LANCASTER COLONY CORP - Annual Report: 2007 (Form 10-K)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2007
or
o | 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 | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
37 West Broad Street | 43215 | |
Columbus, Ohio | (Zip Code) | |
(Address of principal executive offices) |
614-224-7141
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, Without Par Value | The NASDAQ Stock Market LLC | |
(including Series A Participating | (NASDAQ Global Select Market) | |
Preferred Share Purchase Rights) |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer, as defined by Rule 12b-2 of the Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of Common Stock held by non-affiliates on December 29, 2006 was
approximately $1,004,527,000, based on the closing price of these shares on that day.
As of August 20, 2007, there were approximately 30,361,000 shares of Common Stock, without par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be filed for its 2007 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
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PART I
Item 1. Business
GENERAL
Lancaster Colony Corporation, an Ohio corporation (reincorporated in 1992, successor to a
Delaware corporation originally incorporated in 1961), is a diversified manufacturer and marketer
of consumer products with a focus on specialty food products for the retail and foodservice
markets. Other consumer products manufactured and marketed by Lancaster Colony Corporation include
glassware and candles for the retail, floral, and foodservice markets and automotive accessories
for the original equipment market and aftermarket. Our principal executive offices are located at
37 West Broad Street, Columbus, Ohio 43215 and our telephone number is 614-224-7141.
As used in this Annual Report on Form 10-K and except as the context otherwise may require,
the terms we, us, our, registrant, or the Company mean Lancaster Colony Corporation and
all entities owned or controlled by Lancaster Colony Corporation except where it is clear that the
term only means the parent company. Unless otherwise noted, references to year pertain to our
fiscal year; for example, 2007 refers to fiscal 2007, which is the period from July 1, 2006 to June
30, 2007.
Available Information
Our Internet Web site address is http://www.lancastercolony.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available through our Web site as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange Commission. The information
contained on our Web site or connected to it is not incorporated into this Annual Report on Form
10-K.
DESCRIPTION OF AND FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
We operate in three business segments Specialty Foods, Glassware and Candles
and Automotive with continuing operations accounting for approximately 67%, 20% and
13%, respectively, of consolidated net sales for the year ended June 30, 2007. The financial
information relating to business segments for the three years in the periods ended June 30, 2007,
2006 and 2005 is included in Note 18 to the consolidated financial statements, which is included in
Part II, Item 8 of this Annual Report on Form 10-K. Further description of each business segment
within which we operate is provided below.
Specialty Foods
The food products we manufacture and sell include salad dressings and sauces marketed under
the brand names Marzetti, T. Marzetti, Cardinis, Pfeiffer and Girards fruit glazes,
vegetable dips and fruit dips marketed under the brand name T. Marzetti frozen hearth-baked
breads marketed under the brand names New York BRAND and Mamma Bella frozen
Parkerhouse style yeast dinner rolls and sweet rolls marketed under the brand names Sister
Schuberts, Marshalls and Mary Bs premium dry egg noodles marketed under the brand names
Inn Maid and Amish Kitchen frozen specialty noodles and pastas marketed under the brand names
Reames and Aunt Vis croutons and related products marketed under the brand names New York
BRAND, Chatham Village, Cardinis and T. Marzetti and caviar marketed under the
brand name Romanoff. A portion of our sales in this segment is sold under private label to
retailers, distributors and restaurants primarily in the United States. Additionally, a portion of
our sales relates to frozen specialty noodles and pastas sold to industrial customers for use as
ingredients in their products.
The dressings, sauces, croutons, fruit glazes, vegetable dips, fruit dips, frozen hearth-baked
breads and yeast rolls are sold primarily through sales personnel, food brokers and distributors in
various metropolitan areas in the United States with sales being made to retail, club stores and
foodservice markets. We have strong placement of products in U.S. grocery produce departments
through our refrigerated salad dressings, vegetable and fruit dips, and croutons. Within the frozen
aisles of grocery retailers, we also have prominent market positions of frozen yeast rolls, as well
as garlic breads. Products we sell in the foodservice markets
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are often custom-formulated and include salad dressings, sandwich and dipping sauces, frozen
breads and yeast rolls. Similar to our retail efforts, we utilize our research and development
resources to accommodate a strong desire for new and differentiated products among our foodservice
users.
The dry egg noodles and frozen specialty noodles are sold through sales personnel, food
brokers and distributors to retail, foodservice and industrial markets principally in the central
and midwestern United States.
Sales attributable to one customer comprised approximately 13%, 12% and 11% of this segments
total net sales in 2007, 2006 and 2005, respectively. No other customer accounted for more than 10%
of this segments total net sales. Although we have the leading market share in several product
categories, all of the markets in which we sell food products are highly competitive in the areas
of price, quality and customer service.
The Specialty Foods segment reported its 37th consecutive year of record sales in 2007. Our
strong retail brands and product development capabilities continue to be a source of future growth
for this segment. In foodservice markets, we attempt to expand existing customer relationships and
pursue new opportunities by leveraging our culinary skills and experience to support the
development of new menu offerings. Acquisitions are also an important component of our future
growth plans, with a focus on fit and value. The 2007 acquisition of Marshall Biscuit Company,
Inc., a privately owned producer and marketer of frozen yeast rolls and biscuits, is the most
recent example of this segments commitment to growth through complementary acquisitions.
A significant portion of this segments product lines is manufactured at our 16 plants located
throughout the United States. Certain items are manufactured and packaged by third parties located
in the United States, Canada and England under contractual agreements established by us.
Efficient and cost-effective production remains a key focus of the Specialty Foods segment.
Beyond this segments ongoing initiatives for cost savings and operational improvements, we
recently completed the construction of two new production facilities in Hart County, Kentucky. In
2007, we began production at our new salad dressing plant with the incremental capacity enabling us
to achieve operating efficiencies at both the new and existing dressing plant locations. As we
begin 2008, we are also starting production at a newly constructed facility for the manufacture of
frozen yeast rolls. This new facility will help satisfy increased customer demand and improve
operating efficiencies.
The operations of this segment are not affected to any material extent by seasonal
fluctuations. We do not utilize any franchises or concessions in this business segment. The
trademarks that we utilize are significant to the overall success of this segment. The patents and
licenses under which we operate, however, are not essential to the overall success of this segment.
Glassware and Candles
We sell candles, candle accessories, and other home fragrance products in a variety of sizes,
forms and fragrance in retail markets to mass merchants, supermarkets, drug stores and specialty
shops under the Candle-lite brand name. A portion of our candle business is marketed under
private label.
Our glass products include a broad range of machine-blown and pressed consumer glassware.
We offer a diverse line of decorative and ornamental consumer glassware products such as
tumblers, bowls, pitchers, jars, barware, and candle accessories. We market these products under a
variety of trademarks, the most important of which is Indiana Glass.
Glass vases and containers are sold to both the retail and wholesale floral markets under the
brand names Brody and Indiana Glass, as well as to mass merchants and specialty craft stores.
We sell our consumer glassware products in retail markets to mass merchants, department
stores, drug stores and specialty shops, as well as to wholesalers. We also sell products to
customers in certain commercial markets, including restaurants, hotels, hospitals and schools.
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All the markets in which we sell glass products are highly competitive in the areas of design,
price, quality and customer service. Sales attributable to one customer comprised approximately
31%, 30% and 31% of this segments total net sales in 2007, 2006 and 2005, respectively. No other
customer accounted for more than 10% of this segments total net sales.
Seasonal retail stocking patterns cause certain of this segments products to experience
increased sales in the first half of the fiscal year. We do not use any franchises or concessions
in this segment. The patents and licenses under which we operate are not essential to the overall
success of this segment. Certain trademarks are important, however, to this segments marketing
efforts.
In March 2007, we announced the closing of our industrial glass operation located in
Lancaster, Ohio. Production at this facility was largely phased out by May 31, 2007, and it is
expected that business operations, including final sell-through of industrial glass products, will
effectively cease by December 31, 2007.
Automotive
We manufacture and sell running boards, tube steps, toolboxes and other accessories for pickup
trucks, vans and sport utility vehicles to original equipment manufacturers (OEM) and aftermarket
retailers. The items sold to aftermarket retailers are marketed under the Dee Zee brand name and
are also subject to marketing under private labels. Sales attributable to one customer comprised
approximately 41% of this segments total net sales in 2007. In 2006, three customers, each with
sales greater than 10% of total segment sales, accounted for approximately 60% of this segments
total net sales. In 2005, four customers, each with sales greater than 10% of total segment sales,
accounted for approximately 61% of this segments total net sales. No other customer accounted for
more than 10% of this segments total net sales. Although we are among the market leaders in many
of our product lines, all the markets in which we sell automotive products are highly competitive
in the areas of design, price, quality and customer service.
The operations of this segment are not affected to any material extent by seasonal
fluctuations. We do not utilize any significant franchises or concessions in this segment. The
patents and licenses under which we operate are generally not essential to the overall success of
this segment. Certain trademarks, however, are valuable to the segments marketing efforts.
In March 2007, as part of our strategic alternative review of nonfood operations, we announced
the sale of substantially all the operating assets of our automotive accessory operations located
in Wapakoneta, Ohio. Products manufactured at this location included pickup truck bed mats as well
as truck and trailer splashguards. This operation generated net sales of approximately $26 million
in 2006.
In June 2007, also as part of our strategic alternative review of nonfood operations, we
announced the sale of substantially all the operating assets of our automotive accessory operations
located in Coshocton, Ohio and LaGrange, Georgia. The primary products manufactured at these
locations were automotive floor mats. These operations generated net sales of approximately $76
million in 2006.
NET SALES BY CLASS OF PRODUCTS
The following table sets forth business segment information with respect to the percentage of
net sales contributed by each class of similar products that account for at least 10% of our
consolidated net sales in any year from 2005 through 2007:
2007 | 2006 | 2005 | ||||||||||
Specialty Foods: |
||||||||||||
Retail |
34 | % | 35 | % | 33 | % | ||||||
Foodservice |
32 | % | 31 | % | 32 | % | ||||||
Glassware and Candles: |
||||||||||||
Consumer Table and Giftware |
16 | % | 16 | % | 18 | % | ||||||
Automotive: |
||||||||||||
Original Equipment Manufacturers |
11 | % | 11 | % | 7 | % |
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Net sales attributable to Wal-Mart Stores, Inc. (Wal-Mart) totaled approximately 15%, 14%
and 14% of consolidated net sales for 2007, 2006 and 2005, respectively.
RESEARCH AND DEVELOPMENT
The estimated amount spent during each of the last three years on research and development
activities determined in accordance with generally accepted accounting principles is not considered
material.
BACKLOG
The nature of our backlog varies by segment. Orders in our Specialty Foods segment are
generally filled in three to seven days following the receipt of the order. In our Glassware and
Candles segment, certain orders are received in a highly seasonal manner, and the timing of the
receipt of several large customer orders can materially impact the amount of the backlog at any
point in time without being an indication of longer-term sales. In the aftermarket sector of our
Automotive segment, orders are generally filled within four to six weeks following the receipt of
the order, while orders from OEMs are generally filled within four to eight weeks. Our Automotive
segment backlog is impacted by general market conditions in the automobile industry and is subject
to general economic conditions and changes in consumer demand. Due to these variables, we do not
view the amount of backlog at any particular point in time as a meaningful indicator of longer-term
shipments.
ENVIRONMENTAL MATTERS
Certain of our operations are subject to various Federal, state and local environmental
protection laws. Based upon available information, compliance with these laws and regulations is
not expected to have a material adverse effect upon the level of capital expenditures, earnings or
our competitive position for the remainder of the current and succeeding year.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 2007, we had approximately 4,800 employees. Approximately 21% of these
employees are represented under various collective bargaining agreements, which expire at various
times through calendar year 2010. While we believe that labor relations with unionized employees
are good, a prolonged labor dispute could have a material adverse effect on our business and
results of operations.
FOREIGN OPERATIONS AND EXPORT SALES
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.
RAW MATERIALS
During 2007, we obtained adequate supplies of raw materials for all of our segments. We rely
on a variety of raw materials for the day-to-day production of our products, including soybean oil,
certain dairy-related products, flour, fragrances and colorant agents, soda ash, sand, paraffin
wax, plastic and paper packaging materials, plastics, resins, aluminum and steel.
We purchase the majority of these materials on the open market to meet current requirements,
but we also have some longer-term, fixed-price contracts. See further discussion in our contractual
obligations disclosure in Managements Discussion and Analysis of Financial Condition and Results
of Operations. Although the availability of certain of these materials has become more influenced
by the level of global demand, we anticipate that future sources of supply will generally be
adequate for our needs.
Item 1A. Risk Factors
An investment in our common stock is subject to certain risks inherent in our business. The
material risks and uncertainties that we believe affect us are described below. Before making an
investment decision, you should carefully consider the risks and uncertainties described below,
together with all of the other information included or incorporated by reference into this Annual
Report on Form 10-K. The risks and
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uncertainties described below are not the only ones we face. Additional risks and
uncertainties that we are not aware of or focused on or that we currently deem immaterial may also
impair our business operations.
If any of the following risks occur, our financial condition and results of operations could
be materially and adversely affected. If this were to happen, the value of our common stock could
decline significantly.
Competitive conditions within our markets could impact our sales volumes and operating margins.
Competition within all our markets is intense and is expected to remain so. Numerous
competitors exist, many of which are larger in size. Global production overcapacity has also had an
impact on our nonfood operations, particularly within our Glassware and Candles segment. These
competitive conditions could lead to significant downward pressure on the prices of our products,
which could have a material adverse effect on our revenues and profitability.
Competitive considerations in the various product categories in which we sell are multifaceted
and include price, product innovation, product quality, brand recognition and loyalty,
effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer
preferences. In order to protect existing market share or capture increased market share among our
retail channels, we may decide to increase our spending on marketing, advertising and new product
innovation. The success of marketing, advertising and new product innovation is subject to risks,
including uncertainties about trade and consumer acceptance. As a result, any increased
expenditures we make may not maintain or enhance market share and could result in lower
profitability.
Wal-Mart is our largest customer, and the loss of its business could cause our sales and net
income to decrease.
Our net sales to Wal-Mart represented approximately 15% of consolidated net sales for the year
ended June 30, 2007. We believe that our relationship with Wal-Mart is good, but we cannot assure
that we will be able to maintain this relationship. The loss of, or a significant reduction in,
this business could have a material adverse effect on our sales and profitability. Unfavorable
changes in Wal-Marts financial condition could also have a material adverse effect on our business
and results of operations.
Increases in the costs or limitations to the availability of raw materials we use to produce our
products could adversely affect our business by increasing our costs to produce goods.
We purchase a majority of our key raw materials on the open market. Our ability to avoid the
adverse effects of a pronounced, sustained price increase in our raw materials is limited. However,
we try to limit our exposure to price fluctuations for raw materials by occasionally entering into
longer-term, fixed-price contracts for certain raw materials. Our principal raw-material needs
include soybean oil, various dairy-related products, flour, paper and plastic packaging materials,
paraffin wax, resins, steel and aluminum. We have observed increased pricing on many of these raw
materials in recent years. Commodity markets for grain-based products, including dairy, food oil
and flour products, on which our food products depend, have risen and become extremely volatile due
to recent concerns over grain-based fuel sources. We anticipate that future sources of supply will
generally be adequate for our needs, but disruptions in availability and increased prices could
have a material adverse effect on our business and results of operations.
In 2007, we experienced an increase in the costs of raw materials used in our Specialty Foods
segment, which had an adverse impact on our operating income. While we have begun to take measures
to offset the impact of these higher costs, our ability to implement these measures and offset the
higher costs remains uncertain. There is also no assurance that we will not experience further
increases in the costs of raw materials. Such further increases, as well as the extent of our
success in implementing measures to offset higher costs, could have a material adverse impact on
our business and results of operations.
A disruption of production at certain of our manufacturing facilities could result in an
inability to provide adequate levels of customer service.
We produce certain products at a single manufacturing site. It is possible that we could
experience a production disruption at such a site that results in a reduction or elimination of the
availability of some of our
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products. Should we not be able to obtain alternate production capability in a timely manner,
a negative impact on our operations could result.
We may be subject to product recalls or product liability claims for misbranded, adulterated,
contaminated or spoiled food products or defective consumer products.
Our operations could be impacted by both genuine and fictitious claims regarding our products
and our competitors products. Under adverse circumstances, we may need to recall some of our
products if they become adulterated, misbranded, contaminated, or contain a defect, which could
create a substantial product hazard or create an unreasonable risk of serious injury or death, and
we may also be liable if the consumption of any of our products causes injury.
Any claim or product recall could result in noncompliance with regulations of the Food and
Drug Administration, the U.S. Consumer Product Safety Commission or the National Highway Traffic
Safety Administration, force us to stop selling our products and create significant adverse
publicity that could harm our credibility and decrease market acceptance of our products.
If we are required to defend against a product liability claim, whether or not we are found
liable under the claim, we could incur substantial costs, our reputation could suffer and our
customers might substantially reduce their existing or future orders from us.
In addition, either a significant product recall or a product liability claim involving a
competitors products or products in markets related to those in which we compete could result in a
loss of consumer confidence in our products or our markets generally and could have a material
impact on consumer demand. For example, in fiscal 2007, media reports of contaminated produce
products led to a decrease in consumer demand for bagged salads, which affected sales of our
Specialty Foods segment.
Increases in energy-related costs could negatively affect our business by increasing our costs to
produce goods.
We are subject to volatility in energy-related costs that affect the cost of producing our
products. This is especially true in our Glassware and Candles segment, where we use large amounts
of natural gas and paraffin wax, and in our Specialty Foods segment, where we utilize
petroleum-derived packaging materials. Significant increases in energy-related costs, like we
experienced in the first half of fiscal 2006 for natural gas, increase our costs to produce goods
and decrease our operating margins. Increases in these types of costs could have a material adverse
effect on our business and results of operations.
The availability and cost of transportation for our products is vital to our success, and the
loss of availability or increase in the cost of transportation could have an unfavorable impact
on our business and results of operations.
Our ability to obtain adequate and reasonably priced methods of transportation to distribute
our products is a key factor to our success. Our Specialty Foods segment requires the use of
refrigerated trailers to ship many of its products. Delays in transportation, especially in our
Specialty Foods segment, where orders are generally filled in three to seven days following the
receipt of the order, could have a material adverse effect on our business and results of
operations. Further, high fuel costs also impact our financial results. We are often required to
pay fuel surcharges to third-party transporters of our products due to high fuel costs. These fuel
surcharges can be substantial and increase our cost of goods sold. If we are unable to pass those
high costs to our customers in the form of price increases, those higher costs could have a
material adverse effect on our business and results of operations.
Our inability to bring production online and efficiently operate our new frozen yeast roll
manufacturing facility could have a material adverse effect on our business and results of
operations.
We are in the process of starting production at a new frozen yeast roll manufacturing facility
in southern Kentucky. The failure to efficiently bring production online, employ an adequate number
of skilled workers, or operate the facility in an efficient manner could have a material adverse
effect on our business and results of operations.
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Our inability to successfully renegotiate union contracts and any prolonged work stoppages or
other business disruptions could have an adverse effect on our business and results of
operations.
Two of our union contracts will be subject to renegotiation during fiscal 2008. We believe
that our labor relations with unionized employees are good, but our inability to successfully
negotiate the renewal of these contracts could have a material adverse effect on our business and
results of operations. Any prolonged work stoppages could also have an adverse effect on our
results of operations.
We are also subject to risks of other business disruptions associated with our dependence on
our production facilities and our distribution systems. Natural disasters, terrorist activity or
other events could interrupt our production or distribution and have a material adverse impact on
our business and results of operations.
There is no certainty regarding the amount of future CDSOA distributions.
The Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) provides for the distribution
of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers. Our
reported CDSOA receipts totaled approximately $0.7 million, $11.4 million, and $26.2 million in
2007, 2006 and 2005, respectively. These remittances related to certain candles being imported from
the Peoples Republic of China. The World Trade Organization has previously ruled that such
payments are inconsistent with international trade rules. In February 2006, legislation was enacted
to repeal the applicability of CDSOA to duties collected on imported products entered into the
United States after September 2007. In July 2006, the U.S. Court of International Trade (CIT)
ruled unconstitutional, on First Amendment grounds, CDSOAs requirement that a company that is not
a petitioner must have indicated its support for an antidumping petition in order to be eligible
for a distribution. In July 2007, the CIT found the statute was severable to make all domestic
producers eligible for benefits and remanded to the agencies for a determination of moneys owed to
the plaintiff. The remand is ongoing as of mid-August 2007. In September 2006, the CIT, in a
separate case, ruled the requirement unconstitutional on equal protection grounds; following a
remand, the CIT issued a final judgment in July 2007 affirming the agencies decisions on remand. An
appeal can be taken by any of the parties to that case until late September 2007. Other cases
challenging the constitutionality of CDSOA are pending before the CIT, most of which have been
assigned to a panel of three CIT judges and consolidated or stayed. We expect that the rulings of
the CIT, once finalized, will be appealed. The ultimate resolution of the pending litigation, its
timing and what, if any, effects the litigation will have on our receipt of future CDSOA
distributions is uncertain. In addition to the CIT ruling, there are a number of factors that can
affect whether we receive any CDSOA distributions and the amount of such distributions in any year.
These factors include, among other things, potential changes in the law, other ongoing or potential
legal challenges to the law, the administrative operation of the law and the status of the
underlying antidumping orders.
