MARZETTI CO (MZTI)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2024 refers to fiscal 2024, which is the period from July 1, 2023 to June 30, 2024.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Forward-Looking Statements” and those set forth in Item 1A of this Annual Report on Form 10-K.

Our discussion of results for 2024 compared to 2023 is included herein. For discussion of results for 2023 compared to 2022, see our 2023 Annual Report on Form 10-K.

OVERVIEW

Business Overview

Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.

Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied.

Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States.

Our business has the potential to achieve future growth in sales and profitability due to attributes such as:

•leading Retail market positions in several product categories with a high-quality perception;

•recognized innovation in Retail products;

•a broad customer base in both Retail and Foodservice accounts;

•well-regarded culinary expertise among Foodservice customers;

•long-standing Foodservice customer relationships that help to support strategic licensing opportunities in Retail;

•recognized leadership in Foodservice product development;

•experience in integrating complementary business acquisitions; and

•historically strong cash flow generation that supports growth opportunities.

Our goal is to grow both Retail and Foodservice segment sales over time by:

•introducing new products and expanding distribution;

•leveraging the strength of our Retail brands to increase current product sales;

•expanding Retail growth through strategic licensing agreements;

•continuing to rely upon the strength of our reputation in Foodservice product development and quality; and

•acquiring complementary businesses.

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

•a significant capacity expansion project for our Marzetti dressing and sauce facility in Horse Cave, Kentucky that reached substantial completion in March 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; and

•our enterprise resource planning system (“ERP”) project and related initiatives, Project Ascent, that reached completion of the implementation phase in August 2023.

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Project Ascent entailed 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 continued throughout fiscal 2023. Customer fulfillment levels remained strong before and after the initial system cutover with no unplanned disruptions in receiving orders, producing products or shipping orders. During fiscal 2023, we progressed through our ERP implementation with no major disruptions. We completed the final wave of the implementation phase in August 2023 as planned and have shifted our focus towards leveraging the capabilities of our new ERP system.

RESULTS OF CONSOLIDATED OPERATIONS

Net Sales

Consolidated net sales for the year ended June 30, 2024 increased 2.7% to a new record of $1,871.8 million from the prior-year record total of $1,822.5 million, reflecting higher net sales for both the Retail and Foodservice segments driven primarily by volume gains. Deflationary pricing was a headwind to Foodservice segment sales growth. Sales in the prior year were unfavorably impacted by an estimated $25 million in net sales attributed to advance ordering that occurred near the end of fiscal 2022 ahead of our ERP go-live that commenced on July 1, 2022. Breaking down the 2.7% increase in consolidated net sales, approximately 1.8% is attributed to volume/mix impacts, approximately 1.4% is attributed to the ERP go-live sales shift and the remaining offset is net pricing. Consolidated sales volumes, measured in pounds shipped, increased 3.7% in 2024. Excluding the impact of last year’s shift in sales due to our ERP go-live, consolidated sales volumes increased 2.1%.

The relative proportion of sales contributed by each of our business segments can impact a year-to-year comparison of the consolidated statements of income. The following table summarizes the sales mix over each of the last three years:

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

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Gross Profit

Consolidated gross profit increased 11.3% to $432.3 million in 2024 compared to $388.6 million in 2023 as influenced by favorability in pricing net of commodity costs, our cost savings programs and the higher sales volumes. In the prior year, gross profit was unfavorably impacted by an estimated $5 million due to the aforementioned shift of net sales into the quarter ended June 30, 2022 ahead of our ERP go-live.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses decreased 1.8% to $218.1 million in 2024 compared to $222.1 million in 2023. This decrease reflects lower expenditures for Project Ascent, largely offset by higher expenditures to support the continued growth of our business, including investments in personnel, a more normalized level of consumer promotions, higher brokerage costs and IT investments. Project Ascent expenses totaled $8.2 million in 2024 compared to $29.9 million in 2023.

Project Ascent expenses are included within Corporate Expenses. A portion of the costs classified as Project Ascent expenses represent ongoing costs that have continued subsequent to the completion of our ERP implementation. Beginning in 2025, these ongoing costs will no longer be classified separately as Project Ascent expenses.

Restructuring and Impairment Charges

In 2024, we committed to a plan to exit our perimeter-of-the-store bakery product lines and close our Flatout flatbread facility in Saline, Michigan and our Angelic Bakehouse sprouted grain bakery facility in Cudahy, Wisconsin. Due to a lack of scale and direct-to-store distribution capabilities for these products, we were not able to achieve the desired operational or financial performance. Production at these facilities ceased in March 2024, and we completed the divestiture of the real estate and manufacturing equipment at these locations during the quarter ended June 30, 2024. The operations of these facilities have not been classified as discontinued operations as the closures do not represent a strategic shift that would have a major effect on our operations or financial results. In 2024, we recorded restructuring and impairment charges of $14.9 million related to these closures, as well as $2.6 million recorded in Cost of Sales for the write-down of inventories. The restructuring and impairment charges, which consisted of impairment charges for fixed assets and intangible assets, one-time termination benefits and other closing costs, were not allocated to our two reportable segments due to their unusual nature whereas the $2.6 million write-down of inventories was recorded in our Retail segment.

In 2023, we recorded impairment charges of $25.0 million related to the intangible assets of Flatout due to lowered expectations for the projected sales and profitability of the Flatout product lines that we subsequently exited in 2024. These impairment charges were reflected in our Retail segment.

Operating Income

Operating income increased 40.9% to $199.4 million in 2024 compared to $141.5 million in 2023 driven by the increase in gross profit, reduced expenditures for Project Ascent and lower restructuring and impairment charges.

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

Other, Net

Other, net resulted in a benefit of $6.2 million in 2024 compared to a benefit of $1.8 million in 2023. This change reflects higher interest rates for our cash holdings and increased balances of cash and equivalents.

Taxes Based on Income

Our effective tax rate was 22.8% and 22.3% in 2024 and 2023, respectively. See Note 7 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate.

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We include the tax consequences related to stock-based compensation within the computation of income tax expense. We may experience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. For 2024 and 2023, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by less than 0.1% and 0.4%, respectively.

Earnings Per Share

As influenced by the factors discussed above, diluted net income per share totaled $5.76 in 2024, an increase from the 2023 total of $4.04 per diluted share. Diluted weighted average common shares outstanding for each of the years ended June 30, 2024 and 2023 have remained relatively stable.

In 2024, costs related to our decision to exit our perimeter-of-the-store bakery product lines reduced diluted earnings per share by a total of $0.49. These exit costs included restructuring and impairment charges, which reduced diluted earnings per share by $0.42, and the inventory write-down, which reduced diluted earnings per share by $0.07. In 2023, impairment charges related to Flatout’s intangible assets reduced diluted earnings per share by $0.70. In 2024 and 2023, expenditures for Project Ascent reduced diluted earnings per share by $0.23 and $0.84, respectively.

