UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 2005
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
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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
COLUMBUS, OHIO 43215
(Address of principal executive offices) (Zip Code)
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 [ ]
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 31, 2005, there were approximately 33,951,000 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, 2005 and June 30, 2005
Consolidated Statements of Income - Three Months Ended September 30,
2005 and 2004
Consolidated Statements of Cash Flows - Three Months Ended September 30,
2005 and 2004
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) 2005 2005
- ----------------------------------------- ------------ ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................................ $ 98,758 $ 113,265
Short-term investments ...................................... 56,975 71,315
Receivables (less allowance for doubtful accounts,
September - $2,008 and June - $1,830) .................... 121,086 100,351
Inventories:
Raw materials and supplies ............................... 47,943 47,097
Finished goods and work in process ....................... 127,516 117,268
---------- ----------
Total inventories ..................................... 175,459 164,365
Deferred income taxes and other current assets .............. 28,861 25,109
---------- ----------
Total current assets ............................... 481,139 474,405
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements ............................ 130,036 121,290
Machinery and equipment ..................................... 371,325 365,005
---------- ----------
Total cost ............................................... 501,361 486,295
Less accumulated depreciation ............................... 335,829 332,148
---------- ----------
Property, plant and equipment - net ................ 165,532 154,147
OTHER ASSETS:
Goodwill .................................................... 79,219 79,219
Other intangible assets - net ............................... 4,807 4,937
Other noncurrent assets ..................................... 17,457 18,570
---------- ----------
TOTAL ........................................... $ 748,154 $ 731,278
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................ $ 50,583 $ 51,014
Accrued liabilities ......................................... 67,311 52,832
---------- ----------
Total current liabilities .......................... 117,894 103,846
OTHER NONCURRENT LIABILITIES ................................... 30,562 30,492
DEFERRED INCOME TAXES .......................................... 8,274 9,214
SHAREHOLDERS' EQUITY:
Preferred stock - authorized 3,050,000 shares;
outstanding - none
Common stock - authorized 75,000,000 shares; outstanding -
September 30, 2005 - 34,105,621 shares;
June 30, 2005 - 34,235,905 shares ........................ 76,335 73,801
Retained earnings ........................................... 953,682 944,194
Accumulated other comprehensive loss ........................ (10,902) (10,905)
---------- ----------
Total .................................................... 1,019,115 1,007,090
Common stock in treasury, at cost ........................... (427,691) (419,364)
---------- ----------
Total shareholders' equity ......................... 591,424 587,726
---------- ----------
TOTAL ........................................... $ 748,154 $ 731,278
========== ==========
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) 2005 2004
- --------------------------------------------- -------- --------
NET SALES...................................... $285,915 $281,484
COST OF SALES.................................. 232,674 227,467
-------- --------
GROSS MARGIN................................... 53,241 54,017
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 26,034 24,776
RESTRUCTURING AND IMPAIRMENT CHARGE............ 24 442
-------- --------
OPERATING INCOME............................... 27,183 28,799
INTEREST INCOME AND OTHER - NET................ 1,386 627
-------- --------
INCOME BEFORE INCOME TAXES..................... 28,569 29,426
TAXES BASED ON INCOME.......................... 10,523 11,048
-------- --------
NET INCOME..................................... $ 18,046 $ 18,378
======== ========
NET INCOME PER COMMON SHARE:
Basic and diluted........................... $ .53 $ .52
CASH DIVIDENDS PER COMMON SHARE................ $ .25 $ .23
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic....................................... 34,220 35,355
Diluted..................................... 34,287 35,408
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) 2005 2004
- ---------------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 18,046 $ 18,378
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization .................................. 8,240 8,499
Deferred income taxes and other noncash items .................. (2,280) 330
Restructuring and impairment charge ............................ 17 45
Loss (gain) on sale of property ................................ 9 (42)
Loss on sale of business ....................................... 202 --
Payments to pension plans ...................................... (53) (82)
Changes in operating assets and liabilities:
Receivables ................................................. (21,111) (21,141)
