Lancaster Colony(LANC) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for Lancaster Colony Corporation, including balance sheets, income statements, comprehensive income statements, cash flow statements, and statements of shareholders' equity, along with detailed notes for the periods ended December 31, 2023 Condensed Consolidated Balance Sheets The balance sheet shows an increase in cash and equivalents and total assets, alongside a decrease in current liabilities and an increase in total shareholders' equity as of December 31, 2023, compared to June 30, 2023 Balance Sheet Highlights (Dec 31, 2023 vs Jun 30, 2023) | Metric | Dec 31, 2023 (in thousands) | Jun 30, 2023 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | | Cash and equivalents | $133,848 | $88,473 | +$45,375 | | Total current assets | $405,399 | $374,463 | +$30,936 | | Total assets | $1,148,925 | $1,112,994 | +$35,931 | | Total current liabilities | $163,376 | $168,752 | -$5,376 | | Total shareholders' equity | $908,326 | $862,267 | +$46,059 | Condensed Consolidated Statements of Income The income statement reflects significant year-over-year growth in net sales, gross profit, operating income, and net income for both the three and six months ended December 31, 2023, driven by pricing actions and cost savings Income Statement Highlights (3 Months Ended Dec 31) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :------------------ | :------------------ | :----- | :------- | | Net Sales | $485,916 | $477,394 | +$8,522 | +1.8% | | Gross Profit | $121,468 | $102,102 | +$19,366 | +19.0% | | Operating Income | $65,754 | $51,327 | +$14,427 | +28.1% | | Net Income | $51,484 | $39,973 | +$11,511 | +28.8% | | Diluted EPS | $1.87 | $1.45 | +$0.42 | +29.0% | Income Statement Highlights (6 Months Ended Dec 31) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :------------------ | :------------------ | :----- | :------- | | Net Sales | $947,488 | $902,931 | +$44,557 | +4.9% | | Gross Profit | $230,190 | $201,157 | +$29,033 | +14.4% | | Operating Income | $122,529 | $100,625 | +$21,904 | +21.8% | | Net Income | $95,435 | $77,565 | +$17,870 | +23.0% | | Diluted EPS | $3.47 | $2.81 | +$0.66 | +23.5% | Condensed Consolidated Statements of Comprehensive Income Comprehensive income increased for both the three and six months ended December 31, 2023, primarily due to higher net income, with other comprehensive income remaining relatively stable Comprehensive Income (3 Months Ended Dec 31) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :------------------- | :------------------ | :------------------ | | Net Income | $51,484 | $39,973 | | Other Comprehensive Income, Net of Tax | $75 | $95 | | Comprehensive Income | $51,559 | $40,068 | Comprehensive Income (6 Months Ended Dec 31) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :------------------- | :------------------ | :------------------ | | Net Income | $95,435 | $77,565 | | Other Comprehensive Income, Net of Tax | $151 | $190 | | Comprehensive Income | $95,586 | $77,755 | Condensed Consolidated Statements of Cash Flows Operating cash flows saw a slight increase, while investing activities used less cash due to reduced property additions; financing activities used more cash due to higher dividend payments and share repurchases for the six months ended December 31, 2023 Cash Flow Highlights (6 Months Ended Dec 31) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :----- | | Net cash provided by operating activities | $141,523 | $140,440 | +$1,083 | | Net cash used in investing activities | $(40,216) | $(55,776) | +$15,560 | | Net cash used in financing activities | $(55,932) | $(49,460) | -$6,472 | | Net change in cash and equivalents | $45,375 | $35,204 | +$10,171 | Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased, primarily driven by net income and a rise in common stock value, partially offset by cash dividends and treasury stock purchases during the six months ended December 31, 2023 Shareholders' Equity Components (Dec 31, 2023 vs Jun 30, 2023) | Metric | Dec 31, 2023 (in thousands) | Jun 30, 2023 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Common Stock | $149,290 | $143,870 | | Retained Earnings | $1,551,143 | $1,503,963 | | Accumulated Other Comprehensive Loss | $(9,214) | $(9,365) | | Common Stock in Treasury | $(782,893) | $(776,201) | | Total Shareholders' Equity | $908,326 | $862,267 | Cash Dividends Paid (6 Months Ended Dec 31) | Period | 2023 (in thousands) | 2022 (in thousands) | | :----- | :------------------ | :------------------ | | 6 Months | $(48,255) | $(45,529) | Purchase of Treasury Stock (6 Months Ended Dec 31) | Period | 2023 (in thousands) | 2022 (in thousands) | | :----- | :------------------ | :------------------ | | 6 Months | $(6,692) | $(209) | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's significant accounting policies, including basis of presentation, property, plant and equipment, accrued compensation, and earnings per share, also covering long-term debt, commitments, goodwill and other intangible assets, income taxes, business segment information, and stock-based compensation, highlighting no material changes in accounting policies and the impact of recent accounting pronouncements - No changes to significant accounting policies from the 2023 Annual Report on Form 10-K[31] - FASB issued new accounting