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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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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 2019 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, 2020 refers to fiscal 2020, which is the period from July 1, 2019 to June 30, 2020.

Deferred Software Costs

We capitalize certain costs related to hosting arrangements that are service contracts (cloud computing arrangements). For the nine months ended March 31, 2020, we capitalized $6.6 million of deferred software costs related to cloud computing arrangements, primarily for amounts related to our new enterprise resource planning system.

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: 

	March 31,
	2020				2019
Construction in progress in Accounts Payable	$	8,532			$	3,131

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 and stock-settled stock appreciation rights) 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 and stock-settled stock appreciation rights.

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Basic and diluted net income per common share were calculated as follows:

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	Three Months Ended  March 31,								Nine Months Ended  March 31,
	2020				2019				2020				2019
Net income	$	22,429			$	30,604			$	106,598			$	117,539
Net income available to participating securities	(48		)		(52		)		(216		)		(212		)
Net income available to common shareholders	$	22,381			$	30,552			$	106,382			$	117,327
Weighted average common shares outstanding – basic	27,457				27,448				27,447				27,436
Incremental share effect from:
Nonparticipating restricted stock	1				1				2				3
Stock-settled stock appreciation rights	43				100				53				104
Weighted average common shares outstanding – diluted	27,501				27,549				27,502				27,543
Net income per common share – basic	$	0.82			$	1.11			$	3.88			$	4.28
Net income per common share – diluted	$	0.81			$	1.11			$	3.87			$	4.26

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  March 31,								Nine Months Ended  March 31,
	2020				2019				2020				2019
Accumulated other comprehensive loss at beginning of period	$	(10,169	)		$	(8,172	)		$	(10,308	)		$	(8,259	)
Defined Benefit Pension Plan Items:
Amortization of unrecognized net loss	143				111				429				335
Postretirement Benefit Plan Items:
Amortization of unrecognized net gain	(7		)		(9		)		(20		)		(28		)
Amortization of prior service credit	(45		)		(46		)		(136		)		(137		)
Total other comprehensive income, before tax	91				56				273				170
Total tax expense	(21		)		(13		)		(64		)		(40		)
Other comprehensive income, net of tax	70				43				209				130
Accumulated other comprehensive loss at end of period	$	(10,099	)		$	(8,129	)		$	(10,099	)		$	(8,129	)

Significant Accounting Policies

There were no changes to our Significant Accounting Policies from those disclosed in our 2019 Annual Report on Form 10-K. However, see expanded disclosure of lease accounting policies in Note 5 due to the adoption of new lease accounting guidance.

Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to the disclosure requirements for fair value measurements. The guidance removes, modifies and adds disclosures related to fair value. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance will be effective for us in fiscal 2021, including interim periods. As the guidance only relates to disclosures, there will be no impact on our financial position or results of operations.

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Recently Adopted Accounting Standards

In February 2016, the FASB issued new accounting guidance to require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months and issued subsequent clarifications of this new guidance. This guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record a right-of-use asset and a lease liability based upon the present value of the lease payments. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the consolidated financial statements. In July 2018, the FASB issued guidance that allows for an alternate transition method whereby companies can recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than restating comparative periods. We adopted the new guidance on July 1, 2019 using this alternate transition method, but we did not record a cumulative-effect adjustment from initially applying the standard. We elected the package of practical expedients that permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs and made an accounting policy election to exclude short-term leases with an initial term of 12 months or less from our Consolidated Balance Sheets. We have completed the implementation of a lease accounting system to enable the preparation of financial information and have implemented relevant accounting policies and internal controls surrounding the lease accounting process. As a result of adoption, we recognized a lease liability and right-of-use asset of $33.5 million and $31.7 million, respectively. The right-of-use asset balance reflects the reclassification of deferred rent and prepaid rent against the initial asset. The adoption did not impact our results of operations or cash flows. See additional lease disclosures in Note 5.

Note 2 – Acquisitions

Omni Baking Company LLC

On November 16, 2018, we acquired substantially all of the assets of Omni Baking Company LLC (“Omni”). Omni has been a long-time supplier of products to our frozen garlic bread operations and is based in Vineland, New Jersey. The purchase price of $22.3 million, which includes the post-closing working capital adjustment, was funded with cash on hand. Omni’s results of operations are allocated between our Retail and Foodservice segments in a manner consistent with our current segment allocations. These results have been included in our condensed consolidated financial statements from the date of acquisition.

Bantam Bagels, LLC

On October 19, 2018, we acquired all the assets of Bantam Bagels, LLC (“Bantam”). Bantam, a producer and marketer of frozen mini stuffed bagels and other frozen bread products sold to both the retail and foodservice channels, is based in New York, New York. The base purchase price of $33.1 million, which includes the post-closing working capital adjustment, was funded with cash on hand. This purchase price excludes contingent consideration relating to an additional earn-out payment which is tied to performance-based conditions. In general, the terms of the acquisition specify that the sellers will 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. We are unable to provide a range for the amount of this earn-out because it is based on the future adjusted EBITDA of Bantam, and the earn-out does not contain a minimum or maximum value. See further discussion of the earn-out in Note 3. Bantam’s results of operations are allocated between our Retail and Foodservice segments in a manner consistent with our current segment allocations. These results have been included in our condensed consolidated financial statements from the date of acquisition.

