LANCASTER COLONY CORP - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form			10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-04065



Lancaster Colony Corporation
(Exact name of registrant as specified in its charter)


Ohio		13-1955943
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

380 Polaris Parkway	Suite 400
Westerville	Ohio	43082
(Address of principal executive offices)		(Zip Code)


(614)			224-7141
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, without par value	LANC	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ý

As of April 16, 2021, there were approximately 27,545,000 shares of Common Stock, without par value, outstanding.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS




PART I – FINANCIAL INFORMATION		3

Item 1.	Condensed Consolidated Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets – March 31, 2021 and June 30, 2020	3

	Condensed Consolidated Statements of Income – Three and Nine Months Ended March 31, 2021 and 2020	4

	Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended March 31, 2021 and 2020	5

	Condensed Consolidated Statements of Cash Flows – Nine Months Ended March 31, 2021 and 2020	6

	Condensed Consolidated Statements of Shareholders’ Equity – Nine Months Ended March 31, 2021 and 2020	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II – OTHER INFORMATION		25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25



Item 6.	Exhibits	25

SIGNATURES		26

INDEX TO EXHIBITS		27

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(Amounts in thousands, except share data)	March 31, 2021		June 30, 2020
ASSETS
Current Assets:
Cash and equivalents	$	211,121	$	198,273
Receivables	97,877		86,604
Inventories:
Raw materials	40,603		34,374
Finished goods	62,443		50,674
Total inventories	103,046		85,048
Other current assets	16,216		15,687
Total current assets	428,260		385,612
Property, Plant and Equipment:
Land, buildings and improvements	198,911		186,542
Machinery and equipment	435,856		388,929
Total cost	634,767		575,471
Less accumulated depreciation	304,661		282,183
Property, plant and equipment-net	330,106		293,288
Other Assets:
Goodwill	208,371		208,371
Other intangible assets-net	59,969		65,216
Operating lease right-of-use assets	22,350		22,977
Other noncurrent assets	19,294		17,889
Total	$	1,068,350	$	993,353
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	94,336	$	71,433
Accrued liabilities	57,647		54,826
Total current liabilities	151,983		126,259
Noncurrent Operating Lease Liabilities	17,215		17,893
Other Noncurrent Liabilities	31,369		31,661
Deferred Income Taxes	36,670		34,240
Commitments and Contingencies
Shareholders’ Equity:
Preferred stock-authorized 3,050,000 shares; outstanding-none
Common stock-authorized 75,000,000 shares; outstanding-March-27,544,735 shares; June-27,523,935 shares	127,277		125,153
Retained earnings	1,471,151		1,421,121
Accumulated other comprehensive loss	(11,788)		(12,070)
Common stock in treasury, at cost	(755,527)		(750,904)
Total shareholders’ equity	831,113		783,300
Total	$	1,068,350	$	993,353

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended March 31,				Nine Months Ended March 31,
(Amounts in thousands, except per share data)	2021		2020		2021		2020
Net Sales	$	357,249	$	321,363	$	1,081,501	$	1,013,534
Cost of Sales	266,699		244,401		791,452		744,575
Gross Profit	90,550		76,962		290,049		268,959
Selling, General and Administrative Expenses	53,162		46,907		149,607		132,109
Change in Contingent Consideration	—		65		(5,687)		192
Restructuring and Impairment Charges	—		—		1,195		886
Operating Income	37,388		29,990		144,934		135,772
Other, Net	(44)		727		(67)		3,031
Income Before Income Taxes	37,344		30,717		144,867		138,803
Taxes Based on Income	8,447		8,288		34,261		32,205





Net Income	$	28,897	$	22,429	$	110,606	$	106,598






Net Income Per Common Share:
Basic	$	1.05	$	0.82	$	4.02	$	3.88
Diluted	$	1.05	$	0.81	$	4.01	$	3.87



