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.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
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.
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.
The following table represents our Level 3 fair value measurements using significant other unobservable inputs for acquisition-relatedBantam’s contingent consideration:
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.
|
| | | | | | | |
| | 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)
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
March 31, | | Nine Months Ended
March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Amortization expense | $ | 1,161 | | | $ | 1,203 | | | $ | 3,562 | | | $ | 4,052 | |
Total annual amortization expense for each of the next five years is estimated to be as follows:
| | | | | |
| |
| 2023 | $ | 3,105 | |
| 2024 | $ | 3,105 | |
| 2025 | $ | 2,845 | |
| 2026 | $ | 2,215 | |
| 2027 | $ | 2,044 | |
|
| | | |
| | |
| 2019 | $ | 3,858 |
|
| 2020 | $ | 3,823 |
|
| 2021 | $ | 3,738 |
|
| 2022 | $ | 3,664 |
|
| 2023 | $ | 3,105 |
|
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$6.5 million and $6.1$5.1 million were included in Other Current Assets at DecemberMarch 31, 20172022 and June 30, 2017,2021, respectively. Prepaid state and local income taxes of $1.1$1.7 million and $0.9$1.1 million were included in Other Current Assets at DecemberMarch 31, 20172022 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 DecemberMarch 31, 20172022 is generally consistent with that of June 30, 2017.2021. However, due to the decrease in cash and equivalents, the amount of Corporate assets has decreased as compared to June 30, 2021.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
We continue to evaluate our Retail and Foodservice segments based on net sales and operating income. income which follow:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Nine Months Ended
March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net Sales | | | | | | | |
| Retail | $ | 213,128 | | | $ | 198,358 | | | $ | 682,102 | | | $ | 614,653 | |
| Foodservice | 190,366 | | | 158,891 | | | 541,875 | | | 466,848 | |
| Total | $ | 403,494 | | | $ | 357,249 | | | $ | 1,223,977 | | | $ | 1,081,501 | |
| Operating Income | | | | | | | |
| Retail | $ | 22,213 | | | $ | 41,179 | | | $ | 119,997 | | | $ | 144,557 | |
| Foodservice | 18,556 | | | 21,088 | | | 52,690 | | | 66,845 | |
Nonallocated Restructuring and Impairment Charges (1) | (22,723) | | | — | | | (23,749) | | | — | |
| Corporate Expenses | (25,663) | | | (24,879) | | | (70,738) | | | (66,468) | |
| Total | $ | (7,617) | | | $ | 37,388 | | | $ | 78,200 | | | $ | 144,934 | |
(1)Reflects restructuring and impairment charges related to the Bantam business and a facility closure, which were not allocated to our two reportable segments due to their unusual nature.
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
March 31, | | Nine Months Ended
March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Retail | | | | | | | |
| Shelf-stable dressings, sauces and croutons | $ | 94,578 | | | $ | 75,773 | | | $ | 272,439 | | | $ | 199,292 | |
| Frozen breads | 73,328 | | | 73,628 | | | 258,426 | | | 250,157 | |
| Refrigerated dressings, dips and other | 45,222 | | | 48,957 | | | 151,237 | | | 165,204 | |
| Total Retail net sales | $ | 213,128 | | | $ | 198,358 | | | $ | 682,102 | | | $ | 614,653 | |
| Foodservice | | | | | | | |
| Dressings and sauces | $ | 143,156 | | | $ | 120,925 | | | $ | 403,953 | | | $ | 347,101 | |
| Frozen breads and other | 47,210 | | | 37,966 | | | 137,922 | | | 116,040 | |
| Other roll products | — | | | — | | | — | | | 3,707 | |
| Total Foodservice net sales | $ | 190,366 | | | $ | 158,891 | | | $ | 541,875 | | | $ | 466,848 | |
| Total net sales | $ | 403,494 | | | $ | 357,249 | | | $ | 1,223,977 | | | $ | 1,081,501 | |
The following table provides an additional disaggregation of Foodservice net sales by type of customer:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Nine Months Ended
March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Foodservice | | | | | | | |
| National accounts | $ | 146,959 | | | $ | 124,323 | | | $ | 414,840 | | | $ | 359,228 | |
| Branded and other | 43,407 | | | 34,568 | | | 127,035 | | | 103,913 | |
| Other roll products | — | | | — | | | — | | | 3,707 | |
| Total Foodservice net sales | $ | 190,366 | | | $ | 158,891 | | | $ | 541,875 | | | $ | 466,848 | |
|
| | | | | | | | | | | | | | | |
| | 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 |
|
LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
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 million and $0.4$0.9 million for the three months ended DecemberMarch 31, 20172022 and 2016, respectively.2021. Year-to-date SSSARs compensation expense was $1.1$2.9 million for the current-year period compared to $0.9$2.6 million for the prior-year period. At DecemberMarch 31, 2017,2022, there was $3.0$3.9 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 $0.8 million for the three months ended DecemberMarch 31, 20172022 and 2016 and $1.22021, respectively. Year-to-date restricted stock compensation expense was $3.7 million for the six months ended Decembercurrent-year period compared to $2.6 million for the prior-year period. At March 31, 2017 and 2016. At December 31, 2017,2022, there was $2.9$7.3 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 March 31, 2022. Year-to-date performance units compensation expense was $0.8 million for the current-year period. At March 31, 2022, there was $2.9 million of unrecognized compensation expense related to performance units that we will recognize over a weighted-average period of 2 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 was completed in March 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.
