UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-4065-1
-------------------------------
LANCASTER COLONY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 13-1955943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37 WEST BROAD STREET 43215
COLUMBUS, OHIO (Zip Code)
(Address of principal executive offices)
614-224-7141
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [Yes[X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [Yes[X] No[ ]
As of October 29, 2004,January 31, 2005, there were approximately 35,101,00034,886,000 shares of
Common Stock, no par value per share, outstanding.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 30,December 31, 2004 and June 30, 2004
Consolidated Statements of Income - Three and Six Months Ended
September
30,December 31, 2004 and 2003
Consolidated Statements of Cash Flows - ThreeSix Months Ended September 30,December
31, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
SIGNATURES
INDEX TO EXHIBITS
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30DECEMBER 31 JUNE 30
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2004 2004
--------------------------------------- ----------------------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents ............................................................................................................... $ 168,136204,670 $ 178,503
Receivables - (less allowance for doubtful accounts,
SeptemberDecember - $1,961$2,049 and June - $1,819) ..................................... 115,764109,001 94,623
Inventories:
Raw materials and supplies ................................................ 46,953............................................... 46,371 45,277
Finished goods and work in process ........................................ 107,140....................................... 96,427 109,799
--------- ---------
Total inventories ....................................................... 154,093...................................................... 142,798 155,076
Deferred income taxes and other current assets .............................. 26,774............................. 29,224 22,803
--------- ---------
Total current assets .................................................... 464,767................................................... 485,693 451,005
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements ............................................ 119,154........................................... 119,063 118,693
Machinery and equipment ..................................................... 355,698.................................................... 355,750 354,112
--------- ---------
Total cost .............................................................. 474,852............................................................. 474,813 472,805
Less accumulated depreciation ............................................... 319,652.............................................. 320,463 313,311
--------- ---------
Property, plant and equipment - net ..................................... 155,200.................................... 154,350 159,494
OTHER ASSETS:
Goodwill - (net of accumulated amortization,
SeptemberDecember and June - $15,136) ............................................. 79,21879,219 79,187
Other intangible assets - net ............................................... 5,329.............................................. 5,198 5,459
Other noncurrent assets ..................................................... 20,906.................................................... 18,851 17,742
--------- ---------
TOTAL ..................................................................................................................................... $ 725,420743,311 $ 712,887
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................................................................................................... $ 46,97442,428 $ 47,383
Accrued liabilities ......................................................... 58,447........................................................ 61,642 45,348
--------- ---------
Total current liabilities ............................................... 105,421.............................................. 104,070 92,731
OTHER NONCURRENT LIABILITIES ................................................... 22,609.................................................. 22,003 21,576
DEFERRED INCOME TAXES .......................................................... 11,544......................................................... 11,693 11,795
SHAREHOLDERS' EQUITY:
Preferred stock - authorized 3,050,000 shares;
outstanding - none
Common stock - authorized 75,000,000 shares; outstanding
- September 30,December 31, 2004 - 35,198,93734,977,506 shares;
June 30, 2004 - 35,472,163 shares ......................................... 70,836........................................ 72,260 69,809
Retained earnings ........................................................... 895,424.......................................................... 924,780 885,161
Accumulated other comprehensive loss ........................................ (5,544)....................................... (5,548) (5,542)
--------- ---------
Total ................................................................... 960,716.................................................................. 991,492 949,428
Common stock in treasury, at cost ........................................... (374,870).......................................... (385,947) (362,643)
--------- ---------
Total shareholders' equity .................................................. 585,846................................................. 605,545 586,785
--------- ---------
TOTAL ..................................................................................................................................... $ 725,420743,311 $ 712,887
========= =========
See accompanying notes to consolidated financial statements.
3
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 -------------------------------------------2004 2003
- -------------------------------------------- -------- -------- -------- --------
NET SALES ..................................... $281,484 $266,652............................. $297,349 $291,196 $578,833 $557,848
COST OF SALES ................................. 227,467 210,845......................... 237,990 226,145 465,457 436,990
-------- -------- -------- --------
GROSS MARGIN .................................. 54,017 55,807.......................... 59,359 65,051 113,376 120,858
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES... 24,776 24,169EXPENSES ............ 25,531 24,903 50,307 49,072
RESTRUCTURING AND IMPAIRMENT CHARGE ........... 442... 45 - 487 -
-------- -------- -------- --------
OPERATING INCOME .............................. 28,799 31,638
INTEREST...................... 33,783 40,148 62,582 71,786
OTHER INCOME AND OTHER(EXPENSE):
Other Income - NETContinued Dumping and
Subsidy Offset Act ............... 627 34626,226 1,987 26,226 1,987
Interest Income and Other - Net .... 833 493 1,460 839
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES .................... 29,426 31,984............ 60,842 42,628 90,268 74,612
TAXES BASED ON INCOME ......................... 11,048 12,284................. 22,723 15,978 33,771 28,262
-------- -------- -------- --------
NET INCOME ................................................................ $ 18,37838,119 $ 19,70026,650 $ 56,497 $ 46,350
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
Basic and.............................. $ 1.09 $ .75 $ 1.60 $ 1.30
Diluted ...................................................... $ .521.08 $ .55.74 $ 1.60 $ 1.29
CASH DIVIDENDS PER COMMON SHARE ...................... $ .25 $ .23 $ .20.48 $ .43
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic ...................................... 35,355 35,763.............................. 35,084 35,719 35,220 35,741
Diluted .................................... 35,408 35,831............................ 35,144 35,798 35,276 35,815
See accompanying notes to consolidated financial statements.
