Business Context and Reporting Period
Lancaster Colony Corporation, which operates T. Marzetti Company, manufactures specialty food products for retail and foodservice channels. This Form 10-Q covers the three and nine months ended March 31, 2021, representing fiscal 2021 third quarter and year-to-date results. The request metadata identifies “MARZETTI CO” and “2020 Q3,” but the filing is for Lancaster Colony Corporation and fiscal Q3 2021.
Financial Highlights
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Net sales | $357.2 million, up 11% | $1,081.5 million, up 7% |
| Gross profit | $90.6 million, up 18% | $290.0 million, up 8% |
| Gross margin | 25.3%, versus 23.9% | 26.8%, versus 26.5% |
| Operating income | $37.4 million, up 25% | $144.9 million, up 7% |
| Operating margin | 10.5%, versus 9.3% | 13.4%, unchanged |
| Net income | $28.9 million, up 29% | $110.6 million, up 4% |
| Diluted EPS | $1.05, versus $0.81 | $4.01, versus $3.87 |
| Operating cash flow | Not separately provided | $138.7 million, versus $119.1 million |
At March 31, 2021, cash and equivalents were $211.1 million, compared with $198.3 million at June 30, 2020. The company had no borrowings under its $150 million unsecured revolving credit facility and had $2.8 million of standby letters of credit outstanding. Shareholders’ equity was $831.1 million, compared with $783.3 million at June 30, 2020.
Capital expenditures were $55.6 million year to date, versus $72.0 million in the prior-year period. Dividends paid were $60.6 million, and treasury stock purchases totaled $4.6 million. Management expects fiscal 2021 capital expenditures of approximately $110 million.
Material Changes Versus the Prior Comparable Period
- Retail sales increased 17% in the quarter and 18% year to date, supported by elevated at-home food consumption, licensing programs and stronger sales of dressings, sauces and frozen products.
- Retail operating income rose 21% in the quarter and 24% year to date; operating margin increased to 20.8% for the quarter and 23.5% year to date.
- Foodservice sales increased 5% in the quarter as restaurant demand began recovering, but declined 5% year to date because of COVID-19 effects and the termination of the Omni transitional supply arrangement.
- Foodservice operating income increased 65% in the quarter and was approximately flat year to date. Results benefited from better mix, lower employee benefit costs and the absence of the prior-year $4.5 million inventory write-down.
- Gross profit benefited from sales growth, favorable mix, lower employee benefit costs, cost savings and lower retail trade spending. Offsets included commodity inflation, higher manufacturing costs, personal protective equipment and temporary “hero pay.”
- SG&A increased 13% in both periods, principally because Project Ascent ERP expenses increased to $10.8 million for the quarter and $27.6 million year to date, versus $4.9 million and $12.5 million, respectively.
- Year-to-date operating results included a $5.7 million favorable reduction in Bantam contingent consideration and $1.2 million of Bantam intangible-asset impairment charges.
Outlook, Risks and Unusual Items
Management expects fourth-quarter sales to benefit from continued Retail growth, including broader distribution of Chick-fil-A sauces, and a recovery in Foodservice as restaurant demand improves with vaccinations, stimulus spending and warmer weather. Commodity costs and COVID-19-related manufacturing expenses are expected to remain headwinds. Temporary hero pay is expected to end June 30, 2021.
The company is expanding dressing and sauce manufacturing and warehousing capacity in Horse Cave, Kentucky. The project is expected to be completed in the first quarter of fiscal 2023, has a guaranteed maximum price of approximately $113 million, and represented an estimated remaining commitment of approximately $106 million at March 31, 2021.
- COVID-19 could adversely affect demand, restaurant customers, labor availability, supply chains, inventory levels, receivables, manufacturing costs and profitability. Management stated that no material manufacturing or distribution disruption had occurred as of the filing date.
- Project Ascent involves implementation of an SAP S/4HANA ERP system; execution complexity, costs and disruptions are key risks.
- Other risks include ingredient and packaging inflation, capacity constraints, customer concentration or program losses, cyber incidents, acquisitions, product recalls, competition, regulatory matters and litigation.
- Claims and litigation were described as ordinary-course matters not expected to have a material effect.
- The company stated that it was in compliance with its credit-facility covenants and expected to remain compliant. Liquidity is expected to cover the next 12 months.
Investor Verification Checklist
- Verify the reporting-entity and period mismatch: Lancaster Colony Corporation, fiscal quarter ended March 31, 2021, rather than a Marzetti standalone or 2020 Q3 filing.
- Assess the sustainability of Retail demand and licensing-related growth as pandemic-related at-home consumption normalizes.
- Monitor Foodservice recovery, restaurant customer trends and the impact of the discontinued Omni supply arrangement.
- Evaluate the expected returns, remaining spending and implementation risks of the approximately $113 million Horse Cave expansion and Project Ascent.
- Track commodity inflation, manufacturing inefficiencies, hero-pay expiration and resulting margin trends.
- Review the $5.7 million Bantam contingent-consideration benefit and $1.2 million impairment charge as unusual, potentially nonrecurring items.
- Confirm liquidity, capital-expenditure requirements, dividend commitments and compliance with revolving-credit covenants.