UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
(Mark One)
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 20172021
or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-04065
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Lancaster Colony Corporation |
(Exact name of registrant as specified in its charter) |
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Ohio | | 13-1955943 | | | | | | | | | |
Ohio | | 13-1955943 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification No.)
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380 Polaris Parkway | Suite 400 Westerville, Ohio
| | 43082 |
Westerville | Ohio | | 43082 |
(Address of principal executive offices) | | (Zip Code) |
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614-224-7141(614) | 224-7141 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, without par value | LANC | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ý | | Accelerated filer | | ¨☐ |
Non-accelerated filer | | o (Do not check if a smaller reporting company) ☐ | | Smaller reporting company | | ¨☐ |
| | | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý
As of January 18, 2018,14, 2022, there were 27,451,989approximately 27,535,000 shares of Common Stock, without par value, outstanding.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | (Amounts in thousands, except share data) | December 31, 2017 | | June 30, 2017 | (Amounts in thousands, except share data) | December 31, 2021 | | June 30, 2021 |
ASSETS | ASSETS | ASSETS |
Current Assets: | | | | Current Assets: | |
Cash and equivalents | $ | 178,767 |
| | $ | 143,104 |
| Cash and equivalents | $ | 114,011 | | | $ | 188,055 | |
Receivables | 68,360 |
| | 69,922 |
| Receivables | 104,769 | | | 97,897 | |
Inventories: | | | | Inventories: | |
Raw materials | 34,679 |
| | 28,447 |
| Raw materials | 56,291 | | | 48,895 | |
Finished goods | 42,980 |
| | 47,929 |
| Finished goods | 98,874 | | | 72,980 | |
Total inventories | 77,659 |
| | 76,376 |
| Total inventories | 155,165 | | | 121,875 | |
Other current assets | 18,311 |
| | 11,744 |
| Other current assets | 15,462 | | | 15,654 | |
Total current assets | 343,097 |
| | 301,146 |
| Total current assets | 389,407 | | | 423,481 | |
Property, Plant and Equipment: | | | | Property, Plant and Equipment: | |
Land, buildings and improvements | 127,419 |
| | 124,673 |
| Land, buildings and improvements | 293,099 | | | 252,174 | |
Machinery and equipment | 282,294 |
| | 272,582 |
| Machinery and equipment | 459,998 | | | 424,015 | |
Total cost | 409,713 |
| | 397,255 |
| Total cost | 753,097 | | | 676,189 | |
Less accumulated depreciation | 224,695 |
| | 216,584 |
| Less accumulated depreciation | 331,357 | | | 311,567 | |
Property, plant and equipment-net | 185,018 |
| | 180,671 |
| Property, plant and equipment-net | 421,740 | | | 364,622 | |
Other Assets: | | | | Other Assets: | |
Goodwill | 168,030 |
| | 168,030 |
| Goodwill | 208,371 | | | 208,371 | |
Other intangible assets-net | 58,189 |
| | 60,162 |
| Other intangible assets-net | 55,463 | | | 58,766 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 21,906 | | | 22,455 | |
Other noncurrent assets | 10,142 |
| | 6,396 |
| Other noncurrent assets | 23,310 | | | 23,590 | |
Total | $ | 764,476 |
| | $ | 716,405 |
| Total | $ | 1,120,197 | | | $ | 1,101,285 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current Liabilities: | | | | Current Liabilities: | |
Accounts payable | $ | 52,579 |
| | $ | 41,353 |
| Accounts payable | $ | 127,771 | | | $ | 110,338 | |
Accrued liabilities | 32,490 |
| | 35,270 |
| Accrued liabilities | 45,061 | | | 63,585 | |
Total current liabilities | 85,069 |
| | 76,623 |
| Total current liabilities | 172,832 | | | 173,923 | |
Noncurrent Operating Lease Liabilities | | Noncurrent Operating Lease Liabilities | 16,248 | | | 17,228 | |
Other Noncurrent Liabilities | 43,531 |
| | 38,598 |
| Other Noncurrent Liabilities | 24,647 | | | 28,285 | |
Deferred Income Taxes | 14,867 |
| | 25,207 |
| Deferred Income Taxes | 41,461 | | | 38,702 | |
Commitments and Contingencies |
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| Commitments and Contingencies | 0 | | 0 |
Shareholders’ Equity: | | | | Shareholders’ Equity: | |
Preferred stock-authorized 3,050,000 shares; outstanding-none |
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| Preferred stock-authorized 3,050,000 shares; outstanding-none | 0 | | 0 |
Common stock-authorized 75,000,000 shares; outstanding-December-27,450,957 shares; June-27,448,424 shares | 117,203 |
| | 115,174 |
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Common stock-authorized 75,000,000 shares; outstanding-December-27,533,957 shares; June-27,531,040 shares | | Common stock-authorized 75,000,000 shares; outstanding-December-27,533,957 shares; June-27,531,040 shares | 133,419 | | | 128,617 | |
Retained earnings | 1,250,416 |
| | 1,206,671 |
| Retained earnings | 1,504,535 | | | 1,482,220 | |
Accumulated other comprehensive loss | (8,825 | ) | | (8,936 | ) | Accumulated other comprehensive loss | (8,170) | | | (8,253) | |
Common stock in treasury, at cost | (737,785 | ) | | (736,932 | ) | Common stock in treasury, at cost | (764,775) | | | (759,437) | |
Total shareholders’ equity | 621,009 |
| | 575,977 |
| Total shareholders’ equity | 865,009 | | | 843,147 | |
Total | $ | 764,476 |
| | $ | 716,405 |
| Total | $ | 1,120,197 | | | $ | 1,101,285 | |
See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended December 31, | | Six Months Ended December 31, |
(Amounts in thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 | (Amounts in thousands, except per share data) | 2021 | | 2020 | | 2021 | | 2020 |
Net Sales | $ | 319,665 |
| | $ | 326,773 |
| | $ | 618,581 |
| | $ | 618,134 |
| Net Sales | $ | 428,427 | | | $ | 375,015 | | | $ | 820,483 | | | $ | 724,252 | |
Cost of Sales | 235,724 |
| | 233,034 |
| | 459,163 |
| | 443,761 |
| Cost of Sales | 331,825 | | | 268,170 | | | 631,514 | | | 524,753 | |
Gross Profit | 83,941 |
| | 93,739 |
| | 159,418 |
| | 174,373 |
| Gross Profit | 96,602 | | | 106,845 | | | 188,969 | | | 199,499 | |
Selling, General and Administrative Expenses | 36,676 |
| | 34,381 |
| | 67,827 |
| | 64,261 |
| Selling, General and Administrative Expenses | 51,538 | | | 48,247 | | | 103,394 | | | 96,445 | |
Change in Contingent Consideration | | Change in Contingent Consideration | (2,170) | | | — | | | (2,170) | | | (5,687) | |
Restructuring and Impairment Charges | | Restructuring and Impairment Charges | 1,928 | | | — | | | 1,928 | | | 1,195 | |
Operating Income | 47,265 |
| | 59,358 |
| | 91,591 |
| | 110,112 |
| Operating Income | 45,306 | | | 58,598 | | | 85,817 | | | 107,546 | |
Other, Net | 412 |
| | 206 |
| | 770 |
| | 293 |
| Other, Net | 111 | | | (27) | | | 131 | | | (23) | |
Income Before Income Taxes | 47,677 |
| | 59,564 |
| | 92,361 |
| | 110,405 |
| Income Before Income Taxes | 45,417 | | | 58,571 | | | 85,948 | | | 107,523 | |
Taxes Based on Income | 1,757 |
| | 20,608 |
| | 17,055 |
| | 38,049 |
| Taxes Based on Income | 11,047 | | | 13,941 | | | 20,923 | | | 25,814 | |
| Net Income | $ | 45,920 |
| | $ | 38,956 |
| | $ | 75,306 |
| | $ | 72,356 |
| Net Income | $ | 34,370 | | | $ | 44,630 | | | $ | 65,025 | | | $ | 81,709 | |
| Net Income Per Common Share: | | | | | | | | Net Income Per Common Share: | | | | | | | |
Basic | $ | 1.67 |
| | $ | 1.42 |
| | $ | 2.74 |
| | $ | 2.64 |
| Basic | $ | 1.25 | | | $ | 1.62 | | | $ | 2.36 | | | $ | 2.97 | |
Diluted | $ | 1.67 |
| | $ | 1.42 |
| | $ | 2.74 |
| | $ | 2.63 |
| Diluted | $ | 1.25 | | | $ | 1.62 | | | $ | 2.36 | | | $ | 2.96 | |
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Cash Dividends Per Common Share | $ | 0.60 |
| | $ | 0.55 |
| | $ | 1.15 |
| | $ | 1.05 |
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Weighted Average Common Shares Outstanding: | | | | | | | | Weighted Average Common Shares Outstanding: | |
Basic | 27,396 |
| | 27,366 |
| | 27,396 |
| | 27,364 |
| Basic | 27,443 | | | 27,479 | | | 27,451 | | | 27,470 | |
Diluted | 27,460 |
| | 27,441 |
| | 27,456 |
| | 27,435 |
| Diluted | 27,464 | | | 27,518 | | | 27,490 | | | 27,507 | |
See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended December 31, | | Six Months Ended December 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 | (Amounts in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Net Income | $ | 45,920 |
| | $ | 38,956 |
| | $ | 75,306 |
| | $ | 72,356 |
| Net Income | $ | 34,370 | | | $ | 44,630 | | | $ | 65,025 | | | $ | 81,709 | |
Other Comprehensive Income: | | | | | | | | Other Comprehensive Income: | |
Defined Benefit Pension and Postretirement Benefit Plans: | | | | | | | | Defined Benefit Pension and Postretirement Benefit Plans: | |
Amortization of loss, before tax | 134 |
| | 168 |
| | 268 |
| | 338 |
| Amortization of loss, before tax | 100 | | | 168 | | | 200 | | | 336 | |
Amortization of prior service credit, before tax | (46 | ) | | (45 | ) | | (91 | ) | | (90 | ) | Amortization of prior service credit, before tax | (46) | | | (46) | | | (91) | | | (91) | |
Total Other Comprehensive Income, Before Tax | 88 |
| | 123 |
| | 177 |
| | 248 |
| Total Other Comprehensive Income, Before Tax | 54 | | | 122 | | | 109 | | | 245 | |
Tax Attributes of Items in Other Comprehensive Income: | | | | | | | | Tax Attributes of Items in Other Comprehensive Income: | | | | | | | |
Amortization of loss, tax | (50 | ) | | (62 | ) | | (99 | ) | | (125 | ) | Amortization of loss, tax | (24) | | | (39) | | | (47) | | | (78) | |
Amortization of prior service credit, tax | 17 |
| | 17 |
| | 33 |
| | 33 |
| Amortization of prior service credit, tax | 11 | | | 11 | | | 21 | | | 21 | |
Total Tax Expense | (33 | ) | | (45 | ) | | (66 | ) | | (92 | ) | Total Tax Expense | (13) | | | (28) | | | (26) | | | (57) | |
Other Comprehensive Income, Net of Tax | 55 |
| | 78 |
| | 111 |
| | 156 |
| Other Comprehensive Income, Net of Tax | 41 | | | 94 | | | 83 | | | 188 | |
Comprehensive Income | $ | 45,975 |
| | $ | 39,034 |
| | $ | 75,417 |
| | $ | 72,512 |
| Comprehensive Income | $ | 34,411 | | | $ | 44,724 | | | $ | 65,108 | | | $ | 81,897 | |
See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Six Months Ended December 31, | | Six Months Ended December 31, |
(Amounts in thousands) | 2017 | | 2016 | (Amounts in thousands) | 2021 | | 2020 |
Cash Flows From Operating Activities: | | | | Cash Flows From Operating Activities: | | | |
Net income | $ | 75,306 |
| | $ | 72,356 |
| Net income | $ | 65,025 | | | $ | 81,709 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Impacts of noncash items: | | | | Impacts of noncash items: | |
Depreciation and amortization | 13,030 |
| | 11,943 |
| Depreciation and amortization | 22,844 | | | 21,197 | |
Change in acquisition-related contingent consideration | 993 |
| | 224 |
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Change in contingent consideration | | Change in contingent consideration | (2,170) | | | (5,687) | |
Deferred income taxes and other changes | (9,732 | ) | | (153 | ) | Deferred income taxes and other changes | 2,854 | | | 2,272 | |
Stock-based compensation expense | 2,313 |
| | 2,155 |
| Stock-based compensation expense | 4,863 | | | 3,542 | |
Restructuring and impairment charges | | Restructuring and impairment charges | 1,928 | | | 1,195 | |
| Pension plan activity | (248 | ) | | (122 | ) | Pension plan activity | (274) | | | (87) | |
Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | |
Receivables | 1,561 |
| | (3,931 | ) | Receivables | (6,872) | | | (926) | |
Inventories | (1,283 | ) | | (3,589 | ) | Inventories | (33,290) | | | (23,999) | |
Other current assets | (6,705 | ) | | 918 |
| Other current assets | (892) | | | 140 | |
Accounts payable and accrued liabilities | 8,720 |
| | (3,679 | ) | Accounts payable and accrued liabilities | (12,036) | | | 11,500 | |
Net cash provided by operating activities | 83,955 |
| | 76,122 |
| Net cash provided by operating activities | 41,980 | | | 90,856 | |
Cash Flows From Investing Activities: | | | | Cash Flows From Investing Activities: | | | |
Cash paid for acquisitions, net of cash acquired | (318 | ) | | (34,997 | ) | |
Payments for property additions | (15,287 | ) | | (11,838 | ) | Payments for property additions | (66,695) | | | (29,554) | |
| Other-net | 11 |
| | 94 |
| Other-net | 87 | | | (364) | |
