Business Context and Reporting Period
The filing is Lancaster Colony Corporation’s unaudited Form 10-Q for the quarter ended December 31, 2010, covering the three and six months ended December 31, 2010. The request metadata identifies Marzetti Co., but the filing itself identifies Lancaster Colony Corporation.
The company operates through Specialty Foods and Glassware and Candles, with more than 90% of each segment’s sales generated in the United States. Its fiscal year runs from July 1 through June 30; the reported period is the second quarter and first six months of fiscal 2011.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2010 | Three months ended Dec. 31, 2009 | Six months ended Dec. 31, 2010 | Six months ended Dec. 31, 2009 |
|---|---|---|---|---|
| Net sales | $316.2 million | $304.1 million | $581.3 million | $558.3 million |
| Gross margin | $78.2 million; 24.7% | $84.8 million; 27.9% | $136.3 million; 23.5% | $148.5 million; 26.6% |
| Operating income | $52.1 million; 16.5% | $59.2 million; 19.5% | $86.9 million; 15.0% | $101.6 million; 18.2% |
| Net income | $34.9 million | $39.5 million | $57.6 million | $67.9 million |
| Diluted EPS | $1.25 | $1.40 | $2.06 | $2.41 |
- Specialty Foods sales increased 5% in the quarter and 3% year to date; Glassware and Candles sales increased 1% and 7%, respectively.
- SG&A increased 7% in the quarter and 10% year to date, reaching $26.1 million and $49.4 million, respectively.
- No restructuring or impairment charges were recorded in the current periods, compared with $1.2 million in the quarter and $2.0 million year to date in the prior-year periods.
- Operating cash flow was $75.5 million for the six months, compared with $69.2 million in the prior-year period. Capital expenditures were $14.2 million, versus $3.7 million, primarily for the Kentucky frozen-roll facility expansion.
- Cash and equivalents were $119.1 million at December 31, 2010, compared with $100.9 million at June 30, 2010. Total current assets were $322.7 million and current liabilities were $72.7 million.
- The company had no borrowings under its $160 million unsecured revolving credit facility. Approximately $6.6 million of standby letters of credit reduced availability. The facility expires in October 2012, and all financial covenants were satisfied.
- Financing cash outflows were $43.4 million, including $25.8 million for treasury-stock purchases and $17.6 million for dividends. The company repurchased 285,908 shares during the quarter at an average price of $52.74; approximately 1.923 million shares remained authorized for repurchase.
Material Changes Versus the Prior Comparable Period
- Sales rose 4% in both the quarter and first six months, but gross margin declined 8% in both periods.
- Higher dairy, sugar, egg and wax costs, increased freight and warehousing expenses, less favorable product mix, and higher distribution costs compressed margins.
- Consolidated operating income declined 12% in the quarter and 14% year to date. Specialty Foods operating income declined 8% and 10%, while Glassware and Candles operating income declined 29% and 44%, respectively.
- Net income declined 12% in the quarter and 15% year to date; diluted EPS declined from $1.40 to $1.25 and from $2.41 to $2.06, respectively.
- Operating cash flow improved despite lower earnings, while investing and financing outflows increased substantially because of capital spending, share repurchases and higher dividend payments.
- The prior-year periods included restructuring charges associated with the closure of the Wilson, New York dressings and sauces facility; the closure was essentially complete by December 31, 2009.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2011 capital expenditures of approximately $40 million, including the Kentucky frozen-roll facility expansion, expected to be completed by mid-calendar 2011. Approximately $10 million remained obligated under the construction contract at December 31, 2010, with approximately $9 million of equipment purchase commitments outstanding.
- Management expected rising material costs to remain a greater comparative challenge through 2011. Price increases were planned for many products in the fiscal third quarter, but their timing, success and effect on demand were uncertain.
- Higher wax costs were expected to adversely affect Glassware and Candles comparative results through at least the end of fiscal 2011. The later Easter holiday could shift retail sales from the fiscal third quarter into the fourth quarter.
- CDSOA receipts were approximately $1.0 million in the quarter, compared with $0.9 million in the prior-year quarter. Future distributions are uncertain and may eventually cease; reduced distributions could lower earnings and cash flow.
- The company reported a gross tax contingency reserve of approximately $2.1 million, including $0.7 million classified as current. Management did not expect changes in the reserve during the next 12 months to materially affect financial position or results.
- Defined-benefit pension plans had no active employees accruing benefits. No pension contributions were made during the period; approximately $1.8 million of pension contributions were expected during fiscal 2011.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Principal identified risks include raw-material and energy costs, customer concentration and solvency, product recalls, competition, labor and regulatory matters, acquisitions, financing access, tax-law changes and idle real-estate costs.
- Disclosure controls were effective as of December 31, 2010, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Confirm the issuer identity, because the submitted metadata references Marzetti Co. while the filing is for Lancaster Colony Corporation.
- Assess whether planned price increases offset continued ingredient, wax, freight and distribution-cost inflation without materially reducing demand.
- Track the Kentucky facility expansion, remaining construction and equipment commitments, and total fiscal 2011 capital expenditures.
- Evaluate the sustainability of margins and operating income, particularly in Glassware and Candles.
- Monitor cash deployment through share repurchases and dividends relative to operating cash flow and liquidity.
- Consider the uncertain duration and amount of future CDSOA distributions and their contribution to earnings and cash flow.
- Review the revolving-credit facility’s October 2012 maturity, remaining availability after standby letters of credit, and covenant compliance.