guidance related to segment disclosures (effective fiscal 2025/2026) and income tax disclosures (effective fiscal 2026), which relate only to disclosures and will not impact financial position or results of operations[33][34] - The company has an unsecured revolving credit facility of up to $150 million, expiring March 2025, with no outstanding borrowings at December 31, 2023[35][37] Goodwill by Segment (Dec 31, 2023) | Segment | Goodwill (in thousands) | | :-------- | :---------------------- | | Retail | $157,400 | | Foodservice | $51,000 | Amortization Expense for Other Intangible Assets (6 Months Ended Dec 31) | Period | 2023 (in thousands) | 2022 (in thousands) | | :----- | :------------------ | :------------------ | | 6 Months | $264 | $1,257 | Segment Net Sales (6 Months Ended Dec 31) | Segment | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :---------- | :------------------ | :------------------ | :----- | :------- | | Retail | $506,176 | $481,979 | +$24,197 | +5.0% | | Foodservice | $441,312 | $420,952 | +$20,360 | +4.8% | | Total | $947,488 | $902,931 | +$44,557 | +4.9% | Segment Operating Income (6 Months Ended Dec 31) | Segment | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :---------- | :------------------ | :------------------ | :----- | :------- | | Retail | $112,645 | $92,252 | +$20,393 | +22.1% | | Foodservice | $53,778 | $58,625 | -$4,847 | -8.3% | | Corporate Expenses | $(43,894) | $(50,252) | +$6,358 | -12.6% | | Total | $122,529 | $100,625 | +$21,904 | +21.8% | Stock-Based Compensation Expense (6 Months Ended Dec 31) | Type | 2023 (in thousands) | 2022 (in thousands) | | :---------------- | :------------------ | :------------------ | | SSSARs | $600 | $1,400 | | Restricted Stock | $2,700 | $2,800 | | Performance Units | $2,100 | $1,100 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three and six months ended December 31, 2023, covering business overview, market trends, detailed analysis of consolidated and segment-specific operating results, cash flows, liquidity, capital resources, and forward-looking statements - Lancaster Colony Corporation manufactures and markets specialty food products for retail and foodservice channels, with over 95% of products sold in the United States[57][59] - The company aims to grow sales and profitability by introducing new products, expanding distribution, leveraging brand strength, strategic licensing, and acquiring complementary businesses[59] - Completed significant capacity expansion projects for dressing/sauce facilities and frozen pasta, and finalized the implementation of the SAP S/4HANA ERP system (Project Ascent) in August 2023[60] - Experienced significant cost inflation through 2023, particularly for soybean oil, eggs, and flour, which was offset by pricing actions; input costs began to diminish notably near the end of 2023, with aggregate levels below the prior year for the first half of fiscal 2024[62][63] - Consolidated net sales for the six months ended December 31, 2023, increased 4.9% to $947.5 million, driven by volume gains and prior year's pricing actions; sales volumes increased 4.8%, or 2.5% excluding ERP go-live sales shift and value engineering/private label bread impacts[67] - Consolidated operating income for the six months ended December 31, 2023, increased 21.8% to $122.5 million, primarily due to higher gross profit, partially offset by increased SG&A expenses[75] - Diluted net income per share for the six months ended December 31, 2023, totaled $3.47, up from $2.81 in the prior year; Project Ascent expenses reduced diluted EPS by $0.16 in the current period[79] - Retail segment net sales for the six months ended December 31, 2023, increased 5.0% to $506.2 million, driven by pricing actions, higher sales volumes (up 2.0%), and success in licensing programs (e.g., Chick-fil-A sauces), New York BRAND Bakery frozen garlic bread products, and Reames frozen egg noodles[80] - Foodservice segment net sales for the six months ended December 31, 2023, increased 4.8% to $441.3 million, driven by increased demand from national chain restaurant accounts and branded Foodservice products; sales volumes increased 6.6%; deflationary pricing was a headwind[83] - Foodservice segment operating income for the six months ended December 31, 2023, decreased 8.3% to $53.8 million, primarily due to higher supply chain costs, partially offset by increased sales volumes and a more favorable sales mix[84] - Corporate expenses for the six months ended December 31, 2023, decreased to $43.9 million from $50.3 million, mainly due to lower Project Ascent expenses ($5.8 million vs $16.7 million in prior year), partially offset by increased personnel investments[86] - Cash flows from operating activities for the six months ended December 31, 2023, increased to $141.5 million, primarily due to higher net income and depreciation/amortization, partially offset by changes in working capital[89] - The company believes cash from operations, existing cash, and the $150 million credit facility (with no outstanding borrowings) are adequate for liquidity needs over the next 12 months, including projected capital expenditures of $70-80 million for fiscal 2024[95] OVERVIEW Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for retail and foodservice channels, primarily in the U.S. The company aims for growth through new products, expanded