Lancaster Colony(LANC) - 2023 Q4 - Annual Report

Part I Business Lancaster Colony Corporation manufactures and markets specialty food products across Retail and Foodservice segments, focusing on strategic growth through base business acceleration, supply chain simplification, and expansion via licensing and acquisitions - The company's strategic growth plan focuses on accelerating base business growth, simplifying the supply chain for cost reduction and margin growth, and expanding the core business through licensing and M&A[20] - The business operates in two reportable segments: Retail (53% of FY2023 sales) and Foodservice (47% of FY2023 sales)[19][158] - As of June 30, 2023, the company employed 3,400 individuals, with 23% covered by collective bargaining agreements[35] Net Sales by Product Class (% of Total Net Sales) | Class of Products | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Retail Segment: | | | | | Shelf-stable dressings, sauces and croutons | 23% | 22% | 21% | | Frozen breads | 19% | 20% | 21% | | Refrigerated dressings, dips and other | 11% | 13% | 15% | | Foodservice Segment: | | | | | Dressings and sauces | 35% | 34% | 32% | | Frozen breads and other | 12% | 11% | 11% | - Significant customer relationships include Walmart (18% of consolidated net sales), McLane (11%), and Chick-fil-A (26%)[29][30] Retail Segment The Retail segment manufactures and sells branded products, including frozen breads, dressings, and dips, primarily through U.S. grocery channels, with significant sales from licensed brands Key Retail Brands and Products | Products | Brand Names | | :--- | :--- | | Frozen Breads | | | Frozen garlic breads | New York BRAND Bakery | | Frozen Parkerhouse style yeast rolls and dinner rolls | Sister Schubert's | | Refrigerated Dressings and Dips | | | Salad dressings | Marzetti, Marzetti Simply | | Vegetable dips and fruit dips | Marzetti | | Shelf-Stable Dressings and Croutons | | | Salad dressings | Marzetti, Cardini's, Girard's | | Croutons and salad toppings | New York BRAND Bakery, Chatham Village, Marzetti | - The company manufactures and sells products under license agreements for brands including Chick-fil-A®, Olive Garden®, and Buffalo Wild Wings®[21] - The top five retail customers accounted for 59% of the segment's total net sales in FY2023, an increase from 57% in FY2022 and 55% in FY2021[22] Foodservice Segment The Foodservice segment primarily sells custom-formulated private label products to restaurants, with growth driven by existing customer volume gains and new product development - The majority of Foodservice sales are private label products for restaurants, focusing on custom-formulated dressings, sauces, and frozen breads[25] - The top five Foodservice direct customers accounted for 58% of the segment's net sales in both FY2023 and FY2022[26] Human Capital The company's human capital strategy prioritizes Health and Safety, Talent Acquisition, Total Rewards, Employee Engagement, DEI, and Community Engagement, showing progress in workforce diversity - The human capital strategy emphasizes Health and Safety, Talent Acquisition, Total Rewards, Employee Engagement, DEI, and Community Engagement[37] - In FY2023, the workforce comprised 36% female and 44% minority races or ethnicities[43] - From January 2020 to January 2023, the percentage of women at VP level and above increased by 58%, and non-white representation for director and above positions nearly doubled[44] Risk Factors The company faces diverse risks including food safety, operational challenges from inflation and labor, brand reputation, customer concentration, cybersecurity, extensive regulation, and significant ownership influence Risks Related to Health and Food Safety The company faces risks from real or perceived food safety issues, potentially leading to costly product recalls, legal claims, and damage to brand image and sales - The company may face business disruptions, product recalls, or claims for real or perceived safety issues, leading to significant financial loss and damaged customer sentiment[53] - Negative publicity concerning the food industry or the company's products can increase operational costs and reduce demand if consumer concerns are not adequately addressed[55][56] Risks Related to Our Operations Operational risks include increased costs and limited availability of raw materials, labor shortages, production disruptions, cybersecurity threats, manufacturing capacity constraints, and climate change impacts - The company faces risks from increased costs and limited availability of key raw materials like soybean oil, packaging, and flour due to inflation, geopolitical