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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-4065-1
-------------------
LANCASTER COLONY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 13-1955943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37 WEST BROAD STREET 43215
COLUMBUS, OHIO (Zip Code)
(Address of principal executive offices)
614-224-7141
(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of April 30, 2004, there were approximately 35,661,000 shares of Common
Stock, no par value per share, outstanding.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - March 31, 2004 and June 30, 2003
Consolidated Statements of Income - Three and Nine Months Ended
March 31, 2004 and 2003
Consolidated Statements of Cash Flows - Nine Months Ended March
31, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of
Equity Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31 JUNE 30
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2004 2003
- ----------------------------------------- ----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents................................................. $ 159,377 $ 142,847
Receivables - (net of allowance for doubtful accounts,
March - $2,546 and June - $1,952).................................. 106,195 88,583
Inventories:
Raw materials and supplies......................................... 45,488 42,957
Finished goods and work in process................................. 103,364 116,455
----------- -----------
Total inventories................................................ 148,852 159,412
Deferred income taxes and other current assets....................... 28,635 23,543
----------- -----------
Total current assets............................................. 443,059 414,385
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements..................................... 121,543 118,457
Machinery and equipment.............................................. 355,724 343,419
----------- -----------
Total cost....................................................... 477,267 461,876
Less accumulated depreciation........................................ 313,602 300,765
----------- -----------
Property, plant and equipment - net.............................. 163,665 161,111
OTHER ASSETS:
Goodwill - (net of accumulated amortization
March and June - $15,136) ......................................... 84,047 75,212
Other intangible assets.............................................. 412 435
Other noncurrent assets.............................................. 18,795 16,573
----------- -----------
TOTAL............................................................ $ 709,978 $ 667,716
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 42,708 $ 41,983
Accrued liabilities.................................................. 45,136 42,940
----------- -----------
Total current liabilities........................................ 87,844 84,923
OTHER NONCURRENT LIABILITIES............................................ 28,441 27,811
DEFERRED INCOME TAXES................................................... 10,358 7,317
SHAREHOLDERS' EQUITY:
Preferred stock - authorized 3,050,000 shares;
outstanding - none
Common stock - authorized 75,000,000 shares; outstanding -
March 31, 2004 - 35,697,563 shares;
June 30, 2003 - 35,770,663 shares.................................. 69,731 65,864
Retained earnings.................................................... 875,731 836,928
Accumulated other comprehensive loss................................. (8,770) (9,151)
----------- -----------
Total............................................................ 936,692 893,641
Common stock in treasury, at cost.................................... (353,357) (345,976)
----------- -----------
Total shareholders' equity........................................... 583,335 547,665
----------- -----------
TOTAL............................................................ $ 709,978 $ 667,716
=========== ===========
See accompanying notes to consolidated financial statements.
3
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
- -------------------------------------------- ---------- ---------- ---------- ----------
NET SALES........................................ $ 269,463 $ 259,535 $ 827,311 $ 843,025
COST OF SALES.................................... 219,659 205,962 656,649 657,534
---------- ---------- ---------- ----------
GROSS MARGIN..................................... 49,804 53,573 170,662 185,491
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....................... 24,401 24,629 73,473 75,751
RESTRUCTURING AND IMPAIRMENT CHARGE.............. - (84) - 4,861
---------- ---------- ---------- ----------
OPERATING INCOME................................. 25,403 29,028 97,189 104,879
OTHER INCOME (EXPENSE):
Other Income - Continued Dumping and
Subsidy Offset Act.......................... - - 1,987 39,177
Interest Income and Other - Net............... 457 (47) 1,296 1,230
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES....................... 25,860 28,981 100,472 145,286
TAXES BASED ON INCOME............................ 9,815 10,934 38,077 54,704
---------- ---------- ---------- ----------
NET INCOME....................................... $ 16,045 $ 18,047 $ 62,395 $ 90,582
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic......................................... $ .45 $ .50 $ 1.75 $ 2.49
Diluted....................................... $ .45 $ .50 $ 1.74 $ 2.49
CASH DIVIDENDS PER COMMON SHARE.................. $ .23 $ .20 $ .66 $ .58
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic......................................... 35,736 36,013 35,740 36,310
Diluted....................................... 35,814 36,064 35,814 36,366
See accompanying notes to consolidated financial statements.
