Lancaster Colony Corporation Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2021, representing fiscal 2022 second quarter and year to date. The filing identifies the registrant as Lancaster Colony Corporation, which owns T. Marzetti Company; it is not filed under the name “Marzetti Co.”
Business Context
Lancaster Colony manufactures and markets specialty food products through two reportable segments: Retail and Foodservice. More than 95% of products are sold in the United States. The company sells branded, licensed, private-label and custom-formulated products, including dressings, sauces, frozen breads, rolls, dips and related items.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2021 | Three Months Ended Dec. 31, 2020 | Six Months Ended Dec. 31, 2021 | Six Months Ended Dec. 31, 2020 |
|---|---|---|---|---|
| Net sales | $428.4 million | $375.0 million | $820.5 million | $724.3 million |
| Gross profit | $96.6 million | $106.8 million | $189.0 million | $199.5 million |
| Gross margin | 22.5% | 28.5% | 23.0% | 27.5% |
| Operating income | $45.3 million | $58.6 million | $85.8 million | $107.5 million |
| Operating margin | 10.6% | 15.6% | 10.5% | 14.8% |
| Net income | $34.4 million | $44.6 million | $65.0 million | $81.7 million |
| Diluted EPS | $1.25 | $1.62 | $2.36 | $2.96 |
- Sales increased 14% for the quarter and 13% year to date. Consolidated pounds shipped increased 6% and 5%, respectively.
- Cost of sales increased 24% for the quarter and 20% year to date, substantially exceeding sales growth.
- SG&A increased 7% for both periods to $51.5 million and $103.4 million, respectively. Project Ascent ERP expenses were $8.6 million in the quarter and $18.0 million year to date.
- Effective tax rates were 24.3% for the quarter and year to date, compared with 23.8% and 24.0% in the comparable periods.
- Retail sales increased 10% for the quarter and 13% year to date, while Retail operating income declined 18% and 5%, respectively.
- Foodservice sales increased 20% for the quarter and 14% year to date. Foodservice operating income was essentially flat for the quarter and declined 25% year to date.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating cash flow for the six months was $42.0 million, down from $90.9 million in the prior-year period, primarily due to working-capital changes, higher inventories, lower accounts payable and accrued liabilities, and lower net income.
- Investing cash flow was a use of $66.6 million, including $66.7 million of property additions, versus a $29.9 million use in the prior year.
- Financing cash flow was a use of $49.4 million, including $42.7 million of dividends and $5.3 million of treasury-stock purchases.
- Cash and equivalents declined to $114.0 million at December 31, 2021 from $188.1 million at June 30, 2021.
- Total assets were $1.12 billion and shareholders’ equity was $865.0 million at December 31, 2021.
- The company had no borrowings under its $150 million unsecured revolving credit facility and had $2.8 million of standby letters of credit outstanding. The facility expires in March 2025.
- Management stated that the company was in compliance with all facility covenants and expected available cash, operating cash flow and borrowing capacity to satisfy liquidity needs for the next 12 months.
Material Changes and Unusual Items
- Profitability deteriorated despite strong sales growth because of higher commodity and packaging costs, freight and warehousing costs, labor costs, co-manufacturing expenses, supply shortages and unfavorable mix.
- The company recorded a $2.2 million benefit from reducing the fair value of contingent consideration related to the Bantam Bagels acquisition, based on lower forecasted adjusted EBITDA and revised probabilities. The liability declined to $1.3 million from $3.5 million at June 30, 2021.
- The company recorded $1.0 million of restructuring and impairment charges related to closing its leased frozen garlic bread facility in Baldwin Park, California, and a $0.9 million impairment charge related to Bantam’s Retail customer-relationship intangible asset.
- Production at the Baldwin Park facility ceased in January 2022, and the associated Mamma Bella frozen garlic bread product line was discontinued. Closure activities were expected to continue into March 2022.
- Capital expenditures increased materially to support capacity expansions in Horse Cave, Kentucky; Columbus, Ohio; and Altoona, Iowa. The company expects 2022 capital expenditures of $170 million to $190 million.
- The company had an approximately $60 million remaining commitment under a project with a guaranteed maximum price of approximately $113 million to expand dressing and sauce capacity in Horse Cave. Completion is expected in the first half of fiscal 2023.
Guidance, Outlook and Risks
Management expects licensing programs to support Retail growth and expects Foodservice demand to benefit from branded products and selected quick-service restaurant and pizza-chain customers. It expects inflation and supply-chain disruptions to continue in the fiscal third quarter, including elevated soybean oil, packaging, freight, warehousing and labor costs. Pricing actions, cost savings and other net price-realization efforts are expected to offset only part of these pressures.
COVID-19 continues to create uncertainty through shifting demand between Retail and Foodservice, production-planning complexity, labor and operating disruptions, and changing public-health requirements. Other identified risks include ingredient and packaging availability, reliance on co-manufacturers and logistics providers, capacity constraints, labor availability, customer concentration and program losses, ERP implementation and cybersecurity risks, product recalls, acquisitions, competition, regulatory matters and litigation.
Investor Verification Priorities
- Verify whether the intended issuer is Lancaster Colony Corporation rather than a separate Marzetti entity.
- Assess whether pricing actions and cost savings can offset persistent commodity, packaging, labor, freight and warehousing inflation.
- Monitor working-capital requirements, inventory levels and the significant decline in operating cash flow.
- Track execution, remaining spending and capacity benefits from the Horse Cave, Columbus and Altoona projects.
- Evaluate the financial and operational effects of the Baldwin Park closure and Bantam impairment and contingent-consideration adjustments.
- Monitor Project Ascent ERP implementation costs and execution risks.
- Confirm continued compliance with revolving-credit covenants and the availability of liquidity if cash generation remains pressured.