RESULTS OF OPERATIONS - SEGMENTS

Retail Segment

In 2024, net sales for the Retail segment reached a record $988.4 million, a 2.4% increase from the prior-year total of $965.4 million, including the carryover benefit from pricing actions that were taken in 2023. The increase in 2024 Retail net sales also reflects that prior-year sales were unfavorably impacted by advance orders accounting for an estimated $11 million in Retail net sales near the end of fiscal 2022 ahead of our ERP go-live, which commenced on July 1, 2022. Retail segment sales volumes, measured in pounds shipped, increased 1.4% in the current year. Retail sales volume growth was driven by the continued success of our program for licensed sauces and dressings. Our New York BRAND® Bakery frozen garlic bread products also contributed to the increase in the Retail sales volumes. Excluding the impact of last year’s shift in sales due to our ERP go-live, the impact of a value engineering initiative we implemented in 2024, and all sales attributed to the perimeter-of-the-store bakery product lines we exited in 2024, Retail segment sales volumes increased 1.7%.

In 2024, Retail segment operating income increased $68.2 million, or 48.9%, to $207.7 million. Beyond the impacts of last year’s impairment charges and this year’s write-down of inventories, which combined to contribute a net increase to Retail segment operating income of $22.4 million, the growth in Retail segment operating income was driven by: favorability in our pricing net of commodity costs, including pricing impacts from investments in trade spending; our cost savings programs; and the beneficial impact of higher sales volumes.

Foodservice Segment

In 2024, Foodservice segment net sales increased 3.1% to a record $883.3 million from the 2023 total of $857.2 million driven by increased demand from several of our national chain restaurant account customers and growth for our branded Foodservice products. Deflationary pricing was a headwind to Foodservice segment sales growth. Sales in the prior year were unfavorably impacted by the advance ordering that occurred near the end of fiscal 2022 ahead of our ERP go-live, which reduced Foodservice net sales in the prior year by an estimated $14 million. Foodservice segment sales volumes, measured in pounds shipped, increased 5.3% in the current year. Excluding the impact of last year’s shift in sales due to our ERP go-live, Foodservice segment sales volumes increased 3.5%.

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In 2024, Foodservice segment operating income decreased 8.7% to $97.1 million driven by higher supply chain costs, as partially offset by the beneficial impact of higher sales volumes. Foodservice segment operating income for 2024 also compares to a strong prior-year result.

Corporate Expenses

In 2024, corporate expenses totaled $90.5 million as compared to $104.3 million in 2023. This decrease reflects lower expenditures for Project Ascent, as partially offset by higher expenditures to support the continued growth of our business, including investments in personnel and IT. Project Ascent expenses totaled $8.2 million and $29.9 million in 2024 and 2023, respectively.

LOOKING FORWARD

For 2025, we anticipate Retail segment sales will continue to benefit from volume growth led by our licensing program, including increased sales from the new products, flavors and sizes we introduced in 2024 along with the recent addition of Subway® and Texas Roadhouse® as license partners. We also anticipate continued positive sales momentum for our New York BRAND® Bakery frozen garlic bread products in 2025 as well as volume growth for our Marzetti® refrigerated dressings. In the Foodservice segment, we expect sales volumes to be led by growth from select quick-service restaurant customers in our mix of national chain restaurant accounts, while external factors, including U.S. economic performance and consumer behavior, may impact demand. With respect to our input costs, in aggregate we do not foresee significant impacts from commodity cost inflation or deflation in the coming year. We also expect to drive margin improvement through our cost savings programs.

We will continue to periodically reassess our allocation of capital to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders.

FINANCIAL CONDITION

Liquidity and Capital Resources

We maintain sufficient flexibility in our capital structure to ensure our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and opportunistic share repurchases. Our balance sheet maintained fundamental financial strength during 2024 as we ended the year with $163 million in cash and equivalents, along with shareholders’ equity of $926 million and no debt.

Under our unsecured revolving credit facility (“Facility”), which we renewed in March 2024, we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at June 30, 2024. At June 30, 2024, we had $2.2 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires in March 2029, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to SOFR or an alternate base rate defined in the Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.

The Facility contains certain restrictive covenants, including limitations on liens, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At June 30, 2024, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At June 30, 2024, there were no events that would constitute a default under this facility.

We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due.

We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations. Based on our current plans and expectations, we believe our capital expenditures for 2025 could total between $70 and $80 million.

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.

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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 3 to the consolidated financial statements for further information about our lease obligations, including the maturities of minimum lease payments. It is not certain when the liabilities for the underfunded defined benefit pension liability, other post-employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation will become due. See Notes 7, 10 and 11 to the consolidated financial statements for further information about these liabilities.

Certain other contractual obligations are not recognized as liabilities in our consolidated financial statements. Examples of such obligations are commitments to purchase raw materials or packaging inventory that has not yet been received as of June 30, 2024, as well as purchase orders and longer-term purchase arrangements related to the procurement of services, including IT service agreements, and property, plant and equipment. The majority of these obligations is expected to be due within one year.

Cash Flows

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 2024 totaled $251.6 million, an increase of 11.4% as compared with the 2023 total of $225.9 million. The 2024 increase was primarily due to higher net income, as partially offset by the year-over-year changes in deferred income taxes and lower noncash restructuring and impairment charges in the current year.

Cash used in investing activities totaled $67.4 million in 2024 as compared to $90.8 million in 2023. The 2024 decrease primarily reflects a lower level of payments for property additions, which totaled $67.6 million in 2024 compared to $90.2 million in 2023, as the capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky reached substantial completion in March 2023.

Financing activities used net cash totaling $109.2 million and $106.9 million in 2024 and 2023, respectively. The vast majority of the cash used in financing activities is attributed to the payment of dividends, and the 2024 increase in cash used in financing activities primarily reflects higher levels of dividend payments, as partially offset by lower levels of share repurchases and tax withholdings for stock-based compensation. The regular dividend payout rate for 2024 was $3.55 per share, as compared to $3.35 per share in 2023. This past fiscal year marked the 61st consecutive year of increased regular cash dividends.

Future levels of share repurchases and declared dividends are subject to the periodic review of our Board of Directors and are generally determined after an assessment is made of various factors, such as anticipated earnings levels, cash flow requirements and general business conditions.

Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are incurred pertaining to regulatory compliance and, upon occasion, remediation. Such costs have not been, and are not anticipated to become, material.

We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. We do not have any related party transactions that materially affect our results of operations, cash flows or financial condition.

IMPACT OF INFLATION

Our business results can be influenced by significant changes in the costs of our raw materials, packaging and freight. We attempt to mitigate the impact of inflation on our raw-material costs via longer-term fixed-price contractual commitments for a portion of our most significant market-indexed commodities, most notably soybean oil and flour. Specific to freight costs, our transportation network includes a mix of dedicated carriers, longer-term fixed-rate contracts and a small internal fleet that serve to reduce our exposure to spot freight rates. We also have a transportation management system in place to support our freight management processes and help us to secure more competitive freight rates. Nonetheless, we are subject to events and trends in the marketplace that will impact our costs for raw materials, packaging and freight. While we attempt to pass through sustained increases in these costs, any such price adjustments can lag the changes in the related input costs.

