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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 MARCH 31, 2003
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)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of March 31, 2003, there were approximately 35,844,000 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 - March 31, 2003 and
June 30, 2002
Condensed Consolidated Statements of Income - Three and Nine Months
Ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
March 31, 2003 and 2002
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 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
MARCH 31 JUNE 30
(DOLLARS IN THOUSANDS) 2003 2002
-------------------- ------------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents................................................ $ 131,357 $ 83,378
Receivables - net of allowance for doubtful accounts................ 101,520 109,350
Inventories:
Raw materials and supplies........................................ 45,944 43,670
Finished goods and work in process................................ 107,192 104,581
----------- ----------
Total inventories............................................... 153,136 148,251
Prepaid expenses and other current assets........................... 27,022 25,121
----------- ----------
Total current assets............................................ 413,035 366,100
PROPERTY, PLANT AND EQUIPMENT - at cost................................ 455,941 453,671
Less Accumulated Depreciation....................................... 296,086 287,728
----------- ----------
Property, plant and equipment - net............................. 159,855 165,943
GOODWILL - net of accumulated amortization............................. 75,212 72,212
INTANGIBLE ASSETS - net of accumulated amortization.................... 442 465
OTHER ASSETS........................................................... 12,900 13,985
----------- ----------
TOTAL ASSETS........................................................... $ 661,444 $ 618,705
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 42,730 $ 43,258
Accrued liabilities ................................................ 43,885 45,674
Accrued income and other taxes...................................... 4,223 372
----------- ----------
Total current liabilities....................................... 90,838 89,304
OTHER NONCURRENT LIABILITIES........................................... 17,513 15,890
DEFERRED INCOME TAXES.................................................. 10,932 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 March 31, 2003 -
no par value - 47,580,755 shares;
June 30, 2002 - no par value - 47,484,253 shares.................. 65,009 61,919
Retained earnings................................................... 822,120 752,534
Accumulated other comprehensive loss................................ (2,735) (2,752)
----------- -----------
Total........................................................... 884,394 811,701
Common stock in treasury, at cost March 31, 2003 -
11,737,014 shares; June 30, 2002 - 10,886,014 shares.............. (342,233) (310,424)
----------- -----------
Total shareholders' equity...................................... 542,161 501,277
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 661,444 $ 618,705
=========== ===========
See Notes to Condensed Consolidated Financial Statements
3
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN THOUSANDS MARCH 31 MARCH 31
EXCEPT PER SHARE AMOUNTS) 2003 2002 2003 2002
------------------------ ---------- ---------- ---------- ----------
NET SALES........................................ $ 259,535 $ 270,912 $ 843,025 $ 847,714
COST OF SALES.................................... 205,962 213,388 657,534 660,520
---------- ---------- ---------- ----------
GROSS MARGIN..................................... 53,573 57,524 185,491 187,194
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....................... 24,629 26,030 75,751 94,053
RESTRUCTURING AND IMPAIRMENT CHARGE.............. (84) 4,861
---------- ---------- ---------- ----------
OPERATING INCOME................................. 29,028 31,494 104,879 93,141
OTHER INCOME (EXPENSE):
Interest Expense.............................. (54)
Other Income - Continued Dumping
and Subsidy Offset Act...................... 15,588 39,177 15,588
Interest Income and Other - Net............... (47) (205) 1,230 (327)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES....................... 28,981 46,877 145,286 108,348
TAXES BASED ON INCOME............................ 10,934 18,070 54,704 41,777
---------- ---------- ---------- ----------
NET INCOME....................................... $ 18,047 $ 28,807 $ 90,582 $ 66,571
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic and Diluted............................. $ .50 $ .78 $ 2.49 $ 1.80
CASH DIVIDENDS PER COMMON SHARE.................. $ .20 $ .18 $ .58 $ .53
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic......................................... 36,013,000 36,712,000 36,310,000 36,924,000
Diluted....................................... 36,064,000 36,777,000 36,366,000 36,980,000
See Notes to Condensed Consolidated Financial Statements
4
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31
(DOLLARS IN THOUSANDS) 2003 2002
-------------------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 90,582 $ 66,571
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.......................................... 24,056 26,352
Provision for losses on accounts receivable............................ 617 16,418
Deferred income taxes and other noncash charges........................ 1,761 (6,039)
Restructuring and impairment charge.................................... 3,912
Loss on sale of property............................................... 68 129
Changes in operating assets and liabilities:
