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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549-1004
-------------
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 DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-4065-1
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LANCASTER COLONY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 13-1955943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37 WEST BROAD STREET 43215
COLUMBUS, OHIO (Zip Code)
(Address of principal executive offices)
614-224-7141
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of December 31, 2002, there were approximately 36,172,000 shares of
Common Stock, no par value per share, outstanding.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - December 31, 2002
and June 30, 2002
Condensed Consolidated Statements of Income - Three Months and Six
Months Ended December 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows - Six Months Ended
December 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of the Results of Operations and
Financial Condition
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
Index to Exhibits
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31 JUNE 30
(DOLLARS IN THOUSANDS) 2002 2002
- ---------------------- --------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents .............................................. $ 128,505 $ 83,378
Receivables - net of allowance for doubtful accounts .............. 98,407 109,350
Other receivable - Continued Dumping and Subsidy Offset Act ....... 39,177
Inventories:
Raw materials and supplies ...................................... 47,322 43,670
Finished goods and work in process .............................. 100,540 104,581
--------- ---------
Total inventories ............................................. 147,862 148,251
Prepaid expenses and other current assets ......................... 27,559 25,121
--------- ---------
Total current assets .......................................... 441,510 366,100
PROPERTY, PLANT AND EQUIPMENT - at cost ............................. 456,190 453,671
Less Accumulated Depreciation ..................................... 296,912 287,728
--------- ---------
Property, plant and equipment - net ........................... 159,278 165,943
GOODWILL - net of accumulated amortization ........................... 75,212 72,212
INTANGIBLE ASSETS - net of accumulated amortization .................. 450 465
OTHER ASSETS ......................................................... 12,933 13,985
--------- ---------
TOTAL ASSETS ......................................................... $ 689,383 $ 618,705
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 41,208 $ 43,258
Accrued liabilities ............................................... 51,639 45,674
Accrued income and other taxes .................................... 24,129 372
--------- ---------
Total current liabilities ..................................... 116,976 89,304
OTHER NONCURRENT LIABILITIES ......................................... 17,519 15,890
DEFERRED INCOME TAXES ................................................ 11,066 12,234
SHAREHOLDERS' EQUITY:
Preferred stock - authorized 3,050,000 shares issuable in series;
Class A - $1.00 par value, authorized 750,000 shares; Class B and
C - no par value, authorized 1,150,000 shares each; outstanding -
none
Common stock - authorized 75,000,000 shares; issued December 31,
2002 - no par value - 47,566,150 shares;
June 30, 2002 - no par value - 47,484,253 shares ................ 64,643 61,919
Retained earnings ................................................. 811,237 752,534
Accumulated other comprehensive loss .............................. (2,741) (2,752)
--------- ---------
Total ......................................................... 873,139 811,701
Common stock in treasury, at cost December 31, 2002 -
11,394,314 shares; June 30, 2002 - 10,886,014 shares ............ (329,317) (310,424)
--------- ---------
Total shareholders' equity .................................... 543,822 501,277
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 689,383 $ 618,705
========= =========
See Notes to Condensed Consolidated Financial Statements
3
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS DECEMBER 31 DECEMBER 31
EXCEPT PER SHARE AMOUNTS) 2002 2001 2002 2001
- ------------------------ ---------- ---------- ---------- ----------
NET SALES........................................ $ 307,669 $ 311,873 $ 583,490 $ 576,802
COST OF SALES.................................... 233,437 241,520 451,572 447,132
---------- ---------- ---------- ----------
GROSS MARGIN..................................... 74,232 70,353 131,918 129,670
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....................... 26,236 42,359 51,122 68,023
RESTRUCTURING AND IMPAIRMENT
CHARGE........................................ 4,945 4,945
---------- ---------- ---------- ----------
OPERATING INCOME................................. 43,051 27,994 75,851 61,647
OTHER INCOME (EXPENSE):
Interest Expense.............................. (54)
Other Income - Continued Dumping and
Subsidy Offset Act......................... 39,177 39,177
Interest Income and Other - Net............... 880 462 1,277 (122)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES....................... 83,108 28,456 116,305 61,471
TAXES BASED ON INCOME............................ 31,129 11,033 43,770 23,707
---------- ---------- ---------- ----------
