UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] 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 0-4065-1
------------
LANCASTER COLONY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 13-1955943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37 WEST BROAD STREET 43215
COLUMBUS, OHIO (Zip Code)
(Address of principal executive offices)
614-224-7141
(Registrant's telephone number, including area code)
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of October 29, 2004, there were approximately 35,101,000 shares of
Common Stock, no par value per share, outstanding.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 30, 2004 and June 30, 2004
Consolidated Statements of Income - Three Months Ended September
30, 2004 and 2003
Consolidated Statements of Cash Flows - Three Months Ended
September 30, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
INDEX TO EXHIBITS
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 JUNE 30
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2004 2004
--------------------------------------- ------------ ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................................................ $ 168,136 $ 178,503
Receivables - (less allowance for doubtful accounts,
September - $1,961 and June - $1,819) ..................................... 115,764 94,623
Inventories:
Raw materials and supplies ................................................ 46,953 45,277
Finished goods and work in process ........................................ 107,140 109,799
--------- ---------
Total inventories ....................................................... 154,093 155,076
Deferred income taxes and other current assets .............................. 26,774 22,803
--------- ---------
Total current assets .................................................... 464,767 451,005
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements ............................................ 119,154 118,693
Machinery and equipment ..................................................... 355,698 354,112
--------- ---------
Total cost .............................................................. 474,852 472,805
Less accumulated depreciation ............................................... 319,652 313,311
--------- ---------
Property, plant and equipment - net ..................................... 155,200 159,494
OTHER ASSETS:
Goodwill - (net of accumulated amortization,
September and June - $15,136) ............................................. 79,218 79,187
Other intangible assets - net ............................................... 5,329 5,459
Other noncurrent assets ..................................................... 20,906 17,742
--------- ---------
TOTAL ................................................................... $ 725,420 $ 712,887
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 46,974 $ 47,383
Accrued liabilities ......................................................... 58,447 45,348
--------- ---------
Total current liabilities ............................................... 105,421 92,731
OTHER NONCURRENT LIABILITIES ................................................... 22,609 21,576
DEFERRED INCOME TAXES .......................................................... 11,544 11,795
SHAREHOLDERS' EQUITY:
Preferred stock - authorized 3,050,000 shares;
outstanding - none
Common stock - authorized 75,000,000 shares; outstanding -
September 30, 2004 - 35,198,937 shares;
June 30, 2004 - 35,472,163 shares ......................................... 70,836 69,809
Retained earnings ........................................................... 895,424 885,161
Accumulated other comprehensive loss ........................................ (5,544) (5,542)
--------- ---------
Total ................................................................... 960,716 949,428
Common stock in treasury, at cost ........................................... (374,870) (362,643)
--------- ---------
Total shareholders' equity .................................................. 585,846 586,785
--------- ---------
TOTAL ................................................................... $ 725,420 $ 712,887
========= =========
See accompanying notes to consolidated financial statements.
3
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
------------------------------------------- -------- --------
NET SALES ..................................... $281,484 $266,652
COST OF SALES ................................. 227,467 210,845
-------- --------
GROSS MARGIN .................................. 54,017 55,807
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 24,776 24,169
RESTRUCTURING AND IMPAIRMENT CHARGE ........... 442 -
-------- --------
OPERATING INCOME .............................. 28,799 31,638
INTEREST INCOME AND OTHER - NET ............... 627 346
-------- --------
INCOME BEFORE INCOME TAXES .................... 29,426 31,984
TAXES BASED ON INCOME ......................... 11,048 12,284
-------- --------
NET INCOME .................................... $ 18,378 $ 19,700
======== ========
NET INCOME PER COMMON SHARE:
Basic and Diluted .......................... $ .52 $ .55
CASH DIVIDENDS PER COMMON SHARE ............... $ .23 $ .20
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ...................................... 35,355 35,763
Diluted .................................... 35,408 35,831
See accompanying notes to consolidated financial statements.
