What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-25 compared with 2021-08-26 · 128 added, 129 removed, 232 unchanged (53% of the section changed)

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Our discussion of results for 2022 compared to 2021 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.

For discussion of results for 2021 compared to 2020, see our 2021 Annual Report on Form 10-K.

Business Overview

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Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied.

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

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

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

These changes were effective July 1, 2020.

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

In 2021, our Chief Operating Decision Maker (“CODM”), in order to drive enhanced accountability and transparency throughout our organization, initiated a review of functional costs that had historically been part of the indirect costs allocated to our two reportable segments.

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

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

These changes were effective in 2021, and all historical information was retroactively conformed to the current presentation.

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

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

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

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Recent examples of resulting investments include:

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

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

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

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

• a capacity expansion project for one of our Marzetti dressing and sauce facilities in Columbus, Ohio that was completed in January 2022;

• a significant infrastructure improvement and capacity expansion project for our frozen pasta facility in Altoona, Iowa that was completed in March 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;

• 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.

Implementation of this system began in July 2022 and will continue throughout fiscal 2023.

Customer fulfillment levels remained strong before and after the system cutover with no unplanned disruptions in receiving orders, producing products or shipping orders.

We anticipate full deployment throughout our organization in the next 12-18 months.

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:

to ensure the health, safety and welfare of our employees;

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;

• 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

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.

BUSINESS TRENDS

Dating back to the onset of the COVID-19 pandemic in 2020, the effects of COVID-19 on consumer behavior have impacted the relative demand for our Retail and Foodservice products.

More specifically, beginning in March 2020, there has been an overall shift in consumer demand towards increased at-home food consumption and away from in-restaurant dining.

While this shift in demand has been inconsistent and volatile, on balance it has positively impacted our Retail segment sales and negatively impacted our Foodservice segment sales.

From an operations standpoint, the shift in demand, combined with other COVID-19-related issues, has unfavorably impacted the operating results of both our segments.

These issues include higher hourly wage rates paid to our front-line employees, increased costs for personal protective equipment, higher expenditures attributed to incremental co-manufacturing volumes, increased complexity and uncertainty in production planning and forecasting, and overall lower levels of efficiency in our production and distribution network.

The inflationary cost environment we experienced during 2022 resulted in significantly higher input costs for our business.

During 2022, we endured unprecedented inflationary costs for commodities, particularly soybean oil and flour, in addition to notably higher costs for packaging, freight and warehousing, and labor.

This cost inflation was attributed to numerous factors such as the impacts of the COVID-19 pandemic, the war in the Ukraine, climate and weather conditions, supply chain disruptions, including some raw material and packaging shortages, a tight labor market, and government-directed fiscal stimulus actions.

RESULTS OF CONSOLIDATED OPERATIONS

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Change in Contingent Consideration (3,470) (5,687) 257 2,217 (39) % (5,944) N/M

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

Restructuring and Impairment Charges 35,180 1,195 886 33,985 N/M 309 35 %

Operating Income 111,911 185,852 175,948 (73,941) (40) % 9,904 6 %

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Consolidated net sales for the year ended June 30, 2022 increased 14% to a new record of $1,676 million from the prior-year record total of $1,467 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%.

This growth was driven by higher net sales for both the Retail and Foodservice segments, including the favorable impact of pricing actions.

Consolidated sales volumes, measured in pounds shipped, increased 2% in 2022.

In the prior year, consolidated sales volumes increased 3%.

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.

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

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.

Consolidated gross profit decreased 8% to $355.7 million in 2022 compared to $386.7 million in 2021 as we endured unprecedented inflationary costs for commodities, packaging, freight and warehousing, and labor.

We also incurred incremental expenditures attributed to our increased reliance upon co-manufacturers to help satisfy demand.

While our pricing actions helped to offset the impacts of inflation, the gross profit decline reflects an extremely challenging operating environment that, beyond inflation, includes the unfavorable effects of supply chain disruptions, demand volatility and uncertainty, suboptimal capacity utilization, and overall lower productivity resulting in substantially higher costs to produce our products and service our customers.

