Marzetti Co 10-Q for FY2020 Q3
Marzetti Co (MZTI)
10-Q
2020-05-05
For: 2020-03-31
View Original
Added on
April 11, 2026
About this 10-Q
Marzetti Co filed this 10-Q on May 5, 2020, covering the quarter ended March 31, 2020 (FY2020 Q3).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $321.36M
- up 1.1% from $317.88M a year earlier
- Net income
- $22.43M
- down 26.7% from net income of $30.6M a year earlier
- Diluted EPS
- $0.81
- down 27.0% from $1.11 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form | |
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2020
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 000-04065
(Exact name of registrant as specified in its charter) | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
(Address of principal executive offices) | (Zip Code) | ||
(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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
ý | Accelerated filer | ☐ | ||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||
Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
As of April 17, 2020, there were approximately 27,516,000 shares of Common Stock, without par value, outstanding.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1A. | ||
Item 2. | ||
Item 5. | ||
Item 6. | ||
2
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share data) | March 31, 2020 | June 30, 2019 | |||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and equivalents | $ | $ | |||||
Receivables | |||||||
Inventories: | |||||||
Raw materials | |||||||
Finished goods | |||||||
Total inventories | |||||||
Other current assets | |||||||
Total current assets | |||||||
Property, Plant and Equipment: | |||||||
Land, buildings and improvements | |||||||
Machinery and equipment | |||||||
Total cost | |||||||
Less accumulated depreciation | |||||||
Property, plant and equipment-net | |||||||
Other Assets: | |||||||
Goodwill | |||||||
Other intangible assets-net | |||||||
Operating lease right-of-use assets | |||||||
Other noncurrent assets | |||||||
Total | $ | $ | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | $ | |||||
Accrued liabilities | |||||||
Total current liabilities | |||||||
Noncurrent Operating Lease Liabilities | |||||||
Other Noncurrent Liabilities | |||||||
Deferred Income Taxes | |||||||
Commitments and Contingencies | |||||||
Shareholders’ Equity: | |||||||
Preferred stock-authorized 3,050,000 shares; outstanding-none | |||||||
Common stock-authorized 75,000,000 shares; outstanding-March-27,515,651 shares; June-27,491,497 shares | |||||||
Retained earnings | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Common stock in treasury, at cost | ( | ) | ( | ) | |||
Total shareholders’ equity | |||||||
Total | $ | $ | |||||
See accompanying notes to condensed consolidated financial statements.
3
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
(Amounts in thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Net Sales | $ | $ | $ | $ | |||||||||||
Cost of Sales | |||||||||||||||
Gross Profit | |||||||||||||||
Selling, General and Administrative Expenses | |||||||||||||||
Change in Contingent Consideration | ( | ) | |||||||||||||
Restructuring and Impairment Charges | |||||||||||||||
Operating Income | |||||||||||||||
Other, Net | |||||||||||||||
Income Before Income Taxes | |||||||||||||||
Taxes Based on Income | |||||||||||||||
Net Income | $ | $ | $ | $ | |||||||||||
Net Income Per Common Share: | |||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | |||||||||||
Weighted Average Common Shares Outstanding: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
(Amounts in thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Net Income | $ | $ | $ | $ | |||||||||||
Other Comprehensive Income: | |||||||||||||||
Defined Benefit Pension and Postretirement Benefit Plans: | |||||||||||||||
Amortization of loss, before tax | |||||||||||||||
Amortization of prior service credit, before tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total Other Comprehensive Income, Before Tax | |||||||||||||||
Tax Attributes of Items in Other Comprehensive Income: | |||||||||||||||
Amortization of loss, tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization of prior service credit, tax | |||||||||||||||
Total Tax Expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other Comprehensive Income, Net of Tax | |||||||||||||||
Comprehensive Income | $ | $ | $ | $ | |||||||||||
See accompanying notes to condensed consolidated financial statements.
5
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended March 31, | |||||||
(Amounts in thousands) | 2020 | 2019 | |||||
Cash Flows From Operating Activities: | |||||||
Net income | $ | $ | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Impacts of noncash items: | |||||||
Depreciation and amortization | |||||||
Change in contingent consideration | ( | ) | |||||
Deferred income taxes and other changes | |||||||
Stock-based compensation expense | |||||||
Restructuring and impairment charges | ( | ) | |||||
Pension plan activity | ( | ) | ( | ) | |||
Changes in operating assets and liabilities: | |||||||
Receivables | ( | ) | ( | ) | |||
Inventories | ( | ) | ( | ) | |||
Other current assets | ( | ) | |||||
Accounts payable and accrued liabilities | |||||||
Net cash provided by operating activities | |||||||
Cash Flows From Investing Activities: | |||||||
Payments for property additions | ( | ) | ( | ) | |||
Cash paid for acquisitions, net of cash acquired | ( | ) | |||||
Other-net | ( | ) | ( | ) | |||
Net cash used in investing activities | ( | ) | ( | ) | |||
Cash Flows From Financing Activities: | |||||||
Payment of dividends | ( | ) | ( | ) | |||
Purchase of treasury stock | ( | ) | ( | ) | |||
Tax withholdings for stock-based compensation | ( | ) | ( | ) | |||
Other-net | ( | ) | ( | ) | |||
Net cash used in financing activities | ( | ) | ( | ) | |||
Net change in cash and equivalents | ( | ) | ( | ) | |||
Cash and equivalents at beginning of year | |||||||
Cash and equivalents at end of period | $ | $ | |||||
Supplemental Disclosure of Operating Cash Flows: | |||||||
Net cash payments for income taxes | $ | $ | |||||
See accompanying notes to condensed consolidated financial statements.
6
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
Nine Months Ended March 31, 2020 | |||||||||||||||||||||||
(Amounts in thousands, except per share data) | Common Stock Outstanding | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance, June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | |||||||||||||||||||||||
Net pension and postretirement benefit gains, net of $21 tax effect | |||||||||||||||||||||||
Cash dividends - common stock ($0.65 per share) | ( | ) | ( | ) | |||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Stock-based plans | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Balance, September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | |||||||||||||||||||||||
Net pension and postretirement benefit gains, net of $22 tax effect | |||||||||||||||||||||||
Cash dividends - common stock ($0.70 per share) | ( | ) | ( | ) | |||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | |||||||||||||||||||
Stock-based plans | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | |||||||||||||||||||||||
Net pension and postretirement benefit gains, net of $21 tax effect | |||||||||||||||||||||||
Cash dividends - common stock ($0.70 per share) | ( | ) | ( | ) | |||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Stock-based plans | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
7
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(UNAUDITED)
Nine Months Ended March 31, 2019 | |||||||||||||||||||||||
(Amounts in thousands, except per share data) | Common Stock Outstanding | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance, June 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | |||||||||||||||||||||||
Net pension and postretirement benefit gains, net of $13 tax effect | |||||||||||||||||||||||
Cash dividends - common stock ($0.60 per share) | ( | ) | ( | ) | |||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Stock-based plans | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Balance, September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | |||||||||||||||||||||||
Net pension and postretirement benefit gains, net of $14 tax effect | |||||||||||||||||||||||
Cash dividends - common stock ($0.65 per share) | ( | ) | ( | ) | |||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Stock-based plans | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | |||||||||||||||||||||||
Net pension and postretirement benefit gains, net of $13 tax effect | |||||||||||||||||||||||
Cash dividends - common stock ($0.65 per share) | ( | ) | ( | ) | |||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Stock-based plans | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Balance, March 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
8
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lancaster Colony Corporation and our wholly-owned subsidiaries, collectively referred to as “we,” “us,” “our,” “registrant” or the “Company” and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and SEC Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the interim condensed consolidated financial statements are considered to be of a normal recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our 2019 Annual Report on Form 10-K. Unless otherwise noted, the term “year” and references to a particular year pertain to our fiscal year, which begins on July 1 and ends on June 30; for example, 2020 refers to fiscal 2020, which is the period from July 1, 2019 to June 30, 2020.