ConsistentRECENT EVENTS
A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, 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 COVID-19. These measures included limitations on public gatherings, social distancing requirements, travel restrictions, closures of bars and dine-in restaurants, stay-at-home orders, quarantines and restrictions that prohibited many non-essential employees from going to work.
We have 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 employees. 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 this acquisition strategy, in November 2016scheduling COVID-19 vaccination appointments.
After 16 months and once the vaccine became broadly available, we acquired substantially alldiscontinued 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 our sourcing of raw materials and packaging. We have secured additional second-sourcing options to help limit 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 Retail and Foodservice products. Specifically, since the onset of the assetsCOVID-19 pandemic near the end of Angelic Bakehouse, Inc.our fiscal 2020 third quarter, there has been an overall shift in consumer 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 other COVID-19-related issues, has unfavorably impacted the operating results of both our segments. These issues include 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.
RESULTS OF CONSOLIDATED OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | Three Months Ended
March 31, | | | | | | Nine Months Ended
March 31, | | | | |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Net Sales | $ | 403,494 | | | $ | 357,249 | | | $ | 46,245 | | | 13 | % | | $ | 1,223,977 | | | $ | 1,081,501 | | | $ | 142,476 | | | 13 | % |
| Cost of Sales | 335,162 | | | 266,699 | | | 68,463 | | | 26 | % | | 966,676 | | | 791,452 | | | 175,224 | | | 22 | % |
| Gross Profit | 68,332 | | | 90,550 | | | (22,218) | | | (25) | % | | 257,301 | | | 290,049 | | | (32,748) | | | (11) | % |
| Gross Margin | 16.9 | % | | 25.3 | % | | | | | | 21.0 | % | | 26.8 | % | | | | |
| Selling, General and Administrative Expenses | 54,526 | | | 53,162 | | | 1,364 | | | 3 | % | | 157,920 | | | 149,607 | | | 8,313 | | | 6 | % |
| Change in Contingent Consideration | (1,300) | | | — | | | (1,300) | | | N/M | | (3,470) | | | (5,687) | | | 2,217 | | | (39) | % |
| Restructuring and Impairment Charges | 22,723 | | | — | | | 22,723 | | | N/M | | 24,651 | | | 1,195 | | | 23,456 | | | N/M |
| Operating (Loss) Income | (7,617) | | | 37,388 | | | (45,005) | | | (120) | % | | 78,200 | | | 144,934 | | | (66,734) | | | (46) | % |
| Operating Margin | (1.9) | % | | 10.5 | % | | | | | | 6.4 | % | | 13.4 | % | | | | |
| Other, Net | 119 | | | (44) | | | 163 | | | 370 | % | | 250 | | | (67) | | | 317 | | | 473 | % |
| (Loss) Income Before Income Taxes | (7,498) | | | 37,344 | | | (44,842) | | | (120) | % | | 78,450 | | | 144,867 | | | (66,417) | | | (46) | % |
| Taxes Based on (Loss) Income | (3,015) | | | 8,447 | | | (11,462) | | | (136) | % | | 17,908 | | | 34,261 | | | (16,353) | | | (48) | % |
| Effective Tax Rate | 40.2 | % | | 22.6 | % | | | | | | 22.8 | % | | 23.6 | % | | | | |
| Net (Loss) Income | $ | (4,483) | | | $ | 28,897 | | | $ | (33,380) | | | (116) | % | | $ | 60,542 | | | $ | 110,606 | | | $ | (50,064) | | | (45) | % |
| Diluted Net (Loss) Income Per Common Share | $ | (0.17) | | | $ | 1.05 | | | $ | (1.22) | | | (116) | % | | $ | 2.20 | | | $ | 4.01 | | | $ | (1.81) | | | (45) | % |
Net Sales
Consolidated net sales for the three months ended March 31, 2022 increased 13% to a third quarter record $403.5 million versus $357.2 million last year, reflecting higher net sales for both the Retail and Foodservice segments driven by pricing actions. Consolidated sales volumes, measured in pounds shipped, decreased 2% for the three months ended March 31, 2022. In the prior year, consolidated sales volumes increased 5%.