4
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31
(AMOUNTS IN THOUSANDS) 2004 2003
- ---------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 62,395 $ 90,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........................................ 23,183 24,056
(Recovery of) provision for losses on accounts receivable............ (1,039) 617
Deferred income taxes and other noncash charges...................... 4,371 1,761
Restructuring and impairment charge.................................. (60) 3,912
(Gain) loss on sale of property...................................... (699) 68
Changes in operating assets and liabilities:
Receivables........................................................ (15,004) 7,213
Inventories........................................................ 11,635 (4,885)
Other current assets............................................... (5,792) (1,901)
Accounts payable................................................... 333 (528)
Accrued liabilities................................................ 2,380 2,111
---------- ----------
Net cash provided by operating activities........................ 81,703 123,006
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions............................................. (20,568) (3,000)
Payments on property additions......................................... (14,192) (21,673)
Proceeds from sale of property......................................... 1,261 1,440
Other - net............................................................ (4,293) (1,756)
---------- ----------
Net cash used in investing activities............................ (37,792) (24,989)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends................................................... (23,592) (20,996)
Purchase of treasury stock............................................. (7,381) (31,809)
Common stock issued upon exercise of stock options..................... 3,578 2,750
---------- ----------
Net cash used in financing activities............................ (27,395) (50,055)
---------- ----------
Effect of exchange rate changes on cash................................... 14 17
---------- ----------
Net change in cash and equivalents........................................ 16,530 47,979
Cash and equivalents at beginning of year................................. 142,847 83,378
---------- ----------
Cash and equivalents at end of period..................................... $ 159,377 $ 131,357
========== ==========
SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS:
Cash paid during the period for income taxes........................... $ 39,822 $ 51,887
========== ==========
See accompanying notes to consolidated financial statements.
5
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited but, in our
opinion, reflect all adjustments necessary for a fair presentation of the
results of operations and financial position for such periods. All such
adjustments reflected in the interim consolidated financial statements are
considered to be of a normal recurring nature. The results of operations for any
interim period are not necessarily indicative of results for the full year.
Accordingly, these financial statements should be read in conjunction with the
financial statements and notes thereto contained in our Annual Report on Form
10-K for the year ended June 30, 2003.
During the three and nine months ended March 31, 2004 and 2003, certain
inventory quantity reductions resulted in a liquidation of LIFO inventory layers
carried at lower costs which prevailed in prior years. The effect of the
liquidation for the three and nine months ended March 31, 2004 was an increase
in pretax income of approximately $0.8 million and $3.4 million, or
approximately one cent and six cents per share after taxes, respectively. The
effect of the liquidation for the three and nine months ended March 31, 2003 was
an increase in pretax income of approximately $2.4 million and $5.1 million, or
approximately four cents and nine cents per share after taxes, respectively.
We account for our stock option plan under Accounting Principles Board
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 at least 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 we had applied the fair-value-based method under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, to record expense for stock option
compensation:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2004 2003 2004 2003
--------- --------- -------- ---------
Net income as reported.................... $ 16,045 $ 18,047 $ 62,395 $ 90,582
Less: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects.... (102) (1,068) (305) (1,139)
--------- --------- -------- ---------
Pro forma net income...................... $ 15,943 $ 16,979 $ 62,090 $ 89,443
========= ========= ======== =========
Net income per common share -
basic as reported......................... $ .45 $ .50 $ 1.75 $ 2.49
Net income per common share -
diluted as reported....................... $ .45 $ .50 $ 1.74 $ 2.49
Net income per common share -
basic pro forma........................... $ .45 $ .47 $ 1.74 $ 2.46
Net income per common share -
diluted pro forma......................... $ .45 $ .47 $ 1.73 $ 2.46
NOTE 2 - ACQUISITION
On December 12, 2003, we completed the acquisition of substantially all the
operating assets of Warren Frozen Foods, Inc. ("Warren"), a privately owned
producer and marketer of frozen noodle and pasta products based in Altoona,
Iowa. Warren has a well-recognized presence in the industrial and foodservice
markets and will complement our existing frozen noodle operation, which has a
greater presence in the retail markets. Warren is reported in our Specialty
Foods segment, and its results of operations have been included in our
consolidated statement of income since December 12, 2003. Proforma financial
information relating to this acquisition is not included, as the impact of this
transaction is not material to our consolidated results.
