LANCASTER COLONY CORP - Annual Report: 2010 (Form 10-K)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2010
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 | |
(NASDAQ Global Select Market) |
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) 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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one.)
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 31, 2009 was
approximately $958,704,000, based on the closing price of these shares on that day.
As of August 17, 2010, there were approximately 28,083,000 shares of Common Stock, without par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be filed for its 2010 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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Exhibit 32 |
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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 focusing primarily on specialty foods for the retail and foodservice markets.
We also manufacture and market candles for the food, drug and mass markets. Less significantly, we
are also engaged in the distribution of various products, including glassware and candles, to
commercial markets. In recent years, our strategy has shifted away from operating businesses in a
variety of industries towards emphasizing the growth and success we have achieved in our Specialty
Foods segment. 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, 2010 refers to fiscal 2010, which is the period from July 1, 2009 to June
30, 2010.
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 two business segments Specialty Foods and Glassware and Candles with the
sales of these segments accounting for approximately 85% and 15%, respectively, of consolidated net
sales for the year ended June 30, 2010. The financial information relating to business segments for
the three years in the periods ended June 30, 2010, 2009 and 2008 is included in Note 15 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 Greek yogurt vegetable
dips marketed under the brand name Otria frozen breads marketed under the brand names New York
BRAND and Mamma Bella frozen Parkerhouse style yeast dinner rolls and sweet rolls, as well as
biscuits, 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, Texas Toast, Chatham Village,
Cardinis and T. Marzetti and caviar marketed under the brand name Romanoff. A portion of our
sales in this segment relates to products 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 breads and
yeast rolls are sold primarily through sales personnel, food brokers and distributors in various
geographic 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,
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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 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, frozen specialty noodles and pasta are sold through sales
personnel, food brokers and distributors to retail, foodservice and industrial markets.
Sales attributable to one customer comprised approximately 17%, 15% and 13% of this segments
total net sales in 2010, 2009 and 2008, 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.
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 a component of our future
growth plans, with a focus on fit and value.
A significant portion of this segments product lines is manufactured at our 14 food plants
located throughout the United States. However, certain items are also manufactured and packaged by
third parties located in the United States, Canada and Europe.
Efficient and cost-effective production remains a key focus of the Specialty Foods segment. In
2010, we consolidated most of the operations of our dressings and sauces manufacturing operation
located in Wilson, New York into other existing plants, outsourced certain requirements and exited
less profitable dressing lines to achieve greater efficiency in our Specialty Foods segment. In
2009, we also consolidated our Atlanta, Georgia dressing operation into our other existing food
facilities as part of our cost-reduction efforts within this segment. Beyond this segments ongoing
initiatives for cost savings and operational improvements, in recent years we completed the
construction of two new production facilities in Hart County, Kentucky. Our salad dressing plant
provided us with incremental capacity enabling us to achieve operating efficiencies at both the new
and existing dressing plant locations. Our frozen yeast rolls plant helped to satisfy increased
customer demand and improved operating efficiencies.
The operations of this segment are not affected to any material extent by seasonal
fluctuations, although sales of frozen retail products tend to be most pronounced in the fiscal
second quarter. 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. Of less significance, we also sell candles, glassware and various other products to
customers in certain commercial markets, including restaurants, hotels, hospitals and schools.
All the markets in which we sell candle products are highly competitive in the areas of
design, price, quality and customer service. Sales attributable to one customer comprised
approximately 61%, 49% and 34% of this segments total net sales in 2010, 2009 and 2008,
respectively. No other customer accounted for more than 10% of this segments total net sales.
Seasonal retail stocking patterns cause certain products in this segment 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.
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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 2008 through 2010:
2010 | 2009 | 2008 | ||||||||||
Specialty Foods: |
||||||||||||
Non-frozen |
52 | % | 54 | % | 53 | % | ||||||
Frozen |
33 | % | 33 | % | 29 | % | ||||||
Glassware and Candles: |
||||||||||||
Consumer table and giftware |
15 | % | 13 | % | 15 | % |
Net sales attributable to Wal-Mart Stores, Inc. (Wal-Mart) totaled approximately 23%, 20%
and 17% of consolidated net sales for 2010, 2009 and 2008, 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 was less than 1%
of net sales.
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 for which the timing can
materially impact the amount of the backlog we have at any point in time without being an
indication of longer-term sales. 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 succeeding year.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 2010, we had approximately 3,200 employees. Approximately 20% of these
employees are represented under various collective bargaining agreements, which expire at various
times through calendar year 2013. 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 2010, 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, glass, fragrances and colorant agents, paraffin and other
waxes and plastic and paper packaging materials.
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.
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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 in this Annual
Report on Form 10-K.
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 than us in size. Global production overcapacity has
also had an impact on operations 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 23% of consolidated net sales for the year
ended June 30, 2010. We believe that our relationship with Wal-Mart is good, but we cannot assure
that we will be able to maintain this relationship. In addition, changes in Wal-Marts general
business model, such as reducing branded products or devoting more shelf space to private label
products, could affect the profitability of our business with Wal-Mart even if we maintain a good
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
and wax. We have observed increased volatility in the costs of many of these raw materials in
recent years. From 2007 through the first half of 2009, commodity markets for grain-based products,
on which our food products depend, including dairy, soybean oil and flour products, rose
significantly and were unusually volatile due to concerns over grain-based fuel sources and
worldwide demand. Further, fluctuating petroleum prices have impacted our costs of wax and inbound
freight on all purchased materials.
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. The increase in the costs of raw materials used in our
Specialty Foods segment during 2007 to
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2009 had an adverse impact on our operating income. We took measures to offset the impact of
these higher costs, including the implementation of higher pricing. However, there is no assurance
that we will not experience further increases in the costs of raw materials, and uncertainty exists
as to our ability to implement offsetting measures. Such further increases, as well as an inability
to effectively implement additional measures to offset higher costs, could have a material adverse
effect on our business and results of operations.
A disruption of production at certain manufacturing facilities could result in an inability to
provide adequate levels of customer service.
Because we source certain products from single manufacturing sites, it is possible that we
could experience a production disruption that results in a reduction or elimination of the
availability of some of our products. Should we not be able to obtain alternate production
capability in a timely manner, a negative impact on our operations could result, including the
potential for long-term loss of product placement with various customers.
We may be subject to product recalls or product liability claims for mislabeled, 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 are, or have the potential to be, adulterated, mislabeled, contaminated, or
contain a defect. Any of these circumstances could necessitate a recall due to a substantial
product hazard or out of an abundance of caution to avoid any potential product hazards. Any recall
could cause us to incur substantial costs and, therefore, may have an adverse effect on our results
of operations. In addition, 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 or the U.S. Consumer Product Safety Commission. Such an action could 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.
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 true in both our Glassware and Candles segment, in which we use large amounts of
wax, and in our Specialty Foods segment, in which we utilize petroleum-derived packaging materials.
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 a substantial portion 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 negatively 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 would increase our cost of goods sold. If
we
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were unable to pass those high costs to our customers in the form of price increases, those
high costs could have a material adverse effect on our business and results of operations.
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.
We believe that our labor relations with unionized employees are good, but our inability to
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 effect on
our business and results of operations, including the potential for long-term loss of product
placement with various customers.
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 $0.9 million, $8.7 million and $2.5 million in 2010,
2009 and 2008, respectively. These remittances related to certain candles being imported from the
Peoples Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of the CDSOA to duties
collected on products imported after September 2007. Accordingly, we may receive some level of
annual distributions for an undetermined period of years in the future as the monies collected that
relate to entries filed prior to October 2007 are administratively finalized by U.S. Customs.
Without further legislative action, we expect these distributions will eventually cease.
In addition to this legislative development, cases have been brought in U.S. courts
challenging the CDSOA. In two separate cases, the U.S. Court of International Trade (CIT) ruled
that the procedure for determining recipients eligible to receive CDSOA distributions is
unconstitutional. The U.S. Court of Appeals for the Federal Circuit reversed both CIT decisions. We are unable to determine, at this time, what the ultimate outcome of litigation regarding
the CDSOA will be, and it is possible that further legal action, potential additional changes in
the law and other factors could affect the amount of funds available for distribution, including
funds relating to entries prior to October 2007. Accordingly, we cannot predict the amount of
future distributions, and it is possible that we may not receive any further distributions under
the CDSOA. Any reduction in CDSOA distributions could reduce our earnings and cash flow.
Restructuring and impairment charges could have a material adverse effect on our financial
results.
We recorded restructuring and impairment charges totaling approximately $2.5 million,
$1.6 million and $1.3 million in 2010, 2009 and 2008, respectively. Likewise, future events may
occur that could 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 growth, 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 favorable to us. Further, a buyers inability to fulfill contractual obligations that were
assigned as part
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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.
Potential indemnification costs relating to business divestitures could have a material adverse
effect on our business and results of operations.
We made several business divestitures in 2008 and 2007. These divestitures were made pursuant
to agreements that contain customary indemnification provisions, some of which run in favor of the
purchasers. In the future, if any of these indemnification provisions are triggered, we may be
required to make indemnification payments to these purchasers or other parties. Any potential
payments that we may be required to make under our divestiture agreements could have a material
adverse effect on our business and results of operations.
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. These borrowings
continued throughout 2008 and much of 2009. Although we do not have any outstanding debt at this
time, we may incur indebtedness in 2011 or beyond for a variety of reasons, including acquisitions
or potential changes in capitalization that might require significant cash expenditure. It is also
possible that future borrowings may be at higher average levels than in 2008 and 2009. 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. For more information regarding our debt, see the Liquidity and
Capital Resources section in Item 7 of this Annual Report on Form 10-K.
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. If we are not successful in
maintaining our brand recognition, this could have a material adverse effect on our business and
results of operations. We intend to maintain our strong brand recognition by continuing to devote
resources to advertising, marketing and other brand-building efforts. The costs of maintaining our
brands are increasing, and these increased costs could have a material adverse impact on our
financial results.
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We rely on the performance of major retailers, wholesalers, food brokers, distributors,
foodservice customers and mass merchants for the success of our business, and should they perform
poorly or give higher priority to other brands or products, our business could be adversely
affected.
We sell our products principally to retail outlets and wholesale distributors, including
traditional supermarkets, mass merchants, warehouse clubs, wholesalers, foodservice distributors
and direct accounts, specialty food distributors, nonfood outlets such as drug store chains and
dollar stores. The replacement by or poor performance of our major wholesalers, retailers or
chains, or our foodservice customers, or our inability to collect accounts receivable from our
customers, could have a material adverse effect on our results of operations and financial
condition.
In addition, many of our customers offer branded and private label products that compete
directly with our products for retail shelf space and consumer purchases. Accordingly, there is a
risk that these customers may give higher priority or promotional support to their own products or
to the products of our competitors or discontinue the use of our products in favor of their own
products or other competing products. If we are not successful in maintaining our retail shelf
space or priority with these customers, this could have a material adverse effect on our business
and results of operations.
Inherent risks associated with our idle real property, such as our inability to sell it in a
reasonable time period, could have an adverse effect on our business and results of operations.
As a result of recent strategic alternative activities, we currently hold various parcels of
real property that are not currently used in our operations. These facilities have a net book value
at June 30, 2010 of approximately $2.7 million. In addition, we may make further specific
determinations in the future with respect to additional facilities or sell other operations while
retaining the associated real property. These determinations could be announced at any time.
Possible adverse consequences resulting from or related to these properties may include various
accounting charges, disposition costs related to the potential sale of a property, costs associated
with leasing obligations, and other normal or attendant risks and uncertainties associated with
holding, leasing or selling real property.
Although most of our properties have been subjected to periodic environmental assessments,
these assessments may be limited in scope and may not include or identify all potential
environmental liabilities or risks associated with any particular property. We cannot be certain
that our environmental assessments have identified all potential environmental liabilities or that
we will not incur material environmental liabilities in the future. If we do incur or discover any
material environmental liabilities or potential environmental liabilities in the future, we may
face significant remediation costs and find it difficult to sell or lease any affected properties.
In addition, if and as these properties become ready and available for sale, it may take
months and possibly longer to sell these properties at a suitable price. The real estate market is
affected by many factors, such as general economic conditions, availability of financing, interest
rates and other factors, including supply and demand, that are beyond our control. We cannot
predict whether we will be able to sell a property for the price or on the terms set by us or
whether any price or other terms offered by a prospective purchaser would be acceptable to us. We
cannot predict the length of time needed to find a willing purchaser and to close the sale of any
property. If we are unable to sell a property when we determine to do so, it could have an adverse
effect on our cash flow and results of operations.
The loss of the services of one or more members of our senior management team could have a
material adverse effect on our business, financial condition and results of operations.
Our operations and prospects depend in large part on the performance of our senior management
team, several of which are long-serving employees with significant knowledge of our business model
and operations. Should we not be able to find qualified replacements for any of these individuals
if their services were no longer available, our ability to manage our operations or successfully
execute our business strategy may be materially and adversely affected.
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Mr. Gerlach, our Chief Executive Officer and Chairman of our board of directors, has a
significant ownership interest in our Company.
As of June 30, 2010, Mr. Gerlach owned or controlled approximately 29% of the outstanding
shares of our common stock. Accordingly, Mr. Gerlach has significant influence on all matters
submitted to a vote of the holders of our common stock, including the election of directors.
Mr. Gerlachs voting power also may have the effect of discouraging transactions involving an
actual or a potential change of control of our Company, regardless of whether a premium is offered
over then-current market prices.
The interests of Mr. Gerlach may conflict with the interests of other holders of our common
stock.
Anti-takeover provisions could make it more difficult for a third party to acquire us.
Certain provisions of our charter documents, including provisions limiting the ability of
shareholders to raise matters at a meeting of shareholders without giving advance notice and
provisions classifying our Board of Directors, may make it more difficult for a third party to gain
control of our Board of Directors. This may have the effect of delaying or preventing changes of
control or management of the Company, which could have an adverse effect on the market price of our
stock.
Additionally, Ohio corporate law contains certain provisions that could have the effect of
delaying or preventing a change of control. The Ohio Control Share Acquisition Act found in Chapter
1701 of the Ohio Revised Code provides that certain notice and informational filings and a special
shareholder meeting and voting procedures must be followed prior to consummation of a proposed
control share acquisition, as defined in the Ohio Revised Code. Assuming compliance with the
prescribed notice and information filings, a proposed control share acquisition may be accomplished
only if, at a special meeting of shareholders, the acquisition is approved by both a majority of
the voting power of the Company represented at the meeting and a majority of the voting power
remaining after excluding the combined voting power of the interested shares, as defined in the
Ohio Revised Code. The Interested Shareholder Transactions Act found in Chapter 1704 of the Ohio
Revised Code generally prohibits certain transactions, including mergers, majority share
acquisitions and certain other control transactions, with an interested shareholder, as defined
in the Ohio Revised Code, for a three-year period after becoming an interested shareholder, unless
our Board of Directors approved the initial acquisition. After the three-year waiting period, such
a transaction may require additional approvals under this Act, including approval by two-thirds of
all of the Companys voting shares and a majority of the Companys voting shares not owned by the
interested shareholder. The application of these provisions of the Ohio Revised Code, or any
similar anti-takeover law adopted in Ohio, could have the effect of delaying or preventing a change
of control, which could have an adverse effect on the market price of our stock.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
We use approximately 2.7 million square feet of space for our operations. Of this space,
approximately 0.5 million square feet are leased.
The following table summarizes our locations that in total exceed 75,000 square feet of space
(including aggregation of multiple facilities) and that are considered our principal manufacturing
and warehousing operations:
Approximate | Terms of | |||||||
Location | Business Segment | Square Feet | Occupancy | |||||
Altoona, IA (2) |
Specialty Foods | 120,000 | Owned/Leased | |||||
Bedford Heights, OH (1) |
Specialty Foods | 98,000 | Owned/Leased | |||||
Columbus, OH (2) |
Specialty Foods | 393,000 | Owned/Leased | |||||
Grove City, OH |
Specialty Foods | 195,000 | Owned | |||||
Horse Cave, KY |
Specialty Foods | 333,000 | Owned | |||||
Luverne, AL |
Specialty Foods | 91,000 | Owned | |||||
Milpitas, CA (3) |
Specialty Foods | 130,000 | Owned/Leased | |||||
Leesburg, OH |
Glassware and Candles | 860,000 | Owned | |||||
Jackson, OH |
Glassware and Candles | 122,000 | Owned |
(1) | Part leased for term expiring in calendar year 2012 |
|
(2) | Part leased for term expiring in calendar year 2014 |
|
(3) | Part leased for term expiring in calendar year 2015 |
As a result of our past strategic alternative activities, we also hold various parcels of real
property that we do not currently use in our operations. The related facilities contain in excess
of 1.5 million square feet.
Item 3. Legal Proceedings
We currently are a party to various legal proceedings. 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.
Item 4. Removed and Reserved
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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 Corporation common shares
and the dividends paid for each quarter of 2010 and 2009. Stock prices were provided by The NASDAQ
Stock Market LLC.