Consolidated net sales for the nine months ended March 31, 2022 increased 13% to $1,224.0 million versus $1,081.5 million last year, reflecting higher net sales for both the Retail and Foodservice segments including the favorable impact of pricing actions. Consolidated sales volumes, measured in pounds shipped, increased 3% for the nine months ended March 31, 2022. In the prior year, consolidated sales volumes decreased 2%.
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 March 31, 2022 decreased $22.2 million to $68.3 million as we continued to experience unprecedented inflationary costs for commodities, packaging, freight and warehousing, and labor. We also incurred incremental expenditures attributed to our increased reliance upon co-manufacturers to help satisfy demand. While our pricing actions helped to offset the impacts of inflation, the gross profit decline reflects an extremely challenging operating environment that, beyond inflation, includes the unfavorable effects of supply chain disruptions, demand volatility and uncertainty, suboptimal capacity utilization, and overall lower productivity resulting in substantially higher costs to produce our products and service our customers.
Consolidated gross profit for the nine months ended March 31, 2022 decreased $32.7 million to $257.3 million as influenced by the inflationary costs, supply chain challenges and other operational headwinds referenced above for the three months ended March 31, 2022.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | | | Nine Months Ended
March 31, | | | | |
| (Dollars in thousands) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| SG&A Expenses - Excluding Project Ascent | $ | 44,227 | | | $ | 42,367 | | | $ | 1,860 | | | 4 | % | | $ | 129,599 | | | $ | 122,020 | | | $ | 7,579 | | | 6 | % |
| Project Ascent Expenses | 10,299 | | | 10,795 | | | (496) | | | (5) | % | | 28,321 | | | 27,587 | | | 734 | | | 3 | % |
| Total SG&A Expenses | $ | 54,526 | | | $ | 53,162 | | | $ | 1,364 | | | 3 | % | | $ | 157,920 | | | $ | 149,607 | | | $ | 8,313 | | | 6 | % |
| | | | | | | | | | | | | | | |
Selling, general and administrative (“Angelic”SG&A”), expenses for the three months ended March 31, 2022 increased 3% to $54.5 million compared to $53.2 million in the prior-year period. This increase was driven by a manufacturerhigher level of investments to support the continued growth of our business, including investments in personnel and marketerIT infrastructure improvements in addition to higher brokerage costs attributed to the increased sales. Expenditures for Project Ascent, our ERP initiative, totaled $10.3 million in the current-year quarter versus $10.8 million last year.
SG&A expenses for the nine months ended March 31, 2022 increased 6% to $157.9 million compared to $149.6 million in the prior year, reflecting investments in a supply chain optimization study, personnel, and IT infrastructure improvements, as well as higher brokerage costs attributed to the increased sales. Project Ascent expenses increased $0.7 million to $28.3 million.
Project Ascent expenses are included within Corporate Expenses. A portion of premium sprouted grain bakery productsthe 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 nine months ended March 31, 2022, the change in contingent consideration resulted in a benefit of $1.3 million and $3.5 million, respectively. These changes were attributed to a reduction in the fair value of the contingent consideration liability for Bantam Bagels, LLC (“Bantam”) based near Milwaukee, Wisconsin.on our March 31, 2022 and December 31, 2021 fair value measurements. The fair value adjustments were based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023, as well as refinements to the estimated probabilities applied to our forecast scenarios. We recorded the third quarter adjustment of $1.3 million in our Foodservice segment. For the year-to-date adjustment, we recorded $2.6 million in our Foodservice segment and $0.9 million in our Retail segment.