6
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Under the terms of the purchase agreement, we acquired certain personal and
real property including fixed assets, inventory and accounts receivable, and
assumed certain liabilities. The purchase price was approximately $20.6 million,
although this amount is subject to a net asset adjustment as defined under the
terms of the purchase agreement.
The following purchase price allocation is based on the estimated fair
value of the net assets acquired and will be finalized upon resolution of the
net asset adjustment and the completion of an independent appraisal with respect
to certain intangible assets other than goodwill, which we are currently in the
process of obtaining. All of the purchase price in excess of the net
identifiable assets acquired has been tentatively assigned to goodwill, pending
the completion of the third-party valuation. We anticipate that the cumulative
amortization on the intangibles ultimately identified will not have a material
impact on the consolidated statement of income in the current fiscal year.
A preliminary allocation of the purchase price is as follows:
PRELIMINARY
BALANCE SHEET CAPTIONS ALLOCATION
- ---------------------- -----------
Receivables........................................................................ $ 1,519
Inventories........................................................................ 1,075
Property, Plant and Equipment (as determined by independent appraisal)............. 10,062
Goodwill (tax deductible).......................................................... 8,836
Current Liabilities................................................................ (924)
--------
Total............................................................................ $ 20,568
========
NOTE 3 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Revised SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 revises the annual
disclosure requirements for pension and postretirement plans to include
additional disclosures about assets, obligations, cash flows, and net periodic
benefit costs of defined benefit pension and other defined benefit
postretirement plans. SFAS No. 132 also revises the interim disclosure
requirements to include disclosures of the net periodic benefit costs for each
period in which an income statement is presented and the employer's
contributions paid and expected to be paid during the current fiscal year, if
the contributions are significantly different than previously disclosed amounts.
The Statement is effective for financial statements with fiscal years ending
after December 15, 2003. For interim-period disclosures, the Statement is
effective for interim periods beginning after December 15, 2003. We adopted this
Statement for interim-period disclosures with this Form 10-Q (see Note 5), and
we will adopt the annual disclosures with our June 30, 2004 Form 10-K. The
adoption of SFAS No. 132 will not have an impact on our financial condition or
results of operations, as it pertains only to disclosure provisions.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" ("FSP 106-1"). FSP 106-1
permits employers that sponsor postretirement benefit plans that provide
prescription drug benefits to retirees to make a one-time election to defer
accounting for any effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"). We have elected to defer accounting for
any effect of the Act until specific authoritative accounting guidance is
issued. Therefore, the amounts included in the financial statements related to
our postretirement benefit plans do not reflect the effects of the Act. The
effect of the Act is not expected to have a material impact on our results of
operations, cash flows or financial position.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill attributable to the Specialty Foods and Automotive segments was
$83.0 million and $1.0 million, respectively, at March 31, 2004 and $74.2
million and $1.0 million, respectively, at June 30, 2003. The increase in
goodwill was the result of the acquisition of Warren, as discussed in Note 2.
7
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes our segment identifiable other intangible
assets as of March 31, 2004 and June 30, 2003:
MARCH 31 JUNE 30
2004 2003
-------- -------
Specialty Foods - Trademarks
Gross carrying value................................................... $ 370 $ 370
Accumulated amortization............................................... (119) (112)
----- ------
Net Carrying Value..................................................... $ 251 $ 258
===== ======
Glassware and Candles - Customer Lists
Gross carrying value................................................... $ 250 $ 250
Accumulated amortization............................................... (89) (73)
----- ------
Net Carrying Value..................................................... $ 161 $ 177
===== ======
Total Net Carrying Value................................................. $ 412 $ 435
===== ======
Amortization expense relating to these assets was approximately $8,000 and
$23,000 for the three and nine months ended March 31, 2004 and 2003,
respectively. The amortization expense is estimated to be approximately $30,000
for each of the five fiscal years ending June 30, 2004 through 2008.