Dividends | ||||||||||||
Stock Prices | Paid | |||||||||||
High | Low | Per Share | ||||||||||
2010 |
||||||||||||
First quarter |
$ | 53.41 | $ | 41.52 | $ | .285 | ||||||
Second quarter |
$ | 51.96 | $ | 47.01 | .300 | |||||||
Third quarter |
$ | 60.07 | $ | 49.30 | .300 | |||||||
Fourth quarter |
$ | 61.60 | $ | 51.77 | .300 | |||||||
Year |
$ | 1.185 | ||||||||||
2009 |
||||||||||||
First quarter |
$ | 39.24 | $ | 29.57 | $ | .280 | ||||||
Second quarter |
$ | 38.37 | $ | 26.01 | .285 | |||||||
Third quarter |
$ | 43.46 | $ | 31.90 | .285 | |||||||
Fourth quarter |
$ | 48.92 | $ | 40.42 | .285 | |||||||
Year |
$ | 1.135 | ||||||||||
The number of shareholders as of August 17, 2010 was approximately 8,300. The highest and
lowest prices for our common stock from July 1, 2010 to August 17, 2010 were $54.99 and $48.51.
We have paid dividends for 188 consecutive quarters. Future dividends will depend on our
earnings, financial condition and other factors.
Issuer Purchases of Equity Securities
Our Board of Directors (Board) approved a share repurchase authorization of 2,000,000 shares
in August 2007. Approximately 429,000 shares from this authorization remained authorized for future
purchase at June 30, 2010. 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 130, 2010 |
| $ | | | 509,077 | |||||||||||
May 131, 2010 |
| $ | | | 509,077 | |||||||||||
June 130, 2010 |
80,334 | $ | 54.74 | 80,334 | 428,743 | |||||||||||
Total |
80,334 | $ | 54.74 | 80,334 | 428,743 | |||||||||||
This share repurchase authorization does 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, 2005 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 GRAPH)](https://www.sec.gov/Archives/edgar/data/0000057515/000095012310080836/c04814c0481401.gif)
Cumulative Total Return (Dollars)
6/05 | 6/06 | 6/07 | 6/08 | 6/09 | 6/10 | |||||||||||||||||||
Lancaster Colony Corporation |
100.00 | 99.13 | 107.86 | 80.34 | 120.51 | 149.23 | ||||||||||||||||||
S&P Midcap 400 |
100.00 | 112.98 | 133.89 | 124.07 | 89.30 | 111.56 | ||||||||||||||||||
Dow Jones U.S. Food Producers |
100.00 | 108.76 | 127.39 | 115.79 | 97.50 | 105.73 |
There can be no assurance that our stock performance will continue into the future with the
same or similar trends depicted in the above graph.
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Item 6. Selected Financial Data
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
(Thousands Except | Years Ended June 30 | |||||||||||||||||||
Per Share Figures) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Operations |
||||||||||||||||||||
Net Sales |
$ | 1,056,608 | $ | 1,051,491 | $ | 980,915 | $ | 945,810 | $ | 924,571 | ||||||||||
Gross Margin |
$ | 270,332 | $ | 215,492 | $ | 157,341 | $ | 181,740 | $ | 189,074 | ||||||||||
Percent of Sales |
25.6 | % | 20.5 | % | 16.0 | % | 19.2 | % | 20.4 | % | ||||||||||
Interest Expense |
$ | | $ | (1,217 | ) | $ | (3,076 | ) | $ | (150 | ) | $ | | |||||||
Percent of Sales |
0.0 | % | 0.1 | % | 0.3 | % | 0.0 | % | 0.0 | % | ||||||||||
Other Income Continued Dumping
and Subsidy Offset Act |
$ | 893 | $ | 8,696 | $ | 2,533 | $ | 699 | $ | 11,376 | ||||||||||
Income from Continuing Operations
Before Income Taxes |
$ | 175,138 | $ | 137,006 | $ | 75,668 | $ | 101,260 | $ | 125,734 | ||||||||||
Percent of Sales |
16.6 | % | 13.0 | % | 7.7 | % | 10.7 | % | 13.6 | % | ||||||||||
Taxes Based on Income |
$ | 60,169 | $ | 47,920 | $ | 27,229 | $ | 36,981 | $ | 44,494 | ||||||||||
Income from Continuing Operations |
$ | 114,969 | $ | 89,086 | $ | 48,439 | $ | 64,279 | $ | 81,240 | ||||||||||
Percent of Sales |
10.9 | % | 8.5 | % | 4.9 | % | 6.8 | % | 8.8 | % | ||||||||||
Continuing Operations Diluted Income
per Common Share(1) |
$ | 4.07 | $ | 3.17 | $ | 1.64 | $ | 2.03 | $ | 2.42 | ||||||||||
Cash Dividends per Common Share |
$ | 1.185 | $ | 1.135 | $ | 1.11 | $ | 1.07 | $ | 3.03 | ||||||||||
Financial Position |
||||||||||||||||||||
Cash, Equivalents and
Short-Term Investments |
$ | 100,890 | $ | 38,484 | $ | 19,417 | $ | 8,316 | $ | 41,815 | ||||||||||
Total Assets |
$ | 586,453 | $ | 498,481 | $ | 520,178 | $ | 598,497 | $ | 628,021 | ||||||||||
Working Capital |
$ | 239,446 | $ | 148,233 | $ | 144,925 | $ | 137,121 | $ | 235,283 | ||||||||||
Property, Plant and EquipmentNet |
$ | 166,097 | $ | 170,900 | $ | 179,573 | $ | 194,589 | $ | 162,107 | ||||||||||
Long-Term Debt |
$ | | $ | | $ | 55,000 | $ | | $ | | ||||||||||
Property Additions |
$ | 12,833 | $ | 11,336 | $ | 16,832 | $ | 53,589 | $ | 51,860 | ||||||||||
Depreciation and Amortization |
$ | 20,533 | $ | 21,870 | $ | 24,138 | $ | 24,081 | $ | 24,980 | ||||||||||
Shareholders Equity |
$ | 484,908 | $ | 402,556 | $ | 359,218 | $ | 444,309 | $ | 494,421 | ||||||||||
Per Common Share |
$ | 17.21 | $ | 14.32 | $ | 12.63 | $ | 14.45 | $ | 15.33 | ||||||||||
Weighted Average Common Shares
OutstandingDiluted(1) |
28,174 | 28,044 | 29,496 | 31,603 | 33,502 |
(1) | Certain prior year figures have been restated to reflect the
adoption of the provisions of a Financial Accounting Standards Board (FASB)
Staff Position (FSP) on the FASBs Emerging Issues Task Force (EITF) Issue
No. 03-06-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. See further discussion in Note 1 to
the consolidated financial statements. |
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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, 2010, 2009 and 2008 and our liquidity
and capital resources as of June 30, 2010 and 2009. 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, 2010
refers to fiscal 2010, which is the period from July 1, 2009 to June 30, 2010. 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 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 Annual
Report on Form 10-K. 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
Lancaster Colony Corporation is a diversified manufacturer and marketer of consumer products
focusing primarily on specialty foods for the retail and foodservice markets. We also manufacture
and market candles for the food, drug and mass markets. Although not material to our consolidated
operations, we are also engaged in the distribution of various products, including glassware and
candles, to commercial markets. Our operations are organized in two reportable segments: Specialty
Foods and Glassware and Candles. Over 90% of the sales of each segment are made to customers in
the United States.
In recent years, our strategy has shifted away from operating businesses in a variety of
industries towards emphasizing the growth and success we have achieved in our Specialty Foods
segment. Fiscal years prior to 2009 were significant years in implementing this strategy as we
divested nonfood operations and focused our capital investment in the Specialty Foods segment. In
2008, we sold substantially all of the assets of our remaining automotive operations as well as
most of our consumer and floral glass operating assets. These transactions, combined with other
previous strategic dispositions and investments, have resulted in transforming our company into a
predominately food-focused business. See further discussion of these divestitures in Note 2 to the
consolidated financial statements. In 2010, approximately 85% of our consolidated net sales and
effectively all of our operating income were derived from the Specialty Foods segment. For
perspective, in 2000, our Specialty Foods segment comprised approximately 42% and 51% of our
reported consolidated net sales and operating income, respectively. Below is a list of the material
transactions and other events in 2008 that contributed toward our transition to a food-focused
business:
| June 2008 Sale of the remaining automotive operations, ending the previously
reported Automotive segment; |
| November 2007 Sale of substantially all of the operating assets of our consumer
and floral glass operations; and |
| September 2007 Substantial completion and operational start-up of new frozen
yeast roll facility in Horse Cave, Kentucky. |
We intend to continue periodically reassessing the strategic fit and contribution of our
remaining nonfood operations in light of market conditions, capital needs and other factors. Our
current strategy focuses our efforts on the most profitable part of our business and minimizes the
amount of financial and management resources devoted to our nonfood operations. Without distraction
from significant issues
16
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previously posed by our divested automotive and glassware businesses, we believe we are now
better positioned to maximize the future potential of our Specialty Foods segment.
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. |
Our goal is to grow our specialty foods retail and foodservice business over time by:
| leveraging the strength of our retail brands to increase current product sales and
introduce new products; |
||
| growing our foodservice sales through the strength of our reputation in product
development and quality; and |
||
| pursuing acquisitions that meet our strategic criteria. |
Within retail markets, our Specialty Foods segment 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. Over the
long-term, 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 future 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.
As has occasionally been required to support future growth opportunities, we have historically
made substantial capital investments to support our existing food operations, including in the
above-mentioned facility to manufacture frozen yeast rolls that began operations in 2008. At an
adjoining location, we began production activities at a newly-constructed dressing facility in
2007. Both projects helped accommodate potential future sales growth and also provided greater
manufacturing efficiencies. Based on our current plans and expectations, including expectations of
a plant expansion at our Kentucky frozen roll facility, we believe that total capital expenditures
for 2011 will be approximately $40 to $45 million.
Summary of 2010 Results
The following is an overview of our consolidated operating results for the year ended June 30,
2010. Results for 2008 reflect the classification of the sold automotive operations as discontinued
operations. There were no discontinued operations in 2010 or 2009.
Consolidated net sales reached approximately $1,057 million during 2010, increasing by less
than 1% as compared to prior-year net sales of $1,051 million, driven by growth coming from our
Glassware and Candles segment as partially offset by a decline in Specialty Foods segment sales.
The increase in net sales of the Glassware and Candles segment reflected higher unit volume on
improved consumer demand for high-quality, value-priced candles and the introduction and success of
various new products. The decline in sales of the Specialty Foods segment reflected moderately
lower foodservice sales, as partially offset by higher retail sales.
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Gross margin increased 25% to approximately $270.3 million from the prior-year comparable
total of $215.5 million. Lower raw-material costs, a more favorable sales mix in the Specialty
Foods segment and the benefits of higher candle sales contributed to the higher gross margins.
Overall results were also affected by the funds received under the CDSOA. In 2010, we received
approximately $0.9 million under CDSOA, as compared to approximately $8.7 million in 2009 and
approximately $2.5 million in 2008. For a more-detailed discussion of CDSOA, see the subcaption
Other Income Continued Dumping and Subsidy Offset Act of this MD&A.
Net income totaled approximately $115.0 million in 2010, or $4.07 per diluted share, compared
to net income of $89.1 million, or $3.17 per diluted share, in 2009. Net income in 2008 totaled
approximately $37.6 million, or $1.27 per diluted share, and was inclusive of an after-tax loss
from discontinued operations of approximately $10.8 million, or $.37 per diluted share. The 2008
loss on the sale of discontinued operations was approximately $13.5 million, or $.46 per diluted
share.
Looking Forward
We currently anticipate further growth in consolidated sales during 2011. Factors that we
believe should contribute to our growth include the introduction of several new retail food
products as well as the expansion of existing product lines with current customers or into new
markets. We will also continue to review acquisition opportunities within the Specialty Foods
segment that are consistent with our growth strategy, represent good value or otherwise provide
significant strategic benefits. However, unsettled economic conditions affecting consumer and
retailer buying patterns are among the many influences that may impact sales improvement and our
ability to sustain or improve operating margins.
Within our Specialty Foods segment, we anticipate that modest increases in marketing and
promotional costs will occur in 2011 to support the consumer awareness and competiveness of our
branded retail products. All else equal, a continuation of greater consumer spending on food
consumed at home, as opposed to away-from-home, would be helpful to operating margins as our retail
products typically possess higher contribution margins than foodservice products. With respect to
material input costs, on balance, we enter 2011 experiencing an elevation of such costs over 2010
levels. It is also possible that a recovery in general economic conditions and other changes in the
economy and regulatory environment could cause a more-pronounced increase in the costs of food
commodities and other raw materials. To help offset or stabilize the impact of these rising costs,
we have pursued other operational strategies that we believe will aid our future results. For
instance, as part of our cost reduction efforts, we consolidated our Wilson, New York and Atlanta,
Georgia production operations into our other existing facilities in the second quarter of 2010 and
early 2009, respectively. We are continuing to limit some of our exposure to volatile swings in
food commodity costs through a structured purchasing program for certain future requirements.
With respect to our Glassware and Candles segment, operating results in 2010 benefited from
higher sales and production levels as well as lower material costs, especially for paraffin wax.
However, we expect paraffin wax cost comparisons to turn unfavorable in 2011. We are currently
attempting to implement mitigating increases in our prices to customers, although the ultimate
outcome and extent of relief from these actions is indeterminable at present. We currently expect
this segments 2011 operating income to be challenged to reach the level of 2010.
For a more-detailed discussion of the effect of commodity costs, see the Impact of Inflation
section of this MD&A below.
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 will continue to reassess our allocation
of capital periodically to ensure that we maintain adequate operating flexibility while providing
appropriate levels of cash returns to our shareholders, whether through share repurchases or cash
dividends, including special dividends, if appropriate.
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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:
2010 | 2009 | 2008 | ||||||||||
Segment Sales Mix: |
||||||||||||
Specialty Foods |
85 | % | 87 | % | 82 | % | ||||||
Glassware and Candles |
15 | % | 13 | % | 18 | % |
Net Sales and Gross Margin
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||
Net Sales |
||||||||||||||||||||||||||||
Specialty Foods |
$ | 893,256 | $ | 909,897 | $ | 808,507 | $ | (16,641 | ) | (2 | )% | $ | 101,390 | 13 | % | |||||||||||||
Glassware and Candles |
163,352 | 141,594 | 172,408 | 21,758 | 15 | % | (30,814 | ) | (18 | )% | ||||||||||||||||||
Total |
$ | 1,056,608 | $ | 1,051,491 | $ | 980,915 | $ | 5,117 | 0 | % | $ | 70,576 | 7 | % | ||||||||||||||
Gross Margin |
$ | 270,332 | $ | 215,492 | $ | 157,341 | $ | 54,840 | 25 | % | $ | 58,151 | 37 | % | ||||||||||||||
Gross Margin as a
Percentage of Sales |
25.6 | % | 20.5 | % | 16.0 | % |
Consolidated net sales for the year ended June 30, 2010 increased by less than 1% to
approximately $1,057 million from the prior-year total of approximately $1,051 million. In 2010,
increased sales within the Glassware and Candles segment were partially offset by lower sales
within the Specialty Foods segment. The Specialty Foods segments sales decline reflected
moderately lower foodservice sales, as partially offset by higher retail sales. The increase in net
sales of the Glassware and Candles segment reflected higher unit volume on improved consumer demand
for high-quality, value-priced candles and the introduction and success of various new products.
Consolidated net sales for the year ended June 30, 2009 increased 7% over the 2008 total of
approximately $981 million. This sales growth was driven by increased sales in the Specialty Foods
segment as partially offset by a decline in sales of the Glassware and Candles segment. The
Specialty Foods segments growth benefited from pricing actions, as well as higher volumes in both
the retail and foodservice markets. All such growth was internally generated. The decrease in net
sales of the Glassware and Candles segment is primarily attributable to the November 2007 sale of
our consumer and floral glass operations and the prior-year disposition of inventory related to
closing our industrial glassware facility. Net sales attributable to these divested and closed
operations totaled approximately $22 million in 2008.
Our gross margin as a percentage of net sales was approximately 25.6% in 2010 compared with
20.5% in 2009 and 16.0% in 2008. In the Specialty Foods segment, gross margin percentages improved
in 2010 as a result of lower commodity costs, a stronger retail mix and operating efficiency
improvements. We estimate the favorable year-over-year impact of commodity costs for the year ended
June 30, 2010 approximated 5% of the segments net sales. Gross margin percentages in the Glassware
and Candles segment improved from the prior year due to lower material costs, especially for
paraffin wax, and higher sales and production levels. In the Specialty Foods segment, gross margin
percentages improved in 2009, benefiting from both pricing actions and higher sales volumes, which
offset the adverse impact of higher ingredient costs incurred during the first half of the fiscal
year. Gross margin percentages in the Glassware and Candles segment declined from 2008 due to
higher wax costs, declines in candle sales and lower capacity utilization within candle
manufacturing operations. Also affecting 2008 results were a charge of approximately $6.4 million
recorded in cost of sales for the loss on the sale of our consumer and floral glass operations, a
pension settlement charge of approximately $3.0 million recorded in corporate expenses and income
of approximately $1.1 million to reflect a favorable adjustment of prior-year self-insured
deductibles under our general liability insurance.
