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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2022
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-04065
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Lancaster Colony Corporation |
(Exact name of registrant as specified in its charter) |
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Ohio | | 13-1955943 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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380 Polaris Parkway | Suite 400 | | |
Westerville | Ohio | | 43082 |
(Address of principal executive offices) | | (Zip Code) |
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(614) | 224-7141 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, without par value | LANC | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ý | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of January 13, 2023, there were approximately 27,571,000 shares of Common Stock, without par value, outstanding.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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(Amounts in thousands, except share data) | December 31, 2022 | | June 30, 2022 |
ASSETS |
Current Assets: | | | |
Cash and equivalents | $ | 95,487 | | | $ | 60,283 | |
Receivables | 126,919 | | | 135,496 | |
Inventories: | | | |
Raw materials | 57,795 | | | 56,460 | |
Finished goods | 81,618 | | | 88,242 | |
Total inventories | 139,413 | | | 144,702 | |
Other current assets | 11,817 | | | 11,300 | |
Total current assets | 373,636 | | | 351,781 | |
Property, Plant and Equipment: | | | |
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Property, plant and equipment-gross | 833,871 | | | 785,629 | |
Less accumulated depreciation | 352,797 | | | 334,261 | |
Property, plant and equipment-net | 481,074 | | | 451,368 | |
Other Assets: | | | |
Goodwill | 208,371 | | | 208,371 | |
Other intangible assets-net | 31,066 | | | 32,323 | |
Operating lease right-of-use assets | 25,283 | | | 28,177 | |
Other noncurrent assets | 17,741 | | | 18,354 | |
Total | $ | 1,137,171 | | | $ | 1,090,374 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current Liabilities: | | | |
Accounts payable | $ | 131,688 | | | $ | 114,972 | |
Accrued liabilities | 48,483 | | | 50,613 | |
Total current liabilities | 180,171 | | | 165,585 | |
Noncurrent Operating Lease Liabilities | 17,628 | | | 20,494 | |
Other Noncurrent Liabilities | 19,471 | | | 20,719 | |
Deferred Income Taxes | 40,351 | | | 38,889 | |
Commitments and Contingencies | | | |
Shareholders’ Equity: | | | |
Preferred stock-authorized 3,050,000 shares; outstanding-none | | | |
Common stock-authorized 75,000,000 shares; outstanding-December-27,571,087 shares; June-27,520,237 shares | 140,660 | | | 137,814 | |
Retained earnings | 1,517,081 | | | 1,485,045 | |
Accumulated other comprehensive loss | (10,982) | | | (11,172) | |
Common stock in treasury, at cost | (767,209) | | | (767,000) | |
Total shareholders’ equity | 879,550 | | | 844,687 | |
Total | $ | 1,137,171 | | | $ | 1,090,374 | |
See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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| Three Months Ended December 31, | | Six Months Ended December 31, |
(Amounts in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Net Sales | $ | 477,394 | | | $ | 428,427 | | | $ | 902,931 | | | $ | 820,483 | |
Cost of Sales | 375,292 | | | 331,825 | | | 701,774 | | | 631,514 | |
Gross Profit | 102,102 | | | 96,602 | | | 201,157 | | | 188,969 | |
Selling, General and Administrative Expenses | 50,775 | | | 51,538 | | | 100,532 | | | 103,394 | |
Change in Contingent Consideration | — | | | (2,170) | | | — | | | (2,170) | |
Restructuring and Impairment Charges | — | | | 1,928 | | | — | | | 1,928 | |
Operating Income | 51,327 | | | 45,306 | | | 100,625 | | | 85,817 | |
Other, Net | 478 | | | 111 | | | 208 | | | 131 | |
Income Before Income Taxes | 51,805 | | | 45,417 | | | 100,833 | | | 85,948 | |
Taxes Based on Income | 11,832 | | | 11,047 | | | 23,268 | | | 20,923 | |
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Net Income | $ | 39,973 | | | $ | 34,370 | | | $ | 77,565 | | | $ | 65,025 | |
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Net Income Per Common Share: | | | | | | | |
Basic | $ | 1.45 | | | $ | 1.25 | | | $ | 2.82 | | | $ | 2.36 | |
