LANCASTER COLONY CORP - Annual Report: 2011 (Form 10-K)
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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, 2011
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 | 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 þ* 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, 2010 was
approximately $1,074,883,000, based on the closing price of these shares on that day.
As of August 17, 2011, there were approximately 27,341,000 shares of Common Stock, without par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be filed for its November 2011 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form
10-K.
* | The registrant has submitted electronically and posted on its corporate website every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Rule 405)
during the preceding 12 months. Beginning with this report, pursuant to Rule 405, every Interactive
Data File the registrant is required to submit electronically and post on its corporate website
must meet the detailed tagging requirements specified in the EDGAR Filer Manual. The registrant
expects to furnish the Interactive Data File required for this report that complies with the
detailed tagging requirements of the EDGAR Filer Manual by amending this report within 30 days
after the date this report is filed, as permitted by Rule 405. |
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
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PART I
Item 1. | Business |
GENERAL
Lancaster Colony Corporation, an Ohio corporation (reincorporated in 1992, successor to a
Delaware corporation originally incorporated in 1961), is a diversified manufacturer and marketer
of consumer products 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. 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, 2011 refers to fiscal 2011, which is the period from July 1, 2010 to June
30, 2011.
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, 2011. The financial information
relating to business segments for the three years ended June 30, 2011, 2010 and 2009 is included in
Note 13 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, Simply Dressed 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
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placement of products in U.S. grocery produce departments through our refrigerated salad dressings,
vegetable and fruit dips, and croutons. Within the frozen aisles of grocery retailers, we also have
prominent market positions of frozen yeast rolls, as well as garlic breads. Products we sell in the
foodservice markets 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 16%, 17% and 15% of this segments
total net sales in 2011, 2010 and 2009, respectively. No other customer accounted for more than 10%
of this segments total net sales during these years. 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 Horse Cave, 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, which was significantly
expanded in 2011, 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 fragrances in retail markets to mass merchants, supermarkets, drug stores and specialty
shops under the Candle-lite brand name. A significant portion of our candle business is marketed
under private label. While less significant, 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 58%, 61% and 49% of this segments total net sales in 2011, 2010 and 2009,
respectively. No other customer accounted for more than 10% of this segments total net sales
during these years.
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 2009 through 2011:
2011 | 2010 | 2009 | ||||||||||
Specialty Foods: |
||||||||||||
Non-frozen |
53 | % | 52 | % | 54 | % | ||||||
Frozen |
32 | % | 33 | % | 33 | % | ||||||
Glassware and Candles: |
||||||||||||
Consumer table and giftware |
15 | % | 15 | % | 13 | % |
Net sales attributable to Wal-Mart Stores, Inc. (Wal-Mart) totaled approximately 22%, 23%
and 20% of consolidated net sales for 2011, 2010 and 2009, 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 effect upon the level of capital expenditures, earnings or
our competitive position for the succeeding year.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 2011, we had approximately 3,100 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 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 2011, 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 could or do 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 of 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, or a significant reduction in, its business
could cause our sales and net income to decrease.
Our net sales to Wal-Mart represented approximately 22% of consolidated net sales for the year
ended June 30, 2011. 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 or other disruptions to Wal-Mart, such as decreased consumer demand, 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, and again in 2011, 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 market 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 and 2011 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.
Manufacturing capacity constraints may have a material adverse effect on us.
Our current manufacturing facilities may be inadequate to meet significantly increased demand
for some of our food products. Our ability to increase our manufacturing capacity depends on many
factors, including the availability of capital, steadily increasing consumer demand, tool delivery,
construction lead-times, installation and qualification.
A lack of sufficient manufacturing capacity to meet demand could cause our customer order
times to increase and our product quality to decrease, which may negatively affect customer demand
for our products and customer relations generally, and which could have a material adverse effect
on us. In addition, operating our facilities at or near capacity may also negatively affect
relations with our employees, which could result in higher employee turnover, labor disputes, and
disruptions in our operations.
We may be subject to product recalls or other claims for mislabeled, adulterated, contaminated,
defective or spoiled food products or 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, mislabeled, adulterated, contaminated, or
contain a defect. Any of these circumstances could necessitate a recall due to a substantial
product hazard, a need to change a products labeling or out of an abundance of caution to avoid
any potential product hazards. A pervasive product recall may result in significant losses due to
the costs of a recall or related legal claims, the destruction of product inventory, lost sales due
to the unavailability of product for a period of time and a loss of goodwill and, therefore, may
have an adverse effect on our results of operations. In addition, we may also be liable if any of
our products causes injury.
Any claim or product recall could stem from or result in noncompliance with regulations of the
Food and Drug Administration, the U.S. Consumer Product Safety Commission or state law. 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 or other 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, which could have an adverse effect on our business results and the value
of our brands.
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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 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 $14.4 million, $0.9 million and $8.7 million in 2011,
2010 and 2009, respectively. CDSOA remittances have related to certain candles being imported from
the Peoples Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of 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 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 and
the U.S. Supreme Court did not hear either case. This effectively ended the constitutional
challenges brought in these cases, but other cases challenging CDSOA remain active.
We are unable to determine, at this time, what the ultimate outcome of other litigation 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.
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Accordingly, we cannot predict the amount of future distributions we may receive. Any change
in CDSOA distributions could affect our earnings and cash flow.
Restructuring and impairment charges could have a material adverse effect on our financial
results.
We did not record any restructuring and impairment charges for the year ended June 30, 2011,
but we did record such charges totaling approximately $2.5 million and $1.6 million in 2010 and
2009, 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 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.
Although we do not have any outstanding debt at this time, we may incur indebtedness in 2012
or beyond for a variety of reasons, including acquisitions or potential changes in capitalization
that might require significant cash expenditure. 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
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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.
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, 2011 of approximately $2.8 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, 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,
10
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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.
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, 2011, Mr. Gerlach owned or controlled approximately 30% 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.
11
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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 | 386,000 | Owned/Leased | |||||
Grove City, OH |
Specialty Foods | 195,000 | Owned | |||||
Horse Cave, KY |
Specialty Foods | 382,000 | 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 |
We have recently completed the expansion of our frozen yeast roll manufacturing facility in
Horse Cave, Kentucky. The expansion added approximately 49,000 square feet to the original facility
and is included in the table above.
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
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 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 or could
lead to us altering the manner in which we manufacture or sell one or more products, which could
have a material 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 2011 and 2010. Stock prices were provided by The
NASDAQ Stock Market LLC.
Dividends | ||||||||||||
Stock Prices | Paid | |||||||||||
High | Low | Per Share | ||||||||||
2011 |
||||||||||||
First quarter |
$ | 54.99 | $ | 43.28 | $ | .300 | ||||||
Second quarter |
$ | 58.59 | $ | 46.95 | .330 | |||||||
Third quarter |
$ | 60.80 | $ | 51.96 | .330 | |||||||
Fourth quarter |
$ | 64.72 | $ | 56.53 | .330 | |||||||
Year |
$ | 1.290 | ||||||||||
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 | ||||||||||
The number of shareholders as of August 17, 2011 was approximately 8,500. The highest and
lowest prices for our common stock from July 1, 2011 to August 17, 2011 were $64.15 and $53.91.
We have paid dividends for 192 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 November 2010. Approximately 1,618,000 shares from this authorization remained authorized for
future purchase at June 30, 2011. In the fourth quarter, we made the following repurchases of our
common stock:
Total Number | ||||||||||||||||
Total | Average | of Shares | Maximum Number | |||||||||||||
Number | Price | Purchased as | of Shares That May | |||||||||||||
of Shares | Paid Per | Part of Publicly | Yet be Purchased | |||||||||||||
Period | Purchased | Share | Announced Plans | Under the Plans | ||||||||||||
April 1-30, 2011 |
| $ | | | 1,678,544 | |||||||||||
May 1-31, 2011 |
| $ | | | 1,678,544 | |||||||||||
June 1-30, 2011 |
60,194 | $ | 58.81 | 60,194 | 1,618,350 | |||||||||||
Total |
60,194 | $ | 58.81 | 60,194 | 1,618,350 | |||||||||||
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, 2006 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/0000057515/000095012311081026/c21895c2189501.gif)
Cumulative Total Return (Dollars)
6/06 | 6/07 | 6/08 | 6/09 | 6/10 | 6/11 | |||||||||||||||||||
Lancaster Colony Corporation |
100.00 | 108.81 | 81.05 | 121.58 | 150.55 | 175.78 | ||||||||||||||||||
S&P Midcap 400 |
100.00 | 118.51 | 109.81 | 79.04 | 98.74 | 137.63 | ||||||||||||||||||
Dow Jones U.S. Food Producers |
100.00 | 117.13 | 106.46 | 89.64 | 97.21 | 131.53 |
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.
