Business Context and Reporting Period
Lancaster Colony Corporation, which markets products under the T. Marzetti brand, filed this unaudited Form 10-Q for the quarter ended September 30, 2022, the first quarter of fiscal 2023. The company manufactures and markets specialty food products through Retail and Foodservice segments, with more than 95% of products sold in the United States.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $425.5 million | $392.1 million | Up 9% |
| Gross profit | $99.1 million | $92.4 million | Up 7% |
| Gross margin | 23.3% | 23.6% | Down 0.3 points |
| Operating income | $49.3 million | $40.5 million | Up 22% |
| Operating margin | 11.6% | 10.3% | Up 1.3 points |
| Net income | $37.6 million | $30.7 million | Up 23% |
| Diluted EPS | $1.36 | $1.11 | Up 23% |
| Operating cash flow | $50.9 million | $(1.2) million | Improved $52.0 million |
- Retail sales were $223.2 million, essentially flat year over year; operating income declined 11% to $42.9 million and operating margin fell to 19.2% from 21.5%.
- Foodservice sales increased 20% to $202.3 million; operating income more than doubled to $31.9 million and operating margin increased to 15.8% from 9.4%.
- Cash and equivalents totaled $64.2 million at September 30, 2022, compared with $60.3 million at June 30, 2022.
- The company had no borrowings under its $150 million unsecured revolving credit facility and had $2.8 million of standby letters of credit outstanding.
- Total assets were $1.13 billion and shareholders’ equity was $862.1 million at September 30, 2022.
- Capital expenditures were $24.6 million during the quarter. The company paid $22.1 million in dividends, or $0.80 per share.
Material Changes Versus the Prior Comparable Period
- Consolidated sales benefited from pricing and Foodservice growth, but pounds shipped declined 10%. Retail volume declined 15% and Foodservice volume declined 7%.
- Pricing actions began to offset substantial inflation in commodities, packaging, labor, freight and warehousing. Gross margin nevertheless declined modestly.
- Operating income benefited from improved operating efficiency, lower consumer promotions, reduced headcount and the exit of less profitable product lines.
- Project Ascent ERP expenses were $9.2 million, compared with $9.4 million in the prior-year quarter, and reduced diluted EPS by approximately $0.26 in both periods.
- Operating cash flow improved primarily because of favorable year-over-year changes in inventories, receivables, accounts payable and accrued liabilities, together with higher net income.
- Advance customer ordering before the July 1 ERP go-live shifted estimated sales of approximately $25 million into the prior fiscal year, including $11 million of Retail sales and $14 million of Foodservice sales.
Guidance, Outlook, Risks and Unusual Items
- Management expects second-quarter Retail volumes to benefit from licensing growth but face pressure from consumer demand elasticity and product rationalizations. Foodservice volumes are expected to be led by select quick-service restaurant customers.
- Pricing actions and cost savings are expected to mitigate, but not eliminate, continuing cost inflation. Second-quarter results are expected to include startup costs related to the Horse Cave, Kentucky capacity expansion.
- Project Ascent implementation will continue throughout fiscal 2023, with full organizational deployment anticipated in fiscal 2024. Management reported no unplanned fulfillment disruptions after the initial cutover.
- Fiscal 2023 capital expenditures are expected to total approximately $90 million to $110 million, including approximately $50 million for the Horse Cave expansion. Remaining commitment for that project was approximately $15 million at September 30, 2022.
- Key risks include inflation and pricing acceptance, raw-material and packaging availability, labor constraints, supply-chain and capacity issues, ERP implementation and cybersecurity risks, customer concentration, product recalls, competitive pressures, geopolitical disruption and changes in consumer demand.
- Ordinary-course litigation was not expected to materially affect the financial statements, and no material changes to previously disclosed risk factors were reported.
- The company stated that it was in compliance with its credit-facility covenants and expected available cash, operating cash flow and credit capacity to satisfy liquidity needs for at least the next 12 months.
Important Facts for Investors to Verify
- Whether pricing actions continue to offset inflation without causing further volume declines or customer demand elasticity.
- The sustainability of the sharp Foodservice margin recovery and the causes of continued Retail volume and margin pressure.
- Actual spending, timing and operational benefits from the Horse Cave expansion and Project Ascent ERP deployment.
- Whether working-capital benefits that drove the quarter’s strong operating cash flow are recurring or temporary.
- Future capital expenditure requirements, dividend sustainability and the company’s continued ability to operate without revolver borrowings.
- The filing identifies the registrant as Lancaster Colony Corporation; investors should verify the relationship between that registrant and the “Marzetti” company reference in the request metadata.