Inventories ................................................. (11,404) 920
Other current assets ........................................ (2,369) (2,837)
Accounts payable and accrued liabilities .................... 9,935 9,649
-------- --------
Net cash (used in) provided by operating activities ...... (768) 13,719
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on property additions .................................... (16,734) (2,866)
Proceeds from sale of property .................................... 2 304
Proceeds from sale of business .................................... 476 --
Purchases of short-term investments ............................... (10,000) (22,205)
Proceeds from short-term investment sales, calls, and maturities .. 24,340 13,740
Other - net ....................................................... (297) (5,274)
-------- --------
Net cash used in investing activities .................... (2,213) (16,301)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock ........................................ (8,327) (12,227)
Payment of dividends .............................................. (8,557) (8,115)
Proceeds from the exercise of stock options,
including related tax benefits ................................. 2,540 990
Increase in cash overdraft balance ................................ 2,816 3,104
-------- --------
Net cash used in financing activities .................... (11,528) (16,248)
-------- --------
Effect of exchange rate changes on cash .............................. 2 (2)
-------- --------
Net change in cash and equivalents ................................... (14,507) (18,832)
Cash and equivalents at beginning of year ............................ 113,265 113,233
-------- --------
Cash and equivalents at end of period ................................ $ 98,758 $ 94,401
======== ========
SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS:
Cash paid during the period for income taxes ...................... $ 858 $ 822
======== ========
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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2005. Unless otherwise noted, references to
"year" pertain to our fiscal year, which begins on July 1 and ends on June 30;
for example, 2005 refers to fiscal 2005, which is the period from July 1, 2004
to June 30, 2005.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
We reclassified our investments in auction rate securities and variable
rate demand obligations from cash and equivalents to short-term investments for
the prior-year period ended September 30, 2004. This balance sheet
reclassification resulted in the increase in short-term investments of $73.7
million and the decrease in cash and equivalents for the same amount. This
reclassification also resulted in the net short-term investment activity being
reclassified from the change in cash to a gross presentation in investing
activities on the Consolidated Statement of Cash Flows.
LIQUIDATION OF LIFO INVENTORY LAYERS
During the three months ended September 30, 2005 and 2004, 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, 2005 was insignificant. 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Purchases of property,
plant and equipment included in accounts payable at September 30, 2005 were $3.7
million. These purchases, less the June 30, 2005 amount of $2.3 million, have
been excluded from the property additions in the Consolidated Statement of Cash
Flows.
STOCK-BASED EMPLOYEE COMPENSATION PLANS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment," ("SFAS 123R"). SFAS 123R requires the measurement and recognition of
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The cost of the
employee services is recognized as compensation expense over the period that an
employee provides service in exchange for the award, which is typically the
vesting period. SFAS 123R was effective July 1, 2005, and we adopted SFAS 123R
using the modified prospective method in the quarter ended September 30, 2005.
At September 30, 2005, we had vested and unvested options outstanding under our
1995 Key Employee Stock Option Plan (the "Plan"), a stock-based compensation
plan. See a complete discussion of the impact of the adoption of SFAS 123R in
Note 7.
Under the modified prospective method, we have not restated any balance
sheet or income statement items for any prior periods. Had compensation cost for
the Plan been determined based on the fair value at the grant dates for awards
under the Plan consistent with the method of SFAS No. 123, our net income and
6
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
earnings per share would have been reduced to the pro forma amounts indicated
below for the quarter ended September 30, 2004:
THREE MONTHS ENDED
SEPTEMBER 30, 2004
------------------
Net income as reported ..................................................... $18,378
Less: Total stock-based employee compensation expense determined under
fair-value-based method for all awards, net of related tax effects ...... (32)
-------
Pro forma net income ....................................................... $18,346
=======
Net income per common share - basic and diluted as reported and pro forma .. $ .52
SIGNIFICANT ACCOUNTING POLICIES
There were no changes to our Significant Accounting Policies from those
disclosed in our Annual Report on Form 10-K for the year ended June 30, 2005,
except for the adoption of SFAS 123R.