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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 cost savings programs 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 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. In addition, the Foodservice segment has an inherently higher degree of margin volatility from changes in ingredient costs when compared to the Retail segment due to its overall lower margin profile and higher ratio of ingredient pounds to net sales. In Retail, there is an opportunity to offset the impact of inflationary costs through net price realization actions including list price increases, decreased trade spending and packaging size changes. Note that all these Retail cost-recovery options entail some inherent risks and uncertainties, and the implementation timeframe can lag the input cost changes. 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

This MD&A discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including, but not limited to, those related to accounts receivable allowances, distribution costs, asset impairments and self-insurance reserves. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated financial statements. While a summary of our significant accounting policies can be found in Note 1 to the consolidated financial statements, we believe the following critical accounting policies reflect those areas in which more significant judgments and estimates are used in the preparation of our consolidated financial statements.

Trade-Related Allowances

Our receivables balance is net of trade-related allowances, which consist of sales discounts, trade promotions and certain other sales incentives. We evaluate the adequacy of these allowances considering several factors including historical experience, specific trade programs and existing customer relationships. These allowances can fluctuate based on the level of sales and promotional programs as well as the timing of deductions.

Goodwill

Goodwill is not amortized. It is evaluated annually at April 30 by applying impairment testing procedures. We evaluate the future economic benefit of the recorded goodwill when events or circumstances indicate potential recoverability concerns. Carrying amounts are adjusted appropriately when determined to have been impaired.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 to the consolidated financial statements.

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FORWARD-LOOKING STATEMENTS

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below. Management believes these forward-looking statements to be reasonable; however, one should not place undue reliance on such statements that are based on current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update such forward-looking statements, except as required by law.

Items which could impact these forward-looking statements include, but are not limited to, those risk factors identified in Item 1A and:

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

•price and product competition;

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

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

•adequate supply of labor for our manufacturing facilities;

•stability of labor relations;

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

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

•inflationary pressures resulting in higher input costs;

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

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

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

•the impact of any regulatory matters affecting our food business, including any additional requirements imposed by the FDA or any state or local government;

•dependence on key personnel and changes in key personnel;

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

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

•failure to maintain or renew license agreements;

•geopolitical events that could create unforeseen business disruptions and impact the cost or availability of raw materials and energy;

•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 epidemics, pandemics or similar widespread public health concerns and disease outbreaks;

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

•the success and cost of new product development efforts;

•the lack of market acceptance of new products;

•the extent to which good-fitting business acquisitions are identified, acceptably integrated, and achieve operational and financial performance objectives;

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

•maintenance of competitive position with respect to other manufacturers;

•the outcome of any litigation or arbitration;

•changes in estimates in critical accounting judgments;

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

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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2023 refers to fiscal 2023, which is the period from July 1, 2022 to June 30, 2023.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Forward-Looking Statements” and those set forth in Item 1A of this Annual Report on Form 10-K.

Our discussion of results for 2023 compared to 2022 is included herein. For discussion of results for 2022 compared to 2021, see our 2022 Annual Report on Form 10-K.

OVERVIEW

Business Overview

Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.

Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied.

Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States.

Our business has the potential to achieve future growth in sales and profitability due to attributes such as:

•leading Retail market positions in several product categories with a high-quality perception;

•recognized innovation in Retail products;

•a broad customer base in both Retail and Foodservice accounts;

•well-regarded culinary expertise among Foodservice customers;

•long-standing Foodservice customer relationships that help to support strategic licensing opportunities in Retail;

•recognized leadership in Foodservice product development;

•experience in integrating complementary business acquisitions; and

•historically strong cash flow generation that supports growth opportunities.

Our goal is to grow both Retail and Foodservice segment sales over time by:

•introducing new products and expanding distribution;

•leveraging the strength of our Retail brands to increase current product sales;

•expanding Retail growth through strategic licensing agreements;

•continuing to rely upon the strength of our reputation in Foodservice product development and quality; and

•acquiring complementary businesses.

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

•a significant capacity expansion project for our Marzetti dressing and sauce facility in Horse Cave, Kentucky that reached substantial completion in March 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; and

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

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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 continued throughout fiscal 2023. Customer fulfillment levels remained strong before and after the initial system cutover with no unplanned disruptions in receiving orders, producing products or shipping orders. During fiscal 2023, we progressed through our ERP implementation with no major disruptions. We completed the final wave of the implementation phase in August 2023 as planned and will shift our focus towards leveraging the capabilities of our new ERP system in the coming year. Project Ascent will evolve into an on-going Center of Excellence 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.

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, consumer demand shifted towards increased at-home food consumption and away from in-restaurant dining. Over the course of the following two years, while this shift in demand was inconsistent and volatile, on balance it positively impacted our Retail segment sales volumes and negatively impacted our Foodservice segment sales volumes. From an operations standpoint, the shift in demand over the two-year period, combined with other COVID-19-related issues, unfavorably impacted the operating results of both our segments. Beginning near the end of 2022, the volatility and shifts in demand between our Retail and Foodservice products subsided and our operating environment became more predictable and stable.

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 Ukraine, climate and weather conditions, supply chain disruptions, including some raw material and packaging shortages, a tight labor market, and government policy decisions.

We continued to experience significant cost inflation through 2023, particularly for soybean oil, eggs and flour. However, our pricing actions served to offset these inflationary costs. In addition, the operating environment stabilized as we did not experience the supply chain disruptions and demand swings of the preceding years.

RESULTS OF CONSOLIDATED OPERATIONS

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Net Sales

Consolidated net sales for the year ended June 30, 2023 increased 9% to a new record of $1,823 million from the prior-year record total of $1,676 million, reflecting higher net sales for both the Retail and Foodservice segments driven by pricing to offset inflationary costs. Sales in the current year were unfavorably impacted by approximately $25 million in incremental sales attributed to advance ordering that occurred near the end of fiscal 2022 ahead of our ERP go-live that commenced on July 1. Consolidated sales volumes, measured in pounds shipped, decreased 5% in 2023. In the prior year, consolidated sales volumes increased 2%.

The relative proportion of sales contributed by each of our business segments can impact a year-to-year comparison of the consolidated statements of income. The following table summarizes the sales mix over each of the last three years:

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

Gross Profit

Consolidated gross profit increased 9% to $388.6 million in 2023 compared to $355.7 million in 2022 as our pricing actions effectively offset the significant inflationary costs we have experienced for commodities, packaging, labor and warehousing. The higher gross profit also reflects the benefits of a more stable operating environment, improved manufacturing efficiencies and reduced reliance upon co-manufacturers. The current-year gross profit compares to a challenging prior-year period characterized by escalating inflationary costs across our entire supply chain, 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. Note that last year’s gross profit included an estimated $5 million impact from the advance customer orders ahead of our ERP go-live.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased 5% to $222.1 million in 2023. This increase reflects increased investments in personnel and IT; higher brokerage costs associated with the increased sales; higher travel expenses; and some nonrecurring legal charges for closed operations. Project Ascent expenses decreased $9.5 million to $29.9 million.

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 completion of our ERP implementation.

Change in Contingent Consideration

In 2022, the change in contingent consideration resulted in a benefit of $3.5 million. This benefit was attributed to a reduction in the fair value of the contingent consideration liability for Bantam Bagels, LLC (“Bantam”) based on our fair value measurements, resulting in a zero balance at March 31, 2022. We recorded $2.6 million in our Foodservice segment and $0.9 million in our Retail segment. We ultimately exited the Bantam business near the end of fiscal 2022. See further discussion in Note 2 to the consolidated financial statements.