4
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
(AMOUNTS IN THOUSANDS) 2004 2003
-------------------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 18,378 $ 19,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............................. 8,499 7,432
(Recovery of) provision for losses on accounts receivable... (688) 201
Deferred income taxes and other noncash charges ............ 382 1,087
Restructuring and impairment charge ........................ 45 (48)
Gain on sale of property ................................... (42) (744)
Changes in operating assets and liabilities:
Receivables .............................................. (20,453) (17,130)
Inventories .............................................. 920 (8,249)
Other current assets ..................................... (2,853) (2,175)
Accounts payable and accrued liabilities ................. 9,613 15,651
--------- ---------
Net cash provided by operating activities .............. 13,801 15,725
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on property additions ............................... (2,866) (6,677)
Proceeds from sale of property ............................... 304 1,128
Other - net .................................................. (5,356) (923)
--------- ---------
Net cash used in investing activities .................. (7,918) (6,472)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock ................................... (12,227) (1,056)
Payment of dividends ......................................... (8,115) (7,150)
Increase in cash overdraft balance ........................... 3,104 1,309
Proceeds from the exercise of stock options .................. 990 420
--------- ---------
Net cash used in financing activities .................. (16,248) (6,477)
--------- ---------
Effect of exchange rate changes on cash ......................... (2) 10
--------- ---------
Net change in cash and equivalents .............................. (10,367) 2,786
Cash and equivalents at beginning of year ....................... 178,503 142,847
--------- ---------
Cash and equivalents at end of period ........................... $ 168,136 $ 145,633
========= =========
SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS:
Cash paid during the period for income taxes ................. $ 822 $ 1,254
========= =========
See accompanying notes to consolidated financial statements.
5
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited but, in our
opinion, 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 consolidated financial statements are
considered to be of a normal recurring nature. The results of operations for any
interim period are not necessarily indicative of results for the full year.
Accordingly, these financial statements should be read in conjunction with the
financial statements and notes thereto contained in our Annual Report on Form
10-K for the year ended June 30, 2004. Certain prior year amounts have been
reclassified to conform with the current year presentation.
During the three months ended September 30, 2004 and 2003, certain
inventory quantity reductions resulted in a liquidation of LIFO inventory layers
carried at lower costs which prevailed in prior years. The effect of the
liquidation for the three months ended September 30, 2004 was an increase in
pretax income of approximately $0.4 million, or approximately $.01 per share
after taxes. The effect of the liquidation for the three months ended September
30, 2003 was an increase in pretax income of approximately $1.6 million, or
approximately $.03 per share after taxes.
We account for our stock option plan under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, no compensation cost is reflected in net income,
as all options granted under those plans had an exercise price at least equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and net income per common
share as if we had applied the fair-value-based method under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, to record expense for stock option
compensation:
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003
-------- --------
Net income as reported ............................. $ 18,378 $ 19,700
Less: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects ........ (32) (102)
-------- --------
Pro forma net income ............................... $ 18,346 $ 19,598
======== ========
Net income per common share - basic and diluted
as reported and pro forma ......................... $ .52 $ .55
NOTE 2 - ACQUISITION
On December 12, 2003, we completed the acquisition of substantially all
the operating assets of Warren Frozen Foods, Inc. ("Warren"), a privately owned
producer and marketer of frozen noodle and pasta products based in Altoona,
Iowa. Warren has a well-recognized presence in the industrial and foodservice
markets and complements our existing frozen noodle operation, which has a
greater presence in retail markets. Warren is reported in our Specialty Foods
segment, and its results of operations have been included in our consolidated
statement of income since December 12, 2003.
Under the terms of the purchase agreement, we acquired certain personal
and real property including fixed assets, inventory and accounts receivable, and
assumed certain liabilities. The purchase price was approximately $21.1 million,
including a net asset adjustment of approximately $492,000 as determined under
the terms of the purchase agreement. The initial estimate of the net asset
adjustment was $461,000 and was recorded in accounts payable on the Consolidated
Balance Sheet at June 30, 2004. This estimate was subject to the review by and
agreement of the seller. As a result of this review, an additional $31,000 was
included in accounts payable on the Consolidated Balance Sheet at September 30,
2004. No further adjustments to the purchase price are expected.
6
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare Part D and a federal subsidy to
sponsors of retirement health care plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. In accordance with Financial
Accounting Standards Board ("FASB") Staff Position No. 106-1, we elected to
defer recognizing the effect of the Act on the accounting for our postretirement
benefit plans until authoritative accounting guidance was issued. In May 2004,
the FASB issued Staff Position No. 106-2, which provided final guidance on
accounting for the Act. We adopted the provisions of the Staff Position No.