NET INCOME....................................... $ 51,979 $ 17,423 $ 72,535 $ 37,764
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic and Diluted............................. $ 1.43 $ .47 $ 1.99 $ 1.02
CASH DIVIDENDS PER
COMMON SHARE.................................. $ .20 $ .18 $ .38 $ .35
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic......................................... 36,354,000 36,880,000 36,458,000 37,031,000
Diluted....................................... 36,406,000 36,931,000 36,517,000 37,081,000
See Notes to Condensed Consolidated Financial Statements
4
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31
(DOLLARS IN THOUSANDS) 2002 2001
- ---------------------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 72,535 $ 37,764
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.......................................... 16,119 17,486
Provision for losses on accounts receivable............................ 253 16,028
Deferred income taxes and other noncash charges........................ 461 (5,921)
Restructuring and impairment charge.................................... 4,101
(Gain) loss on sale of property........................................ (324) 87
Changes in operating assets and liabilities:
Receivables.......................................................... (28,487) (21,875)
Inventories.......................................................... 389 34,211
Prepaid expenses and other current assets............................ (2,438) (2,444)
Accounts payable..................................................... (5,050) (1,492)
Accrued liabilities and accrued income and other taxes............... 29,666 2,085
--------- ----------
Net cash provided by operating activities.............................. 87,225 75,929
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on property additions........................................... (12,143) (8,734)
Proceeds from sale of property........................................... 1,431 49
Other - net.............................................................. (1,056) (995)
--------- ----------
Net cash used in investing activities.................................. (11,768) (9,680)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock............................................... (18,893) (17,070)
Payment of dividends..................................................... (13,832) (12,943)
Net change in short-term bank loans...................................... (4,500)
Payments on long-term debt............................................... (3,040)
Common stock issued upon exercise of stock options....................... 2,384 2,382
--------- ----------
Net cash used in financing activities.................................. (30,341) (35,171)
--------- ----------
Effect of exchange rate changes on cash..................................... 11 2
--------- ----------
Net change in cash and equivalents.......................................... 45,127 31,080
Cash and equivalents at beginning of year................................... 83,378 4,873
--------- ----------
Cash and equivalents at end of period....................................... $ 128,505 $ 35,953
========= ==========
SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS:
Cash paid during the period for:
Interest............................................................. $ - $ 90
========= ==========
Income taxes......................................................... $ 19,930 $ 24,201
========= ==========
See Notes to Condensed Consolidated Financial Statements
5
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements are unaudited but,
in the opinion of management, reflect all adjustments necessary for a fair
presentation of the results of operations and financial condition for such
periods. All such adjustments reflected in the interim condensed 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
the Company's Annual Report on Form 10-K for the year ended June 30, 2002.
During fiscal 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
December 31, 2002, was an increase in net earnings of approximately $1.7 million
after taxes, or approximately five cents per share.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2 - BUSINESS SEGMENTS INFORMATION
Comparative second quarter and year-to-date unaudited results by segment
are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2002 2001 2002 2001
---------- ---------- ---------- ----------
NET SALES
Specialty Foods............... $ 164,316 $ 149,728 $ 311,949 $ 285,548
Glassware and Candles......... 81,753 103,926 149,963 182,583
Automotive.................... 61,600 58,219 121,578 108,671
---------- ---------- ---------- ----------
Total....................... $ 307,669 $ 311,873 $ 583,490 $ 576,802
========== ========== ========== ==========
OPERATING INCOME
Specialty Foods............... $ 34,296 $ 28,606 $ 60,572 $ 56,906
Glassware and Candles......... 5,896 (2,687) 9,973 2,709
Automotive.................... 4,541 3,505 8,444 5,005
Corporate expenses............ (1,682) (1,430) (3,138) (2,973)
---------- ---------- ---------- ----------
Total....................... $ 43,051 $ 27,994 $ 75,851 $ 61,647
========== ========== ========== ==========
NOTE 3 - GOODWILL AND PURCHASED INTANGIBLE ASSETS
Effective July 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 specifies that, among other things, goodwill and
intangible assets with an indefinite useful life will no longer be amortized.
