Lancaster Colony Corporation — Form 10-Q Summary
Filing and period: The provided filing is Lancaster Colony Corporation’s unaudited Form 10-Q for the quarter and six months ended December 31, 2019, representing fiscal 2020 second-quarter and year-to-date results. The request metadata identifies “MARZETTI CO,” but the filing is for Lancaster Colony Corporation, which owns the Marzetti brand.
Business Context and Reporting Period
Lancaster Colony manufactures and markets specialty food products through Retail and Foodservice segments. More than 95% of sales are in the United States. The company’s fiscal year runs from July 1 through June 30.
- Retail sales include frozen breads, refrigerated dressings and dips, shelf-stable dressings, and croutons.
- Foodservice sales include dressings, sauces, frozen breads, other frozen products, and temporary sales under an Omni supply arrangement.
- The company completed a capacity expansion at its Sister Schubert’s frozen dinner roll facility in January 2020 and continued investments in its ERP system, R&D capabilities, and manufacturing infrastructure.
Financial Performance and Position
| Metric | Three Months Ended December 31, 2019 | Year-over-Year Change | Six Months Ended December 31, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $355.1 million | +2% | $692.2 million | +4% |
| Gross profit | $99.9 million | +9% | $192.0 million | +11% |
| Gross margin | 28.1% | Up from 26.1% | 27.7% | Up from 25.9% |
| Operating income | $54.1 million | -12% | $105.8 million | -4% |
| Operating margin | 15.2% | Down from 17.5% | 15.3% | Down from 16.6% |
| Net income | $43.4 million | -9% | $84.2 million | -3% |
| Diluted EPS | $1.58 | Down from $1.73 | $3.06 | Down from $3.15 |
- Segment results: Retail sales were essentially flat for the quarter and increased 1% year to date. Retail operating income declined 13% for the quarter and 5% year to date, partly because the prior-year period benefited from a $9.7 million reduction in Angelic contingent consideration.
- Foodservice sales increased 3% for the quarter and 7% year to date. Foodservice operating income increased 21% and 23%, respectively, with margins improving to 13.9% from 11.9% for the quarter and from 12.1% to 13.9% year to date.
- SG&A increased 15% for the quarter and 18% year to date, primarily because of ERP expenses of $4.9 million and $7.6 million, respectively. ERP spending reduced diluted EPS by approximately $0.14 for the quarter and $0.21 year to date.
- The effective tax rate was 21.0% for the quarter and 22.1% year to date, compared with 23.0% and 22.8% in the prior-year periods.
- Net cash provided by operating activities was $105.4 million, compared with $113.2 million in the prior-year six-month period.
- Capital expenditures were $57.7 million, versus $27.9 million in the prior year. Investing cash outflows totaled $57.9 million, compared with $86.5 million, primarily because the prior year included acquisitions.
- Cash used in financing activities was $41.5 million, including $37.1 million of dividends and $1.5 million of treasury-stock purchases.
- Cash and equivalents totaled $202.2 million at December 31, 2019, compared with $196.3 million at June 30, 2019.
- 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 April 8, 2021.
- Total shareholders’ equity was $772.8 million at December 31, 2019, compared with $726.9 million at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Sales growth and substantially improved gross margins were driven by cost savings, lower commodity costs, improved net price realization, higher volumes, and a favorable Foodservice mix.
- Operating income and net income declined despite gross-profit improvement because the prior year included a $9.7 million benefit from reducing the Angelic contingent consideration liability and the current year included materially higher ERP and other corporate expenses.
- The company recorded $0.9 million of restructuring and impairment charges in the six-month period, primarily for cleanup and contract termination costs related to the closure of its Saraland, Alabama frozen-bread plant. Management does not expect additional charges for that closure.
- The company adopted the new lease accounting standard on July 1, 2019, recognizing a $24.6 million operating lease right-of-use asset and $26.4 million of operating lease liabilities at December 31, 2019. Adoption did not affect reported earnings or cash flows.
- Year-to-date dividends increased to $37.1 million from $34.4 million. The quarterly dividend was $0.70 per share, compared with $0.65 in the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued Retail growth from shelf-stable dressings and sauces sold under license agreements, new products, and improved pricing.
- Foodservice growth is expected to be modest and may be constrained by a national-account second-sourcing initiative, slowing restaurant-industry trends, and declining Omni sales as the temporary supply agreement approaches its expected December 2020 end.
- Input costs are expected to become increasingly inflationary during the second half of fiscal 2020. Management expects cost savings and pricing initiatives to offset some of the pressure.
- SG&A is expected to remain elevated due to ERP and other strategic investments. Planned fiscal 2020 capital expenditures are estimated at $80 million to $100 million, including approximately $10 million for a future dressing-and-sauce facility expansion. The total project investment is estimated at $95 million, most of which is expected in fiscal 2021.
- Management believes operating cash flow, cash balances, and available credit will meet cash requirements through 2020, including planned capital expenditures and dividends.
- Key risks include ERP implementation difficulties, cybersecurity and information-technology disruptions, customer concentration and loss of major programs, commodity and packaging-cost inflation, labor and capacity constraints, product recalls, regulatory requirements, competition, acquisitions and integration, litigation, and contingent liabilities.
- Ordinary-course claims and litigation were not expected to have a material effect on the consolidated financial statements. Management reported compliance with credit-facility covenants and no events of default.
Important Facts for Investors to Verify
- Confirm the issuer: the provided filing is Lancaster Colony Corporation, not a registrant named Marzetti Co.
- Assess whether Foodservice growth can offset expected Omni declines and the identified national-account and restaurant-industry pressures.
- Track ERP implementation costs, capitalization, execution risks, and their effect on future SG&A and EPS.
- Evaluate whether pricing and cost-savings initiatives can offset expected inflation in ingredients, packaging, freight, energy, and other inputs.
- Review the $80 million–$100 million fiscal 2020 capital-expenditure outlook and the $95 million planned facility expansion.
- Monitor the $9.0 million Bantam contingent consideration liability, whose value depends on future adjusted EBITDA and other unobservable assumptions.
- Verify cash generation, dividend sustainability, credit-facility availability, and compliance with leverage and interest-coverage covenants.