Restructuring and Impairment Charges

In 2023, we recorded impairment charges of $25.0 million related to the intangible assets of Flatout, Inc. (“Flatout”) due to lowered expectations for the projected sales and profitability of the Flatout business. These impairment charges were reflected in our Retail segment.

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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; and

•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 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 charges were not allocated to our two reportable segments. As noted above, we ultimately exited the Bantam business near the end of fiscal 2022. The operations of this business were not classified as discontinued operations as the closure did not represent a strategic shift that would have a major effect on our operations or financial results.

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. The operations of this facility were not classified as discontinued operations as the closure did not represent a strategic shift that would have a major effect on our operations or financial results. We recorded restructuring and impairment charges of $0.7 million, which consisted of one-time termination benefits and impairment charges for fixed assets and an operating lease right-of-use asset. These charges were not allocated to our two reportable segments due to their unusual nature.

Operating Income

Operating income increased 26% to $141.5 million in 2023 driven by the increase in gross profit as our pricing actions served to offset the significant inflationary costs we have experienced for commodities, packaging, labor and warehousing, as well as the impact of lower restructuring and impairment charges. Operating income also benefited from a more stable operating environment, improved manufacturing efficiencies and reduced reliance upon co-manufacturers. The increase in SG&A expenses partially offset these positive factors. Additionally, operating income in the current year was unfavorably impacted by the advance ordering that occurred near the end of fiscal 2022 ahead of our ERP go-live and accounted for an estimated $5 million in operating income.

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

Taxes Based on Income

Our effective tax rate was 22.3% and 20.3% in 2023 and 2022, respectively. See Note 8 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate.

We include the tax consequences related to stock-based compensation within the computation of income tax expense. We may experience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. For 2023 and 2022, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.4% and 0.1%, respectively.

Earnings Per Share

As influenced by the factors discussed above, diluted net income per share totaled $4.04 in 2023, an increase from the 2022 total of $3.25 per diluted share. Diluted weighted average common shares outstanding for each of the years ended June 30, 2023 and 2022 have remained relatively stable.

In 2023 and 2022, expenditures for Project Ascent reduced diluted earnings per share by $0.84 and $1.09, respectively, and restructuring and impairment charges reduced diluted earnings per share by $0.70 and $0.98, respectively. In 2022, the adjustments to Bantam’s contingent consideration increased diluted earnings per share by $0.10.

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RESULTS OF OPERATIONS - SEGMENTS

Retail Segment

In 2023, net sales for the Retail segment reached a record $965.4 million, a 5% increase from the prior-year total of $915.2 million, including the favorable impact of our pricing actions. Sales in the current year were unfavorably impacted by advance orders accounting for an estimated $11 million in Retail net sales near the end of fiscal 2022 ahead of our ERP go-live, which commenced on July 1, 2022. Retail segment sales volumes, measured in pounds shipped, declined 4% in the current year. Sales volumes were unfavorably impacted by the advance ordering ahead of our ERP go-live, price elasticity and product line rationalizations that were implemented during fiscal 2022. In 2022, Retail sales volumes increased 2%.

In 2023, Retail segment operating income decreased 8% to $139.5 million, including the unfavorable impact of higher impairment charges. As referenced in the “Restructuring and Impairment Charges” section above, Retail segment operating income included impairment charges totaling $25.0 million and $9.7 million in 2023 and 2022, respectively. Operating income was favorably impacted by our pricing actions, which served to offset significant cost inflation. Operating income also benefited from our reduced reliance upon co-manufacturers. In the prior year, the net impact of our pricing actions lagged the extraordinary levels of cost inflation, and the segment’s operating income also reflected an unstable operating environment that resulted in increased costs to manufacture products and service the business.

Foodservice Segment

In 2023, Foodservice segment net sales increased 13% to a record $857.2 million from the 2022 total of $761.2 million driven by inflationary pricing and volume gains from certain quick-service restaurant customers in our mix of national chain restaurant accounts. Sales in the current year were unfavorably impacted by the advance ordering that occurred near the end of fiscal 2022 ahead of our ERP go-live, which reduced Foodservice net sales in the current year by an estimated $14 million. Foodservice segment sales volumes, measured in pounds shipped, decreased 5% in the current year. Sales volumes were unfavorably impacted by the advance ordering ahead of our ERP go-live and our decision to exit some less profitable SKUs during fiscal 2022. In 2022, Foodservice sales volumes increased 2%.

In 2023, Foodservice segment operating income increased 29% to $106.3 million as our pricing actions effectively offset inflationary costs. Operating income in the current year also benefited from a more stable operating environment, improved manufacturing efficiencies and our decision to discontinue some less profitable SKUs. Prior-year operating income reflected a lag in pricing relative to inflationary costs, as partially offset by the adjustments to Bantam’s contingent consideration.

Corporate Expenses

In 2023, corporate expenses totaled $104.3 million as compared to $97.0 million in 2022. This increase primarily reflects increased investments in personnel and IT, as well as some nonrecurring legal charges for closed operations. Lower expenditures for Project Ascent partially offset these higher expenses. Project Ascent expenses totaled $29.9 million and $39.3 million in 2023 and 2022, respectively.

LOOKING FORWARD

For 2024, we anticipate Retail segment sales will benefit from volume growth led by our licensing program, including incremental growth from the new products, flavors and sizes we introduced in 2023, along with some new items we have planned for 2024. We also foresee continued positive momentum for our New York BRAND® Bakery frozen garlic bread 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 external factors, including U.S. economic performance and potential changes in consumer sentiment, may impact demand. Consolidated net sales will also continue to benefit from the pricing actions taken in 2023.

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We project the impact of inflationary costs to subside notably in the coming year compared to fiscal 2023. The pricing actions we have implemented along with our cost savings initiatives will help to offset remaining inflationary costs.

With respect to Project Ascent, we completed the final wave of the implementation phase in August 2023 as planned and have shifted towards leveraging the capabilities of our new ERP system to improve execution in the coming year.

We will continue to periodically reassess our allocation of capital to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders.

FINANCIAL CONDITION

Liquidity and Capital Resources

We maintain sufficient flexibility in our capital structure to ensure our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and opportunistic share repurchases. Our balance sheet maintained fundamental financial strength during 2023 as we ended the year with $88 million in cash and equivalents, along with shareholders’ equity of $862 million and no debt.

Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at June 30, 2023. At June 30, 2023, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires in March 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to SOFR or an alternate base rate defined in the Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.

The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At June 30, 2023, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At June 30, 2023, there were no events that would constitute a default under this facility.

We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due.

We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations. Based on our current plans and expectations, we believe our capital expenditures for 2024 could total between $70 and $80 million.

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, 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. It is not certain when the liabilities for the underfunded defined benefit pension liability, other post-employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation will become due. See Notes 8, 11 and 12 to the consolidated financial statements for further information about these liabilities.

Certain other contractual obligations are not recognized as liabilities in our consolidated financial statements. Examples of such obligations are commitments to purchase raw materials or packaging inventory that has not yet been received as of June 30, 2023, as well as purchase orders and longer-term purchase arrangements related to the procurement of services, including IT service agreements, and property, plant and equipment. The majority of these obligations is expected to be due within one year.