Impairment charges could have a material adverse effect on our financial results.
We recorded restructuring and impairment charges totaling approximately $3.5 million and $0.9
million in 2007 and 2005, respectively, including $1.4 million recorded in cost of sales for the
write-down of inventories in 2007. Likewise, future events may occur that would adversely affect
the reported value of our assets and require impairment charges. Such events may include, but are
not limited to, strategic decisions made in response to changes in economic and competitive
conditions, the impact of the economic environment on our customer base, or a material adverse
change in our relationship with significant customers.
We may not be able to successfully consummate proposed acquisitions or divestitures or integrate
acquired businesses.
From time to time, we evaluate acquiring other businesses that would strategically fit within
our various operations. If we are unable to consummate, successfully integrate and grow these
acquisitions and to realize contemplated revenue synergies and cost savings, our financial results
could be adversely affected. In addition, we may, from time to time, divest businesses that are
less of a strategic fit within our portfolio or do not meet our growth or profitability targets. As
a result, our profitability may be impacted by either gains or losses on the sales of those
businesses or lost operating income or cash flows from those businesses. We may also not be able to
divest businesses that are not core businesses or may not be able to do so on terms that are
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favorable to us. Further, a buyers inability to fulfill contractual obligations that were
assigned as part of a business divestiture, including those relating to customer contracts, could
lead to future financial loss on our part. In addition, we may be required to incur asset
impairment or restructuring charges related to acquired or divested businesses, which may reduce
our profitability and cash flows. These potential acquisitions or divestitures present financial,
managerial and operational challenges, including diversion of management attention from existing
businesses, difficulty with integrating or separating personnel and financial and other systems,
increased expenses, assumption of unknown liabilities, indemnities and potential disputes with the
buyers or sellers.
A future increase in our indebtedness could adversely affect our profitability and operational
flexibility.
For the first time in several years, we began incurring borrowings in 2007. We anticipate that
such indebtedness may persist in 2008, perhaps at higher average levels than in 2007. A consequence
of such indebtedness could be a reduction in the level of our profitability due to higher interest
expense. Depending on the future extent and availability of our borrowings, we could also become
more vulnerable to economic downturns, require curtailment of cash dividends or share repurchases,
reduce or delay beneficial expansion or investment plans, or otherwise be unable to meet our
obligations when due.
We are subject to federal, state and local government regulations that could adversely affect our
business and results of operations.
Certain of our business operations are subject to regulation by various federal, state and
local government entities and agencies. As a producer of food products for human consumption, our
operations are subject to stringent production, packaging, quality, labeling and distribution
standards, including regulations mandated by the Federal Food, Drug and Cosmetic Act. We cannot
predict if future regulation by various federal, state and local governmental entities and agencies
would adversely affect our business and results of operations.
In addition, our business operations and the past and present ownership and operation of our
properties are subject to extensive and changing federal, state and local environmental laws and
regulations pertaining to the discharge of materials into the environment, the handling and
disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of
the environment. We cannot assure that environmental issues relating to presently known matters or
identified sites or to other matters or sites will not require additional, currently unanticipated
investigation, assessment or expenditures.
We rely on the value of our brands, and the costs of maintaining and enhancing the awareness of
our brands are increasing, which could have an adverse impact on our revenues and profitability.
We rely on the success of our well-recognized brand names. We intend to maintain our strong
brand recognition by continuing to devote resources to advertising, marketing and other
brand-building efforts. If we are not successful in maintaining our brand recognition, this could
have a material adverse effect on our business and results of operations.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We use approximately 5.2 million square feet of space for our operations. Of this space,
approximately 1.3 million square feet are leased.
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The following table summarizes our locations that in total exceed 75,000 square feet of space
(including aggregation of multiple facilities) and which are considered our principal manufacturing
and warehousing operations:
Approximate | Terms of | |||||||
Location | Business Segment | Square Feet | Occupancy | |||||
Altoona, IA (3) |
Specialty Foods | 109,000 | Owned/Leased | |||||
Bedford Heights, OH (3) |
Specialty Foods | 91,000 | Owned/Leased | |||||
Columbus, OH (3) |
Specialty Foods | 392,000 | Owned/Leased | |||||
Grove City, OH |
Specialty Foods | 195,000 | Owned | |||||
Horse Cave, KY |
Specialty Foods | 225,000 | Owned | |||||
Luverne, AL |
Specialty Foods | 91,000 | Owned | |||||
Milpitas, CA (4) |
Specialty Foods | 130,000 | Owned/Leased | |||||
Wilson, NY |
Specialty Foods | 80,000 | Owned | |||||
Dunkirk, IN |
Glassware and Candles | 622,000 | Owned | |||||
Leesburg, OH (1) |
Glassware and Candles | 875,000 | Owned/Leased | |||||
Sapulpa, OK (3) |
Glassware and Candles | 680,000 | Owned/Leased | |||||
Jackson, OH |
Glassware and Candles | 122,000 | Owned | |||||
Des Moines, IA (2)(4) |
Automotive | 698,000 | Owned/Leased |
(1) | Part leased on a monthly basis | |
(2) | Part leased for term expiring in calendar year 2007 | |
(3) | Part leased for term expiring in calendar year 2009 | |
(4) | Part leased for term expiring in calendar year 2010 |
We have recently completed the construction of a new frozen yeast roll manufacturing facility
in Horse Cave, Kentucky. The facility contains approximately 108,000 square feet.
Item 3. Legal Proceedings
We currently are a party to various legal proceedings, including those noted below. Such
matters did not have a material adverse effect on the current-year results of operations. While we
believe that the ultimate outcome of these various proceedings, individually and in the aggregate,
will not have a material adverse effect on our financial position or future results of operations,
litigation is always subject to inherent uncertainties, and unfavorable rulings could occur. An
unfavorable ruling could include monetary damages or an injunction prohibiting us from manufacturing
or selling one or more products. Were an unfavorable ruling to occur, there exists the possibility
of a material adverse impact on net income for the period in which the ruling occurs and future
periods.
Real
Estate Matters
Due to issues arising from the alleged late payment of real estate taxes, the Polk County,
Iowa Treasurer filed an interpleader action in August 2006 requesting that the Polk County District
Court determine the proper ownership of certain real estate associated with the principal
manufacturing facility of our aluminum automotive accessory operations in Des Moines, Iowa. The
parties entered into a settlement agreement as of May 4, 2007, whereby we agreed to pay $100,836 in
back real estate taxes. We do not have any ongoing material obligations under the settlement
agreement, and a dismissal of the case has been filed.
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Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our common stock trades on The NASDAQ Global Select Market under the symbol LANC.
The following table sets forth the high and low prices for Lancaster Colony common shares and the
dividends paid for each quarter of 2007 and 2006. Stock prices were provided by The NASDAQ Stock
Market LLC.
Dividends | ||||||||||||
Stock Prices | Paid | |||||||||||
High | Low | Per Share | ||||||||||
2007 |
||||||||||||
First quarter |
$ | 46.00 | $ | 37.28 | $ | .26 | ||||||
Second quarter |
47.38 | 39.31 | .27 | |||||||||
Third quarter |
45.96 | 39.99 | .27 | |||||||||
Fourth quarter |
45.09 | 41.23 | .27 | |||||||||
Year |
$ | 1.07 | ||||||||||
2006 |
||||||||||||
First quarter |
$ | 46.24 | $ | 41.93 | $ | .25 | ||||||
Second quarter |
44.16 | 36.35 | 2.26 | (1) | ||||||||
Third quarter |
42.20 | 37.10 | .26 | |||||||||
Fourth quarter |
42.30 | 37.37 | .26 | |||||||||
Year |
$ | 3.03 | ||||||||||
(1) | Includes special cash dividend of $2.00 per common share. This dividend was approved by our Board of Directors (Board) on November 21, 2005 and was paid on December 30, 2005 to shareholders of record on December 9, 2005. |
The number of shareholders as of August 20, 2007 was approximately 7,300. The highest and
lowest prices for our common stock from July 2, 2007 to August 20, 2007 were $44.02 and
$37.05.
We have paid dividends for 176 consecutive quarters. Future dividends will depend on our
earnings, financial condition and other factors.
Issuer Purchases of Equity Securities
Our Board approved a share repurchase authorization of 2,000,000 shares in May 2006.
Approximately 1,345,000 shares from this authorization remained authorized for future purchase at
June 30, 2007. In August 2007, our Board approved an
additional share repurchase authorization of 2,000,000 shares. In the fourth quarter, we made the following repurchases of our common stock:
Total Number | ||||||||||||||||
Total | Average | of Shares | Maximum Number | |||||||||||||
Number | Price | Purchased as | of Shares That May | |||||||||||||
of Shares | Paid Per | Part of Publicly | Yet be Purchased | |||||||||||||
Period | Purchased | Share | Announced Plans | Under the Plans | ||||||||||||
April 1-30, 2007 |
15,013 | $ | 44.329 | 15,013 | 1,890,225 | |||||||||||
May 1-31, 2007 |
240,250 | $ | 43.394 | 240,250 | 1,649,975 | |||||||||||
June 1-30, 2007 |
305,238 | $ | 42.186 | 305,238 | 1,344,737 | |||||||||||
Total |
560,501 | $ | 42.761 | 560,501 | 1,344,737 | |||||||||||
These share repurchase authorizations do not have a stated expiration date.
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PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN
OF LANCASTER COLONY CORPORATION, THE S&P MIDCAP 400 INDEX
AND THE DOW JONES U.S. FOOD PRODUCERS INDEX
OF LANCASTER COLONY CORPORATION, THE S&P MIDCAP 400 INDEX
AND THE DOW JONES U.S. FOOD PRODUCERS INDEX
The graph set forth below compares the five-year cumulative total return from investing $100
on June 30, 2002 in each of our Common Stock, the S&P Midcap 400 Index and the Dow Jones U.S. Food
Producers Index. It is assumed that all dividends are reinvested.
![(PERFORMANCE)](https://www.sec.gov/Archives/edgar/data/0000057515/000095015207007154/l27738al2773801.gif)
Cumulative Total Return (Dollars)
6/02 | 6/03 | 6/04 | 6/05 | 6/06 | 6/07 | |||||||||||||||||||||||||||
Lancaster Colony Corporation |
100.00 | 110.68 | 121.69 | 128.40 | 127.27 | 138.49 | ||||||||||||||||||||||||||
S&P Midcap 400 |
100.00 | 99.29 | 127.07 | 144.90 | 163.71 | 194.01 | ||||||||||||||||||||||||||
Dow Jones U.S. Food Producers |
100.00 | 97.83 | 118.05 | 124.06 | 134.93 | 158.04 | ||||||||||||||||||||||||||
There can be no assurance that our stock performance will continue into the future with the
same or similar trends depicted in the preceding graph.
13
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Item 6. Selected Financial Data
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
Years Ended June 30 | ||||||||||||||||||||
(Thousands Except Per Share Figures) | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||
Operations |
||||||||||||||||||||
Net Sales(1) |
$ | 1,091,162 | $ | 1,073,585 | $ | 1,028,328 | $ | 977,740 | $ | 979,488 | ||||||||||
Gross Margin(1) |
$ | 193,560 | $ | 205,461 | $ | 204,591 | $ | 205,471 | $ | 225,681 | ||||||||||
Percent of Sales |
17.7 | % | 19.1 | % | 19.9 | % | 21.0 | % | 23.0 | % | ||||||||||
Interest Expense |
$ | (150 | ) | $ | | $ | | $ | | $ | | |||||||||
Percent of Sales |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||
Other Income Continued Dumping
and Subsidy Offset Act |
$ | 699 | $ | 11,376 | $ | 26,226 | $ | 1,987 | $ | 39,177 | ||||||||||
Income from Continuing Operations |
||||||||||||||||||||
Before Income Taxes(1) |
$ | 102,003 | $ | 130,674 | $ | 144,219 | $ | 122,380 | $ | 173,440 | ||||||||||
Percent of Sales |
9.3 | % | 12.2 | % | 14.0 | % | 12.5 | % | 17.7 | % | ||||||||||
Taxes Based on Income(1) |
$ | 37,322 | $ | 46,253 | $ | 53,445 | $ | 46,045 | $ | 64,867 | ||||||||||
Income from Continuing Operations(1) |
$ | 64,681 | $ | 84,421 | $ | 90,774 | $ | 76,335 | $ | 108,573 | ||||||||||
Percent of Sales |
5.9 | % | 7.9 | % | 8.8 | % | 7.8 | % | 11.1 | % | ||||||||||
(Loss) Income from Discontinued
Operations, Net of Tax |
$ | (3,877 | ) | $ | (1,467 | ) | $ | 2,314 | $ | 3,667 | $ | 3,973 | ||||||||
Loss on Sale of Discontinued Operations,
Net of Tax |
$ | (15,120 | ) | $ | | $ | | $ | | $ | | |||||||||
Net Income |
$ | 45,684 | $ | 82,954 | $ | 93,088 | $ | 80,002 | $ | 112,546 | ||||||||||
Percent of Sales |
4.2 | % | 7.7 | % | 9.1 | % | 8.2 | % | 11.5 | % | ||||||||||
Diluted Income (Loss) per Common Share: |
||||||||||||||||||||
Continuing Operations(1) |
$ | 2.05 | $ | 2.52 | $ | 2.60 | $ | 2.13 | $ | 3.00 | ||||||||||
Discontinued Operations |
$ | (.60 | ) | $ | (.04 | ) | $ | .07 | $ | .10 | $ | .11 | ||||||||
Net Income |
$ | 1.45 | $ | 2.48 | $ | 2.67 | $ | 2.24 | $ | 3.11 | ||||||||||
Cash Dividends per Common Share |
$ | 1.07 | $ | 3.03 | $ | 0.98 | $ | 0.89 | $ | 0.78 | ||||||||||
Financial Position |
||||||||||||||||||||
Cash, Equivalents and
Short-Term Investments |
$ | 8,318 | $ | 41,815 | $ | 184,580 | $ | 178,503 | $ | 142,847 | ||||||||||
Total Assets |
$ | 598,497 | $ | 628,021 | $ | 731,278 | $ | 712,885 | $ | 667,716 | ||||||||||
Working Capital |
$ | 137,121 | $ | 235,283 | $ | 370,559 | $ | 358,274 | $ | 329,462 | ||||||||||
Property, Plant and Equipment-Net(1) |
$ | 208,431 | $ | 178,351 | $ | 144,387 | $ | 146,890 | $ | 145,228 | ||||||||||
Long-Term Debt |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Property Additions(1) |
$ | 55,823 | $ | 60,068 | $ | 22,103 | $ | 16,546 | $ | 27,568 | ||||||||||
Depreciation and Amortization(1) |
$ | 28,766 | $ | 29,656 | $ | 30,118 | $ | 27,082 | $ | 26,844 | ||||||||||
Shareholders Equity |
$ | 444,309 | $ | 494,421 | $ | 587,726 | $ | 586,785 | $ | 547,665 | ||||||||||
Per Common Share |
$ | 14.45 | $ | 15.33 | $ | 17.17 | $ | 16.54 | $ | 15.31 | ||||||||||
Weighted Average Common Shares
OutstandingDiluted |
31,603 | 33,502 | 34,925 | 35,778 | 36,243 |
(1) | Amounts exclude the impact of certain discontinued automotive operations sold in the fiscal year ended June 30, 2007. |
14
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
This Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) describes the matters that we consider to be important in understanding the results of our
operations for the three years in the periods ended June 30, 2007, 2006 and 2005 and our liquidity
and capital resources as of June 30, 2007 and 2006. 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, 2007
refers to fiscal 2007, which is the period from July 1, 2006 to June 30, 2007. In the discussion
that follows, we analyze the results of our operations for the last three years, including the
trends in our overall business, followed by a discussion of our cash flows and liquidity and
contractual obligations. We then provide a review of the critical accounting policies and estimates
that we have made, which we believe are most important to an understanding of our MD&A and our
consolidated financial statements. We conclude our MD&A with information on recently issued
accounting pronouncements.
The following discussion should be read in conjunction with the Selected Financial Data and
our consolidated financial statements and the notes thereto, all included elsewhere in this report.
The forward-looking statements in this section and other parts of this report involve risks and
uncertainties 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 as a result of factors set forth under the caption
Forward-Looking Statements.
EXECUTIVE SUMMARY
Business Overview
We are primarily a manufacturer and marketer of specialty foods for the retail and foodservice
markets. We also manufacture and market candles for the food, drug and mass markets; glassware for
the retail, floral, and foodservice markets; and automotive accessories for the original equipment
market and aftermarket. Our operating businesses are organized in three reportable segments
Specialty Foods, Glassware and Candles, and Automotive. Over 90% of the sales of each segment are
made to customers in the United States.
We have seen our growth in recent years come from our Specialty Foods segment. In 2007,
approximately 67% of our consolidated net sales and effectively all of our operating income was
derived from the Specialty Foods segment. For perspective, in 1997, our Specialty Foods segment
comprised approximately 38% and 33% of our reported consolidated net sales and operating income,
respectively.
As we focus more on opportunities presented by our Specialty Foods segment, we continue to
review various alternatives with respect to our nonfood operations. In 2007, we sold substantially
all of the operating assets of our automotive accessory division based in Coshocton, Ohio and
LaGrange, Georgia, as well as our automotive accessory division based in Wapakoneta, Ohio. We also
initiated closure activities at our industrial glass operation located in Lancaster, Ohio. The
details of these transactions are discussed below. Similar actions may occur in the future, as we
continue to review our alternatives for the remaining nonfood operations with the assistance of
outside financial advisors. Should our continuing review result in additional divestitures,
closures or other forms of restructuring of any of our operations, we could incur significant
charges. We believe that a prudent conclusion to our review is achievable within fiscal 2008.
Our strategy for growth within our specialty foods operations involves expanding our market
presence within both retail and foodservice markets, developing and introducing new products, and
adding additional business through complementary acquisitions. Over time, we believe our evolving,
more food-focused strategy will best enhance our long-term shareholder value. Our goal is to
continue to grow our Specialty Foods retail and foodservice business by:
| leveraging the strength of our retail brands to increase current product sales and introduce new products; | ||
| continuing to grow our foodservice business through the strength of our reputation in product development and quality; and | ||
| pursuing acquisitions that meet our strategic criteria. |
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This strategy focuses our efforts on the most profitable part of our business and minimizes
the amount of financial and management resources devoted to sectors that have trended toward lower
growth potential and operating margins.
We view our food operations as having the potential to achieve future growth in sales and
profitability due to attributes such as:
| leading retail market positions in several branded products with a high-quality perception; | ||
| a broad customer base in both retail and foodservice accounts; | ||
| well-regarded culinary expertise among foodservice accounts; | ||
| recognized leadership in foodservice product development; | ||
| demonstrated experience in integrating complementary business acquisitions; and | ||
| historically strong cash flow generation that supports growth opportunities. |
Within retail markets, our Specialty Foods group utilizes numerous branded products to support
growth and maintain market competitiveness. We place great emphasis on our product innovation and
development efforts so as to enhance growth by providing distinctive new products meeting the
evolving needs and preferences of consumers.
Our foodservice sales primarily consist of products sold to restaurant chains. We have
experienced broad-based growth in our foodservice sales, as we build on our strong reputation for
product development and quality.
We expect that part of our growth in the Specialty Foods segment will result from
acquisitions. We continue to review potential acquisitions that we believe will provide good
complements to our existing product lines, enhance our gross margins or offer good expansion
opportunities in a manner that fits our overall goals. Consistent with our current acquisition
strategy, in June 2007, we acquired the principal assets of Marshall Biscuit Company, Inc.
(Marshall Biscuit), a privately owned producer and marketer of frozen yeast rolls and biscuits
based in Saraland, Alabama. The purchase price was approximately $22.9 million, and the transaction
is discussed in further detail in Note 3 to the consolidated financial statements. We believe this
acquisition will complement our Sister Schuberts product lines, enhance existing manufacturing
flexibility and provide us with future product development opportunities.
We have made substantial capital investments to support our existing food operations and
future growth opportunities. In 2007, we began production activities at a newly constructed
dressing facility located in Kentucky. Since 2006, we have invested over $45 million in this
facility. During 2007, we also commenced construction of an adjacent facility that will manufacture
frozen yeast rolls. This facility will require a slightly smaller total investment and began
operation in early 2008. Both projects will help accommodate potential future sales growth and also
provide greater manufacturing efficiencies than existing facilities. Each project has generally
progressed in accordance with our expectations; however, start-up costs have been incurred and will
likely persist into 2008. Based on our current plans and expectations, we believe that total
capital expenditures for 2008 will be approximately $30 million.
Summary of 2007 Results
The following is an overview of our consolidated operating results for the year ended June 30,
2007. The current- and prior-year results reflect the classification of the sold automotive
operations as discontinued operations.
Net sales for the year ended June 30, 2007 increased 2% to approximately $1,091 million from
the prior-year total of $1,074 million. This sales growth was driven by increased sales in the
Specialty Foods segment. Gross margin declined 6% to approximately $193.6 million from the
prior-year comparable total of $205.5 million. Our manufacturing costs have been influenced by
higher raw-material costs, especially for various key food commodities, paraffin wax, and aluminum;
but energy costs were lower as compared to the prior-year levels. We were able to offset only a
limited amount of the higher raw-material costs through price increases implemented in 2007. We are
striving to implement additional selected price increases to reduce the impact of these higher
costs. We are also working to mitigate the impact of these increased costs by other
16
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means, including changing various manufacturing processes, but these efforts may lag the
adverse effect of the higher costs.
