Filing Scope and Reporting Period
Source discrepancy: The supplied filing is Lancaster Colony Corporation’s Form 10-Q for the quarter ended March 31, 2014, not Marzetti Co. or fiscal 2013 Q3. Lancaster Colony’s fiscal year runs from July 1 through June 30; the filing covers fiscal 2014 third-quarter and nine-month results. Financial statements are unaudited and prepared under U.S. GAAP.
Lancaster Colony manufactures and markets specialty food products for retail and foodservice customers. On January 30, 2014, it sold substantially all candle manufacturing and marketing operations; those results are presented as discontinued operations for all periods.
Financial Performance and Position
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Nine months ended March 31, 2014 | Nine months ended March 31, 2013 |
|---|---|---|---|---|
| Net sales | $241.8 million | $247.1 million | $782.3 million | $768.6 million |
| Gross margin | $51.9 million; 21.5% | $53.8 million; 21.8% | $190.7 million; 24.4% | $187.0 million; 24.3% |
| Operating income | $28.8 million; 11.9% | $30.7 million; 12.4% | $121.5 million; 15.5% | $117.7 million; 15.3% |
| Income from continuing operations | $18.9 million | $20.7 million | $80.1 million | $78.5 million |
| Net income/(loss) | $(10.4) million | $21.8 million | $53.7 million | $83.8 million |
| Diluted EPS from continuing operations | $0.69 | $0.76 | $2.93 | $2.87 |
| Diluted net EPS | $(0.38) | $0.80 | $1.96 | $3.06 |
- Operating cash flow for the nine months was $98.8 million, compared with $94.9 million in the prior-year period.
- Capital expenditures were $8.1 million year to date, compared with $19.1 million in the prior-year period. Management expected full-year fiscal 2014 capital expenditures of approximately $15 million, subject to project timing and approvals.
- Cash and equivalents were $201.3 million at March 31, 2014, compared with $123.4 million at June 30, 2013.
- The company had no borrowings under its $120 million unsecured revolving credit facility. Approximately $3.7 million of standby letters of credit reduced available capacity.
- Total assets were $630.3 million and shareholders’ equity was $518.5 million at March 31, 2014. Total current liabilities were $70.7 million.
- Cash dividends were $0.44 per share in the quarter and $1.28 per share for the nine months, compared with $0.38 and $6.12, respectively, in the prior-year periods. The prior year included a $5.00 per share special dividend.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 2%, primarily because retail sales decreased approximately 8%, including weaker frozen retail product sales, a later Easter holiday, and challenging market conditions.
- Nine-month sales increased 2%, driven by higher foodservice volumes, particularly from larger chain restaurants. Estimated pounds shipped increased approximately 2% in the quarter and 3% year to date.
- Third-quarter gross margin decreased 4% in dollars and 30 basis points as a percentage of sales. Lower raw-material costs were offset by unfavorable mix, lower foodservice pricing, higher weather-related freight costs, and, year to date, higher trade promotional costs.
- Third-quarter operating income declined 6%; nine-month operating income increased 3%. Specialty Foods operating income declined 7% in the quarter but increased 3% year to date.
- The quarter and year-to-date period included a $44.0 million pretax loss, or $29.6 million after tax, on the sale of the candle operations. This drove discontinued-operations losses of $29.3 million for the quarter and $26.4 million year to date.
- Despite the divestiture charge, income from continuing operations increased 2% for the nine-month period, while nine-month net income declined 36% because of the discontinued-operations loss.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected fourth-quarter sales to benefit from Easter-related timing and anticipated modestly favorable material-cost comparisons.
- Management also expected pressure from continued lower foodservice pricing, significant introductory costs for new retail products, and higher consumer marketing expenditures.
- The company stated that internally generated funds, cash balances, and available bank credit should meet cash requirements through calendar 2014.
- The revolving credit facility expires April 18, 2017. The company was in compliance with its covenants and exceeded financial requirements by substantial margins; management expected continued compliance.
- Risks include customer concentration and program losses, changing demand, product acceptance and recalls, raw-material and energy costs, competition, labor and copacker dependence, acquisitions, financing access, litigation, and changes in accounting estimates.
- Ordinary-course claims and litigation were not expected to have a material effect. A tax contingency reserve of approximately $0.9 million was recorded as a noncurrent liability.
- The company retained potential rights and liabilities related to the sold candle operations, including possible future changes in estimated liabilities and uncertainty regarding Continued Dumping and Subsidy Offset Act distributions. Management considered the likelihood of clawback of prior distributions remote.
- Disclosure controls were effective as of March 31, 2014, and no material changes to internal control over financial reporting were reported.
Investor Verification Items
- Confirm the issuer and period: the supplied document is Lancaster Colony Corporation’s March 31, 2014 Form 10-Q, not a Marzetti Co. 2013 Q3 filing.
- Evaluate continuing-operations performance separately from the material loss on the candle-business divestiture.
- Verify the accounting treatment, tax benefit, proceeds, retained liabilities, and final post-closing adjustments related to the candle sale.
- Assess retail weakness, foodservice volume growth, pricing pressure, promotional spending, freight costs, and product-launch costs.
- Review cash deployment, including dividends, share repurchases, capital expenditures, and the company’s substantial cash balance.
- Confirm available revolving-credit capacity, standby letters of credit, covenant compliance, and the absence of outstanding borrowings.