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Cash Flows

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 2023 totaled $225.9 million, an increase of 122% as compared with the 2022 total of $101.8 million. The 2023 increase was primarily due to the year-over-year changes in net working capital, particularly receivables and accrued liabilities. Receivables reflect the favorable impacts of a current-year decrease in receivables as well as a prior-year increase in receivables. These fluctuations were due in part to an elevated level of receivables at the end of fiscal 2022 resulting from the advance ordering by our customers ahead of our ERP go-live. Accrued liabilities reflect the favorable impacts of a current-year increase in the accruals for compensation and employee benefits as well as a prior-year decline in these balances. Higher net income, as partially offset by the year-over-year change in noncash restructuring and impairment charges, also contributed to the increase in cash provided by operating activities.

Cash used in investing activities totaled $90.8 million in 2023 as compared to $132.2 million in 2022. The 2023 decrease primarily reflects a lower level of payments for property additions, which totaled $90.2 million in 2023 compared to $132.0 million in 2022. Current-year capital expenditures included spending on a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky that reached substantial completion in March 2023. Notable prior-year capital expenditures included spending on: the Horse Cave capacity expansion project; 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.

Financing activities used net cash totaling $106.9 million and $97.3 million in 2023 and 2022, respectively. The vast majority of the cash used in financing activities is attributed to the payment of dividends, and the 2023 increase in cash used in financing activities primarily reflects higher levels of dividend payments, tax withholdings for stock-based compensation and share repurchases. The regular dividend payout rate for 2023 was $3.35 per share, as compared to $3.15 per share in 2022. This past fiscal year marked the 60th consecutive year of increased regular cash dividends.

Future levels of share repurchases and declared dividends are subject to the periodic review of our Board of Directors and are generally determined after an assessment is made of various factors, such as anticipated earnings levels, cash flow requirements and general business conditions.

Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are incurred pertaining to regulatory compliance and, upon occasion, remediation. Such costs have not been, and are not anticipated to become, material.

We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. We do not have any related party transactions that materially affect our results of operations, cash flows or financial condition.

IMPACT OF INFLATION

Our business results can be influenced by significant changes in the costs of our raw materials, packaging and freight. We attempt to mitigate the impact of inflation on our raw-material costs via longer-term fixed-price contractual commitments for a portion of our most significant market-indexed commodities, most notably soybean oil and flour. Specific to freight costs, our transportation network includes a mix of dedicated carriers, longer-term fixed-rate contracts and a small internal fleet that serve to reduce our exposure to spot freight rates. We also have a transportation management system in place to support our freight management processes and help us to secure more competitive freight rates. Nonetheless, we are subject to events and trends in the marketplace that will impact our costs for raw materials, packaging and freight. While we attempt to pass through sustained increases in these costs, any such price adjustments can lag the changes in the related input costs.

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

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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 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. In addition, the Foodservice segment has an inherently higher degree of margin volatility from changes in ingredient costs when compared to the Retail segment due to its overall lower margin profile and higher ratio of ingredient pounds to net sales. In Retail, there is an opportunity to offset the impact of inflationary costs through net price realization actions including list price increases, decreased trade spending and packaging size changes. Note that all these Retail cost-recovery options entail some inherent risks and uncertainties, and the implementation timeframe can lag the input cost changes. 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

This MD&A discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including, but not limited to, those related to accounts receivable allowances, distribution costs, asset impairments and self-insurance reserves. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated financial statements. While a summary of our significant accounting policies can be found in Note 1 to the consolidated financial statements, we believe the following critical accounting policies reflect those areas in which more significant judgments and estimates are used in the preparation of our consolidated financial statements.

Trade-Related Allowances

Our receivables balance is net of trade-related allowances, which consist of sales discounts, trade promotions and certain other sales incentives. We evaluate the adequacy of these allowances considering several factors including historical experience, specific trade programs and existing customer relationships. These allowances can fluctuate based on the level of sales and promotional programs as well as the timing of deductions.

Goodwill and Other Intangible Assets

Goodwill is not amortized. It is evaluated annually at April 30 by applying impairment testing procedures. Other intangible assets are amortized on a straight-line basis over their estimated useful lives to Selling, General and Administrative Expenses. We evaluate the future economic benefit of the recorded goodwill and other intangible assets when events or circumstances indicate potential recoverability concerns. Carrying amounts are adjusted appropriately when determined to have been impaired.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 to the consolidated financial statements.

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FORWARD-LOOKING STATEMENTS

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below. Management believes these forward-looking statements to be reasonable; however, one should not place undue reliance on such statements that are based on current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update such forward-looking statements, except as required by law.

Items which could impact these forward-looking statements include, but are not limited to, those risk factors identified in Item 1A and:

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

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

•price and product competition;

•adequate supply of labor for our manufacturing facilities;

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

•inflationary pressures resulting in higher input costs;

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

•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;

•stability of labor relations;

•dependence on key personnel and changes in key personnel;

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

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

•geopolitical events, such as Russia’s 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 or key customer relationships;

•failure to maintain or renew license agreements;

•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 epidemics, pandemics or similar widespread public health concerns and disease outbreaks;

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

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

•the success and cost of new product development efforts;

•the lack of market acceptance of new products;

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

•the ability to successfully grow acquired businesses;

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

•maintenance of competitive position with respect to other manufacturers;

•the outcome of any litigation or arbitration;

•changes in estimates in critical accounting judgments;

•the impact of any regulatory matters affecting our food business, including any required labeling changes and their impact on consumer demand;

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

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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2022 refers to fiscal 2022, which is the period from July 1, 2021 to June 30, 2022.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Forward-Looking Statements” and those set forth in Item 1A of this Annual Report on Form 10-K.

Our discussion of results for 2022 compared to 2021 is included herein. For discussion of results for 2021 compared to 2020, see our 2021 Annual Report on Form 10-K.

OVERVIEW

Business Overview

Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.

Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. 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.

Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States.

Our business has the potential to achieve future growth in sales and profitability due to attributes such as:

•leading Retail market positions in several product categories with a high-quality perception;

•recognized innovation in Retail products;

•a broad customer base in both Retail and Foodservice accounts;

•well-regarded culinary expertise among Foodservice customers;

•recognized leadership in Foodservice product development;

•experience in integrating complementary business acquisitions; and

•historically strong cash flow generation that supports growth opportunities.

Our goal is to grow both Retail and Foodservice segment sales over time by:

•introducing new products and expanding distribution;

•leveraging the strength of our Retail brands to increase current product sales;

•expanding Retail growth through strategic licensing agreements;

•continuing to rely upon the strength of our reputation in Foodservice product development and quality; and

•acquiring complementary businesses.

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

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

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

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

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

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.

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RESULTS OF CONSOLIDATED OPERATIONS

Net Sales

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

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

Gross Profit

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.

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Selling, General and Administrative Expenses

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

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.

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

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; and

•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

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$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. These impairment charges were reflected in our Foodservice segment.

Operating Income

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.

Taxes Based on Income

Our effective tax rate was 20.3% and 23.4% in 2022 and 2021, respectively. See Note 8 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate.

We include the tax consequences related to stock-based compensation within the computation of income tax expense. We may experience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. For 2022 and 2021, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.1% and 0.6%, respectively.

Earnings Per 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 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

Retail Segment

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%.

