Lancaster Colony Corporation (T. Marzetti business) — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015. The filing is for Lancaster Colony Corporation, not a registrant named “Marzetti Co.” Marzetti is a principal brand and the company operates as a single Specialty Foods segment. The requested 2014 Q4 corresponds to the fiscal fourth quarter ended June 30, 2014, while the filing also provides fiscal fourth-quarter 2015 data.
Business context
Lancaster Colony manufactures and markets specialty food products for retail, foodservice and limited industrial customers, including dressings, sauces, dips, croutons, frozen breads, noodles, flatbreads and pizza crusts. More than 95% of products are sold in the United States. The company completed its exit from non-food operations through the January 2014 sale of its candle business; those results are presented as discontinued operations.
On March 13, 2015, the company acquired Flatout Holdings, a flatbread and pizza-crust manufacturer, for $92.2 million net of cash acquired. Flatout contributed approximately $13 million of FY2015 sales and was not material to consolidated earnings.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $1,104.5 million | $1,041.1 million | Up 6% |
| Gross margin | $257.7 million | $248.6 million | Up 4% |
| Gross margin percentage | 23.3% | 23.9% | Down 0.6 percentage points |
| Operating income | $154.9 million | $153.8 million | Up 1% |
| Income from continuing operations | $101.7 million | $101.0 million | Up modestly |
| Net income | $101.7 million | $75.0 million | Up 36% |
| Diluted EPS | $3.72 | $2.74 | Up $0.98 |
| Cash flow from operations | $132.8 million | $129.1 million | Up 3% |
| Capital expenditures | $18.3 million | $16.0 million | Higher |
| Cash and equivalents at year-end | $182.2 million | $211.5 million | Down $29.3 million |
| Long-term debt | None | None | No change |
FY2014 net income included a $29.1 million after-tax loss on the sale of the candle operations. FY2015 had no discontinued-operations activity.
Fiscal fourth-quarter results
| Metric | Q4 FY2015 | Q4 FY2014 |
|---|---|---|
| Net sales | $277.7 million | $258.8 million |
| Gross margin | $65.0 million | $57.9 million |
| Income from continuing operations | $25.6 million | $20.9 million |
| Net income | $25.6 million | $21.3 million |
| Diluted EPS from continuing operations | $0.93 | $0.76 |
Material changes versus the prior comparable period
- Sales growth reflected higher retail and foodservice volumes, including stronger New York Brand frozen garlic bread and Olive Garden retail dressing sales. Pounds shipped increased approximately 5%.
- Gross margin percentage declined because volume benefits and modestly lower ingredient costs were offset by dressing capacity constraints, higher freight expense, product-placement costs, Flatout-related nonrecurring charges and lower foodservice pricing.
- SG&A increased 8% to $102.8 million, primarily due to consumer promotional spending, Flatout transaction expenses and amortization of acquired intangible assets.
- Cash used in investing activities increased to $112.3 million, principally because of the $92.2 million Flatout acquisition and higher capital expenditures.
- Goodwill increased to $143.8 million from $89.8 million, and net intangible assets increased to $47.8 million from $5.4 million, primarily due to Flatout.
- Regular dividends increased to $1.82 per share from $1.72 per share. The company reported 52 consecutive years of regular dividend increases. No shares were repurchased in the fourth quarter.
Liquidity, debt and commitments
The company ended FY2015 with $182.2 million of cash, $580.9 million of shareholders’ equity and no borrowings. Its unsecured revolving credit facility permits borrowings of up to $120 million, subject to a potential increase to $200 million with lender consent; $4.7 million of standby letters of credit reduced availability. The facility expires in April 2017, and the company was in compliance with its covenants.
Operating cash flow was $132.8 million, compared with $18.3 million of capital expenditures and $49.8 million of dividend payments. Management expected FY2016 capital expenditures of approximately $15 million to $20 million and anticipated funding capital needs from operating cash flow. Contractual obligations totaled $146.9 million, including $130.7 million of purchase obligations and $15.5 million of operating leases.
Outlook, risks and unusual items
- Management expected FY2016 benefits from Flatout and volume-driven growth in retail and foodservice.
- The company anticipated modestly unfavorable material-cost comparisons, primarily from sharply higher egg costs caused by the U.S. avian-influenza outbreak. Pricing actions were expected to offset part of the increase beginning in the first fiscal quarter.
- Key execution factors included integrating and growing Flatout, realizing efficiency gains from the dressing-capacity expansion, successful product innovation and managing promotional, freight and production costs.
- Material risks include volatile raw-material and packaging costs, customer concentration, intense branded and private-label competition, product recalls or contamination claims, manufacturing or transportation disruptions, labor negotiations, pension and multiemployer-plan obligations, and potential impairment of goodwill or intangible assets.
- McLane represented 18% of FY2015 sales and Wal-Mart represented 16%; neither customer was contractually obligated to continue purchasing from the company. Accounts receivable from Wal-Mart and McLane totaled approximately $16.4 million and $8.7 million, respectively.
- The company estimated potential complete-withdrawal liability from two multiemployer pension plans could exceed $14 million, although no such withdrawal was reported.
- No restructuring or impairment charges were recorded during the three-year period ended June 30, 2015. Legal proceedings and environmental matters were not expected to have a material effect based on information available at filing.
Investor verification checklist
- Verify the registrant identity and period: Lancaster Colony Corporation’s FY2015 Form 10-K, with Q4 FY2014 and Q4 FY2015 comparative data.
- Assess whether egg-cost inflation and related pricing actions affected FY2016 gross margin and earnings.
- Review Flatout’s post-acquisition sales, margins, integration progress and any subsequent goodwill or intangible-asset impairment indicators.
- Monitor customer concentration and changes in business with McLane, Wal-Mart and underlying foodservice customers.
- Reconcile operating cash flow, acquisition spending, capital expenditures, dividends and the decline in year-end cash.
- Review multiemployer pension exposure, the April 30, 2016 labor-contract expiration and the April 2017 credit-facility maturity.