106-2 as of July 1, 2004. The provisions of the Act did not have a material
effect on our results of operations, cash flow or financial position.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill attributable to the Specialty Foods and Automotive segments was
$78.2 million and $1.0 million, respectively, at September 30, 2004.
The following table summarizes our segment identifiable other intangible
assets as of September 30, 2004 and June 30, 2004:
SEPTEMBER 30 JUNE 30
2004 2004
------------ -------
SPECIALTY FOODS
Trademarks
Gross carrying value ............. $ 370 $ 370
Accumulated amortization ......... (124) (121)
------- -------
Net Carrying Value ............... $ 246 $ 249
======= =======
Customer Lists
Gross carrying value ............. $ 4,100 $ 4,100
Accumulated amortization ......... (256) (171)
------- -------
Net Carrying Value ............... $ 3,844 $ 3,929
======= =======
Non-compete Agreements
Gross carrying value ............. $ 1,200 $ 1,200
Accumulated amortization ......... (112) (75)
------- -------
Net Carrying Value ............... $ 1,088 $ 1,125
======= =======
GLASSWARE AND CANDLES - CUSTOMER LISTS
Gross carrying value ............... $ 250 $ 250
Accumulated amortization ........... (99) (94)
------- -------
Net Carrying Value ................. $ 151 $ 156
======= =======
Total Net Carrying Value ............. $ 5,329 $ 5,459
======= =======
Amortization expense relating to these assets was approximately $130,000
and $7,000 for the quarters ended September 30, 2004 and 2003, respectively.
Total annual amortization expense is estimated to be approximately $522,000 for
each of the next five fiscal years.
NOTE 5 - PENSION AND OTHER POSTRETIREMENT BENEFITS
We and certain of our operating subsidiaries provide multiple defined
benefit pension and postretirement medical and life insurance benefit plans.
Benefits under the defined benefit pension plans are primarily based on
negotiated rates and years of service and cover the union workers at such
locations. We contribute to these
7
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
pension plans at least the minimum amount required by regulation or contract. We
recognize the cost of pension plans and postretirement medical and life
insurance benefits as the employees render service. Postretirement benefits are
funded as incurred.
The following chart discloses net periodic benefit cost for our pension
and postretirement plans:
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
----- ----- ----- -----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost ................................ $ 138 $ 151 $ 34 $ 63
Interest cost ............................... 633 594 81 60
Expected return on plan assets .............. (694) (627) - -
Amortization of unrecognized net loss ....... 102 175 19 9
Amortization of prior service cost (asset)... 59 58 (2) (2)
Amortization of unrecognized net
obligation existing at transition ......... 9 9 - -
----- ----- ----- -----
Net periodic benefit cost ................... $ 247 $ 360 $ 132 $ 130
===== ===== ===== =====
For the three months ended September 30, 2004, we have made $0.1 million
in contributions to our pension plans. We expect to make approximately $0.9
million more in contributions to our pension plans during the remainder of this
fiscal year.
For the three months ended September 30, 2004, we have made approximately
$0.1 million in contributions to our postretirement medical and life insurance
benefit plans. We expect to make approximately $0.3 million more in
contributions to our postretirement medical and life insurance benefit plans
during the remainder of this fiscal year.
NOTE 6 - RESTRUCTURING AND IMPAIRMENT CHARGE
In the fourth quarter of fiscal 2004, we recorded a restructuring and
impairment charge of approximately $1.1 million ($0.7 million after taxes) for
costs incurred as of June 30, 2004 related to the closing of our automotive
floor mat manufacturing facility located in Waycross, Georgia. Manufacturing
effectively ceased as of June 30, 2004. The decision to close the plant was
brought on by a decline in demand for compression molded rubber floor mats that
resulted in excess segment capacity. During the three months ended September 30,
2004, we recorded an additional restructuring and impairment charge of $0.4
million for costs incurred during that period. Approximately $0.3 million of
this charge results in cash outlays and consists of other closing costs, such as
costs to remove and relocate certain equipment, costs to prepare the building
for sale, and various other charges.