Thus, in accordance with SFAS No. 142, goodwill is no longer being amortized.
Intangible assets with lives restricted by contractual, legal or other means
will continue to be amortized over their useful lives. SFAS No. 142 also
requires goodwill to be tested for impairment on at least an annual basis and
written down to fair value if considered impaired. Accordingly, management has
completed its initial asset impairment assessment and such analysis indicated
that there is no impairment.
The following table summarizes the Company's identifiable intangible assets
as of December 31, 2002 and June 30, 2002:
DECEMBER 31, 2002 JUNE 30, 2002
------------------------ ------------------------
GROSS GROSS
INTANGIBLE ASSETS CARRYING ACCUMULATED CARRYING ACCUMULATED
SUBJECT TO AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------------------- -------- ------------ -------- ------------
Specialty Foods - Trademarks................... $ 370 $ 108 $ 370 $ 103
Glassware & Candles - Customer Lists........... 250 62 250 52
----- ----- --- ----
Total........................................ $ 620 $ 170 $ 620 $ 155
====== ====== ===== =====
6
Amortization expense relating to these assets was approximately $15,000 and
$30,000 for the six months ended December 31, 2002 and the year ended June 30,
2002, respectively. The amortization expense is estimated to be approximately
$30,000 for each of the five fiscal years to end June 30, 2003, 2004, 2005, 2006
and 2007.
Goodwill attributable to the Specialty Foods and Automotive segments is
$74.2 million and $1.0 million, respectively, as of December 31, 2002.
The following is a reconciliation assuming goodwill and other intangible
assets had been accounted for in accordance with the provisions of SFAS No. 142
in the six months ended December 31, 2001:
SIX MONTHS ENDED
DECEMBER 31
2002 2001
-------- --------
Reported Net Income................................................... $ 72,535 $ 37,764
Add back amortization of goodwill, net of taxes....................... 1,256
-------- --------
Adjusted Net Income................................................... $ 72,535 $ 39,020
======== ========
Reported Basic and Diluted Earnings Per Share......................... $1.99 $1.02
Adjusted Basic and Diluted Earnings Per Share......................... $1.99 $1.05
NOTE 4 - RESTRUCTURING AND IMPAIRMENT CHARGE
On November 1, 2002, the Company announced the restructuring and
consolidation of its glass manufacturing facility located in Dunkirk, Indiana
into that of the Company's facility located in Sapulpa, Oklahoma. The Sapulpa
plant gains pressed glassware manufacturing in addition to its blown glassware
capabilities, while warehousing and certain other ancillary functions will
continue to be performed at the Dunkirk facility. This action was deemed
necessary due to a combination of weaker demand for pressed glassware, import
competition and the existence of excess plant capacity and is expected to result
in a substantial improvement over time in capacity utilization.