Weighted Average Common Shares Outstanding:
Basic	27,483		27,457		27,474		27,447
Diluted	27,526		27,501		27,513		27,502

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended March 31,				Nine Months Ended March 31,
(Amounts in thousands)	2021		2020		2021		2020
Net Income	$	28,897	$	22,429	$	110,606	$	106,598
Other Comprehensive Income:
Defined Benefit Pension and Postretirement Benefit Plans:
Amortization of loss, before tax	167		136		503		409
Amortization of prior service credit, before tax	(45)		(45)		(136)		(136)
Total Other Comprehensive Income, Before Tax	122		91		367		273
Tax Attributes of Items in Other Comprehensive Income:
Amortization of loss, tax	(39)		(31)		(117)		(95)
Amortization of prior service credit, tax	11		10		32		31
Total Tax Expense	(28)		(21)		(85)		(64)
Other Comprehensive Income, Net of Tax	94		70		282		209
Comprehensive Income	$	28,991	$	22,499	$	110,888	$	106,807

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended March 31,
(Amounts in thousands)	2021		2020
Cash Flows From Operating Activities:
Net income	$	110,606	$	106,598
Adjustments to reconcile net income to net cash provided by operating activities:
Impacts of noncash items:
Depreciation and amortization	32,569		27,672
Change in contingent consideration	(5,687)		192
Deferred income taxes and other changes	4,305		9,625
Stock-based compensation expense	5,234		4,337
Restructuring and impairment charges	1,195		(268)


Pension plan activity	(118)		(458)
Changes in operating assets and liabilities:
Receivables	(11,273)		(11,958)
Inventories	(17,998)		(10,187)
Other current assets	(2,968)		(15,590)
Accounts payable and accrued liabilities	22,834		9,175
Net cash provided by operating activities	138,699		119,138
Cash Flows From Investing Activities:
Payments for property additions	(55,601)		(72,006)



Other-net	(561)		(389)
Net cash used in investing activities	(56,162)		(72,395)
Cash Flows From Financing Activities:
Payment of dividends	(60,576)		(56,386)
Purchase of treasury stock	(4,623)		(5,387)
Tax withholdings for stock-based compensation	(3,110)		(2,960)

Other-net	(1,380)		(500)
Net cash used in financing activities	(69,689)		(65,233)




Net change in cash and equivalents	12,848		(18,490)
Cash and equivalents at beginning of year	198,273		196,288
Cash and equivalents at end of period	$	211,121	$	177,798
Supplemental Disclosure of Operating Cash Flows:
Net cash payments for income taxes	$	29,855	$	30,355

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)


	Nine Months Ended March 31, 2021
(Amounts in thousands, except per share data)	Common Stock Outstanding			Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Shareholders’ Equity
	Shares	Amount
Balance, June 30, 2020	27,524	$	125,153	$	1,421,121	$	(12,070)	$	(750,904)	$	783,300
Net income				37,079						37,079
Net pension and postretirement benefit gains, net of $29 tax effect						94				94
Cash dividends - common stock ($0.70 per share)				(19,270)						(19,270)
Purchase of treasury stock	—							(15)		(15)
Stock-based plans	16	(1,854)								(1,854)
Stock-based compensation expense		1,772								1,772
Balance, September 30, 2020	27,540	$	125,071	$	1,438,930	$	(11,976)	$	(750,919)	$	801,106
Net income				44,630						44,630
Net pension and postretirement benefit gains, net of $28 tax effect						94				94
Cash dividends - common stock ($0.75 per share)				(20,655)						(20,655)
Purchase of treasury stock	—							(4)		(4)
Stock-based plans	7	(581)								(581)
Stock-based compensation expense		1,770								1,770
Balance, December 31, 2020	27,547	$	126,260	$	1,462,905	$	(11,882)	$	(750,923)	$	826,360
Net income				28,897						28,897
Net pension and postretirement benefit gains, net of $28 tax effect						94				94
Cash dividends - common stock ($0.75 per share)				(20,651)						(20,651)
Purchase of treasury stock	(26)							(4,604)		(4,604)
Stock-based plans	24	(675)								(675)
Stock-based compensation expense		1,692								1,692
Balance, March 31, 2021	27,545	$	127,277	$	1,471,151	$	(11,788)	$	(755,527)	$	831,113