14
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Item 6. | Selected Financial Data |
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
FIVE YEAR FINANCIAL SUMMARY
(Thousands Except | Years Ended June 30 | |||||||||||||||||||
Per Share Figures) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Operations |
||||||||||||||||||||
Net Sales(1) |
$ | 1,089,946 | $ | 1,056,608 | $ | 1,051,491 | $ | 980,915 | $ | 945,810 | ||||||||||
Gross Margin(1) |
$ | 242,429 | $ | 270,332 | $ | 215,492 | $ | 157,341 | $ | 181,740 | ||||||||||
Percent of Sales |
22.2 | % | 25.6 | % | 20.5 | % | 16.0 | % | 19.2 | % | ||||||||||
Interest Expense |
$ | | $ | | $ | (1,217 | ) | $ | (3,076 | ) | $ | (150 | ) | |||||||
Percent of Sales |
0.0 | % | 0.0 | % | 0.1 | % | 0.3 | % | 0.0 | % | ||||||||||
Other Income Continued Dumping
and Subsidy Offset Act |
$ | 14,388 | $ | 893 | $ | 8,696 | $ | 2,533 | $ | 699 | ||||||||||
Income from Continuing Operations |
||||||||||||||||||||
Before Income Taxes(1) |
$ | 161,506 | $ | 175,138 | $ | 137,006 | $ | 75,668 | $ | 101,260 | ||||||||||
Percent of Sales |
14.8 | % | 16.6 | % | 13.0 | % | 7.7 | % | 10.7 | % | ||||||||||
Taxes Based on Income(1) |
$ | 55,142 | $ | 60,169 | $ | 47,920 | $ | 27,229 | $ | 36,981 | ||||||||||
Income from Continuing Operations(1) |
$ | 106,364 | $ | 114,969 | $ | 89,086 | $ | 48,439 | $ | 64,279 | ||||||||||
Percent of Sales |
9.8 | % | 10.9 | % | 8.5 | % | 4.9 | % | 6.8 | % | ||||||||||
Continuing Operations Diluted Income
per Common Share(1)(2) |
$ | 3.84 | $ | 4.07 | $ | 3.17 | $ | 1.64 | $ | 2.03 | ||||||||||
Cash Dividends per Common Share |
$ | 1.29 | $ | 1.185 | $ | 1.135 | $ | 1.11 | $ | 1.07 | ||||||||||
Financial Position |
||||||||||||||||||||
Cash and Equivalents(1) |
$ | 132,266 | $ | 100,890 | $ | 38,484 | $ | 19,417 | $ | 8,316 | ||||||||||
Total Assets |
$ | 622,089 | $ | 586,453 | $ | 498,481 | $ | 520,178 | $ | 598,497 | ||||||||||
Working Capital |
$ | 257,040 | $ | 239,446 | $ | 148,233 | $ | 144,925 | $ | 137,121 | ||||||||||
Property, Plant and EquipmentNet(1) |
$ | 185,282 | $ | 166,097 | $ | 170,900 | $ | 179,573 | $ | 194,589 | ||||||||||
Long-Term Debt |
$ | | $ | | $ | | $ | 55,000 | $ | | ||||||||||
Property Additions(1) |
$ | 35,343 | $ | 12,833 | $ | 11,336 | $ | 16,832 | $ | 53,589 | ||||||||||
Depreciation and Amortization(1) |
$ | 18,940 | $ | 20,533 | $ | 21,870 | $ | 24,138 | $ | 24,081 | ||||||||||
Shareholders Equity |
$ | 517,539 | $ | 484,908 | $ | 402,556 | $ | 359,218 | $ | 444,309 | ||||||||||
Per Common Share |
$ | 18.90 | $ | 17.21 | $ | 14.32 | $ | 12.63 | $ | 14.45 | ||||||||||
Weighted Average Common Shares
OutstandingDiluted(2) |
27,689 | 28,174 | 28,044 | 29,496 | 31,603 |
(1) | 2008 and 2007 amounts exclude the impact of certain
discontinued automotive operations sold in those fiscal years. |
|
(2) | Certain prior-year figures were restated in 2010 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. |
15
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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 ended June 30, 2011, 2010 and 2009 and our liquidity and capital
resources as of June 30, 2011 and 2010. 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, 2011 refers
to fiscal 2011, which is the period from July 1, 2010 to June 30, 2011. 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 various nonfood operations and focused our capital investment in the Specialty Foods
segment. These strategic dispositions and investments resulted in transforming our company into a
predominately food-focused business. In 2011, approximately 85% of our consolidated net sales and
effectively all of our operating income were derived from the Specialty Foods segment. For
perspective, in 2001, our Specialty Foods segment comprised approximately 47% and 72% of our
reported consolidated net sales and operating income, respectively.
We intend to periodically reassess 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. We believe we are 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; |
||
| experience in integrating complementary business acquisitions; and |
||
| historically strong cash flow generation that supports growth opportunities. |
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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, such as the
construction of a new frozen yeast roll facility in Horse Cave, Kentucky that began operations in
2008 and was significantly expanded through a project that was completed in June 2011. At an
adjoining location, we began production activities at a newly-constructed dressing facility in
2007. Both facilities helped accommodate potential future sales growth and also provided greater
manufacturing efficiencies. Based on our current plans and expectations, we believe that our total
capital expenditures for 2012 will be approximately $25 million.
Summary of 2011 Results
The following is an overview of our consolidated operating results for the year ended June 30,
2011.
Consolidated net sales reached approximately $1,090 million during 2011, increasing by
approximately 3% as compared to prior-year net sales of $1,057 million, driven by growth coming
from both operating segments. The Specialty Foods segments increase reflected higher foodservice
sales, which were partially offset by lower retail sales. The increase in sales of the Glassware
and Candles segment primarily reflected higher candle sales volumes from product placement into new
accounts that began in the fourth quarter of 2010.
Gross margin decreased 10% to approximately $242.4 million from the prior-year comparable
total of $270.3 million. Increasing raw-material costs, as well as a less favorable sales mix and
higher freight costs within the Specialty Foods segment, contributed to the lower gross margin.
Overall results were also affected by the funds received under CDSOA. In 2011, we received
approximately $14.4 million under CDSOA, as compared to approximately $0.9 million in 2010 and
approximately $8.7 million in 2009. 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 $106.4 million in 2011, or $3.84 per diluted share, compared
to net income of $115.0 million, or $4.07 per diluted share, in 2010. Net income in 2009 totaled
approximately $89.1 million, or $3.17 per diluted share.
Looking Forward
We are anticipating continued growth in consolidated sales during 2012. Factors that we
believe should contribute to our growth include the incremental impact of several
recently-introduced retail food products, the implementation of higher pricing among various
product lines, as well as the expansion of existing
17
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product lines with current customers or into new geographic markets. We will also continue to
review acquisition opportunities within the Specialty Foods segment that are consistent with our
growth strategy and 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 improve operating margins
in the coming year.
Within our Specialty Foods segment, with respect to material input and freight costs, we enter
2012 experiencing an elevation of such costs over 2011 levels. It is possible that future changes
in the economy and regulatory environment could cause further increases in these costs. To help
offset or stabilize the impact of such increases, we have pursued other operational strategies that
we believe will aid our future results. For example, 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. Further, the 2011
expansion of our frozen roll capacity is expected to improve production throughput and reduce third
party warehouse costs. We are also continuing to limit some of our exposure to volatile swings in
food commodity costs through a structured purchasing program for certain future requirements. We do
expect to realize higher pricing in 2012, but we believe that the related income may ultimately be
less than the total increase in material and freight costs.
With respect to our Glassware and Candles segment, we expect lower 2012 sales levels,
especially for holiday products, as some lower-margin business was not retained. Higher wax costs
will continue to negatively impact the segments operating results, and it will be challenging to
maintain operating efficiencies with the expected lower production levels. Accordingly, we
currently expect this segments 2012 operating income will be challenged to reach the level of
2011.
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.
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:
2011 | 2010 | 2009 | ||||||||||
Segment Sales Mix: |
||||||||||||
Specialty Foods |
85 | % | 85 | % | 87 | % | ||||||
Glassware and Candles |
15 | % | 15 | % | 13 | % |
Net Sales and Gross Margin
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||||||||||
Net Sales |
||||||||||||||||||||||||||||
Specialty Foods |
$ | 922,856 | $ | 893,256 | $ | 909,897 | $ | 29,600 | 3 | % | $ | (16,641 | ) | (2 | )% | |||||||||||||
Glassware and Candles |
167,090 | 163,352 | 141,594 | 3,738 | 2 | % | 21,758 | 15 | % | |||||||||||||||||||
Total |
$ | 1,089,946 | $ | 1,056,608 | $ | 1,051,491 | $ | 33,338 | 3 | % | $ | 5,117 | 0 | % | ||||||||||||||
Gross Margin |
$ | 242,429 | $ | 270,332 | $ | 215,492 | $ | (27,903 | ) | (10 | )% | $ | 54,840 | 25 | % | |||||||||||||
Gross Margin as a
Percentage of Sales |
22.2 | % | 25.6 | % | 20.5 | % |
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Consolidated net sales for the year ended June 30, 2011 increased by approximately 3% to
approximately $1,090 million from the prior-year total of approximately $1,057 million. This sales
growth reflected improved results in both operating segments. The Specialty Foods segments
increase reflected higher foodservice sales, which were partially offset by lower retail sales. The
foodservice sales increase resulted from both higher pricing and new programs with some large
restaurant chains. The decline in retail sales was influenced by the exiting of less profitable
dressing lines midway through 2010, the loss of product placement for certain produce dips at one
customer and generally weak retail market conditions. The increase in sales of the Glassware and
Candles segment primarily reflected higher candle volumes from product placement into new accounts
that began in the fourth quarter of 2010. Consolidated net sales for the year ended June 30, 2010
increased by less than 1% over the 2009 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.
Our gross margin as a percentage of net sales was approximately 22.2% in 2011 compared with
25.6% in 2010 and 20.5% in 2009. As a percentage of net sales, higher material costs in 2011 are
estimated to have impacted gross margin comparisons by approximately 3%. In the Specialty Foods
segment, gross margin percentages declined in 2011, reflecting broadly-higher ingredient and
freight costs and a less favorable sales mix. Gross margin percentages in the Glassware and Candles
segment declined in 2011 due to higher wax costs and, to a lesser extent, lower production volumes.
As a percentage of net sales, lower material costs in 2010 are estimated to have benefited gross
margin comparisons to 2009 by over 4%. In 2010, the Specialty Foods segments gross margin
percentages improved as a result of lower commodity costs, a stronger retail mix and operating
efficiency improvements. Gross margin percentages in the Glassware and Candles segment improved in
2010 due to lower material costs, especially for paraffin wax, and higher sales and production
levels.
Selling, General and Administrative Expenses
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||||||||||
Selling, General and
Administrative Expenses |
$ | 95,425 | $ | 93,821 | $ | 84,238 | $ | 1,604 | 2 | % | $ | 9,583 | 11 | % | ||||||||||||||
SG&A Expense as a
Percentage of Sales |
8.8 | % | 8.9 | % | 8.0 | % |
Selling, general and administrative expenses for 2011 totaled approximately $95.4 million
and increased 2% as compared with the 2010 total of $93.8 million, while the 2010 total had
increased 11% from the 2009 total of $84.2 million. Higher sales-based expenses, increased
compensation expense and greater consumer-directed marketing costs contributed to the overall
increase for 2011, although as a percentage of sales the 2011 expenses were comparable to 2010. 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.
Restructuring and Impairment Charges
Specialty Foods Segment
In 2010, we closed our dressings and sauces manufacturing operation located in Wilson, New
York. During 2010, we recorded restructuring charges of approximately $2.3 million ($1.5 million
after taxes). This closure was essentially complete at December 31, 2009. We do not expect any
other costs or cash expenditures related to this closure.
In 2009, we consolidated our Atlanta, Georgia dressing operation into our other existing food
facilities. 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
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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 $0.8 million ($0.5 million after taxes) during the
year ended June 30, 2009. The 2009 charge was recorded in Corporate expenses. We do not currently
expect other significant restructuring costs related to this closure.