An analysis of our first quarter fiscal 2005 restructuring activity and
the related remaining liability within the Automotive segment is as follows:
THREE MONTHS ENDED
SEPTEMBER 30
ACCRUAL AT ---------------------- ACCRUAL AT
JUNE 30, 2004 CHARGE CASH OUTLAYS SEPT. 30, 2004
------------- ------ ------------ --------------
RESTRUCTURING AND IMPAIRMENT CHARGE
Employee Separation Costs .................... $105 $ - $ (94) $11
Other Costs .................................. 34 307 (298) 43
---- ---- ----- ---
Subtotal ..................................... $139 307 $(392) $54
==== ===== ===
Asset Impairment and Other Noncash Charges.... 135
----
Total Restructuring and Impairment Charge... $442
====
8
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The restructuring accrual is located in accounts payable and accrued
liabilities at September 30, 2004. We expect that the remaining cash outlays for
this plan will occur over this fiscal year.
NOTE 7 - BUSINESS SEGMENT INFORMATION
The following summary financial information by business segment is
consistent with the basis of segmentation and measurement of segment profit or
loss presented in our June 30, 2004 consolidated financial statements:
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003
--------- ---------
NET SALES
Specialty Foods ........ $ 160,609 $ 154,817
Glassware and Candles... 63,732 56,126
Automotive ............. 57,143 55,709
--------- ---------
Total ................ $ 281,484 $ 266,652
========= =========
OPERATING INCOME
Specialty Foods ........ $ 27,379 $ 26,313
Glassware and Candles... 1,079 3,106
Automotive ............. 2,256 3,651
Corporate Expenses ..... (1,915) (1,432)
--------- ---------
Total ................ $ 28,799 $ 31,638
========= =========
NOTE 8 - COMMITMENTS AND CONTINGENCIES
At September 30, 2004, we are a party to various claims and litigation
which have arisen in the ordinary course of business. Such matters did not have
a material effect on the current fiscal year-to-date results of operations and,
in our opinion, their ultimate disposition will not have a material adverse
effect on our consolidated financial statements.
Certain of our automotive accessory products carry explicit limited
warranties that extend from twelve months to the life of the product, based on
terms that are generally accepted in the marketplace. Our policy is to record a
provision for the expected cost of the warranty-related claims at the time of
the sale, and periodically adjust the provision to reflect actual experience.
The amount of warranty liability accrued reflects our best estimate of the
expected future cost of honoring our obligations under the warranty plans. The
warranty accrual as of September 30, 2004 and June 30, 2004 is immaterial to our
financial condition, and the change in the accrual for the current quarter of
fiscal 2005 is immaterial to our results of operations and cash flows.
NOTE 9 - COMPREHENSIVE INCOME
Total comprehensive income for the quarters ended September 30, 2004 and
2003 was approximately $18.4 million and $19.9 million, respectively. The
September 30, 2004 and 2003 comprehensive income primarily consists of net
income and foreign currency translation adjustments.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(TABULAR DOLLARS IN THOUSANDS)
OVERVIEW
We are a diversified manufacturer and marketer of consumer products
including specialty foods for the retail and foodservice markets; glassware and
candles for the retail, industrial, floral and foodservice markets; and
automotive accessories for the original equipment market and aftermarket.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") describes the matters that we consider to be
important in understanding the results of our operations for the three months in
the period ended September 30, 2004 and our financial condition as of September
30, 2004. Our fiscal year begins on July 1 and ends on June 30. In the
discussion that follows, we analyze the results of our operations for the last
three months, including the trends in the overall business, followed by a
discussion of our financial condition.
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto, all included elsewhere
herein. The forward-looking statements in this section and other parts of this
document involve risks and uncertainties 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 as a result of factors set forth under the caption
"Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995."