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)

(UNAUDITED)


	Nine Months Ended March 31, 2020
(Amounts in thousands, except per share data)	Common Stock Outstanding			Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Shareholders’ Equity
	Shares	Amount
Balance, June 30, 2019	27,491	$	122,844	$	1,359,782	$	(10,308)	$	(745,445)	$	726,873
Net income				40,745						40,745
Net pension and postretirement benefit gains, net of $21 tax effect						70				70
Cash dividends - common stock ($0.65 per share)				(17,869)						(17,869)
Purchase of treasury stock	(10)							(1,465)		(1,465)
Stock-based plans	4	(125)								(125)
Stock-based compensation expense		1,436								1,436
Balance, September 30, 2019	27,485	$	124,155	$	1,382,658	$	(10,238)	$	(746,910)	$	749,665
Net income				43,424						43,424
Net pension and postretirement benefit gains, net of $22 tax effect						69				69
Cash dividends - common stock ($0.70 per share)				(19,245)						(19,245)
Purchase of treasury stock	—							(7)		(7)
Stock-based plans	26	(2,571)								(2,571)
Stock-based compensation expense		1,423								1,423
Balance, December 31, 2019	27,511	$	123,007	$	1,406,837	$	(10,169)	$	(746,917)	$	772,758
Net income				22,429						22,429
Net pension and postretirement benefit gains, net of $21 tax effect						70				70

Cash dividends - common stock ($0.70 per share)				(19,272)						(19,272)
Purchase of treasury stock	(28)							(3,915)		(3,915)
Stock-based plans	33	(264)								(264)
Stock-based compensation expense		1,478								1,478
Balance, March 31, 2020	27,516	$	124,221	$	1,409,994	$	(10,099)	$	(750,832)	$	773,284

See accompanying notes to condensed consolidated financial statements.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Note 1 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Lancaster Colony Corporation and our wholly-owned subsidiaries, collectively referred to as “we,” “us,” “our,” “registrant” or the “Company” and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and SEC Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the interim condensed consolidated financial statements are considered to be of a normal recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our 2020 Annual Report on Form 10-K. Unless otherwise noted, the term “year” and references to a particular year pertain to our fiscal year, which begins on July 1 and ends on June 30; for example, 2021 refers to fiscal 2021, which is the period from July 1, 2020 to June 30, 2021.

Deferred Software Costs

We capitalize certain costs related to hosting arrangements that are service contracts (cloud computing arrangements). Capitalized costs are included in Other Current Assets or Other Noncurrent Assets and are amortized on a straight-line basis over the estimated useful life. For the nine months ended March 31, 2021 and 2020, we capitalized $3.2 million and $6.6 million, respectively, of deferred software costs related to cloud computing arrangements.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, except for those acquired as part of a business combination, which are recorded at fair value at the time of purchase. We use the straight-line method of computing depreciation for financial reporting purposes based on the estimated useful lives of the corresponding assets. Purchases of property, plant and equipment included in Accounts Payable and excluded from the property additions and the change in accounts payable in the Condensed Consolidated Statements of Cash Flows were as follows:


	March 31,
	2021		2020
Construction in progress in Accounts Payable	$	3,791	$	8,532

Accrued Compensation and Employee Benefits

Accrued compensation and employee benefits included in Accrued Liabilities was $27.6 million and $32.8 million at March 31, 2021 and June 30, 2020, respectively.

Accrued Distribution

Accrued distribution included in Accrued Liabilities was $11.1 million and $7.1 million at March 31, 2021 and June 30, 2020, respectively.