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Selling, General and Administrative Expenses
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||
Selling, General and
Administrative Expenses |
$ | 93,821 | $ | 84,238 | $ | 80,751 | $ | 9,583 | 11 | % | $ | 3,487 | 4 | % | ||||||||||||||
SG&A Expense as a
Percentage of Sales |
8.9 | % | 8.0 | % | 8.2 | % |
Selling, general and administrative expenses for 2010 totaled approximately $93.8 million and
increased 11% as compared with the 2009 total of $84.2 million, while the 2009 total had increased
4% from the 2008 total of $80.8 million. In 2010, increased costs in consumer-directed marketing
initiatives to support retail sales and increased professional fees within the Specialty Foods
segment contributed to the overall increase. Included in 2009 expenses were recoveries of bad debt
associated with the 2002 bankruptcy filing of Kmart Corporation totaling approximately
$0.7 million. We wrote off approximately $14.3 million related to this bankruptcy in 2002. Relative
to 2008, the 2009 decrease in selling, general and administrative expenses as a percentage of sales
was influenced by the extent to which the higher sales leveraged our existing selling and
organizational infrastructure.
Restructuring and Impairment Charges
Specialty Foods Segment Fiscal 2010
In the first quarter of 2010, we committed to a plan to close our dressings and sauces
manufacturing operation located in Wilson, New York. This decision was intended to provide greater
efficiency in our Specialty Foods segment by consolidating most of this facilitys operations into
other existing plants, outsourcing certain requirements and exiting less profitable dressing lines.
Production at this facility was phased out in the second quarter of 2010; and while timing of the
disposal of the associated real estate is difficult to predict, this closure was essentially
complete at December 31, 2009. The operations of this location have not been reclassified to
discontinued operations in accordance with U.S. generally accepted accounting principles (GAAP)
for the impairment or disposal of long-lived assets.
During 2010, we recorded restructuring charges of approximately $2.3 million ($1.5 million
after taxes), including approximately $0.2 million recorded in Cost of Sales for the write-down of
inventories. The remaining charges consisted of one-time termination benefits, a pension
curtailment charge and other various closing costs. Cash expenditures for 2010 were approximately
$1.8 million and related to the one-time termination benefits and other closing costs.
An analysis of the restructuring activity for 2010 recorded within the Specialty Foods segment
follows:
Accrual at | 2010 | Accrual at | ||||||||||||||
June 30, | 2010 | Cash | June 30, | |||||||||||||
(Dollars in thousands) | 2009 | Charges | Outlays | 2010 | ||||||||||||
Restructuring Charges |
||||||||||||||||
Employee Separation Costs |
$ | | $ | 1,643 | $ | (1,643 | ) | $ | | |||||||
Other Costs |
| 172 | (172 | ) | | |||||||||||
Subtotal |
$ | | 1,815 | $ | (1,815 | ) | $ | | ||||||||
Pension Curtailment Charges |
349 | |||||||||||||||
Inventory Write-Down |
179 | |||||||||||||||
Total Restructuring Charges |
$ | 2,343 | ||||||||||||||
We do not expect any other restructuring costs or cash expenditures related to this closure.
The total costs associated with this closure were ultimately less than originally estimated due to
the actual timing of the closure and its impact on the one-time termination benefits and also due
to lower than expected other closing costs.
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Specialty Foods Segment Fiscal 2009
In the first quarter of 2009, we began consolidating our Atlanta, Georgia dressing operation
into our other existing food facilities as part of our cost-reduction efforts within the Specialty
Foods segment. During 2009, we recorded restructuring and impairment charges of approximately $0.8
million ($0.5 million after taxes). This closure was essentially complete at September 30, 2008,
and the disposition of the associated real estate occurred in December 2008. We do not expect any
other costs or cash expenditures related to this closure.
Other
In 2007, we closed our industrial glass operation that was located in Lancaster, Ohio. The
majority of the total $5.7 million restructuring and impairment charge related to this closure was
recorded in 2007, but we did incur approximately $1.3 million ($0.8 million after taxes) and $0.8
million ($0.5 million after taxes) during the years ended June 30, 2008 and 2009, respectively. The
2007 and 2008 charges were included within our Glassware and Candles segment because that is where
the operation was classified. After the closure was essentially completed in 2009, the related
activities were recorded in Corporate expenses. We do not currently expect other significant
restructuring costs related to this closure.
Held for Sale
As a result of the current-year closing discussed above, as well as various prior-year
restructuring and divestiture activities, we have certain held for sale properties with a total
net book value of approximately $2.7 million that have been reclassified to current assets and are
included in Deferred Income Taxes and Other Current Assets on the Consolidated Balance Sheet. In
accordance with GAAP for property, plant and equipment, we are no longer depreciating these held
for sale assets and they are being actively marketed for sale.
Operating Income (Loss)
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||
Operating Income (Loss) |
||||||||||||||||||||||||||||
Specialty Foods |
$ | 176,194 | $ | 145,848 | $ | 88,975 | $ | 30,346 | 21 | % | $ | 56,873 | 64 | % | ||||||||||||||
Glassware and Candles |
9,445 | (5,671 | ) | (1,887 | ) | 15,116 | 267 | % | (3,784 | ) | (201 | )% | ||||||||||||||||
Corporate Expenses |
(11,440 | ) | (10,529 | ) | (11,751 | ) | (911 | ) | 9 | % | 1,222 | (10 | )% | |||||||||||||||
Total |
$ | 174,199 | $ | 129,648 | $ | 75,337 | $ | 44,551 | 34 | % | $ | 54,311 | 72 | % | ||||||||||||||
Operating Income (Loss) as
a Percentage of Sales |
||||||||||||||||||||||||||||
Specialty Foods |
19.7 | % | 16.0 | % | 11.0 | % | ||||||||||||||||||||||
Glassware and Candles |
5.8 | % | (4.0 | )% | (1.1 | )% | ||||||||||||||||||||||
Consolidated |
16.5 | % | 12.3 | % | 7.7 | % |
Due to the factors discussed above, consolidated operating income for 2010 totaled
approximately $174.2 million, a 34% increase from 2009 operating income of $129.6 million. The 2009
total had increased 72% from 2008 operating income totaling approximately $75.3 million. See
further discussion of operating results by segment following the discussion of Net Income below.
Interest Expense
We incurred no interest expense in 2010 as there were no borrowings outstanding during the
year. Lower interest rates on our debt as well as an overall decrease in average borrowing levels
resulted in interest expense of approximately $1.2 million in 2009 related to long-term borrowings
as compared to $3.1 million in 2008. We had no outstanding borrowings at June 30, 2010 or 2009.
Other Income Continued Dumping and Subsidy Offset Act
The 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
$0.9 million,
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$8.7 million and $2.5 million in 2010, 2009 and 2008, respectively. These remittances related
to certain candles being imported from the Peoples Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of the CDSOA to duties
collected on products imported after September 2007. Accordingly, we may receive some level of
annual distributions for an undetermined period of years in the future as the monies collected that
relate to entries filed prior to October 2007 are administratively finalized by U.S. Customs.
Without further legislative action, we expect these distributions will eventually cease.
In addition to this legislative development, cases have been brought in U.S. courts
challenging the CDSOA. In two separate cases, the CIT ruled that the procedure for determining
recipients eligible to receive CDSOA distributions is unconstitutional. The U.S. Court of Appeals
for the Federal Circuit reversed both CIT decisions. We are unable to determine, at this
time, what the ultimate outcome of litigation regarding the CDSOA will be, and it is possible that
further legal action, potential additional changes in the law and other factors could affect the
amount of funds available for distribution, including funds relating to entries prior to October
2007. Accordingly, we cannot predict the amount of future distributions, and it is possible that we
may not receive any further distributions under the CDSOA. Any reduction in CDSOA distributions
could reduce our earnings and cash flow.
Interest Income and Other Net
Interest income and other was income of less than $0.1 million, expense of approximately
$0.1 million and income of approximately $0.9 million in 2010, 2009 and 2008, respectively. The
decrease from 2008 to 2009 reflects a lower level of interest income due to lower interest rates.
Income from Continuing Operations Before Income Taxes
As affected by the factors discussed above, our income from continuing operations before
income taxes for 2010 of approximately $175.1 million increased 28% from the 2009 total of
$137.0 million. The 2008 total income from continuing operations before income taxes was
approximately $75.7 million. Our effective tax rate on income from continuing operations was 34.4%,
35.0% and 36.0% in 2010, 2009 and 2008, respectively. The lower rate in 2010 reflected, in part, a
favorable resolution of certain previously-reserved state and local tax matters in 2010, as further
discussed in Note 6 to the consolidated financial statements. Relative to 2008, the 2009 rate was
influenced by a higher Federal deduction related to domestic production activities and an overall
lower state tax rate.
Income from Continuing Operations
Income from continuing operations totaled approximately $115.0 million, $89.1 million and
$48.4 million for 2010, 2009 and 2008, respectively, as influenced by the factors noted above.
Income from continuing operations per share totaled approximately $4.08 per basic share and $4.07
per diluted share in 2010, as compared to $3.17 per basic and diluted share in 2009 and $1.64 per
basic and diluted share in 2008. Income per share in each of the last three years has been
beneficially affected by share repurchases, which have totaled approximately $110.6 million over
the three-year period ended June 30, 2010.
Discontinued Operations
There were no discontinued operations in 2010 or 2009. In 2008, we recorded a loss from
discontinued operations of approximately $10.8 million, net of tax, including an after-tax loss on
sale of approximately $13.5 million. Loss from discontinued operations per share totaled
approximately $.37 per basic and diluted share in 2008. See further discussion in Note 2 to the
consolidated financial statements.
Net Income
Net income for 2010 of approximately $115.0 million increased from 2009 net income of
$89.1 million. Net income was approximately $37.6 million in 2008. Diluted net income per share
totaled approximately $4.07 in 2010, a 28% increase from the prior-year total of $3.17. The latter
amount was 150% higher than 2008 diluted earnings per share of $1.27.
SEGMENT REVIEW SPECIALTY FOODS
During 2010, net sales of the Specialty Foods segment declined approximately 2% from the
record level achieved in 2009, and operating income of approximately $176.2 million increased 21%
from the 2009 level
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of $145.8 million. Lower raw-material costs and a more favorable sales mix contributed to the
higher level of operating income. Net sales during 2010 totaled approximately $893.3 million, a
decrease from the prior-year total of $909.9 million. Sales for 2009 increased 13% over the 2008
total of approximately $808.5 million. The percentage of retail customer sales within the segment
was approximately 53% during 2010, as compared to 51% in 2009 and 2008.
The decline in net sales of the Specialty Foods segment in 2010 reflected generally flat
volumes and lower pricing to customers in foodservice channels. Higher sales to retail channel
customers were more than offset by lower foodservice sales. Foodservice sales declined by
approximately 7% for the year ended June 30, 2010, with contributing factors including weaker chain
restaurant demand and downward pricing adjustments in certain of our customer supply arrangements
that occurred as a result of lower key ingredient costs. Net sales to retail channel customers
increased 3% in 2010 on volume growth from several product lines, as partially offset by the
exiting of less profitable dressing lines with the closing of our Wilson, New York operation. In
2009, we estimate that more than half of the Specialty Foods segments sales growth was derived
from pricing actions, although we also attained higher volumes in both the retail and foodservice
markets. In foodservice markets, our 2009 sales increase over 2008 was broad based with growth
among various customers and product lines, including dressings and sauces, frozen rolls and frozen
pasta.
Operating income of the Specialty Foods segment in 2010 totaled approximately $176.2 million,
a 21% increase from the 2009 total of $145.8 million. The 2009 level was 64% higher than the 2008
level of $89.0 million. The 2010 increase reflects lower commodity costs, a stronger retail sales
mix and operating efficiency improvements. We estimate that the favorable year-over-year impact of
commodity costs approximated 5% of net sales. In March 2010, we announced a recall of a limited
number of veggie and chip dip food products after being notified by one of our suppliers, Basic
Food Flavors, Inc., of a recall of an ingredient used in our products due to potential salmonella
contamination. We recorded costs of approximately $0.5 million related to this recall in 2010. We
estimate the total costs of the recall will be approximately $1.5 million. We expect reimbursement
of certain costs incurred over our deductible from our insurance carrier and thus have recorded a
receivable of approximately $1.0 million at June 30, 2010. The 2009 increase in operating income
over 2008 primarily reflects higher pricing and greater sales volumes. These improvements offset
the adverse impact of higher ingredient costs incurred during the first half of the fiscal year. We
estimate the unfavorable year-over-year impact of commodity costs at approximately $15 million in
2009.
SEGMENT REVIEW GLASSWARE AND CANDLES
Glassware and Candles segment sales totaled approximately $163.4 million during 2010, as
compared to $141.6 million in 2009 and $172.4 million in 2008. The increase in net sales of the
Glassware and Candles segment for 2010 reflected higher unit volume on improved consumer demand for
high-quality, value-priced candles and the introduction, expanded product placement and the success
of various new products. The decline in net sales of the Glassware and Candles segment for 2009 was
influenced by the sale of our consumer and floral glass operations in November 2007, as well as the
earlier closure of our industrial glassware facility. Net sales attributable to these divested and
closed operations totaled approximately $22 million in 2008. The 2009 decline was also affected by
lower candle sales. Unsettled economic and competitive retail market conditions contributed to this
decline.
The segment recorded operating income of approximately $9.4 million in 2010 compared to
operating losses of $5.7 million during 2009 and $1.9 million during 2008. Operating results of the
Glassware and Candles segment improved in 2010 due to lower material costs, especially for paraffin
wax, and higher sales and production levels. The 2009 decline reflects a decrease in candle sales,
higher wax costs and lower capacity utilization, as partially offset by higher pricing implemented
on various candle products. Comparisons to 2008 were also affected by the approximately
$6.4 million loss recorded in cost of sales from the November 2007 sale of our consumer and floral
glass operations, as well as the loss of subsequent contribution from these operations over the
balance of 2008. Future results may also remain sensitive to capacity utilization rates due to the
relatively high level of fixed manufacturing costs that exists in this segment.
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CORPORATE EXPENSES
The 2010 corporate expenses totaled approximately $11.4 million as compared to $10.5 million
in 2009 and $11.8 million in 2008. The 2010 increase in corporate expenses includes approximately
$0.9 million of charges for the write-down of fixed assets and other costs related to demolition
activity at certain of our held for sale properties. The decrease in the 2009 expenses of
approximately $1.3 million from 2008 relates to 2008 encompassing a pension settlement charge of
approximately $3.0 million associated with one of our divested automotive operations. On a
comparative basis, this decrease was somewhat offset by 2009 expenses including restructuring and
other costs related to divested and closed operations.
FINANCIAL CONDITION
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 2010, and we ended the year with approximately $100.9 million in cash and
equivalents at June 30, 2010, along with shareholders equity of nearly $485 million and no debt.
In October 2007, we entered into a new unsecured revolving credit facility, which replaced the
previously-existing credit facility. Under the new facility, we may borrow up to a maximum of
$160 million at any one time. Loans may be used for general corporate purposes. We had no
borrowings outstanding under this facility at June 30, 2010. The facility expires in October 2012,
and all outstanding amounts are then due and payable.
The facility contains certain restrictive covenants, including limitations on indebtedness,
asset sales and acquisitions, and financial covenants relating to interest coverage and leverage.
At June 30, 2010, we were in compliance with all applicable provisions and covenants of the
facility, and we met the requirements of the financial covenants by substantial margins.
We currently expect to remain in compliance with the facilitys covenants for the foreseeable
future. A default under the facility could accelerate the repayment of our outstanding indebtedness
and limit our access to additional credit available under the facility. Such an event could require
curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or
investment plans, or otherwise impact our ability to meet our obligations when due. At June 30,
2010, we were not aware of any event that would constitute a default under the facility.
We believe that internally generated funds and our existing aggregate balances in cash and
equivalents, in addition to our currently available bank credit arrangements, should be adequate to
meet our foreseeable cash requirements. If we were to borrow outside of our credit facility under
current market terms, our average interest rate may increase significantly and have an adverse
effect on our results of operations.
For additional information regarding our credit facility, see Note 5 to the consolidated
financial statements.