Deferred Software Costs
Property, Plant and Equipment
March 31, | |||||||
2020 | 2019 | ||||||
Construction in progress in Accounts Payable | $ | $ | |||||
Earnings Per Share
Earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock and common stock equivalents (restricted stock and stock-settled stock appreciation rights) outstanding during each period. Unvested shares of restricted stock granted to employees are considered participating securities since employees receive nonforfeitable dividends prior to vesting and, therefore, are included in the earnings allocation in computing EPS under the two-class method. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with nonparticipating restricted stock and stock-settled stock appreciation rights.
9
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Basic and diluted net income per common share were calculated as follows:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Net income available to participating securities | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income available to common shareholders | $ | $ | $ | $ | |||||||||||
Weighted average common shares outstanding – basic | |||||||||||||||
Incremental share effect from: | |||||||||||||||
Nonparticipating restricted stock | |||||||||||||||
Stock-settled stock appreciation rights | |||||||||||||||
Weighted average common shares outstanding – diluted | |||||||||||||||
Net income per common share – basic | $ | $ | $ | $ | |||||||||||
Net income per common share – diluted | $ | $ | $ | $ | |||||||||||
Accumulated Other Comprehensive Loss
The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Accumulated other comprehensive loss at beginning of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Defined Benefit Pension Plan Items: | |||||||||||||||
Amortization of unrecognized net loss | |||||||||||||||
Postretirement Benefit Plan Items: | |||||||||||||||
Amortization of unrecognized net gain | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization of prior service credit | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total other comprehensive income, before tax | |||||||||||||||
Total tax expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other comprehensive income, net of tax | |||||||||||||||
Accumulated other comprehensive loss at end of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
There were no changes to our Significant Accounting Policies from those disclosed in our 2019 Annual Report on Form 10-K. However, see expanded disclosure of lease accounting policies in Note 5 due to the adoption of new lease accounting guidance.
Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to the disclosure requirements for fair value measurements. The guidance removes, modifies and adds disclosures related to fair value. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance will be effective for us in fiscal 2021, including interim periods. As the guidance only relates to disclosures, there will be no impact on our financial position or results of operations.
10
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Recently Adopted Accounting Standards
In February 2016, the FASB issued new accounting guidance to require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months and issued subsequent clarifications of this new guidance. This guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record a right-of-use asset and a lease liability based upon the present value of the lease payments. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the consolidated financial statements. In July 2018, the FASB issued guidance that allows for an alternate transition method whereby companies can recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than restating comparative periods. We adopted the new guidance on July 1, 2019 using this alternate transition method, but we did not record a cumulative-effect adjustment from initially applying the standard. We elected the package of practical expedients that permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs and made an accounting policy election to exclude short-term leases with an initial term of 12 months or less from our Consolidated Balance Sheets. We have completed the implementation of a lease accounting system to enable the preparation of financial information and have implemented relevant accounting policies and internal controls surrounding the lease accounting process. As a result of adoption, we recognized a lease liability and right-of-use asset of $33.5 million and $31.7 million, respectively. The right-of-use asset balance reflects the reclassification of deferred rent and prepaid rent against the initial asset. The adoption did not impact our results of operations or cash flows. See additional lease disclosures in Note 5.
Note 2 – Acquisitions
Omni Baking Company LLC
On November 16, 2018, we acquired substantially all of the assets of Omni Baking Company LLC (“Omni”). Omni has been a long-time supplier of products to our frozen garlic bread operations and is based in Vineland, New Jersey. The purchase price of $22.3 million, which includes the post-closing working capital adjustment, was funded with cash on hand. Omni’s results of operations are allocated between our Retail and Foodservice segments in a manner consistent with our current segment allocations. These results have been included in our condensed consolidated financial statements from the date of acquisition.
Bantam Bagels, LLC
On October 19, 2018, we acquired all the assets of Bantam Bagels, LLC (“Bantam”). Bantam, a producer and marketer of frozen mini stuffed bagels and other frozen bread products sold to both the retail and foodservice channels, is based in New York, New York. The base purchase price of $33.1 million, which includes the post-closing working capital adjustment, was funded with cash on hand. This purchase price excludes contingent consideration relating to an additional earn-out payment which is tied to performance-based conditions. In general, the terms of the acquisition specify that the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Bantam for the twelve months ending December 31, 2023. We are unable to provide a range for the amount of this earn-out because it is based on the future adjusted EBITDA of Bantam, and the earn-out does not contain a minimum or maximum value. See further discussion of the earn-out in Note 3. Bantam’s results of operations are allocated between our Retail and Foodservice segments in a manner consistent with our current segment allocations. These results have been included in our condensed consolidated financial statements from the date of acquisition.
Note 3 – Fair Value
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:
Level 1 – defined as observable inputs, such as quoted market prices in active markets.
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
11
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and equivalents, accounts receivable, accounts payable, contingent consideration payable and defined benefit pension plan assets. The estimated fair value of cash and equivalents, accounts receivable and accounts payable approximates their carrying value.
Our contingent consideration, which resulted from the earn-outs associated with our acquisitions of Bantam and Angelic Bakehouse, Inc. (“Angelic”), is measured at fair value on a recurring basis and is included in Other Noncurrent Liabilities on the Condensed Consolidated Balance Sheets. The following table summarizes our contingent consideration:
Fair Value Measurements at March 31, 2020 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Contingent consideration - Bantam | $ | $ | $ | $ | |||||||||||
Contingent consideration - Angelic | |||||||||||||||
Total contingent consideration | $ | $ | $ | $ | |||||||||||
Fair Value Measurements at June 30, 2019 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Contingent consideration - Bantam | $ | $ | $ | $ | |||||||||||
Contingent consideration - Angelic | |||||||||||||||
Total contingent consideration | $ | $ | $ | $ | |||||||||||
Bantam Contingent Consideration
This contingent consideration resulted from the earn-out associated with our October 19, 2018 acquisition of Bantam. In general, the terms of the acquisition specify the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Bantam for the twelve months ending December 31, 2023. The initial fair value of the contingent consideration was determined to be $8.0 million, which included a refinement to the purchase price allocation in the prior-year third quarter related to a change in assumptions. The fair value is measured on a recurring basis using a Monte Carlo simulation that randomly changes revenue growth, forecasted adjusted EBITDA and other uncertain variables to estimate an expected value. We record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy.