Diluted | $ | 1.45 | | | $ | 1.25 | | | $ | 2.81 | | | $ | 2.36 | |
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Weighted Average Common Shares Outstanding: | | | | | | | |
Basic | 27,471 | | | 27,443 | | | 27,460 | | | 27,451 | |
Diluted | 27,493 | | | 27,464 | | | 27,476 | | | 27,490 | |
See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
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| Three Months Ended December 31, | | Six Months Ended December 31, |
(Amounts in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Net Income | $ | 39,973 | | | $ | 34,370 | | | $ | 77,565 | | | $ | 65,025 | |
Other Comprehensive Income: | | | | | | | |
Defined Benefit Pension and Postretirement Benefit Plans: | | | | | | | |
Amortization of loss, before tax | 171 | | | 100 | | | 340 | | | 200 | |
Amortization of prior service credit, before tax | (46) | | | (46) | | | (91) | | | (91) | |
Total Other Comprehensive Income, Before Tax | 125 | | | 54 | | | 249 | | | 109 | |
Tax Attributes of Items in Other Comprehensive Income: | | | | | | | |
Amortization of loss, tax | (40) | | | (24) | | | (80) | | | (47) | |
Amortization of prior service credit, tax | 10 | | | 11 | | | 21 | | | 21 | |
Total Tax Expense | (30) | | | (13) | | | (59) | | | (26) | |
Other Comprehensive Income, Net of Tax | 95 | | | 41 | | | 190 | | | 83 | |
Comprehensive Income | $ | 40,068 | | | $ | 34,411 | | | $ | 77,755 | | | $ | 65,108 | |
See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| Six Months Ended December 31, |
(Amounts in thousands) | 2022 | | 2021 |
Cash Flows From Operating Activities: | | | |
Net income | $ | 77,565 | | | $ | 65,025 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Impacts of noncash items: | | | |
Depreciation and amortization | 23,012 | | | 22,844 | |
Change in contingent consideration | — | | | (2,170) | |
Deferred income taxes and other changes | 1,854 | | | 2,854 | |
Stock-based compensation expense | 5,264 | | | 4,863 | |
Restructuring and impairment charges | — | | | 1,928 | |
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Pension plan activity | (330) | | | (274) | |
Changes in operating assets and liabilities: | | | |
Receivables | 8,577 | | | (6,872) | |
Inventories | 5,289 | | | (33,290) | |
Other current assets | (517) | | | (892) | |
Accounts payable and accrued liabilities | 19,726 | | | (12,036) | |
Net cash provided by operating activities | 140,440 | | | 41,980 | |
Cash Flows From Investing Activities: | | | |
Payments for property additions | (56,486) | | | (66,695) | |
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Proceeds from sale of property | 1,159 | | | 221 | |
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Other-net | (449) | | | (134) | |
Net cash used in investing activities | (55,776) | | | (66,608) | |
Cash Flows From Financing Activities: | | | |
Payment of dividends | (45,529) | | | (42,710) | |
Purchase of treasury stock | (209) | | | (5,338) | |
Tax withholdings for stock-based compensation | (2,418) | | | (61) | |
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Principal payments for finance leases | (1,304) | | | (1,307) | |
Net cash used in financing activities | (49,460) | | | (49,416) | |
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Net change in cash and equivalents | 35,204 | | | (74,044) | |
Cash and equivalents at beginning of year | 60,283 | | | 188,055 | |
Cash and equivalents at end of period | $ | 95,487 | | | $ | 114,011 | |
Supplemental Disclosure of Operating Cash Flows: | | | |
Net cash payments for income taxes | $ | 22,977 | | | $ | 16,593 | |
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See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
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| | Six Months Ended December 31, 2022 |
(Amounts in thousands, except per share data) | | Common Stock Outstanding | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
Balance, June 30, 2022 | | 27,520 | | | $ | 137,814 | | | $ | 1,485,045 | | | $ | (11,172) | | | $ | (767,000) | | | $ | 844,687 | |
Net income | | | | | | 37,592 | | | | | | | 37,592 | |
Net pension and postretirement benefit gains, net of $29 tax effect | | | | | | | | 95 | | | | | 95 | |
Cash dividends - common stock ($0.80 per share) | | | | | | (22,067) | | | | | | | (22,067) | |