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Cash Flows from Continuing Operations
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||
Provided by Operating
Activities |
$ | 107,691 | $ | 133,164 | $ | 70,932 | $ | (25,473 | ) | (19 | )% | $ | 62,232 | 88 | % | |||||||||||||
(Used in) Provided by
Investing Activities |
$ | (14,100 | ) | $ | (10,974 | ) | $ | 710 | $ | (3,126 | ) | (28 | )% | $ | (11,684 | ) | N/M | |||||||||||
Used in Financing Activities |
$ | (31,185 | ) | $ | (103,123 | ) | $ | (109,372 | ) | $ | 71,938 | 70 | % | $ | 6,249 | 6 | % |
Our cash flows for the years 2008 through 2010 are presented in the Consolidated Statements of
Cash Flows. Cash flow generated from operations remains the primary source of financing for our
internal growth. Cash provided by operating activities from continuing operations in 2010 totaled
approximately $107.7 million, a decrease of 19% as compared with the prior-year total of
$133.2 million, which increased from the 2008 total of $70.9 million. The 2010 decrease results
from comparatively unfavorable changes in working capital components, especially inventory, prepaid
Federal income taxes and receivables, as partially offset by a higher level of net income and
comparatively favorable changes in accounts payable and accrued liabilities. Most notably,
consolidated inventories increased approximately $19 million primarily as a result of anticipating
larger seasonal sales of candles and frozen breads in 2011. The 2009 increase results from a higher
level of income from continuing operations and comparatively favorable relative changes in working
capital components, especially inventory and prepaid Federal income taxes, as partially offset by
the comparative pension plan activity and the prior-year loss on divestitures, as well as the
comparatively unfavorable relative change in accounts payable. Consolidated inventories in 2009
declined approximately $18 million from 2008 levels primarily due to operational changes,
especially within our Glassware and Candles segment.
Net cash from investing activities totaled a use of approximately $14.1 million in 2010, a use
of approximately $11.0 million in 2009 and a source of approximately $0.7 million for 2008. The
2010 increase in cash used in investing activities reflects lower proceeds from the sale of
property and an increase in capital expenditures in 2010. The 2009 decrease in cash from investing
activities reflects the absence of any divestitures, as partially offset by a lower level of
capital expenditures in 2009. Capital expenditures totaled approximately $12.8 million in 2010,
compared to $11.3 million in 2009 and $16.8 million in 2008. Capital spending allocations during
2010 by segment approximated 88% for Specialty Foods, 11% for Glassware and Candles and 1% for
Corporate. Based on our current plans and expectations, we believe that total capital expenditures
for 2011 will be approximately $40 to $45 million.
Financing activities used net cash totaling approximately $31.2 million, $103.1 million and
$109.4 million in 2010, 2009 and 2008, respectively. The 2010 decrease in cash used in financing
activities is due primarily to a decrease in treasury share repurchases, the net change in
borrowing activity and an increase in the cash overdraft balance. The 2009 decrease is due
primarily to a decrease in treasury share repurchases and an increase in proceeds from the exercise
of stock awards, as partially offset by the net change in borrowing activity and a decrease in the
cash overdraft balance. The total payment for cash dividends for the year ended June 30, 2010 was
approximately $33.4 million. The dividend payout rate for 2010 was $1.185 per share as compared to
$1.135 per share during 2009, and $1.11 per share in 2008. This past fiscal year marked the 47th
consecutive year in which our dividend rate was increased. Cash utilized for share repurchases
totaled approximately $4.4 million, $16.9 million and $89.3 million in 2010, 2009 and 2008,
respectively. Our Board approved a share repurchase authorization of 2,000,000 shares in August
2007. Approximately 429,000 shares from this authorization remained authorized for future purchase
at June 30, 2010.
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.
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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.
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 that 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, 2010 and future minimum lease
payments for the use of property and equipment under operating lease agreements.
In
August 2010, we entered into a construction contract commitment
approximating $13 million and equipment purchase commitments of approximately $5 million for the expansion of our frozen yeast roll
facility located in Kentucky.
The following table summarizes our contractual obligations as of June 30, 2010 (dollars 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) |
$ | 14,805 | $ | 4,166 | $ | 6,141 | $ | 3,921 | $ | 577 | ||||||||||
Purchase Obligations (2) |
63,530 | 63,148 | 366 | 16 | | |||||||||||||||
Other Long-Term Liabilities (as reflected
on Consolidated Balance Sheet) (3) |
2,929 | 64 | 2,865 | | | |||||||||||||||
Total |
$ | 81,264 | $ | 67,378 | $ | 9,372 | $ | 3,937 | $ | 577 | ||||||||||
(1) | Operating leases are primarily entered into for warehouse and office facilities and certain
equipment. See Note 12 to the consolidated financial statements for further information. |
|
(2) | Purchase obligations represent purchase orders and longer-term purchase arrangements related
to the procurement of raw materials, supplies, and property, plant and equipment. |
|
(3) | This amount does not include approximately $16.2 million of other noncurrent liabilities
recorded on the balance sheet, which consist of the underfunded pension liability, other post
employment benefit obligations, tax liabilities 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 6, 9, 10 and 11 to the consolidated financial statements for
further information. |
IMPACT OF INFLATION
In recent years, we have been exposed to significant fluctuations in certain manufacturing
input costs, including materials such as food commodities and paraffin wax. For 2010, we believe
our overall manufacturing costs reflected favorable improvement over prior years, with the
year-over-year contribution derived from lower materials costs approximating 5% of net sales. These
lower costs occurred primarily in the first half of 2010, with our cost comparisons becoming
progressively less favorable as the year progressed. As noted above, some of this benefit was
offset by contractual adjustments existing within certain foodservice pricing arrangements.
Entering 2011, with respect to material input and freight-related fuel costs, on balance, we are
experiencing an elevation of such costs over 2010 levels. This is particularly true with respect to
paraffin wax costs. Relative to 2008, 2009 results were influenced by substantially higher
raw-material costs, especially for various key food commodities and candle wax. The year-over-year
increase in raw-material costs for the Specialty Foods segment was estimated at approximately
$15 million.
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Our 2011 operating results will be impacted by our ability to offset any higher input costs
through pricing adjustments with our customers. Over the course of 2009 and 2008, we were generally
able to adjust various selling prices of food products to offset the effects of increased
raw-material costs. However, these adjustments generally lagged the increase in our costs, having a
net positive impact on our 2009 operating margins and a net negative impact in 2008. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This MD&A discusses our consolidated financial statements, which have been prepared in
accordance with GAAP. 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 typically 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, 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 revenue upon transfer of title and risk of loss, provided that evidence of an
arrangement exists, pricing is fixed or determinable, and collectability is probable. 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, 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 and may differ from actual due to such
factors as changes in customer and consumer demand. 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.
Long-Lived Assets
We monitor the recoverability of the carrying value of our long-lived assets by periodically
considering whether 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.
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Goodwill and Intangible Assets
Goodwill is not amortized. It is evaluated annually at April 30, through asset impairment
testing, 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 intangible assets when events or circumstances indicate potential
recoverability concerns. 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, 2010 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. 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. We recognize the overfunded or
underfunded status of our defined benefit plans as an asset or liability in our Consolidated
Balance Sheet. Any changes in that funded status caused by subsequent plan revaluations are
recognized through comprehensive income. We may also experience
future plan settlements or curtailments having unanticipated effects on operating results.
RECENTLY ISSUED ACCOUNTING STANDARDS
There were no recently issued accounting pronouncements that impact our consolidated financial
statements.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective July 1, 2009, we adopted the provisions of a FASB FSP on the FASBs EITF Issue No.
03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities, which is now part of Accounting Standards Codification (ASC) Topic
260, Earnings Per Share. This FSP addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting, and therefore need to be included in
the earnings allocation in computing earnings per share (EPS) under the two-class method. The
restricted stock we previously granted to employees was deemed to meet the definition of a
participating security as the employees receive nonforfeitable dividends before the stock becomes
vested. Our adoption of this FSP required that we retrospectively restate EPS and diluted weighted
average common shares outstanding for all periods
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presented. This resulted in a $.01 reduction in basic and diluted net income per common share
for both 2009 and 2008. See further discussion in Note 1 to the consolidated financial statements.
In 2010, we adopted FSP No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit
Plan Assets (FSP FAS 132(R)-1), which is now part of ASC Topic 715, Compensation-Retirement
Benefits. FSP FAS 132(R)-1 provides guidance on an employers disclosures about plan assets of a
defined benefit pension or other postretirement plan. This FSP expands the disclosure for
retirement benefits by adding required disclosures about (1) how investment allocation decisions
are made by management, (2) major categories of plan assets, and (3) significant concentration of
risk. Additionally, the FSP requires an employer to disclose information about the valuation of
plan assets similar to that required for fair value measurements. See further discussion in Note 9
to the consolidated financial statements.
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, without limitation, the specific influences outlined below. Management believes
these forward-looking statements to be reasonable; however, you should not place undue reliance on
such statements that are based on current expectations. Forward-looking statements speak only as of
the date they are made, and we undertake no obligation to update such forward-looking statements.
Items which could impact 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; |
||
| 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 candle operations; |
||
| the overall strength of the economy; |
||
| changes in financial markets; |
||
| slower than anticipated sales growth; |
||
| the extent of operational efficiencies achieved; |
||
| price and product competition; |
||
| the uncertainty regarding the effect or outcome of any decision to explore further
strategic alternatives among our nonfood operations; |
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| 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; |
||
| the impact of fluctuations in our pension plan asset values on funding levels,
contributions required and benefit costs; |
||
| maintenance of competitive position with respect to other manufacturers, including
import sources of production; |
||
| dependence on key personnel; |
||
| stability of labor relations; |
||
| dependence on contract copackers; |
||
| effect of governmental regulations, including environmental matters; |
||
| legislation and litigation affecting the future administration of the CDSOA; |
||
| access to any required financing; |
||
| changes in income tax laws; |
||
| unexpected costs relating to the holding or disposition of idle real estate; |
||
| changes in estimates in critical accounting judgments; and |
||
| innumerable other factors. |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to market risks primarily from changes in interest rates and ingredient
prices. We have not had exposure to market risk associated with derivative financial instruments or
derivative commodity instruments.
INTEREST RATE RISK
We are subject to interest rate risk primarily associated with our borrowings. Interest rate
risk is the risk that changes in interest rates could adversely affect earnings and cash flows.
Rates under our credit facility are set at the time of each borrowing and are based on
predetermined formulas connected to certain benchmark rates. Increases in these rates could have an
adverse impact on our earnings and cash flows. At the end of 2010, we had no borrowings outstanding
under our credit facility. The nature and amount of our borrowings may vary as a result of business
requirements, acquisitions, market conditions and other factors.
COMMODITY PRICE RISK
We purchase a variety of commodities and other materials, such as soybean oil, flour, wax and
packaging materials, which we use to manufacture our products. The market prices for these
commodities are subject to fluctuation based upon a number of economic factors and may become
volatile at times. While we do not use any derivative commodity instruments to hedge against
commodity price risk, we do actively manage a portion of the risk through a structured purchasing
program for certain future requirements. This program gives us more predictable input costs, which
may help stabilize our margins during periods of volatility in commodity markets.
Item 8. Financial Statements and Supplementary Data
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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, 2010 and 2009, and the related consolidated
statements of income, stockholders equity, and cash flows for each of the three years in the
period ended June 30, 2010. Our audits also included the financial statement schedule listed in the
table of contents at Item 15. These consolidated financial statements and the financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on the consolidated financial statements and the 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 the Company and subsidiaries as of June 30, 2010 and 2009, and
the results of their operations and their cash flows for each of the three years in the period
ended June 30, 2010, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the 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 6 to the consolidated financial statements, the Company changed its
method of accounting for uncertain tax positions with the adoption of ASC 740, Income Taxes (FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48)), effective July 1,
2007.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial reporting as of June
30, 2010, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated August 25,
2010 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP |
||
Columbus, Ohio |
||
August 25, 2010 |
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
June 30 | ||||||||
(Amounts in thousands, except share data) | 2010 | 2009 | ||||||
ASSETS | ||||||||
Current Assets: |
||||||||
Cash and equivalents |
$ | 100,890 | $ | 38,484 | ||||
Receivables (less allowance for doubtful accounts,
2010$516; 2009$942) |
67,766 | 61,152 | ||||||
Inventories: |
||||||||
Raw materials |
36,812 | 33,067 | ||||||
Finished goods and work in process |
84,697 | 69,456 | ||||||
Total inventories |
121,509 | 102,523 | ||||||
Deferred income taxes and other current assets |
27,234 | 20,653 | ||||||
Total current assets |
317,399 | 222,812 | ||||||
Property, Plant and Equipment: |
||||||||
Land, buildings and improvements |
129,747 | 130,683 | ||||||
Machinery and equipment |
242,024 | 239,380 | ||||||
Total cost |
371,771 | 370,063 | ||||||
Less accumulated depreciation |
205,674 | 199,163 | ||||||
Property, plant and equipmentnet |
166,097 | 170,900 | ||||||
Other Assets: |
||||||||
Goodwill |
89,840 | 89,840 | ||||||
Other intangible assetsnet |
9,514 | 10,678 | ||||||
Other noncurrent assets |
3,603 | 4,251 | ||||||
Total |
$ | 586,453 | $ | 498,481 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 41,904 | $ | 41,180 | ||||
Accrued liabilities |
36,049 | 33,399 | ||||||
Total current liabilities |
77,953 | 74,579 | ||||||
Other Noncurrent Liabilities |
19,138 | 16,719 | ||||||
Deferred Income Taxes |
4,454 | 4,627 | ||||||
Shareholders Equity: |
||||||||
Preferred stockauthorized 3,050,000 shares; outstandingnone |
||||||||
Common stockauthorized 75,000,000 shares; outstanding, 201028,167,549 shares; 200928,101,885 shares |
94,885 | 88,962 | ||||||
Retained earnings |
1,080,015 | 998,476 | ||||||
Accumulated other comprehensive loss |
(9,797 | ) | (9,085 | ) | ||||
Common stock in treasury, at cost |
(680,195 | ) | (675,797 | ) | ||||
Total shareholders equity |
484,908 | 402,556 | ||||||
Total |
$ | 586,453 | $ | 498,481 | ||||
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30 | |||||||||||||
(Amounts in thousands, except per share data) | 2010 | 2009 | 2008 | ||||||||||
Net Sales |
$ | 1,056,608 | $ | 1,051,491 | $ | 980,915 | |||||||
Cost of Sales |
786,276 | 835,999 | 823,574 | ||||||||||
Gross Margin |
270,332 | 215,492 | 157,341 | ||||||||||
Selling, General and Administrative Expenses |
93,821 | 84,238 | 80,751 | ||||||||||
Restructuring and Impairment Charges |
2,312 | 1,606 | 1,253 | ||||||||||
Operating Income |
174,199 | 129,648 | 75,337 | ||||||||||
Other (Expense) Income: |
|||||||||||||
Interest expense |
| (1,217 | ) | (3,076 | ) | ||||||||
Other incomeContinued Dumping and Subsidy
Offset Act |
893 | 8,696 | 2,533 | ||||||||||
Interest income and othernet |
46 | (121 | ) | 874 | |||||||||
Income from Continuing Operations
Before Income Taxes |
175,138 | 137,006 | 75,668 | ||||||||||
Taxes Based on Income |
60,169 | 47,920 | 27,229 | ||||||||||
Income from Continuing Operations |
114,969 | 89,086 | 48,439 | ||||||||||
Discontinued Operations, Net of Tax: |
|||||||||||||
Income from Discontinued Operations |
| | 2,633 | ||||||||||
Loss on Sale of Discontinued Operations |
| | (13,452 | ) | |||||||||
Total Discontinued Operations |
