Lancaster Colony(LANC) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Amounts in thousands) | Item | March 31, 2022 | June 30, 2021 | Change | % Change | | :-------------------------- | :------------- | :------------ | :------- | :------- | | Cash and equivalents | $67,085 | $188,055 | $(120,970) | -64.3% | | Total current assets | $361,579 | $423,481 | $(61,902) | -14.6% | | Property, plant and equipment-net | $438,289 | $364,622 | $73,667 | 20.2% | | Total assets | $1,103,624 | $1,101,285 | $2,339 | 0.2% | | Total current liabilities | $179,477 | $173,923 | $5,554 | 3.2% | | Total shareholders' equity | $838,622 | $843,147 | $(4,525) | -0.5% | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income Highlights (Amounts in thousands, except per share data) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :------------------------------ | :------------------------------ | :------- | :------- | | Net Sales | $403,494 | $357,249 | $46,245 | 12.9% | | Gross Profit | $68,332 | $90,550 | $(22,218) | -24.5% | | Operating (Loss) Income | $(7,617) | $37,388 | $(45,005) | -120.4% | | Net (Loss) Income | $(4,483) | $28,897 | $(33,380) | -115.5% | | Diluted Net (Loss) Income Per Common Share | $(0.17) | $1.05 | $(1.22) | -116.2% | | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net Sales | $1,223,977 | $1,081,501 | $142,476 | 13.2% | | Gross Profit | $257,301 | $290,049 | $(32,748) | -11.3% | | Operating Income | $78,200 | $144,934 | $(66,734) | -46.0% | | Net Income | $60,542 | $110,606 | $(50,064) | -45.3% | | Diluted Net Income Per Common Share | $2.20 | $4.01 | $(1.81) | -45.1% | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income Highlights (Amounts in thousands) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | | :------------------------ | :------------------------------ | :------------------------------ | | Net (Loss) Income | $(4,483) | $28,897 | | Other Comprehensive Income, Net of Tax | $43 | $94 | | Comprehensive (Loss) Income | $(4,440) | $28,991 | | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :------------------------ | :----------------------------- | :----------------------------- | | Net Income | $60,542 | $110,606 | | Other Comprehensive Income, Net of Tax | $126 | $282 | | Comprehensive Income | $60,668 | $110,888 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | Change | % Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net cash provided by operating activities | $58,651 | $138,699 | $(80,048) | -57.7% | | Net cash used in investing activities | $(105,065) | $(56,162) | $(48,903) | 87.1% | | Net cash used in financing activities | $(74,556) | $(69,689) | $(4,867) | 7.0% | | Net change in cash and equivalents | $(120,970) | $12,848 | $(133,818) | -1041.6% | | Cash and equivalents at end of period | $67,085 | $211,121 | $(144,036) | -68.2% | Condensed Consolidated Statements of Shareholders' Equity Shareholders' Equity Changes (Nine Months Ended March 31, 2022, Amounts in thousands) | Item | Amount | | :-------------------------------- | :----- | | Balance, June 30, 2021 | $843,147 | | Net income | $60,542 | | Cash dividends - common stock | $(64,736) | | Purchase of treasury stock | $(7,485) | | Stock-based compensation expense | $7,384 | | Balance, March 31, 2022 | $838,622 | Notes to Condensed Consolidated Financial Statements Note 1 – Summary of Significant Accounting Policies This note outlines the basis of presentation and key accounting policies for the interim financial statements - The financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC Article 10 of Regulation S-X[24] Deferred Software Costs Capitalized (Nine Months Ended March 31, Amounts in thousands) | Year | Amount | | :--- | :----- | | 2022 | $1,600 | | 2021 | $3,200 | - An impairment charge of $6.8 million was recorded for property, plant and equipment related to the Bantam Bagels, LLC business[26] Net (Loss) Income Per Common Share (Diluted) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended March 31 | $(0.17) | $1.05 | | Nine Months Ended March 31 | $2.20 | $4.01 | Note 2 – Fair Value This note details the fair value hierarchy and the measurement of contingent consideration from the Bantam acquisition - Fair value is defined as the exit price, with a three-level hierarchy, and contingent consideration from the Bantam acquisition is measured at Level 3[34][35][38] Change in Bantam Contingent Consideration (Amounts in thousands) | Period | 2022 | 2021 | | :------------------------------------------------ | :----- | :----- | | Change in contingent consideration (3 months) | $(1,300) | $0 | | Change in contingent consideration (9 months) | $(3,470) | $(5,687) | | Contingent consideration at end of period (3 months) | $0 | $3,470 | | Contingent consideration at end of period (9 months) | $0 | $3,470 | - The $1.3 million reduction in Bantam's contingent consideration was due to lower projected sales for its Foodservice business[39] Note 3 – Long-Term Debt The company maintains a $150 million unsecured revolving credit facility expiring in March 2025 - The company has an unsecured credit facility allowing borrowings up to $150 million, expiring on March 19, 2025[44] - No borrowings were outstanding under the facility at March 31, 2022, or June 30, 2021[46] - The facility contains restrictive covenants, including an interest coverage ratio not less than 2.5 to 1 and a consolidated leverage ratio not greater than 3.5 to 1[45] Note 4 – Commitments and Contingencies The company has routine legal matters and a significant capital commitment for a facility