Business Context and Reporting Period
The filing is Lancaster Colony Corporation’s unaudited Form 10-Q, not a Marzetti Co. filing. It covers the three and nine months ended March 31, 2011, within fiscal 2011, which runs from July 1, 2010 through June 30, 2011. Operations consist primarily of Specialty Foods and Glassware and Candles, with more than 90% of each segment’s sales generated in the United States.
Financial Performance and Position
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Net sales | $252.6 million, up 1% | $833.9 million, up 3% |
| Gross margin | $52.5 million; 20.8% of sales | $188.8 million; 22.6% of sales |
| Operating income | $29.5 million; 11.7% of sales | $116.4 million; 14.0% of sales |
| Net income | $19.4 million | $77.1 million |
| Diluted EPS | $0.71 | $2.77 |
- Cash and equivalents were $107.7 million at March 31, 2011, compared with $100.9 million at June 30, 2010.
- Net cash provided by operating activities was $98.0 million for the nine months, compared with $86.9 million in the prior-year period.
- Capital expenditures were $26.9 million, compared with $8.1 million in the prior-year period, primarily for the Kentucky frozen-roll facility expansion.
- Financing activities used $64.6 million, including $39.6 million for treasury-stock purchases and $26.6 million for dividends.
- The company had no borrowings under its $160 million unsecured revolving credit facility. Approximately $6.6 million of standby letters of credit reduced available capacity.
- Current assets were $317.2 million versus current liabilities of $78.3 million. Shareholders’ equity was $497.8 million.
- Cash dividends per share increased to $0.33 for the quarter and $0.96 year to date, compared with $0.30 and $0.885, respectively.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, but gross margin declined 15% in the quarter and 10% year to date. Gross margin percentage fell from 24.7% to 20.8% in the quarter and from 26.0% to 22.6% year to date.
- Operating income declined 21% in the quarter and 16% year to date. Net income declined from $24.2 million to $19.4 million in the quarter and from $92.2 million to $77.1 million year to date.
- Specialty Foods sales increased less than 1% in the quarter and 2% year to date, while Glassware and Candles sales increased 4% and 7%, respectively.
- Specialty Foods operating income declined 18% in the quarter and 12% year to date. Glassware and Candles operating income declined 60% and 47%, respectively.
- Management attributed margin pressure primarily to higher ingredient costs, including soybean oil, dairy products, sugar and eggs; higher freight and warehousing costs; unfavorable product mix; lower frozen-roll production levels; and higher wax costs in Glassware and Candles.
- The prior-year period included approximately $2.3 million of restructuring charges related to the closure of a Wilson, New York dressings and sauces facility. No restructuring charges were recorded in the current nine-month period.
- The company repurchased 244,441 shares during the quarter for approximately $13.8 million, based on the reported average price, and had 1,678,544 shares remaining under its authorization at March 31, 2011.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected fiscal 2011 capital expenditures to approach $40 million, including the Kentucky facility expansion, which was expected to be completed by mid-calendar 2011.
- Management expected higher material and freight costs to persist into the fourth fiscal quarter. Recent pricing actions were expected to offset most higher material costs, although the effect of pricing on demand remained uncertain.
- Higher wax costs were expected to continue adversely affecting Glassware and Candles results through at least the end of fiscal 2011.
- Subsequent to March 31, 2011, the company received notice of special Continued Dumping and Subsidy Offset Act distributions totaling approximately $12.5 million. It had received $2.6 million and expected the remainder by June 30, 2011. Future distributions remain uncertain because of litigation and legislative considerations.
- The company had approximately $4 million remaining under the Kentucky construction contract and approximately $4 million of equipment purchase commitments at March 31, 2011.
- The company reported approximately $1.5 million of gross tax contingency reserves and approximately $2.9 million of net book value in held-for-sale properties.
- Ordinary-course claims and litigation were not expected to have a material adverse effect, but changes in CDSOA distributions could affect earnings and cash flow.
- Key risks include raw-material, energy and freight-cost volatility; customer concentration and loss of major programs; pricing and product competition; demand and product-acceptance changes; product recalls; labor and supplier issues; acquisitions; pension funding; regulation; tax-law changes; and access to financing.
- Management stated that liquidity was adequate for foreseeable requirements and that all credit-facility covenants were satisfied by substantial margins.
Investor Verification Checklist
- Verify the issuer and period: the supplied filing identifies Lancaster Colony Corporation and March 31, 2011, whereas the request metadata identifies Marzetti Co. and “2010 Q3.”
- Verify whether the $12.5 million special CDSOA distribution was fully received and how it was recorded after quarter end.
- Assess whether pricing actions offset higher ingredient, wax, freight and energy costs without materially reducing demand.
- Track completion, final cost and operating benefits of the Kentucky frozen-roll expansion and related commitments.
- Reconcile cash generation with capital expenditures, dividends and share repurchases.
- Review segment-level margin recovery, particularly the Specialty Foods and Glassware and Candles segments.
- Confirm availability and covenant compliance under the revolving credit facility through the remainder of fiscal 2011.