Receivables.......................................................... 7,213 (24,235)
Inventories.......................................................... (4,885) 29,881
Prepaid expenses and other current assets............................ (1,901) (1,330)
Accounts payable..................................................... (528) 1,490
Accrued liabilities and accrued income and other taxes............... 2,111 3,882
--------- ----------
Net cash provided by operating activities.............................. 123,006 113,119
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on property additions........................................... (21,673) (14,305)
Cash paid for acquisitions............................................... (3,000)
Proceeds from sale of property........................................... 1,440 80
Other - net.............................................................. (1,756) (1,552)
--------- ----------
Net cash used in investing activities.................................. (24,989) (15,777)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock............................................... (31,809) (25,128)
Payment of dividends..................................................... (20,996) (19,535)
Net change in short-term bank loans...................................... (4,500)
Payments on long-term debt............................................... (3,040)
Common stock issued upon exercise of stock options....................... 2,750 4,118
--------- ----------
Net cash used in financing activities.................................. (50,055) (48,085)
--------- ----------
Effect of exchange rate changes on cash..................................... 17
--------- ----------
Net change in cash and equivalents.......................................... 47,979 49,257
Cash and equivalents at beginning of year................................... 83,378 4,873
--------- ----------
Cash and equivalents at end of period....................................... $ 131,357 $ 54,130
========= ==========
SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS:
Cash paid during the period for:
Interest............................................................... $ $ 111
========= ==========
Income taxes........................................................... $ 51,887 $ 44,179
========= ==========
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 nine months ended
March 31, 2003 was an increase in net earnings of approximately $1.5 million and
$3.2 million after taxes, or approximately four and nine cents per share,
respectively.
The Company accounts for its stock option plan under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, no compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and net income per common
share as if the Company had applied the fair-value-based method under Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," to record expense for stock option compensation:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2003 2002 2003 2002
--------- --------- -------- ---------
Net income as reported...................... $ 18,047 $ 28,807 $ 90,582 $ 66,571
Less: Total stock-based employee
compensation expense determined
under fair-value-based method for all
awards, net of related tax effects.......... (1,068) (35) (1,139) (106)
--------- --------- -------- ---------
Pro forma net income........................ $ 16,979 $ 28,772 $ 89,443 $ 66,465
========= ========= ======== =========
Net income per common share
Basic
As reported............................. $ .50 $ .78 $ 2.49 $ 1.80
Pro forma............................... $ .47 $ .78 $ 2.46 $ 1.80
Assuming full dilution
As reported............................. $ .50 $ .78 $ 2.49 $ 1.80
Pro forma............................... $ .47 $ .78 $ 2.46 $ 1.80
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2 - BUSINESS SEGMENTS INFORMATION
Comparative third quarter and year-to-date unaudited results by segment are
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2003 2002 2003 2002
--------- ---------- ---------- ----------
NET SALES
Specialty Foods.................. $ 140,959 $ 143,425 $ 452,908 $ 428,973
Glassware and Candles............ 57,274 67,988 207,237 250,571
Automotive....................... 61,302 59,499 182,880 168,170
--------- ---------- ---------- ----------
Total......................... $ 259,535 $ 270,912 $ 843,025 $ 847,714
========= ========== ========== ==========
OPERATING INCOME
Specialty Foods.................. $ 23,342 $ 25,910 $ 83,914 $ 82,816
Glassware and Candles............ 2,279 2,291 12,252 5,000
Automotive....................... 4,937 4,720 13,381 9,725
Corporate expenses............... (1,530) (1,427) (4,668) (4,400)
--------- ---------- ---------- ----------
Total......................... $ 29,028 $ 31,494 $ 104,879 $ 93,141
========= ========== ========== ==========
6
NOTE 3 - GOODWILL AND PURCHASED INTANGIBLE ASSETS
Effective July 1, 2002, the Company adopted the provisions of 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 March 31, 2003 and June 30, 2002:
MARCH 31, 2003 JUNE 30, 2002
----------------------- ------------------------
GROSS GROSS
INTANGIBLE ASSETS CARRYING ACCUMULATED CARRYING ACCUMULATED
SUBJECT TO AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------------------- -------- ------------ -------- ------------
Specialty Foods - Trademarks................... $ 370 $ 110 $ 370 $ 103
Glassware & Candles - Customer Lists........... 250 68 250 52
------ ------ ----- -----
Total........................................ $ 620 $ 178 $ 620 $ 155
====== ====== ===== =====
Amortization expense relating to these assets was approximately $23,000 and
$30,000 for the nine months ended March 31, 2003 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 March 31, 2003. The $74.2
million includes the current year contingent payment of $3.0 million as further
discussed in Note 6.
