LANCASTER COLONY CORPORATION Our fiscal year begins onJuly 1 and ends onJune 30 . Unless otherwise noted, references to "year" pertain to our fiscal year; for example, 2020 refers to fiscal 2020, which is the period fromJuly 1, 2019 toJune 30, 2020 . 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 2020 compared to 2019 is included herein. For discussion of results for 2019 compared to 2018, see our 2019 Annual Report on Form 10-K. OVERVIEW Business OverviewLancaster 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 inthe 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 ofthe 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 Sister Schubert's frozen dinner roll facility inHorse Cave, Kentucky that was completed inJanuary 2020 ; a new R&D center that was completed near the end of 2019; and the establishment of a Transformation Program Office in 2019 that will serve to coordinate our various capital and integration efforts, including our enterprise resource planning system ("ERP") project and related initiatives, Project Ascent, that is now underway. The ERP implementation commenced in late 2019 and entails the replacement of our primary customer and manufacturing transactional systems, warehousing systems, and financial systems with an integrated SAP S/4HANA system. 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, onNovember 16, 2018 , we acquired, using available cash on hand, substantially all of the assets ofOmni Baking Company LLC ("Omni"), a long-time supplier of products to our frozen garlic bread operations. OnOctober 19, 2018 , we acquired, using available cash on hand, all the assets ofBantam Bagels, LLC ("Bantam"), a producer and marketer of 18
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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. To date, COVID-19 has surfaced in nearly all
regions around the world and resulted in business slowdowns or shutdowns in
affected areas. 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 are complying with all guidelines issued by theCenters for Disease Control and Prevention as well as state and local health departments. We have also engaged a pulmonology and critical care physician to advise us on our employee safety protocols. Based on the advice of these experts, we have put in place a range of safety modifications and guidelines in our factories, distribution centers and offices to ensure that we can operate safely, including but not limited to: • engaging a third party to conduct employee temperature checks prior to entering our production facilities;
• conducting extensive cleaning and sanitation of workstations and common
areas before, during, and after each shift;
• employing social distancing guidelines and modifications at workspaces
and in break areas;
• staggering between shift changes and breaks;
• relaxing attendance requirements and enhancing our paid leave policy;
• implementing quarantine protocols in the event of confirmed or
suspected cases of COVID-19;
• providing a $300 bonus for each of our front-line employees in late
March and temporarily increasing the wage rate for our hourly
front-line employees by $2 per hour beginning in April;
• establishing business travel restrictions; and
• working from home whenever possible, consistent with the applicable
stay-at-home order.
With respect to our second priority, as of the date of this filing, there has been no material adverse change in our ability to manufacture and distribute our products. We have not experienced any significant disruptions to our shipping or warehousing operations or sourcing of raw materials. We have also secured additional second-sourcing options as needed to help limit the risk of supply disruptions. We continue to monitor the COVID-19 situation and related guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future. However, COVID-19 could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to higher-than-normal inventory levels, revised payment terms with certain of our customers, additional reserves for inventory and receivables, and higher plant operating costs. During the three months endedJune 30, 2020 , the effects of COVID-19 and the related actions undertaken in theU.S. to attempt to control its spread, specifically the restriction of restaurant dine-in purchases and imposition of stay-at-home orders, negatively impacted the operating results of our Foodservice segment. Our Foodservice segment net sales for the fourth quarter declined 24% to$128.4 million while segment operating income fell 45% to$10.1 million . After a very slow start