Operating Income (Loss)
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||||||||||
Operating Income (Loss) |
||||||||||||||||||||||||||||
Specialty Foods |
$ | 155,218 | $ | 176,194 | $ | 145,848 | $ | (20,976 | ) | (12 | )% | $ | 30,346 | 21 | % | |||||||||||||
Glassware and Candles |
3,764 | 9,445 | (5,671 | ) | (5,681 | ) | (60 | )% | 15,116 | 267 | % | |||||||||||||||||
Corporate Expenses |
(11,978 | ) | (11,440 | ) | (10,529 | ) | (538 | ) | 5 | % | (911 | ) | 9 | % | ||||||||||||||
Total |
$ | 147,004 | $ | 174,199 | $ | 129,648 | $ | (27,195 | ) | (16 | )% | $ | 44,551 | 34 | % | |||||||||||||
Operating Income (Loss) as
a Percentage of Sales |
||||||||||||||||||||||||||||
Specialty Foods |
16.8 | % | 19.7 | % | 16.0 | % | ||||||||||||||||||||||
Glassware and Candles |
2.3 | % | 5.8 | % | (4.0 | )% | ||||||||||||||||||||||
Consolidated |
13.5 | % | 16.5 | % | 12.3 | % |
Due to the factors discussed above, consolidated operating income for 2011 totaled
approximately $147.0 million, a 16% decrease from 2010 operating income of $174.2 million. The 2010
total had increased 34% from 2009 operating income totaling approximately $129.6 million. See
further discussion of operating results by segment following the discussion of Net Income below.
Interest Expense
We incurred no interest expense in 2011 and 2010 as there were no borrowings outstanding
during these years. Interest expense of approximately $1.2 million recorded in 2009 related to
long-term borrowings. We had no outstanding borrowings at June 30, 2011 and 2010.
Other Income Continued Dumping and Subsidy Offset Act
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 $14.4 million,
$0.9 million and $8.7 million in 2011, 2010 and 2009, respectively. CDSOA remittances have related
to certain candles being imported from the Peoples Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of 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 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 and
the U.S. Supreme Court did not hear either case. This effectively ended the constitutional
challenges brought in these cases, but other cases challenging CDSOA remain active.
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We are unable to determine, at this time, what the ultimate outcome of other litigation 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 we
may receive. Any change in CDSOA distributions could affect our earnings and cash flow.
Interest Income and Other Net
Interest income and other was income of approximately $0.1 million, income of less than $0.1
million and expense of approximately $0.1 million in 2011, 2010 and 2009, respectively.
Income Before Income Taxes
As affected by the factors discussed above, our income before income taxes for 2011 of
approximately $161.5 million decreased 8% from the 2010 total of $175.1 million. The 2009 total
income before income taxes was approximately $137.0 million. Our effective tax rate was 34.1%,
34.4% and 35.0% in 2011, 2010 and 2009, respectively. The 2011 rate was primarily impacted by the
domestic manufacturing deduction, for which there was a rate increase in the current year. As
compared to 2009, 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 5 to the
consolidated financial statements.
Net Income
Net income for 2011 of approximately $106.4 million decreased from 2010 net income of $115.0
million. Net income was approximately $89.1 million in 2009. Diluted net income per share totaled
approximately $3.84 in 2011, a 6% decrease from the prior-year total of $4.07. The latter amount
was 28% higher than 2009 diluted earnings per share of $3.17. Income per share in each of the last
three years has been beneficially affected by share repurchases, which have totaled approximately
$64.4 million over the three-year period ended June 30, 2011.
SEGMENT REVIEW SPECIALTY FOODS
During 2011, net sales of the Specialty Foods segment set a new record level, surpassing the
previous record set in 2009, while operating income of approximately $155.2 million decreased 12%
from the 2010 level of $176.2 million. Increasing material and freight costs, as well as a less
favorable sales mix, contributed to the lower level of operating income. Net sales during 2011
totaled approximately $922.9 million, an increase from the prior-year total of $893.3 million.
Sales for 2010 decreased 2% from the 2009 total of approximately $909.9 million. The percentage of
retail customer sales within the segment was approximately 52% during 2011, as compared to 53% in
2010 and 51% in 2009.
In 2011, net sales of the Specialty Foods segment increased by approximately 3%. Contribution
from higher pricing was approximately 1% of net sales. The segments foodservice net sales rose
approximately 9% on increased volumes, particularly from new programs with existing large chain
restaurants, and higher pricing. Retail net sales declined approximately 1% as influenced by the
prior year rationalization of some product lines associated with the mid-year 2010 closing of one
of our dressing facilities. Also, sales of produce dips declined, reflecting a weaker category and
the loss of placement for certain products at one of our customers. Mitigating these declines were
higher retail sales of frozen rolls and the success of several recently-introduced products. 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.
Operating income of the Specialty Foods segment in 2011 totaled approximately $155.2 million,
a 12% decrease from the 2010 record level of $176.2 million. The 2010 level was 21% higher than the
2009 level of $145.8 million. The 2011 decrease reflected broadly higher ingredient and freight
costs, a less favorable sales mix and increased marketing costs. We estimate that higher material
costs adversely affected the segments
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comparative results by approximately 3% of net sales. The 2010 increase reflected 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 2010 net sales.
SEGMENT REVIEW GLASSWARE AND CANDLES
Glassware and Candles segment net sales totaled approximately $167.1 million during 2011, as
compared to $163.4 million in 2010 and $141.6 million in 2009. The 2011 increase reflected higher
candle sales volumes, mainly product placement into new accounts that began in the fourth quarter
of 2010. In 2010, the increase in net sales 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 segment recorded operating income of approximately $3.8 million in 2011 and $9.4 million
in 2010 compared to an operating loss of $5.7 million during 2009. Despite the benefits of
achieving higher sales volumes in 2011, operating results were adversely affected by higher wax
costs and, to a lesser extent, lower production volumes. We estimate that higher wax costs in the
Glassware and Candles segment adversely affected the segments comparative results in 2011 by
approximately 5% of net sales. 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. We estimate the favorable year-over-year impact of wax costs for the year ended June 30,
2010 approximated 4% of the segments net sales.
CORPORATE EXPENSES
The 2011 corporate expenses totaled approximately $12.0 million as compared to $11.4 million
in 2010 and $10.5 million in 2009. The higher level of corporate expenses for 2011 and 2010 related to costs associated with our idle real estate holdings while the increase in expenses in 2011 from 2010 related to increased professional fees and personnel related costs.
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 2011, and we ended the year with approximately $132.3 million
in cash and equivalents, along with shareholders equity of nearly $518 million and no debt.
Under our unsecured revolving credit 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, 2011. The facility expires in October 2012, and all outstanding
amounts are then due and payable. At June 30, 2011, we had approximately $6.6 million of standby
letters of credit outstanding, which reduced the amount available for borrowing on the unsecured
revolving credit facility.
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, 2011, 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 any 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, 2011, we were not aware of any event that would
constitute a default under the facility.
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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 4 to the consolidated
financial statements.
Cash Flows
Year Ended | ||||||||||||||||||||||||||||
June 30 | Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||||||||||
Provided by Operating
Activities |
$ | 147,454 | $ | 107,691 | $ | 133,164 | $ | 39,763 | 37 | % | $ | (25,473 | ) | (19 | )% | |||||||||||||
Used in Investing Activities |
$ | (35,758 | ) | $ | (14,100 | ) | $ | (10,974 | ) | $ | (21,658 | ) | (154 | )% | $ | (3,126 | ) | (28 | )% | |||||||||
Used in Financing Activities |
$ | (80,320 | ) | $ | (31,185 | ) | $ | (103,123 | ) | $ | (49,135 | ) | (158 | )% | $ | 71,938 | 70 | % |
Our cash flows for the years 2009 through 2011 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 in 2011 totaled
approximately $147.5 million, an increase of 37% as compared with the prior-year total of $107.7
million, which decreased from the 2009 total of $133.2 million. The 2011 increase in cash provided
by operating activities reflected favorable changes in working capital, especially within accounts
receivable, inventory and other current assets, as partially offset by the decrease in net income.
The 2010 decrease resulted 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 during 2010
primarily as a result of anticipating larger seasonal sales of candles and frozen breads in 2011.
Conversely, despite broadly higher material costs, such inventories declined approximately $10
million in 2011 due to a reduced need for building seasonal inventories.
Cash used in investing activities totaled approximately $35.8 million in 2011, $14.1 million
in 2010 and $11.0 million for 2009. The 2011 increase in cash used in investing activities
reflected a higher level of capital expenditures in 2011 due to the expansion of our frozen yeast
roll facility in Kentucky. The 2010 increase in cash used in investing activities reflected lower
proceeds from the sale of property and an increase in capital expenditures in 2010. Capital
expenditures totaled approximately $35.3 million in 2011, compared to $12.8 million in 2010 and
$11.3 million in 2009. Capital spending allocations during 2011 by segment approximated 97% for
Specialty Foods and 3% for Glassware and Candles. Based on our current plans and expectations, we
believe that our total capital expenditures for 2012 will be approximately $25 million.
Financing activities used net cash totaling approximately $80.3 million, $31.2 million and
$103.1 million in 2011, 2010 and 2009, respectively. The 2011 increase in cash used in financing
activities reflected a higher level of share repurchases, lower proceeds from the exercise of stock
awards and a lower cash overdraft balance. The 2010 decrease in cash used in financing activities
was due primarily to a decrease in treasury share repurchases, the net change in borrowing activity
and an increase in the cash overdraft balance. The total payment for cash dividends for the year
ended June 30, 2011 was approximately $35.7 million. The dividend payout rate for 2011 was $1.29
per share as compared to $1.185 per share during 2010, and $1.135 per share in 2009. This past
fiscal year marked the 48th consecutive year in which our dividend rate was increased. Cash
utilized for share repurchases totaled approximately $43.1 million, $4.4 million and $16.9 million
in 2011, 2010 and 2009, respectively. Our Board approved a share repurchase authorization of
2,000,000 shares in November 2010. Approximately 1,618,000 shares from this authorization remained
authorized for future purchase at June 30, 2011.
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
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environmental matters, costs are incurred pertaining to regulatory compliance and, upon
occasion, remediation. Such costs have not been, and are not anticipated to become, material.
We are contingently liable with respect to lawsuits, taxes and various other matters that
routinely arise in the normal course of business. Except as discussed above, we do not have any
related party transactions that materially affect our results of operations, cash flow or financial
condition.
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, 2011 and future minimum lease
payments for the use of property and equipment under operating lease agreements.
The following table summarizes our contractual obligations as of June 30, 2011 (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) |
$ | 11,211 | $ | 3,680 | $ | 5,482 | $ | 2,049 | $ | | ||||||||||
Purchase Obligations (2) |
91,750 | 90,451 | 1,299 | | | |||||||||||||||
Other Noncurrent Liabilities (as reflected
on Consolidated Balance Sheet) (3) |
2,227 | | 2,227 | | | |||||||||||||||
Total |
$ | 105,188 | $ | 94,131 | $ | 9,008 | $ | 2,049 | $ | | ||||||||||
(1) | Operating leases are primarily entered into for warehouse and office facilities and certain
equipment. See Note 10 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 $11.4 million of other noncurrent liabilities
recorded on the balance sheet, which consist of the underfunded pension liability, other post
employment benefit obligations, tax liabilities, noncurrent workers compensation obligations,
deferred compensation and interest on deferred compensation. These items are excluded, as it
is not certain when these liabilities will become due. See Notes 5, 7, 8 and 9 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. In 2011, we experienced
comparatively higher ingredient costs (including for soybean oil, dairy products, sugar, eggs and
paraffin wax). We estimate that higher material costs adversely affected our results by
approximately 3% of net sales. We also experienced higher distribution costs, which were, in part,
influenced by higher diesel costs. For 2010, 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 2012, we expect higher material and freight costs to
persist.