As a result of this plan, during the second quarter ended December 31,
2002, the Company recognized a pretax charge of approximately $4.9 million,
consisting of employee separation costs (relating to approximately 250 hourly
and salary employees), pension curtailment costs, closure and cleanup costs and
the write-down of property, plant and equipment having no future utility as a
result of the restructuring decision. The accounting for this restructuring is
in accordance with Emerging Issues Task Force No. 94-3. In accordance with this
guidance, the restructuring provision was determined based on estimates prepared
at the time the restructuring actions were approved by management. An analysis
of the Company's restructuring activity and related liability is as follows:
EMPLOYEE
SEPARATION ASSET OTHER
COSTS WRITE-OFFS CHARGES TOTAL
---------- ---------- ------- --------
Restructuring Provision
Employee separation costs................... $ 1,040 $ - $ - $ 1,040
Property and equipment impairment........... 3,027 3,027
Pension curtailment......................... 678 678
Closing and cleanup costs................... 200 200
-------- ------- ------- --------
Total..................................... 1,040 3,027 878 4,945
Cash Paid..................................... 802 42 844
Non-Cash Charges.............................. 3,027 678 3,705
-------- ------- ------- --------
Accrual Balance at December 31, 2002
(included in accrued liabilities)............. $ 238 $ - $ 158 $ 396
======== ======= ======= ========
It is anticipated that the remaining cash-related charges will be paid by
the end of the current fiscal year. Although pressed glassware manufacturing has
commenced during the third quarter at the Sapulpa facility, it is anticipated
that the Company will incur some amount of transitional costs over the balance
of the fiscal year. Accordingly, it does not appear that the benefits of this
restructuring will become fully evident until the fiscal year beginning July 1,
2003.
7
NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"). FIN 45 requires a guarantor to recognize a liability, at the inception of
the guarantee, for the fair value of obligations it has undertaken in issuing
the guarantee and also include more detailed disclosures with respect to
guarantees. FIN 45 is effective for guarantees issued or modified starting
January 1, 2003 and requires the additional disclosures for the period ended
December 31, 2002. The Company does not expect that the provisions of FIN 45
will have a material impact on the Company's results of operations or financial
condition. The Company has provided additional disclosure with respect to
guarantees in Note 6.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). EITF 00-21 provides guidance on how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting. EITF
00-21 will be effective for arrangements entered into after June 30, 2003. The
adoption of EITF No. 00-21 is not expected to have a material impact on the
Company's results of operation or financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The transition provisions of this Statement are
effective for fiscal years ending after December 15, 2002, and the disclosure
requirements of the Statement are effective for interim periods beginning after
December 15, 2002. The Company currently plans to continue to apply the
intrinsic-value based method to account for stock options and will comply with
the new disclosure requirements beginning with the third quarter of fiscal 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements, none of which appear to apply to the Company at this
time, are effective in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company is
currently evaluating the requirements and impact of FIN 46 on the consolidated
results of operations and financial condition but does not anticipate any impact
to the financials at this time.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
At December 31, 2002, the Company is a party to various claims and
litigation which have arisen in the ordinary course of business. Such matters
did not have a material effect on the current fiscal year-to-date results of
operations and, in the opinion of management, their ultimate disposition will
not have a material adverse effect on the Company's consolidated financial
statements.
In December 2002, the Company received notice from the U.S. Customs Service
regarding its intent to remit to the Company approximately $39.2 million under
the Continued Dumping and Subsidy Offset Act of 2000 ("CDSOA"). This amount was
recognized as other income in the accompanying financial statements. As this
payment was not received until January 2003, a receivable was recorded and
titled "Other receivable - Continued Dumping and Subsidy Offset Act" at December
31, 2002. The Company was notified and received approximately $15.6 million
under this Act in the fiscal third quarter of the prior year. The CDSOA, which
applies to the Company's candle operations, is in its second year of
effectiveness and is intended to redress unfair dumping of imported products
through cash payments to eligible affected companies. Payments to be received in
future years under CDSOA are subject to many variables outside the control of
the Company and, accordingly, the related amounts, if any, are not subject to
reasonable estimation at the present time. The Company is aware that another
candle manufacturer has initiated legal proceedings against the Customs Service
and claims a right to share in the total proceeds payable to candle
manufacturers pursuant to the provisions of CDSOA. The Company has been informed
that the Customs Service, which denied the claim originally, is defending its
8
position before the court. If resolved in favor of the claimant, it might become
asserted that the payments that have been made to Lancaster Colony could be
reduced by an undetermined amount through either smaller future distributions or
as refunds to the Customs Service.
Certain of the Company's 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. The Company's
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
management's best estimate of the expected future cost of honoring Company
obligations under the warranty plans. The warranty accrual as of December 31,
2002 and June 30, 2002 is immaterial to the financial condition of the Company,
and the change in the accrual for the current quarter and the first six months
of fiscal 2003 is immaterial to the Company's results of operations and cash
flows.