The following table represents our Level 3 fair value measurements using significant other unobservable inputs for Bantam’s contingent consideration:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Contingent consideration at beginning of period | $ | $ | $ | $ | |||||||||||
Initial fair value - (reductions)/additions | ( | ) | |||||||||||||
Change in contingent consideration included in operating income | |||||||||||||||
Contingent consideration at end of period | $ | $ | $ | $ | |||||||||||
Angelic Contingent Consideration
This contingent consideration resulted from the earn-out associated with our November 17, 2016 acquisition of Angelic. In general, the terms of the acquisition specify the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021. The initial fair value of the contingent consideration was determined to be $13.9 million. The fair value is measured on a recurring basis using a present value approach, which incorporates factors such as revenue growth and forecasted adjusted EBITDA, to estimate an expected value. We record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy. Our 2019 fair value measurements resulted in a $9.7 million reduction in the fair value of Angelic’s contingent consideration in the second quarter ended December 31, 2018 and a $7.4 million reduction in the fourth quarter ended June 30, 2019 based on changes in Angelic’s forecasted adjusted EBITDA for fiscal 2021. These adjustments were recorded in our Retail segment.
12
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table represents our Level 3 fair value measurements using significant other unobservable inputs for Angelic’s contingent consideration:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Contingent consideration at beginning of period | $ | $ | $ | $ | |||||||||||
Change in contingent consideration included in operating income | ( | ) | |||||||||||||
Contingent consideration at end of period | $ | $ | $ | $ | |||||||||||
Note 4 – Long-Term Debt
At June 30, 2019, we had an unsecured credit facility under which we could borrow, on a revolving credit basis, up to a maximum of $150 million at any one time, with potential to expand the total credit availability to $225 million subject to us obtaining consent of the issuing banks and certain other conditions.
On March 19, 2020, in the ordinary course of business, we entered into a new unsecured revolving credit facility (“New Credit Facility”), replacing the facility discussed above which was to expire in April 2021. The material terms and covenants of the New Credit Facility are substantially similar to our previous credit facility.
The New Credit Facility provides that we may borrow, on a revolving credit basis, up to a maximum of $150 million at any one time, with potential to expand the total credit availability to $225 million based on consent of the issuing banks and certain other conditions. The New Credit Facility expires on March 19, 2025 , and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the New Credit Facility. In the event that LIBOR becomes unavailable or is no longer deemed an appropriate reference rate, the New Credit Facility allows for the use of a benchmark replacement rate. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the New Credit Facility, they will be classified as long-term debt.
At March 31, 2020 and June 30, 2019, we had no borrowings outstanding under these facilities. At March 31, 2020 and June 30, 2019, we had $2.8 million and $5.1 million, respectively, of standby letters of credit outstanding, which reduced the amount available for borrowing under these facilities. We paid no interest for the three and nine months ended March 31, 2020 and 2019.
The New Credit Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions. There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a consolidated leverage ratio not greater than 3.5 to 1, subject to certain exceptions. The interest coverage ratio is calculated by dividing Consolidated EBIT by Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Net Debt by Consolidated EBITDA. All financial terms used in the covenant calculations are defined more specifically in the New Credit Facility.
Note 5 – Leases
General Lease Description
We have operating leases with initial noncancelable lease terms in excess of one year covering the rental of various facilities and equipment. Certain of these leases contain renewal options and some provide options to purchase during the lease term. Our operating leases include leases for real estate for some of our office and manufacturing facilities as well as manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these operating leases range from 1 year to 8 years.
We have finance leases with initial noncancelable lease terms in excess of one year covering the rental of various equipment. These leases are generally for manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these finance leases range from 3 years to 4 years.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Significant Assumptions and Judgments
Contract Contains a Lease
In evaluating our contracts to determine whether a contract is or contains a lease, we considered the following:
• | Whether explicitly or implicitly identified assets have been deployed in the contract; and |
• | Whether we obtain substantially all of the economic benefits from the use of that underlying asset, and we can direct how and for what purpose the asset is used during the term of the contract. |
Allocation of Consideration
In determining how to allocate consideration between lease and non-lease components in a contract that was deemed to contain a lease, we used judgment and consistent application of assumptions to reasonably allocate the consideration.
Options to Extend or Terminate Leases
We have leases which contain options to extend or terminate the leases. On a lease-by-lease basis, we have determined if the extension should be considered reasonably certain to be exercised and thus a right-of-use asset and a lease liability should be recorded.
Discount Rate
The discount rate for leases, if not explicitly stated in the lease, is the incremental borrowing rate, which is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
We used a discount rate to calculate the present value of the lease liability at the date of adoption. In the development of the discount rate, we considered our internal borrowing rate, treasury security rates, collateral and credit risk specific to us, and our lease portfolio characteristics.
As of March 31, 2020, the weighted-average discount rate of our operating and finance leases was 3.0 % and 4.1 %, respectively.
Practical Expedients and Accounting Policy Elections
We elected the package of practical expedients that permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs and made an accounting policy election to exclude short-term leases with an initial term of 12 months or less from our Consolidated Balance Sheets.
Amounts Recognized in the Financial Statements
The components of lease expense were as follows:
Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2020 | ||||||
Operating lease cost in Cost of Sales and Selling, General and Administrative Expenses | $ | $ | |||||
Finance lease cost: | |||||||
Amortization of assets in Cost of Sales | $ | $ | |||||
Interest on lease liabilities in Other, Net | |||||||
Total finance lease cost | $ | $ | |||||
Short-term lease cost in Cost of Sales and Selling, General and Administrative Expenses | |||||||
Total net lease cost | $ | $ | |||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Supplemental balance sheet information related to leases is as follows:
March 31, 2020 | |||
Operating Leases | |||
Operating Lease Right-Of-Use Assets | $ | ||
Current operating lease liabilities in Accrued Liabilities | $ | ||
Noncurrent Operating Lease Liabilities | |||
Total operating lease liabilities | $ | ||
Finance Leases | |||
Finance lease right-of-use assets in Property, Plant and Equipment-Net | $ | ||
Current finance lease liabilities in Accrued Liabilities | $ | ||
Noncurrent finance lease liabilities in Other Noncurrent Liabilities | |||
Total finance lease liabilities | $ | ||
Supplemental cash flow information related to leases is as follows:
Nine Months Ended March 31, 2020 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | ||
Operating cash flows from finance leases | $ | ||
Financing cash flows from finance leases | $ | ||
Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets | $ | ||
Supplemental noncash information on lease liabilities removed due to purchase of leased asset | $ | ||
As of March 31, 2020, the maturities of lease liabilities were as follows:
Operating Leases | Finance Leases | ||||||
Three months ending June 30, 2020 | $ | $ | |||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
2024 | |||||||
Thereafter | |||||||
Total minimum payments | $ | $ | |||||
Less amount representing interest | ( | ) | ( | ) | |||
Present value of lease obligations | $ | $ | |||||
As of March 31, 2020, the weighted-average remaining term of our operating and finance leases was 4.8 years and 3.5 years, respectively.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
As previously disclosed in our 2019 Annual Report on Form 10-K and under the previous lease accounting standard (Topic 840), as of June 30, 2019, future minimum lease payments under noncancelable leases with initial lease terms in excess of one year were as follows:
Operating Leases | Capital Leases | ||||||
2020 | $ | $ | |||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
2024 | |||||||
Thereafter | |||||||
Total minimum payments | $ | $ | |||||
Less amount representing interest | ( | ) | |||||
Present value of capital lease obligations | $ | ||||||
Note 6 – Contingencies
At March 31, 2020, we were a party to various claims and litigation matters arising in the ordinary course of business. Such matters did not have a material effect on the current-year results of operations and, in our opinion, their ultimate disposition will not have a material effect on our consolidated financial statements.