Earnings Per Share

Earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock and common stock equivalents (restricted stock and stock-settled stock appreciation rights) outstanding during each period. Unvested shares of restricted stock granted to employees are considered participating securities since employees receive nonforfeitable dividends prior to vesting and, therefore, are included in the earnings allocation in computing EPS under the two-class method. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with nonparticipating restricted stock and stock-settled stock appreciation rights.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Net income	$	28,897	$	22,429	$	110,606	$	106,598
Net income available to participating securities	(56)		(48)		(223)		(216)
Net income available to common shareholders	$	28,841	$	22,381	$	110,383	$	106,382

Weighted average common shares outstanding – basic	27,483		27,457		27,474		27,447
Incremental share effect from:
Nonparticipating restricted stock	2		1		2		2
Stock-settled stock appreciation rights	41		43		37		53
Weighted average common shares outstanding – diluted	27,526		27,501		27,513		27,502

Net income per common share – basic	$	1.05	$	0.82	$	4.02	$	3.88
Net income per common share – diluted	$	1.05	$	0.81	$	4.01	$	3.87

Accumulated Other Comprehensive Loss

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Accumulated other comprehensive loss at beginning of period	$	(11,882)	$	(10,169)	$	(12,070)	$	(10,308)
Defined Benefit Pension Plan Items:
Amortization of unrecognized net loss	172		143		518		429
Postretirement Benefit Plan Items:
Amortization of unrecognized net gain	(5)		(7)		(15)		(20)
Amortization of prior service credit	(45)		(45)		(136)		(136)
Total other comprehensive income, before tax	122		91		367		273
Total tax expense	(28)		(21)		(85)		(64)
Other comprehensive income, net of tax	94		70		282		209

Accumulated other comprehensive loss at end of period	$	(11,788)	$	(10,099)	$	(11,788)	$	(10,099)

Significant Accounting Policies

There were no changes to our Significant Accounting Policies from those disclosed in our 2020 Annual Report on Form 10-K.

Recently Issued Accounting Standards

There were no recently issued accounting standards that will impact our consolidated financial statements.

Recently Adopted Accounting Standards

In August 2018, the Financial Accounting Standards Board issued new accounting guidance related to the disclosure requirements for fair value measurements. The guidance removes, modifies and adds disclosures related to fair value. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We adopted the new guidance on July 1, 2020. As the guidance only relates to disclosures, there was no impact on our financial position or results of operations. See fair value disclosures in Note 2.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Note 2 – Fair Value

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:

Level 1 – defined as observable inputs, such as quoted market prices in active markets.

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.

Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

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

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


	Fair Value Measurements at March 31, 2021
	Level 1		Level 2		Level 3		Total
Contingent consideration - Bantam	$	—	$	—	$	3,470	$	3,470
Contingent consideration - Angelic	—		—		—		—
Total contingent consideration	$	—	$	—	$	3,470	$	3,470

	Fair Value Measurements at June 30, 2020
	Level 1		Level 2		Level 3		Total
Contingent consideration - Bantam	$	—	$	—	$	9,157	$	9,157
Contingent consideration - Angelic	—		—		—		—
Total contingent consideration	$	—	$	—	$	9,157	$	9,157

Bantam Contingent Consideration

This contingent consideration resulted from the earn-out associated with our October 19, 2018 acquisition of Bantam. In general, the terms of the acquisition specify the sellers will receive an earn-out based upon a pre-determined multiple of Bantam’s defined adjusted EBITDA for the twelve months ending December 31, 2023. The initial fair value of the contingent consideration was determined to be $8.0 million. The fair value is measured on a recurring basis using a Monte Carlo simulation that randomly changes revenue growth, forecasted adjusted EBITDA and other uncertain variables to estimate an expected value. We record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy. Our September 30, 2020 fair value measurement resulted in a $5.7 million reduction in the fair value of Bantam’s contingent consideration based on changes in Bantam’s forecasted adjusted EBITDA for the twelve months ending December 31, 2023. The changes in forecasted adjusted EBITDA reflected the impact of a SKU rationalization by a Foodservice customer resulting in the loss of sales to that customer after November 30, 2020. This adjustment was recorded in our Foodservice segment.