Overall results were also affected by the funds received under the Continued Dumping and
Subsidy Offset Act of 2000 (CDSOA). In 2007, we received approximately $0.7 million under CDSOA,
as compared to $11.4 million in 2006 and $26.2 million in 2005. For a more-detailed discussion of
CDSOA, see the subcaption Other Income Continued Dumping and Subsidy Offset Act of this MD&A.
Income from continuing operations for the current year was approximately $64.7 million or
$2.05 per diluted share, compared to $84.4 million, or $2.52 per diluted share, in the prior year.
Net of after-tax loss from discontinued operations in 2007 of approximately $19.0 million, or $.60
per diluted share, net income totaled $45.7 million, or $1.45 per diluted share, compared to net
income of $83.0 million, or $2.48 per diluted share, in 2006, which was net of an after-tax loss
from discontinued operations of approximately $1.5 million, or $.04 per diluted share. The
current-year loss from discontinued operations included approximately $15.1 million, or $.48 per
diluted share, attributable to the after-tax loss on two automotive divestitures discussed below.
Net income in 2005 totaled approximately $93.1 million, or $2.67 per diluted share, and was
inclusive of after-tax income from discontinued operations of approximately $2.3 million, or $.07
per diluted share.
Business Divestitures/Closure
In June 2007, as part of our strategic alternative review of nonfood operations, we sold
substantially all of the operating assets of our automotive accessory operations located in
Coshocton, Ohio and LaGrange, Georgia. The cash transaction resulted in a pretax loss of
approximately $24.3 million in the fourth quarter of 2007. Similarly, in March 2007, we sold
substantially all of the operating assets of our automotive accessory operations located in
Wapakoneta, Ohio. The cash transaction resulted in a pretax gain of approximately $1.2 million in
the third quarter of 2007. The businesses included in both of these transactions were previously
included in our Automotive segment. See further discussion of these divestitures in Note 2 to the
consolidated financial statements. We have reflected the results of these divested businesses in
the Discontinued Operations, Net of Tax section of the consolidated statements of income for all
periods presented.
In March 2007, we announced that we were closing our industrial glass operation located in
Lancaster, Ohio. Production at the manufacturing facility was largely phased out by May 31, 2007.
We anticipate that active business operations at this facility will cease, in all material
respects, by the end of the 2007 calendar year upon the expected completion of certain sales and
distribution activities. The decision to close this operation resulted from continuing declines in
volume and profitability. We expect to incur total pretax charges in the range of $5 to $7 million
for this closure. The charges will include costs such as one-time termination benefits and other
employee benefits costs, including those related to the union defined benefit pension plan, charges
for asset write-offs, costs associated with disposal-related activities and accelerated
depreciation of certain property, plant and equipment. In 2007, we recorded pretax closing charges
of approximately $3.5 million, including $1.4 million recorded in cost of sales for the write-down
of inventories. The remaining charges are expected to be incurred during 2008. See further
discussion in Note 17 to the consolidated financial statements.
Looking Forward
Based on current conditions, we expect to attain growth in consolidated sales during 2008,
primarily by introducing new products and expanding market presence, implementing price increases
among various product lines and taking advantage of the opportunities provided by the acquisition
of Marshall Biscuit. We will continue to review acquisition opportunities within the Specialty
Foods segment that are consistent with our growth strategy and represent good value. Operating
margins of our continuing operations will be challenged by higher overall levels of ingredient,
commodity and raw-material costs. In particular, we expect to experience increased ingredient and
commodity costs in our Specialty Foods segment, where the general growth in ethanol production has
indirectly led to many of our key ingredients and commodities approaching historically high levels.
We may also experience additional costs in connection with our start-up of a new frozen yeast roll
manufacturing facility.
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In order to ensure that our capitalization is adequate to support our future internal growth
prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns
to our shareholders through cash dividends and share repurchases, we will need to maintain
sufficient flexibility in our future capital structure. We believe that we will utilize somewhat
higher levels of leverage in 2008 than in recent years. This would likely result in higher levels
of interest expense than we have incurred in each of the last three years. We will continue to
reassess our allocation of capital periodically, as well as the timing, nature and extent of our
share repurchase activities, to ensure that we maintain adequate operating flexibility while
providing appropriate levels of cash returns to shareholders.
REVIEW OF CONSOLIDATED OPERATIONS
Segment Sales Mix
The relative proportion of sales contributed by each of our business segments can impact a
year-to-year comparison of the consolidated statements of income. The following table summarizes
the sales mix over each of the last three years:
2007 | 2006 | 2005 | ||||||||||
Segment Sales Mix: (1) |
||||||||||||
Specialty Foods |
67 | % | 66 | % | 66 | % | ||||||
Glassware and Candles |
20 | % | 20 | % | 23 | % | ||||||
Automotive |
13 | % | 14 | % | 12 | % |
(1) | Expressed as a percentage of consolidated net sales; may not add to 100% due to rounding. |
Net Sales and Gross Margin | Year Ended | |||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | |||||||||||||||||||||||
Net Sales |
||||||||||||||||||||||||||||
Specialty Foods |
$ | 728,657 | $ | 708,029 | $ | 673,840 | $ | 20,628 | 3 | % | $ | 34,189 | 5 | % | ||||||||||||||
Glassware and Candles |
217,153 | 216,542 | 233,505 | 611 | 0 | % | (16,963 | ) | (7 | )% | ||||||||||||||||||
Automotive |
145,352 | 149,014 | 120,983 | (3,662 | ) | (2 | )% | 28,031 | 23 | % | ||||||||||||||||||
Total |
$ | 1,091,162 | $ | 1,073,585 | $ | 1,028,328 | $ | 17,577 | 2 | % | $ | 45,257 | 4 | % | ||||||||||||||
Gross Margin |
$ | 193,560 | $ | 205,461 | $ | 204,591 | $ | (11,901 | ) | (6 | )% | $ | 870 | 0 | % | |||||||||||||
Gross Margin as a
Percent of Sales |
17.7 | % | 19.1 | % | 19.9 | % |
Consolidated net sales reached approximately $1,091 million during 2007, increasing 2% as
compared to prior-year sales of $1,074 million, driven by growth coming from the Specialty Foods
segment. This segments growth reflected higher volumes of foodservice products.
Our nonfood segments faced generally lackluster market conditions for many of their products. The
4% consolidated sales growth achieved in 2006 relative to 2005 reflected growth coming from the
Specialty Foods and Automotive segments. In the Specialty Foods segment, the 2006 increase in sales
reflected internal growth, particularly in refrigerated dressings and frozen breads and rolls. In
the Automotive segment, growth benefited from increased sales of aluminum tube steps. Competitive
market conditions contributed to lower sales in the Glassware and Candles segment.
Our gross margin as a percentage of net sales was approximately 17.7% in 2007 compared with
19.1% in 2006 and 19.9% in 2005. In the current year, we experienced higher raw-material costs,
especially for various key food commodities, paraffin wax, and aluminum; but energy costs were
lower as compared to the prior-year levels. Other factors influencing this fluctuation included
start-up costs associated with a new food manufacturing facility as well as approximately $1.4
million of inventory write-downs associated with the closure of our industrial glass operation.
Significant influences affecting the decline in margins between 2006 and 2005 were the presence of
higher levels of freight, energy and nonfood raw-material costs.
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Selling, General and Administrative Expenses
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | |||||||||||||||||||||||
Selling, General and
Administrative Expenses |
$ | 90,979 | $ | 90,053 | $ | 89,484 | $ | 926 | 1 | % | $ | 569 | 1 | % | ||||||||||||||
SG&A Expense as a
Percent of Sales |
8.3 | % | 8.4 | % | 8.7 | % |
Selling, general and administrative expenses for 2007 totaled approximately $91.0 million
and increased 1%, as compared with the 2006 total of $90.1 million, while the 2006 total had
increased 1% from the 2005 total of $89.5 million. Included in these totals were recoveries of bad
debt associated with the 2002 bankruptcy filing of Kmart Corporation totaling approximately $1.0
million, $1.2 million and $1.5 million for 2007, 2006 and 2005, respectively. We wrote off
approximately $14.3 million related to this bankruptcy in 2002. Selling, general and administrative
expenses were relatively stable as a percentage of sales for the years ended June 30, 2007, 2006
and 2005.
Restructuring and Impairment Charge
In 2007, we recorded a restructuring and impairment charge of approximately $3.5 million ($2.3
million after taxes) including $1.4 million recorded in cost of sales for the write-down of
inventories. This charge is related to the planned closing of our industrial glass operations
located in Lancaster, Ohio. The charge consists of asset write-offs, accelerated depreciation of
certain property, plant and equipment, a pension curtailment charge, one-time termination benefits
and other costs. Production at the manufacturing facility was largely phased out by May 31, 2007.
We anticipate that active business operations will effectively cease by the end of the calendar
year upon the expected completion of certain sales and distribution activities. The decision to
close this operation resulted from continuing declines in volume and profitability.
The total estimated costs associated with this plant closure are expected to be between $5 and
$7 million and include the above-noted costs and other costs associated with disposal-related
activities. Total remaining cash expenditures are estimated to be approximately $3 million and are
expected to occur over the balance of calendar 2007.
An analysis of this restructuring activity and the related liability recorded within the
Glassware and Candles segment at June 30, 2007 follows:
Accrual at | 2007 | Accrual at | ||||||||||||||
June 30, | 2007 | Cash | June 30, | |||||||||||||
2006 | Charge | Outlays | 2007 | |||||||||||||
Restructuring and Impairment Charge |
||||||||||||||||
Employee Separation Costs |
$ | | $ | 467 | $ | (201 | ) | $ | 266 | |||||||
Other Costs |
| 275 | (56 | ) | 219 | |||||||||||
Subtotal |
$ | | 742 | $ | (257 | ) | $ | 485 | ||||||||
Pension Curtailment Charges |
287 | |||||||||||||||
Accelerated Depreciation |
1,130 | |||||||||||||||
Inventory Write-Down |
1,400 | |||||||||||||||
Total Restructuring and Impairment Charge |
$ | 3,559 | ||||||||||||||
The restructuring accrual is located in accrued liabilities at June 30, 2007.
In 2005, we recorded a noncash impairment charge of approximately $0.9 million ($0.6 million
after taxes) related to certain glassware-manufacturing equipment. This impairment occurred due to
inefficient production and a slowdown in demand for certain products associated with this
equipment.
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Operating Income
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | |||||||||||||||||||||||
Operating Income |
||||||||||||||||||||||||||||
Specialty Foods |
$ | 101,518 | $ | 113,796 | $ | 111,392 | $ | (12,278 | ) | (11 | )% | $ | 2,404 | 2 | % | |||||||||||||
Glassware and Candles |
5,712 | 3,614 | 7,247 | 2,098 | 58 | % | (3,633 | ) | (50 | )% | ||||||||||||||||||
Automotive |
545 | 4,926 | 2,341 | (4,381 | ) | (89 | )% | 2,585 | 110 | % | ||||||||||||||||||
Corporate Expenses |
(7,320 | ) | (6,928 | ) | (6,808 | ) | (392 | ) | 6 | % | (120 | ) | 2 | % | ||||||||||||||
Total |
$ | 100,455 | $ | 115,408 | $ | 114,172 | $ | (14,953 | ) | (13 | )% | $ | 1,236 | 1 | % | |||||||||||||
Operating Income as
a Percent of Sales |
||||||||||||||||||||||||||||
Specialty Foods |
13.9 | % | 16.1 | % | 16.5 | % | ||||||||||||||||||||||
Glassware and Candles |
2.6 | % | 1.7 | % | 3.1 | % | ||||||||||||||||||||||
Automotive |
0.4 | % | 3.3 | % | 1.9 | % | ||||||||||||||||||||||
Consolidated |
9.2 | % | 10.7 | % | 11.1 | % |
Due to the factors discussed above, consolidated operating income for 2007 totaled
approximately $100.5 million, a 13% decrease from 2006 operating income of $115.4 million. The 2006
total had increased 1% from 2005 operating income totaling $114.2 million. See further discussion
of operating results by segment following the discussion of Net Income below.
Interest Expense
Unlike 2006 and 2005, we had short-term borrowings during 2007, which resulted in interest
expense of less than $0.2 million.
Other Income Continued Dumping and Subsidy Offset Act
We received a distribution of approximately $0.7 million from the U.S. government under CDSOA
in the second quarter of 2007, as compared to distributions of approximately $11.4 million and
$26.2 million in the corresponding periods of 2006 and 2005, respectively. CDSOA, which applies to
our candle operations, is intended to redress unfair dumping of imported products through cash
payments to eligible affected companies. Such payments are in part dependent upon the amount of
antidumping duties collected by the U.S. government on those products. The World Trade Organization
has previously ruled that such payments are inconsistent with international trade rules. In
February 2006, legislation was enacted to repeal the applicability of CDSOA to duties collected on
imported products entered into the United States after September 2007. In July 2006, the U.S. Court
of International Trade (CIT) ruled unconstitutional, on First Amendment grounds, CDSOAs
requirement that a company that is not a petitioner must have indicated its support for an
antidumping petition in order to be eligible for a distribution. In July 2007, the CIT found the
statute was severable to make all domestic producers eligible for benefits and remanded to the
agencies for a determination of moneys owed to the plaintiff. The remand is ongoing as of
mid-August 2007. In September 2006, the CIT, in a separate case, ruled the requirement
unconstitutional on equal protection grounds; following a remand, the CIT issued a final judgment
in July 2007 affirming the agencies decisions on remand. An appeal can be taken by any of the
parties to that case until late September 2007. Other cases challenging the constitutionality of
CDSOA are pending before the CIT, most of which have been assigned to a panel of three CIT judges
and consolidated or stayed. We expect that the rulings of the CIT, once finalized, will be
appealed. The ultimate resolution of the pending litigation, its timing and what, if any, effects
the litigation will have on our receipt of future CDSOA distributions is uncertain. In addition to
the CIT ruling, there are a number of factors that can affect whether we receive any CDSOA
distributions and the amount of such distributions in any year. These factors include, among other
things, potential changes in the law, other ongoing or potential legal challenges to the law, the
administrative operation of the law and the status of the underlying antidumping orders.
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Interest Income and Other Net
Interest income and other for 2007 totaled approximately $1.0 million as compared to $3.9
million in 2006 and $3.8 million in 2005. The current-year decrease was primarily due to lower
interest income, despite higher interest rates, as our aggregate level of cash, cash equivalents,
and short-term investments decreased significantly as compared to the prior year due to the extent
of current- and prior-year share repurchases, dividend payments and capital expenditures.
Income from Continuing Operations Before Income Taxes
As affected by the factors discussed above, including the approximately $10.7 million
reduction in CDSOA receipts, our income from continuing operations before income taxes for 2007 of
approximately $102.0 million decreased 22% from the 2006 total of $130.7 million. The 2005 total
income from continuing operations before income taxes was approximately $144.2 million. Our
effective tax rate on income from continuing operations was 36.6%, 35.4% and 37.1% in 2007, 2006
and 2005, respectively. The 2007 rate was influenced by lower levels of tax-free income than the
prior two years. The 2006 rate benefited from changes in state tax laws within Ohio, an increased
deduction for dividends paid to the ESOP Plan due to the $2.00 per share special dividend paid in
December 2005, and the new federal deduction created by the American Jobs Creation Act related to
domestic manufacturing activities.
Income from Continuing Operations
Income from continuing operations totaled approximately $64.7 million, $84.4 million and $90.8
million for 2007, 2006 and 2005, respectively, as influenced by the level of CDSOA receipts. Income
from continuing operations per share totaled approximately $2.05 per basic and diluted share in
2007, as compared to $2.52 per basic and diluted share in 2006 and $2.60 per basic and diluted
share in 2005. Income per share in each of the last three years has been beneficially affected by
share repurchases, which have totaled approximately $206.9 million over the three-year period ended
June 30, 2007.
Discontinued Operations
In 2007, we recorded a loss from discontinued operations of approximately $19.0 million, net
of tax, including a net after-tax loss of approximately $15.1 million on the sales of our
automotive accessory operations located in Wapakoneta, Ohio; Coshocton, Ohio; and LaGrange,
Georgia. Loss from discontinued operations per share totaled approximately $.60 per basic and
diluted share in 2007. In 2006, we recorded a loss from discontinued operations, net of tax, of
approximately $1.5 million, or $.04 per basic and diluted share. In 2005, income from discontinued
operations totaled approximately $2.3 million, or $.07 per basic and diluted share.
Net Income
Net income for 2007 of approximately $45.7 million decreased from 2006 net income of
approximately $83.0 million. Net income was approximately $93.1 million in 2005. Diluted net income
per share totaled approximately $1.45, a 42% decrease from the prior-year total of $2.48. The
latter amount was 7% lower than 2005 diluted earnings per share of $2.67.
SEGMENT REVIEW SPECIALTY FOODS
Net sales of the Specialty Foods segment during 2007 surpassed the record level achieved in
2006, although operating income of approximately $101.5 million decreased 11% from the 2006 level
of $113.8 million. The benefits from the higher sales volumes were offset primarily by higher
ingredient costs. Net sales during 2007 totaled approximately $728.7 million, a 3% increase over
the prior-year total of $708.0 million. Sales for 2006 increased 5% over the 2005 total of
approximately $673.8 million. The percentage of retail customer sales was approximately 52% during
2007 compared to 53% in 2006 and 51% in 2005.
The increased sales of the Specialty Foods segment during 2007 primarily reflected higher
foodservice volumes. Retail-channel increases occurred primarily within certain frozen product
lines, particularly yeast rolls. The demand for retail salad dressings and related products was
constrained in 2007 by consumer demand for bagged salads and lettuce being adversely affected by
lingering consumer concerns over food
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safety issues and pathogen contamination occurring in the first half of the fiscal year. It is
uncertain whether or not consumer demand for bagged salad and lettuce will return to normal levels
during 2008. Net pricing relief gained in 2007 to help offset higher material costs was not
significant. Sales recorded from the Marshall Biscuit operations acquired in June 2007 were
immaterial. The foodservice increases in 2007 occurred broadly across many product lines and
customers. The sales increase experienced in 2006 was volume-driven, although we did implement a
limited level of price increases on retail product primarily benefiting the second half of the
fiscal year. Among retail products, the growth was primarily in refrigerated produce dressings
(with new packaging and flavors introduced in 2005), produce dips, and frozen breads and rolls. The
level of foodservice sales in 2006 benefited from the growth in several frozen products.
Operating income of the Specialty Foods segment in 2007 totaled approximately $101.5 million,
an 11% decrease from the 2006 total of $113.8 million. The 2006 level was 2% above the 2005 level
of $111.4 million. Despite the higher sales volumes achieved in 2007, operating income was
adversely affected by higher ingredient costs, such as for soybean oil, dairy-derived products,
eggs and flour, and costs associated with plant start-up and customer rollouts at the new salad
dressing manufacturing facility located in Kentucky. We also experienced competitive market
conditions for certain garlic bread items. In 2006, the benefits from the higher sales volumes, a
more favorable sales mix and relatively stable ingredient costs were somewhat offset by higher
freight and energy costs than in 2005. Entering 2008, the substantially higher levels of commodity
costs we face are likely to adversely affect results for at least the first half of the fiscal
year. We have implemented various retail price increases during the first quarter of 2008 with the
expectation that this action should help mitigate the higher costs we are experiencing. Results
during 2008 may also be impacted by start-up costs associated with the segments new frozen yeast
roll facility in Kentucky.
SEGMENT REVIEW GLASSWARE AND CANDLES
Net sales of the Glassware and Candles segment are comprised primarily of candles and related
accessories. Segment sales during 2007 totaled approximately $217.2 million and increased less than
1% compared to 2006 net sales of $216.5 million. This increase was attributable to stronger candle
volumes among various accounts. Sales of glassware declined slightly, as influenced by lower sales
of industrial glassware. Compared to net sales in 2005 totaling approximately $233.5 million, 2006
sales decreased by 7%. This decrease was largely attributable to lower candle sales resulting from
generally soft market demand and competitive market conditions. Overall sales of glassware also
declined.
The segments operating income totaled approximately $5.7 million during 2007, increasing from
the prior-year total of $3.6 million. Operating income for 2005 totaled approximately $7.2 million.
The 2007 results reflected improved operating performance, the benefits of new product
introductions and modest gains from price increases. The 2007 results also reflected a
restructuring charge of approximately $3.5 million, including $1.4 million recorded in cost of
sales for the write-down of inventories, related to the previously announced closing of our
industrial glass manufacturing facility located in Lancaster, Ohio. In addition, over the last
three years, a trend of progressively higher paraffin-wax costs has negatively impacted margins.
Operating results in 2006 were adversely affected by over $3 million in unabsorbed pretax costs
relating to an extended idling of our Oklahoma glassware facility and higher natural gas costs in
the first half of 2006. These negatives were offset somewhat by benefits from better production
efficiencies at our Oklahoma facility prior to the idling. The 2005 operating income included a
noncash impairment charge of approximately $0.9 million relating to the impairment of certain
glassware-manufacturing equipment. Also affecting fluctuations between years was income associated
with the liquidations of LIFO glassware inventory acquired at substantially lower costs in prior
years. Such liquidations reduced cost of sales by an insignificant amount in 2006 and approximately
$1.3 million in 2005.