Purchase of treasury stock | | — | | | | | | | | | (84) | | | (84) | |
Stock-based plans | | 34 | | | (617) | | | | | | | | | (617) | |
Stock-based compensation expense | | | | 2,465 | | | | | | | | | 2,465 | |
Balance, September 30, 2022 | | 27,554 | | | $ | 139,662 | | | $ | 1,500,570 | | | $ | (11,077) | | | $ | (767,084) | | | $ | 862,071 | |
Net income | | | | | | 39,973 | | | | | | | 39,973 | |
Net pension and postretirement benefit gains, net of $30 tax effect | | | | | | | | 95 | | | | | 95 | |
Cash dividends - common stock ($0.85 per share) | | | | | | (23,462) | | | | | | | (23,462) | |
Purchase of treasury stock | | (1) | | | | | | | | | (125) | | | (125) | |
Stock-based plans | | 18 | | | (1,801) | | | | | | | | | (1,801) | |
Stock-based compensation expense | | | | 2,799 | | | | | | | | | 2,799 | |
Balance, December 31, 2022 | | 27,571 | | | $ | 140,660 | | | $ | 1,517,081 | | | $ | (10,982) | | | $ | (767,209) | | | $ | 879,550 | |
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See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended December 31, 2021 |
(Amounts in thousands, except per share data) | | Common Stock Outstanding | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
Balance, June 30, 2021 | | 27,531 | | | $ | 128,617 | | | $ | 1,482,220 | | | $ | (8,253) | | | $ | (759,437) | | | $ | 843,147 | |
Net income | | | | | | 30,655 | | | | | | | 30,655 | |
Net pension and postretirement benefit gains, net of $13 tax effect | | | | | | | | 42 | | | | | 42 | |
Cash dividends - common stock ($0.75 per share) | | | | | | (20,675) | | | | | | | (20,675) | |
Purchase of treasury stock | | (30) | | | | | | | | | (5,329) | | | (5,329) | |
Stock-based plans | | 29 | | | (59) | | | | | | | | | (59) | |
Stock-based compensation expense | | | | 2,274 | | | | | | | | | 2,274 | |
Balance, September 30, 2021 | | 27,530 | | | $ | 130,832 | | | $ | 1,492,200 | | | $ | (8,211) | | | $ | (764,766) | | | $ | 850,055 | |
Net income | | | | | | 34,370 | | | | | | | 34,370 | |
Net pension and postretirement benefit gains, net of $13 tax effect | | | | | | | | 41 | | | | | 41 | |
Cash dividends - common stock ($0.80 per share) | | | | | | (22,035) | | | | | | | (22,035) | |
Purchase of treasury stock | | — | | | | | | | | | (9) | | | (9) | |
Stock-based plans | | 4 | | | (2) | | | | | | | | | (2) | |
Stock-based compensation expense | | | | 2,589 | | | | | | | | | 2,589 | |
Balance, December 31, 2021 | | 27,534 | | | $ | 133,419 | | | $ | 1,504,535 | | | $ | (8,170) | | | $ | (764,775) | | | $ | 865,009 | |
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See accompanying notes to condensed consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lancaster Colony Corporation and our wholly-owned subsidiaries, collectively referred to as “we,” “us,” “our,” “registrant” or the “Company” and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and SEC Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the interim condensed consolidated financial statements are considered to be of a normal recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our 2022 Annual Report on Form 10-K. Unless otherwise noted, the term “year” and references to a particular year pertain to our fiscal year, which begins on July 1 and ends on June 30; for example, 2023 refers to fiscal 2023, which is the period from July 1, 2022 to June 30, 2023.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, except for those acquired as part of a business combination, which are recorded at fair value at the time of purchase. We use the straight-line method of computing depreciation for financial reporting purposes based on the estimated useful lives of the corresponding assets. Purchases of property, plant and equipment included in Accounts Payable and excluded from the property additions and the change in accounts payable in the Condensed Consolidated Statements of Cash Flows were as follows:
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| December 31, |
| 2022 | | 2021 |
Construction in progress in Accounts Payable | $ | 15,062 | | | $ | 26,080 | |
Accrued Distribution
Accrued distribution included in Accrued Liabilities was $10.3 million and $11.9 million at December 31, 2022 and June 30, 2022, respectively.