4
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREESIX MONTHS ENDED
SEPTEMBER 30DECEMBER 31
(AMOUNTS IN THOUSANDS) 2004 2003
-------------------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................................. $ 18,37856,497 $ 19,70046,350
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............................. 8,499 7,432
(Recovery of) provision for..................... 16,865 15,322
Recovery of losses on accounts receivable... (688) 201receivable ......... (692) (629)
Deferred income taxes and other noncash charges ............ 382 1,087charges.... (1,475) 1,916
Restructuring and impairment charge ........................ 45 (48)............... (8) (58)
Gain on sale of property ................................... (42) (744).......................... (79) (736)
Changes in operating assets and liabilities:
Receivables .............................................. (20,453) (17,130)..................................... (13,686) (15,507)
Inventories .............................................. 920 (8,249)..................................... 12,215 9,813
Other current assets ..................................... (2,853) (2,175)............................ (3,085) (3,237)
Accounts payable and accrued liabilities ................. 9,613 15,651........ 8,220 2,895
--------- ---------
Net cash provided by operating activities .............. 13,801 15,725..... 74,772 56,129
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions .......................... (492) (20,568)
Payments on property additions ............................... (2,866) (6,677)...................... (9,583) (10,840)
Proceeds from sale of property ............................... 304 1,128...................... 504 1,130
Other - net .................................................. (5,356) (923)......................................... (4,951) (1,464)
--------- ---------
Net cash used in investing activities .................. (7,918) (6,472)......... (14,522) (31,742)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock ................................... (12,227) (1,056).......................... (23,304) (3,698)
Payment of dividends ......................................... (8,115) (7,150)................................ (16,878) (15,362)
Increase in cash overdraft balance ........................... 3,104 1,309.................. 3,832 3,269
Proceeds from the exercise of stock options .................. 990 420......... 2,273 1,046
--------- ---------
Net cash used in financing activities .................. (16,248) (6,477)......... (34,077) (14,745)
--------- ---------
Effect of exchange rate changes on cash ......................... (2) 10................ (6) 16
--------- ---------
Net change in cash and equivalents .............................. (10,367) 2,786..................... 26,167 9,658
Cash and equivalents at beginning of year ..................................... 178,503 142,847
--------- ---------
Cash and equivalents at end of period ............................................. $ 168,136204,670 $ 145,633152,505
========= =========
SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS:
Cash paid during the period for income taxes ......................... $ 82222,105 $ 1,25421,995
========= =========
See accompanying notes to consolidated financial statements.
5
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited but, in our
opinion, reflect all adjustments necessary for a fair presentation of the
results of operations and financial position for such periods. All such
adjustments reflected in the interim consolidated financial statements are
considered to be of a normal recurring nature. The results of operations for any
interim period are not necessarily indicative of results for the full year.
Accordingly, these financial statements should be read in conjunction with the
financial statements and notes thereto contained in our Annual Report on Form
10-K for the year ended June 30, 2004. Certain prior year amounts have been
reclassified to conform with the current year presentation.
During the three and six months ended September 30,December 31, 2004 and 2003, certain
inventory quantity reductions resulted in a liquidation of LIFO inventory layers
carried at lower costs which prevailed in prior years. The effect of the
liquidation for the three and six months ended September 30,December 31, 2004 was an increase
in pretax income of approximately $0.4$0.3 million and $0.6 million, or less than
$.01 per share and approximately $.01 per share after taxes.taxes, respectively. The
effect of the liquidation for the three and six months ended September
30,December 31, 2003
was an increase in pretax income of approximately $1.6$1.0 million and $2.6 million,
or approximately $.03$.02 and $.05 per share after taxes.taxes, respectively.
We account for our stock option plan under Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, no compensation cost is reflected in net income,
as all options granted under those plans had an exercise price at least equal to
the market value of the underlying common stock on the date of grant. The
Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards ("SFAS") No. 123R. See further discussion of this
new Statement at Note 3. The following table illustrates the effect on net
income and net income per common share as if we had applied the fair-value-based
method under Statement of
Financial Accounting Standards ("SFAS")SFAS No. 123, "Accounting for Stock-Based Compensation," as amended
by SFAS No. 148, to record expense for stock option compensation:
THREE MONTHS ENDED SEPTEMBER 30SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2004 2003 --------2004 2003
----------- ----------- ----------- --------
Net income as reported ................................................. $ 18,37838,119 $ 19,70026,650 $ 56,497 $ 46,350
Less: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects ............ (32) (102) --------(64) (204)
----------- ----------- ----------- --------
Pro forma net income ..................................................... $ 18,34638,087 $ 19,598
========26,548 $ 56,433 $ 46,146
=========== =========== =========== ========
Net income per common share -
basic andas reported ......................... $ 1.09 $ .75 $ 1.60 $ 1.30
Net income per common share -
diluted as reported and....................... $ 1.08 $ .74 $ 1.60 $ 1.29
Net income per common share -
basic pro forma ........................... $ 1.09 $ .74 $ 1.60 $ 1.29
Net income per common share -
diluted pro forma ......................... $ .521.08 $ .55.74 $ 1.60 $ 1.29
NOTE 2 - ACQUISITION
On December 12, 2003, we completed the acquisition of substantially all
the operating assets of Warren Frozen Foods, Inc. ("Warren"), a privately owned
producer and marketer of frozen noodle and pasta products based in Altoona,
Iowa. Warren has a well-recognized presence in the industrial and foodservice
markets and complements our existing frozen noodle operation, which has a
greater presence in retail markets. Warren is reported in our Specialty Foods
segment, and its results of operations have been included in our consolidated
statement of income since December 12, 2003.
6
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Under the terms of the purchase agreement, we acquired certain personal
and real property including fixed assets, inventory and accounts receivable, and
assumed certain liabilities. The purchase price was approximately $21.1 million,
including a net asset adjustment of approximately $492,000 as determined under
the terms of the purchase agreement. The initial estimate of theThis net asset adjustment was $461,000 and was recordedpaid in
accounts payable on the Consolidated
Balance Sheet at June 30,October 2004. This estimate was subject to the review by and
agreement of the seller. As a result of this review, an additional $31,000 was
included in accounts payable on the Consolidated Balance Sheet at September 30,
2004. No further adjustments to the purchase price are expected.
6
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare Part D and a federal subsidy to
sponsors of retirement health care plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. In accordance with Financial
Accounting Standards Board ("FASB") Staff Position No. 106-1, we elected to
defer recognizing the effect of the Act on the accounting for our postretirement
benefit plans until authoritative accounting guidance was issued. In May 2004, the FASB issued Staff PositionSFAS No. 106-2, which provided final guidance123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"). SFAS 123R requires the measurement and
recognition of the cost of employee services received in exchange for an award
of equity instruments based on accountingthe grant-date fair value of the award. The cost
of the employee services is recognized as compensation expense over the period
that an employee provides service in exchange for the Act.award, which is typically
the vesting period. SFAS 123R is effective July 1, 2005 and may be adopted using
a modified prospective method or a modified retrospective method. We adoptedare
currently evaluating the provisionsadoption alternatives and expect to complete our
evaluation during the first quarter of fiscal 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment of APB Opinion No. 29 ("SFAS 153"). APB Opinion No. 29 is
based on the principle that exchanges of nonmonetary assets should be measured
on the fair value of the Staff Position No.