Net cash used in investing activities | (15,594 | ) | | (46,741 | ) | Net cash used in investing activities | (66,608) | | | (29,918) | |
Cash Flows From Financing Activities: | | | | Cash Flows From Financing Activities: | | | |
Payment of dividends | (31,561 | ) | | (28,794 | ) | Payment of dividends | (42,710) | | | (39,925) | |
Purchase of treasury stock | (853 | ) | | (8 | ) | Purchase of treasury stock | (5,338) | | | (19) | |
Tax withholdings for stock-based compensation | (284 | ) | | (152 | ) | Tax withholdings for stock-based compensation | (61) | | | (2,435) | |
| Other-net | | Other-net | (1,307) | | | (451) | |
Net cash used in financing activities | (32,698 | ) | | (28,954 | ) | Net cash used in financing activities | (49,416) | | | (42,830) | |
| Net change in cash and equivalents | 35,663 |
| | 427 |
| Net change in cash and equivalents | (74,044) | | | 18,108 | |
Cash and equivalents at beginning of year | 143,104 |
| | 118,080 |
| Cash and equivalents at beginning of year | 188,055 | | | 198,273 | |
Cash and equivalents at end of period | $ | 178,767 |
| | $ | 118,507 |
| Cash and equivalents at end of period | $ | 114,011 | | | $ | 216,381 | |
Supplemental Disclosure of Operating Cash Flows: | | | | Supplemental Disclosure of Operating Cash Flows: | | | |
Net cash payments for income taxes | $ | 32,457 |
| | $ | 37,383 |
| Net cash payments for income taxes | $ | 16,593 | | | $ | 16,338 | |
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See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
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| | Six Months Ended December 31, 2021 |
(Amounts in thousands, except per share data) | | Common Stock Outstanding | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
Balance, June 30, 2021 | | 27,531 | | | $ | 128,617 | | | $ | 1,482,220 | | | $ | (8,253) | | | $ | (759,437) | | | $ | 843,147 | |
Net income | | | | | | 30,655 | | | | | | | 30,655 | |
Net pension and postretirement benefit gains, net of $13 tax effect | | | | | | | | 42 | | | | | 42 | |
Cash dividends - common stock ($0.75 per share) | | | | | | (20,675) | | | | | | | (20,675) | |
Purchase of treasury stock | | (30) | | | | | | | | | (5,329) | | | (5,329) | |
Stock-based plans | | 29 | | | (59) | | | | | | | | | (59) | |
Stock-based compensation expense | | | | 2,274 | | | | | | | | | 2,274 | |
Balance, September 30, 2021 | | 27,530 | | | $ | 130,832 | | | $ | 1,492,200 | | | $ | (8,211) | | | $ | (764,766) | | | $ | 850,055 | |
Net income | | | | | | 34,370 | | | | | | | 34,370 | |
Net pension and postretirement benefit gains, net of $13 tax effect | | | | | | | | 41 | | | | | 41 | |
Cash dividends - common stock ($0.80 per share) | | | | | | (22,035) | | | | | | | (22,035) | |
Purchase of treasury stock | | — | | | | | | | | | (9) | | | (9) | |
Stock-based plans | | 4 | | | (2) | | | | | | | | | (2) | |
Stock-based compensation expense | | | | 2,589 | | | | | | | | | 2,589 | |
Balance, December 31, 2021 | | 27,534 | | | $ | 133,419 | | | $ | 1,504,535 | | | $ | (8,170) | | | $ | (764,775) | | | $ | 865,009 | |
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See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(UNAUDITED)
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| | Six Months Ended December 31, 2020 |
(Amounts in thousands, except per share data) | | Common Stock Outstanding | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
Balance, June 30, 2020 | | 27,524 | | | $ | 125,153 | | | $ | 1,421,121 | | | $ | (12,070) | | | $ | (750,904) | | | $ | 783,300 | |
Net income | | | | | | 37,079 | | | | | | | 37,079 | |
Net pension and postretirement benefit gains, net of $29 tax effect | | | | | | | | 94 | | | | | 94 | |
Cash dividends - common stock ($0.70 per share) | | | | | | (19,270) | | | | | | | (19,270) | |
Purchase of treasury stock | | — | | | | | | | | | (15) | | | (15) | |
Stock-based plans | | 16 | | | (1,854) | | | | | | | | | (1,854) | |
Stock-based compensation expense | | | | 1,772 | | | | | | | | | 1,772 | |
Balance, September 30, 2020 | | 27,540 | | | $ | 125,071 | | | $ | 1,438,930 | | | $ | (11,976) | | | $ | (750,919) | | | $ | 801,106 | |
Net income | | | | | | 44,630 | | | | | | | 44,630 | |
Net pension and postretirement benefit gains, net of $28 tax effect | | | | | | | | 94 | | | | | 94 | |
Cash dividends - common stock ($0.75 per share) | | | | | | (20,655) | | | | | | | (20,655) | |
Purchase of treasury stock | | — | | | | | | | | | (4) | | | (4) | |
Stock-based plans | | 7 | | | (581) | | | | | | | | | (581) | |
Stock-based compensation expense | | | | 1,770 | | | | | | | | | 1,770 | |
Balance, December 31, 2020 | | 27,547 | | | $ | 126,260 | | | $ | 1,462,905 | | | $ | (11,882) | | | $ | (750,923) | | | $ | 826,360 | |
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See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lancaster Colony Corporation and our wholly-owned subsidiaries, collectively referred to as “we,” “us,” “our,” “registrant” or the “Company” and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and SEC Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the interim condensed consolidated financial statements are considered to be of a normal recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our 20172021 Annual Report on Form 10-K. Unless otherwise noted, the term “year” and references to a particular year pertain to our fiscal year, which begins on July 1 and ends on June 30; for example, 20182022 refers to fiscal 2018,2022, which is the period from July 1, 20172021 to June 30, 2018.2022.
Effective July 1, 2017, David A. Ciesinski, our PresidentDeferred Software Costs
We capitalize certain costs related to hosting arrangements that are service contracts (cloud computing arrangements). Capitalized costs are included in Other Current Assets or Other Noncurrent Assets and Chief Operating Officer, succeeded John B. Gerlach, Jr. as Chief Executive Officer (“CEO”). As Presidentare amortized on a straight-line basis over the estimated useful life. For the six months ended December 31, 2021 and CEO, Mr. Ciesinski became our principal executive officer2020, we capitalized $1.1 million and chief operating decision maker (“CODM”). This change resulted in modifications$2.8 million, respectively, of deferred software costs related to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, beginning on July 1, 2017, our segment reporting structure was amended to align with these changes, and our financial results are now presented as two reportable segments: Retail and Foodservice. See Note 8 for additional details. All historical information was retroactively conformed to the current presentation.cloud computing arrangements.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, except for those acquired as part of a business combination, which are recorded at fair value at the time of purchase. We use the straight-line method of computing depreciation for financial reporting purposes based on the estimated useful lives of the corresponding assets. Purchases of property, plant and equipment included in Accounts Payable and excluded from the property additions and the change in accounts payable in the Condensed Consolidated Statements of Cash Flows were as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Construction in progress in Accounts Payable | $ | 446 |
| | $ | 1,298 |
|
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Construction in progress in Accounts Payable | $ | 26,080 | | | $ | 3,415 | |
Accrued Workers Compensation - Noncurrentand Employee Benefits
Accrued workers compensation and employee benefits included in Other NoncurrentAccrued Liabilities was $12.6$14.9 million and $8.5$32.5 million at December 31, 20172021 and June 30, 2017,2021, respectively.
Earnings Per Share
Earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock and common stock equivalents (restricted stock, and stock-settled stock appreciation rights)rights and performance units) outstanding during each period. Unvested shares of restricted stock granted to employees are considered participating securities since employees receive nonforfeitable dividends prior to vesting and, therefore, are included in the earnings allocation in computing EPS under the two-class method. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with nonparticipating restricted stock, and stock-settled stock appreciation rights.rights and performance units.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Basic and diluted net income per common share were calculated as follows:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 45,920 |
| | $ | 38,956 |
| | $ | 75,306 |
| | $ | 72,356 |
| Net income | $ | 34,370 | | | $ | 44,630 | | | $ | 65,025 | | | $ | 81,709 | |
Net income available to participating securities | (73 | ) | | (77 | ) | | (119 | ) | | (142 | ) | Net income available to participating securities | (98) | | | (94) | | | (185) | | | (173) | |
Net income available to common shareholders | $ | 45,847 |
| | $ | 38,879 |
| | $ | 75,187 |
| | $ | 72,214 |
| Net income available to common shareholders | $ | 34,272 | | | $ | 44,536 | | | $ | 64,840 | | | $ | 81,536 | |
| | | | | | | | | | | | | | | |
Weighted average common shares outstanding – basic | 27,396 |
| | 27,366 |
| | 27,396 |
| | 27,364 |
| Weighted average common shares outstanding – basic | 27,443 | | | 27,479 | | | 27,451 | | | 27,470 | |
Incremental share effect from: | | | | | | | | Incremental share effect from: | |
Nonparticipating restricted stock | 3 |
| | 3 |
| | 4 |
| | 4 |
| Nonparticipating restricted stock | 2 | | | 2 | | | 3 | | | 3 | |
Stock-settled stock appreciation rights | 61 |
| | 72 |
| | 56 |
| | 67 |
| Stock-settled stock appreciation rights | 19 | | | 37 | | | 34 | | | 34 | |
Performance units | | Performance units | — | | | — | | | 2 | | | — | |
Weighted average common shares outstanding – diluted | 27,460 |
| | 27,441 |
| | 27,456 |
| | 27,435 |
| Weighted average common shares outstanding – diluted | 27,464 | | | 27,518 | | | 27,490 | | | 27,507 | |
| | | | | | | | | | | | | | | |
Net income per common share – basic | $ | 1.67 |
| | $ | 1.42 |
| | $ | 2.74 |
| | $ | 2.64 |
| Net income per common share – basic | $ | 1.25 | | | $ | 1.62 | | | $ | 2.36 | | | $ | 2.97 | |
Net income per common share – diluted | $ | 1.67 |
| | $ | 1.42 |
| | $ | 2.74 |
| | $ | 2.63 |
| Net income per common share – diluted | $ | 1.25 | | | $ | 1.62 | | | $ | 2.36 | | | $ | 2.96 | |
Accumulated Other Comprehensive Loss
The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
Accumulated other comprehensive loss at beginning of period | $ | (8,880 | ) | | $ | (11,272 | ) | | $ | (8,936 | ) | | $ | (11,350 | ) | Accumulated other comprehensive loss at beginning of period | $ | (8,211) | | | $ | (11,976) | | | $ | (8,253) | | | $ | (12,070) | |
Defined Benefit Pension Plan Items: | | | | | | | | Defined Benefit Pension Plan Items: | |
Amortization of unrecognized net loss | 143 |
| | 178 |
| | 286 |
| | 357 |
| Amortization of unrecognized net loss | 107 | | | 173 | | | 214 | | | 346 | |
Postretirement Benefit Plan Items: | | | | | | | | Postretirement Benefit Plan Items: | |
Amortization of unrecognized net gain | (9 | ) | | (10 | ) | | (18 | ) | | (19 | ) | Amortization of unrecognized net gain | (7) | | | (5) | | | (14) | | | (10) | |
Amortization of prior service credit | (46 | ) | | (45 | ) | | (91 | ) | | (90 | ) | Amortization of prior service credit | (46) | | | (46) | | | (91) | | | (91) | |
Total other comprehensive income, before tax | 88 |
| | 123 |
| | 177 |
| | 248 |
| Total other comprehensive income, before tax | 54 | | | 122 | | | 109 | | | 245 | |
Total tax expense | (33 | ) | | (45 | ) | | (66 | ) | | (92 | ) | Total tax expense | (13) | | | (28) | | | (26) | | | (57) | |
Other comprehensive income, net of tax | 55 |
| | 78 |
| | 111 |
| | 156 |
| Other comprehensive income, net of tax | 41 | | | 94 | | | 83 | | | 188 | |
| Accumulated other comprehensive loss at end of period | $ | (8,825 | ) | | $ | (11,194 | ) | | $ | (8,825 | ) | | $ | (11,194 | ) | Accumulated other comprehensive loss at end of period | $ | (8,170) | | | $ | (11,882) | | | $ | (8,170) | | | $ | (11,882) | |
Significant Accounting Policies
There were no changes to our Significant Accounting Policies from those disclosed in our 20172021 Annual Report on Form 10-K.