There was no change in contingent consideration for the three months ended March 31, 2021. For the nine months ended March 31, 2021, the change in contingent consideration resulted in a benefit of $5.7 million. This transaction is discussedbenefit 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 a SKU rationalization by a Foodservice customer, and therefore the entire adjustment was reflected within the Foodservice segment.
See further detaildiscussion of these adjustments in Note 2 to the condensed consolidated financial statements.
We have made substantial capital investmentsRestructuring and Impairment Charges
For the three and nine months ended March 31, 2022, we recorded restructuring and impairment charges of $22.7 million related to support our existing food operations and future growth opportunities. For example, we recently started a project to expand processing and warehousing capacity at Angelic to help meet anticipated growth in demandBantam. Impairment testing was triggered for our sprouted grain bakery products. Basedthe related long-lived assets of the asset group based on our current plansdecision to explore strategic alternatives for this business. The restructuring and expectations,impairment charges consisted of impairment charges for intangible assets, fixed assets and an operating lease right-of-use asset, as well as restructuring charges related to a contractual obligation. Due to their unusual nature, these restructuring and impairment charges were not allocated to our two reportable segments. On May 3, 2022, our Board of Directors approved a plan to exit the Bantam business.
For the nine months ended March 31, 2022, we believe our capital expendituresalso recorded an impairment charge of $0.9 million related to Bantam’s Retail customer relationships intangible asset, which reflected lower projected cash flows for 2018 could approximate $30 million. We anticipate we will be able to fund allBantam’s Retail business. The impairment charge represented the excess of our capital needs in 2018 withthe carrying value over the fair value of estimated discounted cash generated from operations.
RESULTS OF CONSOLIDATED OPERATIONS
Net Salesflows for the remaining useful life of the intangible asset 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 includedwas reflected in our condensed consolidated financial statements from the date of acquisition in the Retail segment.
Consolidated net salessegment for the three months ended December 31, 2017 decreased 2%2021.
In the second quarter of 2022, we committed to a plan to close our frozen garlic bread facility in Baldwin Park, California in support of our ongoing efforts to better optimize our manufacturing network. Production at the facility ceased in January 2022, and the Mamma Bella® brand frozen garlic bread product line was discontinued based on its small size and low profitability. 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 bothdiscontinued operations as the Retailclosure does not represent a strategic shift that would have a major effect on our operations or financial results. We recorded restructuring and Foodservice segments experienced net sales declines. Consolidated net salesimpairment charges of $1.0 million related to this closure for the sixnine months ended DecemberMarch 31, 20172022. 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 flatnot allocated to our two reportable segments due to their unusual nature.
For the nine months ended March 31, 2021, we recorded impairment charges of $1.2 million related to certain tradename and technology / know-how intangible assets for Bantam as compared toa result of the prior year-to-date period as higher Retail segment net sales were largely offsetimpact of the above-referenced SKU rationalization by a decline inFoodservice customer. 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 and were reflected within our Foodservice segment net sales.
Consolidated gross profit and related margins declined for the three and six months ended December 31, 2017, driven by the impact of increased commodity costs, most notably eggs, soybean oil, dairy ingredients and garlic, in addition to higher freight costs and the lower second quarter sales volume. These costs were partially offset by supply chain savings realized from our lean six sigma program and modest inflationary pricing in our Foodservice segment. Excluding the impact of pricing, total raw-material costs were estimated to have negatively affected our gross margins by 2% and less than 2% of consolidated net sales for the three and six months ended December 31, 2017, respectively. Higher freight costs were estimated to have negatively affected our gross margins by less than 1% of net sales for both the three and six months ended December 31, 2017. The prior-year results for both the quarter and year-to-date periods reflected a notable benefit from significantly lower ingredient costs with only a modest offset of deflationary pricing.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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% for the three and six months ended December 31, 2017, respectively. The increase in these costs reflected continued investments in personnel and strategic business initiatives to support our future growth and incremental amortization expense and other recurring noncash charges attributed to Angelic. These increases 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 related to closed business operations.
September 30, 2020.
