Lancaster Colony Corporation — Form 10-Q Summary
Business context and reporting period
This filing is for the three months ended September 30, 2021, the first quarter of fiscal 2022. The registrant is Lancaster Colony Corporation, which manufactures and markets specialty food products through Retail and Foodservice segments. More than 95% of sales are in the United States. The filing text does not identify Marzetti Co. as the registrant; T. Marzetti Company is described as a wholly owned subsidiary.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $392.1 million | $349.2 million | Up 12% |
| Gross profit | $92.4 million | $92.7 million | Down $0.3 million |
| Gross margin | 23.6% | 26.5% | Down 2.9 percentage points |
| Operating income | $40.5 million | $48.9 million | Down 17% |
| Operating margin | 10.3% | 14.0% | Down 3.7 percentage points |
| Net income | $30.7 million | $37.1 million | Down 17% |
| Diluted EPS | $1.11 | $1.35 | Down 18% |
| Effective tax rate | 24.4% | 24.3% | Essentially unchanged |
- Retail sales increased 16% to $223.9 million, and Retail operating income increased 13% to $48.2 million. Retail operating margin was 21.5%, compared with 22.0%.
- Foodservice sales increased 8% to $168.2 million, but operating income declined 42% to $15.8 million. Foodservice operating margin fell to 9.4% from 17.6%.
- Net cash used in operating activities was $1.2 million, compared with $23.6 million of cash provided in the prior-year quarter.
- Capital expenditures were $30.2 million, versus $14.4 million in the prior-year period.
- Dividends paid were $20.7 million, or $0.75 per share. Share repurchases totaled $5.3 million for approximately 30,162 shares.
- Cash and equivalents were $130.1 million at September 30, 2021, down from $188.1 million at June 30, 2021.
- The company had no borrowings under its $150 million unsecured revolving credit facility and had $2.8 million of standby letters of credit outstanding. Shareholders’ equity was $850.1 million.
Material changes versus the prior comparable period
- Sales growth was offset by higher commodity and packaging costs, freight and warehousing costs, increased co-manufacturing expenses, and higher labor-related costs. Gross profit was therefore essentially flat despite the 12% sales increase.
- The prior-year quarter benefited from a $5.7 million reduction in Bantam contingent consideration and included $1.2 million of impairment charges. Neither item affected the current-year quarter.
- Foodservice profitability was particularly pressured by the absence of the prior-year contingent-consideration benefit, higher input costs, and increased warehousing expenses.
- Selling, general and administrative expense increased 8% to $51.9 million. Project Ascent, the company’s SAP S/4HANA ERP implementation, accounted for $9.4 million of current-quarter expense versus $8.3 million in the prior year.
- Working-capital investment, especially a $36.5 million increase in inventories, contributed to the decline in operating cash flow.
Guidance, outlook, risks and unusual items
- Management expects Retail licensing activities and Foodservice branded products, quick-service restaurant customers, and pizza-chain customers to support second-quarter sales.
- Management expects inflation to continue, particularly in soybean oil, packaging, freight, and labor. Pricing actions and cost-savings programs are expected to partially offset these pressures, but not necessarily eliminate them.
- COVID-19 continues to create uncertainty through shifting demand between Retail and Foodservice channels, operational costs, labor availability, supply-chain conditions, and changing health requirements.
- Fiscal 2022 capital expenditures are expected to total approximately $170 million to $190 million, including approximately $105 million of initial spending on the Horse Cave, Kentucky dressing and sauce expansion.
- The Horse Cave project has a guaranteed maximum price of approximately $113 million, approximately $78 million of remaining commitment at September 30, 2021, and is expected to be completed in the first quarter of fiscal 2023. Other capacity projects are expected to be completed in fiscal 2022.
- Management believes existing cash, operating cash flow, and availability under the credit facility will meet liquidity needs for at least the next 12 months. The company reported compliance with its credit-facility covenants and no defaults.
- Contingent consideration related to Bantam was $3.5 million at September 30, 2021 and is based on projected future adjusted EBITDA. Ordinary-course litigation was not considered material.
- The company reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting, and no recently issued or adopted accounting standards expected to affect the financial statements.
Important facts investors should verify
- Confirm the correct issuer and filing: the provided document is Lancaster Colony Corporation’s Form 10-Q, not a filing by Marzetti Co.
- Assess whether pricing and cost-savings initiatives can offset continuing commodity, packaging, freight, labor, and warehousing inflation.
- Monitor Foodservice margin recovery and the continuing effect of COVID-19-related demand shifts.
- Track operating cash flow, inventory growth, and the $170 million to $190 million fiscal 2022 capital-spending plan.
- Verify execution, timing, and remaining funding requirements for the Horse Cave, Columbus, and Altoona capacity projects.
- Evaluate Project Ascent implementation costs, risks, and potential operational disruption as the ERP program progresses.
- Review the Bantam contingent-consideration valuation and assumptions regarding projected adjusted EBITDA.