A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. In the U.S., state and local governments recommended or mandated actions to slow the transmission of COVID-19. We continue to monitor the rapidly evolving situation and guidance from authorities, including federal, state and local public health departments. We reviewed the carrying value of our assets as of March 31, 2020 and recorded additional reserves for inventory and receivables related to the impact of COVID-19 on our Foodservice segment. The future impact of COVID-19 on our results of operations, financial condition, and cash flows are contingent upon the duration and severity of the outbreak.
Our acquisitions of Angelic and Bantam included provisions for contingent consideration for the earn-outs associated with these transactions. See further discussion in Note 3.
Note 7 – Goodwill and Other Intangible Assets
Goodwill attributable to the Retail and Foodservice segments was $157.4 million and $51.0 million, respectively, at March 31, 2020 and June 30, 2019.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes our identifiable other intangible assets:
March 31, 2020 | June 30, 2019 | ||||||
Tradenames (20 to 30-year life) | |||||||
Gross carrying value | $ | $ | |||||
Accumulated amortization | ( | ) | ( | ) | |||
Net carrying value | $ | $ | |||||
Customer Relationships (10 to 15-year life) | |||||||
Gross carrying value | $ | $ | |||||
Accumulated amortization | ( | ) | ( | ) | |||
Net carrying value | $ | $ | |||||
Technology / Know-how (10-year life) | |||||||
Gross carrying value | $ | $ | |||||
Accumulated amortization | ( | ) | ( | ) | |||
Net carrying value | $ | $ | |||||
Non-compete Agreements (5-year life) | |||||||
Gross carrying value | $ | $ | |||||
Accumulated amortization | ( | ) | ( | ) | |||
Net carrying value | $ | $ | |||||
Total net carrying value | $ | $ | |||||
Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses, was as follows:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Amortization expense | $ | $ | $ | $ | |||||||||||
Total annual amortization expense for each of the next five years is estimated to be as follows:
2021 | $ | ||
2022 | $ | ||
2023 | $ | ||
2024 | $ | ||
2025 | $ | ||
Note 8 – Income Taxes
Prepaid federal income taxes of $10.7 million and $5.2 million were included in Other Current Assets at March 31, 2020 and June 30, 2019, respectively. Prepaid state and local income taxes of $1.1 million and $0.1 million were included in Other Current Assets at March 31, 2020 and June 30, 2019, respectively.
Note 9 – Business Segment Information
Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied.
Retail - The vast majority of the products we sell in the Retail segment are sold through sales personnel, food brokers and distributors in the United States. We have placement of products in grocery produce departments through our refrigerated salad dressings, vegetable dips and fruit dips. Our flatbread products and sprouted grain bakery products are generally placed in the specialty bakery/deli section of the grocery store. We also have products typically marketed in the shelf-stable section of the grocery store, which include salad dressing, slaw dressing and croutons. Within the frozen food section of the grocery store, we sell yeast rolls, garlic breads and mini stuffed bagels.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Foodservice - The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors in the United States. Most of the products we sell in the Foodservice segment are custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls. The majority of our Foodservice sales are products sold under private label to restaurants. We also manufacture and sell various branded Foodservice products to distributors. Finally, within this segment, we sell other roll products under a transitional co-packing arrangement resulting from the Omni acquisition.
As many of our products are similar between our two segments, our procurement, manufacturing, warehousing and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. Consequently, we do not prepare, and our Chief Operating Decision Maker does not review, separate balance sheets for the reportable segments. As such, our external reporting does not include the presentation of identifiable assets by reportable segment. The composition of our identifiable assets at March 31, 2020 is generally consistent with that of June 30, 2019.
We evaluate our Retail and Foodservice segments based on net sales and operating income which follow:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net Sales | |||||||||||||||
Retail | $ | $ | $ | $ | |||||||||||
Foodservice | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Operating Income | |||||||||||||||
Retail | $ | $ | $ | $ | |||||||||||
Foodservice | |||||||||||||||
Restructuring and Impairment Charges | ( | ) | |||||||||||||
Corporate Expenses | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total | $ | $ | $ | $ | |||||||||||
The following table sets forth net sales disaggregated by class of similar products for the Retail and Foodservice segments:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Retail | |||||||||||||||
Frozen breads | $ | $ | $ | $ | |||||||||||
Refrigerated dressings, dips and other | |||||||||||||||
Shelf-stable dressings and croutons | |||||||||||||||
Total Retail net sales | $ | $ | $ | $ | |||||||||||
Foodservice | |||||||||||||||
Dressings and sauces | $ | $ | $ | $ | |||||||||||
Frozen breads and other | |||||||||||||||
Other roll products | |||||||||||||||
Total Foodservice net sales | $ | $ | $ | $ | |||||||||||
Total net sales | $ | $ | $ | $ | |||||||||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table provides an additional disaggregation of Foodservice net sales by type of customer:
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Foodservice | |||||||||||||||
National accounts | $ | $ | $ | $ | |||||||||||
Branded and other | |||||||||||||||
Other roll products | |||||||||||||||
Total Foodservice net sales | $ | $ | $ | $ | |||||||||||
Note 10 – Stock-Based Compensation
There have been no changes to our stock-based compensation plans from those disclosed in our 2019 Annual Report on Form 10-K.
Our stock-settled stock appreciation rights (“SSSARs”) compensation expense was $0.7 million for the three months ended March 31, 2020 and 2019. Year-to-date SSSARs compensation expense was $2.2 million for the current-year period compared to $2.3 million for the prior-year period. At March 31, 2020, there was $7.0 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of 2 years.
Our restricted stock compensation expense was $0.7 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively. Year-to-date restricted stock compensation expense was $2.1 million for the current-year period compared to $2.2 million for the prior-year period. At March 31, 2020, there was $6.4 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of 2 years.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2020 refers to fiscal 2020, which is the period from July 1, 2019 to June 30, 2020.
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto, all included elsewhere in this report, and our 2019 Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements due to these factors. For more information, see the section below entitled “Forward-Looking Statements.”
OVERVIEW
Business Overview
Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.
Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied.
Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States.