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

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Total SG&A Expenses $ 212,098 $ 205,363 $ 180,945 $ 6,735 3 % $ 24,418 13 %

Selling, general and administrative (“SG&A”) expenses increased 3% to $212.1 million in 2022 as expenditures for Project Ascent increased $1.4 million to $39.3 million.

Excluding Project Ascent, SG&A expenses were higher than the prior year reflecting investments in a supply chain optimization study and IT investments, as well as higher brokerage costs attributed to the increased sales.

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.

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.

In 2022, the change in contingent consideration resulted in a benefit of $3.5 million.

This benefit reflected a reduction in the fair value of the contingent consideration liability for Bantam Bagels, LLC (“Bantam”) based on our 2022 fair value measurements.

The resulting fair value adjustments were due to changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023, as well as refinements to the estimated probabilities applied to our forecast scenarios.

We recorded $2.6 million in our Foodservice segment and $0.9 million in our Retail segment.

In May 2022, our Board of Directors approved a plan to exit the Bantam business.

There was no liability recorded for Bantam’s contingent consideration at June 30, 2022.

In 2021, the change in contingent consideration resulted in a benefit of $5.7 million.

This benefit reflected a reduction in the fair value of the contingent consideration liability for Bantam based on 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.

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Restructuring and Impairment Charges

In 2022, we recorded restructuring and impairment charges totaling $35.2 million related to the following items:

• our decision to explore strategic alternatives and ultimately exit the Bantam business;

• the impact of a revision to the forecasted cash flows of Bantam on the intangible assets of this business;

• the impact of a revision to the forecasted branded sales of Angelic Bakehouse, Inc.

(“Angelic”) on the intangible assets of this business;

• the closure of our frozen garlic bread facility in Baldwin Park, California.

Based on our decision to explore strategic alternatives for the Bantam business, impairment testing was triggered for the related long-lived assets of the asset group.

The related restructuring and impairment charges of $24.8 million included impairment charges for intangible assets, fixed assets and an operating lease right-of-use asset, as well as other closure-related costs.

Due to their unusual nature, these restructuring and impairment charges were not allocated to our two reportable segments.

As noted above, in May 2022, our Board of Directors approved a plan to exit the Bantam business.

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

In 2022, prior to our decision to explore strategic alternatives for the Bantam business, we also recorded an impairment charge of $0.9 million related to Bantam’s Retail customer relationships intangible asset, which reflected lower projected cash flows for Bantam’s Retail business.

This impairment charge was reflected in our Retail segment.

In 2022, we also recorded an impairment charge of $8.8 million related to the tradename intangible asset of Angelic, which reflected the impact of lower projected sales for Angelic’s branded Retail business.

This impairment charge was reflected in our Retail segment.

In 2022, we committed to a plan to close our frozen garlic bread facility in Baldwin Park, California in support of our ongoing efforts to better optimize our manufacturing network.

Production at the facility ceased in January 2022, and the Mamma Bella ® brand frozen garlic bread product line was discontinued based on its small size and low profitability.

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

We recorded restructuring and impairment charges of

$0.7 million, which consisted of one-time termination benefits and impairment charges for fixed assets and the operating lease right-of-use asset, and were not allocated to our two reportable segments due to their unusual nature.

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.

These impairment charges were reflected in our Foodservice segment.

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.

Operating income decreased 40% to $111.9 million in 2022, including the unfavorable impacts of the $25.7 million in restructuring and impairment charges for the Bantam business and the $8.8 million impairment charge for the Angelic tradename intangible asset.

Beyond those charges, operating results were negatively affected by significant inflationary costs for commodities, packaging, freight and warehousing, and labor in addition to increased co-manufacturing costs.

We also experienced the unfavorable impacts of an extremely challenging operating environment characterized by supply chain disruptions, demand volatility and uncertainty, and reduced operating efficiencies.

Our pricing actions helped to offset the inflationary costs.

The decline in operating income also reflected the higher level of SG&A expenditures.

Incremental sales attributed to advance customer orders near the end of 2022 ahead of our ERP go-live added an estimated $5 million to consolidated operating income.

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

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

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

Taxes Based on Income

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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.

As influenced by the factors discussed above, diluted net income per share totaled $3.25 in 2022, a decrease from the 2021 total of $5.16 per diluted share.

Diluted weighted average common shares outstanding for each of the years ended June 30, 2022 and 2021 have remained relatively stable.