Earnings Per Share
Earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock and common stock equivalents (restricted stock, stock-settled stock appreciation rights and performance units) outstanding during each period. Unvested shares of restricted stock granted to employees are considered participating securities since employees receive nonforfeitable dividends prior to vesting and, therefore, are included in the earnings allocation in computing EPS under the two-class method. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with nonparticipating restricted stock, stock-settled stock appreciation rights and performance units.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Basic and diluted net income per common share were calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 39,973 | | | $ | 34,370 | | | $ | 77,565 | | | $ | 65,025 | |
Net income available to participating securities | (118) | | | (98) | | | (232) | | | (185) | |
Net income available to common shareholders | $ | 39,855 | | | $ | 34,272 | | | $ | 77,333 | | | $ | 64,840 | |
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Weighted average common shares outstanding – basic | 27,471 | | | 27,443 | | | 27,460 | | | 27,451 | |
Incremental share effect from: | | | | | | | |
Nonparticipating restricted stock | 2 | | | 2 | | | 3 | | | 3 | |
Stock-settled stock appreciation rights (1) | 18 | | | 19 | | | 9 | | | 34 | |
Performance units | 2 | | | — | | | 4 | | | 2 | |
Weighted average common shares outstanding – diluted | 27,493 | | | 27,464 | | | 27,476 | | | 27,490 | |
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Net income per common share – basic | $ | 1.45 | | | $ | 1.25 | | | $ | 2.82 | | | $ | 2.36 | |
Net income per common share – diluted | $ | 1.45 | | | $ | 1.25 | | | $ | 2.81 | | | $ | 2.36 | |
(1)Excludes the impact of the following weighted average stock-settled stock appreciation rights outstanding with an antidilutive effect: 0.1 million and 0.3 million for the three months ended December 31, 2022 and 2021, respectively; and 0.2 million for the six months ended December 31, 2022 and 2021.
Accumulated Other Comprehensive Loss
The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:
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| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Accumulated other comprehensive loss at beginning of period | $ | (11,077) | | | $ | (8,211) | | | $ | (11,172) | | | $ | (8,253) | |
Defined Benefit Pension Plan Items: | | | | | | | |
Amortization of unrecognized net loss | 182 | | | 107 | | | 363 | | | 214 | |
Postretirement Benefit Plan Items: | | | | | | | |
Amortization of unrecognized net gain | (11) | | | (7) | | | (23) | | | (14) | |
Amortization of prior service credit | (46) | | | (46) | | | (91) | | | (91) | |
Total other comprehensive income, before tax | 125 | | | 54 | | | 249 | | | 109 | |
Total tax expense | (30) | | | (13) | | | (59) | | | (26) | |
Other comprehensive income, net of tax | 95 | | | 41 | | | 190 | | | 83 | |
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Accumulated other comprehensive loss at end of period | $ | (10,982) | | | $ | (8,170) | | | $ | (10,982) | | | $ | (8,170) | |
Significant Accounting Policies
There were no changes to our Significant Accounting Policies from those disclosed in our 2022 Annual Report on Form 10-K.
Recent Accounting Standards
There are no recently issued or adopted accounting standards that will impact our consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 2 – Fair Value
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:
Level 1 – defined as observable inputs, such as quoted market prices in active markets.
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and equivalents, accounts receivable, accounts payable and defined benefit pension plan assets. The estimated fair value of cash and equivalents, accounts receivable and accounts payable approximates their carrying value. Bantam Contingent Consideration
Contingent consideration resulted from the earn-out associated with our October 19, 2018 acquisition of Bantam Bagels, LLC (“Bantam”). In general, the terms of the acquisition specified the sellers could receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Bantam for the twelve months ending December 31, 2023. The initial fair value of the contingent consideration was determined to be $8.0 million. Prior to exiting the Bantam business near the end of fiscal 2022, the fair value was measured on a recurring basis using a Monte Carlo simulation that randomly changed revenue growth, forecasted adjusted EBITDA and other uncertain variables to estimate an expected value. We recorded the present value of these amounts by applying a discount rate. As these fair value measurements were based on significant inputs not observable in the market, they represented Level 3 measurements within the fair value hierarchy. Our fair value measurement at December 31, 2021 resulted in a $2.2 million reduction in the fair value of Bantam’s contingent consideration. The fair value of the contingent consideration was written down to zero at March 31, 2022.
The following table represents our Level 3 fair value measurements using significant other unobservable inputs for Bantam’s contingent consideration:
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| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contingent consideration at beginning of period | $ | — | | | $ | 3,470 | | | $ | — | | | $ | 3,470 | |
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Change in contingent consideration included in operating income | — | | | (2,170) | | | — | | | (2,170) | |
Contingent consideration at end of period | $ | — | | | $ | 1,300 | | | $ | — | | | $ | 1,300 | |
Note 3 – Long-Term Debt
At December 31, 2022 and June 30, 2022, we had an unsecured credit facility (“Facility”) under which we could borrow, on a revolving credit basis, up to a maximum of $150 million at any one time, with potential to expand the total credit availability to $225 million based on consent of the issuing banks and certain other conditions. The Facility expires on March 19, 2025, and all outstanding amounts are then due and payable. The Facility was amended on December 13, 2022 to reflect a change in the calculation of the variable interest rate from formulas tied to LIBOR to formulas tied to SOFR or an alternate base rate as defined in the Facility. In the event SOFR becomes unavailable or is no longer deemed an appropriate reference rate, the Facility allows for the use of a benchmark replacement rate. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.