NOTE 2 - SHORT-TERM INVESTMENTS
At September 30 and June 30, 2005, we held $57.0 million and $71.3 million,
respectively, of short-term investments, which consist of auction rate
securities and variable rate demand obligations classified as available-for-sale
securities.
Our September 30 and June 30 short-term investments by contractual maturity
are as follows:
SEPTEMBER 30 JUNE 30
2005 2005
------------ -------
Due within one year ................. $ 1,200 $ 3,300
Due between one and five years ...... 1,580 1,580
Due after ten years ................. 54,195 66,435
------- -------
Total short-term investments ..... $56,975 $71,315
======= =======
We had no cumulative gross unrealized holding gains (losses) or gross
realized gains (losses) from our short-term investments. All income generated
from these short-term investments was recorded as interest income. Actual
maturities may differ from contractual maturities should the borrower have the
right to call certain obligations.
NOTE 3 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 changes the requirements for the accounting
and reporting of a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
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 and June 30,
2005.
7
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes our segment identifiable other intangible
assets as of September 30 and June 30, 2005:
SEPTEMBER 30 JUNE 30
2005 2005
------------ -------
SPECIALTY FOODS
Trademarks (40-year life)
Gross carrying value ............................. $ 370 $ 370
Accumulated amortization ......................... (133) (131)
------ ------
Net Carrying Value ............................... $ 237 $ 239
====== ======
Customer Lists (12-year life)
Gross carrying value ............................. $4,100 $4,100
Accumulated amortization ......................... (598) (513)
------ ------
Net Carrying Value ............................... $3,502 $3,587
====== ======
Non-compete Agreements (8-year life)
Gross carrying value ............................. $1,200 $1,200
Accumulated amortization ......................... (262) (225)
------ ------
Net Carrying Value ............................... $ 938 $ 975
====== ======
GLASSWARE AND CANDLES - CUSTOMER LISTS (12-YEAR LIFE)
Gross carrying value ................................ $ 250 $ 250
Accumulated amortization ............................ (120) (114)
------ ------
Net Carrying Value .................................. $ 130 $ 136
====== ======
Total Net Carrying Value ............................... $4,807 $4,937
====== ======
Amortization expense relating to these assets was approximately $0.1
million for the three months ended September 30, 2005 and 2004. Total annual
amortization expense is estimated to be approximately $0.5 million for each of
the next five years.
NOTE 5 - PENSION BENEFITS
We and certain of our operating subsidiaries provide multiple defined
benefit pension plans. Benefits under the plans are primarily based on
negotiated rates and years of service and cover the union workers at various
locations. We contribute to these plans at least the minimum amount required by
regulation or contract. We recognize the cost of plan benefits as the employees
render service.
The following table discloses net periodic benefit cost for our pension
plans:
THREE MONTHS
ENDED
SEPTEMBER 30
-------------
2005 2004
----- -----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost ........................................................ $ 188 $ 138
Interest cost ....................................................... 635 633
Expected return on plan assets ...................................... (723) (694)
Amortization of unrecognized net loss ............................... 177 102
Amortization of prior service cost .................................. 59 59
Amortization of unrecognized net obligation existing at transition .. 9 9
----- -----
Net periodic benefit cost ........................................ $ 345 $ 247
===== =====
8
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the three months ended September 30, 2005, we made approximately $0.1
million in contributions to our pension plans. We expect to make approximately
$2.8 million more in contributions to our pension plans during the remainder of
this year.
NOTE 6 - POSTRETIREMENT BENEFITS
We and certain of our operating subsidiaries provide multiple
postretirement medical and life insurance benefit plans. We recognize the cost
of benefits as the employees render service. Postretirement benefits are funded
as incurred.