Recently IssuedRecent Accounting Standards
In March 2017, the Financial Accounting Standards Board (“FASB”)There are no recently issued newor adopted accounting guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by disaggregating the service cost component from the other components of net periodic benefit cost. The amendments require an employer to present service cost in the same line item(s) as compensation costs for the pertinent employees whereas the other components of net periodic benefit cost must be reported separately from service cost and outside of income from operations. The amendments also allow only the service cost component to be eligible for capitalization. The amendments require retrospective application for the income statement presentation provisions and prospective application for the capitalization of the service cost component. However, as a result of prior years’ restructuring activities, we no longer have any active employees continuing to accrue service cost. Therefore, the service cost provisions are not applicable to us, and we expect only changes in classification on the income statement. The guidancestandards that will be effective for us in fiscal 2019 including interim periods.impact our consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
In May 2014, the FASB issued new accounting guidance for the recognition of revenue and issued subsequent clarifications of this new guidance in 2016 and 2017. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This model is based on a control approach rather than the current risks and rewards model. The new guidance would also require expanded disclosures. Since we do not plan to early adopt this standard, the guidance will be effective for us in fiscal 2019 including interim periods and will require either retrospective application to each prior period presented or modified retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. We are currently evaluating the method of adoption but believe that we will apply the modified retrospective approach. We are currently assessing the impact that this standard will have on our accounting policies, processes, system requirements, internal controls and disclosures using internal resources and the assistance of a third party. We have established a project plan, completed an initial review of selected customer contracts and are evaluating the impact of the new standard on certain common practices currently employed by us and by other manufacturers of consumer products. We have not yet determined the impact that this standard will have on our financial position, results of operations and the related notes to the consolidated financial statements.
In February 2016, the FASB issued new accounting guidance to require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record a right-of-use asset and a lease liability based upon the present value of the lease payments. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the consolidated financial statements. The guidance will be effective for us in fiscal 2020 including interim periods using a modified retrospective approach. We are currently evaluating the impact of this guidance.
Recently Adopted Accounting Standards
In March 2016, the FASB issued new accounting guidance to simplify the accounting for stock-based compensation. The amendments include changes to the accounting for share-based payment transactions, including: the inclusion of the tax consequences related to stock-based compensation within the computation of income tax expense versus equity; the classification of awards as either equity or liabilities; and the classification of share-based activity on the statement of cash flows. The adoption may result in increased volatility to our income tax expense and resulting net income in future periods dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. We adopted the new guidance on July 1, 2017 and elected to continue to estimate forfeitures. The adoption of this guidance resulted in 1) the prospective recognition of windfall tax benefits and shortfall tax deficiencies in income tax expense; 2) the retrospective reclassification of windfall tax benefits on the Condensed Consolidated Statements of Cash Flows from financing activities to operating activities; and 3) the retrospective reclassification of employee tax withholdings on the Condensed Consolidated Statements of Cash Flows from operating activities to financing activities. There was no material impact on our condensed consolidated financial statements as a result of this adoption.
Note 2 – Acquisition
On November 17, 2016, we acquired substantially all of the assets of Angelic Bakehouse, Inc. (“Angelic”). Angelic, a privately owned manufacturer and marketer of premium sprouted grain bakery products, is based near Milwaukee, Wisconsin. The purchase price of $35.5 million was funded by cash on hand and includes immaterial post-closing adjustments, which were paid in April 2017 and July 2017, but excludes contingent consideration relating to an additional earn-out payment which is tied to performance-based conditions. In general, the terms of the acquisition specify that the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021. We are unable to provide a range for the amount of this earn-out because it is based on the future adjusted EBITDA of Angelic, and the earn-out does not contain a minimum or maximum value. See further discussion of the earn-out in Note 3. Angelic is reported in our Retail segment, and its results of operations have been included in our condensed consolidated financial statements from the date of acquisition.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 3 – Fair Value
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:
Level 1 – defined as observable inputs, such as quoted market prices in active markets.
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and equivalents, accounts receivable, accounts payable, and contingent consideration payable.payable and defined benefit pension plan assets. The estimated fair value of cash and equivalents, accounts receivable and accounts payable approximates their carrying value.
Our contingent consideration, which resulted from the earn-out associated with our acquisition of Bantam Bagels, LLC (“Bantam”), is measured at fair value on a recurring basis and is included in Other Noncurrent Liabilities on the Condensed Consolidated Balance Sheets.Liabilities. The following table summarizes our contingent consideration:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Contingent consideration - Bantam | $ | — | | | $ | — | | | $ | 1,300 | | | $ | 1,300 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Fair Value Measurements at June 30, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Contingent consideration - Bantam | $ | — | | | $ | — | | | $ | 3,470 | | | $ | 3,470 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2017 |
| Level 1 | Level 2 | Level 3 | Total |
Acquisition-related contingent consideration | $ | — |
| $ | — |
| $ | 16,021 |
| $ | 16,021 |
|
| | | | |
| Fair Value Measurements at June 30, 2017 |
| Level 1 | Level 2 | Level 3 | Total |
Acquisition-related contingent consideration | $ | — |
| $ | — |
| $ | 15,028 |
| $ | 15,028 |
|
Bantam Contingent ConsiderationTheThis contingent consideration resulted from the earn-out associated with our November 17, 2016October 19, 2018 acquisition of Angelic. The purchase price did not include the future earn-out payment which is tied to performance-based conditions.Bantam. In general, the terms of the acquisition specify that the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of AngelicBantam for fiscal 2021.the twelve months ending December 31, 2023. The initial fair value of the contingent consideration was estimateddetermined to be $8.0 million. The fair value is measured on a recurring basis using a present value approach, which incorporates factors such as business risksMonte Carlo simulation that randomly changes revenue growth, forecasted adjusted EBITDA and projections,other uncertain variables to estimate an expected value. ThisWe record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, and thusit represents a Level 3 measurement within the fair value hierarchy. Using this valuation technique,
Our fair value measurement at December 31, 2021 resulted in a $2.2 million reduction in the fair value of theBantam’s contingent consideration based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023, as well as a refinement to the estimated probabilities applied to our forecast scenarios. The changes in forecasted adjusted EBITDA primarily reflected lower projected sales levels for Bantam’s Retail business while the changes in estimated probabilities reflected a lower likelihood of attaining certain Foodservice business. We recorded $1.3 million of this adjustment in our Foodservice segment and $0.9 million in our Retail segment.
Our fair value measurement at September 30, 2020 resulted in a $5.7 million reduction in the fair value of Bantam’s contingent consideration based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023. The changes in forecasted adjusted EBITDA primarily reflected the impact of a SKU rationalization by a Foodservice customer resulting in the loss of sales to that customer after November 30, 2020. This adjustment was determined to be $13.9 million at November 17, 2016.recorded in our Foodservice segment.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table represents our Level 3 fair value measurements using significant other unobservable inputs for acquisition-relatedBantam’s contingent consideration:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Contingent consideration at beginning of period | $ | 3,470 | | | $ | 3,470 | | | $ | 3,470 | | | $ | 9,157 | |
| | | | | | | |
Change in contingent consideration included in operating income | (2,170) | | | — | | | (2,170) | | | (5,687) | |
Contingent consideration at end of period | $ | 1,300 | | | $ | 3,470 | | | $ | 1,300 | | | $ | 3,470 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Acquisition-related contingent consideration at beginning of period | $ | 15,516 |
| | $ | — |
| | $ | 15,028 |
| | $ | — |
|
Additions | — |
| | 13,872 |
| | — |
| | 13,872 |
|
Changes in fair value included in Selling, General and Administrative Expenses | 505 |
| | 224 |
| | 993 |
| | 224 |
|
Acquisition-related contingent consideration at end of period | $ | 16,021 |
| | $ | 14,096 |
| | $ | 16,021 |
| | $ | 14,096 |
|
Note 43 – Long-Term Debt
At December 31, 20172021 and June 30, 2017,2021, we had an unsecured credit facility (“Facility”) under which we could borrow, on a revolving credit basis, up to a maximum of $150$150 million at any one time, with potential to expand the total credit availability to $225$225 million subject to us obtaining based on consent of the issuing banks and certain other conditions. The Facility expires on April 8, 2021,March 19, 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternativealternate base rate defined in the Facility. In the event that LIBOR becomes unavailable or is no longer deemed an appropriate reference rate, the Facility at our option.allows for the use of a benchmark replacement rate. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
At December 31, 2017 and June 30, 2017, we had no borrowings outstanding under the Facility. At December 31, 2017, we had $5.1 million of standby letters of credit outstanding, which reduced the amount available for borrowing on the Facility. We paid no interest for the three and six months ended December 31, 2017 and 2016.
The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions. There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a consolidated leverage ratio not greater than 33.5 to 1, at all times.subject to certain exceptions. The interest coverage ratio is calculated by dividing Consolidated EBIT by Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Net Debt by Consolidated EBITDA. All financial terms used in the covenant calculations are defined more specifically in the Facility.
At December 31, 2021 and June 30, 2021, we had no borrowings outstanding under the Facility. At December 31, 2021 and June 30, 2021, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. We paid no interest for the three and six months ended December 31, 2021 and 2020. Note 54 – Commitments and Contingencies
At December 31, 2017,2021, we were a party to various claims and litigation matters arising in the ordinary course of business. Such matters did not have a material effect on the current-year results of operations and, in our opinion, their ultimate disposition will not have a material effect on our consolidated financial statements.
WithWe have a significant remaining commitment of approximately $60 million related to a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky.
Our acquisition of Angelic, we haveBantam included a provision for contingent liability recordedconsideration for the earn-out associated with thethis transaction. See further discussion in Note 3.2.
Note 65 – Goodwill and Other Intangible Assets
As described in Notes 1 and 8, we changed our reportable segments as of July 1, 2017 when our organizational structure changed. Using a relative fair value approach, we reassigned our existing goodwill balance to the two new reporting units that directly align with our new Retail and Foodservice reportable segments. Based on this approach, goodwillGoodwill attributable to the Retail and Foodservice segments was $119.3$157.4 million and $48.7$51.0 million, respectively, at December 31, 20172021 and June 30, 2017.2021.