On December 12, 2003, we purchased substantially all the operating assets
of Warren Frozen Foods, Inc. ("Warren"), a privately owned producer and marketer
of frozen noodle and pasta products. Warren is reported in our Specialty Foods
segment. This acquisition's final purchase price was approximately $21.1
million, including a net asset adjustment of approximately $492,000 as
determined under the terms of the purchase agreement, and this transaction is
discussed in further detail in Note 2 to the consolidated financial statements.
On April 27, 2004, we announced our intent to close our automotive floor
mat manufacturing facility located in Waycross, Georgia. In fiscal 2004, we
recorded a restructuring and impairment charge of approximately $1.1 million
($0.7 million after taxes). During the three months ended September 30, 2004, we
recorded an additional restructuring and impairment charge of $0.4 million for
costs incurred during that period. See further discussion in Note 6 to the
consolidated financial statements.
The following is an overview of our consolidated operating results for the
three months ended September 30, 2004.
Net sales for the first quarter ended September 30, 2004 increased 6% to a
record level of $281.5 million from the prior year first quarter total of $266.7
million. Gross margin decreased 3% to $54.0 million from the prior year
comparable total of $55.8 million. Net income for the current year first quarter
was $18.4 million or $.52 per diluted share.
Our first quarter results continue to reflect an environment of generally
heightened competition and higher raw material costs. To date, we have found our
opportunities to increase prices to be limited and generally not sufficient to
offset the impact of higher raw material costs. We have been able to maintain a
strong balance sheet with no debt throughout this period.
10
RESULTS OF CONSOLIDATED OPERATIONS
NET SALES AND GROSS MARGIN
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003 CHANGE
-------- -------- ---------------------
NET SALES
Specialty Foods ................... $160,609 $154,817 $ 5,792 4%
Glassware and Candles ............. 63,732 56,126 7,606 14%
Automotive ........................ 57,143 55,709 1,434 3%
-------- -------- -------- --
Total ........................... $281,484 $266,652 $ 14,832 6%
======== ======== ======== ==
GROSS MARGIN ........................ $ 54,017 $ 55,807 $ (1,790) (3)%
======== ======== ======== ==
GROSS MARGIN AS A PERCENT OF SALES... 19.2% 20.9%
==== ====
For the first quarter, consolidated net sales increased 6% compared to the
prior year period due to positive sales growth achieved by all three segments.
For the quarter ended September 30, 2004, net sales of the Specialty Foods
segment totaled $160.6 million, which was $5.8 million higher than the prior
year total of $154.8 million. Warren Frozen Foods, which is discussed in Note 2
to the accompanying consolidated financial statements, contributed over $4
million to the higher first quarter sales. The remaining increase resulted from
modest growth in both the retail and foodservice markets.
Net sales of the Glassware and Candles segment for the first quarter ended
September 30, 2004 totaled $63.7 million, a 14% increase from the comparable
prior year quarter total of $56.1 million. This segment's sales growth resulted
from improved sales of candles, primarily through gains among existing
customers. Candle sales associated with several new customer programs also
contributed to the segment's growth. Sales of glassware products declined, as
broadly impacted by continuing lackluster demand in consumer and industrial
markets.
Automotive segment net sales for the first quarter ended September 30,
2004 totaled $57.1 million, a 3% increase from the prior year first quarter
total of $55.7 million. Sales of original equipment products benefited from
growth in aluminum accessories, partially offset by lower floor mat volume.
As a percentage of sales, our consolidated gross margins for the three
months ended September 30, 2004 totaled 19.2%, as compared to the prior year
level of 20.9% for the first quarter ended September 30, 2003. Margins within
the Specialty Foods segment increased slightly, despite being constrained by
increases in ingredient costs, especially soybean oil and cream. The net impact
of higher ingredient costs on the segment's comparative quarterly results
somewhat exceeded $1 million. Gross margins of the Glassware and Candles segment
were adversely affected by competitive pricing conditions, higher material
costs, and a lower level of income from the reduction of LIFO inventory (see
Note 1 to the consolidated financial statements). In the Automotive segment,
higher material costs, such as for aluminum, steel and synthetic rubber,
contributed to lower margins as compared to the prior year. Further affecting
the comparative results for this segment were costs of approximately $0.4
million incurred in the current quarter for the closing of a manufacturing
facility (see Note 2 to the consolidated financial statements) and the inclusion
of a gain of approximately $0.4 million in the prior year related to the sale of
an idle manufacturing facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003 CHANGE
--------- --------- --------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... $ 24,776 $ 24,169 $607 3%
========= ========= ==== =
SG&A EXPENSES AS A PERCENT OF SALES ........... 8.8% 9.1%
=== ===
11
As a percentage of sales, selling, general and administrative expenses
were relatively stable as compared to the corresponding period of a year ago.