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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

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. 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 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. For a more-detailed discussion of the effect of commodity costs, see the “Impact of Inflation” section of this MD&A below. Changes in other notable recurring costs, such as marketing, transportation, production costs and introductory costs for new products, may also impact our overall results.

We will continue to periodically reassess our allocation of capital to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders.

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FINANCIAL CONDITION

Liquidity and Capital Resources

We maintain sufficient flexibility in our capital structure to ensure our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and opportunistic share repurchases. Our balance sheet maintained fundamental financial strength during 2022 as we ended the year with $60 million in cash and equivalents, along with shareholders’ equity of $845 million and no debt.

Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at June 30, 2022. At June 30, 2022, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires in March 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.

The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At June 30, 2022, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At June 30, 2022, there were no events that would constitute a default under this facility.

We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due.

We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations. Based on our current plans and expectations, we believe our capital expenditures for 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, 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. It is not certain when the liabilities for the underfunded defined benefit pension liability, other post-employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation will become due. See Notes 8, 11 and 12 to the consolidated financial statements for further information about these liabilities.

Certain other contractual obligations are not recognized as liabilities in our consolidated financial statements. Examples of such obligations are commitments to purchase raw materials or packaging inventory that has not yet been received as of June 30, 2022, as well as purchase orders and longer-term purchase arrangements related to the procurement of services, including IT service agreements, and property, plant and equipment. The majority of these obligations is expected to be due within one year. See further discussion below of our obligation related to the capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky.

In November 2020, T. Marzetti Company (“T. Marzetti”), a wholly-owned subsidiary of ours, entered into a Design/Build Agreement (the “Agreement”) with Gray Construction, Inc. (“Gray”) under which Gray will design, coordinate and build additional dressing and sauce manufacturing and warehousing capacity for the T. Marzetti facility in Horse Cave, Kentucky (the “Project”). The Project will result in an expansion of the current facility footprint. Subject to certain conditions in the Agreement, T. Marzetti will pay Gray no more than the guaranteed maximum price of approximately $113 million for the Project. The Agreement contains other terms and conditions that are customary for this type of project. Expected to be completed in the first half of fiscal 2023, we have a remaining commitment of approximately $30 million for the Project.

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Cash Flows

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 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. 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 59th 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.

Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are incurred pertaining to regulatory compliance and, upon occasion, remediation. Such costs have not been, and are not anticipated to become, material.

We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. We do not have any related party transactions that materially affect our results of operations, cash flows or financial condition.

IMPACT OF INFLATION

Our business results can be influenced by significant changes in the costs of our raw materials, packaging and freight. We attempt to mitigate the impact of inflation on our raw-material costs via longer-term fixed-price contractual commitments for a portion of our most significant market-indexed commodities, most notably soybean oil and flour. We have also implemented a procurement strategy for a portion of our egg needs using grain-based pricing contracts to reduce our exposure to egg market spot prices. Specific to freight costs, our transportation network includes a mix of dedicated carriers, longer-term fixed-rate contracts and a small internal fleet that serve to reduce our exposure to spot freight rates. We also have a transportation management system in place to support our freight management processes and help us to secure more competitive freight rates. Nonetheless, we are subject to events and trends in the marketplace that will impact our costs for raw materials, packaging and freight. While we attempt to pass through sustained increases in these costs, any such price adjustments can lag the changes in the related input costs.

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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 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. In addition, the Foodservice segment has an inherently higher degree of margin volatility from changes in ingredient costs when compared to the Retail segment due to its overall lower margin profile and higher ratio of ingredient pounds to net sales. In Retail, there is an opportunity to offset the impact of inflationary costs through net price realization actions including list price increases, decreased trade spending and packaging size changes. Note that all these Retail cost-recovery options entail some inherent risks and uncertainties, and the implementation timeframe can lag the input cost changes. 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

This MD&A discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including, but not limited to, those related to accounts receivable allowances, distribution costs, asset impairments and self-insurance reserves. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated financial statements. While a summary of our significant accounting policies can be found in Note 1 to the consolidated financial statements, we believe the following critical accounting policies reflect those areas in which more significant judgments and estimates are used in the preparation of our consolidated financial statements.

Trade-Related Allowances

Our receivables balance is net of trade-related allowances, which consist of sales discounts, trade promotions and certain other sales incentives. We evaluate the adequacy of these allowances considering several factors including historical experience, specific trade programs and existing customer relationships. These allowances can fluctuate based on the level of sales and promotional programs as well as the timing of deductions.

Goodwill and Other Intangible Assets

Goodwill is not amortized. It is evaluated annually at April 30 by applying impairment testing procedures. Other intangible assets are amortized on a straight-line basis over their estimated useful lives to Selling, General and Administrative Expenses. We evaluate the future economic benefit of the recorded goodwill and other intangible assets when events or circumstances indicate potential recoverability concerns. Carrying amounts are adjusted appropriately when determined to have been impaired.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 to the consolidated financial statements.

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FORWARD-LOOKING STATEMENTS

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below, many of which could be amplified by the COVID-19 pandemic. Management believes these forward-looking statements to be reasonable; however, one should not place undue reliance on such statements that are based on current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update such forward-looking statements, except as required by law.

Items which could impact these forward-looking statements include, but are not limited to, those risk factors identified in Item 1A and:

•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;

•adequate supply of labor for our manufacturing facilities;

•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;

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

•price and product competition;

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

•the success and cost of new product development efforts;

•the lack of market acceptance of new products;

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

•the ability to successfully grow recently acquired businesses;

•dependence on key personnel and changes in key personnel;

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

•maintenance of competitive position with respect to other manufacturers;

•stability of labor relations;

•changes in estimates in critical accounting judgments;

•the impact of any regulatory matters affecting our food business, including any required labeling changes and their impact on consumer demand;

•the outcome of any litigation or arbitration;

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

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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2021 refers to fiscal 2021, which is the period from July 1, 2020 to June 30, 2021.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Forward-Looking Statements” and those set forth in Item 1A of this Annual Report on Form 10-K.

Our discussion of results for 2021 compared to 2020 is included herein. For discussion of results for 2020 compared to 2019, see our 2020 Annual Report on Form 10-K except as included herein for operating results by segment.

OVERVIEW

Business Overview

Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.

Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. Our Chief Operating Decision Maker (“CODM”), in order to drive enhanced accountability and transparency throughout our organization, initiated a review of functional costs that have historically been part of the indirect costs allocated to our two reportable segments. This review was completed as part of our preparation for our upcoming enterprise resource planning system (“ERP”) implementation. As a result of this review, our CODM identified certain support functions that would be more appropriately presented within corporate expenses to facilitate the management of the business, including assessing segment performance and allocating resources. These changes were effective July 1, 2020. All historical information has been retroactively conformed to the current presentation. These changes had no effect on previously reported consolidated net sales, gross profit, operating income, net income or earnings per share. As a result of these changes to historical information by segment, a discussion of segment results for 2020 compared to 2019 is provided in the “Results of Operations - Segments” section below.

Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States.