| | (10,819 | ) | |||||||||
Net Income |
$ | 114,969 | $ | 89,086 | $ | 37,620 | |||||||
Income Per Common Share from
Continuing Operations: |
|||||||||||||
Basic |
$ | 4.08 | $ | 3.17 | $ | 1.64 | |||||||
Diluted |
$ | 4.07 | $ | 3.17 | $ | 1.64 | |||||||
Loss Per
Common Share from Discontinued Operations: |
|||||||||||||
Basic and Diluted |
$ | | $ | | $ | (.37 | ) | ||||||
Net Income Per Common Share: |
|||||||||||||
Basic |
$ | 4.08 | $ | 3.17 | $ | 1.27 | |||||||
Diluted |
$ | 4.07 | $ | 3.17 | $ | 1.27 | |||||||
Weighted Average Common Shares Outstanding: |
|||||||||||||
Basic |
28,144 | 28,033 | 29,494 | ||||||||||
Diluted |
28,174 | 28,044 | 29,496 |
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30 | ||||||||||||
(Amounts in thousands) | 2010 | 2009 | 2008 | |||||||||
Cash Flows From Operating Activities: |
||||||||||||
Net income |
$ | 114,969 | $ | 89,086 | $ | 37,620 | ||||||
Adjustments to reconcile net income
to net cash provided by operating activities: |
||||||||||||
Loss from discontinued operations |
| | 10,819 | |||||||||
Depreciation and amortization |
20,533 | 21,870 | 24,138 | |||||||||
Deferred income taxes and other noncash changes |
3,415 | 3,767 | 4,593 | |||||||||
Restructuring and impairment charges |
677 | (1,221 | ) | 774 | ||||||||
Gain on sale of property |
(40 | ) | (861 | ) | (603 | ) | ||||||
Loss on divestitures |
| | 6,414 | |||||||||
Pension plan activity |
(289 | ) | (2,316 | ) | 2,035 | |||||||
Changes in operating assets and liabilities: |
||||||||||||
Receivables |
(7,421 | ) | (2,287 | ) | (5,851 | ) | ||||||
Inventories |
(19,166 | ) | 17,780 | (7,487 | ) | |||||||
Other current assets |
(6,755 | ) | 13,868 | (8,277 | ) | |||||||
Accounts payable and accrued liabilities |
1,768 | (6,522 | ) | 6,757 | ||||||||
Net cash provided by operating activities
from continuing operations |
107,691 | 133,164 | 70,932 | |||||||||
Cash Flows From Investing Activities: |
||||||||||||
Cash paid for acquisitions |
| | (250 | ) | ||||||||
Payments on property additions |
(12,833 | ) | (11,336 | ) | (16,832 | ) | ||||||
Proceeds from sale of property |
69 | 2,000 | 935 | |||||||||
Net proceeds from divestitures |
| | 19,108 | |||||||||
Othernet |
(1,336 | ) | (1,638 | ) | (2,251 | ) | ||||||
Net cash (used in) provided by investing activities
from continuing operations |
(14,100 | ) | (10,974 | ) | 710 | |||||||
Cash Flows From Financing Activities: |
||||||||||||
Net repayment of $100 million credit facility |
| | (42,500 | ) | ||||||||
Proceeds from debt |
| 25,000 | 146,104 | |||||||||
Payments on debt |
| (80,000 | ) | (91,104 | ) | |||||||
Purchase of treasury stock |
(4,398 | ) | (16,894 | ) | (89,338 | ) | ||||||
Payment of dividends |
(33,430 | ) | (31,854 | ) | (32,578 | ) | ||||||
Proceeds from the exercise of stock awards |
4,643 | 5,407 | 648 | |||||||||
Increase (decrease) in cash overdraft balance |
2,000 | (4,782 | ) | (604 | ) | |||||||
Net cash used in financing activities
from continuing operations |
(31,185 | ) | (103,123 | ) | (109,372 | ) | ||||||
Cash Flows From Discontinued Operations: |
||||||||||||
Net cash provided by operating activities
from discontinued operations |
| | 22,385 | |||||||||
Net cash provided by investing activities
from discontinued operations |
| | 26,444 | |||||||||
Net cash provided by discontinued operations |
| | 48,829 | |||||||||
Effect of exchange rate changes on cash |
| | 2 | |||||||||
Net change in cash and equivalents |
62,406 | 19,067 | 11,101 | |||||||||
Cash and equivalents at beginning of year |
38,484 | 19,417 | 8,316 | |||||||||
Cash and equivalents at end of year |
$ | 100,890 | $ | 38,484 | $ | 19,417 | ||||||
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
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, 2007 |
30,748 | $ | 81,665 | $ | 937,376 | $ | (5,167 | ) | $ | (569,565 | ) | $ | 444,309 | |||||||||||
Net income |
37,620 | 37,620 | ||||||||||||||||||||||
Translation adjustment |
(131 | ) | (131 | ) | ||||||||||||||||||||
Net pension and postretirement
benefit losses, net of $339
tax effect |
(477 | ) | (477 | ) | ||||||||||||||||||||
Comprehensive Income |
37,012 | |||||||||||||||||||||||
Cash dividends common
stock ($1.11 per share) |
(32,578 | ) | (32,578 | ) | ||||||||||||||||||||
Purchase of treasury stock |
(2,340 | ) | (89,338 | ) | (89,338 | ) | ||||||||||||||||||
Stock-based plans |
44 | 648 | 648 | |||||||||||||||||||||
Stock-based compensation expense |
339 | 339 | ||||||||||||||||||||||
Cumulative effect of
FIN 48 adoption |
(1,174 | ) | (1,174 | ) | ||||||||||||||||||||
Balance, June 30, 2008 |
28,452 | 82,652 | 941,244 | (5,775 | ) | (658,903 | ) | 359,218 | ||||||||||||||||
Net income |
89,086 | 89,086 | ||||||||||||||||||||||
Net pension and postretirement
benefit losses, net of $1,897
tax effect |
(3,310 | ) | (3,310 | ) | ||||||||||||||||||||
Comprehensive Income |
85,776 | |||||||||||||||||||||||
Cash dividends common
stock ($1.135 per share) |
(31,854 | ) | (31,854 | ) | ||||||||||||||||||||
Purchase of treasury stock |
(496 | ) | (16,894 | ) | (16,894 | ) | ||||||||||||||||||
Stock-based plans |
146 | 5,347 | 5,347 | |||||||||||||||||||||
Stock-based compensation expense |
963 | 963 | ||||||||||||||||||||||
Balance, June 30, 2009 |
28,102 | 88,962 | 998,476 | (9,085 | ) | (675,797 | ) | 402,556 | ||||||||||||||||
Net income |
114,969 | 114,969 | ||||||||||||||||||||||
Net pension and postretirement
benefit losses, net of $430
tax effect |
(712 | ) | (712 | ) | ||||||||||||||||||||
Comprehensive Income |
114,257 | |||||||||||||||||||||||
Cash dividends common
stock ($1.185 per share) |
(33,430 | ) | (33,430 | ) | ||||||||||||||||||||
Purchase of treasury stock |
(80 | ) | (4,398 | ) | (4,398 | ) | ||||||||||||||||||
Stock-based plans |
146 | 4,274 | 4,274 | |||||||||||||||||||||
Stock-based compensation expense |
1,649 | 1,649 | ||||||||||||||||||||||
Balance, June 30, 2010 |
28,168 | $ | 94,885 | $ | 1,080,015 | $ | (9,797 | ) | $ | (680,195 | ) | $ | 484,908 | |||||||||||
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except 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. Intercompany transactions and accounts have been eliminated in
consolidation. Results for fiscal year 2008 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, 2010 refers to fiscal 2010, which is the period from July 1, 2009 to June 30,
2010.
Subsequent Events
We have evaluated events occurring between the end of our most recent fiscal year and the date
the financial statements were issued and noted no events that would require recognition or
disclosure in these financial statements, except as disclosed in Note
12.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles (GAAP) 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, tax contingency reserves for uncertain tax positions, 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. The carrying amounts of our cash and equivalents approximate fair
value due to their short maturities. 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 $2.0 million as of
June 30, 2010, as compared to zero at June 30, 2009.
Receivables and the Allowance for Doubtful Accounts
The carrying amounts of our accounts receivable approximate fair value. 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 and trade accounts receivable. By policy, we limit the amount of
credit exposure to any one institution or issuer. Our concentration of credit risk with respect to
trade accounts receivable is mitigated by our credit evaluation process and by having a large and
diverse customer base. However, see Note 15 with respect to our accounts receivable with Wal-Mart
Stores, Inc.
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. It is not practicable to segregate work in
process from finished goods
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
inventories. We estimate, however, that work in process inventories amount to approximately 3%
and 5% of the combined total of finished goods and work in process inventories at June 30, 2010 and
2009, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Purchases of
property, plant and equipment included in accounts payable at June 30, 2010, 2009 and 2008 were
approximately $0.1 million, $0.1 million and $0.6 million, respectively, and these purchases have
been excluded from the property additions and the change in accounts payable in 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 45 years while machinery and
equipment range from two to 20 years. For the years ending June 30, 2010, 2009 and 2008,
depreciation expense was approximately $17.0 million, $18.1 million and $20.0 million,
respectively. For tax purposes, we generally compute depreciation using accelerated methods. See
Note 14 for discussion of recent asset impairments.
Long-Lived Assets
We monitor the recoverability of the carrying value of our long-lived assets by periodically
considering whether 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 14 for discussion of
recent asset impairments.
Goodwill and Intangible Assets
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 to general and administrative expense. As of April 30, 2010 and 2009, as
appropriate, we completed asset impairment testing, and such testing indicated that there was no
impairment. We periodically evaluate the future economic benefit of the recorded goodwill and
intangible assets when events or circumstances indicate potential recoverability concerns. Carrying
amounts are adjusted appropriately when determined to have been impaired. See further discussion
and disclosure in Note 3.
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 are
primarily based on historical loss development factors. Differences in estimates and assumptions
could result in an accrual requirement materially different from the calculated accrual.
Revenue Recognition
We recognize revenue upon transfer of title and risk of loss, provided that evidence of an
arrangement exists, pricing is fixed or determinable, and collectability is probable. Net sales are
recorded net of estimated sales discounts, returns and certain sales incentives, including coupons
and rebates.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Advertising Expense
We expense advertising as it is incurred. Advertising expense was approximately 2% of net
sales in 2010, as compared to approximately 1% of net sales in both 2009 and 2008.
Shipping and Handling
Shipping and handling fees billed to customers are recorded as sales, while our 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 GAAP for
stock-based compensation, which 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
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. See further discussion and disclosure in Note 8.
Other Income
During the second quarter of 2010, we received approximately $0.9 million from the U.S.
government under the Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) compared to
approximately $8.7 million received in the second quarter of 2009 and approximately $2.5 million
received in the second quarter of 2008. 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 consolidated financial
statements. See further discussion in Note 13.
Per Share Information
Net income per common share is computed based on the weighted average number of shares of
common stock and common stock equivalents (stock options, restricted stock and stock-settled stock
appreciation rights) 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, restricted stock and stock-settled stock appreciation rights.
Effective July 1, 2009, we adopted the provisions of a Financial Accounting Standards Board
(FASB) Staff Position (FSP) on the FASBs Emerging Issues Task Force (EITF) Issue No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, which is now part of Accounting Standards Codification (ASC) Topic 260, Earnings
Per Share. This FSP addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share (EPS) under the two-class method. The restricted stock
we previously granted to employees was deemed to meet the definition of a participating security as
the employees receive nonforfeitable dividends before the stock becomes vested. Our adoption of
this FSP required that we retrospectively restate EPS and diluted weighted average common shares
outstanding for all periods presented. This resulted in a $.01 reduction in basic and diluted net
income per common share for both 2009 and 2008.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Basic and diluted net income per common share were calculated as follows:
2010 | 2009 | 2008 | ||||||||||
Net income |
$ | 114,969 | $ | 89,086 | $ | 37,620 | ||||||
Net income allocated to participating securities |
(198 | ) | (87 | ) | (17 | ) | ||||||
Net income allocated to common shareholders |
$ | 114,771 | $ | 88,999 | $ | 37,603 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
28,144 | 28,033 | 29,494 | |||||||||
Incremental share effect from: |
||||||||||||
Stock options |
3 | 3 | | |||||||||
Restricted stock |
6 | 6 | 2 | |||||||||
Stock-settled stock appreciation rights |
21 | 2 | | |||||||||
Diluted |
28,174 | 28,044 | 29,496 | |||||||||
Net income per common share: |
||||||||||||
Basic |
$ | 4.08 | $ | 3.17 | $ | 1.27 | ||||||
Diluted |
$ | 4.07 | $ | 3.17 | $ | 1.27 |
Comprehensive Income and Accumulated Other Comprehensive Loss
Comprehensive income includes changes in equity that result from transactions and economic
events from non-owner sources. Comprehensive income is composed of two subsets net income and
other comprehensive income (loss). Included in other comprehensive income (loss) are pension and
postretirement benefits adjustments.
Recently Issued Accounting Standards
There were no recently issued accounting pronouncements that impact our consolidated financial
statements.
Note 2 Acquisitions, Discontinued Operations and Divestitures
Acquisitions
In June 2007, we acquired the principal assets of Marshall Biscuit Company, Inc., a privately
owned producer and marketer of frozen yeast rolls and biscuits based in Saraland, Alabama for
approximately $23.1 million. An earn out payment of approximately $0.2 million was made in 2008, as
determined under the terms of the purchase agreement. There were no earn-out payments in 2010 or
2009, as the conditions, as defined in the purchase agreement, were not met. The final year of this
earn-out payment arrangement was 2010.
Discontinued Operations
In June 2008, as part of a strategic alternative review of nonfood operations, we sold
effectively all of the operating assets of our Des Moines, Iowa automotive accessory operations.
The cash transaction resulted in a pretax loss of approximately $20.4 million for the year ended
June 30, 2008. This operation was previously included in our Automotive segment and had net sales
of approximately $142.1 million in 2008 and a pretax loss of approximately $16.3 million (including
the pretax loss on sale) for the year ended June 30, 2008.
The 2008 financial results of this and other previously-divested operations are reported
separately as discontinued operations. For 2008, the loss from discontinued operations was
approximately $10.8 million, net of tax, and included a net loss on the sale of these operations of
approximately $13.5 million, net of tax of $7.1 million.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Divestitures
In November 2007, as part of a strategic alternative review of nonfood operations, we sold
substantially all the consumer and floral glass operating assets of our Indiana Glass Company and
E. O. Brody Company subsidiaries for gross proceeds of approximately $21.5 million. This cash
transaction resulted in a pretax loss of approximately $6.4 million in 2008, which is recorded in
cost of sales. These operations were included in our Glassware and Candles segment and had net
sales of approximately $18 million during the fiscal year ended June 30, 2008. As part of the sale,
we entered into a non-exclusive, three-year supply agreement with the buyer for certain glassware
products that our candle operations continue to use. In accordance with GAAP for the impairment or
disposal of long-lived assets, the financial results of these operations do not meet the criteria
for classification as discontinued operations and, therefore, have been included in continuing
operations for all periods presented.
Note 3 Goodwill and Other Intangible Assets
Goodwill attributable to the Specialty Foods segment was approximately $89.8 million at June
30, 2010 and 2009.
The following table summarizes our identifiable other intangible assets, all included in the
Specialty Foods segment:
2010 | 2009 | |||||||
Trademarks (40-year life) |
||||||||
Gross carrying value |
$ | 370 | $ | 370 | ||||
Accumulated amortization |
(177 | ) | (167 | ) | ||||
Net Carrying Value |
$ | 193 | $ | 203 | ||||
Customer Relationships (12 to 15-year life) |
||||||||
Gross carrying value |
$ | 13,020 | $ | 13,020 | ||||
Accumulated amortization |
(4,054 | ) | (3,118 | ) | ||||
Net Carrying Value |
$ | 8,966 | $ | 9,902 | ||||
Non-compete Agreements (5 to 8-year life) |
||||||||
Gross carrying value |
$ | 1,540 | $ | 1,540 | ||||
Accumulated amortization |
(1,185 | ) | (967 | ) | ||||
Net Carrying Value |
$ | 355 | $ | 573 | ||||
Total Net Carrying Value |
$ | 9,514 | $ | 10,678 | ||||
Amortization expense relating to these assets was approximately $1.2 million for each of the
years ended June 30, 2010, 2009 and 2008. Total annual amortization expense is estimated to be
approximately $1.2 million for next year, $1.1 million for the second year and $0.9 million for
each of the following three years.
Note 4 Accrued Liabilities
Accrued liabilities at June 30, 2010 and 2009 are composed of:
2010 | 2009 | |||||||
Accrued compensation and employee benefits |
$ | 24,671 | $ | 22,863 | ||||
Accrued marketing and distribution |
6,471 | 5,768 | ||||||
Income and other taxes |
1,269 | 1,307 | ||||||
Book cash overdrafts |
2,000 | | ||||||
Other |
1,638 | 3,461 | ||||||
Total accrued liabilities |
$ | 36,049 | $ | 33,399 | ||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 5 Long-Term Debt
At June 30, 2010 and 2009, we had an unsecured revolving credit facility under which we may
borrow up to a maximum of $160 million at any one time, with the potential to expand the total
credit availability to
$260 million based on obtaining consent of the issuing bank and certain other conditions. The
facility expires in October 2012, and all outstanding amounts are then due and payable. At June 30,
2010 and 2009, we had no borrowings outstanding under this facility. Loans may be used for general
corporate purposes.
Based on the long-term nature of this facility, when we have outstanding borrowings under this
facility, we classify the outstanding balance as long-term debt. We paid no interest in 2010, as
compared to approximately $1.2 million in 2009.
The facility contains two principal financial covenants: an interest expense test that
requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal
quarter; and an indebtedness test that requires us to maintain a leverage ratio not greater than 3
to 1 at all times. The interest coverage ratio is calculated by dividing Consolidated EBIT (as
defined more specifically in the credit agreement) by Consolidated Interest Expense (as defined
more specifically in the credit agreement), and the leverage ratio is calculated by dividing
Consolidated Debt (as defined more specifically in the credit agreement) by Consolidated EBITDA (as
defined more specifically in the credit agreement). We met the requirements of these financial
covenants at June 30, 2010 and 2009.