Operating (Loss) Income
The foregoing factors contributedOperating income decreased $45.0 million to consolidated operating income totaling $47.3 million and $91.6a loss of $7.6 million for the three and six months ended DecemberMarch 31, 2017, respectively.2022, including the unfavorable impact of the $22.7 million in restructuring and impairment charges for the Bantam business. Beyond those charges, operating results for the current-year quarter were negatively affected by significant inflationary costs for commodities, packaging, freight and warehousing, and labor in addition to increased co-manufacturing costs. We also experienced the unfavorable impacts of an extremely challenging operating environment characterized by supply chain disruptions, demand volatility and uncertainty, and reduced operating efficiencies. Our pricing actions helped to offset the inflationary costs. The decline in operating income can be summarized as follows:also reflects the higher level of SG&A expenditures.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % | | | | |
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 (Loss) Income
Our effective tax rate was 18.5%22.8% and 34.5%23.6% for the sixnine months ended DecemberMarch 31, 20172022 and 2016,2021, respectively. The current-yearFor the nine months ended March 31, 2022 and 2021, our effective tax 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 reducedvaried from 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 beas 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 consistresult of the following components:factors:
| | | | | | | | | | | |
| Nine Months Ended
March 31, |
| 2022 | | 2021 |
| Statutory rate | 21.0 | % | | 21.0 | % |
| State and local income taxes | 3.6 | | | 3.6 | |
| Net windfall tax benefits - stock-based compensation | (0.2) | | | (0.6) | |
| Other | (1.6) | | | (0.4) | |
| Effective rate | 22.8 | % | | 23.6 | % |
|
| | | | | | | | | | | | | |
| (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 applyWe include the tax laws that were in effect immediately priorconsequences related 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, requireswithin the recognitioncomputation 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 reduced our effective tax rate by 0.2%. Going forward, this adoptionexpense. 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, particularlynine months ended March 31, 2022 and 2021, the impact of the Tax Act, second quarternet windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.2% and 0.6%, respectively.
Earnings Per Share
Diluted net income per share for 2018the third quarter of $45.9 million2022 was a loss of $0.17, as compared to income of $1.05 per diluted share in the prior year. For the three months ended March 31, 2022, restructuring and impairment charges had an unfavorable impact of $0.63 per diluted share while the adjustment to Bantam’s contingent consideration increased fromdiluted earnings per share by $0.04. Expenditures for Project Ascent reduced diluted earnings per share by $0.29 and $0.30 for the preceding year’sthree months ended March 31, 2022 and 2021, respectively.
For the nine months ended March 31, 2022, diluted net income for the quarter of $39.0 million and year-to-date net income of $75.3 million was higher thanper share totaled $2.20, as compared to $4.01 per diluted share in the prior year-to-date total of $72.4 million. year. For the nine months ended March 31, 2022 and 2021, expenditures for Project Ascent reduced diluted earnings per share by $0.79 and $0.76, respectively; restructuring and impairment charges reduced diluted earnings per share by $0.68 and $0.03, respectively; and the adjustments to Bantam’s contingent consideration increased diluted earnings per share by $0.10 and $0.16, respectively.
Diluted weighted average common shares outstanding have remained relatively stable for the current and prior-year periods ended DecemberMarch 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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | | | Nine Months Ended
March 31, | | | | |
| (Dollars in thousands) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Net Sales | $ | 213,128 | | | $ | 198,358 | | | $ | 14,770 | | | 7 | % | | $ | 682,102 | | | $ | 614,653 | | | $ | 67,449 | | | 11 | % |
| Operating Income | $ | 22,213 | | | $ | 41,179 | | | $ | (18,966) | | | (46) | % | | $ | 119,997 | | | $ | 144,557 | | | $ | (24,560) | | | (17) | % |
| Operating Margin | 10.4 | % | | 20.8 | % | | | | | | 17.6 | % | | 23.5 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 DecemberMarch 31, 2017,2022, 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$213.1 million, a 2%7% increase from the prior-year total of $335.5 million$198.4 million. In addition to the benefit of pricing actions, 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 GardenSister Schubert’s® dressings frozen dinner rolls. Retail segment sales volumes, measured in pounds shipped, decreased 2%, including the impact of some planned product line rationalizations. In the prior-year quarter, retail segment sales volumes increased 12%.
For the nine months ended March 31, 2022, Retail segment net sales increased 11% to $682.1 million compared to the prior-year total of $614.7 million. In addition to the benefit of pricing actions, the increase in Retail sales was driven by volume gains for Chick-fil-A® sauces and Buffalo Wild Wings® sauces as well as higher sales of our New York BRAND Bakery® frozen garlic bread and Sister Schubert’s®frozen dinner rolls and incrementalrolls. Retail segment sales from Angelic.volumes, measured in pounds shipped, increased 4% in the current-year period compared to an increase of 12% last year.