Our business has the potential to achieve future growth in sales and profitability due to attributes such as:
• | leading Retail market positions in several product categories with a high-quality perception; |
• | recognized innovation in Retail products; |
• | a broad customer base in both Retail and Foodservice accounts; |
• | well-regarded culinary expertise among Foodservice customers; |
• | recognized leadership in Foodservice product development; |
• | experience in integrating complementary business acquisitions; and |
• | historically strong cash flow generation that supports growth opportunities. |
Our goal is to grow both Retail and Foodservice segment sales over time by:
• | introducing new products and expanding distribution; |
• | leveraging the strength of our Retail brands to increase current product sales; |
• | expanding Retail growth through strategic licensing agreements; |
• | continuing to rely upon the strength of our reputation in Foodservice product development and quality; and |
• | acquiring complementary businesses. |
With respect to long-term growth, we continually evaluate the future opportunities and needs for our business specific to our plant infrastructure, IT platforms and other initiatives to support and strengthen our operations. Recent examples of resulting investments include a significant capacity expansion project for our Sister Schubert’s frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020; a new R&D center that was completed near the end of 2019; and the establishment of a Transformation Program Office in 2019 that will serve to coordinate our various capital and integration efforts, including our enterprise resource planning system (“ERP”) that is now underway.
We also continue to review potential acquisitions that we believe will complement our existing product lines, enhance our profitability and/or offer good expansion opportunities in a manner that fits our overall strategic goals. Consistent with this acquisition strategy, on November 16, 2018, we acquired, using available cash on hand, substantially all of the assets of Omni Baking Company LLC (“Omni”), a long-time supplier of products to our frozen garlic bread operations. On October 19, 2018, we acquired, using available cash on hand, all the assets of Bantam Bagels, LLC (“Bantam”), a producer and marketer of frozen mini stuffed bagels and other frozen bread products sold to both the retail and foodservice channels. See further discussion of these acquisitions in Note 2 to the condensed consolidated financial statements.
RECENT EVENTS
A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in business slowdowns or shutdowns in affected areas. In the U.S., state and local
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governments recommended or mandated actions to slow the transmission of COVID-19. These measures include limitations on public gatherings, social distancing requirements, travel restrictions, closures of bars and dine-in restaurants, stay-at-home orders, quarantines and restrictions that prohibit many non-essential employees from going to work.
We have two major priorities while navigating through this period of volatility and uncertainty:
1. | to ensure the health, safety and welfare of our employees; and |
2. | to continue to play our part in the vital food supply chain by adequately supplying our customers while maintaining the financial strength of our business. |
With respect to our efforts to ensure the health, safety and welfare of our employees, we are complying with all guidelines issued by the Centers for Disease Control and Prevention as well as state and local health departments. We have also engaged a pulmonology and critical care physician to advise us on our employee safety protocols. Based on the advice of these experts, we have put in place a range of safety modifications and guidelines in our factories, distribution centers and offices to ensure that we can operate safely, including but not limited to:
• | engaging a third party to conduct employee temperature checks prior to entering our production facilities; |
• | conducting extensive cleaning and sanitation of workstations and common areas before, during, and after each shift; |
• | employing social distancing guidelines and modifications at workspaces and in break areas; |
• | staggering between shift changes and breaks; |
• | relaxing attendance requirements and enhancing our paid leave policy; |
• | implementing quarantine protocols in the event of confirmed or suspected cases of COVID-19; |
• | providing a $300 bonus for each of our front-line employees in late March and increasing the wage rate for our hourly front-line employees by $2 per hour beginning in April through the end date of the applicable stay-at-home order; |
• | establishing business travel restrictions; and |
• | working from home whenever possible, consistent with the applicable stay-at-home order. |
With respect to our second priority, as of the date of this filing, there has been no material adverse change in our ability to manufacture and distribute our products. We have not experienced any significant disruptions to our shipping or warehousing operations or sourcing of raw materials. We are also pursuing additional second-sourcing options to help limit the risk of supply disruptions.
We continue to monitor the rapidly evolving situation and guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future. However, we do expect that it could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to higher-than-normal inventory levels, revised payment terms with certain of our customers, additional reserves for inventory and receivables, and higher plant operating costs.
During the three months ended March 31, 2020, particularly the month of March, the effects of COVID-19 and the related actions undertaken in the U.S. to attempt to control its spread, specifically the restriction of restaurant dine-in purchases and imposition of stay-at-home orders, negatively impacted the operating results of our Foodservice segment. In the three-month period, our Foodservice segment sales declined 8% to $151.9 million while segment operating income fell 46% to $9.2 million, including a $4.5 million inventory write-down attributed to the abrupt mid-March slowdown in our Foodservice demand. We anticipate Foodservice segment sales will continue to be negatively impacted and the recovery period for this segment’s sales and operating results is contingent upon the timeline for the resumption of full-service operations at U.S. restaurants, the lifting of stay-at-home orders, the overall pace of the U.S. economic recovery and the willingness of consumers to return to away-from-home dining.
With respect to our Retail segment, the impact of COVID-19 resulted in an increase in sales during the three months ended March 31, 2020, particularly starting mid-March, as consumer food purchases transitioned away from the foodservice channel and into the retail channel. We anticipate this sales shift to our Retail segment will continue at least until U.S. restaurants can resume normal operations and consumers return to more typical levels of spending in the foodservice channel.
Our Foodservice segment, which in 2019 accounted for 50% of our total net sales and approximately 65% of our total pounds produced, is undergoing reduced throughput due to the impact of COVID-19, which will result in a reduction in the recovery of our fixed manufacturing and overhead costs, and will therefore unfavorably influence our financial results.
We continue to operate from a position of financial strength and believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to our access to capital under our unsecured revolving credit facility, should be adequate to meet our liquidity needs over the next 12 months. We are also putting a greater emphasis on tracking the
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financial strength of our customers and suppliers and taking actions, where determined necessary, to limit our financial exposure and operational risks. Additional details regarding our financial strength are provided in the “Financial Condition” section below.
RESULTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands, except per share data) | Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||
Net Sales | $ | 321,363 | $ | 317,882 | $ | 3,481 | 1 | % | $ | 1,013,534 | $ | 984,117 | $ | 29,417 | 3 | % | |||||||||||||
Cost of Sales | 244,401 | 242,485 | 1,916 | 1 | % | 744,575 | 736,129 | 8,446 | 1 | % | |||||||||||||||||||
Gross Profit | 76,962 | 75,397 | 1,565 | 2 | % | 268,959 | 247,988 | 20,971 | 8 | % | |||||||||||||||||||
Gross Margin | 23.9 | % | 23.7 | % | 26.5 | % | 25.2 | % | |||||||||||||||||||||
Selling, General and Administrative Expenses | 46,907 | 37,981 | 8,926 | 24 | % | 132,109 | 109,902 | 22,207 | 20 | % | |||||||||||||||||||
Change in Contingent Consideration | 65 | 88 | (23 | ) | (26 | )% | 192 | (9,517 | ) | 9,709 | (102 | )% | |||||||||||||||||
Restructuring and Impairment Charges | — | — | — | N/M | 886 | — | 886 | N/M | |||||||||||||||||||||
Operating Income | 29,990 | 37,328 | (7,338 | ) | (20 | )% | 135,772 | 147,603 | (11,831 | ) | (8 | )% | |||||||||||||||||
Operating Margin | 9.3 | % | 11.7 | % | 13.4 | % | 15.0 | % | |||||||||||||||||||||
Other, Net | 727 | 1,329 | (602 | ) | (45 | )% | 3,031 | 3,682 | (651 | ) | (18 | )% | |||||||||||||||||
Income Before Income Taxes | 30,717 | 38,657 | (7,940 | ) | (21 | )% | 138,803 | 151,285 | (12,482 | ) | (8 | )% | |||||||||||||||||
Taxes Based on Income | 8,288 | 8,053 | 235 | 3 | % | 32,205 | 33,746 | (1,541 | ) | (5 | )% | ||||||||||||||||||
Effective Tax Rate | 27.0 | % | 20.8 | % | 23.2 | % | 22.3 | % | |||||||||||||||||||||
Net Income | $ | 22,429 | $ | 30,604 | $ | (8,175 | ) | (27 | )% | $ | 106,598 | $ | 117,539 | $ | (10,941 | ) | (9 | )% | |||||||||||
Diluted Net Income Per Common Share | $ | 0.81 | $ | 1.11 | $ | (0.30 | ) | (27 | )% | $ | 3.87 | $ | 4.26 | $ | (0.39 | ) | (9 | )% | |||||||||||
Net Sales
Consolidated net sales for the three months ended March 31, 2020 increased 1% to a third quarter record $321.4 million versus $317.9 million last year. This growth was driven by an increase in Retail segment net sales partially offset by a decline in Foodservice segment net sales. Consolidated net sales for the nine months ended March 31, 2020 increased 3% due to higher sales for both segments. See discussion of net sales by segment following the discussion of “Earnings Per Share” below.
