Filing Scope and Business Context
The supplied filing is Lancaster Colony Corporation’s Form 10-K for the fiscal year ended June 30, 2020, not a Marzetti Co. filing or a 2019 Q4 filing. Lancaster Colony manufactures and markets specialty food products through Retail and Foodservice segments, including frozen breads, dressings, sauces, dips and croutons. More than 95% of sales are generated in the United States.
Key Financial Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $1,334.4 million | $1,307.8 million | +2% |
| Gross profit | $358.0 million | $326.2 million | +10% |
| Gross margin | 26.8% | 24.9% | +190 bps |
| Operating income | $175.9 million | $190.9 million | -8% |
| Operating margin | 13.2% | 14.6% | -140 bps |
| Net income | $137.0 million | $150.5 million | -9% |
| Diluted EPS | $4.97 | $5.46 | -9% |
| Cash flow from operations | $170.8 million | $197.6 million | -14% |
| Capital expenditures | $82.6 million | $70.9 million | +17% |
At June 30, 2020, cash and equivalents were $198.3 million, shareholders’ equity was $783.3 million, and the Company reported no borrowings. The Company had a $150 million unsecured revolving credit facility, with $2.8 million of standby letters of credit outstanding and no revolver borrowings. Total assets were $993.4 million, compared with $905.4 million in 2019.
The regular dividend increased to $2.75 per share from $2.55 per share, marking the 57th consecutive year of dividend increases. Financing activities used $85.5 million, principally for dividends and share-related payments.
Segment Performance and Material Changes
- Retail: Sales increased 9% to $714.1 million, while operating income increased 6% to $142.8 million. Elevated retail demand during COVID-19, stronger shelf-stable dressings and sauces, new licensed products, and higher frozen bread volumes supported growth. Operating margin declined to 20.0% from 20.6% because of higher promotional spending.
- Foodservice: Sales decreased 5% to $620.3 million and operating income decreased 10% to $66.5 million. Sales grew in the first half but declined 16% in the second half as restaurant closures and restrictions reduced demand. Fourth-quarter Foodservice sales declined 24% to $128.4 million and operating income declined 45% to $10.1 million.
- COVID-19 effects: The Company recorded approximately $7.7 million of after-tax COVID-related costs, or approximately $0.28 per diluted share, including front-line employee pay increases, a canceled plant expansion write-off and increased Foodservice inventory reserves.
- Project Ascent: ERP implementation expenses increased to $18.0 million from $1.8 million and reduced fiscal 2020 diluted EPS by approximately $0.50 after tax. The Company capitalized an additional $8.9 million of ERP-related development costs.
- Prior-year comparability: Fiscal 2019 included a $17.1 million pretax reduction in the fair value of Angelic Bakehouse contingent consideration, producing an after-tax benefit of approximately $0.48 per diluted share. Fiscal 2020 included a $0.3 million expense instead.
- Acquisitions and capacity: The Company continued integrating the 2018 acquisitions of Bantam Bagels and Omni Baking Company. A Sister Schubert’s frozen dinner-roll capacity expansion was completed in January 2020.
Cash Flow, Liquidity and Debt
Operating cash flow of $170.8 million exceeded capital expenditures of $82.6 million and cash dividends of $75.6 million. Cash increased modestly to $198.3 million during the year. The Company believes operating cash flow, cash balances and available revolver capacity are sufficient for liquidity needs over the next 12 months.
Management projected fiscal 2021 capital expenditures of approximately $65 million to $85 million, excluding potentially significant future investments such as plant expansions, new construction or brownfield projects. Contractual obligations totaled $273.2 million, including $234.3 million of purchase obligations and $26.5 million of operating lease commitments.
Outlook, Risks and Unusual Items
- Management expects Retail sales in fiscal 2021 to benefit from licensed Chick-fil-A, Buffalo Wild Wings and Olive Garden products, as well as expansion in dollar and value retail channels.
- COVID-19 was expected to continue shifting demand between Retail and Foodservice, with restaurant restrictions and changing consumer behavior creating substantial uncertainty. Management could not reasonably estimate the pandemic’s future effect on results.
- Commodity costs were expected to increase in fiscal 2021 after favorable costs in 2020. Procurement programs and pricing initiatives are intended to offset part of the increase.
- Key risks include customer concentration, particularly Walmart at 18% of consolidated sales, McLane at 13%, and one indirect national restaurant account at 15%; restaurant-sector weakness; raw-material, packaging and freight volatility; production capacity and supply-chain disruptions; food safety and recall exposure; ERP implementation delays; cybersecurity; labor negotiations; pension and multiemployer-plan obligations; and brand-license renewals.
- The Bedford Heights, Ohio collective bargaining agreement covering approximately 6% of employees was scheduled to expire October 31, 2020.
- The Company adopted lease accounting guidance effective July 1, 2019, recognizing $33.5 million of lease liabilities and $31.7 million of right-of-use assets without an impact on earnings or cash flows.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter involved the valuation of Level 3 contingent consideration liabilities.
Investor Verification Priorities
- Confirm the issuer and period: the supplied document is Lancaster Colony Corporation’s fiscal 2020 Form 10-K, not Marzetti Co.’s 2019 Q4 filing.
- Assess the sustainability of elevated Retail demand and the pace of Foodservice recovery after COVID-19-related restaurant restrictions.
- Verify the ongoing cost, timing and implementation risks of Project Ascent and the ERP system.
- Review customer concentration and exposure to Walmart, McLane and the significant indirect national restaurant account.
- Monitor fiscal 2021 commodity inflation, pricing actions, capital expenditures and potential plant investments.
- Review contingent consideration, pension obligations, lease commitments and the expiring Bedford Heights labor agreement.