The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions. There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a consolidated leverage ratio not greater than 3.5 to 1, subject to certain exceptions. The interest coverage ratio is calculated by dividing Consolidated EBIT by Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Net Debt by Consolidated EBITDA. All financial terms used in the covenant calculations are defined more specifically in the Facility.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
At December 31, 2022 and June 30, 2022, we had no borrowings outstanding under the Facility. At December 31, 2022 and June 30, 2022, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. We paid no interest for the three and six months ended December 31, 2022 and 2021.
Note 4 – Commitments and Contingencies
At December 31, 2022, we were a party to various claims and litigation matters arising in the ordinary course of business. Such matters did not have a material effect on the current-year results of operations and, in our opinion, their ultimate disposition is not expected to have a material effect on our consolidated financial statements.
Note 5 – Goodwill and Other Intangible Assets
Goodwill attributable to the Retail and Foodservice segments was $157.4 million and $51.0 million, respectively, at December 31, 2022 and June 30, 2022.
The following table summarizes our identifiable other intangible assets:
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| December 31, 2022 | | June 30, 2022 |
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Tradenames (20 to 30-year life) | | | |
Gross carrying value | $ | 37,100 | | | $ | 37,100 | |
Accumulated amortization | (9,052) | | | (8,385) | |
Net carrying value | $ | 28,048 | | | $ | 28,715 | |
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Customer Relationships (10 to 15-year life) | | | |
Gross carrying value | $ | 5,287 | | | $ | 14,207 | |
Accumulated amortization | (4,076) | | | (12,727) | |
Net carrying value | $ | 1,211 | | | $ | 1,480 | |
Technology / Know-how (10-year life) | | | |
Gross carrying value | $ | 6,350 | | | $ | 6,350 | |
Accumulated amortization | (4,543) | | | (4,222) | |
Net carrying value | $ | 1,807 | | | $ | 2,128 | |
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Total net carrying value | $ | 31,066 | | | $ | 32,323 | |
In the three months ended December 31, 2021, we recorded an impairment charge of $0.9 million related to Bantam’s Retail customer relationships intangible asset, which reflected lower projected cash flows for Bantam’s Retail business. The impairment charge represented the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful life of the intangible asset. As this fair value measurement was based on significant inputs not observable in the market, it represented a Level 3 measurement within the fair value hierarchy. The impairment charge was reflected in Restructuring and Impairment Charges and was recorded in our Retail segment.
Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses, was as follows:
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| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization expense | $ | 628 | | | $ | 1,260 | | | $ | 1,257 | | | $ | 2,401 | |
Total annual amortization expense for each of the next five years is estimated to be as follows:
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2024 | $ | 2,514 | |
2025 | $ | 2,212 | |
2026 | $ | 1,610 | |
2027 | $ | 1,426 | |
2028 | $ | 1,334 | |
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 6 – Income Taxes
Prepaid federal income taxes of $2.3 million were included in Other Current Assets at December 31, 2022. Prepaid state and local income taxes of $0.8 million and $1.9 million were included in Other Current Assets at December 31, 2022 and June 30, 2022, respectively.
Note 7 – Business Segment Information
Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied.
Retail - The vast majority of the products we sell in the Retail segment are sold through sales personnel, food brokers and distributors in the United States. We have placement of products in grocery produce departments through our refrigerated salad dressings, vegetable dips and fruit dips. Our flatbread products and sprouted grain bakery products are generally placed in the specialty bakery/deli section of the grocery store. We also have products typically marketed in the shelf-stable section of the grocery store, which include salad dressings, slaw dressing, sauces and croutons. Within the frozen food section of the grocery store, we sell yeast rolls and garlic breads.
Foodservice - The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors in the United States. Most of the products we sell in the Foodservice segment are custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls. The majority of our Foodservice sales are products sold under private label to restaurants. We also manufacture and sell various branded Foodservice products to distributors.