106-2 asassets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. SFAS 153 amends Opinion
29 to eliminate the exception for nonmonetary exchanges of July 1, 2004. The provisionssimilar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS 153 is effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
We do not expect the Act did notadoption of this Statement to have a material effectimpact on our
financial position or results of operations, cash flowoperations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS
151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing,
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling cost, and wasted material (spoilage). In addition, this
Statement requires that allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We are currently evaluating the implications of this
Statement, but do not expect the adoption of this Statement to have a material
impact on our financial position or financial position.results of operations.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill attributable to the Specialty Foods and Automotive segments was
$78.2 million and $1.0 million, respectively, at SeptemberDecember 31, 2004 and June 30,
2004.
The following table summarizes our segment identifiable other intangible
assets as of September 30,December 31, 2004 and June 30, 2004:
SEPTEMBER 30DECEMBER 31 JUNE 30
2004 2004
----------------------- -------
SPECIALTY FOODS
Trademarks
Gross carrying value ...................................................... $ 370 $ 370
Accumulated amortization ......... (124)..................................... (126) (121)
------- -------
Net Carrying Value .......................................................... $ 246244 $ 249
======= =======
Customer Lists
Gross carrying value ...................................................... $ 4,100 $ 4,100
Accumulated amortization ......... (256)..................................... (342) (171)
------- -------
Net Carrying Value .......................................................... $ 3,8443,758 $ 3,929
======= =======
7
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31 JUNE 30
2004 2004
----------- -------
Non-compete Agreements
Gross carrying value ................................................. $ 1,200 $ 1,200
Accumulated amortization ......... (112)................................ (150) (75)
------- -------
Net Carrying Value ..................................................... $ 1,0881,050 $ 1,125
======= =======
GLASSWARE AND CANDLES - CUSTOMER LISTS
Gross carrying value ..................................................... $ 250 $ 250
Accumulated amortization ........... (99).................................. (104) (94)
------- -------
Net Carrying Value ......................................................... $ 151146 $ 156
======= =======
Total Net Carrying Value ................................................. $ 5,3295,198 $ 5,459
======= =======
Amortization expense relating to these assets was approximately $130,000$131,000
and $7,000$261,000 for the quartersthree and six months ended September 30,December 31, 2004 and 2003, respectively.$8,000 and
$15,000 for the three and six months ended December 31, 2003. Total annual
amortization expense is estimated to be approximately $522,000 for each of the
next five fiscal years.
NOTE 5 - PENSION AND OTHER POSTRETIREMENT BENEFITS
We and certain of our operating subsidiaries provide multiple defined
benefit pension and postretirement medical and life insurance benefit plans.
Benefits under the defined benefit pension plans are primarily based on
negotiated rates and years of service and cover the union workers at such
locations. We contribute to these 7
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
pension plans at least the minimum amount
required by regulation or contract. We recognize the cost of pension plans and
postretirement medical and life insurance benefits as the employees render
service. Postretirement benefits are funded as incurred.
The following charttable discloses net periodic benefit cost for our pension
and postretirement plans:
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- ---------------------------------------------------------- ---------------------------------
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED SEPTEMBER 30 SEPTEMBER 30ENDED ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ----- ------ ----- ----- --------- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost ................................cost................................. $139 $151 $ 138277 $ 151302 $ 34 $ 6364 $ 68 $127
Interest cost ............................... 633cost................................ 632 594 1,265 1,188 81 60 162 120
Expected return on plan assets ..............assets............... (694) (627) (1,388) (1,254) - - - -
Amortization of unrecognized net loss ....... 102loss........ 103 175 19205 350 18 9 37 18
Amortization of prior service cost (asset)... 58 59 58117 117 (2) (2) (4) (4)
Amortization of unrecognized net
obligation existing at transition .........transition.......... 9 9 18 18 - - - -
---- ---- ------ ------ ----- ----- ----- --------- ---- ----
Net periodic benefit cost ...................cost.................... $247 $361 $ 247494 $ 360721 $ 132 $ 130131 $131 $263 $261
==== ==== ====== ====== ===== ===== ===== ========= ==== ====
For the threesix months ended September 30,December 31, 2004, we have made $0.1 million in
contributions to our pension plans. We expect to make approximately $0.9 million
more in contributions to our pension plans during the remainder of this fiscal
year.
For the threesix months ended September 30,December 31, 2004, we have made approximately $0.1$0.2
million in contributions to our postretirement medical and life insurance
benefit plans. We expect to make approximately $0.3$0.2 million more in
contributions to our postretirement medical and life insurance benefit plans
during the remainder of this fiscal year.
8
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 - RESTRUCTURING AND IMPAIRMENT CHARGE
In the fourth quarter of fiscal 2004, we recorded a restructuring and
impairment charge of approximately $1.1 million ($0.7 million after taxes) for
costs incurred as of June 30, 2004 related to the closing of our automotive
floor mat manufacturing facility located in Waycross, Georgia. Manufacturing
effectively ceased as of June 30, 2004. The decision to close the plant was
brought on by a decline in demand for compression molded rubber floor mats that
resulted in excess segment capacity. During the threesix months ended September 30,December 31,
2004, we recorded an additional restructuring and impairment charge of $0.4$0.5
million for costs incurred during that period. Approximately $0.3$0.4 million of
this charge results in cash outlays and consists of other closing costs, such as
costs to remove and relocate certain equipment, costs to prepare the building for sale, costs to maintain the building, and
various other charges.