The following table summarizes our identifiable other intangible assets.
|
| | | | | | | |
| December 31, 2017 | | June 30, 2017 |
Tradenames (20 to 30-year life) | | | |
Gross carrying value | $ | 50,321 |
| | $ | 50,321 |
|
Accumulated amortization | (4,100 | ) | | (3,130 | ) |
Net carrying value | $ | 46,221 |
| | $ | 47,191 |
|
Trademarks (27-year life) | | | |
Gross carrying value | $ | 370 |
| | $ | 370 |
|
Accumulated amortization | (286 | ) | | (241 | ) |
Net carrying value | $ | 84 |
| | $ | 129 |
|
Customer Relationships (10 to 15-year life) | | | |
Gross carrying value | $ | 14,207 |
| | $ | 14,207 |
|
Accumulated amortization | (7,722 | ) | | (7,160 | ) |
Net carrying value | $ | 6,485 |
| | $ | 7,047 |
|
Technology / Know-how (10-year life) | | | |
Gross carrying value | $ | 6,350 |
| | $ | 6,350 |
|
Accumulated amortization | (1,364 | ) | | (1,047 | ) |
Net carrying value | $ | 4,986 |
| | $ | 5,303 |
|
Non-compete Agreements (5-year life) | | | |
Gross carrying value | $ | 791 |
| | $ | 791 |
|
Accumulated amortization | (378 | ) | | (299 | ) |
Net carrying value | $ | 413 |
| | $ | 492 |
|
Total net carrying value | $ | 58,189 |
| | $ | 60,162 |
|
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes our identifiable other intangible assets:
| | | | | | | | | | | |
| December 31, 2021 | | June 30, 2021 |
| | | |
| | | |
Tradenames (20 to 30-year life) | | | |
Gross carrying value | $ | 62,531 | | | $ | 62,531 | |
Accumulated amortization | (13,701) | | | (12,421) | |
Net carrying value | $ | 48,830 | | | $ | 50,110 | |
| | | |
| | | |
| | | |
| | | |
Customer Relationships (2 to 15-year life) | | | |
Gross carrying value | $ | 15,207 | | | $ | 17,507 | |
Accumulated amortization | (12,215) | | | (12,912) | |
Net carrying value | $ | 2,992 | | | $ | 4,595 | |
Technology / Know-how (10-year life) | | | |
Gross carrying value | $ | 8,020 | | | $ | 8,020 | |
Accumulated amortization | (4,379) | | | (3,973) | |
Net carrying value | $ | 3,641 | | | $ | 4,047 | |
Non-compete Agreements (5-year life) | | | |
Gross carrying value | $ | 191 | | | $ | 191 | |
Accumulated amortization | (191) | | | (177) | |
Net carrying value | $ | — | | | $ | 14 | |
Total net carrying value | $ | 55,463 | | | $ | 58,766 | |
In the three months ended December 31, 2021, we recorded an impairment charge of $0.9 million related to Bantam’s Retail customer relationships intangible asset, which reflects lower projected cash flows for Bantam’s Retail business. The impairment charge represents the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful life of the intangible asset. The impairment charge is reflected in Restructuring and Impairment Charges and was recorded in our Retail segment.
In the three months ended September 30, 2020, we recorded impairment charges of $1.2 million related to certain tradename and technology / know-how intangible assets for Bantam, which reflected the impact of a SKU rationalization by a Foodservice customer resulting in the loss of sales to that customer after November 30, 2020. The impairment charges represent the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful lives of the intangible assets. The impairment charges are reflected in Restructuring and Impairment Charges and were recorded in our Foodservice segment. We also reduced the remaining useful life for Bantam’s Foodservice customer relationship and have recorded accelerated amortization expense.
Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses, was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Amortization expense | $ | 1,006 |
| | $ | 846 |
| | $ | 1,973 |
| | $ | 1,537 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Amortization expense | $ | 1,260 | | | $ | 1,508 | | | $ | 2,401 | | | $ | 2,849 | |
Total annual amortization expense for each of the next five years is estimated to be as follows:
| | | | | |
| |
2023 | $ | 4,047 | |
2024 | $ | 4,047 | |
2025 | $ | 3,787 | |
2026 | $ | 3,157 | |
2027 | $ | 2,986 | |
|
| | | |
| |
2019 | $ | 3,858 |
|
2020 | $ | 3,823 |
|
2021 | $ | 3,738 |
|
2022 | $ | 3,664 |
|
2023 | $ | 3,105 |
|
LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 76 – Income Taxes
The Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law on December 22, 2017 with an effective date of January 1, 2018. Most notably, the Tax Act reduced the statutory federal income tax rate for corporations from 35% to 21%. Since we file our tax return based on our fiscal year, the statutory tax rate for our 2018 tax return will be a blended rate of approximately 28.1%. In addition to the effect of the lower overall federal tax rate, the Tax Act resulted in a $9 million one-time benefit for the preliminary re-measurement of our net deferred tax liability in the quarter ended December 31, 2017.
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. We have recorded an estimate of the impact of the Tax Act within our December 31, 2017 financial statements, including the impact of items recorded within accumulated other comprehensive loss and do not expect material changes to the amounts initially recorded. However, we will continue to evaluate the impacts of the Tax Act and record adjustments, as needed, based on changes to our estimates. The FASB has proposed new accounting guidance regarding the treatment of the impact of the Tax Act on those items recorded within accumulated other comprehensive loss, but this guidance has not been finalized.
Prepaid federal income taxes of $10.9$3.9 million and $6.1$5.1 million were included in Other Current Assets at December 31, 20172021 and June 30, 2017,2021, respectively. Prepaid state and local income taxes of $1.1$0.7 million and $0.9$1.1 million were included in Other Current Assets at December 31, 20172021 and June 30, 2017,2021, respectively.
Note 87 – Business Segment Information
Effective July 1, 2017, David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as CEO. As President and CEO, Mr. Ciesinski became our principal executive officer and CODM. This change resulted in modifications to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, beginning on July 1, 2017, our segment reporting structure was amended to align with these changes, and ourOur financial results are now presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. All historical information was retroactively conformed to the current presentation. These segment changes had no effect on previously reported consolidated net sales, operating income, net income or earnings per share.
Retail - The vast majority of the products we sell in the Retail segment are sold through sales personnel, food brokers and distributors.distributors in the United States. We have placement of products in U.S. grocery produce departments through our refrigerated salad dressings, vegetable dips and fruit dips, and croutons.dips. Our flatbread products and sprouted grain bakery products are generally placed in the specialty bakery/deli section of the grocery store. We also have products typically marketed in the shelf-stable section of the grocery store, which include salad dressing,dressings, slaw dressing, dry egg noodlessauces and croutons. Within the frozen food section of the grocery store, we also have prominent market positions of frozensell yeast rolls, garlic breads and egg noodles.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
mini stuffed bagels.
Foodservice - The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors. Productsdistributors in the United States. Most of the products we sell in the Foodservice segment are often custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls. The majority of our Foodservice sales are products sold under branded and private label to distributorsrestaurants. We also manufacture and restaurants primarily insell various branded Foodservice products to distributors. Finally, within this segment, we sold other roll products under a temporary supply agreement resulting from the United States. Additionally, a portionacquisition of Omni Baking Company LLC. The temporary supply agreement was terminated effective October 31, 2020.
As many of our salesproducts are dressing packets, frozen specialty noodles, pasta and flatbreads sold to industrial customers for use as ingredients or components in their products.
Withinsimilar between our organization,two segments, our procurement, manufacturing, warehousing and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity, as many of our products are similar between the two segments.productivity. Consequently, we do not prepare, and the CODMour Chief Operating Decision Maker does not review, separate balance sheets for the reportable segments. As such, our external reporting willdoes not include the presentation of identifiable assets by reportable segment. The composition of our identifiable assets at December 31, 20172021 is generally consistent with that of June 30, 2017.2021.
We continue to evaluate our Retail and Foodservice segments based on net sales and operating income. income which follow:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net Sales | | | | | | | |
Retail | $ | 245,085 | | | $ | 222,570 | | | $ | 468,974 | | | $ | 416,295 | |
Foodservice | 183,342 | | | 152,445 | | | 351,509 | | | 307,957 | |
Total | $ | 428,427 | | | $ | 375,015 | | | $ | 820,483 | | | $ | 724,252 | |
Operating Income | | | | | | | |
Retail | $ | 49,606 | | | $ | 60,720 | | | $ | 97,784 | | | $ | 103,378 | |
Foodservice | 18,309 | | | 18,336 | | | 34,134 | | | 45,757 | |
Nonallocated Restructuring and Impairment Charges (1) | (1,026) | | | — | | | (1,026) | | | — | |
Corporate Expenses | (21,583) | | | (20,458) | | | (45,075) | | | (41,589) | |
Total | $ | 45,306 | | | $ | 58,598 | | | $ | 85,817 | | | $ | 107,546 | |
(1)Reflects restructuring and impairment charges related to a facility closure that were not allocated to our two reportable segments due to their unusual nature.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following summarytable sets forth net sales disaggregated by class of financial information reflects the results ofsimilar products for the Retail and Foodservice segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Retail | | | | | | | |
Shelf-stable dressings, sauces and croutons | $ | 87,334 | | | $ | 64,575 | | | $ | 177,861 | | | $ | 123,519 | |
Frozen breads | 110,379 | | | 103,686 | | | 185,098 | | | 176,529 | |
Refrigerated dressings, dips and other | 47,372 | | | 54,309 | | | 106,015 | | | 116,247 | |
Total Retail net sales | $ | 245,085 | | | $ | 222,570 | | | $ | 468,974 | | | $ | 416,295 | |
Foodservice | | | | | | | |
Dressings and sauces | $ | 136,038 | | | $ | 111,225 | | | $ | 260,797 | | | $ | 226,176 | |
Frozen breads and other | 47,304 | | | 40,282 | | | 90,712 | | | 78,074 | |
Other roll products | — | | | 938 | | | — | | | 3,707 | |
Total Foodservice net sales | $ | 183,342 | | | $ | 152,445 | | | $ | 351,509 | | | $ | 307,957 | |
Total net sales | $ | 428,427 | | | $ | 375,015 | | | $ | 820,483 | | | $ | 724,252 | |
The following table provides an additional disaggregation of Foodservice net sales by type of customer:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Foodservice | | | | | | | |
National accounts | $ | 141,753 | | | $ | 116,827 | | | $ | 267,881 | | | $ | 234,905 | |
Branded and other | 41,589 | | | 34,680 | | | 83,628 | | | 69,345 | |
Other roll products | — | | | 938 | | | — | | | 3,707 | |
Total Foodservice net sales | $ | 183,342 | | | $ | 152,445 | | | $ | 351,509 | | | $ | 307,957 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net Sales | | | | | | | |
Retail | $ | 179,286 |
| | $ | 182,794 |
| | $ | 341,430 |
| | $ | 335,456 |
|
Foodservice | 140,379 |
| | 143,979 |
| | 277,151 |
| | 282,678 |
|
Total | $ | 319,665 |
| | $ | 326,773 |
| | $ | 618,581 |
| | $ | 618,134 |
|
Operating Income | | | | | | | |
Retail | $ | 37,316 |
| | $ | 42,905 |
| | $ | 70,183 |
| | $ | 77,711 |
|
Foodservice | 13,409 |
| | 19,147 |
| | 28,097 |
| | 39,166 |
|
Corporate Expenses | (3,460 | ) | | (2,694 | ) | | (6,689 | ) | | (6,765 | ) |
Total | $ | 47,265 |
| | $ | 59,358 |
| | $ | 91,591 |
| | $ | 110,112 |
|
Note 98 – Stock-Based Compensation
There have been no changes to our stock-based compensation plans from thoseplan as disclosed in our 20172021 Annual Report on Form 10-K. However, as permitted under this plan, we made an initial grant of performance units in August 2021. These performance units have either a market condition or a performance condition and will vest 3 years after the grant date. Dividend equivalents earned during the vesting period will be paid at the time the awards vest.