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 three and nine months ended March 31, 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2003 2002 2003 2002
-------- ------- ------- --------
Reported Net Income.............................. $ 18,047 $28,807 $90,582 $66,571
Add back amortization of goodwill, net of taxes.. 640 1,896
-------- ------- ------- -------
Adjusted Net Income.............................. $ 18,047 $29,447 $90,582 $68,467
======== ======= ======= =======
Reported Basic and Diluted Earnings Per Share.... $.50 $.78 $2.49 $1.80
Adjusted Basic and Diluted Earnings Per Share.... $.50 $.80 $2.49 $1.85
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 has gained pressed glassware manufacturing in addition to its blown
glassware capabilities, while warehousing and certain other ancillary functions
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
improve capacity utilization over time.
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 write-down was reduced approximately
$84,000 during the quarter ended March 31, 2003 based on a final review of the
related property involved. The accounting for this restructuring is in
accordance with Emerging Issues Task Force No. 94-3. In accordance with this
guidance, the restructuring
7
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........... 2,943 2,943
Pension curtailment......................... 678 678
Closing and cleanup costs................... 200 200
-------- ------- ------- --------
Total..................................... 1,040 2,943 878 4,861
Cash Paid..................................... 893 56 949
Non-Cash Charges.............................. 2,943 678 3,621
-------- ------- ------- --------
Accrual Balance at March 31, 2003
(included in accrued liabilities)............. $ 147 $ - $ 144 $ 291
======== ========== ======= ========
It is anticipated that the remaining cash-related charges will be paid by
the end of the current fiscal year. Although pressed glassware manufacturing
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.
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 beginning with the
Company's fiscal second quarter ended December 31, 2002. The provisions of FIN
45 have been adopted with no material impact on the Company's results of
operations or financial condition. Additional disclosure has been provided 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 accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB No. 25 and complies with
the disclosure provisions of SFAS No. 123 and SFAS No. 148.
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
8
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
provisions of FIN 46 have been adopted and based upon a review of such
provisions it has been determined that there are no variable interest entities
which would require consolidation or disclosure at this time.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
At March 31, 2003, 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.
During the second quarter of fiscal 2003, the Company recognized as income
approximately $39.2 million being distributed by the U.S. Customs Service to the
Company consistent with the terms of the Continued Dumping and Subsidy Offset
Act of 2000 ("CDSOA"). In fiscal 2002, approximately $15.6 million received
under this Act was recognized in the fiscal third quarter. These amounts are
recorded as other income in the accompanying financial statements. 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 initiated legal proceedings against the Customs Service and
claimed a right to share in the total proceeds payable to candle manufacturers
pursuant to the provisions of CDSOA. This matter was decided by the trial court
in favor of the Customs Service in April 2003. The trial court ruling has since
been appealed by the plaintiff to the applicable Federal Appeals Court. If this
litigation is eventually resolved in favor of the claimant, it might become
asserted that the payments that have been received by the Company should be
reduced by an undetermined amount through either smaller future distributions or
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 March 31, 2003
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 nine 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. The December 31, 2002 accrual of $3.0 million
was paid during the quarter ended March 31, 2003. The December 31, 2001 accrual
of $2.3 million was paid in the quarter ended June 30, 2002; thus, this activity
was excluded from the Statements of Cash Flows for the period ending March 31,
2002. 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.
NOTE 7 - COMPREHENSIVE INCOME
Total comprehensive income for the quarters ended March 31, 2003 and 2002
was approximately $18.1 million and $28.8 million, respectively. Total
comprehensive income year-to-date as of March 31, 2003 and 2002 was
approximately $90.6 million and $66.6 million, respectively. Total comprehensive
income for these respective periods includes net income and foreign currency
translation adjustments.