During the quarters ended December 31, 2002 and 2001, the Company accrued
$3.0 million and $2.3 million, respectively, in conjunction with estimated
contingent payments associated with the September 2000 acquisition of Sister
Schubert's Homemade Rolls, Inc. As actual cash payments had not yet been made,
this activity was excluded from the Statements of Cash Flows for the respective
periods. This contingent payment arrangement continues through calendar 2003
with a maximum payment of $3.0 million and is based largely on the future annual
level of Sister Schubert's earnings, as defined.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(TABULAR DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2002 2001 2002 2001
---------- ---------- ---------- ----------
NET SALES
Specialty Foods..................... $ 164,316 $ 149,728 $ 311,949 $ 285,548
Glassware and Candles............... 81,753 103,926 149,963 182,583
Automotive.......................... 61,600 58,219 121,578 108,671
---------- ---------- ---------- ----------
Total............................. $ 307,669 $ 311,873 $ 583,490 $ 576,802
========== ========== ========== ==========
As reflected above, consolidated net sales of $308 million for the three
months ended December 31, 2002 declined 1% from the $312 million recorded in the
comparable period of fiscal 2002. Consolidated net sales for the six months
ended December 31, 2002 of $583 million increased 1% over the preceding year's
total of $577 million.
Within the Specialty Foods segment, internally generated growth led to
sales increasing in excess of 9% in both the three- and six-month periods. Among
significant contributors to this growth were retail sales of frozen breads and
rolls along with greater volumes of dressings and sauces sold to larger,
national restaurant accounts. Trade promotional costs, which are netted against
gross sales of the segment, were also somewhat higher last year, particularly in
the second quarter. Factors contributing to this reduction were improved
oversight and changes in customer mix.
Net sales of the Glassware and Candles segment declined 21% and 18% for the
respective three- and six-month periods. This decline is primarily due to lower
sales of candles. Affecting this trend are competitive market pricing
conditions, the general softness of the category and the loss of a large
mass-market customer. Net sales of the Automotive segment increased 6% for the
second quarter and 12% for the six-month period. Increased volume with OEM
accounts, especially of aluminum light truck accessories more than offset weaker
volumes of aftermarket floor mats.
The Company's consolidated gross margins as a percentage of net sales of
24.1% and 22.6% increased for both the respective three- and six-month periods
ended December 31, 2002 relative to the 22.6% and 22.5% achieved for the
comparable periods of fiscal 2002. The second quarter's margins of the Specialty
Foods segment increased as influenced by greater utilization of plant capacity
and lower promotional costs. A decline in year-to-date margins was experienced
due to issues involving sales mix, operating inefficiencies and higher
promotional costs affecting first quarter results. Food commodity costs for the
first six months of fiscal 2003 were relatively stable although it is expected
that increased soybean oil costs may impact the comparative results of the last
six months by in excess of $2 million. Despite pricing pressures impacting many
of its product lines, margins in the Automotive segment for both the three- and
six-month periods improved due to the implementation of manufacturing cost
reduction initiatives and the moderation in certain material costs. However,
such costs are anticipated to rise in the latter half of fiscal 2003.
Gross margins of the Glassware and Candles segment for the fiscal 2003
periods reflected improvement over the prior year as benefiting from the
liquidation of certain LIFO glassware inventory acquired at substantially lower
prior years' costs. Such liquidation reduced cost of sales by $2.7 million in
the second quarter of fiscal 2003. Otherwise, margins were adversely impacted by
issues such as a competitive pricing environment and less fixed cost absorption
on lower candle sales. Prior year margins in this segment were adversely
affected by costs associated with a labor strike occurring at one of the
glassware production facilities.