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Contingent consideration at beginning of period	$	3,470	$	9,027	$	9,157	$	8,900

Change in contingent consideration included in operating income	—		65		(5,687)		192
Contingent consideration at end of period	$	3,470	$	9,092	$	3,470	$	9,092

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Angelic Contingent Consideration

This contingent consideration resulted from the earn-out associated with our November 17, 2016 acquisition of Angelic. In general, the terms of the acquisition specify the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021. The initial fair value of the contingent consideration was determined to be $13.9 million. The fair value is measured on a recurring basis using a present value approach, which incorporates factors such as revenue growth and forecasted adjusted EBITDA, to estimate an expected value. We record the present value of this amount by applying a discount rate. As this fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy. At March 31, 2021 and June 30, 2020, there was no liability recorded for Angelic’s contingent consideration based on current projections for Angelic’s forecasted adjusted EBITDA for fiscal 2021.

Note 3 – Long-Term Debt

At March 31, 2021 and June 30, 2020, we had an unsecured credit facility (“Facility”) under which we could borrow, on a revolving credit basis, up to a maximum of $150 million at any one time, with potential to expand the total credit availability to $225 million based on consent of the issuing banks and certain other conditions. The Facility expires on March 19, 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the Facility. In the event that LIBOR becomes unavailable or is no longer deemed an appropriate reference rate, the Facility allows for the use of a benchmark replacement rate. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.

The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions. There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a consolidated leverage ratio not greater than 3.5 to 1, subject to certain exceptions. The interest coverage ratio is calculated by dividing Consolidated EBIT by Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Net Debt by Consolidated EBITDA. All financial terms used in the covenant calculations are defined more specifically in the Facility.

At March 31, 2021 and June 30, 2020, we had no borrowings outstanding under the Facility. At March 31, 2021 and June 30, 2020, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. We paid no interest for the three and nine months ended March 31, 2021 and 2020.

Note 4 – Commitments and Contingencies

At March 31, 2021, 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.

A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. In the U.S., state and local governments recommended or mandated actions to slow the transmission of COVID-19. We continue to monitor the situation and guidance from authorities, including federal, state and local public health departments. We also continue to review the carrying value of our assets and, as needed, have recorded additional reserves for inventory and receivables related to the impact of COVID-19 on our Foodservice segment. The future impact of COVID-19 on our results of operations, financial condition, and cash flows is contingent upon the duration and severity of the outbreak, the associated recommended or mandated actions imposed by U.S. state and local governments, and the resulting effects on consumer behavior.

We have a significant remaining commitment of approximately $106 million related to a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky.

Our acquisitions of Angelic and Bantam included provisions for contingent consideration for the earn-outs associated with these transactions. See further discussion in Note 2.

Note 5 – Goodwill and Other Intangible Assets

Goodwill attributable to the Retail and Foodservice segments was $157.4 million and $51.0 million, respectively, at March 31, 2021 and June 30, 2020.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

The following table summarizes our identifiable other intangible assets:


	March 31, 2021		June 30, 2020


Tradenames (20 to 30-year life)
Gross carrying value	$	62,531	$	63,121
Accumulated amortization	(11,781)		(9,925)
Net carrying value	$	50,750	$	53,196




Customer Relationships (2 to 15-year life)
Gross carrying value	$	17,507	$	17,507
Accumulated amortization	(12,561)		(11,094)
Net carrying value	$	4,946	$	6,413
Technology / Know-how (10-year life)
Gross carrying value	$	8,020	$	8,950
Accumulated amortization	(3,771)		(3,396)
Net carrying value	$	4,249	$	5,554
Non-compete Agreements (5-year life)
Gross carrying value	$	191	$	791
Accumulated amortization	(167)		(738)
Net carrying value	$	24	$	53
Total net carrying value	$	59,969	$	65,216