The following table discloses net periodic benefit cost for our
postretirement plans:
THREE MONTHS
ENDED
SEPTEMBER 30
---- -----
2005 2004
---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................ $ 44 $ 34
Interest cost........................... 87 81
Amortization of unrecognized net loss... 36 19
Amortization of prior service asset..... (2) (2)
---- ----
Net periodic benefit cost............ $165 $132
==== ====
For the three months ended September 30, 2005, we made less than $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 7 - STOCK OPTIONS
As approved by our shareholders in November 1995, the terms of the 1995 Key
Employee Stock Option Plan reserved 3,000,000 common shares for issuance to key
employees. All options granted under the Plan were exercisable at prices not
less than fair market value as of the date of grant. This Plan expired in August
2005. We intend to solicit shareholder approval for adoption of a new equity
compensation plan at our 2005 Annual Meeting of Shareholders on November 21,
2005.
In general, options granted under the Plan vested immediately and had a
maximum term of five years. Our policy is to issue shares upon option exercise
from new shares that had been previously authorized.
There were no grants of options in the quarters ending September 30, 2005
and 2004.
Under SFAS 123R, we calculate fair value of option grants using the
Black-Scholes option-pricing model. Assumptions used in the model for the
prior-year grants are described in our Annual Report on Form 10-K for the year
ended June 30, 2005. Total compensation cost related to share-based payment
arrangements for the period ended September 30, 2005 was approximately $0.2
million. This amount was reflected in Selling, General and Administrative
Expenses and has been allocated to each segment appropriately. There was no tax
benefit recorded for this compensation cost because it relates to incentive
stock options that do not qualify for a tax deduction until, and only if, a
disqualifying disposition occurs.
During the quarter ended September 30, 2005, we received approximately $2.1
million in cash from the exercise of stock options. The aggregate intrinsic
value of these options was $0.4 million. A related tax benefit of approximately
$0.2 million was recorded in the first quarter and is included in the financing
section of the Consolidated Statement of Cash Flows. This benefit resulted from
incentive stock option disqualifying dispositions and exercises of non-qualified
options. The benefit includes less than $0.1 million of gross windfall tax
benefits.
9
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summarizes the activity relating to stock options granted
under the Plan mentioned above for the quarter ended September 30, 2005:
WEIGHTED
WEIGHTED AVERAGE
NUMBER AVERAGE REMAINING AGGREGATE
OF EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE LIFE VALUE
------- -------- ----------- ---------
Outstanding at beginning of period .. 590,104 $38.77
Exercised ........................ (57,722) 36.96
Granted .......................... -- --
Forfeited ........................ -- --
------- ------
Outstanding at end of period ........ 532,382 $38.97 3.42 $2,145
======= ====== ==== ======
Exercisable at end of period ........ 473,533 $38.79 3.33 $1,995
======= ====== ==== ======
The following summarizes the status of, and changes to, unvested options
during the quarter ended September 30, 2005:
THREE MONTHS ENDED
SEPTEMBER 30, 2005
-------------------
WEIGHTED
NUMBER AVERAGE
OF GRANT DATE
SHARES FAIR VALUE
------ ----------
UNVESTED AT BEGINNING OF PERIOD 58,849 $7.52
GRANTED .................... -- --
VESTED ..................... -- --
FORFEITED .................. -- --
------ -----
UNVESTED AT END OF PERIOD ..... 58,849 $7.52
====== =====
At September 30, 2005, there was approximately $0.2 million of total
unrecognized compensation cost related to unvested share-based compensation
arrangements granted under the Plan. This cost is expected to be recognized over
a weighted-average period of 1.1 years.
NOTE 8 - RESTRUCTURING AND IMPAIRMENT CHARGE
In the fourth quarter of 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 2005, we recorded additional restructuring and
impairment charges of $0.5 million ($0.3 million after taxes) for continuing
costs incurred during that period. During the first quarter ended September 30,
2005, both the new costs incurred and the cash outlays made for the required
upkeep of the facility were immaterial to the consolidated financial statements.
The restructuring accrual is included in accounts payable and accrued
liabilities at September 30, 2005. We expect that the remaining cash outlays for
this plan will be immaterial.