An analysis of our first quarter fiscal 2005year-to-date restructuring activity and the
related remaining liability within the Automotive segment is as follows:
THREESIX MONTHS ENDED
SEPTEMBER 30
ACCRUAL AT ----------------------DECEMBER 31, 2004 ACCRUAL AT
JUNE 30, -------------------- DECEMBER 31,
2004 CHARGE CASH OUTLAYS SEPT. 30, 2004
----------------------- ------ ------------ -------------------------
RESTRUCTURING AND IMPAIRMENT CHARGE
Employee Separation Costs .................... $105Costs....................... $ 105 $ - $ (94) $11(105) $ -
Other Costs ..................................Costs..................................... 34 307 (298) 43
---- ----352 (385) 1
----- ------ ------- ---
Subtotal ..................................... $139 307 $(392) $54
====Subtotal........................................ $ 139 352 $ (490) $ 1
===== ======= ===
Asset Impairment and Other Noncash Charges....Charges...... 135
----------
Total Restructuring and Impairment Charge... $442
====Charge..... $ 487
======
8
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The restructuring accrual is locatedincluded in accounts payable and accrued
liabilities at September 30,December 31, 2004. We expect that the remaining cash outlays for
this plan will be immaterial and occur over this fiscal year.
NOTE 7 - BUSINESS SEGMENT INFORMATION
The following summary financial information by business segment is
consistent with the basis of segmentation and measurement of segment profit or
loss presented in our June 30, 2004 consolidated financial statements:
THREE MONTHS ENDED SEPTEMBER 30SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
--------- ---------- -------- ---------
NET SALES
Specialty Foods ........ $ 160,609 $ 154,817Foods...................... $177,075 $163,888 $337,684 $318,705
Glassware and Candles... 63,732 56,126
Automotive ............. 57,143 55,709
--------- ---------Candles................ 67,842 72,709 131,574 128,835
Automotive........................... 52,432 54,599 109,575 110,308
-------- -------- -------- --------
Total ................ $ 281,484 $ 266,652
========= =========............................. $297,349 $291,196 $578,833 $557,848
======== ======== ======== ========
OPERATING INCOME
Specialty Foods ........Foods...................... $ 27,37931,036 $ 26,31331,096 $ 58,415 $ 57,409
Glassware and Candles... 1,079 3,106
Automotive ............. 2,256 3,651Candles................ 3,684 6,764 4,763 9,870
Automotive........................... 1,098 3,804 3,354 7,455
Corporate Expenses ..... (1,915) (1,432)
--------- ---------Expenses................... (2,035) (1,516) (3,950) (2,948)
-------- -------- -------- --------
Total ............................................. $ 28,79933,783 $ 31,638
========= =========40,148 $ 62,582 $ 71,786
======== ======== ======== ========
NOTE 8 - COMMITMENTS AND CONTINGENCIES
At September 30,December 31, 2004, we are a party to various claims and litigation
which have arisen in the ordinary course of business. Such matters did not have
a material effect on the current fiscal year-to-date results of
9
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
operations and, in our opinion, their ultimate disposition will not have a
material adverse effect on our consolidated financial statements.
Certain of our automotive accessory products carry explicit limited
warranties that extend from twelve months to the life of the product, based on
terms that are generally accepted in the marketplace. Our policy is to record a
provision for the expected cost of the warranty-related claims at the time of
the sale, and periodically adjust the provision to reflect actual experience.
The amount of warranty liability accrued reflects our best estimate of the
expected future cost of honoring our obligations under the warranty plans. The
warranty accrual as of September 30,December 31, 2004 and June 30, 2004 is immaterial to our
financial condition, and the change in the accrual for the current quarterperiods of
fiscal 2005 is immaterial to our results of operations and cash flows.
NOTE 9 - COMPREHENSIVE INCOME
Total comprehensive income for the quartersthree months ended September 30,December 31, 2004
and 2003 was approximately $18.4$38.1 million and $19.9$26.8 million, respectively. Total
comprehensive income for the six-month periods ended December 31, 2004 and 2003
was approximately $56.5 million and $46.7 million, respectively. The September 30,December
31, 2004 and 2003 comprehensive income primarily consists of net income and
foreign currency translation adjustments.
9NOTE 10 - CONTINUED DUMPING AND SUBSIDY OFFSET ACT
We received a $26.2 million distribution from the U.S. government under
the Continued Dumping and Subsidy Offset Act of 2000 ("CDSOA") in the second
quarter of fiscal 2005, as compared to a $2.0 million distribution in the same
period of the prior year. CDSOA is intended to redress unfair dumping of
imported products through cash payments to eligible affected companies. Such
payments are in part dependent upon the amount of anti-dumping duties collected
on those products. The World Trade Organization has previously ruled that such
payments are inconsistent with international trade rules. However, CDSOA
continues to be in effect in the United States at this time. Uncertainties
associated with this program leave us unable to predict the amounts, if any, we
may be entitled to receive in the future.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(TABULAR DOLLARS IN THOUSANDS)
OVERVIEW
We are a diversified manufacturer and marketer of consumer products
including specialty foods for the retail and foodservice markets; glassware and
candles for the retail, industrial, floral and foodservice markets; and
automotive accessories for the original equipment market and aftermarket.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") describes the matters that we consider to be
important in understanding the results of our operations for the three and six
months in
the period ended September 30,December 31, 2004 and our financial condition as of September
30,December 31,
2004. Our fiscal year begins on July 1 and ends on June 30. In the discussion
that follows, we analyze the results of our operations for the last threesix months,
including the trends in the overall business, followed by a discussion of our
financial condition.
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto, all included elsewhere
herein. The forward-looking statements in this section and other parts of this
document involve risks and uncertainties including statements regarding our
plans, objectives, goals, strategies, and financial performance. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of factors set forth under the caption
"Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995."Forward-Looking Statements."
On December 12, 2003, we purchased substantially all the operating assets
of Warren Frozen Foods, Inc. ("Warren"), a privately owned producer and marketer
of frozen noodle and pasta products. Warren is reported in our Specialty Foods
segment. This acquisition's final purchase price was approximately $21.1
million, including a net asset adjustment of approximately $492,000 as
determined under the terms of the purchase agreement, and this transaction is
discussed in further detail in Note 2 to the consolidated financial statements.
