Business Context and Reporting Period
The filing is Lancaster Colony Corporation’s unaudited Form 10-Q for the quarter and six months ended December 31, 2016, representing fiscal 2017. The submission metadata identifies Marzetti Co., but the filing identifies Lancaster Colony Corporation as the registrant. Lancaster Colony manufactures and markets specialty food products through retail and foodservice channels and reports one segment: Specialty Foods.
Financial Performance and Position
| Metric | Three Months Ended December 31, 2016 | Prior Year | Six Months Ended December 31, 2016 | Prior Year |
|---|---|---|---|---|
| Net sales | $326.8 million | $324.8 million | $618.1 million | $618.9 million |
| Gross profit | $93.7 million | $83.6 million | $174.4 million | $151.6 million |
| Gross margin | 28.7% | 25.7% | 28.2% | 24.5% |
| Operating income | $59.4 million | $52.1 million | $110.1 million | $94.0 million |
| Operating margin | 18.2% | 16.0% | 17.8% | 15.2% |
| Net income | $39.0 million | $34.5 million | $72.4 million | $62.1 million |
| Diluted EPS | $1.42 | $1.25 | $2.63 | $2.26 |
- Six-month operating cash flow was $75.8 million, compared with $74.4 million in the prior-year period.
- Cash used in investing activities was $46.7 million, including $35.0 million paid for the Angelic Bakehouse acquisition and $11.8 million of property additions.
- Cash used in financing activities was $28.6 million, primarily dividends. The prior-year period included a $136.7 million special dividend.
- Cash and equivalents were $118.5 million at December 31, 2016, versus $118.1 million at June 30, 2016.
- The company had no borrowings under its $150 million unsecured revolving credit facility; $5.1 million of standby letters of credit reduced availability. The facility expires in April 2021.
- Total assets were $691.5 million and shareholders’ equity was $559.5 million at December 31, 2016. Goodwill was $164.9 million and other intangible assets were $64.8 million.
- Cash dividends were $0.55 per share for the quarter and $1.05 per share for the six-month period, compared with $5.50 and $5.96, respectively, in the prior-year periods, reflecting the prior-year special dividend.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 1%, while six-month sales were essentially flat. Retail sales increased 3% in both periods, but foodservice sales declined 2% for the quarter and 3% year to date.
- Overall volume, measured by pounds shipped, increased 2% for the quarter and 1% year to date. Pricing had a net deflationary impact of 1% in both periods.
- Gross margin expanded by 300 basis points in the quarter and 370 basis points year to date, primarily because of lower raw-material costs, particularly eggs, flour, honey, dairy, soybean oil and resin packaging, together with favorable product mix.
- SG&A increased 9% in the quarter and 12% year to date, driven by greater marketing and promotional investment, new product introductions, staffing additions, consulting and professional fees.
- Specialty Foods operating income increased 12% for the quarter and 16% year to date. Corporate expenses decreased for the quarter but increased year to date.
- On November 17, 2016, the company acquired substantially all assets of Angelic Bakehouse for approximately $35.0 million in cash. The transaction also included preliminary contingent consideration of $13.9 million, remeasured to $14.1 million at December 31, 2016. Angelic’s reported results were not material for the period.
- Goodwill increased by $21.1 million and net intangible assets increased by $20.0 million from June 30, 2016, primarily due to the Angelic acquisition.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The company expects fiscal 2017 capital expenditures of approximately $20 million to $25 million and expects to fund capital needs with operating cash flow.
- Management expects retail volume-driven growth for the balance of fiscal 2017, supported by new products, Flatout, and incremental Angelic sales. The later Easter holiday is expected to shift some retail sales and consumer activity into the fiscal fourth quarter.
- Foodservice volume growth is expected to be largely offset by deflationary pricing, customer rationalization, and continued softness in the casual dining segment.
- Management anticipates a generally neutral ingredient-cost environment in the fiscal third quarter, becoming slightly unfavorable in the fiscal fourth quarter.
- Following ratification of a new collective bargaining agreement on January 21, 2017, the company expects to record a one-time pre-tax charge of $17.7 million in the quarter ending March 31, 2017, related to withdrawal from the Cleveland Bakers and Teamsters Pension Fund and other benefit-related costs.
- The company remains exposed to potential contribution increases or withdrawal liabilities associated with the multiemployer pension plan covering its Milpitas, California facility, although management does not expect related payments to have a material adverse effect.
- Key risks include commodity and packaging-cost volatility, customer concentration and rationalization, competition and private-label products, product recalls or labeling issues, labor relations, acquisition integration, foodservice weakness, capacity constraints and pension obligations.
- Ordinary-course litigation was not expected to have a material effect. The company reported effective disclosure controls and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Lancaster Colony Corporation, not Marzetti Co.
- Assess whether gross-margin gains from lower commodity costs are sustainable as management expects ingredient costs to become slightly unfavorable later in fiscal 2017.
- Evaluate the $17.7 million expected pension-settlement charge and its effect on fiscal third-quarter earnings and cash flow.
- Review the Angelic Bakehouse earn-out, whose ultimate amount has no stated minimum or maximum and is tied to fiscal 2021 adjusted EBITDA.
- Monitor foodservice sales, customer rationalization, casual dining weakness and the effect of deflationary pricing.
- Reconcile planned capital expenditures of $20 million to $25 million with operating cash flow, acquisition spending and dividend policy.
- Review the company’s remaining credit capacity, covenant headroom, multiemployer pension exposure and the potential effect of future acquisitions or withdrawals.