in April, consumer demand at quick-service restaurants made a strong recovery in May and June, and sales for other restaurants also improved notably throughout the quarter. With respect to our Retail segment, the impact of COVID-19 resulted in higher sales during the three months endedJune 30, 2020 as consumer demand in the retail channel remained elevated. We continue to operate from a position of financial strength and believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to our access to capital under our unsecured revolving credit facility, should be adequate to meet our liquidity needs over the next 12 months. We have placed a greater emphasis on tracking the financial strength of our customers and suppliers and taking actions, where determined necessary, to limit our financial exposure and operational risks. Additional details regarding our financial strength are provided in the "Financial Condition" section below. 19
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RESULTS OF CONSOLIDATED OPERATIONS (Dollars in thousands, Years Ended June 30, Change except per share data) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Net Sales$ 1,334,388 $ 1,307,787 $ 1,222,925 $ 26,601 2 %$ 84,862 7 % Cost of Sales 976,352 981,589 919,419 (5,237 ) (1 )% 62,170 7 % Gross Profit 358,036 326,198 303,506 31,838 10 % 22,692 7 % Gross Margin 26.8 % 24.9 % 24.8 % Selling, General and Administrative Expenses 180,945 149,811 129,906 31,134 21 % 19,905 15 % Change in Contingent Consideration 257 (16,180 ) 2,052 16,437 (102 )% (18,232 ) N/M Restructuring and Impairment Charges 886 1,643 - (757 ) (46 )% 1,643 N/M Operating Income 175,948 190,924 171,548 (14,976 ) (8 )% 19,376 11 % Operating Margin 13.2 % 14.6 % 14.0 % Other, Net 3,129 4,618 2,655 (1,489 ) (32 )% 1,963 74 % Income Before Income Taxes 179,077 195,542 174,203 (16,465 ) (8 )% 21,339 12 % Taxes Based on Income 42,094 44,993 38,889 (2,899 ) (6 )% 6,104 16 % Effective Tax Rate 23.5 % 23.0 % 22.3 % Net Income$ 136,983 $ 150,549 $ 135,314 $ (13,566 ) (9 )%$ 15,235 11 % Diluted Net Income Per Common Share$ 4.97 $ 5.46 $ 4.92 $ (0.49 ) (9 )%$ 0.54 11 % Net Sales Consolidated net sales for the year endedJune 30, 2020 increased 2% to a new record of$1,334 million from the prior-year record total of$1,308 million . This growth was driven by an increase in Retail net sales, particularly in the second half of the year, partially offset by a decline in Foodservice net sales. 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: 2020 2019 2018 Segment Sales Mix: Retail 54% 50% 53% Foodservice 46% 50% 47% See discussion of net sales by segment following the discussion of "Earnings Per Share" below. Gross Profit Consolidated gross profit increased 10% to$358.0 million in 2020 compared to$326.2 million in 2019 driven by the higher sales volumes in Retail, our cost savings programs, including continued contributions from our strategic procurement and transportation management initiatives, improved net price realization and lower commodity costs. Offsets to gross profit growth included higher manufacturing costs and other expenses resulting from the impacts of COVID-19. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased 21% to$180.9 million in 2020 as expenditures for Project Ascent increased$16.3 million to$18.0 million . Investments in technology and IT infrastructure, a write-off of engineering costs for a dressing plant expansion project and other expenses attributed to the impacts of COVID-19, and a higher level of consumer promotional spending also contributed to the rise in SG&A expenses. Shifts in demand between our Retail and Foodservice segments led us to cancel the plant expansion project. Project Ascent expenses are included within Corporate Expenses. A portion of the costs classified as Project Ascent expenses represent ongoing costs that will continue subsequent to ERP implementation. 20
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Year Ended June 30, Change
(Dollars in
thousands) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
SG&A Expenses -
Excluding Project
Ascent $ 162,910 $ 148,031 $ 129,906 $ 14,879 10 % $ 18,125 14 %
Project Ascent
Expenses 18,035 1,780 - 16,255 913 % 1,780 N/M
Total SG&A Expenses $ 180,945 $ 149,811 $ 129,906 $ 31,134 21 %