As many of our products are similar between our two segments, our procurement, manufacturing, warehousing and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. Consequently, we do not prepare, and our Chief Operating Decision Maker does not review, separate balance sheets for the reportable segments. As such, our external reporting does not include the presentation of identifiable assets by reportable segment. The composition of our identifiable assets at December 31, 2022 is generally consistent with that of June 30, 2022.
We evaluate our Retail and Foodservice segments based on net sales and operating income which follow:
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| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net Sales | | | | | | | |
Retail | $ | 258,763 | | | $ | 245,085 | | | $ | 481,979 | | | $ | 468,974 | |
Foodservice | 218,631 | | | 183,342 | | | 420,952 | | | 351,509 | |
Total | $ | 477,394 | | | $ | 428,427 | | | $ | 902,931 | | | $ | 820,483 | |
Operating Income | | | | | | | |
Retail | $ | 49,352 | | | $ | 49,606 | | | $ | 92,252 | | | $ | 97,784 | |
Foodservice | 26,696 | | | 18,309 | | | 58,625 | | | 34,134 | |
Nonallocated Restructuring and Impairment Charges (1) | — | | | (1,026) | | | — | | | (1,026) | |
Corporate Expenses | (24,721) | | | (21,583) | | | (50,252) | | | (45,075) | |
Total | $ | 51,327 | | | $ | 45,306 | | | $ | 100,625 | | | $ | 85,817 | |
(1)Reflects restructuring and impairment charges related to a facility closure, which were not allocated to our two reportable segments due to their unusual nature.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table sets forth net sales disaggregated by class of similar products for the Retail and Foodservice segments:
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| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Retail | | | | | | | |
Shelf-stable dressings, sauces and croutons | $ | 94,711 | | | $ | 87,334 | | | $ | 185,749 | | | $ | 177,861 | |
Frozen breads | 117,424 | | | 110,379 | | | 190,282 | | | 185,098 | |
Refrigerated dressings, dips and other | 46,628 | | | 47,372 | | | 105,948 | | | 106,015 | |
Total Retail net sales | $ | 258,763 | | | $ | 245,085 | | | $ | 481,979 | | | $ | 468,974 | |
Foodservice | | | | | | | |
Dressings and sauces | $ | 160,855 | | | $ | 136,038 | | | $ | 311,915 | | | $ | 260,797 | |
Frozen breads and other | 57,776 | | | 47,304 | | | 109,037 | | | 90,712 | |
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Total Foodservice net sales | $ | 218,631 | | | $ | 183,342 | | | $ | 420,952 | | | $ | 351,509 | |
Total net sales | $ | 477,394 | | | $ | 428,427 | | | $ | 902,931 | | | $ | 820,483 | |
The following table provides an additional disaggregation of Foodservice net sales by type of customer:
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| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Foodservice | | | | | | | |
National accounts | $ | 171,814 | | | $ | 141,753 | | | $ | 332,006 | | | $ | 267,881 | |
Branded and other | 46,817 | | | 41,589 | | | 88,946 | | | 83,628 | |
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Total Foodservice net sales | $ | 218,631 | | | $ | 183,342 | | | $ | 420,952 | | | $ | 351,509 | |
Note 8 – Stock-Based Compensation
There have been no changes to our stock-based compensation plan as disclosed in our 2022 Annual Report on Form 10-K.
Our stock-settled stock appreciation rights (“SSSARs”) compensation expense was $0.7 million and $1.0 million for the three months ended December 31, 2022 and 2021, respectively. Year-to-date SSSARs compensation expense was $1.4 million for the current-year period compared to $2.0 million for the prior-year period. At December 31, 2022, there was $1.8 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of 1 year.
Our restricted stock compensation expense was $1.5 million and $1.3 million for the three months ended December 31, 2022 and 2021, respectively. Year-to-date restricted stock compensation expense was $2.8 million for the current-year period compared to $2.4 million for the prior-year period. At December 31, 2022, there was $7.9 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of 2 years.
Our performance units compensation expense was $0.6 million and $0.3 million for the three months ended December 31, 2022 and 2021, respectively. Year-to-date performance units compensation expense was $1.1 million for the current-year period compared to $0.5 million for the prior-year period. At December 31, 2022, there was $5.6 million of unrecognized compensation expense related to performance units that we will recognize over a weighted-average period of 2 years.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2023 refers to fiscal 2023, which is the period from July 1, 2022 to June 30, 2023.
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto, all included elsewhere in this report, and our 2022 Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements due to these factors. For more information, see the section below entitled “Forward-Looking Statements.”
OVERVIEW
Business Overview
Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.
Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied.
Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States.