10
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9 - 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, 2005 consolidated financial statements:
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2005 2004
-------- --------
NET SALES
Specialty Foods ........ $169,534 $160,609
Glassware and Candles... 60,275 63,732
Automotive ............. 56,106 57,143
-------- --------
Total ............... $285,915 $281,484
======== ========
OPERATING INCOME
Specialty Foods ........ $ 25,844 $ 27,379
Glassware and Candles... 2,203 1,079
Automotive ............. 1,134 2,256
Corporate expenses ..... (1,998) (1,915)
-------- --------
Total ............... $ 27,183 $ 28,799
======== ========
NOTE 10 - COMMITMENTS AND CONTINGENCIES
At September 30, 2005, we are a party to various claims and litigation
matters which have arisen in the ordinary course of business. Such matters did
not have a material effect on the current-year results of operations and, in our
opinion, their ultimate disposition will not have a material adverse effect on
our consolidated financial statements.
During the second quarter of 2005, 2004 and 2003, we received approximately
$26.2 million, $2.0 million and $39.2 million from the U.S. government under the
Continued Dumping and Subsidy Offset Act ("CDSOA"). These amounts were recorded
as other income. CDSOA, which applies to our candle operations, is intended to
redress unfair dumping of imported products through cash payments to eligible
affected companies. Such payments are in part dependent upon the amount of
anti-dumping duties collected on those products. The World Trade Organization
has previously ruled that such payments are inconsistent with international
trade rules. Additionally, there is pending litigation to which we are not a
party that challenges the constitutionality of CDSOA. Further, the U.S. Congress
is currently considering legislation to repeal CDSOA. However, CDSOA continues
to be in effect in the United States at this time. Uncertainties associated with
this program leave us unable to predict the amounts, if any, we may be entitled
to receive in the future.
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 and June 30, 2005 is immaterial to our
financial condition, and the change in the accrual for the current quarter of
2006 is immaterial to our results of operations and cash flows.
NOTE 11 - COMPREHENSIVE INCOME
Total comprehensive income for the three months ended September 30, 2005
and 2004 was approximately $18.0 million and $18.4 million, respectively. The
September 30, 2005 and 2004 comprehensive income primarily consists of net
income and foreign currency translation adjustments.
11
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
ended September 30, 2005 and our financial condition as of September 30, 2005.
Unless otherwise noted, references herein to "year" pertain to our fiscal year,
which begins on July 1 and ends on June 30; for example, 2005 refers to fiscal
2005, which is the period from July 1, 2004 to June 30, 2005. 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.
On July 1, 2005, we sold our indirect subsidiary, Colony Printing &
Labeling, for net proceeds of approximately $0.5 million. The loss recorded on
the sale was approximately $0.2 million. Colony Printing & Labeling was part of
our Glassware and Candles segment and was not deemed material for presentation
as a discontinued operation.
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
"Forward-Looking 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," "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 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 energy
and raw materials costs. Management believes these forward-looking statements to
be reasonable; however, undue reliance should not be placed on such statements
that are based on current expectations. We undertake no obligation to publicly
update such forward-looking statements. More detailed statements regarding
significant events that could affect our financial results are included in our
Annual Report on Form 10-K for the year ended June 30, 2005 filed with the
Securities and Exchange Commission.
SUMMARY OF RESULTS
The following is an overview of our consolidated operating results for the
three months ended September 30, 2005.
Net sales for the first quarter ended September 30, 2005 increased 2% to
$285.9 million from the prior-year first quarter total of $281.5 million. Gross
margin decreased 1% to $53.2 million from the prior-year
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first quarter total of $54.0 million. Net income for the current year first
quarter was $18.0 million, or $.53 per diluted share, compared to $18.4 million,
or $.52 per diluted share, in the comparable period of 2005.
Our first quarter results continue to reflect an environment of increased
pricing pressures and higher nonfood material costs as well as generally higher
freight and energy costs. While we are striving to implement selected price
increases, to date, we have found our opportunities to increase prices to be
limited and generally not sufficient to offset the impact of the higher costs.
We are also working to otherwise mitigate the impact of these increased costs,
including changing various manufacturing processes, but these efforts may also
lag the adverse effect of the higher costs. We have been able to maintain a
strong balance sheet with no debt throughout this period.
