Lancaster Colony Corporation — Fiscal 2021 Form 10-K
Period and business context: The filing is Lancaster Colony Corporation’s annual report for the fiscal year ended June 30, 2021, covering July 1, 2020 through June 30, 2021. The request identifies “MARZETTI CO” and “2020 Q4,” but the provided filing is for Lancaster Colony Corporation and is an annual fiscal 2021 report, not a quarterly filing. Lancaster Colony manufactures and markets specialty food products through its Retail and Foodservice segments, including products sold under Marzetti and other owned or licensed brands.
Financial highlights
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $1,467.1 million | $1,334.4 million | Up 10% |
| Gross profit | $386.7 million | $358.0 million | Up 8% |
| Gross margin | 26.4% | 26.8% | Down 40 basis points |
| Operating income | $185.9 million | $175.9 million | Up 6% |
| Operating margin | 12.7% | 13.2% | Down 50 basis points |
| Net income | $142.3 million | $137.0 million | Up 4% |
| Diluted EPS | $5.16 | $4.97 | Up 4% |
| Cash flow from operations | $174.2 million | $170.8 million | Up 2% |
| Capital expenditures | $87.9 million | $82.6 million | Up 6% |
Segment performance: Retail sales increased 16% to $829.0 million and operating income increased 17% to $188.4 million, with a 22.7% margin. Foodservice sales increased 3% to $638.1 million and operating income increased 11% to $89.0 million, with a 14.0% margin. Retail represented 57% of consolidated sales and Foodservice represented 43%.
Liquidity and capital structure: Cash and equivalents were $188.1 million at June 30, 2021, compared with $198.3 million a year earlier. Shareholders’ equity was $843.1 million. The company had no borrowings outstanding and no debt under its $150 million unsecured revolving credit facility; $2.8 million of standby letters of credit reduced availability. The company stated that operating cash flow, cash on hand and available credit should meet liquidity needs for the next 12 months.
Shareholder returns: Dividends paid were $81.2 million, and the regular dividend rate increased to $2.95 per share from $2.75. The company reported its 58th consecutive year of dividend increases. It repurchased $8.5 million of common stock during the year, including 20,000 shares in the fourth quarter at an average price of $195.50.
Material changes versus the prior comparable period
- Sales benefited from elevated Retail demand related to increased at-home food consumption and continued growth in licensed products, particularly Chick-fil-A sauces, Olive Garden dressings and Buffalo Wild Wings sauces.
- Foodservice performance recovered in the second half of fiscal 2021 as restaurant restrictions eased, although the segment remained affected by the pandemic during the first half.
- Gross and operating margins declined despite higher profit because of COVID-19-related manufacturing costs, employee “hero pay,” commodity inflation, freight costs and lower operating efficiencies.
- Project Ascent ERP expenses increased to $37.9 million from $18.0 million and reduced fiscal 2021 diluted EPS by approximately $1.05. ERP implementation was deferred to the start of fiscal 2023.
- A $5.7 million favorable adjustment to Bantam contingent consideration benefited operating income and increased diluted EPS by approximately $0.16. The adjustment followed a Foodservice customer’s SKU rationalization and related forecast reductions.
- The company recorded $1.2 million of Bantam intangible-asset impairment charges. The temporary Omni supply agreement ended October 31, 2020, reducing related Foodservice sales to $3.7 million from $22.3 million.
- Inventories increased to $121.9 million from $85.0 million, while accounts payable increased to $110.3 million from $71.4 million.
Outlook, risks and unusual items
Management expected fiscal 2022 Retail sales to continue benefiting from licensing growth but faced difficult comparisons with the pandemic-related 2021 increase. Foodservice sales were expected to benefit from increased in-restaurant dining. Management anticipated significant inflation in soybean oil and other commodities, packaging, labor and freight. Retail pricing initiatives, Foodservice contractual inflationary pricing, forward purchasing and cost savings were expected to offset part of these pressures, although pricing benefits were expected to lag cost increases.
The company expected fiscal 2022 capital expenditures of $170 million to $190 million, including approximately $105 million for the Horse Cave, Kentucky dressing and sauce facility expansion. The related Design/Build Agreement has a guaranteed maximum price of approximately $113 million, with approximately $92 million remaining as of June 30, 2021.
- COVID-19 remains a source of demand volatility, supply-chain disruption, labor constraints and additional operating costs.
- Raw-material, packaging, freight and energy inflation may pressure margins if price increases do not fully or promptly offset costs.
- Customer concentration is significant: Walmart represented 18% of consolidated sales, McLane 13%, and Chick-fil-A-related sales 21% in fiscal 2021.
- The company depends on key customers, licensed brands, distributors, contract manufacturers and selected manufacturing facilities.
- Labor agreements covering approximately 12% of employees were scheduled to expire at the Milpitas facility in December 2021 and a Columbus facility in March 2022. The company also participates in a multiemployer pension plan that could create additional contribution or withdrawal-liability exposure.
- ERP implementation delays or control deficiencies, cybersecurity events, product recalls, litigation, environmental matters and failed or delayed capacity projects could adversely affect results.
- The Bantam contingent consideration liability was $3.5 million at June 30, 2021 and is based on Level 3 valuation inputs and a future performance-based earn-out.
The company reported effective disclosure controls and effective internal control over financial reporting. Deloitte & Touche issued unqualified opinions on the financial statements and internal controls.
Investor verification checklist
- Confirm that the intended issuer and period are Lancaster Colony fiscal 2021 rather than a Marzetti-specific or 2020 fourth-quarter filing.
- Reconcile the reported earnings improvement with margin contraction and quantify the ongoing versus nonrecurring impact of Project Ascent, COVID-19 costs and the Bantam adjustment.
- Monitor fiscal 2022 commodity, packaging, labor and freight inflation and the timing and effectiveness of related pricing actions.
- Verify execution, remaining cost and completion timing for the Horse Cave, Columbus and Altoona capacity projects.
- Assess customer concentration and the durability of Chick-fil-A licensing and Foodservice relationships, including the impact of the Bantam customer SKU rationalization.
- Review the deferred ERP implementation, projected implementation costs and potential internal-control or operating risks.
- Review dividend sustainability and capital allocation in light of the planned increase in fiscal 2022 capital expenditures.