Business Context and Reporting Period
This Form 10-Q is for Lancaster Colony Corporation and its subsidiaries, a specialty food manufacturer and marketer serving Retail and Foodservice channels. The filing covers the three months ended September 30, 2020, the first quarter of fiscal 2021. The supplied metadata identifies Marzetti Co.; investors should verify the issuer because the filing itself names Lancaster Colony Corporation.
Operations are concentrated in the United States, with Retail products including frozen breads, dressings, dips and sauces, and Foodservice products including dressings, sauces, frozen breads and other roll products.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $349.2 million | $337.1 million | Up 4% |
| Gross profit | $92.7 million | $92.1 million | Up 1% |
| Gross margin | 26.5% | 27.3% | Down 80 basis points |
| Operating income | $48.9 million | $51.7 million | Down 5% |
| Operating margin | 14.0% | 15.3% | Down 130 basis points |
| Net income | $37.1 million | $40.7 million | Down 9% |
| Diluted EPS | $1.35 | $1.48 | Down 9% |
| Operating cash flow | $23.6 million | $40.1 million | Down $16.5 million |
| Capital expenditures | $14.4 million | $43.2 million | Down $28.8 million |
At September 30, 2020, cash and equivalents were $186.1 million, total assets were $1.024 billion, current liabilities were $139.8 million and shareholders’ equity was $801.1 million. 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 paid $19.3 million in common dividends, or $0.70 per share, and made only $15 thousand of treasury-stock purchases during the quarter. Management stated that available cash, operating cash flow and revolver availability should be adequate for liquidity needs over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Retail sales increased 17% to $193.7 million, driven by elevated at-home food consumption, frozen breads, Olive Garden dressings, Chick-fil-A sauces and Buffalo Wild Wings sauces.
- Foodservice sales declined 9% to $155.5 million because COVID-19 restrictions and changed consumer behavior continued to reduce restaurant demand. Sales under the temporary Omni supply agreement fell to $2.8 million from $7.9 million; the agreement terminated October 31, 2020.
- Retail operating income rose 9% to $42.7 million, while Foodservice operating income increased 2% to $27.4 million. Foodservice results benefited from a $5.7 million favorable contingent-consideration adjustment.
- SG&A increased 22% to $48.2 million. Project Ascent, the ERP implementation, accounted for $8.3 million of current-quarter expense versus $2.7 million in the prior year and reduced diluted EPS by approximately $0.23 versus $0.08 previously.
- Gross margin declined because of higher manufacturing, COVID-19, commodity and freight costs, partly offset by a more favorable Retail sales mix, cost savings and improved price realization.
- Operating cash flow decreased primarily because inventories increased by $25.5 million during the quarter, compared with an $8.4 million increase in the prior year.
Guidance, Outlook, Risks and Unusual Items
- No specific full-year revenue or earnings guidance was provided. Management expects Retail sales to continue benefiting from at-home consumption and licensed sauces and dressings.
- Foodservice sales are expected to remain pressured by restaurant restrictions, uncertain consumer demand and the pace of recovery in away-from-home dining.
- Management expects higher commodity, freight and COVID-19-related manufacturing costs in the fiscal second quarter, partly offset by cost savings and pricing.
- The company expects fiscal 2021 capital expenditures of approximately $70 million to $90 million and is evaluating additional investments, including potential plant expansion, new construction or brownfield projects.
- The $5.7 million reduction in Bantam contingent consideration resulted from lower forecasted adjusted EBITDA after a Foodservice customer’s SKU rationalization. The liability declined to $3.5 million from $9.2 million.
- The company recorded $1.2 million of impairment charges on Bantam tradename and technology assets and accelerated amortization of a related customer relationship. The customer-related sales loss is expected after November 30, 2020.
- COVID-19 could materially affect future revenue, profitability and cash flow through restaurant demand, supply disruptions, higher inventory, customer credit risk, additional reserves and increased plant costs. The filing states that the future impact cannot be reasonably estimated.
- Management reported compliance with all credit-facility covenants and no default events. The principal covenants require interest coverage of at least 2.5 to 1 and consolidated leverage of no more than 3.5 to 1.
- Ordinary-course litigation was not considered material. No material changes were reported to previously disclosed risk factors, market risks or internal controls.
Investor Verification Items
- Confirm the issuer identity: the supplied request says Marzetti Co., while the filing is for Lancaster Colony Corporation, ticker LANC.
- Assess the sustainability of Retail demand and the timing and strength of Foodservice recovery as COVID-19 conditions evolve.
- Separate recurring operating performance from the nonrecurring $5.7 million Bantam contingent-consideration benefit and $1.2 million impairment charge.
- Track Project Ascent implementation costs, capitalization and potential execution or cybersecurity risks.
- Verify inventory normalization, operating cash-flow recovery and the planned $70 million to $90 million of fiscal 2021 capital spending.
- Monitor commodity, freight, labor and COVID-19-related manufacturing costs and their effect on margins.
- Review the impact of the Omni supply-agreement termination and the identified Foodservice customer SKU rationalization.