RESULTS OF CONSOLIDATED OPERATIONS
NET SALES AND GROSS MARGIN
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2005 2004 CHANGE
-------- -------- -------------
NET SALES
Specialty Foods .................. $169,534 $160,609 $ 8,925 6 %
Glassware and Candles ............ 60,275 63,732 (3,457) (5)%
Automotive ....................... 56,106 57,143 (1,037) (2)%
-------- -------- ------- --
Total ......................... $285,915 $281,484 $ 4,431 2 %
======== ======== ======= ==
GROSS MARGIN ........................ $ 53,241 $ 54,017 $ (776) (1)%
======== ======== ======= ==
GROSS MARGIN AS A PERCENT OF SALES... 18.6% 19.2%
==== ====
Consolidated net sales for the most recent quarter increased 2%, reflecting
6% growth in sales of the Specialty Foods segment, as partially offset by lower
sales in both of the nonfood segments.
For the quarter ended September 30, 2005, net sales of the Specialty Foods
segment totaled $169.5 million, an increase of 6% over the prior-year total of
$160.6 million. The segment's increased sales reflected solid growth in several
retail product lines, including the recently restyled line of refrigerated salad
dressings. Foodservice sales grew less than retail due to the demand for
dressings and sauces being affected by factors such as weaker same-store sales
and menu changes at several national restaurant chains.
Net sales of the Glassware and Candles segment for the first quarter ended
September 30, 2005 totaled $60.3 million, a 5% decline from the prior-year
quarter total of $63.7 million. This decrease was attributable to weaker candle
volumes, comparisons of which were affected by a decline in sales to dollar
store customers in the current year and a prior-year quarter that benefited from
product being placed in additional retail outlets. Glassware volumes improved
modestly.
Automotive segment net sales for the first quarter ended September 30, 2005
totaled $56.1 million, a 2% decline from the prior-year first quarter total of
$57.1 million. Improved sales of aluminum accessory items were more than offset
by declining sales of automotive floor mats. Initial shipments of aluminum tube
steps for a large, new original equipment manufacturer ("OEM") program began in
the current-year quarter. Floor mat sales continue to be affected primarily by
certain OEM programs that ended in the first half of 2005.
As a percentage of sales, our consolidated gross margin for the three
months ended September 30, 2005 totaled 18.6%, a decline of 0.6% of sales from
the prior-year comparable quarter. Despite modestly lower commodity costs during
the quarter, Specialty Foods' margins decreased slightly in the quarter, as
influenced by markedly higher freight costs, introductory costs associated with
the restyled dressing line and some continued operational inefficiencies
occurring at certain manufacturing facilities. Based on current conditions, it
is our expectation that freight costs will remain well above year-ago levels
through at least the second quarter.
Gross margins in the Glassware and Candles segment improved in the quarter
ended September 30, 2005. Margins within the quarter benefited from more
favorable levels of overhead absorption on higher production volumes, as well as
better production efficiencies at our Sapulpa, Oklahoma glassware manufacturing
facility. The effect of liquidations of LIFO inventory was insignificant for the
three-month
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period ended September 30, 2005 compared to $0.4 million of income for the
prior-year comparable period. Margins were adversely affected by higher wax and
energy costs. These costs are expected to further increase throughout the second
quarter and, combined with expected reductions in both candle and glassware
manufacturing production, may adversely affect comparative segment margins over
the remainder of 2006.
Within our Automotive segment, higher material costs for aluminum and
petroleum-related materials were primarily responsible for lower segment gross
margins present during the current-year quarter. Also affecting segment margins
were start-up costs associated with a large, new OEM program involving aluminum
tube steps. Although not fully eliminated by quarter-end, the extent of such
start-up costs had declined entering the second fiscal quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30
------------------
2005 2004 CHANGE
------- ------- ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... $26,034 $24,776 $1,258 5%
======= ======= ====== =
SG&A EXPENSES AS A PERCENT OF SALES............ 9.1% 8.8%
=== ===
Consolidated selling, general and administrative costs of $26.0 million for
the three months ended September 30, 2005 increased by 5% from the $24.8 million
incurred for the three months ended September 30, 2004. Expenses for the
prior-year period ended September 30, 2004 reflect a $0.8 million recovery of
bad debt associated with one bankrupt customer, whose account was previously
written off in the Glassware and Candles segment during 2002. Without this
recovery, the prior-year selling, general and administrative costs would have
been 9.1% of sales, comparable to the current year.