Future results within this segment will be sensitive to capacity utilization rates due to the
high level of fixed manufacturing costs that exist in this segment. Future results within this
segment may also be affected by the consequences of our ongoing review of strategic alternatives,
including possible divestitures, with respect to our nonfood operations.
SEGMENT REVIEW AUTOMOTIVE
Net sales of the Automotive segment during 2007 totaled approximately $145.4 million, a 2%
decrease from the prior-year sales level of $149.0 million. Sales in 2006 increased 23% from the
sales level of approximately $121.0 million achieved in 2005. Current-year results reflect reduced
sales of aluminum light
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truck accessories due to general sluggishness in the sales of light trucks and the loss of an
export program involving tube steps. Improved sales of aluminum accessories drove the growth in
this segment during 2006. A large, new original equipment manufacturer (OEM) program involving
aluminum tube steps began in the first quarter of 2006 and continued to ramp up through the
remainder of the year. This program continued during 2007.
This segments sales to OEMs are made both directly to the OEMs and, to a lesser extent,
indirectly through third-party Tier 1 suppliers. Such sales are sensitive to the overall rate of
new vehicle sales (especially of light trucks, vans and sport utility vehicles), the availability
of competitive alternatives and the Tier 1 suppliers ongoing ability to maintain their
relationships with the OEMs. Additionally, the extent of pricing flexibility associated with these
sales continues to be particularly limited with certain products subject to annual price
reductions. During 2007, direct and indirect sales to OEMs comprised approximately 79% of this
segments sales compared to approximately 78% and 63% in 2006 and 2005, respectively.
Operating income of the Automotive segment totaled approximately $0.5 million for 2007,
substantially lower than the prior-year total of $4.9 million. Operating income totaled
approximately $2.3 million in 2005. Current-year results were impacted by the lower sales volume
and extent of continuing higher raw-material costs, particularly for aluminum. Compared to 2005,
the segments 2006 results benefited from the higher sales volume as partially offset by start-up
costs associated with the new OEM program involving aluminum tube steps and higher aluminum
raw-material costs. Our 2006 results were also inclusive of a $0.8 million gain that resulted from
the sale of idle real estate.
Future results within this segment and its overall effect on the company may also be affected
by the consequences of our ongoing review of strategic alternatives, including possible
divestitures, with respect to our nonfood operations.
LIQUIDITY AND CAPITAL RESOURCES
In order to ensure that our capitalization is adequate to support our future internal growth
prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns
to our shareholders through cash dividends and share repurchases, we will need to maintain
sufficient flexibility in our future capital structure. Our balance sheet retained fundamental
financial strength during 2007, and we ended the year with net debt (defined as debt less cash,
cash equivalents and short-term investments) at June 30, 2007 of less than $35 million and
shareholders equity in excess of $444 million. Entering 2008, we anticipate a somewhat higher
level of average debt may be experienced than in recent years.
We maintain an unsecured revolving credit facility with several commercial banks totaling $100
million. Terms of the related agreement allow for borrowings to occur at or below the U.S. prime
rate of interest. We expect to enter into negotiation on terms for a new and possibly larger bank
credit agreement during 2008 as the existing facility expires in February 2008. There is no
assurance that the terms of such an agreement may be as favorable as those we currently have. At
June 30, 2007, we had short-term borrowings of $42.5 million outstanding under the existing credit
facility. We did not have any borrowings outstanding as of June 30, 2006 or 2005. We believe that
internally generated funds, the existing credit facility and an ability to obtain additional
financing, combined with the current cash and cash equivalents on hand, will be sufficient to meet
operating requirements and fund future foreseeable capital needs.
Cash Flows from Continuing Operations
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | |||||||||||||||||||||||
Provided by Operating Activities |
$ | 89,133 | $ | 98,996 | $ | 107,008 | $ | (9,863 | ) | (10 | )% | $ | (8,012 | ) | (7 | )% | ||||||||||||
Used in Investing Activities |
(33,121 | ) | (23,261 | ) | (33,641 | ) | (9,860 | ) | (42 | )% | 10,380 | 31 | % | |||||||||||||||
Used in Financing Activities |
(58,871 | ) | (178,849 | ) | (82,467 | ) | 119,978 | 67 | % | (96,382 | ) | (117 | )% |
Our cash flows for the years 2005 through 2007 are presented in the Consolidated
Statements of Cash Flows. The current- and prior-year balance sheet and cash flows reflect the
classification of the sold automotive operations as discontinued operations. Cash flow generated
from operations remains the primary source of financing for our internal growth. Cash provided by
operating activities from continuing operations
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in 2007 totaled approximately $89.1 million, a decrease of 10% as compared with the prior-year
total of $99.0 million, which decreased from the 2005 total of $107.0 million. The 2007 decrease
results primarily from our reduced level of income from continuing operations partially offset by
comparatively favorable relative changes in working capital components, especially accounts
receivable and accounts payable. The 2006 decrease resulted mainly from the decline in income from
continuing operations, increased pension payments and relative changes in working capital.
Net cash used in investing activities totaled approximately $33.1 million, $23.3 million and
$33.6 million for 2007, 2006 and 2005, respectively. The current-year increase in cash used for
investing activities reflects $23.0 million paid for the acquisition of Marshall Biscuit in June
2007, which was partially offset by approximately $12.1 million in proceeds from the sale of
discontinued businesses and a slight reduction in capital expenditures. Capital expenditures
totaled approximately $55.8 million in 2007, compared to $60.1 million in 2006 and $22.1 million in
2005. Capital expenditures were higher in 2007 and 2006 as compared to historical levels due to the
construction of a new salad dressing facility during these years as well as a new frozen yeast roll
facility in 2007. Production at the new frozen yeast roll facility began in early 2008. Capital
spending allocations during 2007 by segment approximated 93% for Specialty Foods, 3% for Glassware
and Candles and 4% for Automotive. Based on our current plans and expectations, we believe that
total capital expenditures for 2008 will be approximately $30 million.
Financing activities used net cash totaling approximately $58.9 million, $178.8 million and
$82.5 million in 2007, 2006 and 2005, respectively. The decrease in 2007 is primarily due to
decreased dividend payments, proceeds from short-term borrowings and lower share repurchases offset
somewhat by the comparative change in cash overdraft balances. Prior-year dividend payments
included a special cash dividend of $2.00 per common share in the second quarter. The total payment
for cash dividends for the year ended June 30, 2007 was approximately $33.7 million. The dividend
payout rate for 2007 was $1.07 per share as compared to $1.03 per share during 2006, excluding the
special dividend, and $.98 per share in 2005. This past fiscal year marked the 44th consecutive
year in which our dividend rate was increased. Cash utilized for share repurchases totaled
approximately $65.9 million, $84.3 million and $56.7 million in 2007, 2006 and 2005, respectively.
Our Board approved a share repurchase authorization of 2,000,000 shares in May 2006. Approximately
1,345,000 shares from this authorization remained authorized for future purchase at June 30, 2007.
In August 2007, our Board approved an additional share
repurchase authorization of 2,000,000
shares.
On February 13, 2006, pursuant to our previously announced share repurchase program, we
purchased 100,000 shares of common stock from the Estate of Dorothy B. Fox (the Estate) at a
price per share of $41.55, which was equal to the average closing price of our common stock over
the eight trading days beginning February 1, 2006. Robert L. Fox, one of our Directors, serves as
Executor of the Estate.
On March 9, 2005, pursuant to our previously announced share repurchase program, we had also
purchased 230,000 shares of common stock from the Estate at a price per share of $42.634, which was
equal to the average closing price of our common stock over the ten trading days beginning February
23, 2005, as adjusted to reflect the effects of our previously declared dividend.
The future levels of share repurchases and declared dividends are subject to the periodic
review of our Board and are generally determined after an assessment is made of such factors as
anticipated earnings levels, cash flow requirements and general business conditions.
Our ongoing business activities continue to be subject to compliance with various laws, rules
and regulations as may be issued and enforced by various Federal, state and local agencies. With
respect to environmental matters, costs are incurred pertaining to regulatory compliance and, upon
occasion, remediation. Such costs have not been, and are not anticipated to become, material.
We are contingently liable with respect to lawsuits, taxes and various other matters that
routinely arise in the normal course of business. Except as discussed above, we do not have any
related party transactions that materially affect our results of operations, cash flow or financial
condition.
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OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMITMENTS
We do not have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as Variable Interest Entities, that have or
are reasonably likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity or capital
expenditures.
We have various contractual obligations, which are appropriately recorded as liabilities in
our consolidated financial statements. Certain other items, such as purchase obligations, are not
recognized as liabilities in our consolidated financial statements. Examples of items not
recognized as liabilities in our consolidated financial statements are commitments to purchase raw
materials or inventory that has not yet been received as of June 30, 2007 and future minimum lease
payments for the use of property and equipment under operating lease agreements.
The following table summarizes our contractual obligations as of June 30, 2007 (in thousands):
Payment Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Contractual Obligations | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Operating Lease Obligations (1) |
$ | 18,137 | $ | 5,598 | $ | 9,019 | $ | 2,824 | $ | 696 | ||||||||||
Purchase Obligations (2) |
68,407 | 63,876 | 3,257 | 1,241 | 33 | |||||||||||||||
Minimum Required Pension Contributions |
48 | 38 | 10 | | | |||||||||||||||
Other Long-Term Liabilities (as reflected
on Consolidated Balance Sheet) (3) |
1,465 | 60 | 1,284 | 121 | | |||||||||||||||
Total |
$ | 88,057 | $ | 69,572 | $ | 13,570 | $ | 4,186 | $ | 729 | ||||||||||
(1) | Operating leases are primarily entered into for warehouse and office facilities and certain equipment. See Note 15 to the consolidated financial statements for further information. | |
(2) | Purchase obligations represent purchase orders and longer-term purchase arrangements related to the procurement of ingredients, supplies, raw materials, and property, plant and equipment. | |
(3) | This amount does not include approximately $8.8 million of other noncurrent liabilities recorded on the balance sheet, which consist of the underfunded pension liability, other post employment benefit obligations, and deferred compensation and interest on deferred compensation. These items are excluded, as it is not certain when these liabilities will become due. See Notes 12, 13 and 14 to the consolidated financial statements for further information. |
IMPACT OF INFLATION
Our manufacturing costs during 2007 were influenced by higher raw-material costs, especially
for various key food commodities, paraffin wax and aluminum; but energy costs were lower as
compared to the prior-year levels. Other than for food commodities, our raw-material costs during
2006 were generally above 2005 levels. Among raw materials most affected by the 2006 increase were
certain metals, petroleum-derived materials and natural gas. Material cost increases especially
affected the 2006 results of the Automotive segment. We are seeing a trend toward markedly higher
food commodity costs, such as soybean oil, dairy-derived products, eggs and flour, and we expect
these costs will be above 2007 levels in 2008.
We generally attempt to adjust our selling prices to offset the effects of increased
raw-material costs; but these adjustments are often difficult to implement. If implemented, such
adjustments tend to lag the increase in costs incurred. We also attempt to minimize the exposure to
increased costs through our ongoing efforts to achieve greater manufacturing and distribution
efficiencies through the improvement of work processes. Historically, our diversity of operations
also has helped minimize our exposure to some raw-material costs. As we focus more on our food
operations, however, our results of operations may become more sensitive to increased prices in
food commodities.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
MD&A discusses our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these
consolidated financial statements requires that we make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments,
including, but not limited to, those related to accounts receivable, inventories, marketing and
distribution costs, asset impairments and self-insurance reserves. We base our estimates and
judgments on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. Historically,
the aggregate differences, if any, between our estimates and actual amounts in any year have not
had a significant impact on our consolidated financial statements. While a summary of our
significant accounting policies can be found in Note 1 to the consolidated financial statements,
which is included in Part II, Item 8 of this Form 10-K, we believe the following critical
accounting policies, among others, affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue Recognition
We recognize net sales and related cost of sales at the time of shipment of the products, or
at the time when all substantial risks of ownership change, if later. Net sales are recorded net of
estimated sales discounts, returns and certain sales incentives, including coupons and rebates.
Receivables and the Allowance for Doubtful Accounts
We provide an allowance for doubtful accounts based on the aging of accounts receivable
balances and historical write-off experience and on-going reviews of our trade receivables.
Measurement of potential losses requires credit review of existing customer relationships,
consideration of historical loss experience, including the need to adjust for current conditions,
and judgments about the probable effects of relevant observable data, including present economic
conditions such as delinquency rates and the economic health of customers. In addition to credit
concerns, we also evaluate the adequacy of our allowances for customer deductions considering
several factors including historical losses and existing customer relationships.
Valuation of Inventory
When necessary, we provide allowances to adjust the carrying value of our inventory to the
lower of cost or net realizable value, including any costs to sell or dispose. The determination of
whether inventory items are slow moving, obsolete or in excess of needs requires estimates about
the future demand for our products. The estimates as to future demand used in the valuation of
inventory are subject to the ongoing success of our products. A decrease in product demand due to
changing customer tastes, consumer buying patterns or loss of shelf space to competitors could
significantly impact our evaluation of our excess and obsolete inventories. Such estimates may
differ from actual due to such factors as changes in customer demand and production schedules.
Long-Lived Assets
We monitor the recoverability of the carrying value of our long-lived assets by periodically
considering whether or not indicators of impairment are present. If such indicators are present, we
determine if the assets are recoverable by comparing the sum of the undiscounted future cash flows
to the assets carrying amount. Our cash flows are based on historical results adjusted to reflect
our best estimate of future market and operating conditions. If the carrying amounts are greater,
then the assets are not recoverable. In that instance, we compare the carrying amounts to the fair
value to determine the amount of the impairment to be recorded.
Goodwill and Intangible Assets
Goodwill is not amortized. It is evaluated annually, at April 30, through asset impairment
assessments as appropriate. Intangible assets with lives restricted by contractual, legal, or other
means are amortized over their useful lives. We periodically evaluate the future economic benefit of the recorded
goodwill and
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intangible assets when events or circumstances indicate potential recoverability
concerns. This evaluation is based on consideration of expected future undiscounted cash flows and
other operating factors. Carrying amounts are adjusted appropriately when determined to have been
impaired.
Accrued Marketing and Distribution
Various marketing programs are offered to customers to reimburse them for a portion or all of
their promotional activities related to our products. Additionally, we often incur various costs
associated with shipping products to the customer. We provide accruals for the costs of marketing
and distribution based on historical information as may be modified by estimates of actual costs
incurred. Actual costs may differ significantly if factors such as the level and success of the
customers programs, changes in customer utilization practices, or other conditions differ from
expectations.
Accruals for Self-Insurance
Self-insurance accruals are made for certain claims associated with employee health care,
workers compensation and general liability insurance. These accruals include estimates that may be
based on historical loss development factors. Differences in estimates and assumptions could result
in an accrual requirement materially different from the calculated accrual.
Accounting for Pension Plans and Other Postretirement Benefit Plans
To determine our ultimate obligation under our defined benefit pension plans and our other
postretirement benefit plans, we must estimate the future cost of benefits and attribute that cost
to the time period during which each covered employee works. To record the related net assets and
obligation of such benefit plans, we use assumptions related to inflation, investment returns,
mortality, employee turnover, medical costs and discount rates. To determine the discount rate, we,
along with our third-party actuaries, considered several factors, including the June 30, 2007 rates
of various bond indices, such as the Moodys Aa long-term bond index, yield curve analysis results
from our actuaries based on expected cash flows of our plans, and the past history of discount
rates used for the plan valuation. These assumptions follow the guidance provided in Statement of
Financial Accounting Standards (SFAS) No. 87, Employers Accounting for Pensions and SFAS No.
106, Employers Accounting for Postretirement Benefits Other Than Pensions. We, along with our
third-party actuaries, review all of these assumptions on an ongoing basis to ensure that the most
reasonable information available is being considered. Changes in assumptions and future investment
returns could potentially have a material impact on pension expense and related funding
requirements. With our adoption of SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS 158), we recognize the overfunded or underfunded status of
our defined benefit plans as an asset or liability in our Consolidated Balance Sheet. We will
recognize changes in that funded status through comprehensive income in future fiscal years. As
most of our defined benefit plans and post-employment obligations relate to our nonfood operations
that are subject to our ongoing review of strategic alternatives, we may also experience future
plan settlements or curtailments associated with divestitures or plant closings, which could have
unanticipated effects on operating results.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value in
order to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This
pronouncement is effective as of the beginning of our 2009 fiscal year. We are currently evaluating
the impact, if any, that SFAS 159 will have on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. This pronouncement is
effective as of the beginning of our 2009 fiscal year. We are currently evaluating the impact, if
any, that SFAS 157 will have on our financial position or results of operations.
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In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for
Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. In addition, FIN 48 requires expanded
disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of
our 2008 fiscal year, July 1, 2007. Upon adoption, we currently estimate that a cumulative
after-tax effect adjustment of approximately $1.0 million to $2.0 million will be charged to
retained earnings to increase our tax contingency reserves for uncertain tax positions. This
estimate is subject to revision as we complete our analysis.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior-year misstatements
should be taken into consideration when quantifying misstatements in current-year financial
statements for purposes of determining whether the current-year financial statements are materially
misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by
recording the necessary adjustments to the carrying values of assets and liabilities as of the
beginning of that year with the offsetting adjustment recorded to the opening balance of retained
earnings if material. We adopted SAB 108 as of June 30, 2007 and noted no material impact on our
financial position or results of operations as a result of the adoption.
In September 2006, the FASB issued SFAS 158, which requires employers to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability
in its statement of financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income. We adopted SFAS 158 as of June 30, 2007.
See Notes 12 and 13 to the consolidated financial statements for further information.
Forward-Looking Statements
We desire to take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the PSLRA). This Annual Report on Form 10-K contains various
forward-looking statements within the meaning of the PSLRA and other applicable securities laws.
Such statements can be identified by the use of the forward-looking words anticipate, estimate,
project, believe, intend, plan, expect, hope, or similar words. These statements
discuss future expectations; contain projections regarding future developments, operations or
financial conditions; or state other forward-looking information. Such statements are based upon
assumptions and assessments made by us in light of our experience and perception of historical
trends, current conditions, expected future developments, and other factors we believe to be
appropriate. These forward-looking statements involve various important risks, uncertainties and
other factors that could cause our actual results to differ materially from those expressed in the
forward-looking statements. Actual results may differ as a result of factors over which we have no,
or limited, control including the strength of the economy, slower than anticipated sales growth,
the extent of operational efficiencies achieved, the success of new product introductions, price
and product competition, and increases in energy and raw-material costs. Management believes these
forward-looking statements to be reasonable; however, undue reliance should not be placed on such
statements that are based on current expectations. We undertake no obligation to update such
forward-looking statements.
Specific influences relating to these forward-looking statements include, but are not limited to:
| the potential for loss of larger programs or key customer relationships; | ||
| the effect of consolidation of customers within key market channels; | ||
| the continued solvency of key customers; | ||
| the success and cost of new product development efforts; | ||
| the lack of market acceptance of new products; | ||
| the reaction of customers or consumers to the effect of price increases we may implement; | ||
| changes in demand for our products, which may result from loss of brand reputation or customer goodwill; |
28
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| changes in market trends; | ||
| the extent to which future business acquisitions are completed and acceptably integrated; | ||
| the possible occurrence of product recalls; | ||
| efficiencies in plant operations, including the ability to optimize overhead utilization in nonfood operations; | ||
| fluctuations in the cost and availability of raw materials; | ||
| adverse changes in energy costs and other factors that may affect costs of producing, distributing or transporting our products; | ||
| maintenance of competitive position with respect to other manufacturers, including import sources of production; | ||
| dependence on key personnel; | ||
| stability of labor relations; | ||
| fluctuations in energy costs; | ||
| dependence on contract copackers; | ||
| effect of governmental regulations, including environmental matters; | ||
| legislation and litigation affecting the future administration of CDSOA; | ||
| access to any required financing; | ||
| changes in income tax laws; | ||
| start-up of our new food production facility in Kentucky in 2008; | ||
| the uncertainty regarding the effect or outcome of our decision to explore strategic alternatives among our nonfood operations; | ||
| changes in estimates in critical accounting judgments; and | ||
| innumerable other factors. |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents all have maturities of 90 days or less. Our short-term
investments have interest reset periods of 35 days or less. These financial instruments may be
subject to interest rate risk through lost income should interest rates increase during their
limited term to maturity or resetting of interest rates. As of June 30, 2007, there was $42.5
million in short-term bank loans but no long-term debt outstanding. Future borrowings would bear
interest at negotiated rates and be subject to interest rate risk. At current borrowing levels, we
do not believe that a hypothetical adverse change of 10% in interest rates would have a material
effect on our financial position.
