Business Context and Reporting Period
This filing is Lancaster Colony Corporation’s Form 10-K for the fiscal year ended June 30, 2014, not a Marzetti Co. filing or a standalone 2013 Q4 filing. Lancaster Colony manufactures and markets specialty food products under brands including Marzetti, Sister Schubert’s, New York Brand and Otria for retail and foodservice markets. The company operated one reportable segment, Specialty Foods, after selling its candle operations on January 30, 2014. Candle results are presented as discontinued operations for all periods.
Financial Performance and Position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $1,041.1 million | $1,013.8 million | +3% |
| Gross margin | $248.6 million; 23.9% | $244.7 million; 24.1% | +2% dollars; margin down 20 bps |
| Operating income | $153.8 million; 14.8% | $153.9 million; 15.2% | Essentially flat; margin down 40 bps |
| Income from continuing operations | $101.0 million | $103.9 million | -3% |
| Net income | $75.0 million | $109.2 million | -31% |
| Diluted EPS | $2.74 | $3.99 | -31% |
| Operating cash flow | $129.1 million | $131.7 million | -2% |
- Retail sales increased approximately 2% and foodservice sales approximately 3%; pounds shipped increased approximately 4%.
- Favorable ingredient costs, particularly soybean oil, sweeteners and eggs, were offset by higher trade promotion, lower foodservice pricing, distribution costs and plant inefficiencies.
- Cash and equivalents were $211.5 million at June 30, 2014, compared with $123.4 million a year earlier. Shareholders’ equity was $528.6 million.
- The company had no debt outstanding and had $3.7 million of standby letters of credit against a $120 million unsecured revolving credit facility expiring in April 2017.
- Capital expenditures were approximately $16.0 million, down from $24.1 million in FY2013. FY2015 capital expenditures were expected to be approximately $20 million.
- Cash dividends were $1.72 per share in FY2014, compared with $6.52 in FY2013, which included a $5.00 special dividend. No shares were repurchased during the fourth quarter; approximately 1.426 million shares remained authorized for repurchase.
Fourth-Quarter Information
For the quarter ended June 30, 2014, net sales were $258.8 million, gross margin was $57.9 million, income from continuing operations was $20.9 million, and net income was $21.3 million, or $0.78 diluted EPS. Comparable fourth-quarter FY2013 amounts were net sales of $245.2 million, gross margin of $57.7 million, continuing-operations income of $25.4 million and net income of $25.5 million, or $0.93 diluted EPS.
Material Changes Versus the Prior Comparable Period
- Continuing operations remained profitable, but income declined primarily because of a higher effective tax rate, increased operating expenses and lower operating margin.
- Net income was significantly reduced by a $44.0 million pretax, $29.1 million after-tax loss on the sale of the candle business. Discontinued operations produced a $26.0 million net loss in FY2014 versus $5.4 million of income in FY2013.
- FY2014 operating cash flow was broadly stable, while investing cash flow turned positive due primarily to $25.6 million of proceeds from the candle-operations sale.
- Non-frozen products represented 65% of sales, up from 64% in FY2013; frozen products represented 35%, down from 36%.
- McLane represented approximately 18% of FY2014 sales, up from 13% in FY2013. Wal-Mart represented approximately 17% in both years.
Guidance, Outlook, Risks and Unusual Items
- Management expected volume-driven growth in both retail and foodservice channels during FY2015 and anticipated modestly favorable material-cost comparisons in the first half of FY2015.
- Lower material costs were expected to be partly offset by lower foodservice pricing. Management also cited risks from trade promotion, marketing, transportation, operating expenses, economic conditions and regulatory changes.
- A significant processing-capacity expansion at the Horse Cave, Kentucky dressing facility was expected to be completed in the first half of FY2015.
- Key business risks include dependence on McLane and Wal-Mart, intense branded and private-label competition, commodity and energy-price volatility, manufacturing and transportation disruptions, product recalls, food-safety regulation, labor disputes, pension and multiemployer-plan obligations, and potential loss or nonrenewal of licensed brands.
- The company reported no restructuring or impairment charges during the three-year period ended June 30, 2014, no material off-balance-sheet arrangements and no legal proceedings expected to materially affect the financial statements. Management and Deloitte & Touche reported effective disclosure controls and internal control over financial reporting.
- The filing states that the company was evaluating the potential impact of ASU 2014-09, Revenue from Contracts with Customers; the filing did not provide a quantified impact.
Investor Verification Items
- Verify the issuer and period: the supplied filing is for Lancaster Colony Corporation, fiscal year 2014, rather than Marzetti Co. or a standalone 2013 Q4 report.
- Assess the sustainability of sales growth and operating margins after the divestiture of the candle business.
- Review customer concentration, particularly McLane’s 18% and Wal-Mart’s 17% share of sales, and related accounts-receivable exposure.
- Evaluate the Horse Cave capacity expansion, approximately $20 million of planned FY2015 capital spending and expected volume benefits.
- Monitor food commodity costs, promotional spending, foodservice pricing and manufacturing efficiency for margin pressure.
- Review pension, postretirement and multiemployer-plan obligations, including potential withdrawal liabilities.
- Reconcile reported net income with continuing operations and the material discontinued-operations loss when evaluating recurring earnings.