RESTRUCTURING AND IMPAIRMENT CHARGE
In the fourth quarter of 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 year ended June 30, 2005, we recorded
additional restructuring and impairment charges of $0.5 million ($0.3 million
after taxes) for continuing costs incurred during that period. During the first
quarter ended September 30, 2005, both the new costs incurred and the cash
outlays made for the required upkeep of the facility were immaterial to the
consolidated financial statements. The restructuring accrual is included in
accounts payable and accrued liabilities at September 30, 2005. We expect that
the remaining cash outlays for this plan will be immaterial.
OPERATING INCOME
The foregoing factors contributed to consolidated operating income totaling
$27.2 million for the three months ended September 30, 2005. This amount
represents a decrease of 6% from the prior-year quarter. By segment, our
operating income can be summarized as follows:
THREE MONTHS ENDED
SEPTEMBER 30
------------------
2005 2004 CHANGE
------- ------- -------------
OPERATING INCOME
Specialty Foods....................... $25,844 $27,379 $(1,535) (6)%
Glassware and Candles................. 2,203 1,079 1,124 104 %
Automotive............................ 1,134 2,256 (1,122) (50)%
Corporate Expenses.................... (1,998) (1,915) (83) 4 %
------- ------- ------- ---
Total.............................. $27,183 $28,799 $(1,616) (6)%
======= ======= ======= ===
OPERATING INCOME AS A PERCENT OF SALES
Specialty Foods....................... 15.2% 17.0%
Glassware and Candles................. 3.7% 1.7%
Automotive............................ 2.0% 3.9%
Consolidated.......................... 9.5% 10.2%
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INTEREST INCOME AND OTHER - NET
The period ended September 30, 2005 included interest income and other of
$1.4 million, as compared to $0.6 million in the prior year. The increase was
primarily due to higher interest income, as interest rates on our cash
equivalents and short-term investments have been higher than in the prior year.
INCOME BEFORE INCOME TAXES
As impacted by the factors discussed above, income before income taxes
decreased by $0.8 million to $28.6 million from the prior-year total of $29.4
million. Our effective tax rate decreased from the prior-year rate of 37.5% to
36.8% in the current quarter due to the changes in state tax laws within Ohio
and the new federal production deduction created by the American Jobs Creation
Act.
NET INCOME
First quarter net income of $18.0 million decreased slightly from the
preceding year's net income for the quarter of $18.4 million. Net income per
share for the first quarter of 2006, as influenced by the above-noted items and
by the extent of share repurchases under our share repurchase program, totaled
$.53 per basic and diluted share, as compared to $.52 per basic and diluted
share recorded in the prior year.
FINANCIAL CONDITION
For the three months ended September 30, 2005, net cash used in operating
activities totaled $0.8 million, which compares to $13.7 million provided in the
comparable prior-year period. This decrease results mainly from the relative
change in inventory between quarters as well as from comparative fluctuations in
deferred income taxes and other noncash items. Consistent with the prior-year
period, the balance sheet increase in accounts receivable from June 30 to
September 30 was influenced by the seasonality of Glassware and Candles segment
sales, which is more pronounced toward the end of the first quarter.
Cash used in investing activities for the three months ended September 30,
2005 decreased to $2.2 million from the prior-year amount of $16.3 million due
to the relative change in net short-term investment activity being offset
somewhat by an increase in capital expenditures. The increase in capital
expenditures primarily reflects construction of a new salad dressing facility.
Capital expenditures for 2006 could exceed $60 million, as influenced by
increased construction activity on this facility.