Our stock-settled stock appreciation rights (“SSSARs”) compensation expense was $0.5$1.0 million and $0.4$0.8 million for the three months ended December 31, 20172021 and 2016,2020, respectively. Year-to-date SSSARs compensation expense was $1.1$2.0 million for the current-year period compared to $0.9$1.7 million for the prior-year period. At December 31, 2017,2021, there was $3.0$4.7 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of 2 years.
Our restricted stock compensation expense was $0.6$1.3 million and $0.9 million for the three months ended December 31, 20172021 and 2016 and $1.22020, respectively. Year-to-date restricted stock compensation expense was $2.4 million for the six months ended December 31, 2017 and 2016.current-year period compared to $1.8 million for the prior-year period. At December 31, 2017,2021, there was $2.9$8.5 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of 2 years.
Our performance units compensation expense was $0.3 million for the three months ended December 31, 2021. Year-to-date performance units compensation expense was $0.5 million for the current-year period. At December 31, 2021, there was $3.2 million of unrecognized compensation expense related to performance units that we will recognize over a weighted-average period of 3 years.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 20182022 refers to fiscal 2018,2022, which is the period from July 1, 20172021 to June 30, 2018.2022.
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto, all included elsewhere in this report.report, and our 2021 Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements due to these factors. For more information, see the section below entitled “Forward-Looking Statements.”
OVERVIEW
Business Overview
Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.
Effective July 1, 2017, David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as our Chief Executive Officer (“CEO”). As President and CEO, Mr. Ciesinski became our principal executive officer and chief operating decision maker (“CODM”). This change resulted in modifications to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, beginning on July 1, 2017, our segment reporting structure was amended to align with these changes, and ourOur financial results are now presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. All historical information was retroactively conformed
Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the current presentation. These segment changes had no effect on previously reported consolidated net sales, operating income, net income or earnings per share. See Note 8 tofuture based upon existing operations. We do not have any fixed assets located outside of the condensed consolidated financial statements for further information about our segments.
Our sales are predominately domestic.United States.
Our business has the potential to achieve future growth in sales and profitability due to attributes such as:
•leading Retail market positions in several product categories with a high-quality perception;
•recognized innovation in Retail products;
•a broad customer base in both Retail and Foodservice accounts;
•well-regarded culinary expertise among Foodservice customers;
•recognized leadership in Foodservice product development;
•experience in integrating complementary business acquisitions; and
•historically strong cash flow generation that supports growth opportunities.
Our goal is to grow both Retail and Foodservice segment sales over time by:
•introducing new products and expanding distribution;
•leveraging the strength of our Retail brands to increase current product sales;
introducing new products and •expanding distribution; andRetail growth through strategic licensing agreements;
•continuing to rely upon the strength of our reputation in Foodservice product development and quality.quality; and
Part•acquiring complementary businesses.
With respect to long-term growth, we continually evaluate the future opportunities and needs for our business specific to our plant infrastructure, IT platforms and other initiatives to support and strengthen our operations. Recent examples of resulting investments include:
•a significant capacity expansion project for our Marzetti dressing and sauce facility in Horse Cave, Kentucky that we expect to complete in the first half of fiscal 2023;
•a capacity expansion project for one of our Marzetti dressing and sauce facilities in Columbus, Ohio that was completed in January 2022;
•a significant infrastructure improvement and capacity expansion project for our frozen pasta facility in Altoona, Iowa that we expect to complete during the third quarter of fiscal 2022;
•a significant capacity expansion project for our Sister Schubert’s frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020; and
•the establishment of a Transformation Program Office in 2019 that serves to coordinate our various capital and integration efforts, including our enterprise resource planning system (“ERP”) project and related initiatives, Project Ascent, that is currently underway.
Project Ascent commenced in late 2019 and entails the replacement of our primary customer and manufacturing transactional systems, warehousing systems, and financial systems with an integrated SAP S/4HANA system. Post implementation, Project Ascent will evolve into an on-going Center of Excellence (“COE”) that will provide oversight for all future growth may result from acquisitions. upgrades of the S/4HANA environment, evaluation of future software needs to support the business, acquisition integration support and master
data standards. Most of the on-going COE costs are expected to consist of annual software maintenance and support, consulting and professional fees and wages and benefits.
We also continue to review potential acquisitions that we believe will complement our existing product lines, enhance our profitability and/or offer good expansion opportunities in a manner that fits our overall strategic goals.
Consistent with this acquisition strategy,RECENT EVENTS
A novel strain of coronavirus (“COVID-19”) was first identified in November 2016 we acquired substantiallyWuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. COVID-19 has surfaced in all regions around the world and resulted in business slowdowns or shutdowns. In the U.S., state and local governments recommended or mandated actions intended to slow the transmission of the assetsCOVID-19. These measures included limitations on public gatherings, social distancing requirements, travel restrictions, closures of Angelic Bakehouse, Inc. (“Angelic”), a manufacturerbars and marketer of premium sprouted grain bakery products based near Milwaukee, Wisconsin. This transaction is discussed in further detail in Note 2dine-in restaurants, stay-at-home orders, quarantines and restrictions that prohibited many non-essential employees from going to the condensed consolidated financial statements.work.
We have made substantial capital investments two major priorities while navigating through this period of volatility and uncertainty:
1.to ensure the health, safety and welfare of our employees; and
2.to continue to play our part in the vital food supply chain by adequately supplying our customers while maintaining the financial strength of our business.
With respect to our efforts to ensure the health, safety and welfare of our employees, we continue to monitor the latest guidance from authorities, including the Centers for Disease Control and Prevention and other federal, state and local public health departments, regarding COVID-19 and adopt the appropriate measures to ensure we continue to operate safely and support our existing foodemployees. We also engaged a pulmonology and critical care physician to advise us on our employee safety protocols. Based on the advice of these experts and our commitment to the health, safety and welfare of our employees, we implemented some policy changes and put in place a range of safety modifications and guidelines in our factories, distribution centers and offices, including but not limited to:
•conducted extensive cleaning and sanitation of workstations and common areas before, during, and after each shift;
•employed social distancing guidelines and modifications at workspaces and in break areas;
•staggered the timing of shift changes and breaks;
•adjusted our attendance requirements and paid leave policy; and
•provided every employee an extra vacation day in 2021 to allow flexibility with scheduling COVID-19 vaccination appointments.
After 16 months and once the vaccine became broadly available, we discontinued our temporary incentive pay compensation (“hero pay”) to our front-line employees at the end of fiscal 2021.
With respect to our second priority, we have experienced some disruptions to our shipping and warehousing operations and future growth opportunities. For example, we recently started a project to expand processingour sourcing of raw materials and warehousing capacity at Angelicpackaging, particularly during the quarter ended December 31, 2021. We have secured additional second-sourcing options to help meet anticipated growth inlimit the risk of supply disruptions and have also secured additional warehousing space to accommodate higher inventory levels needed to service our customers.
The effects of COVID-19 on consumer behavior have impacted the relative demand for our sprouted grain bakeryRetail and Foodservice products. Based on our current plans and expectations, we believe our capital expenditures for 2018 could approximate $30 million. We anticipate we will be able to fund allSpecifically, since the onset of the COVID-19 pandemic near the end of our capital needsfiscal 2020 third quarter, there has been an overall shift in 2018consumer demand towards increased at-home food consumption and away from in-restaurant dining. While this shift in demand has been inconsistent and volatile, on balance it has positively impacted our Retail segment sales and negatively impacted our Foodservice segment sales. From an operations standpoint, the shift in demand combined with cash generated from operations.other COVID-19-related issues such as higher hourly wage rates paid to our front-line employees, increased costs for personal protective equipment, higher expenditures attributed to incremental co-manufacturing volumes, increased complexity and uncertainty in production planning and forecasting, and overall lower levels of efficiency in our production and distribution network have unfavorably impacted the operating results of both our segments.
RESULTS OF CONSOLIDATED OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Net Sales | $ | 428,427 | | | $ | 375,015 | | | $ | 53,412 | | | 14 | % | | $ | 820,483 | | | $ | 724,252 | | | $ | 96,231 | | | 13 | % |
Cost of Sales | 331,825 | | | 268,170 | | | 63,655 | | | 24 | % | | 631,514 | | | 524,753 | | | 106,761 | | | 20 | % |
Gross Profit | 96,602 | | | 106,845 | | | (10,243) | | | (10) | % | | 188,969 | | | 199,499 | | | (10,530) | | | (5) | % |
Gross Margin | 22.5 | % | | 28.5 | % | | | | | | 23.0 | % | | 27.5 | % | | | | |
Selling, General and Administrative Expenses | 51,538 | | | 48,247 | | | 3,291 | | | 7 | % | | 103,394 | | | 96,445 | | | 6,949 | | | 7 | % |
Change in Contingent Consideration | (2,170) | | | — | | | (2,170) | | | N/M | | (2,170) | | | (5,687) | | | 3,517 | | | (62) | % |
Restructuring and Impairment Charges | 1,928 | | | — | | | 1,928 | | | N/M | | 1,928 | | | 1,195 | | | 733 | | | 61 | % |
Operating Income | 45,306 | | | 58,598 | | | (13,292) | | | (23) | % | | 85,817 | | | 107,546 | | | (21,729) | | | (20) | % |
Operating Margin | 10.6 | % | | 15.6 | % | | | | | | 10.5 | % | | 14.8 | % | | | | |
Other, Net | 111 | | | (27) | | | 138 | | | 511 | % | | 131 | | | (23) | | | 154 | | | 670 | % |
Income Before Income Taxes | 45,417 | | | 58,571 | | | (13,154) | | | (22) | % | | 85,948 | | | 107,523 | | | (21,575) | | | (20) | % |
Taxes Based on Income | 11,047 | | | 13,941 | | | (2,894) | | | (21) | % | | 20,923 | | | 25,814 | | | (4,891) | | | (19) | % |
Effective Tax Rate | 24.3 | % | | 23.8 | % | | | | | | 24.3 | % | | 24.0 | % | | | | |
Net Income | $ | 34,370 | | | $ | 44,630 | | | $ | (10,260) | | | (23) | % | | $ | 65,025 | | | $ | 81,709 | | | $ | (16,684) | | | (20) | % |
Diluted Net Income Per Common Share | $ | 1.25 | | | $ | 1.62 | | | $ | (0.37) | | | (23) | % | | $ | 2.36 | | | $ | 2.96 | | | $ | (0.60) | | | (20) | % |
Net Sales and Gross Profit
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Net Sales | | | | | | | | | | | | |
| |
|
Retail | $ | 179,286 |
| | $ | 182,794 |
| | $ | (3,508 | ) | | (2 | )% | | $ | 341,430 |
| | $ | 335,456 |
| | $ | 5,974 |
| | 2 | % |
Foodservice | 140,379 |
| | 143,979 |
| | (3,600 | ) | | (3 | )% | | 277,151 |
| | 282,678 |
| | (5,527 | ) | | (2 | )% |
Total | $ | 319,665 |
| | $ | 326,773 |
| | $ | (7,108 | ) | | (2 | )% | | $ | 618,581 |
| | $ | 618,134 |
| | $ | 447 |
| | — | % |
Gross Profit | $ | 83,941 |
| | $ | 93,739 |
| | $ | (9,798 | ) | | (10 | )% | | $ | 159,418 |
| | $ | 174,373 |
| | $ | (14,955 | ) | | (9 | )% |
Gross Margin | 26.3 | % | | 28.7 | % | | | | | | 25.8 | % | | 28.2 | % | | | | |
In November 2016, we acquired Angelic and its results of operations have been included in our condensed consolidated financial statements from the date of acquisition in the Retail segment.
Consolidated net sales for the three months ended December 31, 2017 decreased 2% as both the Retail and Foodservice segments experienced net sales declines.2021 increased 14% to a second quarter record $428.4 million versus $375.0 million last year. Consolidated net sales for the six months ended December 31, 2017 were flat as compared2021 increased 13% to $820.5 million versus $724.3 million last year. Sales growth for the priorquarter and year-to-date period asperiods reflected higher Retail segment net sales were largely offset by a declinefor both the Retail and Foodservice segments. Consolidated sales volumes, measured in Foodservice segment net sales.
Consolidated gross profitpounds shipped, increased 6% and related margins declined5% for the three and six months ended December 31, 2017, driven2021, respectively. See discussion of net sales by segment following the discussion of “Earnings Per Share” below.