Item 8. Financial Statements and Supplementary Data
29
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lancaster Colony Corporation:
Lancaster Colony Corporation:
We have audited the accompanying consolidated balance sheets of Lancaster Colony Corporation
and subsidiaries (the Company) as of June 30, 2007 and 2006, and the related consolidated
statements of income, shareholders equity, and cash flows for each of the three years in the
period ended June 30, 2007. Our audits also included the financial statement schedule listed in the
Table of Contents at Item 15. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Lancaster Colony Corporation and subsidiaries as of June 30,
2007 and 2006, and the results of their operations and their cash flows for each of the three years
in the period ended June 30, 2007, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 12 and Note 13 to the consolidated financial statements, the Company
adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, in 2007.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of June 30, 2007, based on the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated August 27, 2007, expressed an unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over financial reporting and an unqualified opinion
on the effectiveness of the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
|
Columbus, OH
August 27, 2007
August 27, 2007
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 | ||||||||
(Amounts in thousands, except share data) | 2007 | 2006 | ||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and equivalents |
$ | 8,318 | $ | 6,050 | ||||
Short-term investments |
| 35,765 | ||||||
Receivables (less allowance for doubtful accounts,
2007$916; 2006$867) |
92,635 | 91,525 | ||||||
Inventories: |
||||||||
Raw materials |
40,358 | 36,214 | ||||||
Finished goods and work in process |
109,359 | 112,525 | ||||||
Total inventories |
149,717 | 148,739 | ||||||
Deferred income taxes and other current assets |
28,241 | 24,937 | ||||||
Current assets of discontinued operations |
| 31,767 | ||||||
Total current assets |
278,911 | 338,783 | ||||||
Property, Plant and Equipment: |
||||||||
Land, buildings and improvements |
162,276 | 129,755 | ||||||
Machinery and equipment |
350,357 | 338,739 | ||||||
Total cost |
512,633 | 468,494 | ||||||
Less accumulated depreciation |
304,202 | 290,143 | ||||||
Property, plant and equipmentnet |
208,431 | 178,351 | ||||||
Other Assets: |
||||||||
Goodwill |
89,590 | 79,219 | ||||||
Other intangible assetsnet |
13,111 | 4,416 | ||||||
Other noncurrent assets |
8,454 | 17,879 | ||||||
Noncurrent assets of discontinued operations |
| 9,373 | ||||||
Total |
$ | 598,497 | $ | 628,021 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Short-term bank loans |
$ | 42,500 | $ | | ||||
Accounts payable |
48,423 | 43,193 | ||||||
Accrued liabilities |
50,867 | 52,791 | ||||||
Current liabilities of discontinued operations |
| 7,516 | ||||||
Total current liabilities |
141,790 | 103,500 | ||||||
Other Noncurrent Liabilities |
10,702 | 21,734 | ||||||
Deferred Income Taxes |
1,696 | 8,366 | ||||||
Shareholders Equity: |
||||||||
Preferred stockauthorized 3,050,000 shares;
outstandingnone |
||||||||
Common stockauthorized 75,000,000 shares;
outstanding, 200730,748,390; 200632,245,735 |
81,665 | 78,017 | ||||||
Retained earnings |
937,376 | 925,388 | ||||||
Accumulated other comprehensive loss |
(5,167 | ) | (5,277 | ) | ||||
Common stock in treasury, at cost |
(569,565 | ) | (503,707 | ) | ||||
Total shareholders equity |
444,309 | 494,421 | ||||||
Total |
$ | 598,497 | $ | 628,021 | ||||
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30 | ||||||||||||
(Amounts in thousands, except per share data) | 2007 | 2006 | 2005 | |||||||||
Net Sales |
$ | 1,091,162 | $ | 1,073,585 | $ | 1,028,328 | ||||||
Cost of Sales |
897,602 | 868,124 | 823,737 | |||||||||
Gross Margin |
193,560 | 205,461 | 204,591 | |||||||||
Selling, General and Administrative Expenses |
90,979 | 90,053 | 89,484 | |||||||||
Restructuring and Impairment Charge |
2,126 | | 935 | |||||||||
Operating Income |
100,455 | 115,408 | 114,172 | |||||||||
Other Income (Expense): |
||||||||||||
Interest expense |
(150 | ) | | | ||||||||
Other incomeContinued Dumping and Subsidy
Offset Act |
699 | 11,376 | 26,226 | |||||||||
Interest income and othernet |
999 | 3,890 | 3,821 | |||||||||
Income from Continuing Operations
Before Income Taxes |
102,003 | 130,674 | 144,219 | |||||||||
Taxes Based on Income |
37,322 | 46,253 | 53,445 | |||||||||
Income from Continuing Operations |
64,681 | 84,421 | 90,774 | |||||||||
Discontinued Operations, Net of Tax: |
||||||||||||
(Loss) Income from Discontinued Operations |
(3,877 | ) | (1,467 | ) | 2,314 | |||||||
Loss on Sale of Discontinued Operations |
(15,120 | ) | | | ||||||||
Total Discontinued Operations |
(18,997 | ) | (1,467 | ) | 2,314 | |||||||
Net Income |
$ | 45,684 | $ | 82,954 | $ | 93,088 | ||||||
Income Per Common Share from
Continuing Operations: |
||||||||||||
Basic and Diluted |
$ | 2.05 | $ | 2.52 | $ | 2.60 | ||||||
(Loss) Income Per Common Share from
Discontinued Operations: |
||||||||||||
Basic and Diluted |
$ | (.60 | ) | $ | (.04 | ) | $ | .07 | ||||
Net Income Per Common Share: |
||||||||||||
Basic and Diluted |
$ | 1.45 | $ | 2.48 | $ | 2.67 | ||||||
Weighted Average Common Shares Outstanding: |
||||||||||||
Basic |
31,576 | 33,471 | 34,868 | |||||||||
Diluted |
31,603 | 33,502 | 34,925 |
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30 | ||||||||||||
(Amounts in thousands) | 2007 | 2006 | 2005 | |||||||||
Cash Flows From Operating Activities: |
||||||||||||
Net income |
$ | 45,684 | $ | 82,954 | $ | 93,088 | ||||||
Adjustments to reconcile net income
to net cash provided by operating activities: |
||||||||||||
Loss (income) from discontinued operations |
18,997 | 1,467 | (2,314 | ) | ||||||||
Depreciation and amortization |
28,766 | 29,656 | 30,118 | |||||||||
Deferred income taxes and other noncash charges |
(4,207 | ) | (1,114 | ) | 884 | |||||||
Restructuring and impairment charge |
3,302 | | 930 | |||||||||
Gain on sale of property |
(64 | ) | (1,147 | ) | (30 | ) | ||||||
(Gain) loss on sale of business |
(8 | ) | 178 | | ||||||||
Pension plan activity |
(485 | ) | (2,853 | ) | (999 | ) | ||||||
Changes in operating assets and liabilities: |
||||||||||||
Receivables |
(500 | ) | (6,661 | ) | (9,363 | ) | ||||||
Inventories |
(1,345 | ) | 1,340 | (10,921 | ) | |||||||
Other current assets |
(3,751 | ) | (1,064 | ) | 321 | |||||||
Accounts payable and accrued liabilities |
2,744 | (3,760 | ) | 5,294 | ||||||||
Net cash provided by operating activities
from continuing operations |
89,133 | 98,996 | 107,008 | |||||||||
Cash Flows From Investing Activities: |
||||||||||||
Cash paid for acquisitions |
(23,000 | ) | | (492 | ) | |||||||
Payments on property additions |
(55,823 | ) | (60,068 | ) | (22,103 | ) | ||||||
Proceeds from sale of discontinued operations |
12,143 | | | |||||||||
Proceeds from sale of property |
199 | 1,619 | 658 | |||||||||
Proceeds from sale of business |
8 | 466 | | |||||||||
Purchases of short-term investments |
(5,000 | ) | (31,350 | ) | (52,695 | ) | ||||||
Proceeds from short-term investment sales,
calls and maturities |
40,765 | 66,900 | 46,650 | |||||||||
Othernet |
(2,413 | ) | (828 | ) | (5,659 | ) | ||||||
Net cash used in investing activities
from continuing operations |
(33,121 | ) | (23,261 | ) | (33,641 | ) | ||||||
Cash Flows From Financing Activities: |
||||||||||||
Net change in short-term borrowings |
42,500 | | | |||||||||
Purchase of treasury stock |
(65,858 | ) | (84,343 | ) | (56,721 | ) | ||||||
Payment of dividends |
(33,696 | ) | (101,760 | ) | (34,055 | ) | ||||||
Proceeds from the exercise of stock options |
3,515 | 3,835 | 3,785 | |||||||||
(Decrease) increase in cash overdraft balance |
(5,332 | ) | 3,419 | 4,524 | ||||||||
Net cash used in financing activities
from continuing operations |
(58,871 | ) | (178,849 | ) | (82,467 | ) | ||||||
Cash Flows From Discontinued Operations: |
||||||||||||
Net cash provided by (used in) operating activities
from discontinued operations |
5,025 | (1,982 | ) | 9,670 | ||||||||
Net cash provided by (used in) investing activities
from discontinued operations |
114 | (2,133 | ) | (521 | ) | |||||||
Net cash provided by (used in)
discontinued operations |
5,139 | (4,115 | ) | 9,149 | ||||||||
Effect of exchange rate changes on cash |
(12 | ) | 14 | (17 | ) | |||||||
Net change in cash and equivalents |
2,268 | (107,215 | ) | 32 | ||||||||
Cash and equivalents at beginning of year |
6,050 | 113,265 | 113,233 | |||||||||
Cash and equivalents at end of year |
$ | 8,318 | $ | 6,050 | $ | 113,265 | ||||||
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Accumulated | ||||||||||||||||||||||||
Common Stock | Other | Total | ||||||||||||||||||||||
(Amounts in thousands, | Outstanding | Retained | Comprehensive | Treasury | Shareholders | |||||||||||||||||||
except per share data) | Shares | Amount | Earnings | Loss | Stock | Equity | ||||||||||||||||||
Balance, June 30, 2004 |
35,472 | $ | 69,809 | $ | 885,161 | $ | (5,542 | ) | $ | (362,643 | ) | $ | 586,785 | |||||||||||
Net income |
93,088 | 93,088 | ||||||||||||||||||||||
Translation adjustment |
(17 | ) | (17 | ) | ||||||||||||||||||||
Minimum pension liability,
net of $2,812 tax effect |
(5,346 | ) | (5,346 | ) | ||||||||||||||||||||
Comprehensive Income |
87,725 | |||||||||||||||||||||||
Cash dividends common
stock ($0.98 per share) |
(34,055 | ) | (34,055 | ) | ||||||||||||||||||||
Purchase of treasury stock |
(1,348 | ) | (56,721 | ) | (56,721 | ) | ||||||||||||||||||
Shares issued upon exercise
of stock options including
related tax benefits |
112 | 3,992 | 3,992 | |||||||||||||||||||||
Balance, June 30, 2005 |
34,236 | 73,801 | 944,194 | (10,905 | ) | (419,364 | ) | 587,726 | ||||||||||||||||
Net income |
82,954 | 82,954 | ||||||||||||||||||||||
Translation adjustment |
14 | 14 | ||||||||||||||||||||||
Minimum pension liability,
net of $3,125 tax effect |
5,614 | 5,614 | ||||||||||||||||||||||
Comprehensive Income |
88,582 | |||||||||||||||||||||||
Cash dividends common
stock ($3.03 per share) |
(101,760 | ) | (101,760 | ) | ||||||||||||||||||||
Purchase of treasury stock |
(2,092 | ) | (84,343 | ) | (84,343 | ) | ||||||||||||||||||
Shares issued upon exercise
of stock options including
related tax benefits |
102 | 3,829 | 3,829 | |||||||||||||||||||||
Stock compensation expense |
387 | 387 | ||||||||||||||||||||||
Balance, June 30, 2006 |
32,246 | 78,017 | 925,388 | (5,277 | ) | (503,707 | ) | 494,421 | ||||||||||||||||
Net income |
45,684 | 45,684 | ||||||||||||||||||||||
Translation adjustment |
(12 | ) | (12 | ) | ||||||||||||||||||||
Minimum pension liability,
net of $1,427 tax effect |
2,578 | 2,578 | ||||||||||||||||||||||
Comprehensive Income |
48,250 | |||||||||||||||||||||||
Cash dividends common
stock ($1.07 per share) |
(33,696 | ) | (33,696 | ) | ||||||||||||||||||||
Purchase of treasury stock |
(1,589 | ) | (65,858 | ) | (65,858 | ) | ||||||||||||||||||
Shares issued upon exercise
of stock options including
related tax benefits |
88 | 3,515 | 3,515 | |||||||||||||||||||||
Stock compensation expense |
42 | 42 | ||||||||||||||||||||||
Adjustment to initially apply
SFAS 158, net of
$1,502 tax effect |
(2,456 | ) | (2,456 | ) | ||||||||||||||||||||
Restricted stock issued |
3 | |||||||||||||||||||||||
Restricted stock compensation
expense |
91 | 91 | ||||||||||||||||||||||
Balance, June 30, 2007 |
30,748 | $ | 81,665 | $ | 937,376 | $ | (5,167 | ) | $ | (569,565 | ) | $ | 444,309 | |||||||||||
See accompanying notes to consolidated financial statements.
34
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share and per share data)
Note 1 Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying 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. All significant intercompany transactions and accounts have been
eliminated in consolidation. The current- and prior-year results reflect the classification of the
sold automotive operations as discontinued operations. See further discussion in Note 2. 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, 2007 refers to fiscal 2007, which is the period from July 1, 2006 to
June 30, 2007.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires that we make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes.
Significant estimates included in these consolidated financial statements include allowance for
doubtful accounts receivable, net realizable value of inventories, useful lives for the calculation
of depreciation and amortization, impairments of long-lived assets, accruals for marketing and
merchandising programs, pension and postretirement assumptions, as well as expenses related to
distribution and self-insurance accruals. Actual results could differ from these estimates.
Cash and Equivalents
We consider all highly liquid investments purchased with original maturities of three months
or less to be cash equivalents. As a result of our cash management system, checks issued but not
presented to the banks for payment may create negative book cash balances. Such negative balances
are included in other accrued liabilities and totaled approximately $5.4 million and $10.7 million
as of June 30, 2007 and 2006, respectively.
Short-Term Investments
We account for our short-term investments in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Our
short-term investments consist of auction rate securities and variable rate demand obligations
classified as available-for-sale securities. Our short-term investments in these securities are
recorded at cost, which approximates fair market value due to their variable interest rates, which
typically reset every 7 to 35 days, and, despite the long-term nature of their stated contractual
maturities, we generally have the ability to liquidate these securities in 35 days or less. Our
intent is to hold these securities as liquid assets easily convertible to cash for applicable
operational needs as they may arise.
Receivables and the Allowance for Doubtful Accounts
We provide an allowance for doubtful accounts based on the aging of accounts receivable
balances, historical write-off experience and on-going reviews of our trade receivables.
Measurement of potential losses requires credit review of existing customer relationships,
consideration of historical effects of relevant observable data, including present economic
conditions such as delinquency rates, and the economic health of customers.
Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist
primarily of cash and equivalents, short-term investments and trade accounts receivable. The
carrying amounts of these financial instruments approximate fair value. We place our cash and
equivalents and short-term investments with institutions believed to be of high quality and, by
policy, limit the amount of credit exposure to any one institution or issuer. Concentration of
credit risk with respect to trade accounts receivable is mitigated by
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LANCASTER
COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
having a large and diverse customer base. However, see Note 18 with respect to our
accounts receivable with Wal-Mart Stores, Inc.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Purchases of property, plant and equipment
included in accounts payable at June 30, 2007, 2006 and 2005 were approximately $2.2 million, $1.7
million and $2.3 million, respectively, and these purchases have been excluded from the
Consolidated Statement of Cash Flows. We use the straight-line method of computing depreciation for
financial reporting purposes based on the estimated useful lives of the corresponding assets.
Estimated useful lives for buildings and improvements range from two to forty-five years while
machinery and equipment range from two to twenty years. For tax purposes, we generally compute
depreciation using accelerated methods. See Note 17 for discussions of recent asset impairments.
Long-Lived Assets
We monitor the recoverability of the carrying value of our long-lived assets by periodically
considering whether or not indicators of impairment are present. If such indicators are present, we
determine if the assets are recoverable by comparing the sum of the undiscounted future cash flows
to the assets carrying amount. Our cash flows are based on historical results adjusted to reflect
our best estimate of future market and operating conditions. If the carrying amounts are greater,
then the assets are not recoverable. In that instance, we compare the carrying amounts to the fair
value to determine the amount of the impairment to be recorded. See Note 17 for discussion of
recent asset impairments.
Goodwill and Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), as of
July 1, 2002, goodwill is no longer being amortized. Intangible assets with lives restricted by
contractual, legal, or other means continue to be amortized on a straight-line basis over their
useful lives. Also in accordance with SFAS 142, as of April 30, 2007 and 2006, as appropriate, we
completed asset impairment assessments, and such assessments indicated that there was no
impairment. We periodically evaluate the future economic benefit of the recorded goodwill and other
long-lived assets when events or circumstances indicate potential recoverability concerns. This
evaluation is based on consideration of expected future undiscounted cash flows and other operating
factors. Carrying amounts are adjusted appropriately when determined to have been impaired. See
further discussion and disclosure in Note 6.
Revenue Recognition
We recognize net sales and related cost of sales at the time of shipment of the products, or
at the time when all substantial risks of ownership change, if later. Net sales are recorded net of
estimated sales discounts, returns and certain sales incentives, including coupons and rebates.
Advertising Expense
We expense advertising as it is incurred. Advertising expense represents less than 1% of sales
in each of the three years ended June 30, 2007.
Shipping and Handling
Shipping and handling fees billed to customers are recorded as sales, while the related
shipping and handling costs are included in cost of sales.
Stock-Based Employee Compensation Plans
We account for our stock-based employee compensation plans in accordance with SFAS No. 123R,
Share-Based Payment (SFAS 123R). SFAS 123R requires the measurement and recognition of the cost
of employee services received in exchange for an award of equity instruments based on the
grant-date fair value
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LANCASTER
COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
of the award. The cost of the employee services is recognized as compensation
expense over the period that an employee provides service in exchange for the award, which is
typically the vesting period.
The weighted average per share fair value of options granted during 2005 was $7.68 and was
estimated at the date of grant using the Black-Scholes option pricing model. The following
assumptions were used for options granted in 2005: risk-free interest rate of 3.47%; dividend
yield of 2.41%; volatility factor of the expected market price of our common stock of 26.17%; and a
weighted average expected option life of 3.2 years.
Had compensation cost for the 1995 Key Employee Stock Option Plan (1995 Plan) been
determined based on the fair value at the grant dates for awards under the 1995 Plan consistent
with the method of SFAS No. 123, our net income and earnings per share would have been reduced to
the pro forma amounts indicated below for the year ended June 30, 2005:
Net income |
As reported | $ | 93,088 | |||
Pro forma | $ | 90,984 | ||||
Net Income per Share: |
||||||
Basic and Diluted |
As reported | $ | 2.67 | |||
Basic and Diluted |
Pro forma | $ | 2.61 |
Other Income
During the second quarter of 2007, we received approximately $0.7 million from the U.S.
government under the Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) compared to
approximately $11.4 million received in the second quarter of 2006 and approximately $26.2 million
received in the second quarter of 2005. We recognize CDSOA-related income upon receiving notice
from the U.S. Department of Homeland Security regarding its intent to remit a specific amount to
us. These amounts are recorded as other income in the accompanying financial statements. See
further discussion at Note 16.
Per Share Information
We account for earnings per share under SFAS No. 128, Earnings Per Share. Net income per
common share is computed based on the weighted average number of shares of common stock and common
stock equivalents (stock options) outstanding during each period.
Basic earnings per share 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
earnings per share 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 outstanding stock options. There are no adjustments to net
income necessary in the calculation of basic and diluted earnings per share.
Comprehensive Income and Accumulated Other Comprehensive Loss
Comprehensive income includes changes in equity that result from transactions and economic
events from nonowner sources. Comprehensive income is composed of two subsets net income and
other comprehensive income (loss). Included in other comprehensive income (loss) are foreign
currency translation adjustments for which there are no related income tax effects and a minimum
pension liability adjustment which is recorded net of a related tax provision/(benefit) of
approximately $1.4 million, $3.1 million, and $(2.8) million in 2007, 2006 and 2005, respectively.
These adjustments, as well as the impact of the 2007 adoption of SFAS No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), shown net of tax benefit
of $1.5 million, are accumulated within the Consolidated
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
Balance
Sheet in Accumulated Other Comprehensive Loss, which is comprised of the following as of June
30, 2007, 2006 and 2005:
2007 | 2006 | 2005 | ||||||||||
Cumulative translation adjustments |
$ | 131 | $ | 143 | $ | 129 | ||||||
Minimum pension liability |
| (5,420 | ) | (11,034 | ) | |||||||
Adoption of SFAS 158 |
(5,298 | ) | | | ||||||||
$ | (5,167 | ) | $ | (5,277 | ) | $ | (10,905 | ) | ||||
See further discussion of SFAS 158 adoption at Notes 12 and 13.
Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value in
order to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This
pronouncement is effective as of the beginning of our 2009 fiscal year. We are currently evaluating
the impact, if any, that SFAS 159 will have on our financial position or results of operations.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior-year misstatements
should be taken into consideration when quantifying misstatements in current-year financial
statements for purposes of determining whether the current-year financial statements are materially
misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by
recording the necessary adjustments to the carrying values of assets and liabilities as of the
beginning of that year with the offsetting adjustment recorded to the opening balance of retained
earnings if material. We adopted SAB 108 as of June 30, 2007 and noted no material impact on our
financial position or results of operations as a result of the adoption.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. This pronouncement is
effective as of the beginning of our 2009 fiscal year. We are currently evaluating the impact, if
any, that SFAS 157 will have on our financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for
Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. In addition, FIN 48 requires expanded
disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of
our 2008 fiscal year, July 1, 2007. Upon adoption, we currently estimate that a cumulative
after-tax effect adjustment of approximately $1.0 million to $2.0 million will be charged to
retained earnings to increase our tax contingency reserves for uncertain tax positions. This
estimate is subject to revision as we complete our analysis.