Note 6 Income Taxes
We and our domestic subsidiaries file a consolidated Federal income tax return. Taxes based on
income for the years ended June 30, 2010, 2009 and 2008, have been provided as follows:
2010 | 2009 | 2008 | ||||||||||
Currently payable: |
||||||||||||
Federal |
$ | 55,422 | $ | 40,019 | $ | 23,221 | ||||||
State and local |
3,933 | 3,858 | 3,130 | |||||||||
Total current provision |
59,355 | 43,877 | 26,351 | |||||||||
Deferred Federal, state and local provision |
814 | 4,043 | 878 | |||||||||
Total taxes based on income |
$ | 60,169 | $ | 47,920 | $ | 27,229 | ||||||
Certain tax benefits recorded directly to common stock totaled approximately $0.7 million in
2010, $0.2 million in 2009 and less than $0.1 million in 2008. For the years ended June 30, 2010,
2009 and 2008, our effective tax rate varied from the statutory Federal income tax rate as a result
of the following factors:
2010 | 2009 | 2008 | ||||||||||
Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes |
1.5 | % | 2.1 | % | 3.2 | % | ||||||
ESOP dividend deduction |
(0.1 | )% | (0.2 | )% | (0.4 | )% | ||||||
Domestic manufacturing deduction |
(1.9 | )% | (1.8 | )% | (1.3 | )% | ||||||
Other |
(0.1 | )% | (0.1 | )% | (0.5 | )% | ||||||
Effective rate |
34.4 | % | 35.0 | % | 36.0 | % | ||||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The tax effect of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities at June 30, 2010 and 2009 are comprised of:
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Inventories |
$ | 3,499 | $ | 2,929 | ||||
Employee medical and other benefits |
10,892 | 9,214 | ||||||
Receivable and other allowances |
4,625 | 5,100 | ||||||
Other accrued liabilities |
3,591 | 3,817 | ||||||
Total deferred tax assets |
22,607 | 21,060 | ||||||
Total deferred tax liabilitiesproperty and other |
(12,380 | ) | (10,448 | ) | ||||
Net deferred tax asset |
$ | 10,227 | $ | 10,612 | ||||
Net current deferred tax assets totaled approximately $14.7 million and $15.2 million at June
30, 2010 and 2009, respectively, and were included in Deferred Income Taxes and Other Current
Assets on the Consolidated Balance Sheet. Prepaid Federal, state and local income taxes of
approximately $7.9 million and $1.0 million at June 30, 2010 and 2009, respectively, were also
included in Deferred Income Taxes and Other Current Assets. Cash payments for income taxes were
approximately $66.2 million, $30.4 million and $23.7 million for 2010, 2009 and 2008, respectively.
Effective July 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, and any subsequent interpretations thereto (now codified within
ASC Topic 740). Upon adoption, we recognized a decrease to retained earnings of approximately $1.2
million to increase our tax contingency reserves for uncertain tax positions. The gross tax
contingency reserve at the time of adoption was approximately $2.4 million and consisted of tax
liabilities of approximately $1.5 million and penalties and interest of approximately $0.9 million.
The unrecognized tax benefits recorded as the gross tax contingency reserve noted in the following
table for June 30, 2010 and 2009 would affect our effective tax rate, if recognized.
The following table sets forth changes in our total gross tax contingency reserve (including
interest and penalties):
2010 | 2009 | |||||||
Balance, beginning of year |
$ | 2,932 | $ | 2,673 | ||||
Tax positions related to current year: |
||||||||
Additions |
15 | 336 | ||||||
Reductions |
| | ||||||
Tax positions related to prior years: |
||||||||
Additions |
640 | 243 | ||||||
Reductions |
(32 | ) | (220 | ) | ||||
Decreases due to settlements with taxing authorities |
(1,634 | ) | (100 | ) | ||||
Balance, end of year |
$ | 1,921 | $ | 2,932 | ||||
We have classified approximately $0.5 million of the gross tax contingency reserve at June 30,
2010 as current liabilities as these amounts are expected to be resolved within the next 12 months.
The remaining liability of approximately $1.4 million is included in long-term liabilities. We
expect that the amount of these liabilities will change within the next 12 months; however, we do
not expect the change to have a significant effect on our financial position or results of
operations.
During 2010, we executed several state tax voluntary disclosure agreements. The settlement of
these liabilities resulted in pre-tax income of approximately $0.9 million, which impacted our
effective tax rate for 2010 by approximately 0.4%.
We report accrued interest and penalties related to these tax liabilities in income tax
expense. For 2010 and 2009, we recognized a benefit of approximately $0.4 million and expense of
approximately $0.1 million,
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
respectively, of net tax-related interest and penalties relating to the net activity noted in the
table above. We had accrued interest and penalties of approximately $0.7 million and $1.1 million
as of June 30, 2010 and 2009, respectively.
We file income tax returns in the U.S. and various state and local jurisdictions. With limited
exceptions, we are no longer subject to examination of U.S. Federal or state and local income taxes
for years prior to 2007.
The American Jobs Creation Act provided a tax deduction calculated as a percentage of
qualified income from manufacturing in the United States. 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
all years presented. In accordance with FASB guidance, this deduction is treated as a special
deduction, as opposed to a tax rate reduction.
Note 7 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.
Our Board approved a share repurchase authorization of 2,000,000 shares in August 2007.
Approximately 429,000 shares remained authorized for future purchase at June 30, 2010.
Note 8 Stock-Based Compensation
As approved by our shareholders in November 1995, the terms of the 1995 Key Employee Stock
Option Plan (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 were options
issued under this plan that were exercisable through February 2010. 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 the Lancaster Colony Corporation 2005 Stock Plan
(the 2005 Plan) at our 2005 Annual Meeting of Shareholders. The 2005 Plan reserved 2,000,000
common shares for issuance to our employees and directors, and all awards granted under the 2005
Plan will be exercisable at prices not less than fair market value as of the date of the grant. The
vesting period for awards granted under the 2005 Plan varies as to the type of award granted, but
generally these awards have a maximum term of five years.
Stock Options
Until 2008, we used stock options as the primary vehicle for rewarding certain employees with
long-term incentives for their efforts in helping to create long-term shareholder value. We
calculated the fair value of option grants using the Black-Scholes option-pricing model. There were
no grants of stock options in 2010, 2009, or 2008.
We recognized compensation expense over the requisite service period. Total compensation cost
related to stock options was zero in 2010, as compared to less than $0.1 million for each of the
years ended June 30, 2009 and 2008. These amounts were reflected in Selling, General and
Administrative Expenses and were allocated to each segment appropriately. No initial tax benefits
are recorded for the portion of these compensation costs that relate to incentive stock options,
which do not qualify for a tax deduction until, and only if, a disqualifying disposition occurs.
During the years ended June 30, 2010 and 2009, we received approximately $4.0 million and $5.2
million, respectively, in cash from the exercise of stock options. The aggregate intrinsic value of
these options was approximately $0.9 million and $0.6 million for 2010 and 2009, respectively. A
related tax benefit of approximately $0.3 million and $0.2 million was recorded in 2010 and 2009,
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
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
benefits included less than $0.1 million of gross windfall tax benefits for the years ended
June 30, 2010 and 2009.
The following summarizes for each of the three years in the period ended June 30, 2010 the
activity relating to stock options granted under the 1995 Plan:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number | Average | Remaining | Aggregate | |||||||||||||
of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Life in Years | Value | |||||||||||||
Outstanding at June 30, 2007 |
361 | $ | 40.42 | |||||||||||||
Exercised |
(17 | ) | 37.23 | |||||||||||||
Forfeited |
(33 | ) | 41.11 | |||||||||||||
Expired |
(72 | ) | 37.23 | |||||||||||||
Outstanding at June 30, 2008 |
239 | $ | 41.52 | 1.67 | $ | | ||||||||||
Exercised |
(125 | ) | 41.52 | |||||||||||||
Forfeited |
(18 | ) | 41.52 | |||||||||||||
Outstanding at June 30, 2009 |
96 | $ | 41.52 | .67 | $ | 246 | ||||||||||
Exercised |
(95 | ) | 41.52 | |||||||||||||
Expired |
(1 | ) | 41.52 | |||||||||||||
Outstanding at June 30, 2010 |
| $ | | | $ | | ||||||||||
Exercisable and vested at June 30, 2008 |
237 | $ | 41.52 | 1.67 | $ | | ||||||||||
Vested and expected to vest at June 30, 2008 |
239 | $ | 41.52 | 1.67 | $ | | ||||||||||
Exercisable and vested at June 30, 2009 |
96 | $ | 41.52 | .67 | $ | 246 | ||||||||||
Vested and expected to vest at June 30, 2009 |
96 | $ | 41.52 | .67 | $ | 246 | ||||||||||
Stock-Settled Stock Appreciation Rights
Since 2008, we have used periodic grants of stock-settled stock appreciation rights (SSSARs)
as a vehicle for rewarding certain employees with long-term incentives for their efforts in helping
to create long-term shareholder value. We calculate the fair value of SSSARs grants using the
Black-Scholes option-pricing model.
In February 2010, 2009 and 2008, we granted 167,950, 77,700 and 153,550 SSSARs, respectively,
to various employees under the terms of the 2005 Plan discussed previously. The weighted average
per right fair value of the 2010 SSSARs grant was $11.81 and was estimated at the date of grant
using the following assumptions: risk-free interest rate of 1.67%; dividend yield of 2.04%;
volatility factor of the expected market price of our common stock of 29.97%; and a weighted
average expected life of 3.5 years. The weighted average per right fair value of the 2009 SSSARs
grant was $6.89 and was estimated at the date of grant using the following assumptions: risk-free
interest rate of 1.63%; dividend yield of 2.86%; volatility factor of the expected market price of
our common stock of 28.13%; and a weighted average expected life of 3.5 years. The weighted average
per right fair value of the 2008 SSSARs grant was $6.00 and was estimated at the date of grant
using the following assumptions: risk-free interest rate of 2.54%; dividend yield of 2.91%;
volatility factor of the expected market price of our common stock of 24.04%; and a weighted
average expected life of 3.5 years. For each of these grants, the volatility factor was estimated
based on actual historical volatility of our stock for a time period equal to the term of the
SSSARs. The expected average life was calculated using the simplified method as defined in the
Securities and Exchange Commissions Staff Accounting Bulletin 110, as we do not yet have
sufficient historical exercise experience for this type of grant. The SSSARs from each of these
grants vest one-third on the first anniversary of the grant date, one-third on the second
anniversary of the grant date and one-third on the third anniversary of the grant date. We are
assuming a forfeiture rate of four percent for each of these grants.
We recognize compensation expense over the requisite service period. Total compensation cost
related to SSSARs for the years ended June 30, 2010, 2009 and 2008 was approximately $0.7 million,
$0.4 million and
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
$0.1 million, respectively. These amounts were reflected in Selling, General and
Administrative Expenses and were allocated to each segment appropriately. We recorded a tax benefit
of approximately $0.2 million, $0.1 million and less than $0.1 million for the years ended June 30,
2010, 2009 and 2008, respectively. We also recorded gross windfall tax benefits of approximately
$0.3 million and less than $0.1 million for the years ended June 30, 2010 and 2009, respectively.
There were no windfall tax benefits in 2008. These windfall tax benefits were included in the
financing section of the Consolidated Statements of Cash Flows.
The following summarizes for each of the three years in the period ended June 30, 2010 the
activity relating to SSSARs granted under the 2005 Plan:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number | Average | Remaining | Aggregate | |||||||||||||
of | Exercise | Contractual | Intrinsic | |||||||||||||
Rights | Price | Life in Years | Value | |||||||||||||
Outstanding at June 30, 2007 |
| $ | | |||||||||||||
Granted |
153 | 38.31 | ||||||||||||||
Outstanding at June 30, 2008 |
153 | $ | 38.31 | 4.67 | $ | | ||||||||||
Exercised |
(8 | ) | 38.31 | |||||||||||||
Granted |
78 | 39.86 | ||||||||||||||
Forfeited |
(1 | ) | 38.31 | |||||||||||||
Outstanding at June 30, 2009 |
222 | $ | 38.85 | 4.02 | $ | 1,160 | ||||||||||
Exercised |
(76 | ) | 38.65 | |||||||||||||
Granted |
168 | 58.79 | ||||||||||||||
Forfeited |
(5 | ) | 50.20 | |||||||||||||
Outstanding at June 30, 2010 |
309 | $ | 49.55 | 3.93 | $ | 2,075 | ||||||||||
Exercisable and vested at June 30, 2008 |
| | ||||||||||||||
Vested and expected to vest at June 30, 2008 |
147 | $ | 38.31 | 4.67 | $ | | ||||||||||
Exercisable and vested at June 30, 2009 |
43 | $ | 38.31 | 3.67 | $ | 248 | ||||||||||
Vested and expected to vest at June 30, 2009 |
214 | $ | 38.85 | 4.02 | $ | 1,117 | ||||||||||
Exercisable and vested at June 30, 2010 |
43 | $ | 38.64 | 2.88 | $ | 631 | ||||||||||
Vested and expected to vest at June 30, 2010 |
299 | $ | 49.64 | 3.93 | $ | 1,988 | ||||||||||
The following table summarizes information about the SSSARs outstanding by grant year at June
30, 2010:
Outstanding | Exercisable | |||||||||||||||||||||||
Weighted Average | ||||||||||||||||||||||||
Remaining | ||||||||||||||||||||||||
Grant | Exercise | Number | Contractual | Exercise | Number | Weighted Average | ||||||||||||||||||
Years | Price | Outstanding | Life in Years | Price | Exercisable | Exercise Price | ||||||||||||||||||
2010 |
$ | 58.79 | 165 | 4.66 | $ | 58.79 | | | ||||||||||||||||
2009 |
$ | 39.86 | 61 | 3.66 | $ | 39.86 | 9 | $ | 39.86 | |||||||||||||||
2008 |
$ | 38.31 | 83 | 2.67 | $ | 38.31 | 34 | $ | 38.31 |
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following summarizes the status of, and changes to, unvested SSSARs during the year ended
June 30, 2010:
Weighted | ||||||||
Number | Average | |||||||
of | Grant Date | |||||||
Rights | Fair Value | |||||||
Unvested at beginning of period |
179 | $ | 6.39 | |||||
Granted |
168 | 11.81 | ||||||
Vested |
(76 | ) | 6.30 | |||||
Forfeited |
(5 | ) | 9.54 | |||||
Unvested at end of period |
266 | $ | 9.77 | |||||
At June 30, 2010, there was approximately $2.2 million of total unrecognized compensation cost
related to SSSARs that we will recognize over a weighted-average period of approximately 2.35
years.
Restricted Stock
Since 2008, we have used periodic grants of restricted stock as a vehicle for rewarding our
nonemployee directors and certain employees with long-term incentives for their efforts in helping
to create long-term shareholder value.
In February 2010, 2009 and 2008, we granted a total of 25,000, 5,800 and 23,600 shares of
restricted stock, respectively, to various key employees under the terms of the 2005 Plan. The
restricted stock granted in 2010 had a grant date fair value of approximately $1.5 million based on
a per share closing stock price of $58.79. The restricted stock granted in 2009 had a grant date
fair value of approximately $0.2 million based on a per share closing stock price of $39.86. The
restricted stock granted in 2008 had a grant date fair value of approximately $0.9 million based on
a per share closing stock price of $38.31. The restricted stock under each of these grants vests on
the third anniversary of the grant date. We are assuming a forfeiture rate of four percent for each
of these grants. Under the terms of the grants, employees receive dividends on unforfeited
restricted stock regardless of their vesting status.
In November 2009, we granted a total of 8,435 shares of restricted stock to our seven
nonemployee directors under the terms of the 2005 Plan. The restricted stock had a grant date fair
value of approximately $0.4 million based on a per share closing stock price of $50.86. This
restricted stock vests over a one-year period, and all of these shares are expected to vest.
Dividends earned on the stock over the vesting period are held in escrow and are paid to the
directors at the time the stock vests. An additional 14,000 and 3,000 shares of restricted stock
that were granted to our nonemployee directors in November 2008 and 2007, respectively, vested
during the second quarter of 2010 and 2009, respectively, and the directors were paid the related
dividends that had been held in escrow.
The following summarizes the activity related to restricted stock transactions for the year
ended June 30, 2010:
Weighted | ||||||||
Number | Average | |||||||
of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested restricted stock at beginning of period |
43 | $ | 35.61 | |||||
Granted |
33 | 56.79 | ||||||
Vested |
(14 | ) | 29.57 | |||||
Forfeited |
(1 | ) | 47.41 | |||||
Unvested restricted stock at end of period |
61 | $ | 48.43 | |||||
Expected to vest restricted stock at end of period |
60 | $ | 48.39 | |||||
We recognize compensation expense over the requisite service period. Compensation expense of
approximately $0.9 million was recorded for the year ended June 30, 2010 in Selling, General and
Administrative Expenses, as compared to approximately $0.6 million in 2009 and approximately $0.2
million in 2008. A tax benefit of approximately $0.3 million, $0.2 million and $0.1 million was
recorded for the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
years ended June 30, 2010, 2009 and 2008, respectively. We also recorded gross windfall tax
benefits of less than $0.1 million for the year ended June 30, 2010. There were no windfall tax
benefits recorded in 2009 or 2008. These windfall tax benefits were included in the financing
section of the Consolidated Statement of Cash Flows.
At June 30, 2010, there was approximately $1.7 million of unrecognized compensation expense
related to restricted stock that we will recognize over a weighted average period of approximately
2.15 years.
Note 9 Pension Benefits
Defined Benefit Pension Plans
We and certain of our operating subsidiaries have sponsored multiple defined benefit pension
plans covering union workers at certain locations. As a result of restructuring activities in
recent years, including a 2010 plant closure, at June 30, 2010 there were no active employees
continuing to accrue service cost or otherwise eligible to receive plan benefits. Benefits being
paid under the plans are primarily based on negotiated rates and years of service. We contribute to
these plans at least the minimum amount required by regulation or contract.