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 NINE MONTHS ENDED
MARCH 31 MARCH 31
2003 2002 2003 2002
---------- ---------- ---------- ----------
NET SALES
Specialty Foods..................... $ 140,959 $ 143,425 $ 452,908 $ 428,973
Glassware and Candles............... 57,274 67,988 207,237 250,571
Automotive.......................... 61,302 59,499 182,880 168,170
---------- ---------- ---------- ----------
Total............................. $ 259,535 $ 270,912 $ 843,025 $ 847,714
========== ========== ========== ==========
As reflected above, consolidated net sales of $259.5 million for the fiscal
third quarter ended March 31, 2003 decreased approximately 4% from the
comparable prior year total of $270.9 million. For the nine-month period ended
March 31, 2003, net sales totaled $843.0 million, or less than 1% below the
prior year total of $847.7 million. Of some affect across all three segments in
the three months ended March 31, 2003 was the presence of unsettled economic
conditions, in part resulting from uncertainties associated with the conflict in
Iraq.
Net sales of the Specialty Foods segment for the three-month period ended
March 31, 2003 declined by almost 2% while net sales between the comparable
nine-month periods increased by over 5%. The most recent quarter's sales were
influenced by a more competitive retail environment and by the 2003 Easter
holiday occurring in April, as opposed to March in 2002. Additionally, fiscal
2003 third quarter sales of foodservice products were adversely affected by
harsher winter weather dampening the volume of national chain restaurant
customers. Factors contributing to increased sales for the nine-month period
included growth in retail sales of frozen breads and rolls along with greater
volumes of dressings and sauces sold to national chain restaurant accounts.
Trade promotional costs, which are netted against gross sales, have declined
during both comparative periods of fiscal 2003 as affected by changes in
customer mix, improved oversight and, in the third quarter, lower sales.
Net sales of the Glassware and Candles segment declined approximately 16%
and 17% for the respective three- and nine-month periods. Lackluster consumer
demand, competitive market and pricing conditions, and a softer candle category
led to lower three-month sales for the segment. However, the fiscal 2003
three-month period benefited from the initial stocking shipments of a new line
of branded candle products. This impact was mitigated by the extent of the
related placement costs, which were recorded as a reduction to net sales in the
period. The nine-month decline, which was primarily due to lower candle sales,
was also affected by the loss of a mass-market candle customer that occurred as
of the beginning of calendar 2002.
Automotive segment sales increased 3% for the third quarter and almost 9%
for the nine-month period. Increased volume with OEM accounts, especially of
aluminum light truck accessories, more than offset weaker aftermarket volumes
for floor mats.
The Company's consolidated gross margins as a percentage of net sales of
20.6% and 22.0% declined slightly for both the respective three- and nine-month
periods ended March 31, 2003 relative to the 21.2% and 22.1% achieved for the
comparable periods of fiscal 2002. Third quarter gross margins in the Specialty
Foods segment were adversely affected by a less favorable sales mix and material
costs that rose markedly above levels of a year ago, primarily due to higher
costs for soybean oil. The effect of increased material costs on comparative
third quarter results is estimated to have exceeded $2 million. These factors
also contributed to lower segment gross margins for the nine-month period. It is
anticipated that increased levels of soybean oil costs will persist through at
least the fourth quarter of fiscal 2003. Gross margins of the Automotive segment
during the third quarter were relatively constant as the effects of certain
rising material costs and ongoing pricing pressures were mitigated by a better
sales mix and the implementation of manufacturing cost reduction initiatives.
Nine-month segment gross margins remained ahead of year ago margins.
10
Gross margins of the Glassware and Candles segment for the fiscal 2003
periods reflected improvement over the prior year levels as benefiting from the
liquidation of certain LIFO glassware inventory carried at substantially lower
prior years' costs. Such liquidation reduced segment cost of sales by
approximately $2.4 million and $5.1 million for the respective three- and
nine-month periods of fiscal 2003. Similarly derived income of $0.4 million was
recognized for the comparative periods of fiscal 2002. Margins in the current
year periods also benefited from the overhead eliminated by the closure of the
Dunkirk, Indiana manufacturing operations as further discussed below. Otherwise,
margins were adversely impacted by a competitive pricing environment and less
fixed cost absorption on lower candle sales. Segment operating results were also
impacted in the current year periods by a provision of approximately $1.4
million related to the impairment of certain glass-forming molds based on a
decision to exit several consumer product lines. Prior year margins in this
segment were adversely affected by costs associated with a labor strike which
occurred at the Dunkirk facility.
Consolidated selling, general and administrative costs of $24.6 million and
$75.8 million decreased approximately 5% and 19%, respectively, from the
corresponding fiscal 2002 three- and nine-month totals of $26.0 million and
$94.1 million. Contributing to the decline in the most recent quarter were
volume-driven decreases in selling costs of the Specialty Foods and Glassware
and Candles segments. The fiscal 2002 nine-month total included a second quarter
provision for bad debts within the Glassware and Candles segment of
approximately $14.3 million related to the Company's accounts receivable
exposure to Kmart Corporation, which filed for reorganization under Chapter 11
of the U.S. Bankruptcy Code in January 2002.