events, and climate change[58][63] - Labor shortages, increased labor costs, and high turnover could adversely impact production, shipping, and overall financial results[67] - Cyber attacks, data breaches, or other information security system failures could cause operational disruptions, significant expenses, and reputational damage[74] - Manufacturing capacity constraints may lead to an inability to meet customer demand, potentially resulting in long-term loss of product placement[81][82] Risks Related to the Brands We Sell and Customer Demand for Our Products The company's business is highly dependent on brand reputation, licensing agreements, and key customer relationships, with concentration risks from major partners like Walmart, Chick-fil-A, and McLane - The company's business could be harmed by the failure to maintain its brand reputation or renew key brand license agreements, such as those for Chick-fil-A®, Olive Garden®, and Buffalo Wild Wings® sauces[91][95] - Walmart is the largest retail customer, accounting for 18% of consolidated net sales in FY2023, and its loss would have a material adverse effect[100] - Sales to Chick-fil-A in the Foodservice segment represented 20% of consolidated net sales in FY2023, and its loss would materially impact sales and profitability[101] - McLane is the largest Foodservice customer, accounting for 11% of consolidated net sales in FY2023, serving as a distributor to national chain restaurants[103] Risks Related to Regulatory and Legal Matters The company is subject to extensive federal, state, and local regulations, including food safety, environmental, and data privacy laws, with potential liabilities from a multiemployer pension plan - Operations are subject to stringent food production, packaging, quality, and labeling standards, and non-compliance with evolving privacy laws like CCPA could increase costs and liability[112][115][116] - The company contributes to a multiemployer pension plan and could face increased contributions or withdrawal liability, materially affecting financial results[119] Risks Related to Investments in Our Common Stock Investment risks include the significant ownership interest of the Executive Chairman and family trusts, granting them substantial influence, alongside anti-takeover provisions that could deter acquisitions - As of June 30, 2023, Executive Chairman Mr. Gerlach and family trusts owned or controlled approximately 28% of the company's outstanding common stock, granting them significant influence on shareholder votes[121] - Anti-takeover provisions in the company's charter and Ohio corporate law may hinder third-party acquisition, potentially affecting the stock price[123][124] Unresolved Staff Comments The company reports no unresolved staff comments - None[127] Properties The company utilizes 2.6 million square feet of operational space, with 0.7 million leased, operating principal manufacturing facilities across nine U.S. locations for both segments - The company uses 2.6 million square feet of space for operations, with 0.7 million square feet being leased[128] Principal Manufacturing Locations | Location | Principal Products Produced | Business Segment(s) | Terms of Occupancy | | :--- | :--- | :--- | :--- | | Altoona, IA | Frozen pasta | Retail and Foodservice | Owned | | Bedford Heights, OH | Frozen breads | Retail and Foodservice | Owned | | Columbus, OH | Sauces, dressings, dips | Retail and Foodservice | Owned | | Cudahy, WI | Sprouted grain bakery products | Retail | Owned | | Horse Cave, KY | Sauces, dressings, frozen rolls | Retail and Foodservice | Owned | | Luverne, AL | Frozen rolls | Retail and Foodservice | Owned | | Milpitas, CA | Sauces and dressings | Retail and Foodservice | Owned | | Saline, MI | Flatbread products | Retail and Foodservice | Owned | | Vineland, NJ | Frozen breads | Retail and Foodservice | Owned | | Wareham, MA | Croutons | Retail and Foodservice | Leased | Legal Proceedings The company is involved in routine legal proceedings not expected to materially affect financial statements, with no material environmental matters exceeding its $1 million disclosure threshold - The company is involved in routine legal proceedings but does not expect them to have a material effect on its financial statements[130] - There are no environmental matters to disclose that meet the company's reporting threshold of $1 million[131] Mine Safety Disclosures This item is not applicable to the company - Not applicable[132] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under LANC, with a 60-year history of increasing cash dividends and an active share repurchase authorization - Common stock trades