RESTRUCTURING AND IMPAIRMENT CHARGE
In fiscal 2004, we recorded a restructuring and impairment charge of
approximately $1.1 million ($0.7 million after taxes) for costs incurred as of
June 30, 2004 related to the closing of our automotive floor mat manufacturing
facility located in Waycross, Georgia. Manufacturing effectively ceased as of
June 30, 2004. The decision to close the plant was brought on by a decline in
demand for compression molded rubber floor mats that resulted in excess segment
capacity. During the three months ended September 30, 2004, we recorded an
additional restructuring and impairment charge of $0.4 million for costs
incurred during that period. Approximately $0.3 million of this charge results
in cash outlays and consists of other closing costs, such as costs to remove and
relocate certain equipment, costs to prepare the building for sale, and various
other charges.
An analysis of our first quarter fiscal 2005 restructuring activity and
the related remaining liability within the Automotive segment is as follows:
THREE MONTHS ENDED
SEPTEMBER 30
ACCRUAL AT -------------------------- ACCRUAL AT
JUNE 30, 2004 CHARGE CASH OUTLAYS SEPT. 30, 2004
------------- ------ ------------ --------------
RESTRUCTURING AND IMPAIRMENT CHARGE
Employee Separation Costs ................... $105 $ - $ (94) $11
Other Costs ................................. 34 307 (298) 43
---- ---- ----- ---
Subtotal .................................... $139 307 $(392) $54
==== ===== ===
Asset Impairment and Other Noncash Charges... 135
----
Total Restructuring and Impairment Charge.. $442
====
The restructuring accrual is located in accounts payable and accrued
liabilities at September 30, 2004. We expect that the remaining cash outlays for
this plan will occur over this fiscal year.
OPERATING INCOME
The foregoing factors contributed to consolidated operating income
totaling $28.8 million for the three months ended September 30, 2004. These
amounts represent a decrease of 9% from the prior year quarter. By segment, our
operating income can be summarized as follows:
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003 CHANGE
-------- -------- ---------------
OPERATING INCOME
Specialty Foods.................................... $ 27,379 $ 26,313 $ 1,066 4%
Glassware and Candles.............................. 1,079 3,106 (2,027) (65)%
Automotive......................................... 2,256 3,651 (1,395) (38)%
Corporate Expenses................................. (1,915) (1,432) (483) 34%
-------- -------- -------- --
Total............................................ $ 28,799 $ 31,638 $ (2,839) (9)%
======== ======== ======== ==
OPERATING INCOME AS A PERCENT OF SALES
Specialty Foods.................................... 17.0% 17.0%
Glassware and Candles.............................. 1.7% 5.5%
Automotive......................................... 3.9% 6.6%
Consolidated....................................... 10.2% 11.9%
INTEREST INCOME AND OTHER - NET
The first quarter of fiscal 2005 included interest and other income of
$0.6 million, as compared to $0.3 million in the same quarter of the prior year.
This increase was primarily due to higher interest income, as our cash balances
and interest rates have been higher than they were in the prior year.
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NET INCOME
Consistent with the decline in operating income, first quarter net income
of $18.4 million decreased 7% from the preceding year's net income for the
quarter of $19.7 million. The decline in earnings per share for the fiscal 2005
first quarter to $.52 per basic and diluted share from $.55 per basic and
diluted share recorded in the prior year first quarter reflects the decline in
net income partially offset by the extent of share repurchases under our share
repurchase program.