Change in Contingent Consideration The change in contingent consideration resulted in expense of$0.3 million in 2020 compared to a net benefit of$16.2 million in 2019, which included a$17.1 million reduction in the fair value of the contingent consideration liability forAngelic Bakehouse, Inc. ("Angelic") as a result of our 2019 fair value measurements. See further discussion in Note 3 to the consolidated financial statements. Given the nature of Angelic's sales and historical accounting treatment, the entire adjustment related to Angelic's contingent consideration was recorded within the Retail segment. Restructuring and Impairment Charges In the fourth quarter of 2019, we committed to a plan to close our frozen bread manufacturing plant located inSaraland, Alabama . This decision was intended to provide greater production efficiency by consolidating most of this facility's operations into other existing plants, outsourcing certain requirements and discontinuing less profitable frozen bread products. Production at the plant ceased inJuly 2019 . The operations of this plant have not been classified as discontinued operations as the closure did not represent a strategic shift that would have a major effect on our operations or financial results. During 2020 and 2019, we recorded restructuring and impairment charges of$0.9 million and$1.6 million , respectively. The restructuring and impairment charges, which consisted of one-time termination benefits, fixed asset impairment charges and other closing costs, were not allocated to our two reportable segments due to their unusual nature. We do not expect any additional charges attributed to this plant closure. Operating Income Operating income decreased 8% to$175.9 million in 2020 driven by the impact of the prior-year's favorable adjustment related to Angelic's contingent consideration, increased expenditures for Project Ascent, higher costs attributed to the impacts of COVID-19 and increased investments in technology and IT infrastructure. These unfavorable factors were partially offset by the more favorable sales mix, our cost savings programs, improved net price realization and lower commodity costs. See discussion of operating results by segment following the discussion of "Earnings Per Share" below. Taxes Based on Income Our effective tax rate was 23.5% and 23.0% in 2020 and 2019, 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 2020 and 2019, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.8%. Earnings Per Share As influenced by the factors discussed above, particularly the increased expenditures for Project Ascent and costs attributed to the impacts of COVID-19 in 2020 and the reduction in fair value of Angelic's contingent consideration in 2019, diluted net income per share totaled$4.97 in 2020, a decrease from the 2019 total of$5.46 per diluted share. Diluted weighted average common shares outstanding for each of the years endedJune 30, 2020 and 2019 have remained relatively stable. In 2020, expenditures for Project Ascent reduced diluted earnings per share by$0.50 . Certain costs attributed to the impacts of COVID-19, including the temporary increase in pay for our front-line employees, the write-off of engineering costs for a canceled dressing plant expansion project and an increase in the Foodservice inventory reserve, had an unfavorable impact of$0.28 per diluted share in 2020. The restructuring and impairment charge also reduced diluted earnings per share in 2020 by$0.02 . In 2019, the after-tax benefit from the reduction in the fair value of Angelic's contingent consideration liability was$0.48 per diluted share while Project Ascent expenditures reduced diluted earnings per share by$0.05 and the restructuring and impairment charge had an unfavorable impact of$0.05 per diluted share. 21
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RESULTS OF OPERATIONS - SEGMENTS
Retail Segment
Year Ended June 30 , Change
(Dollars in thousands) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
$ 714,127 $ 656,621 $ 650,234 $ 57,506 9 %$ 6,387 1 % Operating Income$ 142,822 $ 135,093 $ 126,400 $ 7,729 6 %$ 8,693 7 % Operating Margin 20.0 % 20.6 % 19.4 % In 2020, net sales for the Retail segment reached a record$714.1 million , a 9% increase from the prior-year total of$656.6 million as higher retail channel demand attributed to the impacts of COVID-19 and contributions from shelf-stable dressings and sauces sold under license agreements, including new product introductions, drove Retail sales gains. 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$7.7 million , or 6%, to$142.8 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. The prior-year results were favorably impacted by the$17.1 million reduction in the fair value of Angelic's contingent consideration liability. Foodservice Segment Year Ended June 30, Change (Dollars in thousands) 2020 2019 2018 2020