distribution, strategic licensing, and acquisitions, supported by recent investments in capacity expansion and ERP system implementation BUSINESS TRENDS The company experienced significant inflationary costs through 2023, particularly for key commodities, which were largely offset by pricing actions; towards the end of 2023, input cost inflation began to notably diminish, resulting in aggregate costs below the prior year for the first half of fiscal 2024 RESULTS OF CONSOLIDATED OPERATIONS Consolidated net sales, gross profit, operating income, and net income all increased significantly for both the three and six months ended December 31, 2023, driven by favorable pricing, commodity costs, and cost savings programs, despite higher SG&A expenses RESULTS OF OPERATIONS - SEGMENTS The Retail segment saw increased net sales and operating income due to pricing actions, licensing programs, and specific product growth; the Foodservice segment also grew net sales from increased demand, but operating income decreased due to higher supply chain costs, partially offset by volume and mix benefits; corporate expenses decreased due to lower ERP project costs LOOKING FORWARD The company projects continued Retail sales growth from its licensing program and sustained Foodservice volume growth from quick-service restaurant customers; favorable pricing net of commodity costs is expected to continue, though at a lower sequential level, with deflationary pricing remaining a headwind for Foodservice net sales; the focus is now on leveraging the new ERP system and maintaining capital allocation flexibility FINANCIAL CONDITION Net cash provided by operating activities increased slightly, while cash used in investing activities decreased due to lower capital expenditures; cash used in financing activities increased due to higher dividends and share repurchases; the company believes its liquidity sources are adequate for the foreseeable future CRITICAL ACCOUNTING POLICIES There have been no changes in critical accounting policies from those disclosed in the company's 2023 Annual Report on Form 10-K RECENT ACCOUNTING PRONOUNCEMENTS Recent accounting pronouncements and their impact on the consolidated financial statements are disclosed in Note 1 to the condensed consolidated financial statements, primarily relating to enhanced disclosure requirements for segments and income taxes, with no impact on financial position or results of operations FORWARD-LOOKING STATEMENTS This section contains forward-looking statements subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from expectations; the company undertakes no obligation to update these statements, except as required by law Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that its market risks have not materially changed from those disclosed in its 2023 Annual Report on Form 10-K - No material changes to market risks from those disclosed in the 2023 Annual Report on Form 10-K[103] Item 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023; no material changes were made to internal control over financial reporting during the most recent fiscal quarter - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[104] - No material changes were made to internal control over financial reporting during the most recent fiscal quarter[105] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is a party to various claims and litigation matters arising in the ordinary course of business, none of which are expected to have a material effect on its consolidated financial statements; there are no environmental matters requiring disclosure under the specified $1 million threshold - No material effect on current-year results of operations or consolidated financial statements expected from ordinary course litigation[38] - No environmental matters requiring disclosure under the $1 million threshold[107] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed under Item 1A in the company's 2023 Annual Report on Form 10-K - No material changes to risk factors disclosed in the 2023 Annual Report on Form 10-K[108] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase authorization, noting that 1,136,354 common shares remained authorized for future repurchases at December 31, 2023; the company repurchased 254 shares in the second quarter of fiscal 2024, primarily for tax withholding obligations related to restricted stock vesting - 1,136,354 common shares remained authorized for future repurchases at December 31, 2023, under a program approved in November 2010 with no stated expiration date[109] Q2 2024 Share Repurchases | Period | Shares Purchased | Average Price Per Share | | :-------------------- | :--------------- | :---------------------- | | October 1-31, 2023 | 101 | $165.17 | | December 1-31, 2023 | 153 | $166.39 | | Total Q2 2024 | 254 | $165.90 | Item 6. Exhibits This section provides an index of exhibits filed with the Quarterly Report on Form 10-Q, including certifications under the Sarbanes-Oxley Act and various XBRL-related documents - Includes CEO/CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act) and various XBRL documents[112] SIGNATURES - The report was signed by David A. Ciesinski (President, Chief Executive Officer, and Director) and Thomas K. Pigott (Vice President, Chief Financial Officer, and Assistant Secretary) on February 1, 2024[116]