NOTE 5 - PENSION AND OTHER POSTRETIREMENT BENEFITS
We and certain of our operating subsidiaries provide multiple defined
benefit pension and postretirement medical and life insurance benefit plans.
Benefits under the defined benefit pension plans are primarily based on
negotiated rates and years of service and cover the union workers at such
locations. We contribute to these pension plans at least the minimum amount
required by regulation or contract. We recognize the cost of pension plans and
postretirement medical and life insurance benefits as the employees render
service. Postretirement benefits are funded as incurred.
The following chart discloses net periodic benefit cost for our pension and
postretirement plans:
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------- --------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ------ ------ ---- ---- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................. $151 $156 $ 454 $ 469 $ 63 $ 44 $190 $132
Interest cost................................ 594 581 1,782 1,743 60 57 179 170
Expected return on plan assets............... (627) (641) (1,881) (1,923) - - - -
Amortization of unrecognized net loss........ 175 31 524 94 9 - 27 -
Amortization of prior service cost (asset)... 58 67 176 200 (2) (2) (5) (5)
Change in prior service cost due to
curtailment................................ - - - 678 - - - -
Amortization of unrecognized net
obligation (asset) existing at transition.. 9 (5) 26 (14) - - - -
---- ---- ------ ------ ---- ---- ---- ----
Net periodic benefit cost.................... $360 $189 $1,081 $1,247 $130 $ 99 $391 $297
==== ==== ====== ====== ==== ==== ==== ====
For the nine months ended March 31, 2004, we have made $3.0 million in
contributions to our pension plans. We expect to make approximately $80,000 more
in contributions to our pension plans during the remainder of this fiscal year.
8
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the nine months ended March 31, 2004, we have made approximately
$281,000 in contributions to our postretirement medical and life insurance
benefit plans. We expect to make approximately $78,000 more in contributions to
our postretirement medical and life insurance benefit plans during the remainder
of this fiscal year.
NOTE 6 - RESTRUCTURING AND IMPAIRMENT CHARGE
On November 1, 2002, we announced the restructuring and consolidation of
our glass manufacturing facility located in Dunkirk, Indiana into our facility
located in Sapulpa, Oklahoma. The Sapulpa plant 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.
As a result of this plan, during the second quarter of the year ended June
30, 2003, we 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 was
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 we approved the restructuring actions. The liability that remains
for this restructuring is immaterial to the overall consolidated financial
statements. We continue to make cash payments against the liability as deemed
necessary under the plan.
NOTE 7 - BUSINESS SEGMENT INFORMATION
The following summary financial information by business segment is
consistent with the basis of segmentation and measurement of segment profit or
loss presented in our June 30, 2003 consolidated financial statements:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2004 2003 2004 2003
---------- ---------- --------- ----------
NET SALES
Specialty Foods...................... $ 156,748 $ 140,959 $ 475,453 $ 452,908
Glassware and Candles................ 55,658 57,274 184,493 207,237
Automotive........................... 57,057 61,302 167,365 182,880
---------- ---------- --------- ----------
Total ............................. $ 269,463 $ 259,535 $ 827,311 $ 843,025
========== ========== ========= ==========
OPERATING INCOME
Specialty Foods...................... $ 24,085 $ 23,342 $ 81,494 $ 83,914
Glassware and Candles................ 1,147 2,279 11,017 12,252
Automotive........................... 2,025 4,937 9,480 13,381
Corporate expenses................... (1,854) (1,530) (4,802) (4,668)
---------- ---------- --------- ----------
Total.............................. $ 25,403 $ 29,028 $ 97,189 $ 104,879
========== ========== ========= ==========
NOTE 8 - COMMITMENTS AND CONTINGENCIES
At March 31, 2004, we are a party to various claims and litigation which
have arisen in the ordinary course of business. Such matters did not have a
material effect on the current fiscal year-to-date results of operations and, in
our opinion, their ultimate disposition will not have a material adverse effect
on our consolidated financial statements.