on the NASDAQ Global Select Market under the symbol LANC[134] - The company has increased its regular cash dividends for 60 consecutive years[135] - As of June 30, 2023, 1,176,739 common shares remained authorized for future repurchase under a plan approved in November 2010[136] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2023, net sales grew 9% to $1.82 billion driven by pricing, with gross profit up 9% and operating income up 26%, while the company completed its ERP implementation and ended the year with $88 million in cash and no debt Fiscal 2023 Consolidated Financial Highlights | Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,822.5M | $1,676.4M | 9% | | Gross Profit | $388.6M | $355.7M | 9% | | Operating Income | $141.5M | $111.9M | 26% | | Net Income | $111.3M | $89.6M | 24% | | Diluted EPS | $4.04 | $3.25 | 24% | - Consolidated net sales increased 9% due to pricing actions, while consolidated sales volume decreased 5%[157] - Project Ascent, the company's new ERP system, completed its implementation in August 2023 after a phased rollout during fiscal 2023 with no major disruptions[150] - The company ended FY2023 with $88 million in cash and equivalents and no debt[182] Results of Consolidated Operations In FY2023, consolidated net sales increased 9% to $1.82 billion, gross profit rose 9% to $388.6 million, and operating income grew 26% to $141.5 million, despite increased SG&A and impairment charges - Gross profit increased 9% to $388.6 million in FY2023, with the gross margin holding steady at 21.3%, as pricing actions effectively offset significant inflationary costs[159] - SG&A expenses increased 5% to $222.1 million, driven by investments in personnel, IT, and higher brokerage costs, partially offset by a $9.5 million decrease in Project Ascent expenses[160] - The company recorded $25.0 million in impairment charges in FY2023 related to the intangible assets of Flatout, Inc., reflected in the Retail segment[163] - The effective tax rate increased to 22.3% in FY2023 from 20.3% in FY2022[170] Segment Results In FY2023, Retail segment net sales grew 5% but operating income declined 8% due to impairment charges, while Foodservice net sales increased 13% and operating income surged 29% due to pricing and stable operations Retail Segment Performance (FY2023 vs. FY2022) | Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $965.4M | $915.2M | 5% | | Operating Income | $139.5M | $151.6M | (8)% | | Operating Margin | 14.4% | 16.6% | -220 bps | Foodservice Segment Performance (FY2023 vs. FY2022) | Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $857.2M | $761.2M | 13% | | Operating Income | $106.3M | $82.7M | 29% | | Operating Margin | 12.4% | 10.9% | +150 bps | - Retail operating income was negatively impacted by $25.0 million in impairment charges for Flatout intangible assets in FY2023, compared to $9.7 million in charges in FY2022[175] Financial Condition and Cash Flows The company ended FY2023 with $88 million in cash and no debt, with cash from operations significantly increasing to $225.9 million due to favorable working capital changes - The company has a $150 million unsecured revolving credit facility expiring in March 2025, with no borrowings outstanding at June 30, 2023[183] Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Provided By Operating Activities | $225,901 | $101,813 | | Used In Investing Activities | $(90,782) | $(132,240) | | Used In Financing Activities | $(106,929) | $(97,345) | - The 122% increase in cash from operations was primarily due to favorable changes in working capital, particularly receivables and accrued liabilities[191] - Capital expenditures for FY2024 are projected to be between $70 million and $80 million[186] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from fluctuating raw material prices, managed through forward purchasing and fixed-price contracts, with no significant interest rate exposure due to the absence of borrowings - The main market risk is from fluctuating prices of raw materials such as soybean oil and flour[207] - The company manages commodity price risk through a structured forward purchasing program and fixed-price arrangements, not through derivative instruments[207] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2021-2023, including balance sheets, income statements, and cash flows, with an unqualified opinion from Deloitte & Touche LLP on both financial statements and internal controls - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting as of June 30, 2023[210][211] - The auditor identified the valuation of long-lived assets and other intangible assets as a critical audit matter due to significant management judgment in assessing impairment indicators[215][216] Consolidated Balance Sheets As of June 30, 2023, total assets were $1.113 billion, driven by higher cash and property, plant, and equipment, with total liabilities at $250.7 million and shareholders' equity at $862.