Note 2 Discontinued Operations
In June 2007, as part of our strategic alternative review of nonfood operations, we sold
substantially all of the operating assets of our automotive accessory operations located in
Coshocton, Ohio and LaGrange, Georgia. The cash transaction resulted in a pretax loss of
approximately $24.3 million for the year ended June 30, 2007. Similarly, in March 2007, we sold
substantially all of the operating assets of our automotive accessory operations located in
Wapakoneta, Ohio. The cash transaction resulted in a pretax gain of approximately $1.2 million for
the year ended June 30, 2007. The businesses included in both of these transactions were previously
included in our Automotive segment and had net sales of $98.9 million and a
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
pretax loss of $29.2
million, including the pretax loss on sale of $23.1 million, for the year ended June 30, 2007.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the financial results of these operations are reported separately as discontinued
operations for all periods
presented. (Loss) income from discontinued operations was approximately $(19.0) million,
$(1.5) million and $2.3 million, net of tax, for 2007, 2006 and 2005, respectively, and included a
net loss on the sale of these operations of approximately $15.1 million, net of tax of $8.0
million, in 2007.
At June 30, 2006, the assets and liabilities of discontinued operations included the following items:
June 30 | ||||
2006 | ||||
Assets of Discontinued Operations |
||||
Receivables |
$ | 17,462 | ||
Inventories |
13,210 | |||
Other current assets |
1,095 | |||
Total current assets of discontinued operations |
31,767 | |||
Property, plant and equipment, net |
8,920 | |||
Other noncurrent assets |
453 | |||
Total noncurrent assets of discontinued operations |
9,373 | |||
Total assets of discontinued operations |
$ | 41,140 | ||
Current Liabilities of Discontinued Operations |
||||
Accounts payable |
$ | 4,491 | ||
Accrued liabilities |
3,025 | |||
Total current liabilities of discontinued operations |
$ | 7,516 | ||
Note 3 Acquisitions
In June 2007, we acquired the principal assets of Marshall Biscuit Company, Inc. (Marshall
Biscuit), a privately owned producer and marketer of frozen yeast rolls and biscuits based in
Saraland, Alabama. Marshall Biscuits strength in the private-label channel complements our Sister
Schuberts branded rolls. Marshall Biscuit is reported in our Specialty Foods segment, and its
results of operations have been included in our Consolidated Statement of Income since June 1,
2007.
Under the terms of the purchase agreement, we acquired certain personal and real property
including fixed assets, inventory and accounts receivable, and assumed certain liabilities. The
purchase price was approximately $22.9 million, including a net asset adjustment of approximately
$0.1 million as determined under the terms of the purchase agreement. This net asset adjustment is
recorded in receivables on the Consolidated Balance Sheet at June 30, 2007. As defined in the
purchase agreement, there is a potential for future earn out payments of up to $2.0 million. These
payments are based on future sales levels of certain Marshall Biscuit products during the three
years from the date of acquisition and would be accounted for as additional purchase price and thus
goodwill.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
The following purchase price allocation is based on the estimated fair value of the net assets acquired:
Balance Sheet Captions | Allocation | |||
Inventories |
$ | 1,033 | ||
Other Current Assets |
11 | |||
Property, Plant and Equipment |
1,212 | |||
Goodwill (tax deductible) |
11,385 | |||
Other Intangible Assets |
9,260 | |||
Current Liabilities |
(25 | ) | ||
Total |
$ | 22,876 | ||
The intangible assets listed in the allocation above consist of approximately $8.9 million of
customer relationships and $0.4 million of non-compete agreements. The customer relationships have
been assigned a useful life of 15 years. The non-compete agreements have been assigned a useful
life of 5 years based on the terms of the non-compete agreement.
This acquisition was accounted for under the purchase method of accounting and the noncash
aspects have been excluded from the accompanying Consolidated Statements of Cash Flows. The results
of
operations of this entity have been included in the consolidated financial statements from the
date of acquisition and are immaterial in relation to the consolidated totals.
Note 4 Short-Term Investments
We held no short-term investments at June 30, 2007. At June 30, 2006, we held approximately
$35.8 million in short-term investments, which consisted of auction rate securities and variable
rate demand obligations classified as available-for-sale securities and had contractual maturities
of greater than 10 years. Actual maturities may differ from contractual maturities should the
borrower have the right to call certain obligations.
We had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses)
from our short-term investments. All income generated from these short-term investments was
recorded as interest income.
Note 5 Inventories
Inventories are valued at the lower of cost or market and are costed by various methods that
approximate actual cost on a first-in, first-out basis. At June 30, 2005, certain inventories were
costed on a last-in, first-out (LIFO) basis. During 2006 and 2005, certain inventory quantity
reductions resulted in a liquidation of LIFO inventory layers carried at lower costs that prevailed
in prior years. The 2006 effect of the liquidations was insignificant. The 2005 effect of the
liquidations was an increase in net earnings of approximately $0.8 million after taxes, or
approximately $.02 per share.
It is not practicable to segregate work in process from finished goods inventories. We
estimate, however, that work in process inventories amount to approximately 10% and 12% of the
combined total of finished goods and work in process inventories at June 30, 2007 and 2006,
respectively.
Note 6 Goodwill and Other Intangible Assets
Goodwill attributable to the Specialty Foods segment was approximately $89.6 million at June
30, 2007 and $78.2 million at June 30, 2006. The increase in goodwill was due to the acquisition of
Marshall Biscuit. See further discussion at Note 3. At June 30, 2006, the Automotive segment had a
goodwill balance of $1.0 million. This goodwill was written off due to the sale of the related
automotive businesses. See further discussion at Note 2.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
The following tables summarize our identifiable other intangible assets by segment as of June
30, 2007 and 2006:
2007 | 2006 | |||||||
Specialty Foods |
||||||||
Trademarks (40-year life) |
||||||||
Gross carrying value |
$ | 370 | $ | 370 | ||||
Accumulated amortization |
(149 | ) | (140 | ) | ||||
Net Carrying Value |
$ | 221 | $ | 230 | ||||
Customer Relationships (12-15-year life) |
||||||||
Gross carrying value |
$ | 13,020 | $ | 4,100 | ||||
Accumulated amortization |
(1,233 | ) | (854 | ) | ||||
Net Carrying Value |
$ | 11,787 | $ | 3,246 | ||||
Non-compete Agreements (5-8-year life) |
||||||||
Gross carrying value |
$ | 1,540 | $ | 1,200 | ||||
Accumulated amortization |
(531 | ) | (375 | ) | ||||
Net Carrying Value |
$ | 1,009 | $ | 825 | ||||
Glassware and Candles Customer Lists (12-year life) |
||||||||
Gross carrying value |
$ | 250 | $ | 250 | ||||
Accumulated amortization |
(156 | ) | (135 | ) | ||||
Net Carrying Value |
$ | 94 | $ | 115 | ||||
Total Net Carrying Value |
$ | 13,111 | $ | 4,416 | ||||
Amortization expense relating to these assets was approximately $0.6 million for the year
ended June 30, 2007 and approximately $0.5 million for each of the years ended June 30, 2006 and
2005. The amortization expense is estimated to be approximately $1.2 million for each of the next
four years and approximately $1.1 million for the fifth year.
Note 7 Short-Term Borrowings
We may borrow up to $100 million under the terms of an unsecured revolving credit facility.
The facility expires in February 2008 and contains certain representations, warranties, covenants
and conditions customary to credit facilities of this nature. Under terms of the agreement, certain
financial ratios influence the extent of the all-in borrowing costs, including interest and ongoing
facility fees. At June 30, 2007, we were in compliance with all provisions and covenants of the
facility, and we had $42.5 million outstanding under the facility with a weighted average interest
rate of 5.615%. We paid less than $0.1 million of interest for the year ended June 30, 2007.
Note 8 Accrued Liabilities
Accrued liabilities at June 30, 2007 and 2006 are composed of:
2007 | 2006 | |||||||
Accrued compensation and employee benefits |
$ | 27,665 | $ | 25,847 | ||||
Accrued marketing and distribution |
8,216 | 7,310 | ||||||
Income and other taxes |
4,288 | 5,422 | ||||||
Book cash overdrafts |
5,386 | 10,718 | ||||||
Other |
5,312 | 3,494 | ||||||
Total accrued liabilities |
$ | 50,867 | $ | 52,791 | ||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
Note 9 Income Taxes
We and our domestic subsidiaries file a consolidated Federal income tax return. Taxes based on
income for the years ended June 30, 2007, 2006 and 2005, have been provided as follows:
2007 | 2006 | 2005 | ||||||||||
Currently payable: |
||||||||||||
Federal |
$ | 39,073 | $ | 38,419 | $ | 47,411 | ||||||
State and local |
4,591 | 6,532 | 6,244 | |||||||||
Total current provision |
43,664 | 44,951 | 53,655 | |||||||||
Deferred Federal, state and local (benefit) provision |
(6,342 | ) | 1,302 | (210 | ) | |||||||
Total taxes based on income |
$ | 37,322 | $ | 46,253 | $ | 53,445 | ||||||
Certain tax benefits recorded directly to common stock totaled approximately $0.2 million,
$0.3 million and $0.2 million for 2007, 2006 and 2005, respectively. For the years ended June 30,
2007, 2006 and 2005, our effective tax rate varied from the statutory Federal income tax rate as a
result of the following factors:
2007 | 2006 | 2005 | ||||||||||
Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes |
2.4 | % | 2.5 | % | 2.8 | % | ||||||
ESOP dividend deduction |
(0.3 | )% | (0.8 | )% | (0.2 | )% | ||||||
Section 199 deduction |
(0.7 | )% | (0.9 | )% | | % | ||||||
Other |
0.2 | % | (0.4 | )% | (0.5 | )% | ||||||
Effective rate |
36.6 | % | 35.4 | % | 37.1 | % | ||||||
The tax effect of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities at June 30, 2007 and 2006 are comprised of:
2007 | 2006 | |||||||
Deferred tax assets: |
||||||||
Inventories |
$ | 4,731 | $ | 5,055 | ||||
Employee medical and other benefits |
10,550 | 10,954 | ||||||
Receivable and other allowances |
5,341 | 5,487 | ||||||
Other accrued liabilities |
4,311 | 3,773 | ||||||
Total deferred tax assets |
24,933 | 25,269 | ||||||
Total deferred tax liabilitiesproperty and other |
(8,125 | ) | (14,672 | ) | ||||
Net deferred tax asset |
$ | 16,808 | $ | 10,597 | ||||
Net current deferred tax assets totaled approximately $18.5 million and $19.0 million at June
30, 2007 and 2006, respectively, and were included in Deferred Income Taxes and Other Current
Assets on the Consolidated Balance Sheet. Cash payments for income taxes were approximately $38.6
million, $47.0 million and $54.2 million for 2007, 2006 and 2005, respectively.
Ohio corporate tax legislation enacted on June 30, 2005 phases out the Ohio Corporate
Franchise Tax and phases in a new gross receipts tax called the Commercial Activity Tax. The
Corporate Franchise Tax was generally based on federal taxable income, but the Commercial Activity
Tax is based on sales in Ohio. As required by SFAS No. 109, Accounting for Income Taxes, we
recorded the impact of the change in Ohio tax legislation in the fourth quarter of 2005. The effect
of the change in the law was immaterial to the consolidated financial statements.
The American Jobs Creation Act provides a tax deduction calculated as a percentage of
qualified income from manufacturing in the United States (Section 199 Deduction). The deduction
percentage increases from 3% to 9% over a six-year period and began in 2006. We have recorded
amounts for this deduction in 2006
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
and 2007. In accordance with FASB guidance, this deduction is
treated as a special deduction, as opposed to a tax rate reduction.
Note 10 Shareholders Equity
We are authorized to issue 3,050,000 shares of preferred stock consisting of 750,000 shares of
Class A Participating Preferred Stock with $1.00 par value, 1,150,000 shares of Class B Voting
Preferred Stock without par value and 1,150,000 shares of Class C Nonvoting Preferred Stock without
par value.
As authorized by our Board of Directors (Board) in February 2000, each share of our
outstanding common stock includes a non-detachable stock purchase right that provides, upon
becoming exercisable, for the purchase of one-hundredth of a Series A Participating Preferred Share
at an exercise price of $185, subject to certain adjustments. Alternatively, once exercisable, each
right will also entitle the holder to buy shares of common stock having a market value of twice the
exercise price. The rights may be exercised on or after the time when a person or group of persons
without the approval of our Board acquire beneficial ownership of 15% or more of common stock or
announce the initiation of a tender or exchange offer which, if successful, would cause such person
or group to beneficially own 30% or more of the common stock. The person or group effecting such
15% acquisition or undertaking such tender offer will not be entitled to exercise any rights. If we
are acquired in a merger or other business combination, each right will entitle the holder, other
than the acquiring person, to purchase securities of the surviving company having a market value
equal to twice the exercise price of the rights. Until the rights become exercisable, they may be
redeemed at a price of $.01 per right. These rights expire in April 2010 unless earlier redeemed
under circumstances permitted by the applicable Rights Agreement.
Our Board approved a share repurchase authorization of 2,000,000 shares in May 2006.
Approximately 1,345,000 shares remained authorized for future purchase at June 30, 2007.
In August 2007, our Board approved an additional share
repurchase authorization of 2,000,000
shares.
On February 13, 2006, pursuant to our previously announced share repurchase program, we
purchased 100,000 shares of common stock from the Estate of Dorothy B. Fox (the Estate) at a
price per share of $41.55, which was equal to the average closing price of our common stock over
the eight trading days beginning on February 1, 2006. Robert L. Fox, one of our Directors, serves
as Executor of the Estate.
On March 9, 2005, pursuant to our previously announced share repurchase program, we had also
purchased 230,000 shares of common stock from the Estate at a price per share of $42.634, which was
equal to the average closing price of our common stock over the ten trading days beginning February
23, 2005, as adjusted to reflect the effects of our previously declared dividend.
Note 11 Stock-Based Compensation
As approved by our shareholders in November 1995, the terms of the 1995 Plan reserved
3,000,000 common shares for issuance to qualified key employees. All options granted under the 1995
Plan were exercisable at prices not less than fair market value as of the date of grant. The 1995
Plan expired in August 2005, but there are still options outstanding that were issued under this
plan. In general, options granted under the 1995 Plan vested immediately and had a maximum term of
five years. Our policy is to issue shares upon option exercise from new shares that had been
previously authorized.
Our shareholders approved the adoption of a new equity compensation plan, the Lancaster Colony
Corporation 2005 Stock Plan (the 2005 Plan), at our 2005 Annual Meeting of Shareholders. This new
plan reserved 2,000,000 common shares for issuance to our employees and directors, and all options
that will be granted under the plan will be exercisable at prices not less than fair market value
as of the date of the grant.
Stock Options
Under SFAS 123R, we calculate fair value of option grants using the Black-Scholes
option-pricing model. Total compensation cost related to share-based payment arrangements for the
year ended June 30, 2007 was less than $0.1 million, as compared to approximately $0.4 million for
the year ended June 30, 2006. These amounts were reflected in Selling, General and Administrative
Expenses and have been
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
allocated to each segment appropriately. No initial tax benefits are
recorded for these compensation costs because they relate to incentive stock options that do not
qualify for a tax deduction until, and only if, a disqualifying disposition occurs.
During the year ended June 30, 2007, we received approximately $3.3 million in cash from the
exercise of stock options, as compared to approximately $3.5 million in the prior year. The
aggregate intrinsic value of option exercises was approximately $0.6 million and $1.0 million in
2007 and 2006, respectively. A related tax benefit of approximately $0.2 million and $0.3 million
was recorded in 2007 and 2006, respectively. These tax benefits were included in the financing
section of the Consolidated Statements of Cash Flows and resulted from incentive stock option
disqualifying dispositions and exercises of non-qualified options. The benefits include less than
$0.1 million of gross windfall tax benefits for the year ended June 30, 2007, as compared to
approximately $0.1 million in the prior year.
There were no grants of stock options in 2007 and 2006.
The following summarizes for each of the three years in the period ended June 30, 2007 the
activity relating to stock options granted under the 1995 Plan mentioned above:
2007 | 2006 | 2005 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | |||||||||||||||||||
of | Exercise | of | Exercise | of | Exercise | |||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding stock options
vested and expected to
vest at beginning of period |
470,982 | $ | 39.92 | 590,104 | $ | 38.77 | 380,664 | $ | 34.93 | |||||||||||||||
Exercised |
(88,290 | ) | 37.63 | (102,272 | ) | 33.81 | (112,160 | ) | 33.74 | |||||||||||||||
Granted |
| | | | 326,550 | 41.52 | ||||||||||||||||||
Forfeited |
(21,192 | ) | 40.82 | (16,850 | ) | 36.92 | (4,950 | ) | 38.53 | |||||||||||||||
Outstanding stock options
vested and expected to
vest at end of period |
361,500 | $ | 40.42 | 470,982 | $ | 39.92 | 590,104 | $ | 38.77 | |||||||||||||||
Exercisable and vested stock
options at end of period |
353,713 | $ | 40.40 | 454,667 | $ | 39.88 | 531,255 | $ | 38.59 | |||||||||||||||
The weighted average remaining contractual life was approximately 2.18 years and 2.17 years
for the options outstanding and exercisable, respectively, at the end of the year. The aggregate
intrinsic value was approximately $0.5 million for both the options outstanding and exercisable at
June 30, 2007.
The following table summarizes information about the options outstanding at June 30, 2007:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted Average | ||||||||||||||||||||||||
Remaining | ||||||||||||||||||||||||
Grant | Exercise | Number | Contractual | Exercise | Number | Weighted Average | ||||||||||||||||||
Years | Prices | Outstanding | Life in Years | Price | Exercisable | Exercise Price | ||||||||||||||||||
2003 |
$ | 37.23 | 92,500 | .75 | $ | 37.23 | 92,500 | $ | 37.23 | |||||||||||||||
2005 |
$ | 41.52 | 269,000 | 2.67 | $ | 41.52 | 261,213 | $ | 41.52 |
44
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
The following summarizes the status of, and changes to, unvested options during the year ended
June 30, 2007:
Year Ended | ||||||||
June 30, 2007 | ||||||||
Weighted | ||||||||
Number | Average | |||||||
of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested stock options at beginning of period |
16,315 | $ | 7.82 | |||||
Granted |
| | ||||||
Vested |
(8,528 | ) | 7.52 | |||||
Forfeited |
| | ||||||
Unvested stock options at end of period |
7,787 | $ | 8.14 | |||||
At June 30, 2007, there was less than $0.1 million of total unrecognized compensation cost
related to unvested share-based compensation arrangements granted under the 1995 Plan. This cost is
expected to be recognized over a weighted-average period of approximately .9 years.
Restricted Stock
On November 20, 2006, we granted a total of 3,500 shares of restricted stock to our seven
nonemployee directors under the terms of the 2005 Plan discussed above. The restricted stock had a
grant date fair value of approximately $0.1 million based on a per share closing stock price of
$42.70. This restricted stock vests over a one-year period, and all of these shares are expected to
vest. Dividends earned on the stock are held in escrow and will be paid to the directors at the
time the stock vests. Compensation expense related to the restricted stock award will be recognized
over the requisite service period.
The following summarizes the activity related to restricted stock transactions for the year
ended June 30, 2007:
Weighted | ||||||||
Number | Average | |||||||
of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested restricted stock at beginning of period |
| | ||||||
Granted |
3,500 | $ | 42.70 | |||||
Vested |
| | ||||||
Forfeited |
| | ||||||
Unvested restricted stock at end of period |
3,500 | $ | 42.70 | |||||
Compensation expense of approximately $0.1 million was recorded for the year ended June 30,
2007 in Selling, General and Administrative Expenses. A tax benefit of less than $0.1 million was
recorded for the year ended June 30, 2007 related to this restricted stock.
At June 30, 2007, there is less than $0.1 million of unrecognized compensation expense that
will be recognized over a weighted average period of approximately .4 years.
Note 12 Pension Benefits
Defined Benefit Pension Plans
We and certain of our operating subsidiaries provide multiple defined benefit pension plans.
Benefits under the plans are primarily based on negotiated rates and years of service and cover the
union workers at
such locations. We contribute to these plans at least the minimum amount required by
regulation or contract. We recognize the cost of plan benefits as the employees render service. We
use a June 30 measurement date for all of our plans. At the end of the year, we discount our plan
liabilities using an assumed discount rate. In estimating this rate, we, along with our third-party
actuaries, review bond indices and the past history of discount rates.
45
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
The actuarial present value of benefit obligations summarized below was based on the following
assumption:
2007 | 2006 | |||||||
Weighted-average assumption as of June 30 |
||||||||
Discount rate |
6.35 | % | 6.45 | % |
The net periodic benefit costs were determined utilizing the following beginning-of-the-year
assumptions:
2007 | 2006 | 2005 | ||||||||||
Discount rate |
6.45 | % | 5.25 | % | 6.25 | % | ||||||
Expected long-term return on plan assets |
8.00 | % | 8.00 | % | 8.00 | % |
Our investment strategy for our plan assets is to control and manage investment risk through
diversification across asset classes and investment styles. By our current corporate guidelines,
50-85% of plan assets may be allocated to equity securities, 15-40% to debt securities and up to
35% to cash. We expect that a modest allocation to cash will exist within the plans, because each
investment manager is likely to hold limited cash in a portfolio. Our plan assets include an
investment in shares of our common stock with a market value of approximately $2.9 million and $2.7
million as of June 30, 2007 and 2006, respectively.