During the quarter 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 $2.9 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 write-down was reduced approximately $84,000 during the
quarter ended March 31, 2003 based on a final review of the related property
involved. The restructuring and asset impairment 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 improve capacity utilization over time. Additionally, the Sapulpa facility
has gained the capability to manufacture pressed glassware. The number of jobs
adversely affected at the Dunkirk facility approximated 250. Warehousing and
certain other ancillary functions are continuing to be performed at Dunkirk.
Although pressed glassware manufacturing 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
$29.0 million and $104.9 million for the three- and nine-month periods ended
March 31, 2003 compared to the corresponding fiscal 2002 totals of $31.5 million
and $93.1 million. By segment, the Company's operating income can be summarized
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2003 2002 2003 2002
---------- ---------- ---------- ----------
OPERATING INCOME
Specialty Foods......................... $ 23,342 $ 25,910 $ 83,914 $ 82,816
Glassware and Candles................... 2,279 2,291 12,252 5,000
Automotive.............................. 4,937 4,720 13,381 9,725
Corporate expenses...................... (1,530) (1,427) (4,668) (4,400)
---------- ---------- ---------- ----------
Total................................. $ 29,028 $ 31,494 $ 104,879 $ 93,141
========== ========== ========== ==========
During the second quarter of fiscal 2003, the Company recognized as income
approximately $39.2 million being distributed by the U.S. Customs Service to the
Company consistent with the terms of the Continued Dumping and Subsidy Offset
Act of 2000 ("CDSOA"). In fiscal 2002, approximately $15.6 million received
under this Act was recognized in the fiscal third quarter. These amounts are
recorded as other income in the accompanying financial statements. 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
11
another candle manufacturer initiated legal proceedings against the Customs
Service and claimed a right to share in the total proceeds payable to candle
manufacturers pursuant to the provisions of CDSOA. This matter was decided by
the trial court in favor of the Customs Service in April 2003. The trial court
ruling has since been appealed by the plaintiff to the applicable Federal
Appeals Court. If this litigation is eventually resolved in favor of the
claimant, it might become asserted that the payments that have been received by
the Company should be reduced by an undetermined amount through either smaller
future distributions or refunds to the Customs Service. Further affecting other
income during fiscal 2003 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 the fiscal 2002 three-month results being inclusive of the prior
fiscal year's CDSOA remittance, and with the fiscal 2003 nine-month results
notably influenced by the increased CDSOA income applicable to the current
fiscal year, net income of $18.0 million and $90.6 million for the three- and
nine-month periods ended March 31, 2003 decreased by 37% and increased by 36%
over the respective totals of fiscal 2002. As was further affected by the
Company's share repurchases, fully diluted earnings per share of $.50 and $2.49
for the three- and nine-month periods decreased 36% and increased 38%,
respectively, as compared to the corresponding totals of $.78 and $1.80 of a
year ago.
FINANCIAL CONDITION
Net cash provided by operating activities for the nine months ended March
31, 2003 totaled $123.0 million, which is $9.9 million greater than the $113.1
million provided in the nine months ended March 31, 2002. The increased level of
net income and the extent of relative year-over-year changes in various working
capital components influenced this fluctuation in cash flows.
Significant investment activities for the first nine months of fiscal 2003
included $21.7 million paid for property additions and the $3.0 million
contingent payment related to the fiscal 2001 Sister Schubert's Homemade Rolls,
Inc. acquisition. Financing activities for the nine months ended March 31, 2003
included $31.8 million expended for share repurchases and $21.0 million for
dividends paid. The level of total dividends paid in the current nine-month
period increased 7% over that paid in the comparable prior year as the impact of
a five cent, 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 880,000 shares remained authorized for future buyback
at March 31, 2003.
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.
12
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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Index to Exhibits following Certifications.
(b) Reports on Form 8-K - There were no reports filed on Form 8-K during
the three months ended March 31, 2003.
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: May 13, 2003 By: /s/JOHN B. GERLACH, JR.
-------------- ----------------------------------------
John B. Gerlach, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: May 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: May 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: May 13, 2003 By: /s/JOHN L. BOYLAN
-----------------
John L. Boylan
Chief Financial Officer
15
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2003
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