Gross Profit
Consolidated gross profit for the three months ended March 31, 2020 increased $1.6 million, or 2%, to $77.0 million compared to the prior-year period. The increase was driven by the favorable sales mix shift to the Retail segment and our cost savings programs. Gross profit was unfavorably impacted by a $4.5 million inventory write-down attributed to an abrupt mid-March slowdown in Foodservice demand due to the impact of COVID-19. In addition, the company incurred a charge of $1.0 million for bonuses paid to the front-line employees in our factories and distribution network in gratitude for their work in helping us meet the shifting demand within our business.
Consolidated gross profit for the nine months ended March 31, 2020 increased $21.0 million, or 8%, to $269.0 million compared to the prior-year period. The increase was driven by the higher sales volumes, our cost savings programs, lower commodity costs and improved net price realization, as partially offset by the impact of COVID-19.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased 24% for the three months ended March 31, 2020 and increased 20% for the year-to-date period. These increases were primarily driven by ERP expenses, higher IT-related costs and increased consumer spending, as well as higher bad debt expense related to the impact of COVID-19. ERP expenses are included within Corporate Expenses.
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Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||
SG&A Expenses - Excluding ERP | $ | 42,030 | $ | 37,981 | $ | 4,049 | 11 | % | $ | 119,617 | $ | 109,902 | $ | 9,715 | 9 | % | |||||||||||||
ERP Expenses | 4,877 | — | 4,877 | N/M | 12,492 | — | 12,492 | N/M | |||||||||||||||||||||
Total SG&A Expenses | $ | 46,907 | $ | 37,981 | $ | 8,926 | 24 | % | $ | 132,109 | $ | 109,902 | $ | 22,207 | 20 | % | |||||||||||||
Change in Contingent Consideration
The change in contingent consideration resulted in expense of $0.1 million and $0.2 million for the three and nine months ended March 31, 2020, respectively, compared to expense of $0.1 million and a net benefit of $9.5 million for the three and nine months ended March 31, 2019, respectively. The prior-year net benefit for the year-to-date period reflected a $9.7 million reduction in the fair value of the contingent consideration liability for Angelic Bakehouse, Inc. (“Angelic”) as a result of our December 31, 2018 fair value measurement. See further discussion in Note 3 to the condensed consolidated financial statements.
Restructuring and Impairment Charges
In the fourth quarter of 2019, we committed to a plan to close our frozen bread manufacturing plant located in Saraland, Alabama. This decision was intended to provide greater production efficiency by consolidating most of this facility’s operations into other existing plants, outsourcing certain requirements and discontinuing less profitable frozen bread products. Production at the plant ceased in July 2019. The operations of this plant have not been classified as discontinued operations as the closure did not represent a strategic shift that would have a major effect on our operations or financial results.
We recorded restructuring and impairment charges of $0.9 million for the nine months ended March 31, 2020, which primarily consisted of plant clean-up expenses and contract termination costs. These charges were not allocated to our two reportable segments due to their unusual nature. All of these charges were recorded in the three months ended September 30, 2019, and we do not expect any additional charges attributed to this plant closure.
Operating Income
Operating income decreased 20% and 8% for the three and nine months ended March 31, 2020, respectively. For the quarter, operating income was unfavorably influenced by the $4.5 million write-down of Foodservice inventory and higher SG&A costs, including ERP expenses. The change in operating income for the year-to-date period was also unfavorably impacted by the prior-year benefit from the reduction in the fair value of Angelic’s contingent consideration and the current-year restructuring and impairment charges. See discussion of operating results by segment following the discussion of “Earnings Per Share” below.
Taxes Based on Income
Our effective tax rate was 23.2% and 22.3% for the nine months ended March 31, 2020 and 2019, respectively. For the nine months ended March 31, 2020 and 2019, our effective tax rate varied from the statutory federal income tax rate as a result of the following factors:
Nine Months Ended March 31, | |||||
2020 | 2019 | ||||
Statutory rate | 21.0 | % | 21.0 | % | |
State and local income taxes | 2.9 | 2.5 | |||
Net windfall tax benefits - stock-based compensation | (0.9 | ) | (1.0 | ) | |
Other | 0.2 | (0.2 | ) | ||
Effective rate | 23.2 | % | 22.3 | % | |
We include the tax consequences related to stock-based compensation within the computation of income tax expense. We may experience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. For the nine months ended March 31, 2020 and 2019, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.9% and 1.0%, respectively.
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Earnings Per Share
As influenced by the factors noted above, diluted net income per share for the third quarter of 2020 totaled $0.81, as compared to $1.11 per diluted share in the prior year. Year-to-date net income per share was $3.87 per diluted share, as compared to $4.26 per diluted share for the prior-year period. Diluted weighted average common shares outstanding have remained relatively stable for the current and prior-year periods ended March 31.
In 2020, spend for the ERP reduced diluted earnings per share by $0.13 and $0.34 for the third quarter and year-to-date periods, respectively. The Foodservice inventory write-down and bonuses paid to front-line employees reduced net income per diluted share by $0.15 for the current-year third quarter and year-to-date periods. The restructuring and impairment charge had an unfavorable impact of $0.02 per diluted share for the nine months ended March 31, 2020. In 2019, the reduction in the fair value of Angelic’s contingent consideration liability increased diluted earnings per share by $0.27 for the year-to-date period.
RESULTS OF OPERATIONS - SEGMENTS
Retail Segment
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||
Net Sales | $ | 169,414 | $ | 153,038 | $ | 16,376 | 11 | % | $ | 521,701 | $ | 502,088 | $ | 19,613 | 4 | % | |||||||||||||
Operating Income | $ | 29,609 | $ | 24,082 | $ | 5,527 | 23 | % | $ | 104,061 | $ | 102,815 | $ | 1,246 | 1 | % | |||||||||||||
Operating Margin | 17.5 | % | 15.7 | % | 19.9 | % | 20.5 | % | |||||||||||||||||||||
For the three months ended March 31, 2020, Retail segment net sales increased 11%. Retail net sales benefited from higher demand as the COVID-19 outbreak and related stay-at-home orders led to increased consumption in the retail channel. New products introduced during the quarter also contributed to Retail sales growth. The higher sales volumes were led by frozen garlic bread, shelf-stable dressings and sauces sold under license agreements and frozen dinner rolls.