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.

In 2022 and 2021, expenditures for Project Ascent reduced diluted earnings per share by $1.09 and $1.05, respectively;

restructuring and impairment charges reduced diluted earnings per share by $0.98 and $0.03, respectively;

and the adjustments to Bantam’s contingent consideration increased diluted earnings per share by $0.10 and $0.16, respectively.

RESULTS OF OPERATIONS - SEGMENTS

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Operating Margin 16.6 % 22.7 % 22.6 %

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.

In 2022, net sales for the Retail segment reached a record $915.2 million, a 10% increase from the prior-year total of $829.0 million.

In addition to the benefit of pricing actions, the increase in Retail sales was driven by volume gains for Chick-fil-A ® sauces and Buffalo Wild Wings ® sauces, both of which are sold under exclusive licensing agreements.

Volume gains for our New York BRAND Bakery ® frozen garlic bread and Sister Schubert’s ® frozen dinner rolls also contributed to sales growth.

Retail segment sales volumes, measured in pounds shipped, increased 2% in the current year compared to an increase of 11% last year.

Note that Retail segment sales volumes benefited from advance ordering by our customers near the end of the fiscal fourth quarter ahead of our ERP go-live, and the resulting incremental Retail sales were estimated to be $11 million.

In addition, Retail segment sales volumes were unfavorably impacted by our decision to exit certain product lines during 2022 including some private label dips and Mamma Bella ® frozen garlic bread.

Excluding the advance ordering and the product line rationalizations, Retail sales volumes increased 6%.

In 2022, Retail segment operating income decreased 20% to $151.6 million, including the unfavorable impact of impairment charges totaling $9.7 million as referenced in the “Restructuring and Impairment Charges” section above.

The decline in operating income was driven by the unfavorable impacts of increased commodity and packaging costs, significantly higher freight and warehousing costs, increased co-manufacturing costs, higher labor costs and broad-based supply chain challenges.

The net impact of our pricing actions lagged the extraordinary levels of cost inflation.

Foodservice Segment

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Operating Margin 10.9 % 14.0 % 13.0 %

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

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

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

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

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

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

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

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

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

Excluding all sales 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.

In 2022, Foodservice segment net sales increased 19% to a record $761.2 million from the 2021 total of $638.1 million driven by inflationary pricing along with the benefit of volume gains for our branded Foodservice products and select customers within our mix of national chain restaurant accounts.

Note that Foodservice segment sales volumes benefited from advance ordering by our customers near the end of the fiscal fourth quarter ahead of our ERP go-live, and the resulting incremental Foodservice sales were estimated to be $14 million.

Foodservice sales volumes, measured in pounds shipped, increased 2% compared to a decline of 1% last year.

Excluding the benefit of advance ordering and also excluding 2021 sales attributed to a temporary supply agreement resulting from the November 2018 acquisition of Omni Baking Company LLC (“Omni”) that was terminated effective October 31, 2020, Foodservice sales volumes increased 1% in 2022.

In 2022, Foodservice segment operating income decreased 7% to $82.7 million, reflecting increased commodity and packaging costs, higher freight and warehousing expenses, higher labor costs and the unfavorable impacts of broad-based supply chain challenges as partially offset by the benefit of pricing actions.

Corporate Expenses

The 2022 corporate expenses totaled $97.0 million as compared to $91.6 million in 2021.

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.

This increase reflects increased IT investments and professional fees as well as higher expenditures for Project Ascent, which totaled $39.3 million in 2022 as compared to $37.9 million in 2021.

In 2022 and 2021, we also capitalized an additional $1.6 million and $3.5 million, respectively, 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.

For 2023, we anticipate our Retail sales volumes will continue to benefit from the growth of our licensing program, but will also face offsets from consumer demand elasticity and rationalization initiatives for some of our low-margin products.

In Foodservice, we expect sales volumes to be led by growth from select quick-service restaurant customers in our mix of national chain restaurant accounts while the external factors of a slowing economy and changes in consumer sentiment may dampen demand.

Both our Retail and Foodservice sales will also continue to benefit from our pricing actions.

Note that our 2023 first quarter sales will be unfavorably impacted by the advance ordering that occurred ahead of our ERP go-live near the end of 2022.

