Lancaster Colony Corporation Form 10-Q Summary
Filing period: Three months ended September 30, 2017, the first quarter of fiscal 2018. The filing identifies the registrant as Lancaster Colony Corporation, not Marzetti Co. Financial statements are unaudited and presented under U.S. GAAP.
Business Context and Reporting Changes
Lancaster Colony manufactures and markets specialty food products through Retail and Foodservice channels. Effective July 1, 2017, David A. Ciesinski became CEO and chief operating decision maker. The company changed its reportable segments to Retail and Foodservice; historical segment information was recast without changing consolidated results.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $298.9 million | $291.4 million | Up 3% |
| Gross profit | $75.5 million | $80.6 million | Down 6% |
| Gross margin | 25.3% | 27.7% | Down 2.4 percentage points |
| Operating income | $44.3 million | $50.8 million | Down 13% |
| Operating margin | 14.8% | 17.4% | Down 2.6 percentage points |
| Net income | $29.4 million | $33.4 million | Down 12% |
| Diluted EPS | $1.07 | $1.22 | Down 12% |
| Cash dividend per share | $0.55 | $0.50 | Up 10% |
| Operating cash flow | $38.9 million | $45.5 million | Down $6.6 million |
Segment Performance
| Segment | Sales | Year-over-year change | Operating income | Operating margin |
|---|---|---|---|---|
| Retail | $162.1 million | Up 6% | $32.9 million | 20.3% |
| Foodservice | $136.8 million | Down 1% | $14.7 million | 10.7% |
Retail sales benefited from 4% organic volume growth and a 2% contribution from Angelic Bakehouse, acquired in November 2016. Foodservice sales reflected softness in the restaurant industry, particularly among national chain accounts.
Financial Position, Liquidity and Capital Allocation
- Cash and equivalents were $157.2 million at September 30, 2017, compared with $143.1 million at June 30, 2017.
- Total assets were $749.2 million and shareholders’ equity was $590.5 million.
- The company had no borrowings under its $150 million unsecured revolving credit facility. Standby letters of credit of $5.1 million reduced borrowing availability. The facility expires in April 2021.
- The company was in compliance with all credit-facility covenants and stated that it exceeded the financial covenant requirements by substantial margins.
- Capital expenditures were $8.5 million during the quarter. Management expects fiscal 2018 capital expenditures to approximate $30 million, funded with operating cash flow.
- Cash dividends paid were $15.1 million, and treasury-stock purchases were $0.8 million. At September 30, 2017, 1,404,320 shares remained authorized for repurchase.
- Investing cash outflows included $0.3 million for acquisition-related payments and $8.5 million for property additions.
Material Changes and Unusual Items
- Gross margin declined primarily because of higher soybean oil, dairy, egg, garlic and freight costs. Raw-material inflation was estimated to reduce consolidated gross margin by approximately 1% of sales, excluding pricing effects.
- SG&A increased 4% to $31.2 million due to leadership and strategic-business investments, Angelic-related amortization and recurring noncash charges. Lower corporate expenses partly offset these increases.
- The fair value of Angelic acquisition-related contingent consideration increased from $15.0 million to $15.5 million, with a $0.5 million fair-value adjustment recorded in SG&A. The earn-out is based on Angelic’s fiscal 2021 adjusted EBITDA and has no stated minimum or maximum value.
- The company adopted new stock-based compensation accounting guidance on July 1, 2017. There was no material initial financial statement impact, but future tax expense and net income may be more volatile.
- The company adopted a revised segment structure and began a capacity-expansion project at Angelic to support anticipated demand for sprouted-grain bakery products.
Outlook, Risks and Contingencies
Management expects the second fiscal quarter to be the strongest sales quarter because of the holiday season. Retail is expected to receive volume-driven growth from new products and incremental Angelic sales. Foodservice growth is expected to remain challenged by sluggish restaurant-industry conditions, partially offset by selected national-chain growth and modest pricing.
Management expects increasingly unfavorable material-cost comparisons, particularly for eggs, soybean oil, dairy and garlic, and continued freight pressure from industry capacity constraints. Lean Six Sigma savings and supply-chain efficiencies are expected to provide partial offsets.
- Key risks include commodity, packaging, freight and energy costs; customer and product competition; customer consolidation; store-brand competition; capacity constraints; dependence on key personnel and contract manufacturers; product recalls; regulatory and labeling matters; labor issues; litigation; pension obligations; and integration or performance risks related to acquisitions.
- Ordinary-course litigation was not expected to have a material effect on consolidated results.
- The company stated that cash, operating cash flow and available credit should be adequate to meet cash requirements through fiscal 2018.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor Verification Items
- Verify the requested issuer: the supplied filing is for Lancaster Colony Corporation, although the request metadata names Marzetti Co.
- Assess whether commodity and freight inflation continues to pressure gross and Foodservice margins.
- Track Retail volume growth, new product launches and the performance and capacity expansion of Angelic Bakehouse.
- Review the valuation and eventual cash settlement risk of the uncapped Angelic earn-out.
- Confirm fiscal 2018 capital spending, operating cash conversion and continued compliance with credit-facility covenants.
- Monitor Foodservice demand, national restaurant-account activity and the timing of contractual pricing adjustments for ingredient costs.