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Over the course of 2011 and 2009, 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 negative impact on our 2011 operating
margins and a net positive impact in 2009. Our 2012 operating results will also be impacted by our
ability to offset any higher input costs through pricing adjustments with our customers. We do
expect to realize higher pricing in 2012, but we believe that the related income may ultimately be
less than the total increase from higher material and freight costs.
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 U.S. generally accepted accounting principles. 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
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recoverable by comparing the sum of the undiscounted future cash flows to the assets carrying
amount. Our cash flows are based on historical results adjusted to reflect our best estimate of
future market and operating conditions. If the carrying amounts are greater, then the assets are
not recoverable. In that instance, we compare the carrying amounts to the fair value to determine
the amount of the impairment to be recorded.
Goodwill and Intangible Assets
Goodwill is not amortized. It is evaluated annually at April 30, through asset impairment
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, 2011 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
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive
Income: Presentation of Comprehensive Income (ASU 11-05). This ASU amends current comprehensive
income guidance to eliminate the option to present the components of other comprehensive income as
part of the statement of shareholders equity. Instead, it requires entities to report components of
comprehensive income in either (1) a continuous statement of comprehensive income or (2) two
separate but consecutive statements. ASU 11-05 will be effective for public companies during the
interim and annual periods beginning after December 15, 2011, with early adoption permitted. We do
not expect the adoption of this update to have a material impact on our financial position or
results of operations.
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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 presented. This resulted in a $.01 reduction in
basic and diluted net income per common share for 2009. 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 7
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,
except as required by law.
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 or other defective or mislabeled product costs; |
27
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| 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; |
||
| 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 and limited or exclusive sources for certain goods; |
||
| effect of governmental regulations, including environmental matters; |
||
| legislation and litigation affecting the future administration of the Continued
Dumping and Subsidy Offset Act of 2000; |
||
| access to any required financing; |
||
| changes in income tax laws; |
||
| unknown costs relating to the holding or disposition of idle real estate; |
||
| changes in estimates in critical accounting judgments; |
||
| the outcome of any litigation or arbitration; 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 2011, 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
28
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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, 2011 and 2010, and the related consolidated
statements of income, cash flows, and shareholders equity for each of the three years in the
period ended June 30, 2011. Our audits also included the financial statement schedule listed in the
table of contents at Item 15. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on the consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as, evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries as of June 30, 2011 and 2010, and
the results of their operations and their cash flows for each of the three years in the period
ended June 30, 2011, 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.
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, 2011, 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 29,
2011 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP |
||
Columbus, Ohio |
||
August 29, 2011 |
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 | ||||||||
(Amounts in thousands, except share data) | 2011 | 2010 | ||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and equivalents |
$ | 132,266 | $ | 100,890 | ||||
Receivables (less allowance for doubtful accounts,
2011$570; 2010$516) |
63,762 | 67,766 | ||||||
Inventories: |
||||||||
Raw materials |
36,785 | 36,812 | ||||||
Finished goods and work in process |
75,100 | 84,697 | ||||||
Total inventories |
111,885 | 121,509 | ||||||
Deferred income taxes and other current assets |
25,283 | 27,234 | ||||||
Total current assets |
333,196 | 317,399 | ||||||
Property, Plant and Equipment: |
||||||||
Land, buildings and improvements |
141,175 | 129,747 | ||||||
Machinery and equipment |
263,449 | 242,024 | ||||||
Total cost |
404,624 | 371,771 | ||||||
Less accumulated depreciation |
219,342 | 205,674 | ||||||
Property, plant and equipmentnet |
185,282 | 166,097 | ||||||
Other Assets: |
||||||||
Goodwill |
89,840 | 89,840 | ||||||
Other intangible assetsnet |
8,350 | 9,514 | ||||||
Other noncurrent assets |
5,421 | 3,603 | ||||||
Total |
$ | 622,089 | $ | 586,453 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 42,570 | $ | 41,904 | ||||
Accrued liabilities |
33,586 | 36,049 | ||||||
Total current liabilities |
76,156 | 77,953 | ||||||
Other Noncurrent Liabilities |
13,646 | 19,138 | ||||||
Deferred Income Taxes |
14,748 | 4,454 | ||||||
Shareholders Equity: |
||||||||
Preferred stockauthorized 3,050,000 shares; outstandingnone |
||||||||
Common stockauthorized 75,000,000 shares;
outstanding, 201127,385,781 shares; 201028,167,549 shares |
97,197 | 94,885 | ||||||
Retained earnings |
1,150,683 | 1,080,015 | ||||||
Accumulated other comprehensive loss |
(7,043 | ) | (9,797 | ) | ||||
Common stock in treasury, at cost |
(723,298 | ) | (680,195 | ) | ||||
Total shareholders equity |
517,539 | 484,908 | ||||||
Total |
$ | 622,089 | $ | 586,453 | ||||
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30 | ||||||||||||
(Amounts in thousands, except per share data) | 2011 | 2010 | 2009 | |||||||||
Net Sales |
$ | 1,089,946 | $ | 1,056,608 | $ | 1,051,491 | ||||||
Cost of Sales |
847,517 | 786,276 | 835,999 | |||||||||
Gross Margin |
242,429 | 270,332 | 215,492 | |||||||||
Selling, General and Administrative Expenses |
95,425 | 93,821 | 84,238 | |||||||||
Restructuring and Impairment Charges |
| 2,312 | 1,606 | |||||||||
Operating Income |
147,004 | 174,199 | 129,648 | |||||||||
Other (Expense) Income: |
||||||||||||
Interest expense |
| | (1,217 | ) | ||||||||
Other incomeContinued Dumping and Subsidy
Offset Act |
14,388 | 893 | 8,696 | |||||||||
Interest income and othernet |
114 | 46 | (121 | ) | ||||||||
Income Before Income Taxes |
161,506 | 175,138 | 137,006 | |||||||||
Taxes Based on Income |
55,142 | 60,169 | 47,920 | |||||||||
Net Income |
$ | 106,364 | $ | 114,969 | $ | 89,086 | ||||||
Net Income Per Common Share: |
||||||||||||
Basic |
$ | 3.84 | $ | 4.08 | $ | 3.17 | ||||||
Diluted |
$ | 3.84 | $ | 4.07 | $ | 3.17 | ||||||
Weighted Average Common Shares Outstanding: |
||||||||||||
Basic |
27,664 | 28,144 | 28,033 | |||||||||
Diluted |
27,689 | 28,174 | 28,044 |
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30 | ||||||||||||
(Amounts in thousands) | 2011 | 2010 | 2009 | |||||||||
Cash Flows From Operating Activities: |
||||||||||||
Net income |
$ | 106,364 | $ | 114,969 | $ | 89,086 | ||||||
Adjustments to reconcile net income
to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
18,940 | 20,533 | 21,870 | |||||||||
Deferred income taxes and other noncash changes |
10,977 | 3,415 | 3,767 | |||||||||
Restructuring and impairment charges |
| 677 | (1,221 | ) | ||||||||
Loss (gain) on sale of property |
14 | (40 | ) | (861 | ) | |||||||
Pension plan activity |
(1,326 | ) | (289 | ) | (2,316 | ) | ||||||
Changes in operating assets and liabilities: |
||||||||||||
Receivables |
3,615 | (7,421 | ) | (2,287 | ) | |||||||
Inventories |
9,624 | (19,166 | ) | 17,780 | ||||||||
Other current assets |
317 | (6,755 | ) | 13,868 | ||||||||
Accounts payable and accrued liabilities |
(1,071 | ) | 1,768 | (6,522 | ) | |||||||
Net cash provided by operating activities |
147,454 | 107,691 | 133,164 | |||||||||
Cash Flows From Investing Activities: |
||||||||||||
Payments on property additions |
(35,343 | ) | (12,833 | ) | (11,336 | ) | ||||||
Proceeds from sale of property |
19 | 69 | 2,000 | |||||||||
Othernet |
(434 | ) | (1,336 | ) | (1,638 | ) | ||||||
Net cash used in investing activities |
(35,758 | ) | (14,100 | ) | (10,974 | ) | ||||||
Cash Flows From Financing Activities: |
||||||||||||
Proceeds from debt |
| | 25,000 | |||||||||
Payments on debt |
| | (80,000 | ) | ||||||||
Purchase of treasury stock |
(43,103 | ) | (4,398 | ) | (16,894 | ) | ||||||
Payment of dividends |
(35,696 | ) | (33,430 | ) | (31,854 | ) | ||||||
Proceeds from the exercise of stock awards,
including tax benefits |
479 | 4,643 | 5,407 | |||||||||
(Decrease) increase in cash overdraft balance |
(2,000 | ) | 2,000 | (4,782 | ) | |||||||
Net cash used in financing activities |
(80,320 | ) | (31,185 | ) | (103,123 | ) | ||||||
Net change in cash and equivalents |
31,376 | 62,406 | 19,067 | |||||||||
Cash and equivalents at beginning of year |
100,890 | 38,484 | 19,417 | |||||||||
Cash and equivalents at end of year |
$ | 132,266 | $ | 100,890 | $ | 38,484 | ||||||
See accompanying notes to consolidated financial statements.
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Accumulated | ||||||||||||||||||||||||
Common Stock | Other | Total | ||||||||||||||||||||||
(Amounts in thousands, | Outstanding | Retained | Comprehensive | Treasury | Shareholders | |||||||||||||||||||
except per share data) | Shares | Amount | Earnings | Loss | Stock | Equity | ||||||||||||||||||
Balance, June 30, 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 | ||||||||||||||||
Net income |
106,364 | 106,364 | ||||||||||||||||||||||
Net pension and postretirement
benefit gains, net of $1,776
tax effect |
2,754 | 2,754 | ||||||||||||||||||||||
Comprehensive Income |
109,118 | |||||||||||||||||||||||
Cash dividends common
stock ($1.29 per share) |
(35,696 | ) | (35,696 | ) | ||||||||||||||||||||
Purchase of treasury stock |
(810 | ) | (43,103 | ) | (43,103 | ) | ||||||||||||||||||
Stock-based plans |
28 | (4 | ) | (4 | ) | |||||||||||||||||||
Stock-based compensation expense |
2,316 | 2,316 | ||||||||||||||||||||||
Balance, June 30, 2011 |
27,386 | $ | 97,197 | $ | 1,150,683 | $ | (7,043 | ) | $ | (723,298 | ) | $ | 517,539 | |||||||||||
See accompanying notes to consolidated financial statements.