On April 27, 2004, we announced our intent to close our automotive floor
mat manufacturing facility located in Waycross, Georgia. In fiscal 2004, we
recorded a restructuring and impairment charge of approximately $1.1 million
($0.7 million after taxes). During the threesix months ended September 30,December 31, 2004, we
recorded an additional restructuring and impairment charge of $0.4$0.5 million for
costs incurred during that period. See further discussion in Note 6 to the
consolidated financial statements.
We recorded Other Income - Continued Dumping and Subsidy Offset Act for
the three and six months ended December 31, 2004 of $26.2 million compared to
$2.0 million for the comparable prior year periods. This income represents
distributions we received from the U.S. government under the Continued Dumping
and Subsidy Offset Act of 2000 ("CDSOA"). CDSOA is intended to redress unfair
dumping of imported products through cash payments to eligible affected
companies. Such payments are in part dependent upon the amount of anti-dumping
duties collected on those products.
FORWARD-LOOKING STATEMENTS
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"). This Quarterly Report on
Form 10-Q contains various "forward-looking statements" within the meaning of
the PSLRA and other applicable securities laws. Such statements can be
identified by the use of the forward-looking words "anticipate," "estimate,"
"project," "believe," "intend," "expect," "hope," or similar words. These
statements discuss future expectations; contain projections regarding future
developments, operations or financial conditions; or state other forward-looking
information. Such statements are based upon assumptions and assessments made by
us in light of our experience and perception of historical trends, current
conditions, expected future developments, and other factors we believe to be
appropriate. These forward-looking statements involve various important risks,
uncertainties and other factors that could cause our actual results to differ
materially from those expressed in the forward-looking statements. Actual
results may differ as a result of factors over which we have no, or
11
limited, control including the strength of the economy, slower than anticipated
sales growth, the extent of operational efficiencies achieved, the success of
new product introductions, price and product competition, and increases in raw
materials costs. Management believes these forward-looking statements to be
reasonable; however, undue reliance should not be placed on such statements that
are based on current expectations. We undertake no obligation to publicly update
such forward-looking statements. More detailed statements regarding significant
events that could affect our financial results are included in our Annual Report
on Form 10-K for the year ended June 30, 2004 filed with the Securities and
Exchange Commission.
SUMMARY OF RESULTS
The following is an overview of our consolidated operating results for the
three and six months ended September 30,December 31, 2004.
Net sales for the firstsecond quarter ended September 30,December 31, 2004 increased 6%2% to
a
record level of $281.5$297.3 million from the prior year firstsecond quarter total of $266.7$291.2 million. Gross
margin decreased 3%9% to $54.0$59.4 million from the prior year comparablesecond quarter total of
$55.8$65.1 million. Net income for the current year firstsecond quarter was $18.4$38.1 million,
or $.52$1.08 per diluted share.
For the current year-to-date period, net sales were $578.8 million, a 4%
increase from $557.8 million in the prior year period. Gross margin declined by
6% to $113.4 million from the prior year period total of $120.9 million. Net
income for the six months ended December 31, 2004, as impacted by the $26.2
million CDSOA distribution discussed above, was $56.5 million, or $1.60 per
diluted share.
Our firstsecond quarter and year-to-date results continue to reflect an
environment of generally
heightened competition, increased pricing pressures and higher
rawnonfood material costs as well as generally higher freight and energy costs. To
date, we have found our opportunities to increase prices to be limited and
generally not sufficient to offset the impact of the higher raw material costs. We have been
able to maintain a strong balance sheet with no debt throughout this period.
10
RESULTS OF CONSOLIDATED OPERATIONS
NET SALES AND GROSS MARGIN
THREE MONTHS ENDED SEPTEMBER 30SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2004 2003 CHANGE 2004 2003 CHANGE
-------- -------- --------------------------------- -------- -------- --------------
NET SALES
Specialty Foods ................... $160,609 $154,817 $ 5,792 4%Foods......... $177,075 $163,888 $13,187 8 % $337,684 $318,705 $18,979 6%
Glassware and Candles ............. 63,732 56,126 7,606 14%
Automotive ........................ 57,143 55,709 1,434 3%Candles... 67,842 72,709 (4,867) (7)% 131,574 128,835 2,739 2%
Automotive.............. 52,432 54,599 (2,167) (4)% 109,575 110,308 (733) (1)%
-------- -------- ------- - -------- ---------- ------- ----
Total ........................... $281,484 $266,652................ $297,349 $291,196 $ 14,832 6%6,153 2% $578,833 $557,848 $20,985 4%
======== ======== ======= = ======== ========== ======= ====
GROSS MARGIN ........................MARGIN.............. $ 54,01759,359 $ 55,807 $ (1,790) (3)65,051 $(5,692) (9)% $113,376 $120,858 $(7,482) (6)%
======== ======== ======= = ======== ========== ======= ====
GROSS MARGIN
AS A PERCENT OF SALES... 19.2% 20.9%20.0% 22.3% 19.6% 21.7%
==== ==== ==== ====
ForConsolidated net sales for the firstmost recent quarter increased 2%,
reflecting 8% growth in sales of the Specialty Foods segment as partially offset
by lower sales in both of the nonfood segments. Fiscal year-to-date consolidated
net sales increased 6% compared togrew 4% through December 31, 2004, benefiting from higher sales in all
but the prior year period due to positiveAutomotive segment. Sales of the Glassware and Candles segment for the
six months benefited from the comparative strength of sales growth achieved by all three segments.recorded during the
quarter ended September 30, 2004, which reflected a 14% increase.
For the quarter ended September 30,December 31, 2004, net sales of the Specialty Foods
segment totaled $160.6$177.1 million, which was $5.8 million higher thanan increase of 8% over the prior year total of
$154.8$163.9 million. For the six months ended December 31, 2004, the Specialty Foods
segment's net sales increased by 6% over the prior year total of $318.7 million.
Most of the segment's year-to-date increased sales were internally generated
through greater sales of both retail and foodservice products. Our December 2003
Warren Frozen Foods, which isacquisition, discussed in Note 2 to the accompanying consolidated
financial statements, contributed over $4approximately $5 million toand $9 million in
incremental net sales in the higher firstcurrent year second quarter sales. The remaining increase resulted from
modest growth in both the retail and foodservice markets.year-to-date
periods, respectively.