Note 3 – 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.

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Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and equivalents, accounts receivable, accounts payable, contingent consideration payable and defined benefit pension plan assets. The estimated fair value of cash and equivalents, accounts receivable and accounts payable approximates their carrying value.

Our contingent consideration, which resulted from the earn-outs associated with our acquisitions of Bantam and Angelic Bakehouse, Inc. (“Angelic”), is measured at fair value on a recurring basis and is included in Other Noncurrent Liabilities on the Condensed Consolidated Balance Sheets. The following table summarizes our contingent consideration:

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	Fair Value Measurements at March 31, 2020
	Level 1				Level 2				Level 3				Total
Contingent consideration - Bantam	$	—			$	—			$	9,092			$	9,092
Contingent consideration - Angelic	—				—				—				—
Total contingent consideration	$	—			$	—			$	9,092			$	9,092
	Fair Value Measurements at June 30, 2019
	Level 1				Level 2				Level 3				Total
Contingent consideration - Bantam	$	—			$	—			$	8,900			$	8,900
Contingent consideration - Angelic	—				—				—				—
Total contingent consideration	$	—			$	—			$	8,900			$	8,900

Bantam Contingent Consideration

This contingent consideration resulted from the earn-out associated with our October 19, 2018 acquisition of Bantam. In general, the terms of the acquisition specify the sellers will 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, which included a refinement to the purchase price allocation in the prior-year third quarter related to a change in assumptions. The fair value is measured on a recurring basis using a Monte Carlo simulation that randomly changes revenue growth, forecasted adjusted EBITDA and other uncertain variables to estimate an expected value. We record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy.

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  March 31,								Nine Months Ended  March 31,
	2020				2019				2020				2019
Contingent consideration at beginning of period	$	9,027			$	8,995			$	8,900			$	—
Initial fair value - (reductions)/additions	—				(900		)		—				8,000
Change in contingent consideration included in operating income	65				88				192				183
Contingent consideration at end of period	$	9,092			$	8,183			$	9,092			$	8,183

Angelic Contingent Consideration

This contingent consideration resulted from the earn-out associated with our November 17, 2016 acquisition of Angelic. In general, the terms of the acquisition specify the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021. The initial fair value of the contingent consideration was determined to be $13.9 million. The fair value is measured on a recurring basis using a present value approach, which incorporates factors such as revenue growth and forecasted adjusted EBITDA, to estimate an expected value. We record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy. Our 2019 fair value measurements resulted in a $9.7 million reduction in the fair value of Angelic’s contingent consideration in the second quarter ended December 31, 2018 and a $7.4 million reduction in the fourth quarter ended June 30, 2019 based on changes in Angelic’s forecasted adjusted EBITDA for fiscal 2021. These adjustments were recorded in our Retail segment.

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The following table represents our Level 3 fair value measurements using significant other unobservable inputs for Angelic’s contingent consideration:

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	Three Months Ended  March 31,								Nine Months Ended  March 31,
	2020				2019				2020				2019
Contingent consideration at beginning of period	$	—			$	7,380			$	—			$	17,080
Change in contingent consideration included in operating income	—				—				—				(9,700		)
Contingent consideration at end of period	$	—			$	7,380			$	—			$	7,380

Note 4 – Long-Term Debt

At June 30, 2019, we had an unsecured credit 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 subject to us obtaining consent of the issuing banks and certain other conditions.

On March 19, 2020, in the ordinary course of business, we entered into a new unsecured revolving credit facility (“New Credit Facility”), replacing the facility discussed above which was to expire in April 2021. The material terms and covenants of the New Credit Facility are substantially similar to our previous credit facility.

The New Credit Facility provides that we may 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 New Credit Facility expires on March 19, 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the New Credit Facility. In the event that LIBOR becomes unavailable or is no longer deemed an appropriate reference rate, the New Credit 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 New Credit Facility, they will be classified as long-term debt.

At March 31, 2020 and June 30, 2019, we had no borrowings outstanding under these facilities. At March 31, 2020 and June 30, 2019, we had $2.8 million and $5.1 million, respectively, of standby letters of credit outstanding, which reduced the amount available for borrowing under these facilities. We paid no interest for the three and nine months ended March 31, 2020 and 2019.

The New Credit 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 New Credit Facility.

Note 5 – Leases

General Lease Description

We have operating leases with initial noncancelable lease terms in excess of one year covering the rental of various facilities and equipment. Certain of these leases contain renewal options and some provide options to purchase during the lease term. Our operating leases include leases for real estate for some of our office and manufacturing facilities as well as manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these operating leases range from 1 year to 8 years.

We have finance leases with initial noncancelable lease terms in excess of one year covering the rental of various equipment. These leases are generally for manufacturing and non-manufacturing equipment used in our business. The remaining lease terms for these finance leases range from 3