Consolidated selling, general and administrative costs of $26.2 million and
$51.1 million decreased 38% and 25%, respectively, from the corresponding fiscal
2002 three- and six-month totals of $42.4 million and $68.0 million. This
decrease is primarily due to the Glassware and Candles segment incurring a
greater provision for
10
bad debts in fiscal 2002 including a $14.3 million charge to reserve accounts
receivable associated with the bankruptcy filing of Kmart Corporation.
For the three- and six-month periods ended December 31, 2002, a
restructuring and asset impairment charge totaling $4.9 million before taxes was
provided in the Glassware and Candles segment. The accounting for this
restructuring has been in accordance with Emerging Issues Task Force No. 94-3.
The majority of this charge, approximately $3.0 million, was associated with the
write-down of property, plant and equipment no longer expected to be used as a
result of the restructuring. This charge related to the November 2002
announcement that the Company's glass manufacturing facility located in Dunkirk,
Indiana would be consolidated over a period of several months into that of the
Company's facility located in Sapulpa, Oklahoma. This action is expected to
result in a substantial improvement over time in capacity utilization.
Additionally, the Sapulpa facility is gaining the capability to manufacture
pressed glassware. The number of jobs adversely affected at the Dunkirk facility
approximated 250. Warehousing and certain other ancillary functions will
continue to be performed at Dunkirk. Although pressed glassware manufacturing
has commenced during the third quarter at the Sapulpa facility, it is
anticipated that the Company will incur some amount of transitional costs over
the balance of the fiscal year. Accordingly, it is anticipated that the benefits
of this restructuring will not become fully evident until the fiscal year
beginning July 1, 2003.
The foregoing factors contributed to consolidated operating income totaling
$43.1 million and $75.9 million for the three- and six-month periods ended
December 31, 2002. These amounts represented increases of 54% and 23% over the
corresponding fiscal 2002 totals of $28.0 million and $61.6 million. By segment,
the Company's operating income can be summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2002 2001 2002 2001
-------- -------- -------- --------
OPERATING INCOME
Specialty Foods..................... $ 34,296 $ 28,606 $ 60,572 $ 56,906
Glassware and Candles............... 5,896 (2,687) 9,973 2,709
Automotive.......................... 4,541 3,505 8,444 5,005
Corporate expenses.................. (1,682) (1,430) (3,138) (2,973)
-------- -------- -------- --------
Total............................. $ 43,051 $ 27,994 $ 75,851 $ 61,647
======== ======== ======== ========
In December 2002, the Company received notice from the U.S. Customs Service
regarding its intent to remit to the Company approximately $39.2 million under
the Continued Dumping and Subsidy Offset Act of 2000 ("CDSOA"). This amount was
recognized as other income in the accompanying financial statements. As this
payment was not received until January 2003, a receivable was recorded and
titled "Other receivable - Continued Dumping and Subsidy Offset Act" at December
31, 2002. The Company was notified and received approximately $15.6 million
under this Act in the fiscal third quarter of the prior year. The CDSOA, which
applies to the Company's candle operations, is in its second year of
effectiveness and is intended to redress unfair dumping of imported products
through cash payments to eligible affected companies. Payments to be received in
future years under CDSOA are subject to many variables outside the control of
the Company and, accordingly, the related amounts, if any, are not subject to
reasonable estimation at the present time. The Company is aware that another
candle manufacturer has initiated legal proceedings against the Customs Service
and claims a right to share in the total proceeds payable to candle
manufacturers pursuant to the provisions of CDSOA. The Company has been informed
that the Customs Service, which denied the claim originally, is defending its
position before the court. If resolved in favor of the claimant, it might become
asserted that the payments that have been made to Lancaster Colony could be
reduced by an undetermined amount through either smaller future distributions or
as refunds to the Customs Service. Further affecting other income has been an
increase in the level of interest income as influenced by the Company's greater
level of investable cash and equivalents, although as somewhat offset by a
year-over-year decline in interest rates. Also recognized in other income in the
second quarter of fiscal 2002 was a gain of approximately $1 million related to
insurance proceeds associated with a casualty loss that occurred in January
2001.