12
Net sales of the Glassware and Candles segment for the firstsecond quarter
ended September 30,December 31, 2004 totaled $63.7$67.8 million, a 14% increase7% decline from the comparable
prior year quarter total of $56.1$72.7 million. This segment's sales growthdecline primarily resulted from
improvedlower sales of candles,glassware products. For the six months ended December 31, 2004,
Glassware and Candles sales were $131.6 million, or a 2% increase from the prior
year total of $128.8 million. This increase was primarily through gainsattributable to
improved candle sales among existing customers. Candlecustomers, as well as candle sales
associated with several new customer programs also
contributed to the segment's growth. Sales of glassware products declined, as
broadly impacted by continuing lackluster demand in consumer and industrial
markets.programs.
Automotive segment net sales for the firstsecond quarter ended September 30,December 31,
2004 totaled $57.1$52.4 million, a 3% increase4% decline from the prior year firstsecond quarter
total of $55.7$54.6 million. SalesSimilarly, for the six-month period ended December 31,
2004, Automotive segment net sales were $109.6 million, or a 1% decline from the
comparable prior year period total of original equipment products benefited from
growth in$110.3 million. Improved sales of aluminum
truck accessories partiallywere more than offset by lowera decline in sales of automotive
floor mat volume.mats.
As a percentage of sales, our consolidated gross margins for the three and
six months ended September 30,December 31, 2004 totaled 19.2%20.0% and 19.6%, as comparedrespectively, which
are somewhat lower than the levels that were achieved during the comparable
periods of fiscal 2004. Contributing to the prior year
level of 20.9% for the first quarter ended September 30, 2003. Marginslower margins within the Specialty Foods
segment increased slightly, despite being constrained by
increaseswas a less favorable sales mix toward foodservice volumes and, during
the second quarter, manufacturing inefficiencies occurring in ingredient costs, especially soybean oil and cream. The net impact
of higher ingredient costs on the segment's comparative quarterly results
somewhat exceeded $1 million.our frozen bread
operations. Gross margins of the Glassware and Candles segment were adversely affecteddeclined as
influenced by higher raw material costs and intense competitive pressures on
pricing conditions,in retail markets. Additionally, this segment's margins in the prior
year benefited from the liquidation of certain LIFO glassware inventory carried
at substantially lower prior years' costs. Such liquidations reduced segment
costs of sales by approximately $1.0 million and $2.6 million for the three and
six-month periods of fiscal 2004 compared to $0.3 million and $0.6 million for
the comparable periods of fiscal 2005. We continue to evaluate opportunities to
further enhance glass manufacturing efficiencies and profitability. It is
possible that further operational reviews on our part may result in the
accounting impairment of certain machinery and equipment based on updated
assessments of the related, future cash flow contributions. Within our
Automotive segment, lower sales volumes and higher material costs and a lower level of income from the reduction of LIFO inventory (see
Note 1 to the consolidated financial statements). In the Automotive segment,
higher material costs, such as for steel,
aluminum steel and synthetic rubber contributed towere primarily responsible for lower segment gross
margins as compared topresent during the current fiscal year. This segment's prior year. Further affecting
the comparativeyear
results for this segment were costs of approximately $0.4
million incurred in the current quarter for the closing of a manufacturing
facility (see Note 2 to the consolidated financial statements) andsix months ended December 31, 2003 also reflected the inclusion
of a gain of approximately $0.4 million ingain on the prior year related to theAugust 2003 sale of an idle manufacturing
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED SEPTEMBER 30SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2004 2003 CHANGE 2004 2003 CHANGE
------- ------- --------- --------- ---------------------- ------- ----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...EXPENSES..... $25,531 $24,903 $ 24,776628 3% $ 24,169 $60750,307 $49,072 $1,235 3%
========= ========= ==== ======== ======= ===== == ======== ======= ====== ===
SG&A EXPENSES AS A
PERCENT OF SALES ...........SALES............ 8.6% 8.6% 8.7% 8.8%
9.1%=== === === ===
11
AsConsolidated selling, general and administrative costs of $25.5 million
and $50.3 million for the three and six months ended December 31, 2004,
respectively, increased by 3% from the $24.9 million and $49.1 million incurred
for the three and six months ended December 31, 2003, respectively. Despite the
dollar increase in these costs, as a percentage of sales, selling, general and
administrative expensescosts were relatively stable as comparedcomparable to the corresponding periodprior period. Expenses of the prior
year second quarter were net of a year ago.bad debt recovery occurring within the
Glassware and Candles segment that totaled approximately $1.2 million.
RESTRUCTURING AND IMPAIRMENT CHARGE
In the fourth quarter of fiscal 2004, we recorded a restructuring and
impairment charge of approximately $1.1 million ($0.7 million after taxes) for
costs incurred as of June 30, 2004 related to the closing of our automotive
floor mat manufacturing facility located in Waycross, Georgia. Manufacturing
effectively ceased as of June 30, 2004. The decision to close the plant was
brought on by a decline in demand for compression molded rubber floor mats that
resulted in excess segment capacity. During the threesix months ended September 30,December 31,
2004, we recorded an additional restructuring and impairment charge of $0.4$0.5
million for costs incurred during that period. Approximately $0.3$0.4 million of
this charge results in cash outlays and consists of other closing costs, such as
costs to remove and
relocate certain equipment, costs to prepare the building for sale, costs to maintain the building, and
various other charges.