From a cost standpoint, subject to future changes in the markets for our raw materials, we are currently forecasting a notable increase in our commodity costs in the coming year versus fiscal 2022 and higher costs for other items such as packaging, labor and freight that will pose a headwind to our financial results.

To help mitigate these rising costs, we recently implemented another round of price increases for dressings and sauces sold through our Retail segment while our Foodservice segment will continue to realize offsets to increased commodity and freight costs through contractual-based inflationary pricing.

Our cost savings programs and other net price realization efforts will also help to offset the unfavorable impacts of inflation in the year ahead.

The implementation phase for Project Ascent, our ERP initiative, will continue throughout fiscal 2023 as we integrate additional plants and warehouses into our new ERP network.

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.

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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.

Based on our current plans and expectations, we believe our capital expenditures for 2023 could total between $90 and $110 million, which includes approximately $50 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 half of fiscal 2023.

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

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.

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

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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.

Expected to be completed in the first half of fiscal 2023, we have a remaining commitment of approximately $30 million for the Project.

Year Ended June 30, Change

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Used In Financing Activities $ (97,345) $ (95,430) $ (85,519) $ (1,915) (2) % $ (9,911) (12) %

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 provided by operating activities and our existing balances in cash and equivalents remain the primary sources for funding our investing and financing activities, as well as financing our organic growth initiatives.

Cash provided by operating activities in 2022 totaled $101.8 million, a decrease of 42% as compared with the 2021 total of $174.2 million.

The 2022 decrease was primarily due to the year-over-year changes in net working capital, particularly accounts payable and accrued liabilities, as well as receivables.

The favorable cash flow impact of higher accounts payable was more pronounced in the prior year due to fluctuations in production levels for the comparative periods.

The changes in accrued liabilities were primarily related to current-year declines in the accruals for compensation and employee benefits.

The larger current-year increase in receivables reflected higher sales, including advance ordering by our customers near the end of the fiscal fourth quarter ahead of our ERP go-live.

Lower net income, which was impacted by significantly higher noncash restructuring and impairment charges in 2022, also contributed to the reduced level of cash provided by operating activities.

Cash used in investing activities totaled $132.2 million in 2022 as compared to $89.0 million in 2021.

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.

The 2022 increase primarily reflected a higher level of payments for property additions in the current year.

Notable capital expenditures in 2022 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 half of fiscal 2023;

a capacity expansion project for one of our Marzetti dressing and sauce facilities in Columbus, Ohio that was completed in January 2022;

and infrastructure improvements and capacity expansion investments at our frozen pasta facility in Altoona, Iowa that was completed in March 2022.

Capital expenditures in 2021 included spending on the capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky and the infrastructure improvements and capacity expansion investments at our frozen pasta facility in Altoona, Iowa.

Payments for property additions totaled $132.0 million in 2022 compared to $87.9 million in 2021.

Financing activities used net cash totaling $97.3 million and $95.4 million in 2022 and 2021, 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 vast majority of the cash used in financing activities is attributed to the payment of dividends, and the 2022 increase in cash used in financing activities was primarily due to higher dividend payments.

The regular dividend payout rate for 2022 was $3.15 per share, as compared to $2.95 per share in 2021.

This past fiscal year marked the 58 th consecutive year in which our dividend rate was increased.

This past fiscal year marked the 59 th consecutive year of increased regular cash dividends.

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.

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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.

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 labor rates, including annual wage adjustments and benefit costs.

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

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

freight costs.

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.

These supply contracts may vary by account specific 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.

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

We also implement value engineering initiatives, such as the use of lower-cost packaging materials and alternative ingredients and/or recipes, to reduce Retail and Foodservice product costs to help offset inflation.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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;

• inflationary pressures resulting in higher input costs;

• efficiencies in plant operations and our overall supply chain network;

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

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

• the reaction of customers or consumers to pricing actions we take to offset inflationary costs;

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

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

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

• 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;

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

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

• geopolitical events, such as Russia’s recent invasion of Ukraine, that could create unforeseen business disruptions and impact the cost or availability of raw materials and energy;

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

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• 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;

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

What changed 10-K

Item 7. Management’s Discussion and Analysis