Business Context and Reporting Period
Lancaster Colony Corporation, the parent of T. Marzetti Company, manufactures and markets specialty food products through Retail and Foodservice channels. This unaudited Form 10-Q covers the three and six months ended December 31, 2020, representing the second quarter and first six months of fiscal 2021. More than 95% of sales are generated in the United States.
Financial Results and Key Metrics
| Metric | Three Months Ended December 31, 2020 | Year-over-Year | Six Months Ended December 31, 2020 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $375.0 million | +6% | $724.3 million | +5% |
| Gross profit | $106.8 million | +7% | $199.5 million | +4% |
| Gross margin | 28.5% | Up from 28.1% | 27.5% | Down from 27.7% |
| Operating income | $58.6 million | +8% | $107.5 million | +2% |
| Operating margin | 15.6% | Up from 15.2% | 14.8% | Down from 15.3% |
| Net income | $44.6 million | +3% | $81.7 million | -3% |
| Diluted EPS | $1.62 | +3% | $2.96 | -3% |
- Retail sales increased 20% in the quarter and 18% year to date, led by licensed dressings and sauces, frozen garlic bread and frozen dinner rolls. Retail operating income increased 40% in the quarter and 25% year to date; operating margins were 27.3% and 24.8%, respectively.
- Foodservice sales declined 10% in the quarter and 9% year to date as COVID-19 reduced restaurant demand. Foodservice operating income declined 32% in the quarter and 15% year to date; operating margins were 12.0% and 14.9%, respectively.
- SG&A increased 5% in the quarter and 13% year to date. Project Ascent, the company’s ERP transformation, represented $8.5 million of quarterly expense and $16.8 million year to date, versus $4.9 million and $7.6 million in the prior-year periods.
- Operating cash flow was $90.9 million for the six months ended December 31, 2020, compared with $105.4 million in the prior year. The decline primarily reflected higher inventory investment.
- Capital expenditures were $29.6 million, compared with $57.7 million in the prior year. Cash dividends were $39.9 million, and net cash used in financing activities was $42.8 million.
- Cash and equivalents totaled $216.4 million at December 31, 2020, compared with $198.3 million at June 30, 2020.
- The company had no borrowings under its $150 million unsecured revolving credit facility and had $2.8 million of standby letters of credit outstanding. The facility expires in March 2025; the company reported compliance with all covenants.
Material Changes Versus the Prior Comparable Period
- Retail demand benefited from elevated at-home food consumption during the pandemic, while Foodservice demand remained pressured by restaurant restrictions and changed consumer behavior.
- The six-month period included a $5.7 million favorable reduction in Bantam contingent consideration, compared with a $0.1 million expense in the prior year. The adjustment increased year-to-date diluted EPS by approximately $0.16.
- The company recorded $1.2 million of impairment charges related to Bantam tradename and technology/know-how assets after a Foodservice customer rationalized SKUs and sales were lost. The prior-year period included $0.9 million of restructuring and impairment charges primarily related to a plant closure.
- Other net income decreased to an expense of less than $0.1 million from prior-year benefits of $0.9 million for the quarter and $2.3 million year to date, primarily because of lower interest income on cash holdings.
- The effective tax rate increased to 24.0% from 22.1% for the six-month period.
- The company entered into a Design/Build Agreement for an approximately $113 million expansion of dressing and sauce manufacturing and warehousing capacity in Horse Cave, Kentucky. Completion is expected in the first quarter of fiscal 2023.
- Segment expense allocations were revised effective July 1, 2020 as part of ERP preparation, with historical information retrospectively conformed. The change did not affect consolidated results.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued Retail gains in licensed dressings and sauces and frozen bread products during the fiscal third quarter. Foodservice sales are expected to remain pressured by COVID-19 and restaurant restrictions.
- COVID-19 is expected to continue increasing manufacturing costs. Commodity and freight inflation is expected to become more unfavorable in the fiscal third quarter, partly offset by cost savings programs and net price realization.
- Management expects fiscal 2021 capital expenditures of $105 million to $125 million, including approximately $30 million of initial spending on the Horse Cave expansion.
- The company stated that it cannot reasonably estimate the full future effect of COVID-19. Potential effects include weaker revenue and profitability, higher inventories, revised customer payment terms, additional inventory or receivable reserves, supply-chain disruption and higher plant operating costs.
- Management identified risks involving ERP implementation, cybersecurity, supply and commodity costs, capacity constraints, customer concentration and program losses, product recalls, acquisitions, labor availability, regulatory matters, litigation and changing consumer demand.
- Ordinary-course litigation was not expected to have a material effect on the consolidated financial statements. No material changes to previously disclosed risk factors were reported.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the filing issuer: the submitted 10-Q is for Lancaster Colony Corporation, not a registrant named “Marzetti Co.”
- Assess whether the Retail sales benefit and Foodservice weakness are temporary COVID-19 effects or longer-term channel shifts.
- Monitor Foodservice customer losses, including the Bantam SKU rationalization, related impairment charges and contingent consideration estimates.
- Track Project Ascent ERP spending, implementation progress and the extent to which related costs continue after implementation.
- Evaluate funding requirements and execution risks for the approximately $113 million Horse Cave capacity expansion.
- Review inventory growth, operating cash flow conversion and the effect of commodity, freight, labor and COVID-related costs on margins.
- Verify the company’s ability to remain within credit-facility covenants while funding capital expenditures and dividends.