Gross Profit
Consolidated gross profit for the three months ended December 31, 2021 decreased to $96.6 million compared to $106.8 million in the prior-year period driven by the unfavorable impacts of significantly higher commodity and packaging costs, increased costs to service the shifting demands of our business, incremental expenditures attributed to our increased reliance upon co-manufacturers to help satisfy growing demand, higher freight and warehousing costs, increased labor costs, ingredient and packaging supply shortages, and a less favorable sales mix. Inflationary pricing and our ongoing cost savings programs partially offset these unfavorable impacts.
Consolidated gross profit for the six months ended December 31, 2021 decreased 5% to $189.0 million compared to $199.5 million in the prior-year period as significantly higher commodity and packaging costs, increased costs to service the shifting demands of our business, incremental expenditures attributed to our increased reliance upon co-manufacturers, higher freight and warehousing costs, and increased labor costs more than offset the sales growth and our ongoing cost savings programs.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
SG&A Expenses - Excluding Project Ascent | $ | 42,945 | | | $ | 39,741 | | | $ | 3,204 | | | 8 | % | | $ | 85,372 | | | $ | 79,653 | | | $ | 5,719 | | | 7 | % |
Project Ascent Expenses | 8,593 | | | 8,506 | | | 87 | | | 1 | % | | 18,022 | | | 16,792 | | | 1,230 | | | 7 | % |
Total SG&A Expenses | $ | 51,538 | | | $ | 48,247 | | | $ | 3,291 | | | 7 | % | | $ | 103,394 | | | $ | 96,445 | | | $ | 6,949 | | | 7 | % |
| | | | | | | | | | | | | | | |
Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2021 increased 7% to $51.5 million compared to $48.2 million in the prior-year period. This increase was driven by a higher level of investments to support the continued growth of our business. These investments included a supply chain optimization study, higher brokerage costs attributed to the increased sales, a modest resumption of consumer spending and IT infrastructure improvements. Expenditures for Project Ascent, our ERP initiative, totaled $8.6 million in the current-year quarter versus $8.5 million last year.
SG&A expenses for the six months ended December 31, 2021 increased 7% to $103.4 million compared to $96.4 million in the prior year, reflecting increased investments in personnel and business initiatives to support continued growth as well as higher expenditures for Project Ascent. Project Ascent expenses increased $1.2 million to $18.0 million.
Project Ascent expenses are included within Corporate Expenses. A portion of the costs that have been classified as Project Ascent expenses represent ongoing costs that will continue subsequent to the ERP implementation.
Change in Contingent Consideration
For the three and six months ended December 31, 2021, the change in contingent consideration resulted in a benefit of $2.2 million. This benefit was attributed to a reduction in the fair value of the contingent consideration liability for Bantam Bagels, LLC (“Bantam”) based on our December 31, 2021 fair value measurement. The fair value adjustment was based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023, as well as a refinement to the estimated probabilities applied to our forecast scenarios. We recorded $1.3 million of this adjustment in our Foodservice segment and $0.9 million in our Retail segment.
There was no change in contingent consideration for the three months ended December 31, 2020. For the six months ended December 31, 2020, the change in contingent consideration resulted in a benefit of $5.7 million. This benefit was attributed to a reduction in the fair value of the contingent consideration liability for Bantam based on our September 30, 2020 fair value measurement. The fair value adjustment resulted from the impact of increased commodity costs, most notably eggs, soybean oil, dairy ingredientsa SKU rationalization by a Foodservice customer, and therefore the entire adjustment was reflected within the Foodservice segment.
See further discussion of these adjustments in Note 2 to the condensed consolidated financial statements.
Restructuring and Impairment Charges
In the second quarter of 2022, we committed to a plan to close our frozen garlic bread facility in additionBaldwin Park, California in support of our ongoing efforts to higher freight costsbetter optimize our manufacturing network. Production at the facility ceased in January 2022, and the lower second quarter sales volume. These costs were partially offset by supply chain savings realized fromMamma Bella® brand frozen garlic bread product line was discontinued based on its small size and low profitability. Certain facility clean-up and closure activities are expected to continue into March 2022. The Baldwin Park facility is a leased building with the lease term ending in June 2023. The operations of this facility have not been classified as discontinued operations as the closure does not represent a strategic shift that would have a major effect on our lean six sigma programoperations or financial results. We recorded restructuring and modest inflationary pricing in our Foodservice segment. Excluding the impactimpairment charges of pricing, total raw-material costs were estimated$1.0 million related to have negatively affected our gross margins by 2% and less than 2% of consolidated net salesthis closure for the three and six months ended December 31, 2017, respectively. Higher freight costs2021. The restructuring and impairment charges, which consisted of one-time termination benefits and impairment charges for fixed assets and the operating lease right-of-use asset, were estimatednot allocated to have negatively affected our gross margins by less than 1% of net sales for bothtwo reportable segments due to their unusual nature.
For the three and six months ended December 31, 2017.2021, we also recorded an impairment charge of $0.9 million related to Bantam’s Retail customer relationships intangible asset, which reflects lower projected cash flows for Bantam’s Retail business. The prior-year results for bothimpairment charge represents the quarter and year-to-date periods reflected a notable benefit from significantly lower ingredient costs with only a modest offsetexcess of deflationary pricing.
Selling, General and Administrative Expenses
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
SG&A Expenses | $ | 36,676 |
| | $ | 34,381 |
| | $ | 2,295 |
| | 7 | % | | $ | 67,827 |
| | $ | 64,261 |
| | $ | 3,566 |
| | 6 | % |
SG&A Expenses as a Percentage of Net Sales | 11.5 | % | | 10.5 | % | | | | | | 11.0 | % | | 10.4 | % | | | | |
Selling, general and administrative (“SG&A”) expenses increased 7% and 6%the carrying value over the fair value of estimated discounted cash flows for the threeremaining useful life of the intangible asset and was reflected in our Retail segment.
For the six months ended December 31, 2017, respectively.2020, we recorded impairment charges of $1.2 million related to certain tradename and technology / know-how intangible assets for Bantam as a result of the impact of the above-referenced SKU rationalization by a Foodservice customer. The increase in theseimpairment charges represent the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful lives of the intangible assets and were reflected within our Foodservice segment for the three months ended September 30, 2020.
Operating Income
Operating income decreased 23% to $45.3 million for the three months ended December 31, 2021. In the current-year quarter, operating income was negatively affected by higher commodity and packaging costs, reflected continued investments in personnelincreased co-manufacturing costs, higher freight and strategic business initiativeswarehousing costs, higher labor costs, ingredient and packaging supply shortages, and a higher level of SG&A expenditures to support the continued growth of our future growth and incremental amortization expense and other recurring noncash charges attributed to Angelic.business. These increasesunfavorable factors were partially offset by a lower level of promotional spending. Additionally, the prior-year’s second quarter corporate expenses included a favorable non-recurring item relatedincreased sales volume and pricing actions in addition to closed business operations.
our ongoing cost savings programs.
Operating Income
The foregoing factors contributedincome decreased $21.7 million to consolidated operating income totaling $47.3 million and $91.6$85.8 million for the three and six months ended December 31, 2017, respectively. Our2021. The prior-year period included the $5.7 million benefit related to Bantam’s contingent consideration. In the current year, operating income can be summarized as follows:was
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Operating Income | | | | | | | | | | | | | | | |
Retail | $ | 37,316 |
| | $ | 42,905 |
| | $ | (5,589 | ) | | (13 | )% | | $ | 70,183 |
| | $ | 77,711 |
| | $ | (7,528 | ) | | (10 | )% |
Foodservice | 13,409 |
| | 19,147 |
| | (5,738 | ) | | (30 | )% | | 28,097 |
| | 39,166 |
| | (11,069 | ) | | (28 | )% |
Corporate Expenses | (3,460 | ) | | (2,694 | ) | | (766 | ) | | 28 | % | | (6,689 | ) | | (6,765 | ) | | 76 |
| | (1 | )% |
Total | $ | 47,265 |
| | $ | 59,358 |
| | $ | (12,093 | ) | | (20 | )% | | $ | 91,591 |
| | $ | 110,112 |
| | $ | (18,521 | ) | | (17 | )% |
Operating Margin | | | | | | | | | | | | | | | |
Retail | 20.8 | % | | 23.5 | % | | | | | | 20.6 | % | | 23.2 | % | | | | |
Foodservice | 9.6 | % | | 13.3 | % | | | | | | 10.1 | % | | 13.9 | % | | | | |
Total | 14.8 | % | | 18.2 | % | | | | | | 14.8 | % | | 17.8 | % | | | | |
negatively affected by higher commodity and packaging costs, increased co-manufacturing costs, higher freight and warehousing costs, increased labor costs, a higher level of SG&A expenditures to support the continued growth of our business, and increased expenditures for Project Ascent. These unfavorable factors were partially offset by the increased sales volume and pricing actions in addition to our ongoing cost savings programs.See discussion of operating results by segment following the discussion of “Net Income”“Earnings Per Share” below.
Income Before Income Taxes
As impacted by the factors discussed above, income before income taxes for the three months ended December 31, 2017 decreased by $11.9 million to $47.7 million from the prior-year total of $59.6 million. Income before income taxes for the six months ended December 31, 2017 and 2016 was $92.4 million and $110.4 million, respectively.
Taxes Based on Income
Our effective tax rate was 18.5%24.3% and 34.5%24.0% for the six months ended December 31, 20172021 and 2016,2020, respectively. The current-year rate was impacted by the Tax Cuts and Jobs Act of 2017 (“Tax Act”), which was signed into law on December 22, 2017 with an effective date of January 1, 2018. Most notably, the Tax Act reduced the statutory federal income tax rate for corporations from 35% to 21%. Since we file our tax return based on our fiscal year, the statutory tax rate for our 2018 tax return will be a blended rate of approximately 28.1%. In addition to the effect of the lower overall federal tax rate, the Tax Act resulted in a $9 million one-time benefit for the preliminary re-measurement of our net deferred tax liability in the quarter ended December 31, 2017. Excluding the impact of this one-time benefit, our effective tax rate was 28.3% for the six months ended December 31, 2017, and we expect our effective tax rate to remain at approximately 28.3% for the remainder of our fiscal year. Looking ahead to 2019, we expect an effective tax rate of approximately 24%.
Our taxes based on income for the current year consist of the following components:
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| | | | | | | | | | | | | |
(Dollars in thousands) | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
One-time benefit on preliminary re-measurement of net deferred tax liability | $ | (8,878 | ) | | (18.6 | )% | | $ | (8,878 | ) | | (9.6 | )% |
Net windfall tax benefits - stock-based compensation | (101 | ) | | (0.2 | )% | | (180 | ) | | (0.2 | )% |
Federal, state and local provision | 10,736 |
| | 22.5 | % | | 26,113 |
| | 28.3 | % |
Taxes Based on Income | $ | 1,757 |
| | 3.7 | % | | $ | 17,055 |
| | 18.5 | % |
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. We have recorded an estimate of the impact of the Tax Act within our December 31, 2017 financial statements, including the impact of items recorded within accumulated other comprehensive loss and do not expect material changes to the amounts initially recorded. However, we will continue to evaluate the impacts of the Tax Act and record adjustments, as needed, based on changes to our estimates. The Financial Accounting Standards Board has proposed new accounting guidance regarding the treatment of the impact of the Tax Act on those items recorded within accumulated other comprehensive loss, but this guidance has not been finalized.
On July 1, 2017, we adopted new accounting guidance for stock-based compensation that, among other things, requires the recognition of windfall tax benefits and shortfall tax deficiencies in our income tax expense, instead of equity. For the six months ended December 31, 2017, the impact of net windfall tax benefits reduced2021 and 2020, our effective tax rate by 0.2%. Going forward, this adoptionvaried from the statutory federal income tax rate as a result of the following factors:
| | | | | | | | | | | |
| Six Months Ended December 31, |
| 2021 | | 2020 |
Statutory rate | 21.0 | % | | 21.0 | % |
State and local income taxes | 3.3 | | | 3.4 | |
Net windfall tax benefits - stock-based compensation | — | | | (0.5) | |
Other | — | | | 0.1 | |
Effective rate | 24.3 | % | | 24.0 | % |
We include the tax consequences related to stock-based compensation within the computation of income tax expense. We may result inexperience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. This adoption is discussed in further detail in Note 1 toFor the condensed consolidated financial statements.
