Business Context and Reporting Period
This filing is Lancaster Colony Corporation’s unaudited Form 10-Q for the quarter and nine months ended March 31, 2020, within fiscal 2020. The provided metadata identifies “MARZETTI CO” and “2019 Q3,” but the filing registrant is Lancaster Colony Corporation, which owns T. Marzetti Company; the filing period is fiscal 2020 third quarter, not 2019 Q3.
The company manufactures and markets specialty food products through Retail and Foodservice segments. More than 95% of products are sold in the United States.
Financial Metrics
| Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 31, 2020 | Nine Months Ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $321.4 million | $317.9 million | $1,013.5 million | $984.1 million |
| Gross profit | $77.0 million | $75.4 million | $269.0 million | $248.0 million |
| Gross margin | 23.9% | 23.7% | 26.5% | 25.2% |
| Operating income | $30.0 million | $37.3 million | $135.8 million | $147.6 million |
| Operating margin | 9.3% | 11.7% | 13.4% | 15.0% |
| Net income | $22.4 million | $30.6 million | $106.6 million | $117.5 million |
| Diluted EPS | $0.81 | $1.11 | $3.87 | $4.26 |
- Operating cash flow for the nine months was $119.1 million, compared with $143.4 million in the prior-year period.
- Capital expenditures were $72.0 million, compared with $44.0 million in the prior year.
- Cash used for dividends was $56.4 million; share repurchases and related tax withholdings totaled approximately $8.3 million.
- Cash and equivalents were $177.8 million at March 31, 2020, versus $196.3 million at June 30, 2019.
- The company had no borrowings outstanding under its revolving credit facilities. The new unsecured facility provides up to $150 million of borrowing capacity, expandable to $225 million subject to conditions, and expires March 19, 2025. Standby letters of credit reduced availability by $2.8 million.
- Total shareholders’ equity was $773.3 million at March 31, 2020, compared with $726.9 million at June 30, 2019.
- Operating lease liabilities totaled $26.2 million, and finance lease liabilities totaled $1.6 million at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 1%, while nine-month sales increased 3%.
- Retail sales increased 11% in the quarter and 4% year to date, benefiting from increased at-home consumption and new products. Retail operating income increased 23% in the quarter but only 1% year to date because the prior-year period included a $9.7 million benefit from reducing Angelic Bakehouse contingent consideration.
- Foodservice sales declined 8% in the quarter as restaurant activity contracted during the COVID-19 outbreak. Foodservice operating income declined 46% to $9.2 million, and segment margin fell to 6.0% from 10.4%.
- Quarterly gross profit benefited from favorable mix and cost savings but included a $4.5 million Foodservice inventory write-down and approximately $1.0 million of frontline employee bonuses.
- SG&A increased 24% in the quarter and 20% year to date, principally due to enterprise resource planning, higher information-technology costs, increased consumer spending, and higher bad debt expense. ERP expense was $4.9 million in the quarter and $12.5 million year to date.
- The company recorded $0.9 million of restructuring and impairment charges year to date related primarily to the closure of its Saraland, Alabama frozen bread facility.
- The new lease accounting standard was adopted July 1, 2019, adding a $31.7 million right-of-use asset and a $33.5 million lease liability at adoption, without an impact on operating results or cash flows.
Outlook, Risks, Contingencies and Unusual Items
- Management expects COVID-19 to continue pressuring Foodservice sales and profitability, with lower production throughput reducing absorption of fixed manufacturing and overhead costs. The timing and extent of recovery depend on restaurant reopenings, government restrictions, economic conditions, and consumer behavior.
- Retail sales were expected to continue benefiting from the shift toward at-home consumption, although some new product launches and retail resets could be delayed.
- The company stated that it could not reasonably estimate the future COVID-19 impact and warned of potential material adverse effects on revenue growth, profitability, inventory levels, receivables, payment terms, and plant operating costs.
- Management believed operating cash flow, cash balances, and available revolver capacity were adequate for liquidity needs over the following 12 months. The company was in compliance with credit-facility covenants and expected to remain compliant.
- The ERP implementation timeline was delayed because of COVID-19, although design-stage work was continuing.
- The company canceled and terminated a planned approximately $80 million expansion of its Horse Cave, Kentucky dressing and sauce facility, effective May 1, 2020. Termination costs were not expected to be material.
- Planned fiscal 2020 capital expenditures were approximately $90 million.
- Key risks include COVID-19-related demand and supply-chain disruption, customer and supplier financial weakness, ingredient and packaging costs, capacity constraints, ERP execution and cybersecurity, acquisitions, competition, labor availability, product recalls, litigation, and regulatory matters.
- Contingent consideration for Bantam was $9.1 million at March 31, 2020. Its ultimate amount depends on future adjusted EBITDA and is based on significant unobservable assumptions.
- Ordinary-course litigation was not expected to have a material effect on the consolidated financial statements.
Facts an Investor Should Verify
- Confirm the intended issuer and period: the supplied filing is Lancaster Colony Corporation, fiscal third quarter ended March 31, 2020, rather than a 2019 Q3 filing for a standalone Marzetti entity.
- Assess the duration and severity of COVID-19 effects on Foodservice demand, inventory reserves, bad debt, production utilization, and margins.
- Reconcile the $4.5 million Foodservice inventory write-down, frontline bonuses, ERP spending, and restructuring charges to reported earnings and EPS.
- Monitor Retail-to-Foodservice demand shifts and the expected expiration of the Omni temporary supply agreement by December 2020.
- Evaluate liquidity, capital spending, dividend capacity, and revolver covenant compliance under prolonged Foodservice weakness.
- Review the delayed ERP implementation, canceled facility expansion, and any resulting changes to strategic investment plans.