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and equivalents | $88,473 | $60,283 | | Total current assets | $374,463 | $351,781 | | Property, plant and equipment-net | $482,206 | $451,368 | | Goodwill | $208,371 | $208,371 | | Total Assets | $1,112,994 | $1,090,374 | | Liabilities & Equity | | | | Total current liabilities | $168,752 | $165,585 | | Total liabilities | $250,727 | $245,687 | | Total shareholders' equity | $862,267 | $844,687 | | Total Liabilities & Equity | $1,112,994 | $1,090,374 | Note 6 – Goodwill and Other Intangible Assets As of June 30, 2023, goodwill remained stable at $208.4 million, while the net carrying value of other intangible assets significantly decreased to $4.8 million due to a $25.0 million impairment charge related to Flatout, Inc - In FY2023, the company recorded impairment charges of $25.0 million related to the intangible assets of Flatout, Inc. due to lowered expectations for sales and profitability[301] - In FY2022, the company recorded impairment charges of $13.2 million for Bantam's intangible assets and $8.8 million for Angelic's tradename intangible asset[303][304] - Amortization expense for other intangible assets was $2.5 million in FY2023, down from $4.4 million in FY2022[306] Note 10 – Stock-Based Compensation The company grants stock-based awards under its 2015 Omnibus Incentive Plan, with total compensation expense of $9.1 million in FY2023, shifting to performance units for long-term incentives based on shareholder return and revenue growth - Total stock-based compensation expense was $9.1 million in FY2023, $9.6 million in FY2022, and $7.1 million in FY2021[268][233] - Beginning in FY2022, the company began granting performance units, which vest based on relative total shareholder return and revenue growth, as a primary long-term incentive vehicle instead of SSSARs[337] - At June 30, 2023, $10.1 million of total unrecognized compensation expense related to all stock-based awards is to be recognized over a weighted-average period of approximately 2 years[332][336][341] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[361] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2023, with the SAP S/4HANA ERP system implementation having no material adverse effect - Management concluded that disclosure controls and procedures were effective as of June 30, 2023[363] - Management concluded that internal control over financial reporting was effective as of June 30, 2023, based on the COSO framework[365] - The phased implementation of the new SAP S/4HANA ERP system during fiscal 2023 did not have a material adverse effect on the company's internal control over financial reporting[367] Other Information The company reports no other information - None[376] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[377] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the November 2023 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference from the company's 2023 Proxy Statement[378][380] Executive Compensation Information regarding executive officer and director compensation is incorporated by reference from the November 2023 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference from the company's 2023 Proxy Statement[381] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and equity compensation plans is incorporated by reference from the November 2023 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference from the company's 2023 Proxy Statement[382] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the November 2023 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference from the company's 2023 Proxy Statement[383] Principal Accountant Fees and Services Information on fees paid to and services provided by the independent registered public accounting firm, including Audit Committee pre-approval policies, is incorporated by reference from the November 2023 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference from the company's 2023 Proxy Statement[384] Part IV Exhibit and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements, governance documents, and required certifications - Lists the consolidated financial statements included in Item 8 and all exhibits filed with the report, such as the Credit Agreement, incentive plans, and CEO/CFO certifications[385][388] Form 10-K Summary This item is not applicable to the company - Not applicable[390]