LANCASTER COLONY CORP [LANC] Filings

10-Q 1 lanc-20221231.htm 10-Q lanc-20221231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form			10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022


☐			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



Lancaster Colony Corporation
(Exact name of registrant as specified in its charter)


Ohio		13-1955943
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

380 Polaris Parkway	Suite 400
Westerville	Ohio	43082
(Address of principal executive offices)		(Zip Code)


(614)			224-7141
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


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.

Large accelerated filer

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




PART I – FINANCIAL INFORMATION		3

Item 1.	Condensed Consolidated Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets – December 31, 2022 and June 30, 2022	3

	Condensed Consolidated Statements of Income – Three and Six Months Ended December 31, 2022 and 2021	4

	Condensed Consolidated Statements of Comprehensive Income – Three and Six Months Ended December 31, 2022 and 2021	5

	Condensed Consolidated Statements of Cash Flows – Six Months Ended December 31, 2022 and 2021	6

	Condensed Consolidated Statements of Shareholders’ Equity – Six Months Ended December 31, 2022 and 2021	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

PART II – OTHER INFORMATION		24

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24



Item 6.	Exhibits	24

SIGNATURES		26

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(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:


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)


	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





Net Income	$	39,973	$	34,370	$	77,565	$	65,025






Net Income Per Common Share:
Basic	$	1.45	$	1.25	$	2.82	$	2.36
Diluted	$	1.45	$	1.25	$	2.81	$	2.36



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)


	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)


	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


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)

Proceeds from sale of property	1,159		221

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)

Principal payments for finance leases	(1,304)		(1,307)
Net cash used in financing activities	(49,460)		(49,416)




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

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)


	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

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

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:


	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

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

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:


	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

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:


	Three Months Ended December 31,				Six Months Ended December 31,
	2022		2021		2022		2021
Contingent consideration at beginning of period	$	—	$	3,470	$	—	$	3,470

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:


	December 31, 2022		June 30, 2022


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




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




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:


	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:



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:


	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:


	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

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:


	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

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.

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


(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


	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	$