13
An analysis of our first quarter fiscal 2005year-to-date restructuring activity and the
related remaining liability within the Automotive segment is as follows:
THREEACCRUAL AT SIX MONTHS ENDED
SEPTEMBER 30
ACCRUAL AT -------------------------- ACCRUAL AT
JUNE 30, DECEMBER 31, 2004 DECEMBER 31,
2004 CHARGE CASH OUTLAYS SEPT. 30, 2004
----------------------- ------ ------------ -------------------------
RESTRUCTURING AND IMPAIRMENT CHARGE
Employee Separation Costs ...................Costs........................ $105 $ - $(105) $ (94) $11-
Other Costs .................................Costs...................................... 34 307 (298) 43352 (385) 1
---- ---- ----- ---
Subtotal ....................................Subtotal......................................... $139 307 $(392) $54352 $(490) $ 1
==== ===== ===
Asset Impairment and Other Noncash Charges...Charges....... 135
----
Total Restructuring and Impairment Charge.. $442Charge...... $487
====
The restructuring accrual is locatedincluded in accounts payable and accrued
liabilities at September 30,December 31, 2004. We expect that the remaining cash outlays for
this plan will be immaterial and occur over this fiscal year.
OPERATING INCOME
The foregoing factors contributed to consolidated operating income
totaling $28.8$33.8 million and $62.6 million for the three and six months ended
September 30, 2004.December 31, 2004, respectively. These amounts represent a decrease of 9%16% from
the prior year quarter.quarter and 13% from the prior year to date. By segment, our
operating income can be summarized as follows:
THREE MONTHS ENDED SEPTEMBER 30SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2004 2003 CHANGE 2004 2003 CHANGE
------- ------- -------------- -------- -------- ---------------------- --------------
OPERATING INCOME
Specialty Foods....................................Foods......... $31,036 $31,096 $ 27,379(60) -% $ 26,31358,415 $57,409 $ 1,066 4%1,006 2%
Glassware and Candles.............................. 1,079 3,106 (2,027) (65)Candles... 3,684 6,764 (3,080) (46)% Automotive......................................... 2,256 3,651 (1,395) (38)4,763 9,870 (5,107) (52)%
Automotive.............. 1,098 3,804 (2,706) (71)% 3,354 7,455 (4,101) (55)%
Corporate Expenses................................. (1,915) (1,432) (483) 34%Expenses...... (2,035) (1,516) (519) (34)% (3,950) (2,948) (1,002) (34)%
------- ------- ------- --- -------- -------- -------- --
Total............................................------- ------ ---
Total ................ $33,783 $40,148 $(6,365) (16)% $ 28,799 $ 31,638 $ (2,839) (9)62,582 $71,786 $(9,204) (13)%
======= ======= ======= === ======== ======== ======== ========= ======= ===
OPERATING INCOME
AS A PERCENT OF SALES
Specialty Foods.................................... 17.0% 17.0%Foods......... 17.5% 19.0% 17.3% 18.0%
Glassware and Candles.............................. 1.7% 5.5%
Automotive......................................... 3.9% 6.6%
Consolidated....................................... 10.2% 11.9%Candles... 5.4% 9.3% 3.6% 7.7%
Automotive.............. 2.1% 7.0% 3.1% 6.8%
Consolidated............ 11.4% 13.8% 10.8% 12.9%
INTERESTOTHER INCOME AND OTHER(EXPENSE)
Other Income - NETContinued Dumping and Subsidy Offset Act for the three and
six months ended December 31, 2004 was $26.2 million compared to $2.0 million
for the comparable prior year periods. This income represents distributions we
received from the U.S. government under CDSOA. CDSOA is intended to redress
unfair dumping of imported products through cash payments to eligible affected
companies. Such payments are in part dependent upon the amount of anti-dumping
duties collected on those products. The first quarter of fiscal 2005World Trade Organization has previously
ruled that such payments are inconsistent with international trade rules.
However, CDSOA continues to be in effect in the United States at this time.
Uncertainties associated with this program leave us unable to predict the
amounts, if any, we may be entitled to receive in the future.
The year-to-date period ended December 31, 2004 included interest income
and other income of $0.6$1.5 million, as compared to $0.3$0.8 million in the same quarter of the prior year. ThisThe
increase was primarily due to higher interest income, as our cash balances and
interest rates have been higher than they were in the prior year.
1214
NET INCOME
Consistent withAs influenced by the decline in operating income, firstimpact of the CDSOA distributions, second quarter net
income of $18.4$38.1 million decreased 7%increased from the preceding year's net income for the
quarter of $19.7$26.7 million. The declineYear-to-date December 31, 2004 net income was $56.5
million compared to $46.4 million in earningsthe prior year period. Net income per share
for the fiscal 2005 firstsecond quarter to $.52 per basicwas influenced by the above-noted items and diluted share from $.55 per basic and
diluted share recorded in the prior year first quarter reflects the decline in
net income partially offset
by the extent of share repurchases under our share repurchase program.program and
totaled $1.09 per basic share and $1.08 per diluted share as compared to $.75
per basic share and $.74 per diluted share recorded in the prior year.
Year-to-date December 31, 2004 net income per share was $1.60 on a basic and
diluted basis compared to $1.30 on a basic basis and $1.29 on a diluted basis
for the prior year period.
FINANCIAL CONDITION
For the threesix months ended September 30,December 31, 2004, net cash provided by operating
activities totaled $13.8$74.8 million, which compares to $15.7$56.1 million provided in
the correspondingcomparable prior year period. This declineincrease results from the decreaseincrease in net
income as well asdue to the larger CDSOA distribution and relative changes in working
capital components, particularly accounts receivable and accounts payable and accrued liabilities, partially offset by inventories. The increase in accounts
receivable at September 30 was most influenced by higher sales, seasonality and
a greater nonfood mix, as payment terms associated with nonfood sales tend to be
longer than with sales of specialty foods.liabilities.
Cash used in investing activities for the threesix months ended September
30,December 31,
2004 increaseddecreased to $7.9$14.5 million from the prior year amount of $6.5$31.7 million
largely due
to increasesthe prior year acquisition of Warren for approximately $20.6 million.
Year-to-date capital expenditures of $9.6 million are comparable to the prior
year-to-date total of $10.8 million. Full year fiscal 2005 capital expenditures
could reach as much as $35 million due to the start of construction on a food
manufacturing facility. See further discussion in other assets offset somewhat by the decrease in
property additions, as there were no major capital projects completed this
quarter.Contractual Obligations below.
