LANCASTER COLONY CORP [LANC] Filings

10-Q 1 lanc-20220331.htm 10-Q lanc-20220331

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 March 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 April 15, 2022, there were approximately 27,522,000 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 – March 31, 2022 and June 30, 2021	3

	Condensed Consolidated Statements of Income – Three and Nine Months Ended March 31, 2022 and 2021	4

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

	Condensed Consolidated Statements of Cash Flows – Nine Months Ended March 31, 2022 and 2021	6

	Condensed Consolidated Statements of Shareholders’ Equity – Nine Months Ended March 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	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II – OTHER INFORMATION		26

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26



Item 6.	Exhibits	26

SIGNATURES		27

INDEX TO EXHIBITS		28

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)	March 31, 2022		June 30, 2021
ASSETS
Current Assets:
Cash and equivalents	$	67,085	$	188,055
Receivables	110,131		97,897
Inventories:
Raw materials	61,165		48,895
Finished goods	104,857		72,980
Total inventories	166,022		121,875
Other current assets	18,341		15,654
Total current assets	361,579		423,481
Property, Plant and Equipment:
Land, buildings and improvements	311,280		252,174
Machinery and equipment	463,661		424,015
Total cost	774,941		676,189
Less accumulated depreciation	336,652		311,567
Property, plant and equipment-net	438,289		364,622
Other Assets:
Goodwill	208,371		208,371
Other intangible assets-net	41,969		58,766
Operating lease right-of-use assets	29,879		22,455
Other noncurrent assets	23,537		23,590
Total	$	1,103,624	$	1,101,285
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	127,361	$	110,338
Accrued liabilities	52,116		63,585
Total current liabilities	179,477		173,923
Noncurrent Operating Lease Liabilities	23,111		17,228
Other Noncurrent Liabilities	22,564		28,285
Deferred Income Taxes	39,850		38,702
Commitments and Contingencies
Shareholders’ Equity:
Preferred stock-authorized 3,050,000 shares; outstanding-none
Common stock-authorized 75,000,000 shares; outstanding-March-27,523,562 shares; June-27,531,040 shares	135,645		128,617
Retained earnings	1,478,026		1,482,220
Accumulated other comprehensive loss	(8,127)		(8,253)
Common stock in treasury, at cost	(766,922)		(759,437)
Total shareholders’ equity	838,622		843,147
Total	$	1,103,624	$	1,101,285

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended March 31,				Nine Months Ended March 31,
(Amounts in thousands, except per share data)	2022		2021		2022		2021
Net Sales	$	403,494	$	357,249	$	1,223,977	$	1,081,501
Cost of Sales	335,162		266,699		966,676		791,452
Gross Profit	68,332		90,550		257,301		290,049
Selling, General and Administrative Expenses	54,526		53,162		157,920		149,607
Change in Contingent Consideration	(1,300)		—		(3,470)		(5,687)
Restructuring and Impairment Charges	22,723		—		24,651		1,195
Operating (Loss) Income	(7,617)		37,388		78,200		144,934
Other, Net	119		(44)		250		(67)
(Loss) Income Before Income Taxes	(7,498)		37,344		78,450		144,867
Taxes Based on (Loss) Income	(3,015)		8,447		17,908		34,261





Net (Loss) Income	$	(4,483)	$	28,897	$	60,542	$	110,606






Net (Loss) Income Per Common Share:
Basic	$	(0.17)	$	1.05	$	2.20	$	4.02
Diluted	$	(0.17)	$	1.05	$	2.20	$	4.01



Weighted Average Common Shares Outstanding:
Basic	27,442		27,483		27,448		27,474
Diluted	27,442		27,526		27,478		27,513