The asset allocation for our plans at June 30 by asset category, is as follows:
Percentage of | ||||||||
Noncash Plan Assets | ||||||||
at June 30 | ||||||||
Asset Category | 2007 | 2006 | ||||||
Equity securities |
73 | % | 79 | % | ||||
Fixed income |
27 | % | 21 | % | ||||
Total |
100 | % | 100 | % | ||||
The expected return on plan assets is based on our historical experience, our plan investment
guidelines, and our expectations for long-term rates of return. Our plan investment guidelines are
established based upon an evaluation of market conditions, tolerance for risk, and cash
requirements for benefit payments. Due to the potential impact of our recent business divestitures
and restructuring activities, we may reassess our investment allocation in 2008.
Relevant information with respect to our pension benefits as of June 30, can be summarized as
follows:
2007 | 2006 | |||||||
Change in benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 40,796 | $ | 48,534 | ||||
Service cost |
510 | 752 | ||||||
Interest cost |
2,499 | 2,542 | ||||||
Amendments |
431 | 123 | ||||||
Actuarial loss (gain) |
1,116 | (7,041 | ) | |||||
Benefits paid |
(3,387 | ) | (4,114 | ) | ||||
Benefit obligation at end of year |
$ | 41,965 | $ | 40,796 | ||||
Change in plan assets |
||||||||
Fair value of plan assets at beginning of year |
$ | 38,445 | $ | 37,094 | ||||
Actual return on plan assets |
5,038 | 2,612 | ||||||
Employer contributions |
1,439 | 2,853 | ||||||
Benefits paid |
(3,387 | ) | (4,114 | ) | ||||
Fair value of plan assets at end of year |
$ | 41,535 | $ | 38,445 | ||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
2007 | 2006 | |||||||
Reconciliation of funded status |
||||||||
Underfunded status |
$ | (430 | ) | $ | (2,351 | ) | ||
Unrecognized net actuarial loss |
| 9,308 | ||||||
Unrecognized prior service cost |
| 2,308 | ||||||
Unrecognized net transition asset |
| (1 | ) | |||||
Net (accrued) prepaid benefit cost |
$ | (430 | ) | $ | 9,264 | |||
Amounts recognized in the consolidated balance sheets consist of |
||||||||
Prepaid benefit cost(1) |
$ | 1,490 | $ | 9,264 | ||||
Accrued benefit liability(2) |
(1,920 | ) | (10,584 | ) | ||||
Intangible asset(1) |
| 2,000 | ||||||
Accumulated other comprehensive loss |
| 8,584 | ||||||
Net amount recognized |
$ | (430 | ) | $ | 9,264 | |||
Accumulated benefit obligation |
$ | 41,965 | $ | 40,796 | ||||
(1) | Recorded in other noncurrent assets | |
(2) | Recorded in other noncurrent liabilities |
The following table discloses, in the aggregate, those plans with benefit obligations in
excess of the fair value of plan assets at the June 30 measurement date:
2007 | 2006 | |||||||
Benefit obligations |
$ | 14,789 | $ | 33,376 | ||||
Fair value of plan assets at end of year |
$ | 12,869 | $ | 30,613 |
Effective June 30, 2007, we adopted the provisions of SFAS 158. The incremental effects of
applying SFAS 158 on individual lines in our Consolidated Balance Sheet are as follows:
Balances Before | Balances After | |||||||||||
Adoption of | Adoption of | |||||||||||
SFAS 158 | Adjustments | SFAS 158 | ||||||||||
Other noncurrent assets |
$ | 15,465 | $ | (7,011 | ) | $ | 8,454 | |||||
Other noncurrent liabilities |
$ | 13,758 | $ | (3,056 | ) | $ | 10,702 | |||||
Deferred income tax liabilities |
$ | 6,432 | $ | (4,736 | ) | $ | 1,696 | |||||
Accumulated other comprehensive loss |
$ | 2,712 | $ | 2,455 | $ | 5,167 | ||||||
Total assets |
$ | 605,508 | $ | (7,011 | ) | $ | 598,497 | |||||
Total liabilities |
$ | 161,980 | $ | (7,792 | ) | $ | 154,188 | |||||
Total shareholders equity |
$ | 446,764 | $ | (2,455 | ) | $ | 444,309 |
Amounts recognized in accumulated other comprehensive loss at June 30, 2007 are as follows:
2007 | ||||
Net actuarial loss |
$ | 7,674 | ||
Prior service cost |
861 | |||
Net transition asset |
(2 | ) | ||
Income taxes |
(3,236 | ) | ||
Total |
$ | 5,297 | ||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
Amounts expected to be recognized in accumulated other comprehensive loss during the next
fiscal year are as follows:
2008 | ||||
Net actuarial loss |
$ | 171 | ||
Prior service cost amortization |
102 | |||
Net transition obligation |
3 | |||
Total |
$ | 276 | ||
The following table summarizes the components of net periodic benefit cost at June 30:
2007 | 2006 | 2005 | ||||||||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | 510 | $ | 752 | $ | 554 | ||||||
Interest cost |
2,499 | 2,542 | 2,531 | |||||||||
Expected return on plan assets |
(2,987 | ) | (2,889 | ) | (2,775 | ) | ||||||
SFAS 88 curtailment/settlement charges |
2,068 | 574 | | |||||||||
Amortization of unrecognized net loss |
276 | 694 | 410 | |||||||||
Amortization of prior service cost |
232 | 245 | 234 | |||||||||
Amortization of unrecognized net
obligation existing at transition |
2 | 35 | 35 | |||||||||
Net periodic benefit cost |
$ | 2,600 | $ | 1,953 | $ | 989 | ||||||
The above-noted net periodic benefit cost includes $2.3 million for 2007, $1.4 million for
2006 and $0.5 million for 2005 of costs that are presented in discontinued operations because those
costs relate to the discontinued businesses.
During 2007, two of our plans became subject to curtailment accounting because of the sale of
a business and the announcement of the upcoming closure of another. This resulted in the immediate
recognition of all of the outstanding prior service cost and transition obligations of these plans.
Total curtailment charges of approximately $1.6 million were recorded, as required under SFAS No.
88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits (SFAS 88).
Also during the current year, one of our plans experienced lump sum payments that exceeded the
plans annual service and interest costs. This resulted in an accelerated recognition of plan costs
of approximately $0.5 million, as required under SFAS 88.
In 2006, one of our plans experienced lump sum payments that exceeded the plans annual
service and interest costs. This resulted in an accelerated recognition of plan costs of
approximately $0.6 million, as required under SFAS 88.
We have not yet finalized our anticipated funding level for 2008, but, based on initial
estimates, we anticipate funding approximately $0.8 million.
Benefit payments estimated for future years are as follows:
2008 |
$ | 2,420 | ||
2009 |
$ | 2,393 | ||
2010 |
$ | 2,251 | ||
2011 |
$ | 2,289 | ||
2012 |
$ | 2,613 | ||
2013 2017 |
$ | 16,486 |
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
Note 13 Postretirement Benefits
Postretirement Medical and Life Insurance Benefit Plans
We and certain of our operating subsidiaries provide multiple postretirement medical and life
insurance benefit plans. We recognize the cost of benefits as the employees render service.
Postretirement benefits are funded as incurred. We use a June 30 measurement date for all of our plans. At the end of the
year, we discount our plan liabilities using an assumed discount rate. In estimating this rate, we,
along with our third-party actuaries, review bond indices and the past history of discount rates.
The actuarial present value of benefit obligations summarized below was based on the following
assumption:
2007 | 2006 | |||||||
Weighted-average assumption as of June 30 |
||||||||
Discount rate |
6.35 | % | 6.45 | % |
The net periodic benefit costs were determined utilizing the following beginning-of-the-year
assumptions:
2007 | 2006 | 2005 | ||||||||||
Discount rate |
6.45 | % | 5.25 | % | 6.25 | % | ||||||
Health care cost trend rate |
11.00 | % | 12.00 | % | 12.00 | % |
Relevant information with respect to our postretirement medical and life insurance benefits as
of June 30, can be summarized as follows:
2007 | 2006 | |||||||
Change in benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 6,746 | $ | 6,764 | ||||
Service cost |
133 | 175 | ||||||
Interest cost |
423 | 346 | ||||||
Actuarial gain |
(260 | ) | (252 | ) | ||||
Plan amendments |
| (22 | ) | |||||
Effect of curtailment |
(2,938 | ) | | |||||
Benefits paid |
(300 | ) | (265 | ) | ||||
Benefit obligation at end of year |
$ | 3,804 | $ | 6,746 | ||||
Change in plan assets |
||||||||
Employer contributions |
$ | 300 | $ | 265 | ||||
Benefits paid |
(300 | ) | (265 | ) | ||||
Fair value of plan assets at end of year |
$ | | $ | | ||||
Reconciliation of funded status |
||||||||
Underfunded status |
$ | (3,804 | ) | $ | (6,746 | ) | ||
Unrecognized net actuarial loss |
| 2,717 | ||||||
Unrecognized prior service asset |
| (86 | ) | |||||
Accrued benefit cost |
$ | (3,804 | ) | $ | (4,115 | ) | ||
Amounts recognized in the consolidated balance sheets consist of |
||||||||
Current accrued benefit liability |
$ | (330 | ) | $ | | |||
Noncurrent accrued benefit liability |
$ | (3,474 | ) | $ | (4,115 | ) | ||
Accumulated benefit obligation |
$ | 3,804 | $ | 6,746 | ||||
Effective June 30, 2007, we adopted the provisions of SFAS 158. As a result of this adoption,
we recorded the underfunded status of our plans as a liability on our Consolidated Balance Sheet,
and we recognized the changes in our funded status through comprehensive income. There was no
material impact
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
on our financial position or results of operations as a result of this adoption.
The incremental effects of applying SFAS 158 on individual lines in our Consolidated Balance Sheet
are as follows:
Balances Before | Balances After | |||||||||||
Adoption of | Adoption of | |||||||||||
SFAS 158 | Adjustments | SFAS 158 | ||||||||||
Other noncurrent liabilities |
$ | 10,698 | $ | 4 | $ | 10,702 | ||||||
Deferred income tax liabilities |
$ | 1,694 | $ | 2 | $ | 1,696 | ||||||
Accumulated other comprehensive loss |
$ | 5,166 | $ | 1 | $ | 5,167 | ||||||
Total liabilities |
$ | 154,182 | $ | 6 | $ | 154,188 | ||||||
Total shareholders equity |
$ | 444,310 | $ | (1 | ) | $ | 444,309 |
Amounts recognized in accumulated other comprehensive loss at June 30, 2007 are as follows:
2007 | ||||
Net actuarial loss |
$ | 53 | ||
Prior service benefit |
(50 | ) | ||
Income taxes |
(2 | ) | ||
Total |
$ | 1 | ||
Amounts expected to be recognized in accumulated other comprehensive loss during the next
fiscal year are as follows:
2008 | ||||
Prior service cost amortization |
$ | (5 | ) | |
The following table summarizes the components of net periodic benefit cost at June 30:
2007 | 2006 | 2005 | ||||||||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | 133 | $ | 175 | $ | 135 | ||||||
Interest cost |
423 | 346 | 323 | |||||||||
Amortization of unrecognized net loss |
128 | 143 | 75 | |||||||||
Amortization of prior service asset |
(8 | ) | (6 | ) | (7 | ) | ||||||
SFAS 88 curtailment benefit |
(691 | ) | | | ||||||||
Net periodic benefit (benefit) cost |
$ | (15 | ) | $ | 658 | $ | 526 | |||||
The above-noted net periodic benefit (benefit) cost includes $(0.3) million for 2007, $0.2
million for 2006 and $0.4 million for 2005 that are presented in discontinued operations because
those benefit costs relate to the discontinued businesses.
In 2007, our plans experienced a curtailment due to a significant reduction in future service
as a result of the sale of certain automotive operations and the planned closure of our industrial
glassware operation. This resulted in the immediate recognition of a portion of the outstanding
prior service asset related to the impacted employees, as required under SFAS 88.
We expect to contribute approximately $0.3 million to our postretirement benefit plans in 2008.
Benefit payments estimated for future years are as follows:
2008 |
$ | 330 | ||
2009 |
$ | 289 | ||
2010 |
$ | 283 | ||
2011 |
$ | 278 | ||
2012 |
$ | 295 | ||
2013 2017 |
$ | 1,493 |
50
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
For other postretirement benefit measurement purposes, annual increases in medical costs
for 2007 are assumed to total approximately 10% per year and gradually decline to 5% by
approximately the year 2012 and remain level thereafter. Annual increases in medical costs for 2006
were assumed to total approximately 11% per year and gradually decline to 5% by approximately the
year 2012 and remain level thereafter.
Assumed health care cost rates can have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost trend rates would have
the following effect:
1-Percentage-Point | 1-Percentage-Point | |||||||
Increase | Decrease | |||||||
Effect on total of service and interest cost components |
$ | 20 | $ | (17 | ) | |||
Effect on postretirement benefit obligation as of June 30, 2007 |
$ | 309 | $ | (269 | ) |
Note 14 Defined Contribution and Other Employee Plans
We sponsored seven defined contribution plans established pursuant to Section 401(k) of the
Internal Revenue Code during 2007. Two of these plans are in the process of being terminated as a
result of the sale of certain automotive operations. Contributions are determined under various
formulas, and we contributed to five of the plans in the current year. Costs related to such plans
totaled approximately $1.0 million in each of the years ended June 30, 2007, 2006 and 2005.
Certain of our subsidiaries also participate in multiemployer plans that provide pension and
postretirement health and welfare benefits to the union workers at such locations. The
contributions required by our participation in the multi-employer plans totaled approximately $3.7
million in each of the years ended June 30, 2007, 2006 and 2005.
We offer a deferred compensation plan for select employees who may elect to defer a certain
percentage of annual compensation. We do not match any contributions. Each participant earns
interest based upon the prime rate of interest, adjusted semi-annually, on their respective
deferred compensation balance. Participants are paid out upon retirement or termination. Our
liability for total deferred compensation and accrued interest was approximately $2.0 million and
$3.8 million for the years ended June 30, 2007 and 2006, respectively. Deferred compensation
expense totaled approximately $0.2 million for each of the years ended June 30, 2007, 2006 and
2005.
Note 15 Commitments
We have operating leases with initial noncancelable lease terms in excess of one year covering
the rental of various facilities and equipment, which expire at various dates through 2014. Certain
of these leases contain renewal options, some provide options to purchase during the lease term and
some require contingent rentals based on usage. The future minimum rental commitments due under
these leases are summarized as follows (in thousands): 2008$5,598; 2009$5,278; 2010$3,741;
2011$1,872; 2012$952; thereafter$696.
Total rent expense, including short-term cancelable leases, during the years ended June 30,
2007, 2006 and 2005 is summarized as follows:
2007 | 2006 | 2005 | ||||||||||
Operating leases: |
||||||||||||
Minimum rentals |
$ | 5,683 | $ | 5,839 | $ | 5,236 | ||||||
Contingent rentals |
435 | 554 | 376 | |||||||||
Short-term cancelable leases |
1,994 | 2,012 | 1,909 | |||||||||
Total |
$ | 8,112 | $ | 8,405 | $ | 7,521 | ||||||
Note 16 Contingencies
In addition to the items discussed below, at June 30, 2007, we were a party to various claims
and litigation matters arising in the ordinary course of business. Such matters did not have a
material adverse
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
effect on the current-year results of operations and, in our opinion, their ultimate
disposition will not have a material adverse effect on our consolidated financial statements.
Approximately 21% of our employees are represented under various collective bargaining
agreements, which expire at various times through calendar year 2010. While we believe that labor
relations with unionized employees are good, a prolonged labor dispute could have a material
adverse effect on our business and results of operations.
We received a distribution of approximately $0.7 million from the U.S. government under CDSOA
in the second quarter of 2007, as compared to distributions of approximately $11.4 million and
$26.2 million in the corresponding periods of 2006 and 2005, respectively. CDSOA, which applies to
our candle operations, is intended to redress unfair dumping of imported products through cash
payments to eligible affected companies. Such payments are in part dependent upon the amount of
antidumping duties collected by the U.S. government on those products. The World Trade Organization
has previously ruled that such payments are inconsistent with international trade rules. In
February 2006, legislation was enacted to repeal the applicability of CDSOA to duties collected on
imported products entered into the United States after September 2007. In July 2006, the U.S. Court
of International Trade (CIT) ruled unconstitutional, on First Amendment grounds, CDSOAs
requirement that a company that is not a petitioner must have indicated its support for an
antidumping petition in order to be eligible for a distribution. In July 2007, the CIT found the
statute was severable to make all domestic producers eligible for benefits and remanded to the
agencies for a determination of moneys owed to the plaintiff. The remand is ongoing as of
mid-August 2007. In September 2006, the CIT, in a separate case, ruled the requirement
unconstitutional on equal protection grounds; following a remand, the CIT issued a final judgment
in July 2007 affirming the agencies decisions on remand. An appeal can be taken by any of the
parties to that case until late September 2007. Other cases challenging the constitutionality of
CDSOA are pending before the CIT, most of which have been assigned to a panel of three CIT judges
and consolidated or stayed. We expect that the rulings of the CIT, once finalized, will be
appealed. The ultimate resolution of the pending litigation, its timing and what, if any, effects
the litigation will have on our receipt of future CDSOA distributions is uncertain. In addition to
the CIT ruling, there are a number of factors that can affect whether we receive any CDSOA
distributions and the amount of such distributions in any year. These factors include, among other
things, potential changes in the law, other ongoing or potential legal challenges to the law, the
administrative operation of the law and the status of the underlying antidumping orders.
Certain of our automotive accessory products carry explicit limited warranties that extend
from twelve months to the life of the product, based on terms that are generally accepted in the
marketplace. Our policy is to record a provision for the expected cost of the warranty-related
claims at the time of the sale, and periodically adjust the provision to reflect actual experience.
The amount of warranty liability accrued reflects our best estimate of the expected future cost of
honoring our obligations under the warranty plans. The warranty accrual as of June 30, 2007 and
2006 is immaterial to our financial position, and the change in the accrual for 2007 is immaterial
to our results of operations and cash flows.
Note 17 Restructuring and Impairment Charge
In 2007, we recorded a restructuring and impairment charge of approximately $3.5 million ($2.3
million after taxes) including $1.4 million recorded in cost of sales for the write-down of
inventories. This charge is related to the planned closing of our industrial glass operations
located in Lancaster, Ohio. The charge consists of asset write-offs, accelerated depreciation of
certain property, plant and equipment, a pension curtailment charge, one-time termination benefits
and other costs. Production at the manufacturing facility was largely phased out by May 31, 2007.
We anticipate that active business operations will effectively cease by the end of the calendar
year upon the expected completion of certain sales and distribution activities. The decision to
close this operation resulted from continuing declines in volume and profitability.
The total estimated costs associated with this plant closure are expected to be between $5 and
$7 million and include the above-noted costs and other costs associated with disposal-related
activities. Total remaining cash expenditures are estimated to be approximately $3 million and are
expected to occur over the balance of calendar 2007.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
An analysis of this restructuring activity and the related liability recorded within the
Glassware and Candles segment at June 30, 2007 follows:
Accrual at | 2007 | Accrual at | ||||||||||||||
June 30, | 2007 | Cash | June 30, | |||||||||||||
2006 | Charge | Outlays | 2007 | |||||||||||||
Restructuring and Impairment Charge |
||||||||||||||||
Employee Separation Costs |
$ | | $ | 467 | $ | (201 | ) | $ | 266 | |||||||
Other Costs |
| 275 | (56 | ) | 219 | |||||||||||
Subtotal |
$ | | 742 | $ | (257 | ) | $ | 485 | ||||||||
Pension Curtailment Charges |
287 | |||||||||||||||
Accelerated Depreciation |
1,130 | |||||||||||||||
Inventory Write-Down |
1,400 | |||||||||||||||
Total Restructuring and Impairment Charge |
$ | 3,559 | ||||||||||||||
The restructuring accrual is located in accrued liabilities at June 30, 2007.
In the third quarter of 2005, we recorded a noncash impairment charge of approximately $0.9
million ($0.6 million after taxes) related to certain glassware-manufacturing equipment. This
impairment occurred due to inefficient production and a slowdown in demand for certain products
associated with this equipment.
Note 18 Business Segments Information
We have evaluated our operations in accordance with SFAS No. 131 and have determined that the
business is separated into three distinct operating and reportable segments: Specialty Foods,
Glassware and Candles and Automotive.
Specialty Foodsincludes the production and marketing of a family of pourable and refrigerated
produce salad dressings, croutons, sauces, refrigerated produce vegetable and fruit dips, chip
dips, dry and frozen pasta and egg noodles, caviar, frozen hearth-baked breads, and frozen yeast
rolls. Salad dressings, sauces, croutons, frozen pasta and egg noodles, frozen bread products and
frozen yeast rolls are sold to both retail and foodservice markets. The remaining products of this
business segment are primarily directed to retail markets.