Our business has the potential to achieve future growth in sales and profitability due to attributes such as:
•leading Retail market positions in several product categories with a high-quality perception;
•recognized innovation in Retail products;
•a broad customer base in both Retail and Foodservice accounts;
•well-regarded culinary expertise among Foodservice customers;
•recognized leadership in Foodservice product development;
•experience in integrating complementary business acquisitions; and
•historically strong cash flow generation that supports growth opportunities.
Our goal is to grow both Retail and Foodservice segment sales over time by:
•introducing new products and expanding distribution;
•leveraging the strength of our Retail brands to increase current product sales;
•expanding Retail growth through strategic licensing agreements;
•continuing to rely upon the strength of our reputation in Foodservice product development and quality; and
•acquiring complementary businesses.
With respect to long-term growth, we continually evaluate the future opportunities and needs for our business specific to our plant infrastructure, IT platforms and other initiatives to support and strengthen our operations. Recent examples of resulting investments include:
•a significant capacity expansion project for our Marzetti dressing and sauce facility in Horse Cave, Kentucky that commenced commercial production in December 2022;
•a capacity expansion project for one of our Marzetti dressing and sauce facilities in Columbus, Ohio that was completed in January 2022;
•a significant infrastructure improvement and capacity expansion project for our frozen pasta facility in Altoona, Iowa that was completed in March 2022; and
•the establishment of a Transformation Program Office in 2019 that serves to coordinate our various capital and integration efforts, including our enterprise resource planning system (“ERP”) project and related initiatives, Project Ascent, that is currently in the implementation phase.
Project Ascent commenced in late 2019 and entails the replacement of our primary customer and manufacturing transactional systems, warehousing systems, and financial systems with an integrated SAP S/4HANA system. Implementation of this system began in July 2022 and will continue throughout fiscal 2023. Customer fulfillment levels remained strong before and after the system cutover with no unplanned disruptions in receiving orders, producing products or shipping orders. We remain on schedule to complete the planned implementation of Project Ascent in fiscal 2024.
Post implementation, Project Ascent will evolve into an on-going Center of Excellence (“COE”) that will provide oversight for all future upgrades of the S/4HANA environment, evaluation of future software needs to support the business, acquisition integration support and master data standards. Most of the on-going COE costs are expected to consist of consulting and professional fees, as well as wages and benefits.
BUSINESS TRENDS
Dating back to the onset of the COVID-19 pandemic in 2020, the effects of COVID-19 on consumer behavior have impacted the relative demand for our Retail and Foodservice products. More specifically, beginning in March 2020, consumer demand shifted towards increased at-home food consumption and away from in-restaurant dining. Over the course of the following two years, while this shift in demand was inconsistent and volatile, on balance it positively impacted our Retail segment sales volumes and negatively impacted our Foodservice segment sales volumes. From an operations standpoint, the shift in demand over the two-year period, combined with other COVID-19-related issues, unfavorably impacted the operating results of both our segments. These issues included higher hourly wage rates paid to our front-line employees, increased costs for personal protective equipment, higher expenditures attributed to incremental co-manufacturing volumes, increased complexity and uncertainty in production planning and forecasting, and overall lower levels of efficiency in our production and distribution network. Beginning near the end of 2022, the volatility and shifts in demand between our Retail and Foodservice products subsided and our operating environment became more predictable and stable.
The inflationary cost environment we experienced during 2022 resulted in significantly higher input costs for our business. During 2022, we endured unprecedented inflationary costs for commodities, particularly soybean oil and flour, in addition to notably higher costs for packaging, freight and warehousing, and labor. This cost inflation was attributed to numerous factors such as the impacts of the COVID-19 pandemic, the war in Ukraine, climate and weather conditions, supply chain disruptions, including some raw material and packaging shortages, a tight labor market, and government policy decisions. We continued to experience significant cost inflation through the first half of 2023, particularly for soybean oil, eggs and flour.