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, consider yield
curve analysis results and the past history of discount rates.
The actuarial present value of benefit obligations summarized below was based on the following
assumption:
2010 | 2009 | |||||||
Weighted-average assumption as of June 30 |
||||||||
Discount rate |
5.21 | % | 6.34 | % |
The net periodic benefit costs were determined utilizing the following beginning-of-the-year
assumptions:
2010 | 2009 | 2008 | ||||||||||
Discount rate |
6.34 | % | 6.65 | % | 6.35 | % | ||||||
Expected long-term return on plan assets |
8.00 | % | 8.00 | % | 8.00 | % |
In determining the long-term expected return on plan assets, we consider our related
investment guidelines, our expectations of long-term rates of return by asset category, our target
asset allocation weighting and historical rates of return and volatility for equity and fixed
income investments. The investment strategy for plan assets is to control and manage investment
risk through diversification among asset classes, investment managers/funds and investment styles.
The plans investment guidelines have been designed to meet the intended objective that plan assets
earn at least nominal returns equal to or in excess of the plans liability growth rate. In
consideration of the current average age of the plans participants, the investment guidelines are
based upon an investment horizon of at least 10 years.
The target and actual asset allocations for our plans at June 30 by asset category are as
follows:
Target Percentage |
Actual Percentage |
|||||||||
of Plan Assets | of Plan Assets | |||||||||
at June 30 | at June 30 | |||||||||
Asset Category | 2010 | 2010 | 2009 | |||||||
Cash |
010% | 2 | % | 2 | % | |||||
Equity securities |
3070% | 54 | % | 58 | % | |||||
Fixed income |
3070% | 44 | % | 40 | % | |||||
Total |
100 | % | 100 | % | ||||||
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Our target asset allocations are maintained through ongoing review and periodic rebalancing of
equity and fixed income investments with assistance from an independent outside investment
consultant. Also, the plan assets are diversified among asset classes, asset managers or funds and
investment styles to avoid concentrations of risk. 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 June 30, 2009 plan assets included an investment in shares of our common stock with a
market value of approximately $2.2 million. There were no plan asset investments in shares of our
common stock at June 30, 2010.
In 2010, we adopted FSP No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit
Plan Assets (FSP FAS 132(R)-1), which is now part of ASC Topic 715, Compensation-Retirement
Benefits. FSP FAS 132(R)-1 provides guidance on our disclosures about the plan assets of our
defined benefit pension plans. FSP FAS 132(R)-1 requires us to categorize our plan assets within a
three-level fair value hierarchy as follows:
Level 1 Quoted market prices in active markets for identical assets.
Level 2 Observable market based inputs or unobservable inputs that are corroborated by
market data.
Level 3 Unobservable inputs that are not corroborated by market data.
The following table summarizes the fair values and levels, within the fair value hierarchy,
for our plan assets at June 30, 2010:
Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash and equivalents |
$ | 523 | $ | | $ | | $ | 523 | ||||||||
Money market funds |
174 | | | 174 | ||||||||||||
U.S. government obligations |
| 3,836 | | 3,836 | ||||||||||||
Corporate obligations |
| 1,812 | | 1,812 | ||||||||||||
Mortgage obligations |
| 2,262 | | 2,262 | ||||||||||||
Mutual funds fixed income |
5,048 | | | 5,048 | ||||||||||||
Mutual funds equity |
16,388 | | | 16,388 | ||||||||||||
Total |
$ | 22,133 | $ | 7,910 | $ | | $ | 30,043 | ||||||||
The plan assets classified at Level 1 include money market funds, common stock and mutual
funds. Quoted market prices in active markets are available for investments in this category.
The plan assets classified at Level 2 include fixed income securities consisting of U.S.
Government securities, corporate obligations and mortgage
obligations. In valuing Level 2 assets, we apply a market or income approach utilizing a number of observable standard inputs. These inputs may be
prioritized differently on any given day for any security based on market conditions, and not all
inputs listed are available for use in the evaluation process for each security on any given day.
Relevant information with respect to our pension benefits as of June 30 can be summarized as
follows:
2010 | 2009 | |||||||
Change in benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 34,484 | $ | 33,599 | ||||
Service cost |
45 | 117 | ||||||
Interest cost |
2,118 | 2,170 | ||||||
Actuarial loss |
4,192 | 986 | ||||||
Benefits paid |
(2,375 | ) | (2,388 | ) | ||||
Benefit obligation at end of year |
$ | 38,464 | $ | 34,484 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
2010 | 2009 | |||||||
Change in plan assets |
||||||||
Fair value of plan assets at beginning of year |
$ | 27,738 | $ | 29,672 | ||||
Actual return on plan assets |
3,878 | (2,621 | ) | |||||
Employer contributions |
802 | 3,075 | ||||||
Benefits paid |
(2,375 | ) | (2,388 | ) | ||||
Fair value of plan assets at end of year |
$ | 30,043 | $ | 27,738 | ||||
Reconciliation of funded status |
||||||||
Net accrued benefit cost |
$ | (8,421 | ) | $ | (6,746 | ) | ||
Amounts recognized in the consolidated balance sheets consist of |
||||||||
Accrued benefit liability (noncurrent liabilities) |
$ | (8,421 | ) | $ | (6,746 | ) | ||
Net amount recognized |
$ | (8,421 | ) | $ | (6,746 | ) | ||
Accumulated benefit obligation |
$ | 38,464 | $ | 34,484 | ||||
Each of our plans had benefit obligations in excess of the fair value of plan assets at the
June 30, 2010 and 2009 measurement dates.
Amounts recognized in accumulated other comprehensive loss at June 30, 2010 and 2009 are as
follows:
2010 | 2009 | |||||||
Net actuarial loss |
$ | 16,747 | $ | 14,780 | ||||
Prior service cost |
| 354 | ||||||
Net transition asset |
(3 | ) | (3 | ) | ||||
Income taxes |
(6,296 | ) | (5,689 | ) | ||||
Total |
$ | 10,448 | $ | 9,442 | ||||
Amounts in accumulated other comprehensive loss expected to be recognized as components of net
periodic benefit cost during the next fiscal year are as follows:
2011 | ||||
Net actuarial loss |
$ | 546 | ||
Net transition asset |
(1 | ) | ||
Total |
$ | 545 | ||
The following table summarizes the components of net periodic benefit cost at June 30:
2010 | 2009 | 2008 | ||||||||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | 45 | $ | 117 | $ | 155 | ||||||
Interest cost |
2,118 | 2,170 | 2,381 | |||||||||
Expected return on plan assets |
(2,150 | ) | (2,263 | ) | (2,904 | ) | ||||||
Curtailment/settlement charges |
349 | 331 | 3,011 | |||||||||
Amortization of unrecognized net loss |
496 | 327 | 145 | |||||||||
Amortization of prior service cost |
5 | 75 | 102 | |||||||||
Amortization of unrecognized net (asset)
obligation existing at transition |
(1 | ) | 2 | 3 | ||||||||
Net periodic benefit cost |
$ | 862 | $ | 759 | $ | 2,893 | ||||||
In 2010, one of our plans became subject to curtailment accounting. This resulted in the
immediate recognition of all of the outstanding prior service cost of the plan, which was
approximately $0.3 million. This charge was included in our Specialty Foods segment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
In 2009, one of our plans became subject to curtailment accounting. This resulted in the
immediate recognition of all of the outstanding prior service cost of the plan, which was
approximately $0.3 million. This charge was included in our corporate expenses within continuing
operations because the costs related to the retained liabilities of sold operations.
In 2008, one of our plans experienced lump sum payments that exceeded the plans annual
service and interest costs, which resulted in an accelerated recognition of plan costs of
approximately $3.0 million. This charge was included in continuing operations in corporate expenses
because the costs were related to the retained liabilities of sold and discontinued operations.
We have not yet finalized our anticipated funding level for 2011, but, based on initial
estimates, we anticipate funding approximately $1.8 million.
Benefit payments estimated for future years are as follows:
2011 |
$ | 2,171 | ||
2012 |
$ | 2,158 | ||
2013 |
$ | 2,161 | ||
2014 |
$ | 2,150 | ||
2015 |
$ | 2,149 | ||
2016 2020 |
$ | 11,977 |
Note 10 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. 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, consider yield curve analysis results and the past history of
discount rates.
The actuarial present value of benefit obligations summarized below was based on the following
assumption:
2010 | 2009 | |||||||
Weighted-average assumption as of June 30 |
||||||||
Discount rate |
5.21 | % | 6.34 | % |
The net periodic benefit costs were determined utilizing the following beginning-of-the-year
assumptions:
2010 | 2009 | 2008 | ||||||||||
Discount rate |
6.34 | % | 6.65 | % | 6.35 | % | ||||||
Health care cost trend rate |
10.00 | % | 10.00 | % | 10.00 | % |
Relevant information with respect to our postretirement medical and life insurance benefits as
of June 30, can be summarized as follows:
2010 | 2009 | |||||||
Change in benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 3,153 | $ | 3,102 | ||||
Service cost |
17 | 17 | ||||||
Interest cost |
193 | 198 | ||||||
Actuarial (gain) loss |
(491 | ) | 48 | |||||
Benefits paid |
(165 | ) | (212 | ) | ||||
Benefit obligation at end of year |
$ | 2,707 | $ | 3,153 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
2010 | 2009 | |||||||
Change in plan assets |
||||||||
Employer contributions |
$ | 165 | $ | 212 | ||||
Benefits paid |
(165 | ) | (212 | ) | ||||
Fair value of plan assets at end of year |
$ | | $ | | ||||
Reconciliation of funded status |
||||||||
Accrued benefit cost |
$ | (2,707 | ) | $ | (3,153 | ) | ||
Amounts recognized in the consolidated balance sheets consist of |
||||||||
Current accrued benefit liability |
$ | (169 | ) | $ | (225 | ) | ||
Noncurrent accrued benefit liability |
$ | (2,538 | ) | $ | (2,928 | ) | ||
Accumulated benefit obligation |
$ | (2,707 | ) | $ | (3,153 | ) | ||
Amounts recognized in accumulated other comprehensive loss at June 30, 2010 and 2009 are as
follows:
2010 | 2009 | |||||||
Net actuarial gain |
$ | (1,011 | ) | $ | (534 | ) | ||
Prior service benefit |
(33 | ) | (38 | ) | ||||
Income taxes |
393 | 215 | ||||||
Total |
$ | (651 | ) | $ | (357 | ) | ||
Amounts in accumulated other comprehensive loss expected to be recognized as components of net
periodic benefit cost during the next fiscal year are as follows:
2011 | ||||
Prior service cost amortization |
$ | (5 | ) | |
Unrecognized gain amortization |
(47 | ) | ||
Total |
$ | (52 | ) | |
The following table summarizes the components of net periodic benefit cost at June 30:
2010 | 2009 | 2008 | ||||||||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | 17 | $ | 17 | $ | 26 | ||||||
Interest cost |
193 | 198 | 231 | |||||||||
Amortization of unrecognized net gain |
(14 | ) | (17 | ) | | |||||||
Amortization of prior service asset |
(5 | ) | (5 | ) | (5 | ) | ||||||
Curtailment benefit |
| | (27 | ) | ||||||||
Net periodic benefit cost |
$ | 191 | $ | 193 | $ | 225 | ||||||
In 2008, our plans experienced a curtailment due to a significant reduction in future service
as a result of the sale of certain automotive operations. This resulted in the immediate
recognition of a portion of the outstanding prior service asset related to the impacted employees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
We expect to contribute approximately $0.2 million to our postretirement benefit plans in 2011.
Benefit payments estimated for future years are as follows:
2011 |
$ | 169 | ||
2012 |
$ | 181 | ||
2013 |
$ | 185 | ||
2014 |
$ | 183 | ||
2015 |
$ | 187 | ||
2016 2020 |
$ | 951 |
For other postretirement benefit measurement purposes, annual increases in medical costs for
2010 are assumed to total approximately 10% per year and gradually decline to 5% by approximately
the year 2015 and remain level thereafter. Annual increases in medical costs for 2009 were assumed
to total approximately 10% per year and gradually decline to 5% by approximately the year 2014 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 |
$ | 9 | $ | (8 | ) | |||
Effect on postretirement benefit obligation as of June 30, 2010 |
$ | 165 | $ | (144 | ) |
Note 11 Defined Contribution and Other Employee Plans
We sponsored five defined contribution plans established pursuant to Section 401(k) of the
Internal Revenue Code during 2010. Contributions are determined under various formulas, and we
contributed to three of the plans in 2010. Costs related to such plans totaled approximately $0.8
million, $0.8 million and $0.9 million in the years ended June 30, 2010, 2009 and 2008,
respectively.
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 $4.8
million, $4.5 million and $4.1 million in the years ended June 30, 2010, 2009 and 2008,
respectively.
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 $2.6 million and
$2.4 million for the years ended June 30, 2010 and 2009, respectively. Deferred compensation
expense totaled approximately $0.1 million, $0.1 million and $0.2 million for the years ended June
30, 2010, 2009 and 2008, respectively.
Note 12 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 fiscal year
2016. 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): 2011$4,166;
2012$3,425; 2013$2,716; 2014$2,471;
2015$1,450; thereafter$577.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Total rent expense, including short-term cancelable leases, during the years ended June 30,
2010, 2009 and 2008 is summarized as follows:
2010 | 2009 | 2008 | ||||||||||
Operating leases: |
||||||||||||
Minimum rentals |
$ | 4,336 | $ | 4,388 | $ | 4,431 | ||||||
Contingent rentals |
456 | 355 | 401 | |||||||||
Short-term cancelable leases |
1,253 | 1,458 | 1,609 | |||||||||
Total |
$ | 6,045 | $ | 6,201 | $ | 6,441 | ||||||
In
August 2010, we entered into a construction contract commitment
approximating $13 million and equipment purchase commitments of approximately $5 million for the expansion of our frozen yeast roll
facility located in Kentucky.
Note 13 Contingencies
In addition to the items discussed below, at June 30, 2010, 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 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 20% of our employees are represented under various collective bargaining
agreements, which expire at various times through calendar year 2013. 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.
The 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 $0.9
million, $8.7 million and $2.5 million in 2010, 2009 and 2008, respectively. These remittances
related to certain candles being imported from the Peoples Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of the CDSOA to duties
collected on products imported after September 2007. Accordingly, we may receive some level of
annual distributions for an undetermined period of years in the future as the monies collected that
relate to entries filed prior to October 2007 are administratively finalized by U.S. Customs.
Without further legislative action, we expect these distributions will eventually cease.
In addition to this legislative development, cases have been brought in U.S. courts
challenging the CDSOA. In two separate cases, the U.S. Court of International Trade (CIT) ruled
that the procedure for determining recipients eligible to receive CDSOA distributions is
unconstitutional. The U.S. Court of Appeals for the Federal Circuit reversed both CIT decisions. We are unable to determine, at this time, what the ultimate outcome of litigation regarding
the CDSOA will be, and it is possible that further legal action, potential additional changes in
the law and other factors could affect the amount of funds available for distribution, including
funds relating to entries prior to October 2007. Accordingly, we cannot predict the amount of
future distributions, and it is possible that we may not receive any further distributions under
the CDSOA. Any reduction in CDSOA distributions could reduce our earnings and cash flow.
Note 14 Restructuring and Impairment Charges
Specialty Foods Segment Fiscal 2010
In the first quarter of 2010, we committed to a plan to close our dressings and sauces
manufacturing operation located in Wilson, New York. This decision was intended to provide greater
efficiency in our Specialty Foods segment by consolidating most of this facilitys operations into
other existing plants, outsourcing certain requirements and exiting less profitable dressing lines.
Production at this facility was phased out in the second quarter of 2010; and while timing of the
disposal of the associated real estate is
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
difficult to predict, this closure was essentially
complete at December 31, 2009. The operations of this location have not been reclassified to
discontinued operations in accordance with GAAP for the impairment or disposal of long-lived
assets.
During 2010, we recorded restructuring charges of approximately $2.3 million ($1.5 million
after taxes), including approximately $0.2 million recorded in Cost of Sales for the write-down of
inventories. The remaining charges consisted of one-time termination benefits, a pension
curtailment charge and other various closing costs. Cash expenditures for 2010 were approximately
$1.8 million and related to the one-time termination benefits and other closing costs.
An analysis of the restructuring activity for 2010 recorded within the Specialty Foods segment
follows:
Accrual at | 2010 | Accrual at | ||||||||||||||
June 30, | 2010 | Cash | June 30, | |||||||||||||
2009 | Charges | Outlays | 2010 | |||||||||||||
Restructuring Charges |
||||||||||||||||
Employee Separation Costs |
$ | | $ | 1,643 | $ | (1,643 | ) | $ | | |||||||
Other Costs |
| 172 | (172 | ) | | |||||||||||
Subtotal |
$ | | 1,815 | $ | (1,815 | ) | $ | | ||||||||
Pension Curtailment Charges |
349 | |||||||||||||||
Inventory Write-Down |
179 | |||||||||||||||
Total Restructuring Charges |
$ | 2,343 | ||||||||||||||
We do not expect any other restructuring costs or cash expenditures related to this closure.