9
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Certain of our automotive accessory products carry explicit limited
warranties that extend from twelve months to the life of the product, based on
terms that are generally accepted in the marketplace. Our policy is to record a
provision for the expected cost of the warranty-related claims at the time of
the sale, and periodically adjust the provision to reflect actual experience.
The amount of warranty liability accrued reflects our best estimate of the
expected future cost of honoring our obligations under the warranty plans. The
warranty accrual as of March 31, 2004 and June 30, 2003 is immaterial to our
financial condition, and the change in the accrual for the current quarter of
fiscal 2004 is immaterial to our results of operations and cash flows.
NOTE 9 - COMPREHENSIVE INCOME
Total comprehensive income for the three months ended March 31, 2004 and
2003 was approximately $16.1 million and $18.1 million, respectively. Total
comprehensive income for the nine-month periods ended March 31, 2004 and 2003
was approximately $62.8 million and $90.6 million, respectively. Total
comprehensive income for these respective periods includes net income and
foreign currency translation adjustments.
NOTE 10 - SUBSEQUENT EVENT
On April 27, 2004, we announced our intent to close our automotive floor
mat manufacturing facility located in Waycross, Georgia. We currently anticipate
that manufacturing will cease by June 30, 2004. The decision to close the plant
was brought on by the decrease in demand for compression molded rubber floor
mats that has resulted in excess capacity at this and our other automotive plant
locations. The estimated cash costs associated with closure include termination
benefits and other associated costs totaling approximately $600,000. Some of
these costs will be incurred and thus recorded in the quarter ended June 30,
2004. The other associated costs include removal and relocation costs for
certain equipment, costs to prepare the building for sale, and various other
charges. In the fourth quarter, we also expect to record an impairment charge of
approximately $700,000 relating to this facility's property, plant and
equipment.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(TABULAR DOLLARS IN THOUSANDS)
OVERVIEW
We are a diversified manufacturer and marketer of consumer products
including specialty foods for the retail and foodservice markets; glassware and
candles for the retail, industrial, floral and foodservice markets; and
automotive accessories for the original equipment market and aftermarket.
On December 12, 2003, we purchased substantially all the operating assets
of Warren Frozen Foods, Inc. ("Warren"), a privately owned producer and marketer
of frozen noodle and pasta products. Warren is reported in our Specialty Foods
segment. This acquisition is discussed in further detail in Note 2 to the
accompanying consolidated financial statements.
On April 27, 2004, we announced our intent to close our automotive floor
mat manufacturing facility located in Waycross, Georgia. We currently anticipate
that manufacturing will cease by June 30, 2004. The decision to close the plant
was brought on by the decrease in demand for compression molded rubber floor
mats that has resulted in excess capacity at this and our other automotive plant
locations. The estimated cash costs associated with closure include termination
benefits and other associated costs totaling approximately $600,000. Some of
these costs will be incurred and thus recorded in the quarter ended June 30,
2004. The other associated costs include removal and relocation costs for
certain equipment, costs to prepare the building for sale, and various other
charges. In the fourth quarter, we also expect to record an impairment charge of
approximately $700,000 relating to this facility's property, plant and
equipment.
The following is an overview of our consolidated operating results for the
three and nine months ended March 31, 2004.
Net sales for the third quarter ended March 31, 2004 increased 4% to $269.5
million from the prior year third quarter total of $259.5 million. Gross margin
decreased 7% to $49.8 million from the prior year comparable total of $53.6
million. Net income for the current year third quarter was $16.0 million or
$0.45 per diluted share.
For the current year-to-date period, net sales were $827.3 million, a 2%
decline from $843.0 million in the prior year-to-date period. Gross margin
declined by 8% to $170.7 million from the prior year period total of $185.5
million. Net income for the nine months ended March 31, 2004 was $62.4 million
or $1.74 per diluted share.