34
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LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except 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. 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, 2011 refers to fiscal 2011, which is
the period from July 1, 2010 to June 30, 2011.
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.
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. These June 30 balances were as follows:
2011 | 2010 | |||||||
Negative book cash balances reclassed to other accrued liabilities |
$ | | $ | 2,000 |
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 13 with respect to our accounts receivable with Wal-Mart
Stores, Inc.
35
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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
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 inventories. We estimate that work in process inventories as a
percentage of the combined total of finished goods and work in process inventories at June 30 are
as follows:
2011 | 2010 | |||||||
Work in process as a percentage of the combined total
of finished goods and work in process |
4 | % | 3 | % |
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 and excluded from the property additions
and the change in accounts payable in the Consolidated Statement of Cash Flows at June 30 are as
follows:
2011 | 2010 | 2009 | ||||||||||
Construction in progress in accounts payable |
$ | 45 | $ | 90 | $ | 88 |
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 generally from two to 45 years while machinery and equipment range
generally from two to 20 years. For tax purposes, we generally compute depreciation using
accelerated methods.
The following table sets forth depreciation expense in each of the years ending June 30:
2011 | 2010 | 2009 | ||||||||||
Depreciation expense |
$ | 15,961 | $ | 17,049 | $ | 18,141 |
Held for Sale
As a result of various prior-years restructuring and divestiture activities, we have certain
held for sale properties with a total net book value of approximately $2.8 million at June 30,
2011. This balance is included in Other Noncurrent 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.
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 12 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, 2011 and 2010, as
appropriate, we completed our goodwill impairment testing, and have determined that our estimated fair
value was substantially in excess of the related carrying value. We periodically evaluate the
future economic benefit of the recorded goodwill
and intangible assets when events or circumstances indicate potential recoverability concerns.
Carrying amounts
36
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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)
are
adjusted appropriately when determined to have been impaired. See further discussion regarding year-end balances and
disclosure in Note 2.
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.
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 November
2010. Approximately 1,618,000 shares remained authorized for future purchase at June 30, 2011.
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.
Advertising Expense
We expense advertising as it is incurred. The following table summarizes advertising expense
as a percentage of net sales in each of the years ending June 30:
2011 | 2010 | 2009 | ||||||||||
Advertising expense as a percentage of sales |
2 | % | 2 | % | 1 | % |
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 6.
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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)
Other Income
During 2011, we received approximately $14.4 million from the U.S. government under the
Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) compared to $0.9 million received in
2010 and $8.7 million received in 2009. 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 11.
Income Taxes
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax
benefits reflect managements best assessment of estimated future taxes to be paid. We are subject
to income taxes in numerous domestic jurisdictions.
Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts
of items treated differently for tax purposes than for financial reporting purposes. Tax law
requires certain items be included in the tax return at different times than the items are
reflected in the financial statements. Some of these differences are permanent, such as expenses
that are not deductible in our tax return, and some differences are temporary, reversing over time,
such as depreciation expense. These temporary differences create deferred tax assets and
liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date. Realization of certain
deferred tax assets is dependent upon generating sufficient taxable income in the appropriate
jurisdiction prior to the expiration of the carryforward periods. Although realization is not
assured, management believes it is more likely than not that our deferred tax assets will be
realized and thus we have not recorded any valuation allowance for the years ended June 30, 2011 or
2010.
In accordance with accounting literature related to uncertainty in income taxes, tax benefits
from uncertain tax positions that are recognized in the financial statements are measured based on
the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities
in the future. Management is not aware of any such changes that would have a material effect on our
results of operations, cash flow or financial position. See further discussions in Note 5.
Earnings Per Share
Earnings per share (EPS) 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. 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 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 2009.
Basic EPS excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during the period. Diluted
EPS is computed by dividing income available to common shareholders by the diluted weighted average
number of common shares outstanding during the period, which includes the dilutive potential common
shares associated with outstanding stock options, restricted stock and stock-settled stock
appreciation rights.
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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:
2011 | 2010 | 2009 | ||||||||||
Net income |
$ | 106,364 | $ | 114,969 | $ | 89,086 | ||||||
Net income available to participating securities |
(146 | ) | (198 | ) | (87 | ) | ||||||
Net income available to common shareholders |
$ | 106,218 | $ | 114,771 | $ | 88,999 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
27,664 | 28,144 | 28,033 | |||||||||
Incremental share effect from: |
||||||||||||
Stock options |
| 3 | 3 | |||||||||
Restricted stock |
5 | 6 | 6 | |||||||||
Stock-settled stock appreciation rights |
20 | 21 | 2 | |||||||||
Diluted |
27,689 | 28,174 | 28,044 | |||||||||
Net income per common share: |
||||||||||||
Basic |
$ | 3.84 | $ | 4.08 | $ | 3.17 | ||||||
Diluted |
$ | 3.84 | $ | 4.07 | $ | 3.17 |
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
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive
Income: Presentation of Comprehensive Income (ASU 11-05). This ASU amends current comprehensive
income guidance to eliminate the option to present the components of other comprehensive income as
part of the statement of shareholders equity. Instead, it requires entities to report components of
comprehensive income in either (1) a continuous statement of comprehensive income or (2) two
separate but consecutive statements. ASU 11-05 will be effective for public companies during the
interim and annual periods beginning after December 15, 2011, with early adoption permitted. We do
not expect the adoption of this update to have a material impact on our financial position or
results of operations.
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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 2 Goodwill and Other Intangible Assets
Goodwill attributable to the Specialty Foods segment was approximately $89.8 million at June
30, 2011 and 2010.
The following table summarizes our identifiable other intangible assets, all included in the
Specialty Foods segment, at June 30:
2011 | 2010 | |||||||
Trademarks (40-year life) |
||||||||
Gross carrying value |
$ | 370 | $ | 370 | ||||
Accumulated amortization |
(186 | ) | (177 | ) | ||||
Net Carrying Value |
$ | 184 | $ | 193 | ||||
Customer Relationships (12 to 15-year life) |
||||||||
Gross carrying value |
$ | 13,020 | $ | 13,020 | ||||
Accumulated amortization |
(4,991 | ) | (4,054 | ) | ||||
Net Carrying Value |
$ | 8,029 | $ | 8,966 | ||||
Non-compete Agreements (5 to 8-year life) |
||||||||
Gross carrying value |
$ | 1,540 | $ | 1,540 | ||||
Accumulated amortization |
(1,403 | ) | (1,185 | ) | ||||
Net Carrying Value |
$ | 137 | $ | 355 | ||||
Total Net Carrying Value |
$ | 8,350 | $ | 9,514 | ||||
Amortization expense relating to these assets in each of the years ending June 30 was as
follows:
2011 | 2010 | 2009 | ||||||||||
Amortization expense |
$ | 1,164 | $ | 1,164 | $ | 1,164 |
Total annual amortization expense for each of the next five years is estimated to be as
follows:
2012 |
$ | 1,083 | ||
2013 |
$ | 946 | ||
2014 |
$ | 946 | ||
2015 |
$ | 946 | ||
2016 |
$ | 775 |
Note 3 Accrued Liabilities
Accrued liabilities at June 30 are composed of:
2011 | 2010 | |||||||
Accrued compensation and employee benefits |
$ | 23,623 | $ | 24,671 | ||||
Accrued marketing and distribution |
5,547 | 6,471 | ||||||
Income and other taxes |
1,490 | 1,269 | ||||||
Book cash overdrafts |
| 2,000 | ||||||
Other |
2,926 | 1,638 | ||||||
Total accrued liabilities |
$ | 33,586 | $ | 36,049 | ||||
Note 4 Long-Term Debt
At June 30, 2011 and 2010, 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, 2011 and 2010, we had no borrowings outstanding under this facility. Loans
may be used for general corporate purposes. At June 30,
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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)
2011, we had approximately $6.6 million of standby letters of credit outstanding, which reduced the
amount available for borrowing on the unsecured revolving credit facility.
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 2011 and
2010.
The facility contains certain restrictive covenants, including limitations on indebtedness,
asset sales and acquisitions. There are two principal financial covenants: an interest expense test
that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each
fiscal quarter; and an indebtedness test that requires us to maintain a 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). At June 30, 2011 and 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 any 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,
2011, we were not aware of any event that would constitute a default under the facility.
Note 5 Income Taxes
We and our domestic subsidiaries file a consolidated Federal income tax return. Taxes based on
income for the years ended June 30 have been provided as follows:
2011 | 2010 | 2009 | ||||||||||
Currently payable: |
||||||||||||
Federal |
$ | 43,140 | $ | 55,422 | $ | 40,019 | ||||||
State and local |
4,542 | 3,933 | 3,858 | |||||||||
Total current provision |
47,682 | 59,355 | 43,877 | |||||||||
Deferred Federal, state and local provision |
7,460 | 814 | 4,043 | |||||||||
Total taxes based on income |
$ | 55,142 | $ | 60,169 | $ | 47,920 | ||||||
Certain tax benefits recorded directly to common stock for each of the years ending June 30
were as follows:
2011 | 2010 | 2009 | ||||||||||
Tax benefits recorded directly to common stock |
$ | 479 | $ | 674 | $ | 213 |
For the years ended June 30, our effective tax rate varied from the statutory Federal income
tax rate as a result of the following factors:
2011 | 2010 | 2009 | ||||||||||
Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes |
1.9 | % | 1.5 | % | 2.1 | % | ||||||
ESOP dividend deduction |
(0.2 | )% | (0.1 | )% | (0.2 | )% | ||||||
Domestic manufacturing deduction |
(2.5 | )% | (1.9 | )% | (1.8 | )% | ||||||
Other |
(0.1 | )% | (0.1 | )% | (0.1 | )% | ||||||
Effective rate |
34.1 | % | 34.4 | % | 35.0 | % | ||||||
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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 are comprised of:
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
Inventories |
$ | 4,101 | $ | 3,499 | ||||
Employee medical and other benefits |
9,459 | 10,892 | ||||||
Receivable and other allowances |
4,423 | 4,625 | ||||||
Other accrued liabilities |
3,437 | 3,591 | ||||||
Total deferred tax assets |
21,420 | 22,607 | ||||||
Total deferred tax liabilitiesproperty and other |
(20,429 | ) | (12,380 | ) | ||||
Net deferred tax asset |
$ | 991 | $ | 10,227 | ||||
Net current deferred tax assets and prepaid Federal, state and local income taxes were
included in Deferred Income Taxes and Other Current Assets on the Consolidated Balance Sheet. The
related balances at June 30 are as follows:
2011 | 2010 | |||||||
Net current deferred tax assets |
$ | 15,739 | $ | 14,681 | ||||
Prepaid Federal, state and local income taxes |
$ | 8,140 | $ | 7,863 |
Cash payments for income taxes for each of the years ending June 30 were as follows:
2011 | 2010 | 2009 | ||||||||||
Cash payments for income taxes |
$ | 47,598 | $ | 66,236 | $ | 30,415 |
The gross tax contingency reserve at June 30, 2011 was approximately $1.8 million. The
unrecognized tax benefits recorded as the gross tax contingency reserve noted in the following
table for June 30, 2011 and 2010 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):
2011 | 2010 | |||||||
Balance, beginning of year |
$ | 1,921 | $ | 2,932 | ||||
Tax positions related to current year: |
||||||||
Additions |
18 | 15 | ||||||
Reductions |
| | ||||||
Tax positions related to prior years: |
||||||||
Additions |
455 | 640 | ||||||
Reductions |
(599 | ) | (32 | ) | ||||
Decreases due to settlements with taxing authorities |
| (1,634 | ) | |||||
Balance, end of year |
$ | 1,795 | $ | 1,921 | ||||
We have classified approximately $0.1 million of the gross tax contingency reserve at June 30,
2011 as current liabilities as these amounts are expected to be resolved within the next 12 months.