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

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Amortization expense	$	1,203	$	1,269	$	4,052	$	3,817

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



2022	$	4,739
2023	$	4,180
2024	$	4,180
2025	$	3,920
2026	$	3,290

Note 6 – Income Taxes

Prepaid federal income taxes of $3.5 million and $5.3 million were included in Other Current Assets at March 31, 2021 and June 30, 2020, respectively.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

Note 7 – Business Segment Information

Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. Our Chief Operating Decision Maker (“CODM”), in order to drive enhanced accountability and transparency throughout our organization, initiated a review of functional costs that have historically been part of the indirect costs allocated to our two reportable segments. This review was completed as part of our preparation for our upcoming enterprise resource planning system implementation. As a result of this review, our CODM identified certain support functions that would be more appropriately presented within corporate expenses to facilitate the management of the business, including assessing segment performance and allocating resources. These changes were effective July 1, 2020. All historical information has been retroactively conformed to the current presentation. These changes had no effect on previously reported consolidated net sales, operating income, net income or earnings per share.

Retail - The vast majority of the products we sell in the Retail segment are sold through sales personnel, food brokers and distributors in the United States. We have placement of products in grocery produce departments through our refrigerated salad dressings, vegetable dips and fruit dips. Our flatbread products and sprouted grain bakery products are generally placed in the specialty bakery/deli section of the grocery store. We also have products typically marketed in the shelf-stable section of the grocery store, which include salad dressing, slaw dressing and croutons. Within the frozen food section of the grocery store, we sell yeast rolls, garlic breads and mini stuffed bagels.

Foodservice - The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors in the United States. Most of the products we sell in the Foodservice segment are custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls. The majority of our Foodservice sales are products sold under private label to restaurants. We also manufacture and sell various branded Foodservice products to distributors. Finally, within this segment, we sold other roll products under a transitional co-packing arrangement resulting from the acquisition of Omni Baking Company LLC. This arrangement was terminated effective October 31, 2020.

As many of our products are similar between our two segments, our procurement, manufacturing, warehousing and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. Consequently, we do not prepare, and our CODM does not review, separate balance sheets for the reportable segments. As such, our external reporting does not include the presentation of identifiable assets by reportable segment. The composition of our identifiable assets at March 31, 2021 is generally consistent with that of June 30, 2020.

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Net Sales
Retail	$	198,358	$	169,414	$	614,653	$	521,701
Foodservice	158,891		151,949		466,848		491,833
Total	$	357,249	$	321,363	$	1,081,501	$	1,013,534
Operating Income
Retail	$	41,179	$	34,150	$	144,557	$	116,628
Foodservice	21,088		12,765		66,845		66,660
Nonallocated Restructuring and Impairment Charges (1)	—		—		—		(886)
Corporate Expenses	(24,879)		(16,925)		(66,468)		(46,630)
Total	$	37,388	$	29,990	$	144,934	$	135,772

(1)Reflects restructuring and impairment charges related to a plant closure that were not allocated to our two reportable segments due to their unusual nature.

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share data)

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Retail
Frozen breads	$	73,628	$	68,682	$	250,157	$	221,084
Refrigerated dressings, dips and other	48,957		49,479		165,204		163,521
Shelf-stable dressings and croutons	75,773		51,253		199,292		137,096
Total Retail net sales	$	198,358	$	169,414	$	614,653	$	521,701
Foodservice
Dressings and sauces	$	120,925	$	106,306	$	347,101	$	341,039
Frozen breads and other	37,966		40,339		116,040		131,300
Other roll products	—		5,304		3,707		19,494
Total Foodservice net sales	$	158,891	$	151,949	$	466,848	$	491,833
Total net sales	$	357,249	$	321,363	$	1,081,501	$	1,013,534

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Foodservice
National accounts	$	124,323	$	110,384	$	359,228	$	356,192
Branded and other	34,568		36,261		103,913		116,147
Other roll products	—		5,304		3,707		19,494
Total Foodservice net sales	$	158,891	$	151,949	$	466,848	$	491,833

Note 8 – Stock-Based Compensation

There have been no changes to our stock-based compensation plans from those disclosed in our 2020 Annual Report on Form 10-K.

