Filing Scope and Business Context
The supplied filing is Lancaster Colony Corporation’s Form 10-K for the fiscal year ended June 30, 2018, not Marzetti Co.’s 2017 Q4 filing. Lancaster manufactures and markets specialty food products through Retail and Foodservice segments. Fiscal 2018 covered July 1, 2017 through June 30, 2018. The fourth-quarter figures below are unaudited.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $1,222.9 million | $1,201.8 million | +2% |
| Gross profit | $303.5 million | $318.8 million | -5% |
| Gross margin | 24.8% | 26.5% | -170 basis points |
| Operating income | $172.1 million | $174.7 million | -2% |
| Operating margin | 14.1% | 14.5% | -40 basis points |
| Net income | $135.3 million | $115.3 million | +17% |
| Diluted EPS | $4.92 | $4.20 | +17% |
| Cash flow from operations | $160.7 million | $146.4 million | +10% |
| Capital expenditures | $31.0 million | $27.0 million | +15% |
Retail sales increased 1% to $650.2 million, while operating income declined 9% to $126.4 million and segment margin fell to 19.4% from 21.6%. Foodservice sales increased 2% to $572.7 million, while operating income declined 12% to $58.4 million and margin fell to 10.2% from 11.8%.
At June 30, 2018, cash and equivalents were $205.8 million, shareholders’ equity was $652.3 million, and the Company had no borrowings. Its revolving credit facility provided up to $150 million, subject to $5.1 million of outstanding standby letters of credit. Total assets were $804.5 million, compared with $716.4 million in 2017.
Regular dividends increased to $2.35 per share from $2.15 per share, marking the 55th consecutive year of increases. No common shares were repurchased in the fourth quarter, although 1,402,219 shares remained authorized for repurchase.
Fourth-Quarter Results
| Metric | Q4 Fiscal 2018 | Q4 Fiscal 2017 |
|---|---|---|
| Net sales | $308.2 million | $289.9 million |
| Gross profit | $76.2 million | $72.5 million |
| Net income | $32.4 million | $28.5 million |
| Diluted EPS | $1.18 | $1.04 |
Material Changes Versus the Prior Period
- Sales growth was primarily supported by pricing actions, lower retail trade spending and lower coupon expense; shipment volume was essentially flat.
- Gross margin contracted because of higher costs for eggs, soybean oil, flour, dairy ingredients, packaging and freight. Management estimated raw-material inflation reduced gross margin by approximately 1% of sales and freight inflation reduced it by nearly 1%.
- Operating income was pressured by higher input and freight costs, personnel investments, growth initiatives and Angelic Bakehouse-related amortization and recurring noncash charges.
- Fiscal 2017 included a $17.6 million multiemployer pension settlement and related charge. Fiscal 2018 benefited from a $9.5 million one-time deferred-tax remeasurement benefit related to the Tax Cuts and Jobs Act, equal to approximately $0.35 per diluted share.
- Cash increased by $62.6 million during fiscal 2018, primarily because operating cash flow exceeded capital expenditures, acquisition spending and dividends.
Outlook, Risks and Unusual Items
Management expected fiscal 2019 Retail volume growth from new products, improved trade spending and additional price realization. Foodservice growth was expected from selected national-chain accounts, distributors and price increases. Capital expenditures were projected at $60 million to $80 million, including a frozen dinner-roll capacity expansion expected to be completed in mid-2020; management expected to fund these needs with operating cash flow and cash on hand.
Management anticipated continued unfavorable commodity comparisons and freight pressure in the first half of fiscal 2019, although less severe than in fiscal 2018. It expected pricing, distribution-network optimization, procurement actions and lean six sigma initiatives to offset these pressures. The projected fiscal 2019 effective tax rate was approximately 24%.
- Customer concentration: Walmart represented 17% of consolidated sales and McLane represented 15%; a single indirect national-chain restaurant accounted for 13%.
- Input-cost and logistics exposure includes eggs, soybean oil, flour, dairy products, packaging, fuel and transportation capacity.
- Food safety, recalls, regulatory changes, manufacturing disruptions, labor disputes, cyber incidents and competitive pricing could materially affect results.
- The Milpitas, California collective bargaining agreement covering approximately 4% of employees expired in December 2018.
- The Angelic Bakehouse acquisition includes performance-based contingent consideration valued at $17.1 million at June 30, 2018, with the ultimate payout dependent on fiscal 2021 adjusted EBITDA and no stated minimum or maximum.
- Operating lease and purchase obligations totaled $240.6 million, including $199.7 million of purchase obligations.
Important Facts for Investors to Verify
- Verify the issuer and period: the supplied document identifies Lancaster Colony Corporation and fiscal 2018, while the request identifies Marzetti Co. and 2017 Q4.
- Determine how much of the $4.92 diluted EPS reflects the one-time $9.5 million tax benefit and compare adjusted performance without that item.
- Assess whether pricing actions can offset commodity and freight inflation without reducing volume or customer relationships.
- Monitor Walmart, McLane and the major indirect national-chain account for changes in sales, concentration and receivables.
- Review the planned $60 million to $80 million fiscal 2019 capital program, capacity expansion execution and resulting returns.
- Review the Angelic earn-out assumptions, labor-contract developments and any potential multiemployer pension or litigation liabilities.