The remaining liability of approximately $1.7 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%.
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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)
We recognize interest and penalties related to these tax liabilities in income tax expense.
For each of the years ended June 30, we recognized the change in the accrual for net tax-related
interest and penalties as follows:
2011 | 2010 | |||||||
Expense (benefit) recognized for the net tax-related interest and penalties |
$ | 96 | $ | (445 | ) |
We had accrued interest and penalties at June 30 as follows:
2011 | 2010 | |||||||
Accrued interest and penalties included in the gross
tax contingency reserve |
$ | 802 | $ | 706 |
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 2008.
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 for 2011 was 9%.
In accordance with FASB guidance, this deduction is treated as a special deduction, as opposed to a
tax rate reduction.
Note 6 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. In general, options granted under the 1995 Plan vested
immediately and had a maximum term of five years. The 1995 Plan expired in August 2005, but there
were options issued under this plan that were exercisable through February 2010. There were no
options outstanding under this plan at June 30, 2011.
Our shareholders have approved the adoption of and subsequent amendments to the Lancaster
Colony Corporation 2005 Stock Plan (the 2005 Plan). 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 2011, 2010, or 2009. Total compensation cost related to stock options
was zero in 2011, 2010 and 2009.
There were no stock option exercises in 2011. During the year ended June 30, 2010, we received
approximately $4.0 million in cash from the exercise of stock options. The aggregate intrinsic
value of these options was approximately $0.9 million. A related tax benefit of approximately $0.3
million was recorded in 2010. This tax benefit was included in the financing section of the
Consolidated Statements of Cash Flows and resulted from incentive stock option disqualifying
dispositions and exercises of non-qualified options. The benefits included approximately $44,000 of
gross windfall tax benefits for the year ended June 30, 2010.
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. Our policy is to issue shares upon SSSARs exercise from new
shares that had been previously authorized.
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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)
In February 2011, 2010 and 2009, we granted SSSARs to various employees under the terms of the
2005 Plan. The following table summarizes information relating to each of these grants:
2011 | 2010 | 2009 | ||||||||||
SSSARs granted |
94 | 168 | 78 | |||||||||
Weighted average fair value per right |
$ | 10.12 | $ | 11.81 | $ | 6.89 | ||||||
Assumptions used in fair value calculations: |
||||||||||||
Risk-free interest rate |
1.27 | % | 1.67 | % | 1.63 | % | ||||||
Dividend yield |
2.28 | % | 2.04 | % | 2.86 | % | ||||||
Volatility factor of the expected market price of our
common stock |
28.78 | % | 29.97 | % | 28.13 | % | ||||||
Weighted average expected life in years |
3.11 | 3.50 | 3.50 |
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. For the 2011 SSSARs
grant, the expected average life was determined based on historical exercise experience for this
type of grant. For the 2010 and 2009 SSSARs grants, the expected average life was calculated using
the simplified method as defined in the Securities and Exchange Commissions Staff Accounting
Bulletin 110, as we did 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. Compensation cost was
reflected in Cost of Sales or Selling, General and Administrative Expenses based on the grantees
salaries expense classification and was allocated to each segment appropriately. We recorded tax
benefits and gross windfall tax benefits related to SSSARs. These windfall tax benefits were
included in the financing section of the Consolidated Statements of Cash Flows. The following table
summarizes SSSARs compensation expense and tax benefits recorded for each of the years ending June
30:
2011 | 2010 | 2009 | ||||||||||
Compensation expense |
$ | 1,120 | $ | 684 | $ | 353 | ||||||
Tax benefits |
$ | 392 | $ | 240 | $ | 124 | ||||||
Intrinsic value of exercises |
$ | 922 | $ | 926 | $ | 19 | ||||||
Gross windfall tax benefits |
$ | 334 | $ | 324 | $ | 7 |
The total fair values of SSSARs vested for each of the years ended June 30 are as follows:
2011 | 2010 | 2009 | ||||||||||
Fair value of vested rights |
$ | 1,095 | $ | 479 | $ | 306 |
The following table summarizes the activity relating to SSSARs granted under the 2005 Plan for
the year ended June 30, 2011:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number | Average | Remaining | Aggregate | |||||||||||||
of | Exercise | Contractual | Intrinsic | |||||||||||||
Rights | Price | Life in Years | Value | |||||||||||||
Outstanding at June 30, 2010 |
309 | $ | 49.55 | |||||||||||||
Exercised |
(70 | ) | $ | 39.75 | ||||||||||||
Granted |
94 | $ | 57.78 | |||||||||||||
Forfeited |
(9 | ) | $ | 52.33 | ||||||||||||
Outstanding at June 30, 2011 |
324 | $ | 53.98 | 3.62 | $ | 2,214 | ||||||||||
Exercisable and vested at June 30, 2011 |
100 | $ | 48.88 | 2.85 | $ | 1,186 | ||||||||||
Vested and expected to vest at June
30, 2011 |
318 | $ | 54.01 | 3.61 | $ | 2,165 | ||||||||||
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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 table summarizes information about the SSSARs outstanding by grant year at June
30, 2011:
Outstanding | Exercisable | |||||||||||||||||||||||
Weighted Average | ||||||||||||||||||||||||
Remaining | ||||||||||||||||||||||||
Grant | Exercise | Number | Contractual | Exercise | Number | Weighted Average | ||||||||||||||||||
Years | Price | Outstanding | Life in Years | Price | Exercisable | Exercise Price | ||||||||||||||||||
2011 |
$ | 57.78 | 94 | 4.65 | $ | 57.78 | | | ||||||||||||||||
2010 |
$ | 58.79 | 155 | 3.66 | $ | 58.79 | 50 | $ | 58.79 | |||||||||||||||
2009 |
$ | 39.86 | 43 | 2.66 | $ | 39.86 | 18 | $ | 39.86 | |||||||||||||||
2008 |
$ | 38.31 | 32 | 1.67 | $ | 38.31 | 32 | $ | 38.31 |
At June 30, 2011, there was approximately $2.0 million of unrecognized compensation cost
related to SSSARs that we will recognize over a weighted-average period of approximately 2.01
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 2011, 2010 and 2009, we granted shares of restricted stock to various employees
under the terms of the 2005 Plan. The following table summarizes information relating to each of
these grants:
2011 | 2010 | 2009 | ||||||||||
Restricted stock granted |
7 | 25 | 6 | |||||||||
Grant date fair value |
$ | 390 | $ | 1,470 | $ | 231 | ||||||
Closing stock price on grant date |
$ | 57.78 | $ | 58.79 | $ | 39.86 |
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. An additional 21,500 shares of restricted stock that were granted to various key
employees in February 2008 vested in 2011.
In November 2010, we granted a total of 8,155 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 $51.52. This
restricted stock vests over a one-year period, and all of these shares are expected to vest.
Dividends earned on the stock during the vesting period are held in escrow and will be paid to the
directors at the time the stock vests. An additional 8,435, 14,000 and 3,000 shares of restricted
stock that were granted to our nonemployee directors in November 2009, 2008 and 2007, respectively,
vested during the second quarter of 2011, 2010 and 2009, respectively, and the directors were paid
the related dividends that had been held in escrow.
We recognize compensation expense over the requisite service period. Compensation cost was
reflected in Cost of Sales or Selling, General and Administrative Expenses based on the grantees
salaries expense classification and was allocated to each segment appropriately. We recorded tax
benefits and gross windfall tax benefits related to restricted stock. These windfall tax benefits
were included in the financing section of the Consolidated Statements of Cash Flows. The following
table summarizes restricted stock compensation expense and tax benefits recorded for each of the
years ending June 30:
2011 | 2010 | 2009 | ||||||||||
Compensation expense |
$ | 1,177 | $ | 948 | $ | 612 | ||||||
Tax benefits |
$ | 412 | $ | 332 | $ | 214 | ||||||
Gross windfall tax benefits |
$ | 145 | $ | 43 | $ | |
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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 total fair values of restricted stock vested for each of the years ended June 30 are as
follows:
2011 | 2010 | 2009 | ||||||||||
Fair value of vested shares |
$ | 1,258 | $ | 423 | $ | 114 |
The following table summarizes the activity related to restricted stock granted under the 2005
Plan for the year ended June 30, 2011:
Weighted | ||||||||
Number | Average | |||||||
of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested restricted stock at beginning of period |
61 | $ | 48.43 | |||||
Granted |
15 | $ | 54.35 | |||||
Vested |
(30 | ) | $ | 41.83 | ||||
Forfeited |
(2 | ) | $ | 50.75 | ||||
Unvested restricted stock at end of period |
44 | $ | 54.86 | |||||
At June 30, 2011, there was approximately $1.3 million of unrecognized compensation expense
related to restricted stock that we will recognize over a weighted-average period of approximately
1.72 years.
Note 7 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, at June 30, 2011 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:
2011 | 2010 | |||||||
Weighted-average assumption as of June 30 |
||||||||
Discount rate |
5.29 | % | 5.21 | % |
The net periodic benefit costs were determined utilizing the following beginning-of-the-year
assumptions:
2011 | 2010 | 2009 | ||||||||||
Discount rate |
5.21 | % | 6.34 | % | 6.65 | % | ||||||
Expected long-term return on plan assets |
7.00 | % | 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.
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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)
The target and actual asset allocations for our plans at June 30 by asset category are as
follows:
Target | ||||||||||||
Percentage | ||||||||||||
of Plan | Actual | |||||||||||
Assets | Percentage | |||||||||||
at June 30 | of Plan Assets | |||||||||||
2011 | 2011 | 2010 | ||||||||||
Cash and equivalents |
0-10 | % | 1 | % | 2 | % | ||||||
Equity securities |
30-70 | % | 50 | % | 54 | % | ||||||
Fixed income |
30-70 | % | 49 | % | 44 | % | ||||||
Total |
100 | % | 100 | % | ||||||||
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.
There were no plan asset investments in shares of our common stock at June 30, 2011 and 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.