expansion - The company has a significant remaining commitment of approximately $46 million for a capacity expansion project in Horse Cave, Kentucky[48] - Various claims and litigation matters are not expected to have a material effect on the consolidated financial statements[47] Note 5 – Goodwill and Other Intangible Assets This note details goodwill allocation and a $12.3 million impairment charge for Bantam's intangible assets Goodwill by Segment (Amounts in thousands) | Segment | March 31, 2022 | June 30, 2021 | | :-------- | :------------- | :------------ | | Retail | $157,400 | $157,400 | | Foodservice | $51,000 | $51,000 | - An impairment charge of $12.3 million was recorded to write off the net carrying value of Bantam's intangible assets[51] Total Net Carrying Value of Other Intangible Assets (Amounts in thousands) | Date | Amount | | :----------- | :----- | | March 31, 2022 | $41,969 | | June 30, 2021 | $58,766 | Note 6 – Income Taxes This note provides details on prepaid federal, state, and local income taxes included in Other Current Assets Prepaid Income Taxes (Amounts in thousands) | Type | March 31, 2022 | June 30, 2021 | | :-------------------- | :------------- | :------------ | | Prepaid federal income taxes | $6,500 | $5,100 | | Prepaid state and local income taxes | $1,700 | $1,100 | Note 7 – Business Segment Information The company operates in two reportable segments, Retail and Foodservice, with both showing sales growth but declining operating income - The company's financial results are presented as two reportable segments: Retail and Foodservice[59] Segment Net Sales (Amounts in thousands) | Segment | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Retail | $213,128 | $198,358 | $682,102 | $614,653 | | Foodservice | $190,366 | $158,891 | $541,875 | $466,848 | | Total | $403,494 | $357,249 | $1,223,977 | $1,081,501 | Segment Operating Income (Amounts in thousands) | Segment | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Retail | $22,213 | $41,179 | $119,997 | $144,557 | | Foodservice | $18,556 | $21,088 | $52,690 | $66,845 | | Nonallocated Restructuring and Impairment Charges | $(22,723) | $0 | $(23,749) | $0 | | Corporate Expenses | $(25,663) | $(24,879) | $(70,738) | $(66,468) | | Total | $(7,617) | $37,388 | $78,200 | $144,934 | Note 8 – Stock-Based Compensation This note details stock-based compensation expenses and unrecognized costs for various equity awards Stock-Based Compensation Expense (Amounts in thousands) | Type | Three Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2022 | | :-------------------------- | :------------------------------ | :----------------------------- | | SSSARs compensation expense | $900 | $2,900 | | Restricted stock compensation expense | $1,300 | $3,700 | | Performance units compensation expense | $300 | $800 | - An initial grant of performance units was made in August 2021, with a vesting period of 3 years[67] - At March 31, 2022, unrecognized compensation expense totaled $3.9 million for SSSARs, $7.3 million for restricted stock, and $2.9 million for performance units[68][69][70] 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, condition, and future outlook OVERVIEW - Lancaster Colony Corporation manufactures and markets specialty food products, with over 95% of products sold in the United States[74][76] - The company's growth strategy includes new products, distribution expansion, strategic licensing, and complementary acquisitions[76] - Significant investments include a capacity expansion in Kentucky and an ongoing ERP system replacement, Project Ascent[77] RECENT EVENTS - The company's two major priorities during the COVID-19 pandemic are employee health and safety and maintaining the food supply chain[80] - COVID-19 has shifted consumer demand towards at-home food consumption, impacting segment sales differently[82] - Operational results have been unfavorably impacted by higher wage rates, increased PPE costs, and lower efficiency due to COVID-19[82] RESULTS OF CONSOLIDATED OPERATIONS Consolidated Financial Performance (Amounts in thousands, except per share data) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :------------------------------ | :------------------------------ | :------- | :------- | | Net Sales | $403,494 | $357,249 | $46,245 | 13% | | Gross Profit | $68,332 | $90,550 | $(22,218) | (25)% | | Operating (Loss) Income | $(7,617) | $37,388 | $(45,005) | (120)% | | Net (Loss) Income | $(4,483) | $28,897 | $(33,380) | (116)% | | Diluted Net (Loss) Income Per Common Share | $(0.17) | $1.05 | $(1.22) | (116)% | | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net Sales | $1,223,977 | $1,081,501 | $142,476 | 13% | | Gross Profit | $257,301 | $290,049 | $(32,748) | (11)% | | Operating Income | $78,200 | $144,934 | $(66,734) | (46)% | | Net Income | $60,542 | $110,606 | $(50,064) | (45)% | | Diluted Net Income Per Common Share | $2.20 | $4.01 | $(1.81) | (45)% | - Consolidated gross profit decreased due to unprecedented inflationary costs for commodities, packaging, freight, and labor[88][89] - Operating income for Q3 2022 was negatively impacted by $22.7 million in restructuring and impairment charges[96][98][100] RESULTS OF OPERATIONS - SEGMENTS Retail Segment Retail sales grew due to pricing, but operating income declined significantly as cost inflation outpaced price increases Retail Segment Performance (Amounts in thousands) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Sales | $213,128 | $198,358 | $682,102 | $614,653 | | Operating Income | $22,213 | $41,179 | $119,997 | $144,557 | | Operating Margin | 10.4% | 20.8% | 17.6% | 23.5% | - Retail segment sales were driven by pricing actions and volume gains for Chick-fil-A sauces and Sister Schubert's rolls[106] - Retail operating income decreased due to increased commodity, packaging, freight, and labor costs, with pricing actions lagging cost inflation[106][107] Foodservice Segment Foodservice sales grew from pricing and demand, but operating income fell due to higher costs and supply chain challenges Foodservice Segment Performance (Amounts in thousands) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Sales | $190,366 | $158,891 | $541,875 | $466,848 | | Operating Income | $18,556 | $21,088 | $52,690 | $66,845 | | Operating Margin | 9.7% | 13.3% | 9.7% | 14.3% | - Foodservice net sales grew due to inflationary pricing and increased demand, despite a 2% decrease in sales volume for the quarter[109] - Foodservice operating income decreased, reflecting increased commodity, packaging, freight, and labor costs[111][112] Corporate Expenses Corporate expenses increased due to higher investments in personnel and the company's ERP initiative, Project Ascent Corporate Expenses (Amounts in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended March 31 | $25,663 | $24,879 | | Nine Months Ended March 31 | $70,738 | $66,468 | Project Ascent Expenses (Amounts in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended March 31 | $10,300 | $10,800 | | Nine Months Ended March 31 | $28,300 | $27,600 | - The increase in corporate expenses reflects increased investments in personnel and higher expenditures for Project Ascent[113][114] LOOKING FORWARD - Net sales are expected to continue benefiting from pricing actions in both Retail and Foodservice segments[115] - The inflationary environment and broad-based supply chain challenges are anticipated to persist[115] - The impact of the COVID-19 pandemic on financial results remains difficult to forecast[116] FINANCIAL CONDITION Cash Flows Operating cash flow decreased significantly due to working capital changes and lower net income, while investing cash use increased Cash Flow Summary (Nine Months Ended March 31, Amounts in thousands) | Activity | 2022 | 2021 | Change | | :-------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $58,651 | $138,699 | $(80,048) | | Net cash used in investing activities | $(105,065) | $(56,162) | $(48,903) | | Net cash used in financing activities | $(74,556) | $(69,689) | $(4,867) | - The decrease in operating cash flow was primarily due to changes in net working capital and lower net income[117] - Increased cash used in investing activities reflects a higher level of payments for property additions, including capacity expansion projects[118] Liquidity and Capital Resources The company believes existing cash, operating cash flows, and its credit facility are sufficient to meet liquidity needs - The company has an unsecured revolving credit facility of up to $150 million, with no outstanding borrowings[120] - The company was in compliance with all applicable financial covenants of its credit facility at March 31, 2022[121] - Liquidity is expected to be adequate for needs including projected capital expenditures of approximately $150 million for fiscal 2022[123][124] CRITICAL ACCOUNTING POLICIES - There have been no changes in critical accounting policies from those disclosed in the company's 2021 Annual Report on Form 10-K[127] RECENT ACCOUNTING PRONOUNCEMENTS - There are no recently issued or adopted accounting standards that will impact the company's consolidated financial statements[128] FORWARD-LOOKING STATEMENTS - Forward-looking statements are subject to risks including the COVID-19 pandemic, inflationary pressures, and supply chain disruptions[129][130] - The company undertakes no obligation to update such forward-looking statements, except as required by law[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risks have not materially changed from those disclosed in its 2021 Annual Report on Form 10-K - The company's market risks have not changed materially from those disclosed in its 2021 Annual Report on Form 10-K[130] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[131] - No material changes were made to the company's internal control over financial reporting during the most recent fiscal quarter[132] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company has no environmental matters to disclose in this Form 10-Q - Applying a $1 million threshold, there are no environmental matters to disclose in this Form 10-Q[134] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2021 Annual Report - There have been no material changes to the risk factors disclosed in the company's 2021 Annual Report on Form 10-K[135] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 13,386 shares in February 2022 under its authorized share repurchase program - As of March 31, 2022, 1,226,096 common shares remained authorized for future repurchases[136] Common Stock Repurchases (February 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------ | :----------------------------- | :--------------------------- | | February 1-28, 2022 | 13,386 | $160.38 | Item 6. Exhibits This section refers to the Index to Exhibits for a complete list of documents filed with the report - A complete list of exhibits is provided in the Index to Exhibits[137] SIGNATURES - The report was signed on May 5, 2022, by the CEO and CFO[141][142] INDEX TO EXHIBITS - The index lists various exhibits, including Sarbanes-Oxley certifications and XBRL documents[144]