With fiscal 2003 results notably influenced by the CDSOA income, net income
of $52.0 million and $72.5 million for the three- and six-month periods ended
December 31, 2002 increased by 198% and 92% over the corresponding totals of
fiscal 2002. As was further affected by the Company's share repurchases, fully
diluted earnings per share of $1.43 and $1.99 for the three- and six-month
periods increased 204% and 95%, respectively, compared to the preceding year's
comparable totals of $.47 and $1.02.
11
FINANCIAL CONDITION
Net cash provided by operating activities for the six months ended December
31, 2002 totaled $87.2 million, which is $11.3 million greater than the $75.9
million provided in the six months ended December 31, 2001. This fluctuation in
cash flows was influenced by the increased level of net income and the extent of
relative year-over-year changes in various working capital components. Total
receivables of $137.6 million were $28.2 million greater than at June 30, 2002
due to the CDSOA remittance of $39.2 million from the U.S. Customs Service not
being received until early January 2003. Accrued liabilities and accrued income
and other taxes at December 31, 2002 of $75.8 million increased $29.7 million
since June 30, 2002 primarily due to greater accruals for corporate income taxes
as affected by the higher level of net income, which included the CDSOA income,
and seasonal factors.
Significant investment activities for the first half of fiscal 2003
included $12.1 million paid for property additions. Financing activities for the
six months ended December 31, 2002 included $18.9 million expended for share
repurchases and $13.8 million for dividends paid. The level of total dividends
paid in the current six-month period increased 7% over that paid in the
comparable prior year as the impact of a $.03, or 9%, per share increase in the
effective dividend rate was partially offset by the impact of the Company's
share repurchases on shares outstanding. Approximately 1,223,000 shares remained
authorized for future buyback at December 31, 2002.
Management believes that cash and equivalents currently available, cash
provided from operations and the currently available bank credit arrangements
should be adequate to meet the Company's foreseeable cash requirements over the
remainder of fiscal 2003.
There have been no significant changes in critical accounting policies from
those disclosed in the Company's Annual Report on Form 10-K for the year ended
June 30, 2002.
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 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 Form 10-K filed with the Securities and Exchange Commission.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any significant deficiencies or material
weaknesses of internal controls that would require corrective action.
12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant held its annual meeting of the shareholders on November 18,
2002. 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 term will expire in 2005:
Shares Shares
Voted Shares Not
"For" "Withheld" Voted
----------- ---------- ----------
Robert L. Fox......................... 34,205,404 53,726 2,285,292
John B. Gerlach, Jr................... 34,098,739 160,391 2,285,292
Edward H. Jennings.................... 33,882,082 377,048 2,285,292
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Index to Exhibits following Certifications.
(b) Reports on Form 8-K - On December 23, 2002, the Company filed a Form
8-K under Item 5 - Other Events, regarding a press release announcement
that Lancaster Colony Corporation had been notified by the U.S. Customs
Service that the Company would receive a payment of approximately $39
million under the Continued Dumping and Subsidy Offset Act of 2000.
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
Date: February 13, 2003 By: /s/JOHN B. GERLACH, JR.
------------------- ---------------------------
John B. Gerlach, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: February 13, 2003 By: /s/JOHN L. BOYLAN
------------------- ---------------------------
John L. Boylan
Treasurer, Vice President,
Assistant Secretary and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
13
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, John B. Gerlach, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lancaster Colony
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003 By: /s/JOHN B. GERLACH, JR.
-----------------------
John B. Gerlach, Jr.
Chief Executive Officer
14
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, John L. Boylan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lancaster Colony
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003 By: /s/JOHN L. BOYLAN
-----------------
John L. Boylan
Chief Financial Officer
15
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2002
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATED AT
- ------ ----------- ----------
99.1 Certification of CEO under Section 906 of the
Sarbanes-Oxley Act of 2002......................... Filed herewith
99.2 Certification of CFO under Section 906 of the
Sarbanes-Oxley Act of 2002......................... Filed herewith
16