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, 2011 and 2010:
June 30, 2011 | ||||||||||||||||
Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash and equivalents |
$ | 264 | $ | | $ | | $ | 264 | ||||||||
Money market funds |
97 | | | 97 | ||||||||||||
U.S. government obligations |
| 3,825 | | 3,825 | ||||||||||||
Corporate obligations |
| 1,918 | | 1,918 | ||||||||||||
Mortgage obligations |
| 2,562 | | 2,562 | ||||||||||||
Mutual funds fixed income |
9,088 | | | 9,088 | ||||||||||||
Mutual funds equity |
17,592 | | | 17,592 | ||||||||||||
Total |
$ | 27,041 | $ | 8,305 | $ | | $ | 35,346 | ||||||||
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 for identical assets are available for investments in
this category.
47
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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 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:
2011 | 2010 | |||||||
Change in benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 38,464 | $ | 34,484 | ||||
Service cost |
| 45 | ||||||
Interest cost |
1,947 | 2,118 | ||||||
Actuarial (gain) loss |
(481 | ) | 4,192 | |||||
Benefits paid |
(2,291 | ) | (2,375 | ) | ||||
Benefit obligation at end of year |
$ | 37,639 | $ | 38,464 | ||||
Change in plan assets |
||||||||
Fair value of plan assets at beginning of year |
$ | 30,043 | $ | 27,738 | ||||
Actual return on plan assets |
5,802 | 3,878 | ||||||
Employer contributions |
1,792 | 802 | ||||||
Benefits paid |
(2,291 | ) | (2,375 | ) | ||||
Fair value of plan assets at end of year |
$ | 35,346 | $ | 30,043 | ||||
Reconciliation of funded status |
||||||||
Net accrued benefit cost |
$ | (2,293 | ) | $ | (8,421 | ) | ||
Amounts recognized in the consolidated balance sheets consist of |
||||||||
Prepaid benefit cost (noncurrent assets) |
$ | 117 | $ | | ||||
Accrued benefit liability (noncurrent liabilities) |
(2,410 | ) | (8,421 | ) | ||||
Net amount recognized |
$ | (2,293 | ) | $ | (8,421 | ) | ||
Accumulated benefit obligation |
$ | 37,639 | $ | 38,464 | ||||
The following table discloses, in the aggregate, those plans with benefit obligations in
excess of the fair value of plan assets at the June 30 measurement date:
2011 | 2010 | |||||||
Benefit obligations |
$ | 33,990 | $ | 38,464 | ||||
Fair value of plan assets at end of year |
$ | 31,580 | $ | 30,043 |
Amounts recognized in accumulated other comprehensive loss at June 30 are as follows:
2011 | 2010 | |||||||
Net actuarial loss |
$ | 11,945 | $ | 16,747 | ||||
Net transition asset |
(2 | ) | (3 | ) | ||||
Income taxes |
(4,413 | ) | (6,296 | ) | ||||
Total |
$ | 7,530 | $ | 10,448 | ||||
48
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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)
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:
2012 | ||||
Net actuarial loss |
$ | 355 | ||
Net transition asset |
(1 | ) | ||
Total |
$ | 354 | ||
The following table summarizes the components of net periodic benefit cost at June 30:
2011 | 2010 | 2009 | ||||||||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | | $ | 45 | $ | 117 | ||||||
Interest cost |
1,947 | 2,118 | 2,170 | |||||||||
Expected return on plan assets |
(2,027 | ) | (2,150 | ) | (2,263 | ) | ||||||
Curtailment charges |
| 349 | 331 | |||||||||
Amortization of unrecognized net loss |
546 | 496 | 327 | |||||||||
Amortization of prior service cost |
| 5 | 75 | |||||||||
Amortization of unrecognized net (asset)
obligation existing at transition |
(1 | ) | (1 | ) | 2 | |||||||
Net periodic benefit cost |
$ | 465 | $ | 862 | $ | 759 | ||||||
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.
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.
We have not yet finalized our anticipated funding level for 2012, but, based on initial
estimates, we anticipate funding approximately $1.0 million.
Benefit payments estimated for future years are as follows:
2012 |
$ | 2,193 | ||
2013 |
$ | 2,196 | ||
2014 |
$ | 2,180 | ||
2015 |
$ | 2,166 | ||
2016 |
$ | 2,199 | ||
2017 2021 |
$ | 12,337 |
Note 8 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.
49
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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 actuarial present value of benefit obligations summarized below was based on the following
assumption:
2011 | 2010 | |||||||
Weighted-average assumption as of June 30 |
||||||||
Discount rate |
5.29 | % | 5.21 | % |
The net periodic benefit costs were determined utilizing the following beginning-of-the-year
assumptions:
2011 | 2010 | 2009 | ||||||||||
Discount rate |
5.21 | % | 6.34 | % | 6.65 | % | ||||||
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:
2011 | 2010 | |||||||
Change in benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 2,707 | $ | 3,153 | ||||
Service cost |
24 | 17 | ||||||
Interest cost |
137 | 193 | ||||||
Actuarial loss (gain) |
220 | (491 | ) | |||||
Benefits paid |
(207 | ) | (165 | ) | ||||
Benefit obligation at end of year |
$ | 2,881 | $ | 2,707 | ||||
Change in plan assets |
||||||||
Employer contributions |
$ | 207 | $ | 165 | ||||
Benefits paid |
(207 | ) | (165 | ) | ||||
Fair value of plan assets at end of year |
$ | | $ | | ||||
Reconciliation of funded status |
||||||||
Accrued benefit cost |
$ | (2,881 | ) | $ | (2,707 | ) | ||
Amounts recognized in the consolidated
balance sheets consist of |
||||||||
Current accrued benefit liability |
$ | (203 | ) | $ | (169 | ) | ||
Noncurrent accrued benefit liability |
$ | (2,678 | ) | $ | (2,538 | ) | ||
Accumulated benefit obligation |
$ | (2,881 | ) | $ | (2,707 | ) | ||
Amounts recognized in accumulated other comprehensive loss at June 30 are as follows:
2011 | 2010 | |||||||
Net actuarial gain |
$ | (745 | ) | $ | (1,011 | ) | ||
Prior service benefit |
(28 | ) | (33 | ) | ||||
Income taxes |
286 | 393 | ||||||
Total |
$ | (487 | ) | $ | (651 | ) | ||
50
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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)
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:
2012 | ||||
Prior service asset amortization |
$ | (5 | ) | |
Unrecognized gain amortization |
(31 | ) | ||
Total |
$ | (36 | ) | |
The following table summarizes the components of net periodic benefit cost at June 30:
2011 | 2010 | 2009 | ||||||||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | 24 | $ | 17 | $ | 17 | ||||||
Interest cost |
137 | 193 | 198 | |||||||||
Amortization of unrecognized net gain |
(46 | ) | (14 | ) | (17 | ) | ||||||
Amortization of prior service asset |
(5 | ) | (5 | ) | (5 | ) | ||||||
Net periodic benefit cost |
$ | 110 | $ | 191 | $ | 193 | ||||||
We expect to contribute approximately $0.2 million to our postretirement benefit plans in
2012.
Benefit payments estimated for future years are as follows:
2012 |
$ | 203 | ||
2013 |
$ | 207 | ||
2014 |
$ | 205 | ||
2015 |
$ | 205 | ||
2016 |
$ | 212 | ||
2017 2021 |
$ | 1,018 |
For other postretirement benefit measurement purposes, annual increases in medical costs for
2011 are assumed to total approximately 10% per year and gradually decline to 5% by approximately
the year 2016 and remain level thereafter. Annual increases in medical costs for 2010 were assumed
to total approximately 10% per year and gradually decline to 5% by approximately the year 2015 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, 2011 |
$ | 171 | $ | (149 | ) |
Note 9 Defined Contribution and Other Employee Plans
We sponsored four defined contribution plans established pursuant to Section 401(k) of the
Internal Revenue Code during 2011. Contributions are determined under various formulas, and we
contributed to three of the plans in 2011. Costs related to such plans for each of the years ending
June 30 were as follows:
2011 | 2010 | 2009 | ||||||||||
Costs related to defined contribution plans |
$ | 820 | $ | 782 | $ | 753 |
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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)
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 multiemployer plans for each of the years ending
June 30 were as follows:
2011 | 2010 | 2009 | ||||||||||
Multiemployer plan contributions |
$ | 5,075 | $ | 4,815 | $ | 4,465 |
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. The
following table summarizes our liability for total deferred compensation and accrued interest at
June 30:
2011 | 2010 | |||||||
Liability for deferred compensation and accrued interest |
$ | 2,950 | $ | 2,595 |
Deferred compensation expense for each of the years ending June 30 was as follows:
2011 | 2010 | 2009 | ||||||||||
Deferred compensation expense |
$ | 88 | $ | 80 | $ | 94 |
Note 10 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:
2012 |
$ | 3,680 | ||
2013 |
$ | 2,899 | ||
2014 |
$ | 2,583 | ||
2015 |
$ | 1,473 | ||
2016 |
$ | 576 | ||
Thereafter |
$ | |
Total rent expense, including short-term cancelable leases, during the years ended June 30 is
summarized as follows:
2011 | 2010 | 2009 | ||||||||||
Operating leases: |
||||||||||||
Minimum rentals |
$ | 4,491 | $ | 4,336 | $ | 4,388 | ||||||
Contingent rentals |
217 | 456 | 355 | |||||||||
Short-term cancelable leases |
1,621 | 1,253 | 1,458 | |||||||||
Total |
$ | 6,329 | $ | 6,045 | $ | 6,201 | ||||||
Note 11 Contingencies
In addition to the items discussed below, at June 30, 2011, we were a party to various claims
and litigation matters arising in the ordinary course of business. Such matters did not have a
material effect on the current-year results of operations and, in our opinion, their ultimate
disposition will not have a material effect on our consolidated financial statements.
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
effect on our business and results of operations.
52
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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)
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 $14.4 million,
$0.9 million and $8.7 million in 2011, 2010 and 2009, respectively. CDSOA remittances have related
to certain candles being imported from the Peoples Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of 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 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 and
the U.S. Supreme Court did not hear either case. This effectively ended the constitutional
challenges brought in these cases, but other cases challenging CDSOA remain active.
We are unable to determine, at this time, what the ultimate outcome of other litigation 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 we
may receive. Any change in CDSOA distributions could affect our earnings and cash flow.
Note 12 Restructuring and Impairment Charges
Specialty Foods Segment
In 2010, we closed our dressings and sauces manufacturing operation located in Wilson, New
York. During 2010, we recorded restructuring charges of approximately $2.3 million ($1.5 million
after taxes). This closure was essentially complete at December 31, 2009. We do not expect any
other costs or cash expenditures related to this closure.
