Lancaster Colony Corporation Form 10-Q Summary
Reporting period: Three months ended September 30, 2016, the first quarter of fiscal 2017. The submitted filing is for Lancaster Colony Corporation, which owns T. Marzetti Company; it is not filed under the legal registrant name “Marzetti Co.” Financial statements are unaudited and presented under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $291.4 million | $294.1 million | Down 1% |
| Gross profit | $80.6 million | $68.0 million | Up 19% |
| Gross margin | 27.7% | 23.1% | Up 460 basis points |
| Operating income | $50.8 million | $41.9 million | Up 21% |
| Operating margin | 17.4% | 14.2% | Up 320 basis points |
| Net income | $33.4 million | $27.6 million | Up 21% |
| Diluted EPS | $1.22 | $1.01 | Up 21% |
| Cash flow from operations | $45.4 million | $33.3 million | Up $12.1 million |
| Capital expenditures | $4.1 million | $3.4 million | Up $0.8 million |
| Cash dividends per share | $0.50 | $0.46 | Up 9% |
- Cash and equivalents were $145.7 million at September 30, 2016, compared with $118.1 million at June 30, 2016.
- Total current assets were $310.3 million and current liabilities were $92.8 million, implying a current ratio of approximately 3.3x.
- The company had no borrowings under its $150 million unsecured revolving credit facility. Standby letters of credit of $5.1 million reduced available borrowing capacity.
- Shareholders’ equity was $534.5 million at quarter-end, compared with $513.6 million at June 30, 2016.
- The company paid $13.7 million in dividends and repurchased $8 thousand of stock, consisting of 64 shares withheld for employee tax obligations.
Material Changes Versus the Prior Comparable Period
- Sales declined modestly because a 3% increase in retail sales was more than offset by a 5% decline in foodservice sales.
- Shipment volume decreased by less than 1%, while pricing had a net deflationary effect of less than 1% of sales.
- Gross profit and margins benefited primarily from lower costs for eggs, soybean oil, flour, honey and resin packaging, as well as favorable product mix and lower freight costs. Raw-material costs favorably affected gross margin by approximately 4% of net sales, excluding pricing actions.
- SG&A increased 15% to $29.9 million, reflecting increased marketing, promotional spending, new product introductions and higher corporate costs related to closed business operations.
- Specialty Foods operating income increased 22% to $54.8 million, while corporate expenses increased 32% to $4.1 million.
- Operating cash flow increased primarily because of higher net income and lower working-capital requirements, particularly accounts receivable.
- The company adopted new inventory measurement guidance and cash-flow presentation guidance effective July 1, 2016; neither adoption had a material impact.
Outlook, Risks and Unusual Items
- Management expects the second quarter to be seasonally strongest because of holiday demand.
- Retail sales are expected to achieve volume-driven growth, supported by new products and increased sales from Flatout.
- Foodservice growth from continuing customers is expected to be largely offset by deflationary pricing, particularly from lower egg costs, and customer rationalization initiated in the third quarter of fiscal 2016.
- Management expects modestly favorable material-cost comparisons through the second quarter, followed by a more neutral ingredient-cost environment in the second half of fiscal 2017.
- Fiscal 2017 capital expenditures are expected to total approximately $20 million to $22 million and are expected to be funded with operating cash flow.
- Management believes cash, operating cash flow and available revolver capacity will be adequate through 2017. The company was in compliance with its credit-facility covenants and expected to remain compliant.
- Principal risks include commodity and packaging-cost volatility, pricing pressure, customer concentration or loss of programs, customer consolidation, product recalls or labeling issues, new-product acceptance, competition, freight and labor costs, capacity constraints, litigation, pension obligations and acquisition execution.
- Ordinary-course claims and litigation were not expected to have a material effect. No material changes to previously disclosed risk factors were reported.
- On October 27, 2016, after quarter-end, the company adopted revised change-in-control agreements and entered into related agreements with executives, including a payment multiple of three for President and COO David A. Ciesinski and two for CFO Douglas A. Fell.
Investor Verification Checklist
- Confirm the legal issuer: the filing is Lancaster Colony Corporation, with T. Marzetti Company as a wholly owned subsidiary.
- Assess whether gross-margin gains from lower commodity costs are sustainable as management anticipates a more neutral cost environment later in fiscal 2017.
- Monitor foodservice sales, customer rationalization effects and deflationary pricing, particularly for egg-related costs.
- Compare planned fiscal 2017 capital expenditures of $20 million to $22 million with actual spending and operating cash generation.
- Verify continued compliance with the revolving facility’s interest-coverage and leverage covenants and the availability of unused credit capacity.
- Review the effect of higher marketing and promotional spending on future SG&A and operating margins.
- Review subsequent filings for changes in commodity prices, customer programs, labor negotiations, litigation, acquisitions and executive change-in-control obligations.