Cash used in financing activities for the three months ended September 30,
2005 of $11.5 million declined from the prior-year total of $16.2 million due
primarily to a $3.9 million decrease in share repurchases. At September 30,
2005, approximately 2,838,000 shares remain authorized for future buyback. Total
dividends paid during the current period increased approximately 5% as compared
to the prior-year period due to the effects of a 9% increase in the stated
dividend rate being somewhat offset by the extent of share repurchases.
We believe that internally generated funds, our existing aggregate balances
in cash, cash equivalents and short-term investments, in addition to our
currently available bank credit arrangements, should be adequate to meet our
foreseeable cash requirements.
We reclassified our investments in auction rate securities and variable
rate demand obligations from cash and equivalents to short-term investments for
the prior-year period ended September 30, 2004. This balance sheet
reclassification resulted in the increase in short-term investments of $73.7
million and the decrease in cash and equivalents for the same amount. This
reclassification also resulted in the net short-term investment activity being
reclassified from the change in cash to a gross presentation in investing
activities on the Consolidated Statement of Cash Flows.
CONTRACTUAL OBLIGATIONS
We have various contractual obligations, which are appropriately recorded
as liabilities in our consolidated financial statements. Certain other items,
such as purchase obligations, are not recognized as liabilities in our
consolidated financial statements. Examples of items not recognized as
liabilities in our consolidated financial statements are commitments to purchase
raw materials or inventory that have not yet been received as of September 30,
2005 and future minimum lease payments for the use of property and equipment
under operating lease agreements. In our Annual Report on Form 10-K for the year
ended
15
June 30, 2005, we disclosed our contractual obligations as of June 30, 2005.
There have been no significant changes to the obligations disclosed therein.
CRITICAL ACCOUNTING POLICIES
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, 2005.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 changes the requirements for the accounting
and reporting of a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective July 1, 2005, we adopted SFAS No. 123R, "Share-Based Payment"
("SFAS 123R"), using the modified prospective method, which requires the
measurement and recognition of the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award.
Prior to SFAS 123R, our stock-based compensation plan was accounted for
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25. Under this guidance, because the exercise price of the stock
options was at least equal to the market price of the underlying stock, no
compensation expense was recognized in the financial statements.
Under the modified prospective method, we have not restated any prior
period balance sheet or income statement items. Pro forma disclosure for these
periods can be seen in Note 1 to the consolidated financial statements.
Total compensation cost related to share-based payment arrangements for the
period ended September 30, 2005 was approximately $0.2 million. This amount was
reflected in Selling, General and Administrative Expenses and has been allocated
to each segment appropriately. There was no tax benefit recorded for this
compensation cost, because it related to incentive stock options that do not
qualify for a tax deduction until, and only if, a disqualifying disposition
occurs.
At September 30, 2005, there was approximately $0.2 million of total
unrecognized compensation cost related to unvested share-based compensation
arrangements. This cost is expected to be recognized over a weighted-average
period of 1.1 years.
See Note 7 to the consolidated financial statements for further
information.
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, 2005 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.
(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.
16
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) In both August 2004 and May 2005, our Board of Directors approved share
repurchase authorizations of 2,000,000 shares, of which approximately 2,838,000
shares remain authorized for future repurchases at September 30, 2005. 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, 2005 ....... -- $ -- -- 3,026,314
August 1-31, 2005 ..... 52,688 $44.765 52,688 2,973,626
September 1-30, 2005 .. 135,318 $44.105 135,318 2,838,308
These share repurchase authorizations do not have a stated expiration date.
ITEM 6. EXHIBITS. See Index to Exhibits following Signatures.
17
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, 2005 By: /s/ JOHN B. GERLACH, JR.
---------------- ----------------------------------------
John B. Gerlach, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: November 9, 2005 By: /s/ JOHN L. BOYLAN
---------------- ----------------------------------------
John L. Boylan
Treasurer, Vice President,
Assistant Secretary,
Chief Financial Officer
(Principal Financial and Accounting
Officer) and Director
18
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2005
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
19