Lancaster Colony Corporation Form 10-Q Summary
Filing-period note: The supplied filing is for Lancaster Colony Corporation, not Marzetti Co. It covers the three and nine months ended March 31, 2019, the third quarter of fiscal 2019. The request metadata identifies “MARZETTI CO” and “2018 Q3,” which does not match the filing.
Business Context and Reporting Period
Lancaster Colony manufactures and markets specialty food products through Retail and Foodservice segments. More than 95% of sales are in the United States. The fiscal year runs from July 1 through June 30. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Three Months Ended March 31, 2019 | Year-over-Year | Nine Months Ended March 31, 2019 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $317.9 million | +7% | $984.1 million | +8% |
| Gross profit | $75.4 million | +11% | $248.0 million | +9% |
| Gross margin | 23.7% | 22.9% prior year | 25.2% | 24.9% prior year |
| Operating income | $37.3 million | Essentially flat | $147.6 million | +15% |
| Operating margin | 11.7% | 12.7% prior year | 15.0% | 14.1% prior year |
| Net income | $30.6 million | +11% | $117.5 million | +14% |
| Diluted EPS | $1.11 | $1.00 prior year | $4.26 | $3.74 prior year |
- Retail sales increased 1% in the quarter and 2% year to date; Retail operating income declined 9% in the quarter but increased 7% year to date.
- Foodservice sales increased 14% in both periods; operating income increased 20% in the quarter and 31% year to date.
- Quarterly SG&A rose 27% to $38.0 million, increasing to 11.9% of sales from 10.1%. Year-to-date SG&A rose 13% to $109.9 million.
- Operating cash flow for the nine-month period was $143.4 million, compared with $116.8 million in the prior year.
- Cash and equivalents were $187.4 million at March 31, 2019, compared with $205.8 million at June 30, 2018.
- There were no borrowings under the $150 million unsecured revolving credit facility. Standby letters of credit totaled $5.1 million.
- Total assets were $886.3 million and shareholders’ equity was $715.0 million at March 31, 2019. Current liabilities were $108.8 million.
- Cash used in investing activities was $102.1 million, including $57.5 million for acquisitions and $44.0 million for property additions. Financing cash outflows were $59.7 million, primarily dividends of $52.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Foodservice, national restaurant accounts, frozen products, pricing actions, and contributions from the Bantam and Omni acquisitions. Excluding those acquisitions, sales increased 3% in the quarter and 6% year to date.
- Gross margin improved because of higher volumes, pricing, and lean manufacturing and procurement savings, partly offset by Omni integration costs, Bantam distribution investments, higher warehousing and freight costs, and costs associated with discontinuing the Marzetti Simple Harvest line.
- Operating income was nearly unchanged in the quarter because higher SG&A and lower Retail profitability offset gross-profit growth.
- Year-to-date operating income benefited from a $9.7 million reduction in the estimated Angelic contingent consideration liability. The related after-tax benefit was $7.4 million, or $0.27 per diluted share.
- In October 2018, the Company acquired Bantam Bagels for a base cash purchase price of $33.1 million, plus $8.0 million of initial estimated contingent consideration. In November 2018, it acquired Omni Baking Company for approximately $24.4 million.
- Goodwill increased to $210.4 million from $168.0 million at June 30, 2018, primarily from the two acquisitions.
- The Company adopted the new revenue recognition standard on July 1, 2018 without a material impact on financial position or results of operations.
Guidance, Outlook, Risks, and Unusual Items
- For the fiscal fourth quarter, management expects Retail sales to benefit from Bantam, shelf-stable dressings and sauces, and the later Easter timing. Foodservice is expected to benefit from selected national accounts, distributors, and the Bantam and Omni acquisitions.
- Packaging and certain commodity costs are expected to be modestly inflationary. Ongoing Omni operational-improvement costs and elevated SG&A investment are also expected.
- Fiscal 2019 capital expenditures are expected to total approximately $70 million. The Company expects to fund needs through operating cash flow and cash on hand and does not currently expect to borrow under its credit facility during 2019.
- A frozen dinner roll capacity expansion in Kentucky has a guaranteed maximum construction price of approximately $40 million, plus approximately $14 million of equipment commitments, with expected completion in mid-2020.
- The Company reported compliance with its credit-facility covenants and no defaults. The facility expires in April 2021.
- Key risks include acquisition integration, commodity, freight and packaging inflation, pricing and competitive pressures, customer concentration and program losses, capacity constraints, product recalls, regulatory matters, labor availability, litigation, pension obligations, and changes in contingent consideration estimates.
- Ordinary-course litigation was not expected to have a material effect. The filing states that there were no material changes to previously reported risk factors or market risks.
Important Facts for Investors to Verify
- Confirm the issuer and period: the filing is Lancaster Colony Corporation for the quarter ended March 31, 2019, not Marzetti Co. or 2018 Q3.
- Assess the sustainability of earnings excluding the $9.7 million Angelic contingent-consideration benefit and the prior-year Tax Act benefit.
- Monitor Retail margin pressure, elevated SG&A, Omni integration costs, and the effect of commodity, freight and packaging inflation.
- Evaluate the performance and integration of Bantam and Omni, including the uncapped Bantam earn-out tied to future adjusted EBITDA.
- Verify cash requirements for the Kentucky expansion, planned capital expenditures, dividends, acquisitions, and share repurchases.
- Review Foodservice growth quality, including the temporary Omni supply agreement and potential volatility from ingredient and freight-cost pass-through timing.