In 2009, we consolidated our Atlanta, Georgia dressing operation into our other existing food
facilities. 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 $0.8 million ($0.5 million after taxes) during the
year ended June 30, 2009. The 2009 charge was recorded in Corporate expenses. We do not currently
expect other significant restructuring costs related to this closure.
Note 13 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, fruit glazes, refrigerated produce
vegetable and fruit dips, chip dips, dry and frozen pasta and egg noodles, caviar, frozen
hearth-baked breads, frozen yeast rolls, sweet rolls and biscuits. Salad dressings, sauces,
croutons, frozen pasta and egg noodles, frozen bread products and
53
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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)
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 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 reportable 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:
2011 | 2010 | 2009 | ||||||||||
Specialty Foods |
||||||||||||
Non-frozen |
$ | 570,547 | $ | 547,704 | $ | 569,053 | ||||||
Frozen |
352,309 | 345,552 | 340,844 | |||||||||
Total Specialty Foods |
$ | 922,856 | $ | 893,256 | $ | 909,897 | ||||||
Glassware and Candles |
||||||||||||
Consumer table and giftware |
$ | 161,635 | $ | 158,327 | $ | 134,991 | ||||||
Nonconsumer ware and other |
5,455 | 5,025 | 6,603 | |||||||||
Total Glassware and Candles |
$ | 167,090 | $ | 163,352 | $ | 141,594 | ||||||
Total |
$ | 1,089,946 | $ | 1,056,608 | $ | 1,051,491 | ||||||
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.
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)
The following sets forth certain additional financial information attributable to our
reportable segments for the years ended June 30 and certain items retained at the corporate level:
2011 | 2010 | 2009 | ||||||||||
Net Sales(1) |
||||||||||||
Specialty Foods |
$ | 922,856 | $ | 893,256 | $ | 909,897 | ||||||
Glassware and Candles |
167,090 | 163,352 | 141,594 | |||||||||
Total |
$ | 1,089,946 | $ | 1,056,608 | $ | 1,051,491 | ||||||
Operating Income (Loss)(2) |
||||||||||||
Specialty Foods |
$ | 155,218 | $ | 176,194 | $ | 145,848 | ||||||
Glassware and Candles |
3,764 | 9,445 | (5,671 | ) | ||||||||
Corporate Expenses |
(11,978 | ) | (11,440 | ) | (10,529 | ) | ||||||
Total |
$ | 147,004 | $ | 174,199 | $ | 129,648 | ||||||
Identifiable Assets(1)(3) |
||||||||||||
Specialty Foods |
$ | 385,470 | $ | 362,844 | $ | 349,401 | ||||||
Glassware and Candles |
87,452 | 105,537 | 93,813 | |||||||||
Corporate |
149,167 | 118,072 | 55,267 | |||||||||
Total |
$ | 622,089 | $ | 586,453 | $ | 498,481 | ||||||
Capital Expenditures |
||||||||||||
Specialty Foods |
$ | 34,292 | $ | 11,321 | $ | 10,680 | ||||||
Glassware and Candles |
948 | 1,340 | 492 | |||||||||
Corporate |
103 | 172 | 164 | |||||||||
Total |
$ | 35,343 | $ | 12,833 | $ | 11,336 | ||||||
Depreciation and Amortization |
||||||||||||
Specialty Foods |
$ | 15,435 | $ | 15,832 | $ | 15,409 | ||||||
Glassware and Candles |
3,427 | 4,601 | 6,303 | |||||||||
Corporate |
78 | 100 | 158 | |||||||||
Total |
$ | 18,940 | $ | 20,533 | $ | 21,870 | ||||||
(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. (Wal-Mart)
for each of the years ending June 30 were as follows:
2011 | 2010 | 2009 | ||||||||||
Net sales to Wal-Mart |
$ | 243,064 | $ | 246,759 | $ | 205,882 | ||||||
As a percentage of consolidated net sales |
22 | % | 23 | % | 20 | % |
Combined accounts receivable for the two segments attributable to Wal-Mart at June 30 as a
percentage of consolidated accounts receivable were as follows:
2011 | 2010 | |||||||
Accounts receivable due from Wal-Mart as a
percentage of consolidated accounts
receivable |
35 | % | 41 | % |
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)
Note 14 Selected Quarterly Financial Data (Unaudited)
First | Second | Third | Fourth | Fiscal | ||||||||||||||||
Quarter | Quarter(1) | Quarter | Quarter(2) | Year(3) | ||||||||||||||||
2011 |
||||||||||||||||||||
Net Sales |
$ | 265,051 | $ | 316,238 | $ | 252,623 | $ | 256,034 | $ | 1,089,946 | ||||||||||
Gross Margin |
$ | 58,071 | $ | 78,244 | $ | 52,534 | $ | 53,580 | $ | 242,429 | ||||||||||
Net Income |
$ | 22,767 | $ | 34,863 | $ | 19,441 | $ | 29,293 | $ | 106,364 | ||||||||||
Diluted Net Income per Share |
$ | .81 | $ | 1.25 | $ | .71 | $ | 1.07 | $ | 3.84 |
First | Second | Third | Fourth | Fiscal | ||||||||||||||||
Quarter(4) | Quarter(5) | 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 |
(1) | Included in the second quarter earnings is income of approximately $0.6 million, net of
taxes, or approximately $.02 per share, related to funds received under CDSOA. |
|
(2) | Included in the fourth quarter earnings is income of approximately $8.9 million, net of
taxes, or approximately $.33 per share, related to additional 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. |
|
(4) | 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. |
|
(5) | 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. |
56
Table of Contents
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well-designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management must apply its judgment in evaluating the
costbenefit relationship of possible controls and procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by this 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, 2011.
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.
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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, 2011, 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 Report of Management. 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). 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 generally
accepted accounting principles. 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 generally accepted accounting principles,
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, 2011, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended June 30, 2011 of the Company and our report dated August 29,
2011, expressed an unqualified opinion on those consolidated financial statements and financial
statement schedule.
/s/ Deloitte & Touche LLP |
||
Columbus, Ohio |
||
August 29, 2011 |
58
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 November 2011 Annual Meeting of
Shareholders (2011 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 2011 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
2011 Proxy Statement.
The information regarding our Code of Business Ethics is incorporated by reference to the
information contained in our 2011 Proxy Statement.
Item 11. | Executive Compensation |
The information regarding executive officer and director compensation is incorporated by
reference to the information contained in our 2011 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 2011
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 2011 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 2011 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, 2011 and 2010 and the pre-approval policies
and procedures of the Audit Committee is incorporated by reference to the information contained in
our 2011 Proxy Statement.
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Table of Contents
PART IV
Item 15. | Exhibits, Financial Statement Schedules |
(a) (1) Financial Statements. The following consolidated financial statements as of June 30,
2011 and 2010 and for each of the three years in the period ended June 30, 2011, together with the
report thereon of Deloitte & Touche LLP dated August 29, 2011, are included in Item 8 of this
report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2011 and 2010
Consolidated Statements of Income for the years ended June 30, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended June 30, 2011, 2010 and 2009
Consolidated Statements of Shareholders Equity for the years ended June 30, 2011, 2010 and
2009
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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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 29, 2011 |
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 29, 2011 | ||
/s/ John L. Boylan
|
Treasurer, Vice President, Assistant
Secretary,
Chief Financial Officer
and Director (Principal Financial and Accounting Officer) |
August 29, 2011 | ||
/s/ James B. Bachmann
|
Director | August 15, 2011 | ||
/s/ Neeli Bendapudi
|
Director | August 17, 2011 | ||
/s/ Kenneth L. Cooke
|
Director | August 15, 2011 | ||
/s/ Robert L. Fox
|
Director | August 16, 2011 | ||
/s/ Alan F. Harris
|
Director | August 17, 2011 | ||
/s/ Edward H. Jennings
|
Director | August 15, 2011 | ||
/s/ Zuheir Sofia
|
Director | August 17, 2011 |
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Table of Contents
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
For each of the three years in the period ended June 30, 2011
For each of the three years in the period ended June 30, 2011
Column A | Column B | Column C | Column D | Column E | ||||||||||||
Additions | ||||||||||||||||
Balance at | Charged to | Balance at | ||||||||||||||
Beginning | Costs and | 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, 2009 |
$ | 1,069 | $ | (218 | ) | $ | (91 | ) | $ | 942 | ||||||
Year ended June 30, 2010 |
$ | 942 | $ | (51 | ) | $ | 375 | $ | 516 | |||||||
Year ended June 30, 2011 |
$ | 516 | $ | 65 | $ | 11 | $ | 570 | ||||||||
Notes:
(A) | Represents uncollectible accounts written-off net of recoveries. |
|
(B) | For 2009, includes recovery of previously written-off bad debt of approximately $0.7 million
related to a customer within the Glassware and Candles segment. |
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Table of Contents
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-K
JUNE 30, 2011
FORM 10-K
JUNE 30, 2011
INDEX TO EXHIBITS
Exhibit | ||||
Number | Description | |||
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 (incorporated by reference to Exhibit 4.1 to the
Annual Report on Form 10-K (000-04065), filed August 25, 2010). |
|||
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 | (a) | 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 | (a) | 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 | (a) | 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 | (a) | Lancaster Colony Corporation Amended and Restated 2005 Stock Plan (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K (000-04065), filed November
19, 2010). |
||
10.5 | (a) | Form of Restricted Stock Award Agreement for Directors under the Lancaster
Colony Corporation 2005 Stock Plan (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q (000-04065), filed February 9, 2011). |
||
10.6 | (a) | 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 (000-04065), filed May 10, 2011). |
||
10.7 | (a) | 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 (000-04065), filed May 10, 2011). |
||
10.8 | (a) | 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). |
||
10.9 | (a) | 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). |
||
10.10 | (a) | 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). |
||
10.11 | Construction Contract Between Sister Schuberts Homemade Rolls, Inc. and Gray Construction,
Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (000-04065),
filed August 27, 2010). |
|||
21 | Subsidiaries of Registrant. |
|||
23 | Consent of Independent Registered Public Accounting Firm |
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Table of Contents
Exhibit | ||||
Number | Description | |||
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. |
|||
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. |
|||
101.INS | (b) | XBRL Instance Document |
||
101.SCH | (b) | XBRL Taxonomy Extension Schema Document |
||
101.CAL | (b) | XBRL Taxonomy Extension Calculation Linkbase Document |
||
101.DEF | (b) | XBRL Taxonomy Definition Linkbase Document |
||
101.LAB | (b) | XBRL Taxonomy Extension Label Linkbase Document |
||
101.PRE | (b) | XBRL Taxonomy Extension Presentation Linkbase Document |
(a) | Indicates a management contract or compensatory plan, contract or arrangement in
which any Director or any Executive Officer participates. |
|
(b) | To be furnished by amendment
pursuant to Rule 405 of Regulation S-T within 30 days
of the filing of this report. |
64