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended March 31,				Nine Months Ended March 31,
(Amounts in thousands)	2022		2021		2022		2021
Net (Loss) Income	$	(4,483)	$	28,897	$	60,542	$	110,606
Other Comprehensive Income:
Defined Benefit Pension and Postretirement Benefit Plans:
Amortization of loss, before tax	101		167		301		503
Amortization of prior service credit, before tax	(45)		(45)		(136)		(136)
Total Other Comprehensive Income, Before Tax	56		122		165		367
Tax Attributes of Items in Other Comprehensive Income:
Amortization of loss, tax	(24)		(39)		(71)		(117)
Amortization of prior service credit, tax	11		11		32		32
Total Tax Expense	(13)		(28)		(39)		(85)
Other Comprehensive Income, Net of Tax	43		94		126		282
Comprehensive (Loss) Income	$	(4,440)	$	28,991	$	60,668	$	110,888

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended March 31,
(Amounts in thousands)	2022		2021
Cash Flows From Operating Activities:
Net income	$	60,542	$	110,606
Adjustments to reconcile net income to net cash provided by operating activities:
Impacts of noncash items:
Depreciation and amortization	34,417		32,569
Change in contingent consideration	(3,470)		(5,687)
Deferred income taxes and other changes	1,587		4,305
Stock-based compensation expense	7,384		5,234
Restructuring and impairment charges	24,435		1,195


Pension plan activity	(411)		(118)
Changes in operating assets and liabilities:
Receivables	(12,234)		(11,273)
Inventories	(44,147)		(17,998)
Other current assets	(4,240)		(2,968)
Accounts payable and accrued liabilities	(5,212)		22,834
Net cash provided by operating activities	58,651		138,699
Cash Flows From Investing Activities:
Payments for property additions	(104,888)		(55,601)



Other-net	(177)		(561)
Net cash used in investing activities	(105,065)		(56,162)
Cash Flows From Financing Activities:
Payment of dividends	(64,736)		(60,576)
Purchase of treasury stock	(7,485)		(4,623)
Tax withholdings for stock-based compensation	(356)		(3,110)

Other-net	(1,979)		(1,380)
Net cash used in financing activities	(74,556)		(69,689)




Net change in cash and equivalents	(120,970)		12,848
Cash and equivalents at beginning of year	188,055		198,273
Cash and equivalents at end of period	$	67,085	$	211,121
Supplemental Disclosure of Operating Cash Flows:
Net cash payments for income taxes	$	18,775	$	29,855

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)


	Nine Months Ended March 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, 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
Net loss				(4,483)						(4,483)
Net pension and postretirement benefit gains, net of $13 tax effect						43				43
Cash dividends - common stock ($0.80 per share)				(22,026)						(22,026)
Purchase of treasury stock	(14)							(2,147)		(2,147)
Stock-based plans	4	(295)								(295)
Stock-based compensation expense		2,521								2,521
Balance, March 31, 2022	27,524	$	135,645	$	1,478,026	$	(8,127)	$	(766,922)	$	838,622

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)

(UNAUDITED)


	Nine Months Ended March 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, 2020	27,524	$	125,153	$	1,421,121	$	(12,070)	$	(750,904)	$	783,300
Net income				37,079						37,079
Net pension and postretirement benefit gains, net of $29 tax effect						94				94
Cash dividends - common stock ($0.70 per share)				(19,270)						(19,270)
Purchase of treasury stock	—							(15)		(15)
Stock-based plans	16	(1,854)								(1,854)
Stock-based compensation expense		1,772								1,772
Balance, September 30, 2020	27,540	$	125,071	$	1,438,930	$	(11,976)	$	(750,919)	$	801,106
Net income				44,630						44,630
Net pension and postretirement benefit gains, net of $28 tax effect						94				94
Cash dividends - common stock ($0.75 per share)				(20,655)						(20,655)
Purchase of treasury stock	—							(4)		(4)
Stock-based plans	7	(581)								(581)
Stock-based compensation expense		1,770								1,770
Balance, December 31, 2020	27,547	$	126,260	$	1,462,905	$	(11,882)	$	(750,923)	$	826,360
Net income				28,897						28,897
Net pension and postretirement benefit gains, net of $28 tax effect						94				94

Cash dividends - common stock ($0.75 per share)				(20,651)						(20,651)
Purchase of treasury stock	(26)							(4,604)		(4,604)
Stock-based plans	24	(675)								(675)
Stock-based compensation expense		1,692								1,692
Balance, March 31, 2021	27,545	$	127,277	$	1,471,151	$	(11,788)	$	(755,527)	$	831,113

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 2021 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, 2022 refers to fiscal 2022, which is the period from July 1, 2021 to June 30, 2022.