Net Income
As influenced by the factors noted above, particularlysix months ended December 31, 2021 and 2020, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by less than 0.1% and 0.5%, respectively.
Earnings Per Share
Diluted net income per share for the Tax Act, second quarter of 2022 totaled $1.25, as compared to $1.62 per diluted share in the prior year. Expenditures for Project Ascent reduced diluted earnings per share by $0.24 and $0.23 for the three months ended December 31, 2021 and 2020, respectively. For the three months ended December 31, 2021, the adjustment to Bantam’s contingent consideration increased diluted earnings per share by $0.06 while restructuring and impairment charges had an unfavorable impact of $0.05 per diluted share.
For the six months ended December 31, 2021, diluted net income for 2018 of $45.9 million increased from the preceding year’s net income for the quarter of $39.0 million and year-to-date net income of $75.3 million was higher thanper share totaled $2.36, as compared to $2.96 per diluted share in the prior year-to-date total of $72.4 million. year. For the six months ended December 31, 2021 and 2020, expenditures for Project Ascent reduced diluted earnings per share by $0.50 and $0.46, respectively; the adjustment to Bantam’s contingent consideration increased diluted earnings per share by $0.06 and $0.16, respectively; and restructuring and impairment charges reduced diluted earnings per share by $0.05 and $0.03, respectively.
Diluted weighted average common shares outstanding have remained relatively stable for the current and prior-year periods ended December 31. As a result, and due to the change in net income for each year, net income per share for the second quarter of 2018 totaled $1.67 per diluted share, as compared to net income of $1.42 per diluted share in the prior year. Year-to-date net income per share was $2.74 per diluted share, as compared to $2.63 per diluted share for the prior-year period. The estimated favorable impact of the Tax Act on second quarter and year-to-date net income was $14.5 million, or $.53 per diluted share, which includes the cumulative effect of a lower federal income tax rate and a $9 million one-time benefit from the preliminary re-measurement of our net deferred tax liability.
RESULTS OF OPERATIONS - SEGMENTS
Retail Segment
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| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Net Sales | $ | 245,085 | | | $ | 222,570 | | | $ | 22,515 | | | 10 | % | | $ | 468,974 | | | $ | 416,295 | | | $ | 52,679 | | | 13 | % |
Operating Income | $ | 49,606 | | | $ | 60,720 | | | $ | (11,114) | | | (18) | % | | $ | 97,784 | | | $ | 103,378 | | | $ | (5,594) | | | (5) | % |
Operating Margin | 20.2 | % | | 27.3 | % | | | | | | 20.9 | % | | 24.8 | % | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Net Sales | $ | 179,286 |
| | $ | 182,794 |
| | $ | (3,508 | ) | | (2 | )% | | $ | 341,430 |
| | $ | 335,456 |
| | $ | 5,974 |
| | 2 | % |
Operating Income | $ | 37,316 |
| | $ | 42,905 |
| | $ | (5,589 | ) | | (13 | )% | | $ | 70,183 |
| | $ | 77,711 |
| | $ | (7,528 | ) | | (10 | )% |
Operating Margin | 20.8 | % | | 23.5 | % | | | | | | 20.6 | % | | 23.2 | % | | | | |
For the three months ended December 31, 2017,2021, Retail segment net sales decreased 2% as growth from Olive Garden® dressings, a full quarter contribution from Angelic, reduced trade spending and lower coupon redemptions were more than offset by disruptions in the production and supply of our New York BRAND® Bakery frozen garlic bread products and a slowdown in late-December outbound shipments due to insufficient freight capacity. The impact of pricing on Retail net sales was minimal.
Year-to-date net sales for the Retail segment reached $341.4$245.1 million, a 2%10% increase from the prior-year total of $335.5 million$222.6 million. In addition to the benefit of inflationary pricing, Retail segment sales were driven by growth fromvolume gains for Chick-fil-A® sauces and Buffalo Wild Wings® sauces, both of which are sold under exclusive licensing agreements, and higher sales of our Olive Garden® dressings and Sister Schubert’s®frozen dinner rolls and incrementalrolls. Retail segment sales from Angelic.volumes, measured in pounds shipped, increased 4%.
For the three and six months ended December 31, 2017,2021, Retail segment net sales increased 13% to $469.0 million compared to the prior-year total of $416.3 million. The increase was driven by volume gains for Chick-fil-A® sauces and Buffalo Wild Wings® sauces, both of which are sold under exclusive licensing agreements, and higher sales of our New York BRAND Bakery® frozen garlic bread. Retail segment sales volumes, measured in pounds shipped, increased 7%.
For the three months ended December 31, 2021, Retail segment operating income and related margins decreased due18% to $49.6 million as the impactunfavorable impacts of lower second quarter sales, increased commodity and freight costs, recent investments in personnel and business growth initiatives and incremental amortization expense and other recurring noncash charges attributed to Angelic. These higher costs were partially offset by supply chain savings realized from our lean six sigma program and lower consumer promotional spending. The prior-year operating income and related margins reflected a significant benefit from lower ingredient costs.
Foodservice Segment
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| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Net Sales | $ | 140,379 |
| | $ | 143,979 |
| | $ | (3,600 | ) | | (3 | )% | | $ | 277,151 |
| | $ | 282,678 |
| | $ | (5,527 | ) | | (2 | )% |
Operating Income | $ | 13,409 |
| | $ | 19,147 |
| | $ | (5,738 | ) | | (30 | )% | | $ | 28,097 |
| | $ | 39,166 |
| | $ | (11,069 | ) | | (28 | )% |
Operating Margin | 9.6 | % | | 13.3 | % | | | | | | 10.1 | % | | 13.9 | % | | | | |
For the three and six months ended December 31, 2017, Foodservice segment net sales decreased 3% and 2%, respectively, reflecting continued overall softness in the restaurant industry resulting in a decline in sales to our national chain restaurant accounts, including limited-time-offer programs, as compared to the prior year. As discussed in the Retail segment, a slowdown in late-December outbound shipments due to insufficient freight capacity also hindered sales. These declines were
partially offset by a modest level of inflationary pricing totaling less than 1% of net sales for both the three and six months ended December 31, 2017.
For the three and six months ended December 31, 2017, the declines in Foodservice segment operating income and related margins were driven by the impact of lower sales volumes, increased commodity and freight costs and recent investments in personnel and business growth initiatives. These higher costs were partially offset by supply chain savings realized from our lean six sigma program and inflationary pricing. The prior-year operating income and related margins reflected a significant benefit from lower ingredient costs that was only partially offset by deflationary pricing.
With regard to the impact of commodity costs on Foodservice segment operating income, most of our supply contracts with national chain restaurant accounts incorporate pricing adjustments to account for changes in ingredient costs. These supply contracts may vary by customer with regard to the time lapse between the actual change in ingredient costs we incur and the effective date of the associated price increase or decrease. As a result, the reported operating margins of the Foodservice segment are subject to increased volatility during periods of rapidly rising or falling ingredient costs because at least some portion of the change in ingredient costs is reflected in the segment’s results prior to the impact of any associated change in pricing. In addition, the Foodservice segment has an inherently higher degree of margin volatility from changes in ingredient costs when compared to the Retail segment due to its overall lower margin profile and higher ratio of ingredient pounds to net sales.
LOOKING FORWARD
Looking forward, we expect our fiscal third quarter net sales to be favorably impacted by the earlier Easter holiday in the current year. We expect volume-driven growth in our Retail segment with support from recent and upcoming new product introductions. Price increases were taken in the Retail segment early in the third quarter as we try to recover the increases in commodity and freight costs we have seen in the first half of the year. To address the disruptions in the production and supply of our frozen garlic bread products, we are implementing corrective actions to recover and meet demand, but expect these sales to remain constrained through the third quarter. In the Foodservice segment, we anticipate sales growth will remain challenged by continued sluggish sales throughout the restaurant industry. However, projected volume growth from select national chain restaurant accounts, a modest level of inflationary pricing and additional Foodservice segment price increases implemented early in the third quarter in response to higher commodity and packaging costs, increased co-manufacturing costs, increased freight and warehousing costs, should help to overcome industry headwinds.
Based on current market conditions, we foresee some abatement in commodityhigher labor costs and freight costs starting iningredient supply shortages more than offset the third quarter, but still expect these costs to remain above last year’s level for the balance of the fiscal year. Supply chain efficiency gains, cost savings from our lean six sigma programinflationary pricing, increased sales volumes and our pricing actions will help offset these higher costs.
FINANCIAL CONDITIONa more favorable sales mix.
For the six months ended December 31, 2017,2021, Retail segment operating income decreased 5% to $97.8 million as higher commodity and packaging costs, increased co-manufacturing costs, increased freight and warehousing expenses and higher labor costs more than offset the inflationary pricing, increased sales volumes and a more favorable sales mix.
Foodservice Segment
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| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Net Sales | $ | 183,342 | | | $ | 152,445 | | | $ | 30,897 | | | 20 | % | | $ | 351,509 | | | $ | 307,957 | | | $ | 43,552 | | | 14 | % |
Operating Income | $ | 18,309 | | | $ | 18,336 | | | $ | (27) | | | — | % | | $ | 34,134 | | | $ | 45,757 | | | $ | (11,623) | | | (25) | % |
Operating Margin | 10.0 | % | | 12.0 | % | | | | | | 9.7 | % | | 14.9 | % | | | | |
For the three months ended December 31, 2021, Foodservice segment net sales grew 20% to $183.3 million compared to $152.4 million in the prior-year period driven by inflationary pricing and volume gains for certain quick-service restaurant and pizza chain customers in our mix of national chain restaurant accounts along with a solid recovery for our branded products as demand for those products in the prior-year quarter was markedly constrained by the impacts of COVID-19. Foodservice sales volume, measured in pounds shipped, increased 7%.
For the six months ended December 31, 2021, Foodservice segment net sales increased 14% to $351.5 million from the prior-year total of $308.0 million driven by inflationary pricing and volume gains for our branded Foodservice products. Foodservice sales volume, measured in pounds shipped, increased 5%. Excluding all sales resulting from the November 2018 acquisition of Omni Baking Company LLC, Foodservice segment net sales increased 16%. Omni sales attributed to a temporary supply agreement totaled $3.7 million in the prior-year period. There were no such sales in the current year as the temporary supply agreement was terminated effective October 31, 2020.
For the three months ended December 31, 2021, Foodservice segment operating income was flat at $18.3 million as inflationary pricing and the $1.3 million benefit recorded to Foodservice from the adjustment to Bantam’s contingent consideration offset increased commodity costs and higher warehousing expenses.
For the six months ended December 31, 2021, Foodservice segment operating income decreased 25% to $34.1 million. The decline in Foodservice segment operating income was driven by the impact of last year’s $5.7 million benefit related to Bantam’s contingent consideration, as well as increased commodity costs and higher warehousing expenses. Operating income was favorably impacted by inflationary pricing and the current-year adjustment to Bantam’s contingent consideration.
Corporate Expenses
For the three months ended December 31, 2021 and 2020, corporate expenses totaled $21.6 million and $20.5 million, respectively. This increase reflects increased investments in personnel. Project Ascent expenses totaled $8.6 million and $8.5 million for the three months ended December 31, 2021 and 2020, respectively.
For the six months ended December 31, 2021 and 2020, corporate expenses totaled $45.1 million and $41.6 million, respectively. This increase reflects increased investments in personnel and higher expenditures for Project Ascent, which totaled $18.0 million and $16.8 million for the six months ended December 31, 2021 and 2020, respectively. For the six months ended December 31, 2021 and 2020, we also capitalized an additional $1.1 million and $2.8 million, respectively, of ERP-related expenditures for application development stage activities.