Our third quarter and year-to-date results continue to reflect an
environment of increased competition and higher material costs. To date, we have
found our opportunities to increase prices to be limited and generally not
sufficient to offset the impact of higher material costs. We have been able to
maintain a strong balance sheet with no debt throughout this period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2004 2003 CHANGE 2004 2003 CHANGE
-------- -------- ------------- -------- -------- ---------------
NET SALES
Specialty Foods......... $156,748 $140,959 $15,789 11% $475,453 $452,908 $ 22,545 5 %
Glassware and Candles... 55,658 57,274 (1,616) (3) 184,493 207,237 (22,744) (11)
Automotive.............. 57,057 61,302 (4,245) (7) 167,365 182,880 (15,515) (8)
-------- -------- -------- -- -------- -------- -------- ---
Total ................ $269,463 $259,535 $ 9,928 4% $827,311 $843,025 $(15,714) (2)%
======== ======== ======= == ======== ======== ======== ===
For the most recent quarter, consolidated net sales increased 4% compared
to the prior year period due to the strength of the 11% sales growth achieved by
the Specialty Foods segment. However, the Glassware and Candles segment and the
Automotive segment experienced sales declines of 3% and 7%, respectively. For
11
the current year's nine-month period, the sales growth of the Specialty Foods
segment was more than offset by the combined sales decline occurring within the
nonfood segments.
For the quarter ended March 31, 2004, net sales of the Specialty Foods
segment totaled $156.7 million, which was $15.7 million higher than the prior
year total of $141.0 million. Approximately one-third of this increase was due
to the incremental sales of Warren, which is discussed in Note 2 to the
accompanying consolidated financial statements. The remaining increase was
primarily volume-driven from both retail and foodservice customers. The current
year third quarter's sales of retail products were influenced by higher levels
of trade promotional support, while the prior year volume was negatively
impacted by a somewhat later Easter holiday. Additionally, foodservice demand
in the prior year was adversely affected by unusually severe winter weather.
For the nine months ended March 31, 2004, the Specialty Foods segment's net
sales increased by 5% over the prior year. Similar to the comparative quarterly
results, this segment's year-to-date increased sales were also generated in both
the retail and foodservice lines.
Net sales of the Glassware and Candles segment for the third quarter ended
March 31, 2004 totaled $55.7 million, a 3% decline from the comparable prior
year quarter total of $57.3 million. This segment's sales were influenced by a
continued weakness in glassware demand and intense competitive pressures,
especially on pricing. However, the third quarter sales of candles increased
over the prior year's comparable quarter and benefited from a lower level of
promotional support and the introduction of a new line of private-label candle
products. For the nine months ended March 31, 2004, Glassware and Candles sales
were $184.5 million, an 11% decline from the prior year total of $207.2 million.
Automotive segment net sales for the third quarter ended March 31, 2004
totaled $57.1 million, a 7% decline from the prior year third quarter total of
$61.3 million. Similarly, for the nine-month period ended March 31, 2004,
Automotive segment net sales were $167.4 million, an 8% decline from the
comparable prior year period total of $182.9 million. The loss of a larger
aluminum accessory original equipment manufacturer ("OEM") program in the first
quarter of 2004 adversely affected sales in this segment, as only a portion of
this loss was offset by gains with other OEM manufacturers. Also, sales of
aftermarket floor mats continued to decline.
As a percentage of sales, our consolidated gross margins for the three and
nine months ended March 31, 2004 totaled 18.5% and 20.6%, respectively, as
compared to the prior year levels of 20.6% for the third quarter and 22.0% for
the nine months ended March 31, 2003. Margins within the Specialty Foods segment
declined due to continued increases in ingredient costs, especially soybean oil
and certain dairy-related products. The current year impact of the higher
soybean oil costs alone was in excess of $1.0 million and $4.5 million for the
third quarter and year-to-date periods, respectively. Based on current market
conditions, we anticipate that unfavorable comparisons with ingredient costs
will become even more pronounced in the quarter ending June 30, 2004. Gross
margins of the Glassware and Candles segment were adversely affected by
competitive pricing conditions and lower fixed cost absorption due to the
segment's reduced production levels. Higher material costs along with less fixed
cost absorption persisted in the Automotive segment, contributing to lower
margins as compared to the prior year.