RESULTS OF CONSOLIDATED OPERATIONS
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(Dollars in thousands, except per share data) | Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Net Sales | $ | 477,394 | | | $ | 428,427 | | | $ | 48,967 | | | 11 | % | | $ | 902,931 | | | $ | 820,483 | | | $ | 82,448 | | | 10 | % |
Cost of Sales | 375,292 | | | 331,825 | | | 43,467 | | | 13 | % | | 701,774 | | | 631,514 | | | 70,260 | | | 11 | % |
Gross Profit | 102,102 | | | 96,602 | | | 5,500 | | | 6 | % | | 201,157 | | | 188,969 | | | 12,188 | | | 6 | % |
Gross Margin | 21.4 | % | | 22.5 | % | | | | | | 22.3 | % | | 23.0 | % | | | | |
Selling, General and Administrative Expenses | 50,775 | | | 51,538 | | | (763) | | | (1) | % | | 100,532 | | | 103,394 | | | (2,862) | | | (3) | % |
Change in Contingent Consideration | — | | | (2,170) | | | 2,170 | | | (100) | % | | — | | | (2,170) | | | 2,170 | | | (100) | % |
Restructuring and Impairment Charges | — | | | 1,928 | | | (1,928) | | | (100) | % | | — | | | 1,928 | | | (1,928) | | | (100) | % |
Operating Income | 51,327 | | | 45,306 | | | 6,021 | | | 13 | % | | 100,625 | | | 85,817 | | | 14,808 | | | 17 | % |
Operating Margin | 10.8 | % | | 10.6 | % | | | | | | 11.1 | % | | 10.5 | % | | | | |
Other, Net | 478 | | | 111 | | | 367 | | | 331 | % | | 208 | | | 131 | | | 77 | | | 59 | % |
Income Before Income Taxes | 51,805 | | | 45,417 | | | 6,388 | | | 14 | % | | 100,833 | | | 85,948 | | | 14,885 | | | 17 | % |
Taxes Based on Income | 11,832 | | | 11,047 | | | 785 | | | 7 | % | | 23,268 | | | 20,923 | | | 2,345 | | | 11 | % |
Effective Tax Rate | 22.8 | % | | 24.3 | % | | | | | | 23.1 | % | | 24.3 | % | | | | |
Net Income | $ | 39,973 | | | $ | 34,370 | | | $ | 5,603 | | | 16 | % | | $ | 77,565 | | | $ | 65,025 | | | $ | 12,540 | | | 19 | % |
Diluted Net Income Per Common Share | $ | 1.45 | | | $ | 1.25 | | | $ | 0.20 | | | 16 | % | | $ | 2.81 | | | $ | 2.36 | | | $ | 0.45 | | | 19 | % |
Net Sales
Consolidated net sales for the three months ended December 31, 2022 increased 11% to a second quarter record $477.4 million versus $428.4 million last year, reflecting higher net sales for both the Retail and Foodservice segments driven by pricing to offset inflationary costs. Consolidated sales volumes, measured in pounds shipped, decreased 4% for the three months ended December 31, 2022. In the prior-year quarter ended December 31, 2021, consolidated sales volumes increased 6%.
Consolidated net sales for the six months ended December 31, 2022 increased 10% to $902.9 million versus $820.5 million last year, reflecting higher net sales for both the Retail and Foodservice segments driven by pricing to offset inflationary costs. Sales in the current year were unfavorably impacted by the advance ordering that occurred near the end of fiscal 2022 ahead of our ERP go-live that commenced on July 1. Consolidated sales volumes, measured in pounds shipped, decreased 7% for the six months ended December 31, 2022. In the prior year, consolidated sales volumes increased 5% for the six months ended December 31, 2021.
See discussion of net sales by segment following the discussion of “Earnings Per Share” below.
Gross Profit
Consolidated gross profit for the three months ended December 31, 2022 increased $5.5 million to $102.1 million as our pricing actions effectively offset the significant inflationary costs we have experienced for commodities, packaging, labor, freight and warehousing. The higher gross profit also reflects improved manufacturing efficiencies and a more stable operating environment.
Consolidated gross profit for the six months ended December 31, 2022 increased $12.2 million to $201.2 million as influenced by the pricing actions we have taken to offset significant inflationary costs. Gross profit also benefited from a more stable operating environment and our actions taken to exit less profitable product lines and reduce headcount.
Selling, General and Administrative Expenses
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| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
(Dollars in thousands) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
SG&A Expenses - Excluding Project Ascent | $ | 43,324 | | | $ | 42,945 | | | $ | 379 | | | 1 | % | | $ | 83,862 | | | $ | 85,372 | | | $ | (1,510) | | | (2) | % |
Project Ascent Expenses | 7,451 | | | 8,593 | | | (1,142) | | | (13) | % | | 16,670 | | | 18,022 | | | (1,352) | | | (8) | % |
Total SG&A Expenses | $ | 50,775 | | | $ | 51,538 | | | $ | (763) | | | (1) | % | | $ | 100,532 | | | $ | |