For the three and six months ended DecemberMarch 31, 2017,2022, Retail segment operating income and related margins decreased 46% to $22.2 million due to the impactunfavorable impacts of lower second quarter sales, increased commodity and packaging costs, significantly higher freight and warehousing costs, recentincreased co-manufacturing costs, higher labor costs and broad-based supply chain challenges. The net impact of our pricing actions lagged the extraordinary levels of cost inflation.
For the nine months ended March 31, 2022, Retail segment operating income decreased 17% to $120.0 million due to the unfavorable impacts of the higher costs and broad-based supply chain challenges detailed above. The net impact of our pricing actions lagged the extraordinary levels of cost inflation.
Foodservice Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | | | Nine Months Ended
March 31, | | | | |
| (Dollars in thousands) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Net Sales | $ | 190,366 | | | $ | 158,891 | | | $ | 31,475 | | | 20 | % | | $ | 541,875 | | | $ | 466,848 | | | $ | 75,027 | | | 16 | % |
| Operating Income | $ | 18,556 | | | $ | 21,088 | | | $ | (2,532) | | | (12) | % | | $ | 52,690 | | | $ | 66,845 | | | $ | (14,155) | | | (21) | % |
| Operating Margin | 9.7 | % | | 13.3 | % | | | | | | 9.7 | % | | 14.3 | % | | | | |
For the three months ended March 31, 2022, Foodservice segment net sales grew 20% to $190.4 million compared to $158.9 million in the prior-year period driven by inflationary pricing and increased demand for our branded products. Foodservice sales volume, measured in pounds shipped, decreased 2% as total demand for the segment was unfavorably influenced by the industry-wide challenges of heightened cost pressures, a weakening consumer environment, and a tight labor market along with some periods of severe winter weather in some locations. In the prior-year quarter, Foodservice sales volume was essentially flat.
For the nine months ended March 31, 2022, Foodservice segment net sales increased 16% to $541.9 million from the prior-year total of $466.8 million driven by inflationary pricing and volume gains for our branded Foodservice products. Foodservice sales volume, measured in pounds shipped, increased 2% compared to a decline of 9% last year. Excluding all sales resulting from the November 2018 acquisition of Omni Baking Company LLC, Foodservice segment net sales increased 17%. 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 March 31, 2022, Foodservice segment operating income decreased 12% to $18.6 million, reflecting increased commodity and packaging costs, higher freight and warehousing expenses, higher labor costs and the unfavorable impacts of broad-based supply chain challenges as partially offset by the benefit of pricing actions.
For the nine months ended March 31, 2022, Foodservice segment operating income decreased 21% to $52.7 million as the unfavorable impacts of the higher costs and broad-based supply chain challenges detailed above more than offset the benefit of pricing actions.
Corporate Expenses
For the three months ended March 31, 2022 and 2021, corporate expenses totaled $25.7 million and $24.9 million, respectively. This increase reflects increased investments in personnel. Project Ascent expenses totaled $10.3 million and $10.8 million for the three months ended March 31, 2022 and 2021, respectively.
For the nine months ended March 31, 2022 and 2021, corporate expenses totaled $70.7 million and $66.5 million, respectively. This increase reflects increased investments in personnel and business growth initiativeshigher expenditures for Project Ascent, which totaled $28.3 million and incremental amortization expense$27.6 million for the nine months ended March 31, 2022 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 | % | | | | |
2021, respectively. For the three and sixnine months ended DecemberMarch 31, 2017, Foodservice segment net sales decreased 3%2022 and 2%,2021, we also capitalized an additional $1.6 million and $3.2 million, 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 salesERP-related expenditures 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.application development stage activities.
