Business Context and Reporting Period
This Form 10-Q is for Lancaster Colony Corporation, not Marzetti Co. It covers the fiscal third quarter and nine months ended March 31, 2016; fiscal 2016 runs from July 1, 2015 through June 30, 2016. Lancaster Colony manufactures and markets specialty food products for retail and foodservice markets, primarily in the United States, through its Specialty Foods segment.
The filing is unaudited and was filed May 3, 2016. The company acquired Flatout Holdings in March 2015 for $92.2 million; Flatout contributed approximately $10 million of quarterly sales and $31 million of year-to-date sales in fiscal 2016.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Net sales | $287.8 million, up 9% | $906.6 million, up 10% |
| Gross margin | $72.9 million; 25.3% of sales | $224.5 million; 24.8% of sales |
| Operating income | $43.9 million, up 41%; 15.3% margin | $137.9 million, up 19%; 15.2% margin |
| Net income | $29.0 million, up 42% | $91.2 million, up 20% |
| Diluted EPS | $1.06, versus $0.75 | $3.32, versus $2.78 |
| Operating cash flow | Not separately provided | $100.6 million, versus $96.6 million |
SG&A expense increased 14% for the quarter and 13% year to date, reaching 10.1% and 9.5% of sales, respectively. The nine-month effective tax rate was 33.9%, compared with 34.3% in the prior-year period.
At March 31, 2016, cash and equivalents were $94.4 million, compared with $182.2 million at June 30, 2015. Total current assets were $250.0 million and total current liabilities were $71.8 million. Shareholders’ equity was $498.5 million. The company had no borrowings outstanding under its existing unsecured revolving credit facility and had $4.7 million of standby letters of credit outstanding.
Capital expenditures were $11.6 million for the first nine months. The company expected fiscal 2016 capital expenditures of approximately $16 million, funded by operating cash flow.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected Flatout, higher retail and foodservice volumes, and pricing actions. Pounds shipped increased 4% in the quarter and 6% year to date.
- Retail sales increased 12% for the quarter and 11% year to date; foodservice sales increased 7% and 8%, respectively.
- Gross margin benefited from pricing, higher volumes, lower freight, and lower costs for soybean oil, resin packaging, and flour. Egg costs, which had been elevated due to avian influenza, returned to comparable prior-year levels during the quarter.
- Specialty Foods operating income increased 36% for the quarter and 18% year to date. Corporate expenses declined 15% in the quarter and were essentially unchanged year to date.
- Cash used in investing activities fell to $12.1 million from $109.4 million because the prior-year period included the $92.2 million Flatout acquisition.
- Cash used in financing activities increased to $176.3 million, principally because of the $136.7 million special dividend, or $5.00 per share, paid in December 2015. The regular quarterly dividend was $0.50 per share, versus $0.46 in the prior-year quarter.
- Retained earnings declined to $1.133 billion from $1.219 billion at June 30, 2015, primarily reflecting the special dividend.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- For the fourth quarter, management expected the year-over-year benefit from pricing actions to moderate as lower egg costs were passed through to foodservice national-account customers.
- Management expected foodservice sales growth to slow because of selective rationalization of certain foodservice business. Commodity and freight costs were expected to remain favorable, while product placement, marketing, and promotional costs were expected to increase for new retail product introductions.
- On April 8, 2016, the company entered a new unsecured revolving credit facility with availability of up to $150 million, potentially expandable to $225 million, expiring April 8, 2021. The facility includes interest-coverage and leverage covenants.
- Management believed operating cash flow, cash balances, and available credit would fund requirements through fiscal 2016 and 2017. It expected to remain in compliance with the new facility’s covenants.
- Principal risks include avian influenza and other commodity volatility, customer reactions to price increases, loss of major customers, competition, product recalls, capacity constraints, labor negotiations, pension funding, Flatout integration and growth, acquisitions, and access to financing.
- Litigation matters arising in the ordinary course were not expected to have a material effect. A $1.5 million tax contingency reserve was recorded in noncurrent liabilities; management did not expect a significant effect from changes in the reserve over the next 12 months.
- The company terminated medical benefits under certain postretirement plans in the December 2015 quarter. The resulting negative plan amendment and remeasurement reduced fiscal 2016 postretirement benefit cost.
- Disclosure controls were effective as of March 31, 2016, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Entity and period: Confirm that the intended issuer is Lancaster Colony Corporation and that “2015 Q3” refers to the fiscal quarter ended March 31, 2016.
- Flatout contribution: Assess the extent to which reported sales and profit growth reflects the acquisition rather than organic growth.
- Margin sustainability: Monitor egg, soybean oil, packaging, flour, freight, and other commodity costs, along with the durability of pricing actions.
- Cash deployment: Reconcile the $136.7 million special dividend and its effect on cash, retained earnings, and future capital allocation.
- Liquidity and covenants: Review the April 2016 credit facility, its covenants, standby letters of credit, and available borrowing capacity.
- Foodservice strategy: Evaluate the impact of selective business rationalization and the expected moderation in foodservice growth.
- Forward-looking items: Verify management’s approximately $16 million capital expenditure expectation and the assumptions supporting its liquidity outlook through fiscal 2017.