vs. 2019 2019 vs. 2018 Net Sales$ 620,261 $ 651,166 $ 572,691 $ (30,905 ) (5 )%$ 78,475 14 % Operating Income$ 66,480 $ 73,828 $ 58,440 $ (7,348 ) (10 )%$ 15,388 26 % Operating Margin 10.7 % 11.3 % 10.2 % In 2020, Foodservice net sales decreased 5% to$620.3 million from the 2019 total of$651.2 million . After growth of 7% in the first half of the fiscal year, Foodservice net sales declined 16% in the second half as consumer demand shifted away from the foodservice channel due to the impacts of COVID-19. Excluding all sales resulting from theNovember 2018 acquisition of Omni, total Foodservice net sales declined 5%. Omni sales attributed to a temporary supply agreement totaled$22.3 million in the current fiscal year compared to$19.4 million last year. In 2020, the$7.3 million decline in Foodservice segment operating income and decrease in operating margin was primarily due to the sales decline, reduced absorption of fixed production costs resulting from the lower sales volumes and other costs attributed to the impacts of COVID-19, including the cancelation of the dressing plant expansion project, an inventory write-down and the temporary increase in hourly wages for our front-line employees. Corporate Expenses The 2020 corporate expenses totaled$32.5 million as compared to$16.4 million in 2019. The increase was driven by expenditures for Project Ascent, which totaled$18.0 million in 2020 as compared to$1.8 million in 2019. In 2020, we also capitalized an additional$8.9 million of ERP-related expenditures for application development stage activities. LOOKING FORWARD For 2021, we expect Retail segment sales will continue to benefit from the growth in shelf-stable dressings and sauces sold under license agreements, including sales gains for Chick-fil-A® sauces following a successful pilot test that was launched inMarch 2020 , expanded geographic distribution of Buffalo Wild Wings® sauces in single bottles and growth in the dollar and value channels for Olive Garden® dressings. We also anticipate both our Retail and Foodservice segment sales will continue to be impacted by the COVID-19 pandemic, which has caused shifts in consumer demand between the retail and foodservice channels. The extent of this impact on our 2021 results is very difficult to predict due to ongoing regional ebbs and flows of COVID-19 cases and the associated loosening and tightening of stay-at-home orders and other restrictions and guidelines that create uncertainty for the restaurant industry and consumer behavior over an unpredictable timeline. Based on current market conditions, following a year in which commodity costs were notably favorable, we expect commodity costs to increase in 2021. Our cost savings programs and pricing initiatives will help to offset these increased costs. Our 2021 SG&A expenses will continue to include Project Ascent expenses. We will continue to consider acquisition opportunities that represent good value and are consistent with our growth strategy or otherwise provide significant strategic benefits. Our exposure to volatile swings in food commodity costs will continue to be managed and mitigated through a strategic forward purchasing program for certain key materials such as soybean oil and flour. For a more-detailed discussion of the effect 22
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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 2020 as we ended the year with$198 million in cash and equivalents, along with shareholders' equity of$783 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 atJune 30, 2020 . AtJune 30, 2020 , we had$2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires inMarch 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. AtJune 30, 2020 , 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. AtJune 30, 2020 , 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. Based on our current plans and expectations, we believe our capital expenditures for 2021 could total between$65 and$85 million . In addition, we will also continue to evaluate other potentially significant investments, such as a plant expansion, new plant construction or brownfield investment, to meet increasing demand for our dressing and sauce products. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations. Cash Flows Year Ended June 30, Change (Dollars in thousands) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Provided By Operating Activities$ 170,769 $ 197,598 $ 160,714 $ (26,829 ) (14 )%$ 36,884 23 % Used In Investing Activities$ (83,265 ) $ (126,861 ) $ (31,452 ) $ 43,596 34 %$ (95,409 ) N/M Used In Financing Activities$ (85,519 ) $ (80,201 ) $ (66,614 ) $ (5,318 ) (7 )%$ (13,587 ) (20 )% Cash provided by operating activities remains the primary source for funding our investing and financing activities, as well as financing our organic growth initiatives. Cash provided by operating activities in 2020 totaled$170.8 million , a decrease of 14% as compared with the 2019 total of$197.6 million . The 2020 decrease was due to the year-over-year change in net working capital and lower net income, as partially offset by the impact of the prior-year reduction in the fair value of Angelic's contingent consideration. Cash used in investing activities totaled$83.3 million in 2020 as compared to$126.9 million in 2019. The 2020 decrease primarily reflects the impact of the prior-year second quarter acquisitions of Bantam and Omni as partially offset by a higher level of payments for property additions in the current year. The year-over-year increase in our capital expenditures includes spending on a capacity expansion project at our frozen dinner roll facility inHorse Cave, Kentucky that was completed inJanuary 2020 and the purchase of the Omni manufacturing facility that was previously leased. Payments for property additions totaled$82.6 million in 2020 compared to$70.9 million in 2019. 23
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Financing activities used net cash totaling$85.5 million and$80.2 million in 2020 and 2019, respectively. In general, cash used in financing activities reflects the payment of dividends and share repurchases. The 2020 increase was primarily due to higher dividend payments. The regular dividend payout rate for 2020 was$2.75 per share, as compared to$2.55 per share in 2019. This past fiscal year marked the 57th consecutive year in which our dividend rate was increased. The future levels of share repurchases and declared dividends are subject to the periodic review of our Board of Directors and are generally determined after an assessment is made of various factors, such as anticipated earnings levels, cash flow requirements and general business conditions. Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are incurred pertaining to regulatory compliance and, upon occasion, remediation. Such costs have not been, and are not anticipated to become, material. We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. We do not have any related party transactions that materially affect our results of operations, cash flows or financial condition. OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMITMENTS We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "Variable Interest Entities," that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures. We have various contractual obligations that are appropriately recorded as liabilities in our consolidated financial statements. Certain other contractual obligations are not recognized as liabilities in our consolidated financial statements. Examples of such items are commitments to purchase raw materials or packaging inventory that has not yet been received as ofJune 30, 2020 . The following table summarizes our contractual obligations as ofJune 30, 2020 (dollars in thousands): Payment Due by Period Less than 1 More than 5 Contractual Obligations Total Year 1-3 Years 3-5 Years Years Finance Lease Obligations (1)$ 2,293 $ 638 $ 1,265 $ 390 $ - Operating Lease Obligations (1) 26,470 7,404 10,591 5,569 2,906 Purchase Obligations (2) 234,339 206,046 25,211 2,851 231 Other Noncurrent Liabilities (as reflected on Consolidated Balance Sheet) (3) 10,132 - 942 9,190 - Total$ 273,234 $ 214,088 $ 38,009 $ 18,000 $ 3,137
(1) Finance leases are primarily entered into for certain equipment and warehouse
facilities. Operating leases are primarily entered into for warehouse and
office facilities and certain equipment. See Note 5 to the consolidated
financial statements for further information.
(2) Purchase obligations represent purchase orders and longer-term purchase
arrangements related to the procurement of raw materials, supplies, services,
and property, plant and equipment.
(3) This amount does not include
recorded on the balance sheet, which largely consist of the underfunded
defined benefit pension liability, other post employment benefit obligations,
tax liabilities, noncurrent workers compensation obligations, deferred
compensation and interest on deferred compensation. These items are excluded,
as it is not certain when these liabilities will become due. See Notes 9, 12
and 13 to the consolidated financial statements for further information.
