Business Context and Reporting Period
This unaudited Form 10-Q is for Lancaster Colony Corporation, although the request metadata identifies Marzetti Co. The report covers the three and six months ended December 31, 2011, representing fiscal 2012 second-quarter and year-to-date results. Lancaster Colony operates primarily in Specialty Foods and also in Glassware and Candles, with predominantly domestic sales.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2011 | Prior Year | Six Months Ended December 31, 2011 | Prior Year |
|---|---|---|---|---|
| Net sales | $311.8 million | $316.2 million | $586.3 million | $581.3 million |
| Gross margin | $69.9 million; 22.4% | $78.2 million; 24.7% | $125.3 million; 21.4% | $136.3 million; 23.5% |
| Operating income | $43.7 million; 14.0% | $52.1 million; 16.5% | $76.2 million; 13.0% | $86.9 million; 15.0% |
| Net income | $30.4 million | $34.9 million | $51.6 million | $57.6 million |
| Diluted EPS | $1.11 | $1.25 | $1.89 | $2.06 |
- Specialty Foods sales increased 5% in the quarter and 6% year to date, supported by higher retail and foodservice sales and approximately 5% pricing.
- Glassware and Candles sales declined 26% in the quarter and 22% year to date, primarily because of lower volume and the exit from certain lower-margin business.
- Higher soybean oil, flour, freight, and wax costs reduced margins. Management estimated that higher material costs adversely affected Specialty Foods gross margins by approximately 6% of segment sales.
- Six-month cash flow from operations was $66.6 million, compared with $75.5 million in the prior year. Capital expenditures were $9.1 million, versus $14.2 million.
- Cash and equivalents were $162.4 million at December 31, 2011, compared with $132.3 million at June 30, 2011.
- The company had no borrowings under its $160 million unsecured revolving credit facility. Approximately $6.7 million of standby letters of credit reduced availability. The facility expires in October 2012.
- Six-month financing cash outflows were $26.9 million, including $18.8 million of dividends and $8.2 million of treasury-stock purchases.
- Current assets were $359.3 million and current liabilities were $73.1 million at December 31, 2011. Shareholders’ equity was $543.4 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales decreased 1%, while year-to-date sales increased 1%.
- Quarterly and year-to-date gross margin declined 11% and 8%, respectively, reflecting substantially higher input and freight costs.
- Operating income declined 16% for the quarter and 12% year to date. Specialty Foods operating income decreased 13% and 11%, respectively; Glassware and Candles operating income decreased 63% and 70%.
- Net income declined 13% for the quarter and 10% year to date. Diluted EPS declined from $1.25 to $1.11 for the quarter and from $2.06 to $1.89 year to date.
- CDSOA receipts increased to $2.7 million in the quarter from $1.0 million in the prior-year quarter, providing a non-operating benefit that may not recur at the same level.
- Share repurchases decreased from the prior year, while dividend payments increased. Approximately 1.478 million shares remained authorized for repurchase at December 31, 2011.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected fiscal 2012 capital expenditures not to exceed $20 million.
- Management anticipated that the impact of higher material costs would become less pronounced during the second half of fiscal 2012. An earlier Easter in 2012 could shift certain retail sales into the fiscal third quarter.
- CDSOA distributions are expected eventually to cease, and future amounts cannot be predicted because of administrative, legislative, and litigation uncertainties. Changes could affect earnings and cash flow.
- Management believed cash, internally generated funds, and available bank credit would satisfy foreseeable cash requirements and expected continued compliance with credit-facility covenants.
- The company reported approximately $1.9 million of gross tax contingency reserves, including approximately $0.8 million of penalties and interest. Management did not expect changes in the reserve to materially affect results.
- Various ordinary-course claims and litigation were not expected to have a material effect, although the filing notes that litigation and legal changes concerning CDSOA could affect future distributions.
- Other cited risks include raw-material and energy-cost volatility, customer concentration and program losses, product recalls, competition, demand and pricing pressure, labor and capacity issues, acquisitions, pension funding, environmental regulation, financing access, and changes in tax law.
- The company held approximately $2.9 million of properties for sale and was no longer depreciating those assets.
- Disclosure controls were deemed effective as of December 31, 2011, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Confirm that the filing issuer is Lancaster Colony Corporation rather than Marzetti Co.
- Assess whether pricing can offset continued soybean oil, flour, freight, wax, and other input-cost inflation.
- Evaluate the sustainability and timing of CDSOA receipts, which contributed $2.7 million to quarterly other income and are expected to end eventually.
- Review the October 2012 maturity or renewal of the revolving credit facility and the related covenant requirements.
- Monitor the sharp decline in Glassware and Candles sales and profitability following lower volume and business exits.
- Reconcile operating cash flow with working-capital movements, particularly receivables and inventories.
- Review the company’s dividend and share-repurchase policy against cash generation and the remaining repurchase authorization.