ( 1,188 ) 2,639 Benefits paid ( 2,307 ) ( 2,298 ) Benefit obligation at end of year $ 37,439 $ 39,969 2021 2020 Change in plan assets Fair value of plan assets at beginning of year $ 36,768 $ 36,628 Actual return on plan assets 4,931 2,344 Employer contributions 27 94 Benefits paid ( 2,307 ) ( 2,298 ) Fair value of plan assets at end of year $ 39,419 $ 36,768 2021 2020 Funded status - net prepaid (accrued) benefit cost $ 1,980 $ ( 3,201 ) 2021 2020 Amounts recognized in the Consolidated Balance Sheets consist of Prepaid benefit cost (Other Noncurrent Assets) $ 3,655 $ 339 Accrued benefit liability (Other Noncurrent Liabilities) ( 1,675 ) ( 3,540 ) Net amount recognized $ 1,980 $ ( 3,201 ) 2021 2020 Accumulated benefit obligation $ 37,439 $ 39,969 The following table discloses, in the aggregate, those plans with benefit obligations in excess of the fair value of plan assets at the June 30 measurement date: 2021 2020 Benefit obligations $ 7,206 $ 37,883 Fair value of plan assets at end of year $ 5,531 $ 34,343 Amounts recognized in accumulated other comprehensive loss at June 30 were as follows: 2021 2020 Net actuarial loss $ 12,138 $ 17,170 Income taxes ( 2,837 ) ( 4,013 ) Total $ 9,301 $ 13,157 54 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) The following table summarizes the components of net periodic benefit income for our pension plans at June 30: 2021 2020 2019 Components of net periodic benefit income Interest cost $ 965 $ 1,246 $ 1,453 Expected return on plan assets ( 1,779 ) ( 2,302 ) ( 2,487 ) Amortization of unrecognized net loss 692 572 447 Net periodic benefit income $ ( 122 ) $ ( 484 ) $ ( 587 ) We have not yet finalized our anticipated funding level for 2022, but based on initial estimates, we do not expect our 2022 contributions to our pension plans to be material. Benefit payments estimated for future years are as follows: 2022 $ 2,393 2023 $ 2,367 2024 $ 2,360 2025 $ 2,349 2026 $ 2,317 2027 - 2031 $ 10,844 Note 13 – Defined Contribution and Other Employee Plans Company-Sponsored Defined Contribution Plans We sponsor three defined contribution plans established pursuant to Section 401(k) of the Internal Revenue Code. Contributions are determined under various formulas, and we contributed to each of these plans in 2021. The employer matching contribution percentage for one of these plans was increased effective January 1, 2019. Costs related to such plans for each of the years ended June 30 were as follows: 2021 2020 2019 Costs related to company-sponsored defined contribution plans $ 5,015 $ 4,170 $ 2,637 Multiemployer Plans In the three years ended June 30, 2021, one of our subsidiaries participated in a multiemployer plan that provides pension benefits to retiree workers under a collective bargaining contract. This plan generally provides for retirement, death and/or termination benefits for eligible employees within the collective bargaining contract, based on specific eligibility/participation requirements, vesting periods and benefit formulas. The risks of participating in a multiemployer plan are different from single-employer plans in the following aspects: (1) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (2) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (3) if a participating employer chooses to stop participating in the multiemployer plan, it may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. 55 Table of Contents LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share data) Our participation in this multiemployer pension plan for the three years ended June 30, 2021 is reflected in the following table. All information in the table is as of December 31 of the relevant year, except contributions which are based on our fiscal year, or except as otherwise noted. The EIN/PN column provides the Employer Identification Number (“EIN”) and the Plan Number (“PN”). The pension protection act zone status is based on information that we received from the plan. Among other factors, generally, plans in critical status (red zone) are less than 65 percent funded, plans in endangered or seriously endangered status (yellow zone or orange zone, respectively) are less than 80 percent funded, and plans at least 80 percent funded are said to be in the green zone. The FIP/RP status pending/implemented column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented by the trustees of each plan. There have been no significant changes that affect the comparability of 2021, 2020 or 2019 contributions. Pension Protection Act Zone Status Fiscal Year Contributions Plan Name EIN/PN 2020 2019 FIP/RP Status Pending / Implemented 2021 2020 2019 Surcharge Imposed Expiration Date of Collective Bargaining Agreement Western Conference of Teamsters Pension Plan 916145047 - 001 Green 12/31/19 Green 12/31/18 No $ 327 $ 327 $ 388 No 12/15/2021 Under this multiemployer plan and one additional multiemployer plan, we also contribute amounts for health and welfare benefits that are defined by each plan. These benefits are not vested. The contributions required by our participation in these plans for each of the years ended June 30 were as follows: 2021 2020 2019 Multiemployer health and welfare plan contributions $ 3,428 $ 3,242 $ 3,189 We also make non-elective contributions for the union employees at our Bedford Heights, Ohio plant into a union-sponsored multiemployer 401(k) plan. Our contributions totaled $ 0.7 million in 2021, 2020 and 2019. Deferred Compensation Plan We offer a deferred compensation plan for select employees who may elect to defer a certain percentage of annual compensation. We do not match any contributions. Each participant earns interest based upon the prime rate of interest, adjusted semi-annually, on their respective deferred compensation balance. Participants are paid out upon retirement or termination in accordance with their annual election. The following table summarizes our liability for total deferred compensation and accrued interest at June 30: 2021 2020 Liability for deferred compensation and accrued interest $ 4,606 $ 4,390 Deferred compensation expense for each of the years ended June 30 was as follows: 2021 2020 2019 Deferred compensation expense $ 147 $ 239 $ 239 56 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.