IMPACT OF INFLATION
Our business results can be influenced by significant changes in the costs of
our raw materials, packaging and freight. We attempt to mitigate the impact of
inflation on our raw materials by entering into longer-term fixed-price
contracts for a portion of our most significant commodities, soybean oil and
flour. We have also implemented a procurement strategy for a portion of our egg
needs through the use of grain-based pricing contracts to reduce our exposure to
egg market spot prices. With regard to freight costs, during 2019 we added more
dedicated carriers to our overall transportation network to help reduce our
exposure to spot freight rates. In 2019 we also implemented a transportation
management system which improved the efficiency of our internal freight
management processes and also allowed us to secure more competitive freight
rates. Nonetheless, we remain
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exposed to events and trends in the marketplace for our other raw-material, packaging and freight costs. While we attempt to pass through sustained increases in raw-material costs, any such price adjustments will often lag the changes in the related input costs. In 2020, commodity costs were modestly favorable driven by lower costs for eggs, soybean oil and flour. Packaging materials and freight costs were also favorable in 2020. Our strategic procurement programs, transportation management system and other cost savings initiatives also helped to reduce our expenditures on commodities, packaging materials and freight in 2020. In 2019, commodity cost inflation moderated to nearly flat compared to 2018 while packaging and freight costs were modestly inflationary. Looking ahead to 2021, under current market conditions we foresee inflation in commodities. Our ongoing cost savings programs and pricing initiatives will help to offset these higher commodity costs. Although typically less notable, we are also exposed to the unfavorable effects of general inflation beyond material and freight costs, especially in the areas of annual wage adjustments and benefit costs. Over time, we attempt to minimize the exposure to such cost increases through ongoing improvements and greater efficiencies throughout our manufacturing operations, including benefits gained through our lean six sigma program and strategic investments in plant equipment. With regard to the impact of commodity and freight costs on Foodservice segment operating income, most of our supply contracts with national chain restaurant accounts incorporate pricing adjustments to account for changes in ingredient and freight costs. These supply contracts may vary by account with regard to the time lapse between the actual change in ingredient and freight costs we incur and the effective date of the associated price increase or decrease. As a result, the reported operating margins of the Foodservice segment are subject to increased volatility during periods of rapidly rising or falling ingredient and/or freight costs because at least some portion of the change in ingredient and/or freight costs is reflected in the segment's results prior to the impact of any associated change in pricing. In addition, the Foodservice segment has an inherently higher degree of margin volatility from changes in ingredient costs when compared to the Retail segment due to its overall lower margin profile and higher ratio of ingredient pounds to net sales. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This MD&A discusses our consolidated financial statements, which have been prepared in accordance withU.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. Receivables and Related Allowances We evaluate the adequacy of our allowances for customer deductions considering several factors including historical experience, specific trade programs and existing customer relationships.Goodwill and Other Intangible AssetsGoodwill is not amortized. It is evaluated annually atApril 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. 25
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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:
• significant shifts in consumer demand and disruptions to our employees,
communities, customers, supply chains, operations, and production
processes resulting from COVID-19 and other epidemics, pandemics or
similar widespread public health concerns and disease outbreaks;
• efficiencies in plant operations;
• dependence on contract manufacturers, distributors and freight
transporters, including their financial strength in continuing to
support our business;
• fluctuations in the cost and availability of ingredients and packaging;
• the potential for loss of larger programs or key customer relationships;
• capacity constraints that may affect our ability to meet demand or may
increase our costs;
• changes in demand for our products, which may result from loss of brand
reputation or customer goodwill;
• difficulties in designing and implementing our new enterprise resource
planning system;
• cyber-security incidents, information technology disruptions, and data
breaches;
• ability to successfully grow recently acquired businesses;
• the extent to which recent and future business acquisitions are
completed and acceptably integrated;
• price and product competition;
• the lack of market acceptance of new products;
• the success and cost of new product development efforts;
• the impact of customer store brands on our branded retail volumes;
• the reaction of customers or consumers to price increases we may implement;
• adverse changes in freight, energy or other costs of producing,
distributing or transporting our products;
• stability of labor relations;
• dependence on key personnel and changes in key personnel;
• the effect of consolidation of customers within key market channels;
• the impact of fluctuations in our pension plan asset values on funding
levels, contributions required and benefit costs;
• the possible occurrence of product recalls or other defective or
mislabeled product costs;
• maintenance of competitive position with respect to other manufacturers;
• 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;
• adequate supply of skilled labor; and
• certain other risk factors, including those discussed in other filings
we have submitted to the Securities and Exchange Commission .
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