Lancaster Colony(LANC) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Condensed Consolidated Financial Statements The unaudited condensed consolidated financial statements for Q1 2020 show increased assets, equity, net sales, and net income, reflecting the adoption of new lease accounting guidance Condensed Consolidated Balance Sheets Total assets increased to $962.3 million and shareholders' equity to $749.7 million as of September 30, 2019, with new lease accounting impacting liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2019 | June 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and equivalents | $173,461 | $196,288 | | Total current assets | $368,651 | $368,569 | | Property, plant and equipment-net | $280,859 | $247,044 | | Operating lease right-of-use assets | $24,584 | $— | | Total Assets | $962,341 | $905,399 | | Liabilities & Equity | | | | Total current liabilities | $136,573 | $119,706 | | Noncurrent Operating Lease Liabilities | $19,638 | $— | | Total Shareholders' Equity | $749,665 | $726,873 | Condensed Consolidated Statements of Income Net sales increased 6.4% to $337.1 million, driving gross profit up 13.4% and net income rising 4.4% to $40.7 million Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $337,054 | $316,654 | +6.4% | | Gross Profit | $92,108 | $81,199 | +13.4% | | Operating Income | $51,704 | $49,120 | +5.3% | | Net Income | $40,745 | $39,028 | +4.4% | | Diluted EPS | $1.48 | $1.42 | +4.2% | Condensed Consolidated Statements of Cash Flows Operating cash flow was $40.1 million, but investing activities used $43.3 million, primarily for property additions, leading to a net cash decrease Cash Flow Summary (in thousands) | Activity | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $40,095 | $40,860 | | Net cash used in investing activities | ($43,345) | ($9,811) | | Net cash used in financing activities | ($19,577) | ($18,866) | | Net change in cash and equivalents | ($22,827) | $12,183 | - The significant increase in cash used for investing activities was primarily due to payments for property additions, which rose to $43.2 million from $9.7 million year-over-year[17] Notes to Condensed Consolidated Financial Statements Key notes detail new lease accounting adoption, recent acquisitions, contingent consideration valuation, and segment performance showing growth - The company adopted new lease guidance on July 1, 2019, recognizing a right-of-use asset of $31.7 million and a lease liability of $33.5 million, with no impact on operations or cash flows[29] - In fiscal 2019, the company acquired Omni Baking Company for $22.3 million and Bantam Bagels for a base price of $33.1 million, plus potential contingent consideration[30][31] - Contingent consideration for the Bantam acquisition was valued at $9.0 million as of September 30, 2019, based on a Level 3 fair value measurement using a Monte Carlo simulation[36][37] Segment Performance - Three Months Ended Sep 30 (in thousands) | Segment | Net Sales 2019 | Net Sales 2018 | Operating Income 2019 | Operating Income 2018 | | :--- | :--- | :--- | :--- | :--- | | Retail | $166,077 | $162,748 | $35,435 | $33,948 | | Foodservice | $170,977 | $153,906 | $23,789 | $18,861 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported record Q1 net sales of $337.1 million, up 6%, with gross profit up 13%, despite higher SG&A and restructuring charges Results of Consolidated Operations Consolidated net sales increased 6% to $337.1 million, with gross profit up 13%, but operating income growth was tempered by increased SG&A and restructuring Consolidated Operations Summary (in thousands) | Metric | Q1 2020 | Q1 2019 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $337,054 | $316,654 | $20,400 | 6% | | Gross Profit | $92,108 | $81,199 | $10,909 | 13% | | SG&A Expenses | $39,455 | $32,079 | $7,376 | 23% | | Operating Income | $51,704 | $49,120 | $2,584 | 5% | | Net Income | $40,745 | $39,028 | $1,717 | 4% | - Excluding sales from the Bantam and Omni acquisitions, consolidated net sales increased 3% for the quarter[79] - SG&A expenses increased by $7.4 million, driven by a $2.7 million spend on the ERP initiative, increased consumer promotions, and incremental expenses from the Bantam acquisition[81][82] - The company recorded $0.9 million in restructuring and impairment charges related to the closure of its frozen bread plant in Saraland, Alabama[84][85] Results of Operations - Segments Retail segment net sales grew 2% and operating income 4%, while Foodservice net sales surged 11% and operating income 26% - Retail segment net sales grew 2%, or 1.5% excluding the Bantam acquisition, driven by Marzetti® dressings and dips, frozen garlic bread, and licensed dressings[90] - Foodservice segment net sales grew 11%, or 4% excluding acquisitions, attributed to national chain restaurant accounts, branded products, and frozen pasta, with Omni acquisition contributing $7.9 million[92] - Foodservice operating income increased 26%, benefiting from higher sales volumes and cost savings from the lean six sigma program[93] Looking Forward The company anticipates a strong Q2 driven by holiday sales and product expansion, with elevated SG&A and moderately unfavorable commodity costs expected later - The second quarter is typically the strongest sales quarter due to the holiday season[95] - Anticipates continued sales growth for Bantam in both Retail and Foodservice segments, as retail distribution expands and foodservice trends with Starbucks® remain positive[95] - Commodity costs are expected to be similar to the prior year in Q2 but turn 'moderately unfavorable' in the second half of the fiscal year[95] Financial Condition Operating cash flow was $40.1 million, with capital expenditures increasing to $43.3 million for capacity expansion, maintaining strong liquidity - Increased capital expenditures include spending on a capacity expansion project at the frozen dinner roll facility in Horse Cave, Kentucky, expected to be completed near the end of Q2[97] - The company expects capital expenditures for fiscal 2020 to total between $80 million and $100 million[102] - As of September 30, 2019, the company had no borrowings outstanding under its $150 million revolving credit facility and was in compliance with all covenants[99][100] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to market risks from those disclosed in its 2019 Annual Report on Form 10-K - There were no material changes to market risks from the 2019 Annual Report on Form 10-K[107] Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2019[108] - No material changes were made to internal control over financial reporting during the most recent fiscal quarter[109] PART II – OTHER INFORMATION Risk Factors The company reports no material changes to the risk factors previously disclosed in its 2019 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the 2019 Annual Report on Form 10-K[112] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 10,279 common shares at $142.49 per share, with 1,344,144 shares remaining authorized for future repurchase Common Stock Repurchases - Q1 2020 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 1-31, 2019 | 40 | $148.22 | | August 1-31, 2019 | 239 | $145.90 | | September 1-30, 2019 | 10,000 | $142.39 | | Total | 10,279 | $142.49 | - As of September 30, 2019, 1,344,144 common shares remained authorized for future repurchase under the Board-approved plan[113] Exhibits This section references the Index to Exhibits, listing certifications and XBRL data files submitted with the Form 10-Q