Cash used in financing activities for the threesix months ended September 30,December 31,
2004 increased to $16.2$34.1 million from the prior year total of $6.5$14.7 million due
to higher dividend payments and increasesan increase in the purchase of treasury stock.share repurchases. At September 30,December 31, 2004, approximately
2,075,0001,813,000 shares remain authorized for future buyback. These shares reflect the impact of the August 2004 Board of Directors
approval of a share repurchase authorization of an additional 2,000,000 shares.
Total dividends paid
during the current quarteryear-to-date period increased approximately 14%10% as compared
to the prior year period due to the effects of a 15%12% increase in the stated
dividend rate being somewhat offset by the extent of share repurchases.
We believe that cash provided from operations, our existing cash balances,
and the currently available bank credit arrangements should be adequate to meet
our foreseeable cash requirements over the remainder of fiscal 2005.
CONTRACTUAL OBLIGATIONS
We have various contractual obligations, which are appropriately recorded
as liabilities in our consolidated financial statements. Certain other items,
such as purchase obligations, are not recognized as liabilities in our
consolidated financial statements. Examples of items not recognized as
liabilities in our consolidated financial statements are commitments to purchase
raw materials or inventory that has not yet been received as of December 31,
2004 and future minimum lease payments for the use of property and equipment
under operating lease agreements. In our Annual Report on Form 10-K for the year
ended June 30, 2004, we disclosed our contractual obligations as of June 30,
2004. There have been no significant changes to the obligations disclosed
therein, except as follows:
On December 7, 2004, T. Marzetti Company, LLC ("TMC"), an indirect wholly
owned subsidiary of ours, entered into a Design/Build Agreement (the
"Agreement") with Shambaugh and Son, LP ("Shambaugh"), an affiliate of EMCOR
Group, Inc. Under the terms of the Agreement, TMC has contracted for Shambaugh
to design, organize, coordinate, direct and construct a new production facility
(the "Project") located in Hart County, Kentucky to be utilized for the
manufacture of salad dressings and sauces. Subject to certain conditions, the
Agreement provides that the total cost to be charged TMC for Shambaugh's work on
the Project is to be within a guaranteed maximum price, as defined, of
approximately $44 million. The Agreement contains other terms and conditions
addressing issues common to such arrangements and contemplates completion of the
Project not later than October 2006. See Agreement included herein as Exhibit
10.1.
15
SIGNIFICANT ACCOUNTING POLICIES
There have been no changes in critical accounting policies from those
disclosed in our Annual Report on Form 10-K for the year ended June 30, 2004.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains forward-looking statements related to future
growth and earnings opportunities. Such statements are based upon certain
assumptions and assessments made by management of the Company in light of its
experience and perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. Actual
results may differ as a result of factors over which the Company has no, or
limited, control including the strength of the economy, slower than anticipated
sales growth, the extent of operational efficiencies achieved, the success of
new product introductions, price and product competition, and increases in raw
materials costs. Management believes these forward-looking statements to be
reasonable; however, undue reliance should not be placed on such statements,
which are based on current expectations. The Company undertakes no obligation to
publicly update such forward-looking statements. More detailed statements
regarding significant events which could affect the Company's financial results
are included in the Company's Forms 10-Q and 10-K filed with the Securities and
Exchange Commission.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this Quarterly Report on Form 10-Q, our Chief Executive
Officer and Chief Financial Officer evaluated, with the participation of
management, the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")). Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of September 30,December 31, 2004 to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
13
(b) Changes in Internal Control Over Financial Reporting. No changes were
made to our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) In May 2000 and August 2004, the Board of Directors approved share
repurchase authorizations of 3,000,000 and 2,000,000 shares, respectively, of
which approximately 2,075,0001,813,000 shares remain authorized for future repurchases.
In the firstsecond quarter, we made the following repurchases of our common stock:
TOTAL NUMBER MAXIMUM NUMBER
TOTAL AVERAGE OF SHARES OF SHARES THAT MAY
NUMBER PRICE PURCHASED AS YET BE PURCHASED
OF SHARES PAID PER PART OF PUBLICLY UNDER THE PLANS OR
PERIOD PURCHASED SHARE ANNOUNCED PLANS PROGRAMS
- ------ --------- -------- ---------------- -------------------------------------
JulyOctober 1-31, 2004...................... 85,000 $39.53 85,000 289,732
August2004................... 97,500 $41.57 97,500 1,977,232
November 1-30, 2004.................. 90,000 $42.68 90,000 1,887,232
December 1-31, 2004.................... 95,000 $40.39 95,000 2,194,732
September 1-30, 2004................. 120,000 $41.91 120,000 2,074,7322004.................. 74,189 $42.89 74,189 1,813,043
These share repurchase authorizations do not have a stated expiration date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of the shareholders on November 15, 2004.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934. There were no matters discussed or voted upon
at the annual meeting, except for the election of the following three directors
whose terms will expire in 2007:
SHARES SHARES
VOTED SHARES NOT
"FOR" "WITHHELD" VOTED
---------- --------- ---------
John L. Boylan........................................ 32,029,736 1,557,747 1,702,704
Henry M. O'Neill, Jr.................................. 33,216,563 370,920 1,702,704
Zuheir Sofia.......................................... 32,015,870 1,571,613 1,702,704
ITEM 6. EXHIBITS. See Index to Exhibits following Signatures.
1416
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: NovemberFebruary 9, 20042005 By: /s/JOHN B. GERLACH, JR.
-----------------------------------------------------------------------------
John B. Gerlach, Jr.
Chairman, Chief Executive Officer
and President
Date: NovemberFebruary 9, 20042005 By: /s/JOHN L. BOYLAN
-----------------------------------------------------------------------------
John L. Boylan
Treasurer, Vice President,
Assistant Secretary and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
1517
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30,DECEMBER 31, 2004
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATED AT
- ------------- ----------- ----------
10.1 Design/Build Agreement Between T. Marzetti Company, LLC and
Shambaugh & Son, LP. (The registrant undertakes to furnish
supplementally a copy of any omitted schedule or other attachment
to the Securities and Exchange Commission upon request.)..................... Filed herewith
31.1 Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002..... Filed herewith
31.2 Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002..... Filed herewith
32.32 Certification of CEO and CFO under Section 906 of the Sarbanes-Oxley
Act of 2002.................................................................2002.................................................................. Filed herewith
16
18