Consolidated selling, general and administrative expenses of $24.4 million
and $73.5 million for the three and nine months ended March 31, 2004,
respectively, decreased 1% and 3% from the $24.6 million and $75.8 million
incurred for the three and nine months ended March 31, 2003, respectively. The
2004 year-to-date costs reflect a $1.8 million recovery of bad debt associated
with one bankrupt customer whose account was previously written off in the
Glassware and Candles segment during fiscal 2002. The majority of this recovery
was received and recognized in the current year's second quarter. As a
percentage of sales, selling, general and administrative expenses were 9.1% and
8.9% for the most recent quarter and year-to-date periods, respectively. In the
prior year, such costs were 9.5% and 9.0% for the third quarter and year-to-date
periods, respectively.
In the prior year's second quarter, we recorded a restructuring and
impairment charge of approximately $4.9 million ($3.0 million after taxes) due
to the consolidation of our glass manufacturing operations in Dunkirk, Indiana
into our facility located in Sapulpa, Oklahoma. The charge consisted of employee
separation costs, pension curtailment costs, closure and cleanup costs, and the
writedown of property, plant and equipment having no future utility as a result
of the restructuring decision. The plant consolidation, which affected
approximately 250 jobs, was substantially completed by June 2003. The liability
that remains for this restructuring is immaterial to the overall consolidated
financial statements. We continue to make cash payments against the liability as
deemed necessary under the plan.
12
The foregoing factors contributed to consolidated operating income totaling
$25.4 million and $97.2 million for the three and nine months ended March 31,
2004, respectively. These amounts represent a decrease of 12% from the prior
year quarter and 7% from the prior year-to-date period. By segment, our
operating income can be summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2004 2003 CHANGE 2004 2003 CHANGE
------- ------- --------------- ------- -------- ----------------
OPERATING INCOME
Specialty Foods........ $24,085 $23,342 $ 743 3 % $81,494 $ 83,914 $ (2,420) (3)%
Glassware and Candles.. 1,147 2,279 (1,132) (50) 11,017 12,252 (1,235) (10)
Automotive............. 2,025 4,937 (2,912) (59) 9,480 13,381 (3,901) (29)
Corporate Expenses..... (1,854) (1,530) (324) (21) (4,802) (4,668) (134) (3)
------- ------- ------- --- ------- -------- -------- ---
Total ............... $25,403 $29,028 $(3,625) (12)% $97,189 $104,879 $ (7,690) (7)%
======= ======= ======= === ======= ======== ======== ===
Other income - Continued Dumping and Subsidy Offset Act year-to-date March
31, 2004 was $2.0 million compared to $39.2 million for the comparable prior
year period. This income represents distributions received from the U.S.
government under the Continued Dumping and Subsidy Offset Act of 2000 ("CDSOA").
The CDSOA is intended to redress unfair dumping of imported products through
cash payments to eligible affected companies.
Consistent with the decline in operating income, third quarter net income
of $16.0 million decreased 11% from the preceding year's net income for the
quarter of $18.0 million. As affected by the substantially lower level of income
from the CDSOA distribution in the current year, year-to-date March 31, 2004 net
income was $62.4 million compared to $90.6 million in the prior year period.
Earnings per share for the fiscal 2004 third quarter of $0.45 per basic and
diluted share was influenced by the above-noted items and by our share
repurchase program, and compares to $0.50 per basic and diluted share recorded
in the prior year. Year-to-date March 31, 2004 earnings per share were $1.75 on
a basic basis and $1.74 on a diluted basis compared to $2.49 per basic and
diluted share for the prior year period.
FINANCIAL CONDITION
For the nine months ended March 31, 2004, net cash provided by operating
activities totaled $81.7 million, which compares to $123.0 million provided in
the corresponding prior year period. This decrease results partly from the
decrease in net income due to the prior year's higher level of CDSOA income.
Also, the decrease results from relative changes in working capital components,
particularly accounts receivable and inventory.