Year-to-date net sales for the Retail segment reached $521.7 million, a 4% increase from the prior-year total of $502.1 million driven by higher sales of frozen garlic bread, croutons, shelf-stable dressings and sauces sold under license agreements and frozen dinner rolls. The sales increase is due in part to higher retail channel demand attributed to the impact of COVID-19 along with the strategic growth initiatives we have implemented for our Retail segment.
For the three months ended March 31, 2020, Retail segment operating income increased 23%, reflecting benefits from the increased sales volume, our cost savings programs and improved net price realization.
For the nine months ended March 31, 2020, Retail segment operating income increased 1% as the prior-year results were favorably impacted by the $9.7 million reduction in the fair value of Angelic’s contingent consideration liability. Retail segment operating income benefited from the higher sales volumes, our cost savings programs and improved net price realization, as partially offset by higher trade and consumer promotional spending.
Foodservice Segment
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||
Net Sales | $ | 151,949 | $ | 164,844 | $ | (12,895 | ) | (8 | )% | $ | 491,833 | $ | 482,029 | $ | 9,804 | 2 | % | ||||||||||||
Operating Income | $ | 9,185 | $ | 17,124 | $ | (7,939 | ) | (46 | )% | $ | 56,390 | $ | 55,390 | $ | 1,000 | 2 | % | ||||||||||||
Operating Margin | 6.0 | % | 10.4 | % | 11.5 | % | 11.5 | % | |||||||||||||||||||||
For the three months ended March 31, 2020, Foodservice segment net sales decreased 8%. Excluding all sales attributed to Omni, Foodservice segment net sales declined 7% as foodservice channel demand was unfavorably influenced by the impact of COVID-19. Omni sales totaled $5.3 million in the current year compared to $7.9 million in the prior year. Note that Omni sales are attributed to a temporary supply agreement that is expected to end by December 2020 with declining sales projected through the end of the agreement.
For the nine months ended March 31, 2020, Foodservice segment net sales increased 2%. Excluding all sales attributed to Omni, Foodservice segment net sales were nearly flat as the decline in national chain restaurant sales resulting from the impact of COVID-19 was offset by higher Bantam sales and improved sales for branded products and frozen pasta products. Omni sales totaled $19.5 million in the current year compared to $11.7 million in the prior year.
The decline in Foodservice segment operating income for the three months ended March 31, 2020 reflects the impact of the sales decline and the $4.5 million inventory write-down, both of which are attributed to the impact of COVID-19. The
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modest increase in Foodservice segment operating income for the nine months ended March 31, 2020 is attributed to a more favorable sales mix and the benefits from our cost savings programs which were nearly offset by the unfavorable impact of COVID-19.
Corporate Expenses
For the three months ended March 31, 2020 and 2019, corporate expenses totaled $8.8 million and $3.9 million, respectively. For the nine months ended March 31, 2020 and 2019, corporate expenses totaled $23.8 million and $10.6 million, respectively. The increase for both periods was primarily driven by ERP expenses which totaled $4.9 million and $12.5 million for the three and nine months ended March 31, 2020, respectively. For the nine months ended March 31, 2020, we also capitalized an additional $4.9 million of ERP-related expenditures for application development stage activities.
LOOKING FORWARD
Looking forward to our fiscal fourth quarter, our Foodservice segment sales will continue to be unfavorably influenced by the impact of the COVID-19 pandemic as the restaurant industry experiences steep sales declines due to restrictions on dine-in purchases and the imposition of stay-at-home orders. The full impact of these circumstances on our Foodservice segment sales and operating results is difficult to quantify based on the uncertainty surrounding the timeline for the resumption of full-service operations at U.S. restaurants, the lifting of stay-at-home orders, the overall pace of the U.S. economic recovery and the willingness of consumers to return to away-from-home dining. We anticipate that since the Foodservice segment accounted for 50% of our total net sales and approximately 65% of our total pounds produced in 2019, notable declines in our Foodservice segment sales will unfavorably impact the absorption of fixed manufacturing and overhead expenses. We have taken actions to reduce costs resulting from the lower Foodservice segment demand including voluntary furlough programs. We anticipate fiscal fourth quarter Retail segment sales will continue to benefit from the shift in consumer purchases to retail stores due to the stay-at-home orders and other changes in consumer behavior attributed to COVID-19. Note that under the current environment, new product launches into the retail channel are subject to delay by some retailers as they focus their efforts on stocking shelves with existing items and, in some cases, forgo shelf resets to introduce new items. With respect to our ERP initiative, considering the current environment resulting from the impact of COVID-19, we are delaying the implementation timeframe for the project but will continue with our design stage efforts.
FINANCIAL CONDITION
For the nine months ended March 31, 2020, net cash provided by operating activities totaled $119.1 million, as compared to $143.4 million in the prior-year period. This decrease was due to the year-over-year change in net working capital and lower net income, as partially offset by the impact of the prior-year reduction in the fair value of Angelic’s contingent consideration and the current-year increase in the deferred income tax liability due to additional bonus depreciation taken for tax purposes.
Cash used in investing activities for the nine months ended March 31, 2020 was $72.4 million, as compared to $102.1 million in the prior year. This decrease primarily reflects the impact of the prior-year second quarter acquisitions of Bantam and Omni as partially offset by a higher level of capital expenditures paid in the current year. The year-over-year increase in our capital expenditures includes spending on a capacity expansion project at our frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020 and the purchase of the Omni manufacturing facility that was previously leased.
Cash used in financing activities for the nine months ended March 31, 2020 of $65.2 million increased from the prior-year total of $59.7 million. This increase was primarily due to higher dividend payments.
Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at March 31, 2020. At March 31, 2020, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires in March 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.
The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At March 31, 2020, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At March 31, 2020, there were no events that would constitute a default under this facility.
We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or curtailment of cash dividends or
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share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due.
We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments. Due to the recent shifts in demand between our Retail and Foodservice segments and uncertainty attributed to the impact of COVID-19, we have canceled the planned expansion of our dressing and sauce production facility in Horse Cave, Kentucky and terminated the related design/build agreement effective May 1, 2020. We are obligated to pay for work completed as of the date of termination and for any costs actually incurred as a result of the termination, which are not expected to be material. Based on our current plans and expectations, we believe our capital expenditures for 2020 will total approximately $90 million. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations.
CONTRACTUAL OBLIGATIONS
We have various contractual obligations that are appropriately recorded as liabilities in our condensed consolidated financial statements. Certain other contractual obligations are not recognized as liabilities in our condensed consolidated financial statements. Examples of such items are commitments to purchase raw materials or packaging inventory that has not yet been received as of March 31, 2020. There have been no significant changes to the contractual obligations disclosed in our 2019 Annual Report on Form 10-K aside from expected changes in raw-material costs associated with changes in product demand or pricing.