LOOKING FORWARD
Looking forward we expectto our fiscal thirdfourth quarter, our net sales will continue to be favorably impacted by the earlier Easter holidaybenefit from pricing actions in the current year. We expect volume-driven growth inboth our Retail segment with support from recent and upcoming new product introductions. Price increases were takenFoodservice segments while sales volumes, measured in pounds shipped, will compare to strong growth of 9% in Retail and 29% in Foodservice. 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 halfimplemented an additional round of the year. To address the disruptions in the production and supply ofpricing actions for our frozen garlic bread and pasta products wethat took effect in late April and are implementing correctiveevaluating further actions to recover and meet demand, but expect these sales to remain constrained throughfor the third quarter. In thesegment. Our 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 ofcontinue to reflect contractual-based inflationary pricing and additional Foodservice segment price increases implemented early in the third quarter in responsetied to higher commodity and freight costs. Note that we may realize some incremental sales during the month of June as our customers adjust their order patterns for our products to build inventory in advance of our ERP implementation go-live date in early July. We anticipate the inflationary environment and the broad-based supply chain challenges that have resulted in increased costs should help to overcome industry headwinds.
Based on current market conditions, we foresee some abatement in commodityproduce our products and freight costs startingservice our customers to continue in the thirdcoming quarter.
Our fiscal fourth quarter but still expect thesefinancial 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 remain above last year’s levelproduce 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 balance of the fiscal year. Supply chain efficiency gains, cost savings from our lean six sigma programrestaurant industry and our pricing actions will help offset these higher costs.consumer behavior over an unpredictable timeline.
FINANCIAL CONDITION
Cash Flows
For the sixnine months ended DecemberMarch 31, 2017,2022, net cash provided by operating activities totaled $84.0$58.7 million, as compared to $76.1$138.7 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,employee benefits. The larger current-year increase in inventories reflects higher commodity costs and overall elevated quantities on-hand to better service our customers. Lower net income, as a result of the timing of shipmentspartially offset by noncash restructuring and related payment terms to major customers, offset somewhat by other current assets dueimpairment charges, 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 sixnine months ended DecemberMarch 31, 20172022 was $15.6$105.1 million, as compared to $46.7$56.2 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 equipment to increasefirst half of fiscal 2023; a capacity and/or improve operational efficiencies.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 was completed in March 2022.
Cash used in financing activities for the sixnine months ended DecemberMarch 31, 20172022 of $32.7$74.6 million increased from the prior-year total of $29.0$69.7 million. This increase was primarily due to higher dividend payments in the current year. There was also an increase in 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.payments.
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 DecemberMarch 31, 2017.2022. At DecemberMarch 31, 2017,2022, 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 DecemberMarch 31, 2017,2022, 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 DecemberMarch 31, 2017, we2022, 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 will total approximately $150 million, which includes an estimated $90 million in 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.
CONTRACTUAL OBLIGATIONSBeyond the next 12 months, we expect that cash provided by operating activities will be the primary source of liquidity. 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 DecemberMarch 31, 20172022, as well as purchase orders and future minimum lease paymentslonger-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 $46 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 consumerssimilar widespread public health concerns and disease outbreaks;
•inflationary pressures resulting in higher input costs;
•efficiencies in plant operations and our overall supply chain network;
•adverse changes in freight, energy or other costs of producing, distributing or transporting our products;
•fluctuations in the cost and availability of ingredients and packaging;
•dependence on contract manufacturers, distributors and freight transporters, including their operational capacity and financial strength in continuing to price increases we may implement;support our business;
•capacity constraints that may affect our ability to meet demand or may increase our costs;
dependence on contract manufacturers, distributors•adequate supply of labor for our manufacturing facilities;
•the reaction of customers or consumers to price increases we may implement;
•cyber-security incidents, information technology disruptions, and freight transporters;data breaches;
fluctuations in•complexities related to the design and implementation of our new enterprise resource planning system;
•geopolitical events, such as Russia’s recent invasion of Ukraine, that could create unforeseen business disruptions and impact the cost andor availability of ingredientsraw materials and packaging;energy;
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•stability of labor relations;
•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 DecemberMarch 31, 20172022 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 1,404,2891,226,096 common shares remained authorized for future repurchases at DecemberMarch 31, 2017.2022. This share repurchase authorization does not have a stated expiration date. In the secondthird quarter, we made the following repurchases of our common stock:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| January 1-31, 2022 | — | | | $ | — | | | — | | | 1,239,482 | |
February 1-28, 2022 (1) | 13,386 | | | $ | 160.38 | | | 13,386 | | | 1,226,096 | |
| March 1-31, 2022 | — | | | $ | — | | | — | | | 1,226,096 | |
| Total | 13,386 | | | $ | 160.38 | | | 13,386 | | | 1,226,096 | |
(1)Includes 3,386 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.