FINANCIAL CONDITION
For the three months ended September 30, 2004, net cash provided by
operating activities totaled $13.8 million, which compares to $15.7 million
provided in the corresponding prior year period. This decline results from the
decrease in net income, as well as relative changes in working capital
components, particularly accounts receivable and accounts payable and accrued
liabilities, partially offset by inventories. The increase in accounts
receivable at September 30 was most influenced by higher sales, seasonality and
a greater nonfood mix, as payment terms associated with nonfood sales tend to be
longer than with sales of specialty foods.
Cash used in investing activities for the three months ended September
30, 2004 increased to $7.9 million from the prior year amount of $6.5 million,
largely due to increases in other assets offset somewhat by the decrease in
property additions, as there were no major capital projects completed this
quarter.
Cash used in financing activities for the three months ended September 30,
2004 increased to $16.2 million from the prior year total of $6.5 million due to
higher dividend payments and increases in the purchase of treasury stock. At
September 30, 2004, approximately 2,075,000 shares remain authorized for future
buyback. These shares reflect the impact of the August 2004 Board of Directors
approval of a share repurchase authorization of an additional 2,000,000 shares.
Total dividends paid during the current quarter increased approximately 14% as
compared to the prior year period due to the effects of a 15% increase in the
stated dividend rate being somewhat offset by the extent of share repurchases.
We believe that cash provided from operations, our existing cash balances,
and the currently available bank credit arrangements should be adequate to meet
our foreseeable cash requirements over fiscal 2005.
There have been no changes in critical accounting policies from those
disclosed in our Annual Report on Form 10-K for the year ended June 30, 2004.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains forward-looking statements related to future
growth and earnings opportunities. Such statements are based upon certain
assumptions and assessments made by management of the Company in light of its
experience and perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. Actual
results may differ as a result of factors over which the Company has no, or
limited, control including the strength of the economy, slower than anticipated
sales growth, the extent of operational efficiencies achieved, the success of
new product introductions, price and product competition, and increases in raw
materials costs. Management believes these forward-looking statements to be
reasonable; however, undue reliance should not be placed on such statements,
which are based on current expectations. The Company undertakes no obligation to
publicly update such forward-looking statements. More detailed statements
regarding significant events which could affect the Company's financial results
are included in the Company's Forms 10-Q and 10-K filed with the Securities and
Exchange Commission.
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 Chief Executive
Officer and Chief Financial Officer evaluated, with the participation of
management, 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 have concluded that our disclosure
controls and procedures were effective as of September 30, 2004 to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
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(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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) In May 2000 and August 2004, the Board of Directors approved share
repurchase authorizations of 3,000,000 and 2,000,000 shares, respectively, of
which approximately 2,075,000 shares remain authorized for future repurchases.
In the first quarter, we made the following repurchases of our common stock:
TOTAL NUMBER MAXIMUM NUMBER
TOTAL AVERAGE OF SHARES OF SHARES THAT MAY
NUMBER PRICE PURCHASED AS YET BE PURCHASED
OF SHARES PAID PER PART OF PUBLICLY UNDER THE PLANS OR
PERIOD PURCHASED SHARE ANNOUNCED PLANS PROGRAMS
- ------ --------- -------- ---------------- ------------------
July 1-31, 2004...................... 85,000 $39.53 85,000 289,732
August 1-31, 2004.................... 95,000 $40.39 95,000 2,194,732
September 1-30, 2004................. 120,000 $41.91 120,000 2,074,732
These share repurchase authorizations do not have a stated expiration date.
ITEM 6. EXHIBITS. See Index to Exhibits following Signatures.
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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.
LANCASTER COLONY CORPORATION
--------------------------------------------
(Registrant)
Date: November 9, 2004 By: /s/JOHN B. GERLACH, JR.
----------------------------------------
John B. Gerlach, Jr.
Chairman, Chief Executive Officer and
President
Date: November 9, 2004 By: /s/JOHN L. BOYLAN
----------------------------------------
John L. Boylan
Treasurer, Vice President,
Assistant Secretary and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
15
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2004
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATED AT
- ------- ----------- ----------
31.1 Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002..... Filed herewith
31.2 Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002..... Filed herewith
32. Certification of CEO and CFO under Section 906 of the Sarbanes-Oxley
Act of 2002................................................................. Filed herewith
16