The total costs associated with this closure were ultimately less than originally estimated due to
the actual timing of the closure and its impact on the one-time termination benefits and also due
to lower than expected other closing costs.
Specialty Foods Segment Fiscal 2009
In the first quarter of 2009, we began consolidating our Atlanta, Georgia dressing operation
into our other existing food facilities as part of our cost-reduction efforts within the Specialty
Foods segment. During 2009, we recorded restructuring and impairment charges of approximately $0.8
million ($0.5 million after taxes). This closure was essentially complete at September 30, 2008,
and the disposition of the associated real estate occurred in December 2008. We do not expect any
other costs or cash expenditures related to this closure.
Other
In 2007, we closed our industrial glass operation that was located in Lancaster, Ohio. The
majority of the total $5.7 million restructuring and impairment charge related to this closure was
recorded in 2007, but we did incur approximately $1.3 million ($0.8 million after taxes) and $0.8
million ($0.5 million after taxes) during the years ended June 30, 2008 and 2009, respectively. The
2007 and 2008 charges were included within our Glassware and Candles segment because that is where
the operation was classified. After the closure was essentially completed in 2009, the related
activities were recorded in Corporate expenses. We do not currently expect other significant
restructuring costs related to this closure.
Held for Sale
As a result of the current-year closing discussed above, as well as various prior-year
restructuring and divestiture activities, we have certain held for sale properties with a total
net book value of approximately $2.7 million that have been reclassified to current assets and are
included in Deferred Income Taxes and Other Current Assets on the Consolidated Balance Sheet. In
accordance with GAAP for property, plant and equipment, we are no longer depreciating these held
for sale assets and they are being actively marketed for sale.
54
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 15 Business Segments Information
We have evaluated our operations and have determined that the business is separated into two
distinct operating and reportable segments: Specialty Foods and Glassware and Candles.
Specialty Foodsincludes the production, marketing and sale 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 consumer products consisting
of candles in a variety of popular sizes, shapes and scents and other home fragrance products, as
well as the distribution of various commercial products, including glassware and candles. This
segments products are sold primarily to retail markets such as mass merchandisers and food and
drug stores, but also, to a lesser extent, to commercial markets.
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:
2010 | 2009 | 2008 | ||||||||||
Specialty Foods |
||||||||||||
Non-frozen |
$ | 547,704 | $ | 569,053 | $ | 526,142 | ||||||
Frozen |
345,552 | 340,844 | 282,365 | |||||||||
Total Specialty Foods |
$ | 893,256 | $ | 909,897 | $ | 808,507 | ||||||
Glassware and Candles |
||||||||||||
Consumer table and giftware |
$ | 158,327 | $ | 134,991 | $ | 146,434 | ||||||
Nonconsumer ware and other |
5,025 | 6,603 | 25,974 | |||||||||
Total Glassware and Candles |
$ | 163,352 | $ | 141,594 | $ | 172,408 | ||||||
Total |
$ | 1,056,608 | $ | 1,051,491 | $ | 980,915 | ||||||
Corporate Expensesinclude various expenses of a general corporate nature, as well as costs
related to certain divested or closed nonfood operations, including the expense associated with
retirement plans applicable to those closed units and any real property held for sale. These
corporate expenses are generally not directly attributable to the reportable operating segments and
therefore have not been allocated to those segments.
The following sets forth certain additional financial information attributable to our business
segments for the three years ended June 30, 2010, 2009 and 2008 and certain items retained at the
corporate level:
2010 | 2009 | 2008 | ||||||||||
Net Sales(1) |
||||||||||||
Specialty Foods |
$ | 893,256 | $ | 909,897 | $ | 808,507 | ||||||
Glassware and Candles |
163,352 | 141,594 | 172,408 | |||||||||
Total |
$ | 1,056,608 | $ | 1,051,491 | $ | 980,915 | ||||||
Operating Income (Loss)(2) |
||||||||||||
Specialty Foods |
$ | 176,194 | $ | 145,848 | $ | 88,975 | ||||||
Glassware and Candles |
9,445 | (5,671 | ) | (1,887 | ) | |||||||
Corporate Expenses |
(11,440 | ) | (10,529 | ) | (11,751 | ) | ||||||
Total |
$ | 174,199 | $ | 129,648 | $ | 75,337 | ||||||
55
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
2010 | 2009 | 2008 | ||||||||||
Identifiable Assets(1)(3) |
||||||||||||
Specialty Foods |
$ | 362,844 | $ | 349,401 | $ | 364,402 | ||||||
Glassware and Candles |
105,537 | 93,813 | 108,394 | |||||||||
Corporate |
118,072 | 55,267 | 47,382 | |||||||||
Total |
$ | 586,453 | $ | 498,481 | $ | 520,178 | ||||||
Capital Expenditures |
||||||||||||
Specialty Foods |
$ | 11,321 | $ | 10,680 | $ | 15,400 | ||||||
Glassware and Candles |
1,340 | 492 | 1,389 | |||||||||
Corporate |
172 | 164 | 43 | |||||||||
Total |
$ | 12,833 | $ | 11,336 | $ | 16,832 | ||||||
Depreciation and Amortization |
||||||||||||
Specialty Foods |
$ | 15,832 | $ | 15,409 | $ | 15,307 | ||||||
Glassware and Candles |
4,601 | 6,303 | 8,580 | |||||||||
Corporate |
100 | 158 | 251 | |||||||||
Total |
$ | 20,533 | $ | 21,870 | $ | 24,138 | ||||||
(1) | Net sales and long-lived assets are predominantly domestic. |
|
(2) | Operating income represents net sales less operating expenses related to the business
segments. All intercompany transactions have been eliminated, and intersegment revenues are
not significant. |
|
(3) | 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 and equivalents, deferred income taxes and certain real property that is held for sale. |
Combined net sales from the two segments attributable to Wal-Mart Stores, Inc. totaled
approximately $247 million in 2010, or 23% of consolidated 2010 net sales; $206 million in 2009, or
20% of consolidated 2009 net sales; and $166 million in 2008, or 17% of consolidated net sales in
2008.
Combined accounts receivable for the two segments attributable to Wal-Mart Stores, Inc.
totaled approximately 41% and 39% of consolidated accounts receivable at June 30, 2010 and 2009,
respectively.
56
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 16 Selected Quarterly Financial Data
(Unaudited)
First | Second | Third | Fourth | Fiscal | ||||||||||||||||
Quarter(1) | Quarter(2) | Quarter | Quarter | Year(3) | ||||||||||||||||
2010 |
||||||||||||||||||||
Net Sales |
$ | 254,160 | $ | 304,115 | $ | 250,328 | $ | 248,005 | $ | 1,056,608 | ||||||||||
Gross Margin |
$ | 63,707 | $ | 84,777 | $ | 61,923 | $ | 59,925 | $ | 270,332 | ||||||||||
Net Income |
$ | 28,405 | $ | 39,527 | $ | 24,222 | $ | 22,815 | $ | 114,969 | ||||||||||
Diluted Net Income per Share |
$ | 1.01 | $ | 1.40 | $ | .86 | $ | .81 | $ | 4.07 |
First | Second | Third | Fourth | Fiscal | ||||||||||||||||
Quarter(4) | Quarter(5) | Quarter | Quarter | Year(3) | ||||||||||||||||
2009 |
||||||||||||||||||||
Net Sales |
$ | 263,837 | $ | 288,242 | $ | 246,027 | $ | 253,385 | $ | 1,051,491 | ||||||||||
Gross Margin |
$ | 39,669 | $ | 58,163 | $ | 52,642 | $ | 65,018 | $ | 215,492 | ||||||||||
Net Income |
$ | 11,020 | $ | 28,452 | $ | 21,213 | $ | 28,401 | $ | 89,086 | ||||||||||
Diluted Net Income per Share |
$ | .39 | $ | 1.02 | $ | .76 | $ | 1.01 | $ | 3.17 |
(1) | Included in the first quarter earnings is expense of approximately $0.6 million, net of
taxes, or approximately $.02 per share, related to the closing of our dressings and sauces
manufacturing operation located in Wilson, New York. |
|
(2) | Included in the second quarter earnings are (A) expense of approximately $0.8 million, net of
taxes, or approximately $.03 per share, related to the closing of our dressings and sauces
manufacturing operation located in Wilson, New York and (B) income of approximately $0.6
million, net of taxes, or approximately $.02 per share, related to funds received under CDSOA. |
|
(3) | 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. Prior year diluted net income per share has been restated to reflect the adoption of new
accounting guidance on participating securities. See Note 1 for further discussion. |
|
(4) | Included in the first quarter earnings are (A) expense of approximately $0.5 million, net of
taxes, or approximately $.02 per share, related to the closing of our industrial glass
operation in Lancaster, Ohio and (B) expense of approximately $0.5 million, net of taxes, or
approximately $.02 per share, related to the consolidation of our Atlanta, Georgia dressing
operation into other existing facilities. |
|
(5) | Included in the second quarter earnings is income of approximately $5.6 million, net of
taxes, or approximately $.20 per share, related to funds received under CDSOA. |
57
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 Annual Report
on Form 10-K. 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, 2010.
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 a report on the
effectiveness of our internal control over financial reporting. This report is set forth on the
following page.
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.
58
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 the internal control over financial reporting of Lancaster Colony Corporation
and subsidiaries (the Company) as of June 30, 2010, 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, included in the accompanying managements report. Our responsibility is to express an
opinion on 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) (PCAOB). 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, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
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, the Company maintained, in all material respects, effective internal control
over financial reporting as of June 30, 2010, 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) (PCAOB), the consolidated financial statements and the financial
statement schedule as of and for the year ended June 30, 2010, of the Company and our report dated
August 25, 2010, expressed an unqualified opinion on those consolidated financial statements and
the financial statement schedule and included an explanatory paragraph regarding the Companys
adoption of a new accounting standard.
/s/ Deloitte & Touche LLP
|
Columbus, Ohio
August 25, 2010
August 25, 2010
59
Table of Contents
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding our directors and executive officers, including the identification
of the Audit Committee and the Audit Committee financial expert, is incorporated by reference to
the information contained in our definitive proxy statement for our 2010 Annual Meeting of
Shareholders (2010 Proxy Statement).
The information regarding Section 16(a) beneficial ownership reporting compliance is
incorporated by reference to the material under the heading Section 16(a) Beneficial Ownership
Reporting Compliance in our 2010 Proxy Statement.
The information regarding changes, if any, in procedures by which shareholders may recommend
nominees to our Board of Directors is incorporated by reference to the information contained in our
2010 Proxy Statement.
The information regarding our Code of Business Ethics is incorporated by reference to the
information contained in our 2010 Proxy Statement.
Item 11. Executive Compensation
The information regarding executive officer and director compensation is incorporated by
reference to the information contained in our 2010 Proxy Statement.
The information regarding Compensation Committee interlocks and insider participation and the
Compensation Committee Report is incorporated by reference to the information contained in our 2010
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information regarding security ownership of certain beneficial owners and management and
securities authorized for issuance under our equity compensation plans is incorporated by reference
to the information contained in our 2010 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information regarding certain relationships and related transactions and director
independence is incorporated by reference to the information contained in our 2010 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information regarding fees paid to and services provided by our independent registered public
accounting firm during the fiscal years ended June 30, 2010 and 2009 and the pre-approval policies
and procedures of the Audit Committee is incorporated by reference to the information contained in
our 2010 Proxy Statement.
60
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements. The following consolidated financial statements as of June 30,
2010 and 2009 and for each of the three years in the period ended June 30, 2010, together with the
report thereon of Deloitte & Touche LLP dated August 25, 2010, are included in Item 8 of this
report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2010 and 2009
Consolidated Statements of Income for the years ended June 30, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended June 30, 2010, 2009 and 2008
Consolidated Statements of Shareholders Equity for the years ended June 30, 2010, 2009 and
2008
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules. 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. | |||
John B. Gerlach, Jr. | ||||
Chairman, Chief Executive Officer, President and Director |
||||
Date: August 25, 2010 |
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, Chief Executive Officer, President and Director (Principal Executive Officer) |
August 25, 2010 | ||
/s/ John L. Boylan
|
Treasurer, Vice President, Assistant Secretary, Chief Financial Officer and Director (Principal Financial and Accounting Officer) |
August 25, 2010 | ||
/s/ James B. Bachmann
|
Director | August 16, 2010 | ||
/s/ Neeli Bendapudi
|
Director | August 17, 2010 | ||
/s/ Robert L. Fox
|
Director | August 17, 2010 | ||
/s/
Alan F. Harris
|
Director | August 17, 2010 | ||
/s/ Edward H. Jennings
|
Director | August 17, 2010 | ||
/s/ Henry M. ONeill, Jr.
|
Director | August 18, 2010 | ||
/s/ Zuheir Sofia
|
Director | August 17, 2010 |
62
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, 2010
For each of the three years in the period ended June 30, 2010
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, 2008 |
$ | 581 | $ | 1,049 | $ | 561 | $ | 1,069 | ||||||||
Year ended June 30, 2009 |
$ | 1,069 | $ | (218 | ) | $ | (91 | ) | $ | 942 | ||||||
Year ended June 30, 2010 |
$ | 942 | $ | (51 | ) | $ | 375 | $ | 516 | |||||||
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 $0.7 million for 2009. |
63
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-K
JUNE 30, 2010
FORM 10-K
JUNE 30, 2010
INDEX TO EXHIBITS
Exhibit | ||||
Number | Description | |||
2.1 | Asset Purchase Agreement, dated as of June 10, 2008, by and among MBR, Inc., RBM, L.L.C., Dee
Zee, Inc. and Lancaster Colony Corporation (incorporated herein by reference to Exhibit 2.1 to
the Current Report on Form 8-K (000-04065), filed June 17, 2008). |
|||
3.1 | Amended and Restated Articles of Incorporation of Lancaster Colony Corporation (incorporated
by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q (000-04065), filed February
9, 2009). |
|||
3.2 | Amended and Restated Regulations of Lancaster Colony Corporation (incorporated by reference
to Exhibit 3.2 to the Quarterly Report on Form 10-Q (000-04065), filed February 9, 2009). |
|||
4.1 | Specimen Certificate of Common Stock. |
|||
4.2 | Credit Agreement, dated as of October 5, 2007, by and among Lancaster Colony Corporation, the
Lenders (as defined therein) and JPMorgan Chase Bank, NA (incorporated by reference to Exhibit
4.1 to the Current Report on Form 8-K (000-04065), filed October 11, 2007). |
|||
10.1 | * | Lancaster Colony Corporation Executive Employee Deferred Compensation Plan (incorporated by
reference to Exhibit 10.9 to the Annual Report on Form 10-K (000-04065), filed September 26,
2000). |
||
10.2 | * | 2004 Amendment to Lancaster Colony Corporation Executive Employee Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (000-04065),
filed January 3, 2005). |
||
10.3 | * | Lancaster Colony Corporation 2005 Executive Employee Deferred Compensation Plan
(incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K (000-04065),
filed February 25, 2005). |
||
10.4 | * | Lancaster Colony Corporation 2005 Stock Plan (incorporated by reference to Appendix C to the
Definitive Proxy Statement on Schedule 14A (000-04065), filed October 17, 2005). |
||
10.5 | * | Form of Restricted Stock Award Agreement for Directors under the Lancaster Colony
Corporation 2005 Stock Plan (incorporated by reference to Exhibit 10.10 to the Annual Report
on Form 10-K (000-04065), filed August 28, 2007). |
||
10.6 | * | Form of Stock Appreciation Rights Award Agreement for employees and consultants under the
Lancaster Colony Corporation 2005 Stock Plan (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q/A (000-04065), filed August 28, 2008). |
||
10.7 | * | Form of Restricted Stock Award Agreement for employees and consultants under the Lancaster
Colony Corporation 2005 Stock Plan (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q/A (000-04065), filed August 28, 2008). |
||
10.8 | Agreement, dated as of October 9, 2007, by and among Lancaster Colony Corporation, Barington
Companies Equity Partners, L.P. and the other parties thereto (incorporated by reference to
Exhibit 99.2 to the Current Report on Form 8-K (000-04065), filed October 11, 2007). |
|||
10.9 | * | Amended and Restated Key Employee Severance Agreement, dated December 3, 2008, between
Lancaster Colony Corporation and John L. Boylan (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q (000-04065), filed February 9, 2009). |
||
10.10 | * | Amended and Restated Key Employee Severance Agreement, dated December 3, 2008, between
Lancaster Colony Corporation and Bruce L. Rosa (incorporated by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q (000-04065), filed February 9, 2009). |
||
10.11 | * | Description of Executive Bonus Arrangements (incorporated by reference to Exhibit 10.9 to
the Annual Report on Form 10-K (000-04065), filed September 10, 2004). |
||
21 | Subsidiaries of Registrant. |
64
Table of Contents
Exhibit | ||||
Number | Description | |||
23 | Consent of Deloitte & Touche LLP. |
|||
31.1 | Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|||
31.2 | Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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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. |
* | Indicates a management contract or compensatory plan, contract or arrangement in which any
Director or any Executive Officer participates. |
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