Glassware and Candlesincludes the production and marketing of table and giftware consisting
of domestic glassware, both machine pressed and machine blown; imported glassware; candles in a
variety of popular sizes, shapes and scents; potpourri and related scented products; and glass
floral containers. This segments products are sold primarily to retail markets such as mass
merchandisers and food and drug stores.
Automotiveincludes the production and marketing for original equipment manufacturers and the
auto aftermarket of running boards, tube steps, toolboxes and other accessories for pickup trucks,
vans and sport utility vehicles.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
The following table sets forth business segment information with respect to the amount of
net sales contributed by each class of similar products of our consolidated net sales in each of
the years ending June 30:
2007 | 2006 | 2005 | ||||||||||
Specialty Foods |
||||||||||||
Retail |
$ | 375,987 | $ | 375,255 | $ | 343,658 | ||||||
Foodservice |
352,670 | 332,774 | 330,182 | |||||||||
Total Specialty Foods |
$ | 728,657 | $ | 708,029 | $ | 673,840 | ||||||
Glassware and Candles |
||||||||||||
Consumer Table and Giftware |
$ | 171,935 | $ | 170,845 | $ | 189,071 | ||||||
Nonconsumer Ware and Other |
45,218 | 45,697 | 44,434 | |||||||||
Total Glassware and Candles |
$ | 217,153 | $ | 216,542 | $ | 233,505 | ||||||
Automotive |
||||||||||||
Original Equipment Manufacturers |
$ | 114,998 | $ | 116,933 | $ | 76,163 | ||||||
Aftermarket |
30,354 | 32,081 | 44,820 | |||||||||
Total Automotive |
$ | 145,352 | $ | 149,014 | $ | 120,983 | ||||||
Total |
$ | 1,091,162 | $ | 1,073,585 | $ | 1,028,328 | ||||||
Operating income represents net sales less operating expenses related to the business
segments. Expenses of a general corporate nature have not been allocated to the business segments.
All intercompany transactions have been eliminated, and intersegment revenues are not significant.
Identifiable assets for each segment include those assets used in its operations and intangible
assets allocated to purchased businesses. Corporate assets consist principally of cash, cash
equivalents, short-term investments and deferred income taxes.
The following sets forth certain financial information attributable to our business segments
for the three years ended June 30, 2007, 2006 and 2005:
2007 | 2006 | 2005 | ||||||||||
Net Sales(1) |
||||||||||||
Specialty Foods |
$ | 728,657 | $ | 708,029 | $ | 673,840 | ||||||
Glassware and Candles |
217,153 | 216,542 | 233,505 | |||||||||
Automotive |
145,352 | 149,014 | 120,983 | |||||||||
Total |
$ | 1,091,162 | $ | 1,073,585 | $ | 1,028,328 | ||||||
Operating Income |
||||||||||||
Specialty Foods |
$ | 101,518 | $ | 113,796 | $ | 111,392 | ||||||
Glassware and Candles |
5,712 | 3,614 | 7,247 | |||||||||
Automotive |
545 | 4,926 | 2,341 | |||||||||
Corporate Expenses |
(7,320 | ) | (6,928 | ) | (6,808 | ) | ||||||
Total |
$ | 100,455 | $ | 115,408 | $ | 114,172 | ||||||
Identifiable Assets(1) |
||||||||||||
Specialty Foods |
$ | 348,637 | $ | 274,652 | $ | 231,219 | ||||||
Glassware and Candles |
147,232 | 171,553 | 187,707 | |||||||||
Automotive |
67,463 | 126,755 | 106,461 | |||||||||
Corporate |
35,165 | 55,061 | 205,891 | |||||||||
Total |
$ | 598,497 | $ | 628,021 | $ | 731,278 | ||||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
2007 | 2006 | 2005 | ||||||||||
Capital Expenditures |
||||||||||||
Specialty Foods |
$ | 51,746 | $ | 47,984 | $ | 15,152 | ||||||
Glassware and Candles |
1,786 | 3,847 | 3,621 | |||||||||
Automotive |
2,245 | 8,208 | 3,211 | |||||||||
Corporate |
46 | 29 | 119 | |||||||||
Total |
$ | 55,823 | $ | 60,068 | $ | 22,103 | ||||||
Depreciation and Amortization |
||||||||||||
Specialty Foods |
$ | 12,433 | $ | 9,767 | $ | 9,589 | ||||||
Glassware and Candles |
11,333 | 14,850 | 16,387 | |||||||||
Automotive |
4,874 | 4,873 | 3,983 | |||||||||
Corporate |
126 | 166 | 159 | |||||||||
Total |
$ | 28,766 | $ | 29,656 | $ | 30,118 | ||||||
(1) | Net sales and long-lived assets are predominantly domestic. |
Combined net sales from the three segments attributable to Wal-Mart Stores, Inc. totaled
approximately $164 million, or 15% of consolidated 2007 net sales; $154 million, or 14% of
consolidated 2006 net sales and $148 million, or 14% of consolidated net sales in 2005.
Combined accounts receivable for the three segments attributable to Wal-Mart Stores, Inc.
totaled approximately 17% and 15% of consolidated accounts receivable at June 30, 2007 and 2006,
respectively.
Note 19 Selected Quarterly Financial Data (Unaudited)
First | Second | Third | Fourth | Fiscal | ||||||||||||||||
Quarter | Quarter(1) | Quarter(2) | Quarter(3) | Year(4) | ||||||||||||||||
2007 |
||||||||||||||||||||
Net Sales |
$ | 262,064 | $ | 292,332 | $ | 265,692 | $ | 271,074 | $ | 1,091,162 | ||||||||||
Gross Margin |
$ | 44,649 | $ | 54,927 | $ | 45,701 | $ | 48,283 | $ | 193,560 | ||||||||||
Income from
Continuing Operations |
$ | 14,490 | $ | 20,360 | $ | 13,595 | $ | 16,236 | $ | 64,681 | ||||||||||
Loss from Discontinued
Operations, Net of Tax |
$ | (709 | ) | $ | (2,531 | ) | $ | (96 | ) | $ | (15,661 | ) | $ | (18,997 | ) | |||||
Net Income |
$ | 13,781 | $ | 17,829 | $ | 13,499 | $ | 575 | $ | 45,684 | ||||||||||
Diluted Income (Loss) per Share: |
||||||||||||||||||||
Continuing Operations |
$ | .45 | $ | .64 | $ | .43 | $ | .52 | $ | 2.05 | ||||||||||
Discontinued Operations |
$ | (.02 | ) | $ | (.08 | ) | $ | | $ | (.50 | ) | $ | (.60 | ) | ||||||
Net Income |
$ | .43 | $ | .56 | $ | .43 | $ | .02 | $ | 1.45 | ||||||||||
2006 |
||||||||||||||||||||
Net Sales |
$ | 262,604 | $ | 289,646 | $ | 257,038 | $ | 264,297 | $ | 1,073,585 | ||||||||||
Gross Margin |
$ | 50,020 | $ | 58,236 | $ | 40,512 | $ | 56,693 | $ | 205,461 | ||||||||||
Income from
Continuing Operations |
$ | 17,536 | $ | 30,728 | $ | 12,990 | $ | 23,167 | $ | 84,421 | ||||||||||
Income (Loss) from Discontinued
Operations, Net of Tax |
$ | 510 | $ | (498 | ) | $ | (1,216 | ) | $ | (263 | ) | $ | (1,467 | ) | ||||||
Net Income |
$ | 18,046 | $ | 30,230 | $ | 11,774 | $ | 22,904 | $ | 82,954 | ||||||||||
Diluted Income (Loss) per Share: |
||||||||||||||||||||
Continuing Operations |
$ | .51 | $ | .91 | $ | .39 | $ | .71 | $ | 2.52 | ||||||||||
Discontinued Operations |
$ | .01 | $ | (.01 | ) | $ | (.04 | ) | $ | (.01 | ) | $ | (.04 | ) | ||||||
Net Income |
$ | .53 | $ | .89 | $ | .35 | $ | .70 | $ | 2.48 |
55
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in thousands, except share and per share data)
(1) | Included in the second quarter earnings is income of approximately $0.4 million, net of taxes, or approximately $.01 per share, related to funds received under CDSOA. | |
(2) | Included in the third quarter earnings is expense of approximately $1.5 million, net of taxes, or approximately $.05 per share, related to the planned closing of our industrial glass operation in Lancaster, Ohio. | |
(3) | Included in the fourth quarter earnings are (A) income of approximately $0.6 million, net of taxes, or approximately $.02 per share, related to a bad debt recovery and (B) expense of approximately $0.7 million, net of taxes, or approximately $.02 per share, related to the planned closing of our industrial glass operation in Lancaster, Ohio. | |
(4) | Basic and diluted earnings per share are calculated independently for each of the quarters presented. Accordingly, the sum of the quarterly earnings per share amounts may not agree with the fiscal year. | |
(5) | Included in the second quarter earnings are (A) income of approximately $7.4 million, net of taxes, or approximately $.22 per share, related to funds received under CDSOA and (B) income of approximately $0.5 million, net of taxes, or approximately $.02 per share, related to the sale of idle real estate in the Automotive segment. | |
(6) | Included in the third quarter earnings is income of approximately $0.8 million, net of taxes, or approximately $.02 per share, related to a bad debt recovery. | |
(7) | Included in the fourth quarter earnings is income of approximately $0.7 million, net of taxes, or approximately $.02 per share, related to our annual actuarial review of our self-insured workers compensation. |
56
Table of Contents
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well-designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management must apply its judgment in evaluating the
costbenefit relationship of possible controls and procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by this report. Based
on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level as of June 30,
2007.
REPORT OF MANAGEMENT
Internal control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board
of Directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes those policies
and procedures that:
1. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | ||
2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and | ||
3. | Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over financial reporting
also can be circumvented by collusion or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations are known features
of the financial reporting process. Therefore, it is possible to design into the process safeguards
to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over
financial reporting. Management has used the framework set forth in the report entitled Internal
Control Integrated Framework published by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission to evaluate the effectiveness of our internal control over financial reporting.
Management has concluded that our internal control over financial reporting was effective as of the
end of the most recent year. Deloitte & Touche LLP has issued an attestation report on managements
assessment of our internal control over financial reporting.
There has been no change in our internal control over financial reporting during our most
recent quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
57
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lancaster Colony Corporation:
Lancaster Colony Corporation:
We have audited managements assessment, included in the accompanying Report of Management,
that Lancaster Colony Corporation and subsidiaries (the Company) maintained effective internal
control over financial reporting as of June 30, 2007, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control
over financial reporting as of June 30, 2007, is fairly stated, in all material respects, based on
the criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of June 30, 2007,
based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company as of June 30, 2007
and 2006, and the related consolidated statements of income, shareholders equity and cash flows
and the financial statement schedule for each of the three years in the period ended June 30, 2007.
Our report dated August 27, 2007 expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule and included an explanatory paragraph that, as
discussed in Note 12 and 13 to the consolidated financial statements, the Company adopted the
recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, in 2007.
/s/ Deloitte & Touche LLP
|
Columbus, OH
August 27, 2007
August 27, 2007
58
Table of Contents
Item 9B. Other Information
None
PART III
Items 10 through 14 are incorporated herein by reference to the sections captioned Nomination
and Election of Directors, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate
Governance, Board Committees and Meetings, Executive Compensation, Compensation Discussion
and Analysis, Compensation of Directors, Security Ownership of Certain Beneficial Owners,
Certain Relationships and Related Transactions and Director Independence, Compensation Committee
Interlocks and Insider Participation, Compensation Committee Report, and Audit and Related
Fees, as applicable, in the Registrants definitive proxy statement for its 2007 Annual Meeting of
Shareholders.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements. The following consolidated financial statements as of June 30,
2007 and 2006 and for each of the three years in the period ended June 30, 2007, together with the
report thereon of Deloitte & Touche LLP dated August 27, 2007, are included in Item 8 of this
report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2007 and 2006
Consolidated Statements of Income for the years ended June 30, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005
Consolidated Statements of Shareholders Equity for the years ended June 30, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2007 and 2006
Consolidated Statements of Income for the years ended June 30, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005
Consolidated Statements of Shareholders Equity for the years ended June 30, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules Required by Item 8. Included in Part IV of this report
is the following additional financial data that should be read in conjunction with the consolidated
financial statements included in Item 8 of this report:
Schedule II Valuation and Qualifying Accounts.
Supplemental schedules not included with the additional financial data have been omitted
because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(a) (3) Exhibits Required by Item 601 of Regulation S-K and Item 15(b). See Index to Exhibits
following Schedule II Valuation and Qualifying Accounts.
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Lancaster Colony Corporation | ||||||
(Registrant) |
||||||
By: | /s/John B. Gerlach, Jr.
|
|||||
Chairman, Chief Executive Officer, | ||||||
President and Director | ||||||
Date: August 28, 2007 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures | Title | Date | ||
/s/ John B. Gerlach, Jr.
|
Chairman, | August 28, 2007 | ||
Chief Executive Officer, | ||||
President and Director | ||||
(Principal Executive Officer) | ||||
/s/ John L. Boylan
|
Treasurer, Vice President, | August 28, 2007 | ||
Assistant Secretary, | ||||
Chief Financial Officer | ||||
and Director | ||||
(Principal Financial and | ||||
Accounting Officer) | ||||
/s/James B. Bachmann
|
Director | August 18, 2007 | ||
/s/ Neeli Bendapudi
|
Director | August 22, 2007 | ||
/s/Robert L. Fox
|
Director | August 20, 2007 | ||
/s/ Robert S. Hamilton
|
Director | August 22, 2007 | ||
Robert S. Hamilton |
||||
/s/ Edward H. Jennings
|
Director | August 23, 2007 | ||
/s/ Henry M. ONeill, Jr.
|
Director | August 27, 2007 | ||
/s/ Zuheir Sofia
|
Director | August 22, 2007 | ||
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Table of Contents
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
For each of the three years in the period ended June 30, 2007
For each of the three years in the period ended June 30, 2007
Column A | Column B | Column C | Column D | Column E | ||||||||||||
Additions | ||||||||||||||||
Balance at | Charged to | Balance | ||||||||||||||
Beginning | Costs and | at End | ||||||||||||||
Description | of Year | Expenses(B) | Deductions(A)(B) | of Year | ||||||||||||
Reserves deducted from asset to which they
apply Allowance for doubtful accounts
(amounts in thousands): |
||||||||||||||||
Year ended June 30, 2005 |
$ | 1,515 | $ | (602 | ) | $ | (685 | ) | $ | 1,598 | ||||||
Year ended June 30, 2006 |
$ | 1,598 | $ | (1,105 | ) | $ | (374 | ) | $ | 867 | ||||||
Year ended June 30, 2007 |
$ | 867 | $ | (846 | ) | $ | (895 | ) | $ | 916 | ||||||
Notes: | ||
(A) | Represents uncollectible accounts written-off net of recoveries. | |
(B) | Includes recovery of previously written-off bad debt related to the 2002 bankruptcy of Kmart Corporation of approximately $1.0 million, $1.2 million and $1.5 million for 2007, 2006 and 2005, respectively. |
61
Table of Contents
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-K
JUNE 30, 2007
FORM 10-K
JUNE 30, 2007
INDEX TO EXHIBITS
Exhibit | ||||||
Number | Description | Located at | ||||
3.1 | Articles of Incorporation of Lancaster Colony Corporation approved by
the shareholders November 18, 1991 |
(e) | ||||
.2 | Certificate of Amendment to the Articles of Incorporation of Lancaster
Colony Corporation approved by the shareholders November 16, 1992 |
(e) | ||||
.3 | Certificate of Amendment to the Articles of Incorporation of Lancaster
Colony Corporation approved by the shareholders November 17, 1997 |
(e) | ||||
.4 | Regulations of Lancaster Colony Corporation as amended through
November 18, 1991 |
(o) | ||||
.5 | Certificate of Designation, Rights and Preferences of the Series A
Participating Preferred Stock of Lancaster Colony Corporation |
(b) | ||||
4.1 | Specimen Certificate of Common Stock |
(h) | ||||
.2 | Rights Agreement dated as of April 20, 2000 by and between Lancaster
Colony Corporation and The Huntington National Bank |
(g) | ||||
.3 | Credit Agreement dated as of February 13, 2001 among Lancaster
Colony Corporation, The Lenders and Bank One, NA, as Agent |
(i) | ||||
.4 | First Amendment to Credit Agreement dated as of June 24, 2003 among
Lancaster Colony Corporation, the Lenders and Bank One, NA as LC Issuer
and Agent |
(j) | ||||
.5 | Second Amendment to Credit Agreement dated as of March 3, 2005
among Lancaster Colony Corporation, the Lenders and J. P. Morgan
Chase Bank, N.A. as LC Issuer and as Agent |
(n) | ||||
10.1 | * | Key Employee Severance Agreement between Lancaster Colony
Corporation and John L. Boylan |
(c) | |||
.2 | * | Lancaster
Colony Corporation 1995 Key Employee Stock Option Plan |
(d) | |||
.3 | * | Key Employee Severance Agreement between Lancaster Colony
Corporation and Bruce L. Rosa |
(f) | |||
.4 | * | Lancaster Colony Corporation Executive Employee Deferred
Compensation Plan |
(h) | |||
.5 | * | Description of Registrants Executive Bonus Arrangements |
(k) | |||
.6 | Design/Build Agreement between Sister Schuberts Homemade Rolls, Inc.
and Shambaugh & Son, LP |
(p) | ||||
.7 | * | 2004 Amendment to the Lancaster Colony Corporation Executive
Employee Deferred Compensation Plan |
(l) | |||
.8 | * | Lancaster Colony Corporation 2005 Executive Employee Deferred
Compensation Plan |
(m) | |||
.9 | * | Lancaster Colony Corporation 2005 Stock Plan |
(a) | |||
.10 | * | Form of
Restricted Stock Award Agreement under the Lancaster Colony
Corporation 2005 Stock Plan |
Filed herewith | |||
21 | Subsidiaries of Registrant |
Filed herewith | ||||
23 | Consent of Deloitte & Touche LLP |
Filed herewith |
62
Table of Contents
Exhibit | ||||||
Number | Description | Located at | ||||
31.1 | Certification of CEO Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934 |
Filed herewith | ||||
31.2 | Certification of CFO Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934 |
Filed herewith | ||||
32 | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Filed herewith |
* | Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. | |
(a) | Indicates the exhibit is incorporated by reference to Appendix C to the Proxy Statement on Schedule 14A (000-04065) of Lancaster Colony Corporation for the Annual Meeting of Shareholders held November 21, 2005. | |
(b) | Indicates the exhibit is incorporated by reference from filing as an exhibit to Lancaster Colony Corporations Quarterly Report on Form 10-Q (000-04065) for the quarter ended March 31, 1990. | |
(c) | Indicates the exhibit is incorporated by reference to Exhibit 10.6 to Lancaster Colony Corporations Annual Report on Form 10-K (000-04065) for the year ended June 30, 1991. | |
(d) | Indicates the exhibit is incorporated by reference to Exhibit A to the Proxy Statement (000-04065) of Lancaster Colony Corporation for the Annual Meeting of Shareholders held November 20, 1995. | |
(e) | Indicates the exhibit is incorporated by reference from filing as an exhibit to Lancaster Colony Corporations Annual Report on Form 10-K (000-04065) for the year ended June 30, 1998. | |
(f) | Indicates the exhibit is incorporated by reference to Exhibit 10.8 to the Lancaster Colony Corporations Annual Report on Form 10-K (000-04065) for the year ended June 30, 1999. | |
(g) | Indicates the exhibit is incorporated by reference to Exhibit 1 to Lancaster Colony Corporations report on Form 8-A (000-04065) filed April 20, 2000. | |
(h) | Indicates the exhibit is incorporated by reference from filing as an exhibit to Lancaster Colony Corporations Annual Report on Form 10-K (000-04065) for the year ended June 30, 2000. | |
(i) | Indicates the exhibit is incorporated by reference to Exhibit 4.3 to Lancaster Colony Corporations Quarterly Report on Form 10-Q (000-04065) for the quarter ended March 31, 2001. | |
(j) | Indicates the exhibit is incorporated by reference to Exhibit 4.4 to Lancaster Colony Corporations Annual Report on Form 10-K (000-04065) for the year ended June 30, 2003. | |
(k) | Indicates the exhibit is incorporated by reference to Exhibit 10.9 to Lancaster Colony Corporations Annual Report on Form 10-K (000-04065) for the year ended June 30, 2004. | |
(l) | Indicates the exhibit is incorporated by reference to Exhibit 10.1 to Lancaster Colony Corporations Current Report on Form 8-K (000-04065) filed January 3, 2005. | |
(m) | Indicates the exhibit is incorporated by reference to Exhibit 99.2 to Lancaster Colony Corporations Current Report on Form 8-K (000-04065) filed February 25, 2005. | |
(n) | Indicates the exhibit is incorporated by reference to Exhibit 99.1 to Lancaster Colony Corporations Current Report on Form 8-K (000-04065) filed March 7, 2005. | |
(o) | Indicates the exhibit is incorporated by reference to Exhibit 3.4 to Lancaster Colony Corporations Annual Report on Form 10-K (000-04065) for the year ended June 30, 2006. | |
(p) | Indicates the exhibit is incorporated by reference to Exhibit 10.1 to Lancaster Colony Corporations Current Report on Form 8-K (000-04065) filed March 16, 2007. |
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