Cash used in investing activities for the nine months ended March 31, 2004
increased to $37.8 million from the prior year amount of $25.0 million. The
increase was primarily due to the acquisition of Warren for approximately $20.6
million, but this was offset somewhat by a decrease in the payments for property
additions, as the prior year total included a plant addition of approximately $8
million. The Warren purchase price is subject to a net asset adjustment as
defined under the terms of the purchase agreement. The entire purchase price in
excess of the net identifiable assets acquired has been tentatively assigned to
goodwill. We are in the process of obtaining an independent appraisal of the
intangible assets other than goodwill. The final purchase price allocation will
be completed upon the resolution of the net asset adjustment and the independent
valuation. We anticipate that the cumulative amortization on the intangibles
ultimately identified will not have a material impact on the consolidated
statement of income in the current fiscal year.
Cash used in financing activities for the nine months ended March 31, 2004
decreased to $27.4 million from the prior year total of $50.1 million due to a
decrease in the purchase of treasury stock. At March 31, 2004, approximately
602,000 shares remain authorized for future buyback. Offsetting the decrease was
the increase in the amount of dividends paid over the prior year. Total
dividends paid during the current year-to-date period increased approximately
12% as compared to the prior year period due to the effects of a 14% increase in
the stated dividend rate being somewhat offset by the extent of share
repurchases.
We believe that cash provided from operations and the currently available
bank credit arrangements should be adequate to meet our foreseeable cash
requirements over the remainder of fiscal 2004 and into fiscal 2005.
13
There have been no changes in critical accounting policies from those
disclosed in our Annual Report on Form 10-K for the year ended June 30, 2003.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains forward-looking statements related to future growth
and earnings opportunities. Such statements are based upon certain assumptions
and assessments made by management of the Company in light of its experience and
perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. Actual results may
differ as a result of factors over which the Company has no, or limited, control
including the strength of the economy, slower than anticipated sales growth, the
extent of operational efficiencies achieved, the success of new product
introductions, price and product competition, and increases in raw materials
costs. Management believes these forward-looking statements to be reasonable;
however, undue reliance should not be placed on such statements, which are based
on current expectations. The Company undertakes no obligation to publicly update
such forward-looking statements. More detailed statements regarding significant
events which could affect the Company's financial results are included in the
Company's Forms 10-Q and 10-K filed with the Securities and Exchange Commission.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this Quarterly Report on Form 10-Q, our Chief Executive
Officer and Chief Financial Officer evaluated, with the participation of
management, the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")). Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of March 31, 2004 to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting. No changes were
made to our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
In May 2000, the Board of Directors approved a share repurchase
authorization of 3,000,000 shares. In the third quarter, we made the following
repurchases of our common stock:
TOTAL NUMBER MAXIMUM NUMBER
TOTAL AVERAGE OF SHARES OF SHARES THAT MAY
NUMBER PRICE PURCHASED AS YET BE PURCHASED
OF SHARES PAID PER PART OF PUBLICLY UNDER THE PLANS OR
PERIOD PURCHASED SHARE ANNOUNCED PLANS PROGRAMS
- ------ --------- -------- ---------------- ------------------
January 1-31, 2004................... - - - 690,193
February 1-29, 2004.................. 1,200 $43.00 1,200 688,993
March 1-31, 2004..................... 87,261 $41.62 87,261 601,732
There were no share repurchase plans that expired during the quarter, and
we did not terminate any plan prior to its expiration date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See Index to Exhibits following Signatures.
(b) Reports on Form 8-K. A report, dated January 29, 2004, on Form 8-K was
filed with the SEC on January 29, 2004 pursuant to Items 7 and 12, announcing
the financial results for the three and six months ended December 31, 2003.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANCASTER COLONY CORPORATION
-------------------------------------------
(Registrant)
Date: May 10, 2004 By: /s/JOHN B. GERLACH, JR.
------------- -----------------------------------------
John B. Gerlach, Jr.
Chairman, Chief Executive Officer and
President
Date: May 10, 2004 By: /s/JOHN L. BOYLAN
------------- --------------------------------------
John L. Boylan
Treasurer, Vice President,
Assistant Secretary and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
15
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2004
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATED AT
- ------ ----------- ----------
31.1 Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002........... Filed herewith
31.2 Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002........... Filed herewith
32. Certification of CEO and CFO under Section 906 of the Sarbanes-Oxley
Act of 2002........................................................................ Filed herewith
16