LOOKING FORWARD
Looking forward to our fiscal third quarter, we expect our licensing program to remain an important source of growth for Retail segment sales while our Foodservice segment should continue to benefit from higher demand for our branded Foodservice products and growth from select quick-service restaurant and pizza chain customers in our mix of national chain restaurant accounts. We anticipate the inflationary environment and the supply chain disruptions and challenges that have resulted in increased costs to produce our products and service our customers to continue in the coming quarter, including higher commodity costs, particularly for soybean oil, along with increased costs for packaging, freight, warehousing and labor.
Inflationary pricing in both the Retail and Foodservice segments will help to partially offset the higher costs along with our ongoing cost savings programs and other net price realization efforts.
Our fiscal third quarter financial results will continue to be impacted by the COVID-19 pandemic, which has caused shifts in consumer demand between the retail and foodservice channels, complicated our production planning and resulted in higher costs to produce our products and service our customers. The extent of this impact on our financial results is difficult to forecast due to ongoing regional ebbs and flows of COVID-19 cases and the associated changes to the COVID-19 guidelines provided by or mandates imposed by health authorities and government agencies, which creates uncertainty for the restaurant industry and consumer behavior over an unpredictable timeline.
FINANCIAL CONDITION
Cash Flows
For the six months ended December 31, 2021, net cash provided by operating activities totaled $84.0$42.0 million, as compared to $76.1$90.9 million in the prior-year period. This increasedecrease was primarily due to higherthe year-over-year changes in net income, increases in noncash charges for depreciation and amortization, an increase in the noncash acquisition-related contingent consideration and lower working capital, requirements, partially offset by the decrease in deferred income taxes as a result of the Tax Act. The lower level of working capital requirements occurred primarily withinparticularly accounts payable and accrued liabilities, as well as inventories. The favorable cash flow impact of higher accounts payable was more pronounced in the prior year due to extended payment terms,fluctuations in production levels for the comparative periods. The changes in accrued liabilities are primarily related to larger current-year declines in the accruals for compensation and receivables, as a result of the timing of shipmentsemployee benefits. The larger current-year change in inventories reflects increased commodity costs and related payment termsoverall higher quantities on-hand to major customers, offset somewhat by other current assets duebetter service our customers. Lower net income also contributed to the timingreduced level of estimated tax payments and the favorable impact of the Tax Act.cash provided by operating activities.
Cash used in investing activities for the six months ended December 31, 20172021 was $15.6$66.6 million, as compared to $46.7$29.9 million in the prior year. This decreaseincrease primarily reflects cash paid for the acquisition of Angelic in November 2016, as partially offset by a higher level of payments for property additions in the current year. Notable current-year capital expenditures include spending on: a capacity expansion project at our dressing and sauce facility in 2018, withHorse Cave, Kentucky that we expect to complete in the largest amounts spent on new equipmentfirst half of fiscal 2023; a capacity expansion project for one of our Marzetti dressing and sauce facilities in Columbus, Ohio that was completed in January 2022; and infrastructure improvements and capacity expansion investments at our frozen pasta facility in Altoona, Iowa that we expect to increase capacity and/or improve operational efficiencies.complete in the third quarter of fiscal 2022.
Cash used in financing activities for the six months ended December 31, 20172021 of $32.7$49.4 million increased from the prior-year total of $29.0$42.8 million. This increase was primarily due to a higher dividend payments in the current year. There was also an increase inlevel of share repurchases of $0.8 million in the six months ended December 31, 2017. At December 31, 2017, 1,404,289 shares remained authorized for future buyback under the existing share repurchase program.repurchases.
Liquidity and Capital Resources
Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at December 31, 2017.2021. At December 31, 2017,2021, we had $5.1$2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing onunder the Facility. The Facility expires in April 2021,March 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternativealternate base rate defined in the Facility, at our option.Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.
The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At December 31, 2017,2021, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At December 31, 2017, we2021, there were not aware of any eventno events that would constitute a default under this facility.
We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due.
We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our cash requirements through 2018.liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase significantly and have an adverse effect on our results of operations. Based on our current plans and expectations, we believe our capital expenditures for 2022 could total between $170 and $190 million, which includes approximately $105 million in initial expenditures attributed to a substantial investment for a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky that we expect to complete in the first half of fiscal 2023.
Beyond the next 12 months, we expect that cash provided by operating activities will be the primary source of liquidity for the foreseeable future. This source, combined with our existing balances in cash and equivalents and amounts available under the Facility, is expected to be sufficient to meet our overall cash requirements.
We have various contractual and other obligations that are appropriately recorded as liabilities in our condensed consolidated financial statements. Certain other contractual obligations are not recognized as liabilities in our condensed consolidated financial statements. Examples of such itemsobligations are commitments to purchase raw materials or packaging inventory that has not yet been received as of December 31, 20172021 and future minimuma warehouse lease paymentscommitment that has not yet commenced, as well as purchase orders and longer-term purchase arrangements related to the procurement of services, including IT service agreements, and property, plant and equipment. The majority of these obligations is expected to be due within one year. See further discussion below of our obligation related to the capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky.
In November 2020, T. Marzetti Company (“T. Marzetti”), a wholly-owned subsidiary of ours, entered into a Design/Build Agreement (the “Agreement”) with Gray Construction, Inc. (“Gray”) under which Gray will design, coordinate and build additional dressing and sauce manufacturing and warehousing capacity for the useT. Marzetti facility in Hart County, Kentucky (the “Project”). The Project will result in an expansion of propertythe current facility footprint. Subject to certain conditions in the Agreement, T. Marzetti will pay Gray no more than the guaranteed maximum price of approximately $113 million for the Project. The Agreement contains other terms and equipment under operating lease agreements. Aside from expected changesconditions that are customary for this type of project. Expected to be completed in raw-material costs associated with changes in product demand or pricing, therethe first half of fiscal 2023, we have been no significant changes toa remaining commitment of approximately $60 million for the contractual obligations disclosed in our 2017 Annual Report on Form 10-K.Project.
CRITICAL ACCOUNTING POLICIES
There have been no changes in critical accounting policies from those policies disclosed in our 20172021 Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 to the condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below.below, many of which could be amplified by the COVID-19 pandemic. Management believes these forward-looking statements to be reasonable; however, one should not place undue reliance on such statements that are based on current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update such forward-looking statements, except as required by law.
Items which could impact these forward-looking statements include, but are not limited to:
•significant shifts in consumer demand and disruptions to our employees, communities, customers, supply chains, production planning, operations, and production processes resulting from the reactionimpacts of customersCOVID-19 and other epidemics, pandemics or consumers to price increases we may implement;similar widespread public health concerns and disease outbreaks;
•fluctuations in the cost and availability of ingredients and packaging;
•inflationary pressures resulting in higher input costs;
•capacity constraints that may affect our ability to meet demand or may increase our costs;
•dependence on contract manufacturers, distributors and freight transporters;transporters, including their operational capacity and financial strength in continuing to support our business;
fluctuations•adequate supply of labor for our manufacturing facilities;
•efficiencies in plant operations;
•the costreaction of customers or consumers to price increases we may implement;
•cyber-security incidents, information technology disruptions, and availabilitydata breaches;
•complexities related to the design and implementation of ingredients and packaging;our new enterprise resource planning system;
•stability of labor relations;
•adverse changes in freight, energy or other costs of producing, distributing or transporting our products;
price and product competition;
the impact of customer store brands on our branded retail volumes;
the success and cost of new product development efforts;
dependence on key personnel and changes in key personnel;
the effect of consolidation of customers within key market channels;
the lack of market acceptance of new products;
the ability to successfully grow recently acquired businesses;
the extent to which future business acquisitions are completed and acceptably integrated;
the possible occurrence of product recalls or other defective or mislabeled product costs;
•the potential for loss of larger programs, including licensing agreements, or key customer relationships;
•changes in demand for our products, which may result from loss of brand reputation or customer goodwill;
•price and product competition;
•the possible occurrence of product recalls or other defective or mislabeled product costs;
•the success and cost of new product development efforts;
•the lack of market acceptance of new products;
•the impact of customer store brands on our branded retail volumes;
•the extent to which recent and future business acquisitions are completed and acceptably integrated;
•the ability to successfully grow recently acquired businesses;
•dependence on key personnel and changes in key personnel;
•the effect of consolidation of customers within key market channels;
•maintenance of competitive position with respect to other manufacturers;
efficiencies•changes in plant operations;estimates in critical accounting judgments;
•the impact of any regulatory matters affecting our food business, including any required labeling changes and their impact on consumer demand;
stability of labor relations;
•the outcome of any litigation or arbitration;
the impact, if any, of certain contingent liabilities associated with our withdrawal from a multiemployer pension plan;
•the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs; and
changes in estimates in critical accounting judgments; and
•certain other factors, including the information disclosed in our discussion of risk factors under Item 1A of our 20172021 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks have not changed materially from those disclosed in our 20172021 Annual Report on Form 10-K.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 20172021 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is 1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and 2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. No changes were made to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are required to disclose certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe will be in excess of an applied threshold not to exceed $1 million. We are using a threshold of $1 million as we believe this amount is reasonably designed to result in disclosure of such proceedings that are material to our business or financial condition. Applying this threshold, there are no environmental matters to disclose in this Form 10-Q.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed under Item 1A in our 20172021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) In November 2010, our Board of Directors approved a share repurchase authorization of 2,000,000 common shares, of which 1,404,2891,239,482 common shares remained authorized for future repurchases at December 31, 2017.2021. This share repurchase authorization does not have a stated expiration date. In the second quarter, we made the following repurchases of our common stock:
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Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares that May Yet be Purchased Under the Plans |
October 1-31, 2021 | — | | | $ | — | | | — | | | 1,239,539 | |
November 1-30, 2021 (1) | 57 | | | $ | 163.48 | | | 57 | | | 1,239,482 | |
December 1-31, 2021 | — | | | $ | — | | | — | | | 1,239,482 | |
Total | 57 | | | $ | 163.48 | | | 57 | | | 1,239,482 | |
(1)Represents shares that were repurchased in satisfaction of tax withholding obligations arising from the vesting of restricted stock granted to employees under the Lancaster Colony Corporation 2015 Omnibus Incentive Plan.
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Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares that May Yet be Purchased Under the Plans |
October 1-31, 2017 | — |
| | $ | — |
| | — |
| | 1,404,320 |
|
November 1-30, 2017 | — |
| | $ | — |
| | — |
| | 1,404,320 |
|
December 1-31, 2017 (1) | 31 |
| | $ | 133.37 |
| | 31 |
| | 1,404,289 |
|
Total | 31 |
| | $ | 133.37 |
| | 31 |
| | 1,404,289 |
|
| |
(1) | Represents shares that were repurchased in satisfaction of tax withholding obligations arising from the vesting of restricted stock granted to employees under the Lancaster Colony Corporation 2015 Omnibus Incentive Plan. |
Item 6. Exhibits
See Index to Exhibits following Signatures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | LANCASTER COLONY CORPORATION |
| | | | | (Registrant) |
Date: | January 30, 2018February 3, 2022 | | By: | | /s/ DAVID A. CIESINSKI |
| | | | | David A. Ciesinski |
| | | | | President, Chief Executive Officer |
| | | | | and Director |
| | | | | (Principal Executive Officer) |
| | | | | |
Date: | January 30, 2018February 3, 2022 | | By: | | /s/ DOUGLAS A. FELLTHOMAS K. PIGOTT |
| | | | | Douglas A. FellThomas K. Pigott |
| | | | | Treasurer, Vice President, |
| | | | | Assistant Secretary and |
| | | | | Chief Financial Officer |
| | | | | and Assistant Secretary |
| | | | | (Principal Financial and Accounting Officer) |
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 20172021
INDEX TO EXHIBITS
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Exhibit Number | | Description |
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Exhibit
| | Description | | Located at |
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101.INS(a) | | XBRL Instance Document | | Filed herewith - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH(a) | | Inline XBRL Taxonomy Extension Schema Document | | Filed herewith |
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101.CAL(a) | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
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101.DEF(a) | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
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101.LAB(a) | | Inline XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
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101.PRE(a) | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104(a) | | The cover page of Lancaster Colony Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, formatted in Inline XBRL (included within Exhibit 101 attachments) |
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(a) | | Filed herewith |
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(b) | | Furnished herewith |