Deferred Software Costs

We capitalize certain costs related to hosting arrangements that are service contracts (cloud computing arrangements). Capitalized costs are included in Other Current Assets or Other Noncurrent Assets and are amortized on a straight-line basis over the estimated useful life. For the nine months ended March 31, 2022 and 2021, we capitalized $1.6 million and $3.2 million, respectively, of deferred software costs related to cloud computing arrangements.

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,
	2022		2021
Construction in progress in Accounts Payable	$	21,256	$	3,791

In the three months ended March 31, 2022, we recorded an impairment charge of $6.8 million for certain property, plant and equipment related to the Bantam Bagels, LLC (“Bantam”) business. This charge resulted from our decision to explore strategic alternatives for this business, which triggered impairment testing, and represents the excess of the carrying value over the fair value. The fair value was based on estimated selling prices for these assets, which represents a Level 3 measurement within the fair value hierarchy. The impairment charge is reflected in Restructuring and Impairment Charges and was not allocated to our two reportable segments due to its unusual nature.

Accrued Compensation and Employee Benefits

Accrued compensation and employee benefits included in Accrued Liabilities was $18.6 million and $32.5 million at March 31, 2022 and June 30, 2021, respectively.

Current Operating Lease Liabilities

Current operating lease liabilities included in Accrued Liabilities were $9.4 million and $6.9 million at March 31, 2022 and June 30, 2021, respectively.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

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.

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Net (loss) income	$	(4,483)	$	28,897	$	60,542	$	110,606
Net income available to participating securities	(52)		(56)		(168)		(223)
Net (loss) income available to common shareholders	$	(4,535)	$	28,841	$	60,374	$	110,383

Weighted average common shares outstanding – basic	27,442		27,483		27,448		27,474
Incremental share effect from:
Nonparticipating restricted stock	—		2		3		2
Stock-settled stock appreciation rights	—		41		26		37
Performance units	—		—		1		—
Weighted average common shares outstanding – diluted	27,442		27,526		27,478		27,513

Net (loss) income per common share – basic	$	(0.17)	$	1.05	$	2.20	$	4.02
Net (loss) income per common share – diluted	$	(0.17)	$	1.05	$	2.20	$	4.01

Accumulated Other Comprehensive Loss

The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Accumulated other comprehensive loss at beginning of period	$	(8,170)	$	(11,882)	$	(8,253)	$	(12,070)
Defined Benefit Pension Plan Items:
Amortization of unrecognized net loss	107		172		321		518
Postretirement Benefit Plan Items:
Amortization of unrecognized net gain	(6)		(5)		(20)		(15)
Amortization of prior service credit	(45)		(45)		(136)		(136)
Total other comprehensive income, before tax	56		122		165		367
Total tax expense	(13)		(28)		(39)		(85)
Other comprehensive income, net of tax	43		94		126		282

Accumulated other comprehensive loss at end of period	$	(8,127)	$	(11,788)	$	(8,127)	$	(11,788)

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Significant Accounting Policies

There were no changes to our Significant Accounting Policies from those disclosed in our 2021 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.

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, 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. Impairment charges for property, plant and equipment and intangible assets resulted from nonrecurring fair value measurements. See further discussion in Note 1 and Note 5.

Our contingent consideration, which resulted from the earn-out associated with our acquisition of Bantam, is measured at fair value on a recurring basis and is included in Other Noncurrent Liabilities. The following table summarizes our contingent consideration:


	Fair Value Measurements at March 31, 2022
	Level 1		Level 2		Level 3		Total
Contingent consideration - Bantam	$	—	$	—	$	—	$	—



	Fair Value Measurements at June 30, 2021
	Level 1		Level 2		Level 3		Total
Contingent consideration - Bantam	$	—	$	—	$	3,470	$	3,470

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. 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.

Our fair value measurement at March 31, 2022 resulted in a $1.3 million reduction in the fair value of Bantam’s contingent consideration based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023. The changes in forecasted adjusted EBITDA primarily reflected lower projected sales levels for Bantam’s Foodservice business. This adjustment was recorded in our Foodservice segment.

