Business Context and Reporting Period
The filing is Lancaster Colony Corporation’s unaudited Form 10-Q for the third quarter and nine months of fiscal 2015, ended March 31, 2015. The request metadata identifies Marzetti Co., but the filing itself identifies Lancaster Colony Corporation. The company manufactures and markets specialty food products for retail and foodservice customers; the former candle business is reported as discontinued operations.
The company operates one reportable segment, Specialty Foods. On March 13, 2015, it acquired Flatout Holdings, Inc., a manufacturer and marketer of flatbread and pizza crusts.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2015 | Three Months Ended March 31, 2014 | Nine Months Ended March 31, 2015 | Nine Months Ended March 31, 2014 |
|---|---|---|---|---|
| Net sales | $263.4 million | $241.8 million | $826.8 million | $782.3 million |
| Gross margin | $56.6 million; 21.5% | $51.9 million; 21.5% | $192.7 million; 23.3% | $190.7 million; 24.4% |
| Operating income | $31.2 million; 11.8% | $28.8 million; 11.9% | $116.0 million; 14.0% | $121.5 million; 15.5% |
| Income from continuing operations | $20.4 million | $18.9 million | $76.1 million | $80.1 million |
| Net income (loss) | $20.4 million | $(10.4) million | $76.1 million | $53.7 million |
| Diluted EPS from continuing operations | $0.75 | $0.69 | $2.78 | $2.93 |
| Diluted net EPS | $0.75 | $(0.38) | $2.78 | $1.96 |
For the nine months, operating cash flow was $96.6 million versus $98.8 million in the prior-year period. Investing cash flow was $(109.4) million, including $92.2 million paid for the Flatout acquisition and $15.8 million of property additions. Financing cash flow was $(37.3) million, including $37.2 million of dividends.
Cash and equivalents were $161.4 million at March 31, 2015, compared with $211.5 million at June 30, 2014. The company had no borrowings under its $120 million unsecured revolving credit facility and had $4.2 million of standby letters of credit outstanding. Shareholders’ equity was $569.4 million, compared with $528.6 million at June 30, 2014.
Cash dividends were $0.46 per share in the quarter and $1.36 per share for the nine-month period. Capital expenditures are expected to total $18 million to $20 million for fiscal 2015.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 9%, primarily from volume and mix; retail sales increased 14% and foodservice sales increased 4%. Nine-month sales increased 6%.
- Third-quarter gross margin percentage was unchanged at 21.5%. The nine-month gross margin percentage declined to 23.3% from 24.4% because of capacity constraints, higher freight costs, promotional spending and placement costs for new products.
- Third-quarter operating income increased 8% to $31.2 million, while nine-month operating income decreased 4% to $116.0 million. Nine-month Specialty Foods operating income declined 4% to $124.9 million.
- Third-quarter continuing-operations income increased 8% and diluted continuing-operations EPS increased to $0.75 from $0.69. Nine-month continuing-operations income decreased 5% and EPS declined to $2.78 from $2.93.
- Reported net income improved substantially because the prior-year periods included a $29.6 million after-tax loss on the sale of the candle business. No discontinued operations were reported in fiscal 2015.
- SG&A increased 10% in the quarter and 11% year to date. The 2015 periods included approximately $0.4 million of Flatout transaction expenses.
- Cash decreased by $50.1 million during the nine months, principally because of the Flatout acquisition and capital expenditures, partly offset by operating cash flow.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued investment in branded retail products, promotional costs and new product introductions in the fourth quarter.
- Freight costs are expected to be slightly higher, while material costs are expected to be modestly favorable. Management identified a potentially sizeable U.S. avian influenza outbreak as a risk to egg-based ingredient costs.
- The company expects a full quarter of Flatout contribution in the fourth quarter, partly offset by approximately $0.8 million of transitional costs. Easter-related sales will not recur in the fourth quarter because the holiday occurred earlier in fiscal 2015.
- Management believes cash generated internally, existing cash balances and available bank credit should meet cash requirements through 2015.
- The Flatout purchase price allocation remains preliminary and may change as valuation, tax matters and post-closing working-capital adjustments are finalized. The acquisition generated $36.9 million of goodwill and $47.1 million of other intangible assets.
- Key disclosed risks include customer concentration or loss of major programs, product acceptance and recalls, competition, raw-material and packaging costs, capacity constraints, freight and energy costs, labor relations, acquisition integration, financing access and litigation.
- Management stated that ordinary-course claims and litigation were not material and were not expected to have a material effect. No material changes to previously disclosed risk factors were reported.
- The company was in compliance with its credit-facility covenants by substantial margins and expected to remain compliant. The facility expires in April 2017.
- The company is evaluating the potential effect of ASU 2014-09, Revenue from Contracts with Customers; the filing does not provide a quantified impact.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Lancaster Colony Corporation, not Marzetti Co.
- Assess whether lower year-to-date margins and operating income reflect temporary costs or continuing pressure from capacity, freight, promotion and placement expenses.
- Review the integration, final purchase-price allocation and performance of Flatout, including the expected $0.8 million of transitional costs.
- Monitor egg-based ingredient prices and any effects from avian influenza, along with freight and other input costs.
- Reconcile the $50.1 million cash decline with the $92.2 million acquisition payment, capital expenditures, dividends and operating cash flow.
- Verify the company’s continued covenant compliance, available borrowing capacity and liquidity through fiscal year-end.
- Distinguish ongoing operating performance from prior-year comparisons affected by the discontinued candle business and its $29.6 million after-tax sale loss.