Business Context and Reporting Period
The filing is a Form 10-Q for Lancaster Colony Corporation, not Marzetti Co. It covers the three and nine months ended March 31, 2017, within fiscal 2017, which runs from July 1, 2016 through June 30, 2017. Lancaster Colony manufactures and markets specialty food products through retail and foodservice channels and reports one segment, Specialty Foods.
Key Financial Metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Net sales | $293.8 million | $287.8 million | $912.0 million | $906.6 million |
| Gross profit | $71.9 million | $72.9 million | $246.3 million | $224.5 million |
| Gross margin | 24.5% | 25.3% | 27.0% | 24.8% |
| Operating income | $22.0 million | $43.9 million | $132.1 million | $137.9 million |
| Operating margin | 7.5% | 15.3% | 14.5% | 15.2% |
| Net income | $14.5 million | $29.0 million | $86.8 million | $91.2 million |
| Diluted EPS | $0.53 | $1.06 | $3.16 | $3.32 |
For the nine-month period, net cash provided by operating activities was $105.4 million, compared with $100.6 million in the prior-year period. Investing cash outflow was $55.0 million, including $35.0 million for the Angelic Bakehouse acquisition and $20.1 million of capital expenditures. Financing cash outflow was $43.8 million, principally dividends of $43.9 million.
At March 31, 2017, cash and equivalents were $124.8 million, compared with $118.1 million at June 30, 2016. The company had no borrowings under its $150 million unsecured revolving credit facility and had $5.1 million of standby letters of credit outstanding. The facility expires in April 2021. Total shareholders’ equity was $559.2 million, compared with $513.6 million at June 30, 2016.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 2%; nine-month sales increased 1%. Excluding Angelic, pounds shipped increased 2% in the quarter and 1% year to date, while pricing had a net deflationary impact of 1% of sales in both periods.
- Third-quarter gross margin declined 80 basis points because of deflationary foodservice pricing. Year-to-date gross margin improved 220 basis points, primarily from lower raw-material costs, especially eggs, flour, honey, soybean oil and resin packaging.
- SG&A increased 11% in the quarter and 12% year to date, reflecting additional personnel, business initiatives, marketing, promotions, new-product placement costs and Angelic-related costs.
- The company recorded a one-time $17.6 million charge for withdrawal from the underfunded Cleveland Bakers and Teamsters Pension Fund and initial funding of a union-sponsored 401(k) plan. Management estimated the charge reduced third-quarter and year-to-date diluted EPS by $0.42.
- Operating income declined 50% in the quarter and 4% year to date. Specialty Foods operating income declined 46% in the quarter and 3% year to date.
- Cash generation improved year to date, but was supported in part by the $17.6 million pension-related accrual and higher accounts payable and accrued liabilities.
- The November 2016 acquisition of Angelic Bakehouse added $21.1 million of goodwill, $21.5 million of identifiable intangible assets and $14.6 million of acquisition-related contingent consideration at March 31, 2017. The acquisition’s operating results were not material.
Guidance, Outlook, Risks and Unusual Items
- Management expects retail volume-driven growth for the balance of fiscal 2017, supported by new products and incremental Angelic sales.
- Foodservice volume growth is expected to be modest and largely offset by diminishing deflationary pricing benefits and the effects of customer rationalization. Industry softness remains a headwind.
- Management expects ingredient costs to become slightly unfavorable in the fiscal fourth quarter and expects continued investment in personnel and business initiatives to increase SG&A.
- Fiscal 2017 capital expenditures are projected at approximately $25 million and are expected to be funded with operating cash flow.
- Management believes cash, operating cash flow and available credit will be adequate for cash requirements through fiscal 2017 and 2018. The company reported substantial compliance with its credit-facility covenants.
- Key risks include ingredient and packaging cost volatility, competition, customer concentration and rationalization, product recalls or labeling issues, labor relations, capacity constraints, acquisition integration, litigation, pension-related contingent liabilities and changes in consumer demand.
- Pending accounting changes include stock-compensation guidance effective July 1, 2017, revenue-recognition guidance effective in fiscal 2019 and lease accounting guidance effective in fiscal 2020. The company is evaluating the impacts where applicable.
- Management stated that ordinary-course litigation is not expected to have a material effect. Disclosure controls and procedures were effective as of March 31, 2017, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Verify the issuer identity: the supplied filing is Lancaster Colony Corporation, while the request metadata identifies Marzetti Co.
- Assess underlying profitability excluding the $17.6 million one-time pension settlement and related benefit charge.
- Review whether retail growth, Angelic integration and new-product placements offset foodservice softness, customer rationalization and competitive pressure.
- Monitor ingredient, packaging, trade-promotion and new-product placement costs, which materially affect margins.
- Evaluate the $14.6 million Level 3 Angelic earn-out liability, whose ultimate payment depends on Angelic’s fiscal 2021 adjusted EBITDA and has no stated minimum or maximum.
- Confirm capital spending, dividend requirements, credit-facility availability and continued compliance with leverage and interest-coverage covenants.