Our fair value measurement at December 31, 2021 resulted in a $2.2 million reduction in the fair value of Bantam’s contingent consideration based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023, as well as a refinement to the estimated probabilities applied to our forecast scenarios. The changes in forecasted adjusted EBITDA primarily reflected lower projected sales levels for Bantam’s Retail business while the changes in estimated probabilities reflected a lower likelihood of attaining certain Foodservice business. We recorded $1.3 million of this adjustment in our Foodservice segment and $0.9 million in our Retail segment.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Our fair value measurement at September 30, 2020 resulted in a $5.7 million reduction in the fair value of Bantam’s contingent consideration based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023. The changes in forecasted adjusted EBITDA primarily reflected the impact of a SKU rationalization by a Foodservice customer resulting in the loss of sales to that customer after November 30, 2020. This adjustment was recorded in our Foodservice segment.

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Contingent consideration at beginning of period	$	1,300	$	3,470	$	3,470	$	9,157

Change in contingent consideration included in operating income	(1,300)		—		(3,470)		(5,687)
Contingent consideration at end of period	$	—	$	3,470	$	—	$	3,470

Note 3 – Long-Term Debt

At March 31, 2022 and June 30, 2021, 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. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the Facility. In the event that LIBOR 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.

At March 31, 2022 and June 30, 2021, we had no borrowings outstanding under the Facility. At March 31, 2022 and June 30, 2021, 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 nine months ended March 31, 2022 and 2021.

Note 4 – Commitments and Contingencies

At March 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 will not have a material effect on our consolidated financial statements.

We have a significant remaining commitment of approximately $46 million related to a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky.

Our acquisition of Bantam included a provision for contingent consideration for the earn-out associated with this transaction. See further discussion in Note 2.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

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 March 31, 2022 and June 30, 2021.

The following table summarizes our identifiable other intangible assets:


	March 31, 2022		June 30, 2021


Tradenames (20 to 30-year life)
Gross carrying value	$	50,321	$	62,531
Accumulated amortization	(12,350)		(12,421)
Net carrying value	$	37,971	$	50,110




Customer Relationships (2 to 15-year life)
Gross carrying value	$	14,207	$	17,507
Accumulated amortization	(12,496)		(12,912)
Net carrying value	$	1,711	$	4,595
Technology / Know-how (10-year life)
Gross carrying value	$	6,350	$	8,020
Accumulated amortization	(4,063)		(3,973)
Net carrying value	$	2,287	$	4,047
Non-compete Agreements (5-year life)
Gross carrying value	$	191	$	191
Accumulated amortization	(191)		(177)
Net carrying value	$	—	$	14
Total net carrying value	$	41,969	$	58,766

In the three months ended March 31, 2022, we recorded an impairment charge of $12.3 million to write off the net carrying value of Bantam’s tradename, customer relationships and technology / know-how intangible assets based on our decision to explore strategic alternatives for this business. The impairment charge represents the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful life of the intangible assets. The impairment charge is reflected in Restructuring and Impairment Charges and was not allocated to our two reportable segments due to its unusual nature.

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 reflects lower projected cash flows for Bantam’s Retail business. The impairment charge represents the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful life of the intangible asset. The impairment charge is reflected in Restructuring and Impairment Charges and was recorded in our Retail segment.

In the three months ended September 30, 2020, we recorded impairment charges of $1.2 million related to certain tradename and technology / know-how intangible assets for Bantam, which reflected the impact of a SKU rationalization by a Foodservice customer resulting in the loss of sales to that customer after November 30, 2020. The impairment charges represent the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful lives of the intangible assets. The impairment charges are reflected in Restructuring and Impairment Charges and were recorded in our Foodservice segment. We also reduced the remaining useful life for Bantam’s Foodservice customer relationship and have recorded accelerated amortization expense.