Our business has the potential to achieve future growth in sales and profitability due to attributes such as:

•leading Retail market positions in several product categories with a high-quality perception;

•recognized innovation in Retail products;

•a broad customer base in both Retail and Foodservice accounts;

•well-regarded culinary expertise among Foodservice customers;

•recognized leadership in Foodservice product development;

•experience in integrating complementary business acquisitions; and

•historically strong cash flow generation that supports growth opportunities.

Our goal is to grow both Retail and Foodservice segment sales over time by:

•introducing new products and expanding distribution;

•leveraging the strength of our Retail brands to increase current product sales;

•expanding Retail growth through strategic licensing agreements;

•continuing to rely upon the strength of our reputation in Foodservice product development and quality; and

•acquiring complementary businesses.

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

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

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

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

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

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

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

Project Ascent commenced in late 2019 and entails the replacement of our primary customer and manufacturing transactional systems, warehousing systems, and financial systems with an integrated SAP S/4HANA system. Post implementation, Project Ascent will evolve into an on-going Center of Excellence (“COE”) that will provide oversight for all future upgrades of the S/4HANA environment, evaluation of future software needs to support the business, acquisition integration support and master data standards. Most of the on-going COE costs are expected to consist of annual software maintenance and support, consulting and professional fees and wages and benefits.

We also continue to review potential acquisitions that we believe will complement our existing product lines, enhance our profitability and/or offer good expansion opportunities in a manner that fits our overall strategic goals. Consistent with this acquisition strategy, on November 16, 2018, we acquired, using available cash on hand, substantially all of the assets of Omni Baking Company LLC (“Omni”), a long-time supplier of products to our frozen garlic bread operations. On October 19, 2018, we acquired, using available cash on hand, all the assets of Bantam Bagels, LLC (“Bantam”), a producer and marketer of frozen mini stuffed bagels and other frozen bread products sold to both the retail and foodservice channels. See further discussion of these acquisitions in Note 2 to the consolidated financial statements.

RECENT EVENTS

A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. COVID-19 has surfaced in all regions around the world and resulted in business slowdowns or shutdowns. In the U.S., state and local governments recommended or mandated actions to slow the transmission of COVID-19. These measures included limitations on public gatherings, social distancing requirements, travel restrictions, closures of bars and dine-in restaurants, stay-at-home orders, quarantines and restrictions that prohibited many non-essential employees from going to work.

We have two major priorities while navigating through this period of volatility and uncertainty:

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

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

With respect to our efforts to ensure the health, safety and welfare of our employees, we continue to monitor the latest guidance from authorities, including the Centers for Disease Control and Prevention and other federal, state and local public health departments, regarding COVID-19 and adopt the appropriate measures to ensure we continue to operate safely and support our employees. We also engaged a pulmonology and critical care physician to advise us on our employee safety protocols. Based on the advice of these experts and our commitment to the health, safety and welfare of our employees, we implemented some policy changes and put in place a range of safety modifications and guidelines in our factories, distribution centers and offices, including but not limited to:

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

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

•staggered the timing of shift changes and breaks;

•relaxed attendance requirements and enhanced our paid leave policy; and

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

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

With respect to our second priority, as of the date of this filing, there has been no material adverse change in our ability to manufacture and distribute our products. We have not experienced any significant disruptions to our shipping or warehousing operations or sourcing of raw materials. We have also secured additional second-sourcing options to help limit the risk of supply disruptions.

The effects of COVID-19, including changes in consumer purchasing habits and actions undertaken in the U.S. to attempt to control the spread of COVID-19, most notably the restriction of restaurant dine-in purchases, negatively impacted the operating results of our Foodservice segment, particularly in the first half of fiscal 2021. Foodservice segment sales rebounded

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

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

RESULTS OF CONSOLIDATED OPERATIONS

Net Sales

Consolidated net sales for the year ended June 30, 2021 increased 10% to a new record of $1,467 million from the prior-year record total of $1,334 million. This growth was driven by higher net sales for both the Retail and Foodservice segments. Excluding all sales attributed to a temporary supply agreement resulting from the November 2018 acquisition of Omni, consolidated net sales for the year ended June 30, 2021 increased 12%.

The relative proportion of sales contributed by each of our business segments can impact a year-to-year comparison of the consolidated statements of income. The following table summarizes the sales mix over each of the last three years:

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

Gross Profit

Consolidated gross profit increased 8% to $386.7 million in 2021 compared to $358.0 million in 2020 driven by the strong sales growth, a more favorable sales mix, inflationary Foodservice pricing, our ongoing cost savings programs, a lower level of Retail trade spending and lower employee benefit costs, partially offset by higher manufacturing costs, commodity cost inflation and higher freight costs. Manufacturing costs in the current year continued to reflect the impacts of COVID-19, including hero pay for our front-line employees, higher costs incurred to service the shifts and surges in demand for our products, increased expenditures for personal protective equipment and lower operating efficiencies. The hero pay program was discontinued at the end of fiscal 2021.

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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.

Change in Contingent Consideration

The change in contingent consideration resulted in a benefit of $5.7 million in 2021 compared to expense of $0.3 million in 2020. The 2021 benefit included a reduction in the fair value of the contingent consideration liability for Bantam as a result of our 2021 fair value measurements. As the fair value adjustment resulted from the impact of a SKU rationalization by a Foodservice customer, the entire adjustment related to Bantam’s contingent consideration was reflected within the Foodservice segment. See further discussion in Note 3 to the consolidated financial statements.

Restructuring and Impairment Charges

We recorded impairment charges of $1.2 million in 2021 related to certain tradename and technology / know-how intangible assets for Bantam as a result of the impact of a SKU rationalization by a Foodservice customer. The impairment charges represent the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful lives of the intangible assets and were reflected within our Foodservice segment.

We recorded restructuring and impairment charges of $0.9 million in 2020, which primarily consisted of plant clean-up expenses and contract termination costs related to the closure of our frozen bread manufacturing plant located in Saraland, Alabama. These charges were not allocated to our two reportable segments due to their unusual nature.

Operating Income

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

Other, Net

Other, net resulted in expense of $0.1 million in 2021 compared to a benefit of $3.1 million in 2020. This change primarily reflects lower interest rates for our cash holdings.

Taxes Based on Income

Our effective tax rate was 23.4% and 23.5% in 2021 and 2020, respectively. See Note 9 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate.

We include the tax consequences related to stock-based compensation within the computation of income tax expense. We may experience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. For 2021 and 2020, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.6% and 0.8%, respectively.

Earnings Per Share

As influenced by the factors discussed above, particularly the strong sales growth partially offset by the increased expenditures for Project Ascent and higher manufacturing costs, diluted net income per share totaled $5.16 in 2021, an increase from the 2020 total of $4.97 per diluted share. Diluted weighted average common shares outstanding for each of the years ended June 30, 2021 and 2020 have remained relatively stable.

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In 2021, expenditures for Project Ascent reduced diluted earnings per share by $1.05 compared to $0.50 in the prior year. The favorable adjustment related to Bantam’s contingent consideration increased diluted earnings per share by $0.16 in 2021. Restructuring and impairment charges had an unfavorable impact of $0.03 and $0.02 per diluted share in 2021 and 2020, respectively. In 2020, the write-off of engineering costs for a canceled dressing plant expansion project and an increase in the Foodservice inventory reserve had an unfavorable impact of $0.09 and $0.08 per diluted share, respectively.