CRITICAL ACCOUNTING POLICIES
There have been no changes in critical accounting policies from those policies disclosed in our 2019 Annual Report on Form 10-K. We adopted the new lease accounting guidance on July 1, 2019. See expanded disclosure of lease accounting policies in Note 5 to the condensed consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 to the condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below, many of which could be amplified by the COVID-19 pandemic. Management believes these forward-looking statements to be reasonable; however, one should not place undue reliance on such statements that are based on current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update such forward-looking statements, except as required by law.
Items which could impact these forward-looking statements include, but are not limited to:
• | significant shifts in consumer demand and disruptions to our employees, communities, customers, supply chains, operations, and production processes resulting from COVID-19 and other epidemics, pandemics or similar widespread public health concerns and disease outbreaks; |
• | efficiencies in plant operations; |
• | dependence on contract manufacturers, distributors and freight transporters, including their financial strength in continuing to support our business; |
• | fluctuations in the cost and availability of ingredients and packaging; |
• | the potential for loss of larger programs or key customer relationships; |
• | capacity constraints that may affect our ability to meet demand or may increase our costs; |
• | changes in demand for our products, which may result from loss of brand reputation or customer goodwill; |
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• | difficulties in designing and implementing our new enterprise resource planning system; |
• | cyber-security incidents, information technology disruptions, and data breaches; |
• | ability to successfully grow recently acquired businesses; |
• | the extent to which recent and future business acquisitions are completed and acceptably integrated; |
• | price and product competition; |
• | the lack of market acceptance of new products; |
• | the success and cost of new product development efforts; |
• | the impact of customer store brands on our branded retail volumes; |
• | the reaction of customers or consumers to price increases we may implement; |
• | adverse changes in freight, energy or other costs of producing, distributing or transporting our products; |
• | stability of labor relations; |
• | dependence on key personnel and changes in key personnel; |
• | the effect of consolidation of customers within key market channels; |
• | the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs; |
• | the possible occurrence of product recalls or other defective or mislabeled product costs; |
• | maintenance of competitive position with respect to other manufacturers; |
• | changes in estimates in critical accounting judgments; |
• | the impact of any regulatory matters affecting our food business, including any required labeling changes and their impact on consumer demand; |
• | the outcome of any litigation or arbitration; |
• | adequate supply of skilled labor; and |
• | certain other factors, including the information disclosed in our discussion of risk factors under Item 1A of our 2019 Annual Report on Form 10-K. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks have not changed materially from those disclosed in our 2019 Annual Report on Form 10-K.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is 1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and 2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. No changes were made to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1A. Risk Factors
Other than the addition of the following item, there have been no material changes to the risk factors disclosed under Item 1A in our 2019 Annual Report on Form 10-K.
Epidemics, pandemics or similar widespread public health concerns and disease outbreaks, such as the novel coronavirus (“COVID-19”), have disrupted and may continue to disrupt consumption, supply chains, operations and production processes, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Epidemics, pandemics or similar widespread health concerns and disease outbreaks, such as COVID-19, as well as related government mandates, including the avoidance of gatherings, self-quarantine and the closure of a variety of businesses and restaurants have negatively affected and may continue to negatively affect our business, results of operations, financial condition and cash flows. These effects may include, but are not limited to:
• | significant reductions or volatility in consumer demand for our products as quarantines, stay-at-home orders, travel restrictions, restrictions on gatherings, actual disease outbreaks, customer fears and financial hardship of customers may inhibit consumption or shift demand from discretionary or higher-priced products to lower-priced products and restrict the business operations of our retail and foodservice customers; |
• | forced or temporary curtailment of business operations, including the closure of restaurants and restaurant chains or limitations on restaurants to offer only take-out or delivery sales, resulting in a significant reduction in demand for our foodservice products; |
• | failure of third parties on which we rely, including our customers, distributors, suppliers, contract manufacturers, and other partners to meet their obligations to us, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties; |
• | inability to meet our retail customers’ needs and achieve cost targets due to disruption in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials or other finished product components, transportation, workforce, or other manufacturing and distribution capability; and |
• | disruption in operations if a significant percentage of our workforce is unable to work due to illness, travel or other government restrictions, or other reasons in connection with epidemics, pandemics or disease outbreaks. |
Despite our efforts to manage and remedy these effects, their ultimate significance also depends on factors beyond our knowledge or control, including the duration and severity of any such outbreak as well as third-party actions taken to contain the spread and mitigate public health effects.
In addition, pandemics or disease outbreaks could result in a widespread health crisis that could adversely affect the economies and financial markets of many areas, resulting in economic downturns (local, regional, national, and/or global) that could affect customers’ demand for our products.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) In November 2010, our Board of Directors approved a share repurchase authorization of 2,000,000 common shares, of which 1,316,387 common shares remained authorized for future repurchases at March 31, 2020. This share repurchase authorization does not have a stated expiration date. In the third quarter, we made the following repurchases of our common stock:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares that May Yet be Purchased Under the Plans | ||||||||
January 1-31, 2020 | — | $ | — | — | 1,344,099 | |||||||
February 1-29, 2020 (1) | 2,660 | $ | 156.95 | 2,660 | 1,341,439 | |||||||
March 1-31, 2020 (1) | 25,052 | $ | 139.61 | 25,052 | 1,316,387 | |||||||
Total | 27,712 | $ | 141.27 | 27,712 | 1,316,387 | |||||||
(1) | Includes 2,660 shares in February 2020 and 52 shares in March 2020 that were repurchased in satisfaction of tax withholding obligations arising from the vesting of restricted stock granted to employees under the Lancaster Colony Corporation 2015 Omnibus Incentive Plan. |
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Item 5. Other Information
On February 27, 2020, T. Marzetti Company (“T. Marzetti”), a wholly-owned subsidiary of ours, entered into a Design/Build Agreement (the “Agreement”) with Gray Construction, Inc. (“Gray”) for the design and construction of an expansion of T. Marzetti’s existing facility in Hart County, Kentucky at a guaranteed maximum price of approximately $80 million. This expansion was intended to support the growth of certain national chain restaurant accounts. Based on the recent shifts in demand between our Retail and Foodservice segments and uncertainty attributed to COVID-19, T. Marzetti terminated the Agreement effective May 1, 2020. T. Marzetti is obligated to pay Gray for work completed as of the date of termination and for any costs actually incurred as a result of the termination, which are not expected to be material.
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: | May 5, 2020 | By: | /s/ DAVID A. CIESINSKI | ||
David A. Ciesinski | |||||
President, Chief Executive Officer | |||||
and Director | |||||
(Principal Executive Officer) | |||||
Date: | May 5, 2020 | By: | /s/ THOMAS K. PIGOTT | ||
Thomas K. Pigott | |||||
Chief Financial Officer and Assistant Secretary | |||||
(Principal Financial and Accounting Officer) | |||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2020
INDEX TO EXHIBITS
Exhibit Number | Description | |
10.1(a), (b) | ||
10.2(a), (b) | ||
31.1(b) | ||
31.2(b) | ||
32(c) | ||
101.INS(b) | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH(b) | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL(b) | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF(b) | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB(b) | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE(b) | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104(b) | The cover page of Lancaster Colony Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL (included within Exhibit 101 attachments) | |
(a) | Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. | |
(b) | Filed herewith | |
(c) | Furnished herewith | |
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