As the fair value measurements used above were based on significant inputs not observable in the market, they represent Level 3 measurements within the fair value hierarchy.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses, was as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Amortization expense	$	1,161	$	1,203	$	3,562	$	4,052

Total annual amortization expense for each of the next five years is estimated to be as follows:



2023	$	3,105
2024	$	3,105
2025	$	2,845
2026	$	2,215
2027	$	2,044

Note 6 – Income Taxes

Prepaid federal income taxes of $6.5 million and $5.1 million were included in Other Current Assets at March 31, 2022 and June 30, 2021, respectively. Prepaid state and local income taxes of $1.7 million and $1.1 million were included in Other Current Assets at March 31, 2022 and June 30, 2021, 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, garlic breads and mini stuffed bagels.

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. Finally, within this segment, we sold other roll products under a temporary supply agreement resulting from the acquisition of Omni Baking Company LLC. The temporary supply agreement was terminated effective October 31, 2020.

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 March 31, 2022 is generally consistent with that of June 30, 2021. However, due to the decrease in cash and equivalents, the amount of Corporate assets has decreased as compared to June 30, 2021.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

We evaluate our Retail and Foodservice segments based on net sales and operating income which follow:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Net Sales
Retail	$	213,128	$	198,358	$	682,102	$	614,653
Foodservice	190,366		158,891		541,875		466,848
Total	$	403,494	$	357,249	$	1,223,977	$	1,081,501
Operating Income
Retail	$	22,213	$	41,179	$	119,997	$	144,557
Foodservice	18,556		21,088		52,690		66,845
Nonallocated Restructuring and Impairment Charges (1)	(22,723)		—		(23,749)		—
Corporate Expenses	(25,663)		(24,879)		(70,738)		(66,468)
Total	$	(7,617)	$	37,388	$	78,200	$	144,934

(1)Reflects restructuring and impairment charges related to the Bantam business and a facility closure, which were not allocated to our two reportable segments due to their unusual nature.

The following table sets forth net sales disaggregated by class of similar products for the Retail and Foodservice segments:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Retail
Shelf-stable dressings, sauces and croutons	$	94,578	$	75,773	$	272,439	$	199,292
Frozen breads	73,328		73,628		258,426		250,157
Refrigerated dressings, dips and other	45,222		48,957		151,237		165,204
Total Retail net sales	$	213,128	$	198,358	$	682,102	$	614,653
Foodservice
Dressings and sauces	$	143,156	$	120,925	$	403,953	$	347,101
Frozen breads and other	47,210		37,966		137,922		116,040
Other roll products	—		—		—		3,707
Total Foodservice net sales	$	190,366	$	158,891	$	541,875	$	466,848
Total net sales	$	403,494	$	357,249	$	1,223,977	$	1,081,501

The following table provides an additional disaggregation of Foodservice net sales by type of customer:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Foodservice
National accounts	$	146,959	$	124,323	$	414,840	$	359,228
Branded and other	43,407		34,568		127,035		103,913
Other roll products	—		—		—		3,707
Total Foodservice net sales	$	190,366	$	158,891	$	541,875	$	466,848

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Note 8 – Stock-Based Compensation

There have been no changes to our stock-based compensation plan as disclosed in our 2021 Annual Report on Form 10-K. However, as permitted under this plan, we made an initial grant of performance units in August 2021. These performance units have either a market condition or a performance condition and will vest 3 years after the grant date. Dividend equivalents earned during the vesting period will be paid at the time the awards vest.

Our stock-settled stock appreciation rights (“SSSARs”) compensation expense was $0.9 million for the three months ended March 31, 2022 and 2021. Year-to-date SSSARs compensation expense was $2.9 million for the current-year period compared to $2.6 million for the prior-year period. At March 31, 2022, there was $3.9 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of 2 years.

Our restricted stock compensation expense was $1.3 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively. Year-to-date restricted stock compensation expense was $3.7 million for the current-year period compared to $2.6 million for the prior-year period. At March 31, 2022, there was $7.3 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 $0.3 million for the three months ended March 31, 2022. Year-to-date performance units compensation expense was $0.8 million for the current-year period. At March 31, 2022, there was $2.9 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, 2022 refers to fiscal 2022, which is the period from July 1, 2021 to June 30, 2022.

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 2021 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.