RESULTS OF OPERATIONS - SEGMENTS

Retail Segment

In 2021, net sales for the Retail segment reached a record $829.0 million, a 16% increase from the prior-year total of $714.1 million, due in part to the impacts of the COVID-19 outbreak, which drove higher demand for at-home food consumption. The strength of our licensing program was also a significant contributor to the sales growth, led by Chick-fil-A® sauces, Olive Garden® dressings and Buffalo Wild Wings® sauces. Other products contributing to the growth in Retail net sales included frozen garlic bread, croutons and frozen dinner rolls. The net sales increase also reflects a reduced level of Retail trade spending.

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

In 2020, net sales for the Retail segment reached a then record $714.1 million, a 9% increase from the 2019 total of $656.6 million as higher retail channel demand attributed to the impacts of COVID-19 and contributions from shelf-stable dressings and sauces sold under license agreements, including new product introductions, drove Retail sales gains. Higher sales volumes for frozen garlic bread and frozen dinner rolls, along with some beneficial net price realization, also added to the growth in Retail net sales.

In 2020, Retail segment operating income increased $12.5 million, or 8%, to $161.5 million. Retail segment operating income benefited from the increase in sales, our ongoing cost savings programs, improved net price realization and lower commodity costs as partially offset by higher trade and consumer promotional spending. Operating income for 2019 was favorably impacted by a $17.1 million reduction in the fair value of the contingent consideration liability for Angelic Bakehouse, Inc.

Foodservice Segment

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.

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In 2020, Foodservice net sales decreased 5% to $620.3 million from the 2019 total of $651.2 million. After growth of 7% in the first half of the fiscal year, Foodservice net sales declined 16% in the second half as consumer demand shifted away from the foodservice channel due to the impacts of COVID-19. Excluding all sales attributed to a temporary supply agreement resulting from the November 2018 acquisition of Omni, Foodservice net sales declined 5%. These Omni sales totaled $22.3 million in 2020 compared to $19.4 million in 2019.

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

Corporate Expenses

The 2021 corporate expenses totaled $91.6 million as compared to $65.1 million in 2020. The increase was driven by expenditures for Project Ascent, which totaled $37.9 million in 2021 as compared to $18.0 million in 2020. In 2021, we also capitalized an additional $3.5 million of ERP-related expenditures for application development stage activities.

The 2020 corporate expenses totaled $65.1 million as compared to $42.6 million in 2019. The increase was driven by expenditures for Project Ascent, which totaled $18.0 million in 2020 as compared to $1.8 million in 2019. In 2020, we also capitalized an additional $8.9 million of ERP-related expenditures for application development stage activities.

LOOKING FORWARD

For 2022, we anticipate our Retail sales will continue to benefit from the growth of our licensing program while sales for the remainder of our Retail segment will have tough comparisons to the strong growth in 2021 as influenced by the higher demand for at-home food consumption due to the impacts of COVID-19. In our Foodservice segment, we expect increased consumer demand for in-restaurant dining to drive Foodservice sales higher. From a cost standpoint, we foresee significant inflation in 2022. We expect notable increases in commodity costs, particularly soybean oil. Packaging costs are also forecasted considerably higher, as are labor and freight expenses. To help mitigate these rising costs, we have pricing initiatives in place for our Retail segment while our Foodservice segment will continue to realize offsets to increased commodity and freight costs through contractual-based inflationary pricing. Note that the benefit of higher pricing will lag the unfavorable impact of inflationary costs in the coming year. Our ongoing cost savings programs and other net price realization efforts will also help to partially offset the higher costs.

Our 2022 financial results will continue to be impacted by the COVID-19 pandemic, which has caused shifts in consumer demand between the retail and foodservice channels and resulted in higher costs to produce our products and service our customers. The extent of this impact on our 2022 results is difficult to forecast due to ongoing regional ebbs and flows of COVID-19 cases and the associated changes to the COVID-19 guidelines provided or mandates imposed by health authorities and government agencies that create uncertainty for the restaurant industry and consumer behavior over an unpredictable timeline.

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

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

In addition to the above commentary specific to rising commodity costs, our exposure to volatile swings in food commodity costs will continue to be managed and mitigated through a strategic forward purchasing program for certain key materials such as soybean oil and flour. For a more-detailed discussion of the effect of commodity costs, see the “Impact of Inflation” section of this MD&A below. Changes in other notable recurring costs, such as marketing, transportation, production costs and introductory costs for new products, may also impact our overall results.

We will continue to periodically reassess our allocation of capital to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders.

FINANCIAL CONDITION

Liquidity and Capital Resources

We maintain sufficient flexibility in our capital structure to ensure our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and opportunistic share repurchases. Our balance sheet maintained fundamental financial strength during 2021 as we ended the year with $188 million in cash and equivalents, along with shareholders’ equity of $843 million and no debt.

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Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at June 30, 2021. At June 30, 2021, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires in March 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.

The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At June 30, 2021, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At June 30, 2021, there were no events that would constitute a default under this facility.

We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due.

We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations. Based on our current plans and expectations, we believe our capital expenditures for 2022 could total between $170 and $190 million, which includes approximately $105 million in expenditures attributed to a substantial investment for a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky that we expect to complete in the first quarter of fiscal 2023.

Beyond the next 12 months, we expect that cash provided by operating activities will continue to be the primary source of liquidity for the foreseeable future. This source, combined with our existing balances in cash and equivalents and amounts available under the Facility, is expected to be sufficient to meet our overall cash requirements.

We have various contractual and other obligations that are appropriately recorded as liabilities in our consolidated financial statements, including finance lease obligations, operating lease obligations, contingent consideration payable, the underfunded defined benefit pension liability, other post-employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation. See Note 3 to the consolidated financial statements for further information about our contingent consideration payable, which is due in fiscal 2024. See Note 5 to the consolidated financial statements for further information about our lease obligations, including the maturities of minimum lease payments. It is not certain when the liabilities for the underfunded defined benefit pension liability, other post-employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation will become due. See Notes 9, 12 and 13 to the consolidated financial statements for further information about these liabilities.

Certain other contractual obligations are not recognized as liabilities in our consolidated financial statements. Examples of such obligations are commitments to purchase raw materials or packaging inventory that has not yet been received as of June 30, 2021, as well as purchase orders and longer-term purchase arrangements related to the procurement of services, including IT service agreements, and property, plant and equipment. The majority of these obligations is expected to be due within one year. See further discussion below of our obligation related to the capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky.

In November 2020, T. Marzetti Company (“T. Marzetti”), a wholly-owned subsidiary of ours, entered into a Design/Build Agreement (the “Agreement”) with Gray Construction, Inc. (“Gray”) under which Gray will design, coordinate and build additional dressing and sauce manufacturing and warehousing capacity for the T. Marzetti facility in Horse Cave, Kentucky (the “Project”). The Project will result in an expansion of the current facility footprint. Subject to certain conditions in the Agreement, T. Marzetti will pay Gray no more than the guaranteed maximum price of approximately $113 million for the Project. The Agreement contains other terms and conditions that are customary for this type of project. Expected to be completed in the first quarter of fiscal 2023, the Project is in its early stages, thus we are still obligated for the majority of the guaranteed maximum price.

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Cash Flows