Our stock-settled stock appreciation rights (“SSSARs”) compensation expense was $0.9 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. Year-to-date SSSARs compensation expense was $2.6 million for the current-year period compared to $2.2 million for the prior-year period. At March 31, 2021, there was $7.7 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of 2 years.

Our restricted stock compensation expense was $0.8 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. Year-to-date restricted stock compensation expense was $2.6 million for the current-year period compared to $2.1 million for the prior-year period. At March 31, 2021, there was $6.1 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of 2 years.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2021 refers to fiscal 2021, which is the period from July 1, 2020 to June 30, 2021.

The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto, all included elsewhere in this report, and our 2020 Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements due to these factors. For more information, see the section below entitled “Forward-Looking Statements.”

OVERVIEW

Business Overview

Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.

Our financial results are presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. Our Chief Operating Decision Maker (“CODM”), in order to drive enhanced accountability and transparency throughout our organization, initiated a review of functional costs that have historically been part of the indirect costs allocated to our two reportable segments. This review was completed as part of our preparation for our upcoming enterprise resource planning system (“ERP”) implementation. As a result of this review, our CODM identified certain support functions that would be more appropriately presented within corporate expenses to facilitate the management of the business, including assessing segment performance and allocating resources. These changes were effective July 1, 2020. All historical information has been retroactively conformed to the current presentation. These changes had no effect on previously reported consolidated net sales, operating income, net income or earnings per share.

Over 95% of our products are sold in the United States. 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. We do not have any fixed assets located outside of the United States.

Our business has the potential to achieve future growth in sales and profitability due to attributes such as:

•leading Retail market positions in several product categories with a high-quality perception;

•recognized innovation in Retail products;

•a broad customer base in both Retail and Foodservice accounts;

•well-regarded culinary expertise among Foodservice customers;

•recognized leadership in Foodservice product development;

•experience in integrating complementary business acquisitions; and

•historically strong cash flow generation that supports growth opportunities.

Our goal is to grow both Retail and Foodservice segment sales over time by:

•introducing new products and expanding distribution;

•leveraging the strength of our Retail brands to increase current product sales;

•expanding Retail growth through strategic licensing agreements;

•continuing to rely upon the strength of our reputation in Foodservice product development and quality; and

•acquiring complementary businesses.

With respect to long-term growth, we continually evaluate the future opportunities and needs for our business specific to our plant infrastructure, IT platforms and other initiatives to support and strengthen our operations. Recent examples of resulting investments include a significant capacity expansion project for our Sister Schubert’s frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020; a new R&D center that was completed near the end of 2019; and the establishment of a Transformation Program Office in 2019 that will serve to coordinate our various capital and integration efforts, including our ERP project and related initiatives, Project Ascent, that is now underway. Project Ascent commenced in late 2019 and entails the replacement of our primary customer and manufacturing transactional systems, warehousing systems, and financial systems with an integrated SAP S/4HANA system. Post implementation, Project Ascent will evolve into an on-going Center of Excellence (“COE”) that will provide oversight for all future upgrades of the S/4HANA environment, evaluation of future software needs to support the business, acquisition integration support and master data standards. Most of the on-going COE costs are expected to consist of annual software maintenance and support, consulting and professional fees and wages and benefits.

We also continue to review potential acquisitions that we believe will complement our existing product lines, enhance our profitability and/or offer good expansion opportunities in a manner that fits our overall strategic goals.

RECENT EVENTS

A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in business slowdowns or shutdowns in affected areas. In the U.S., state and local governments recommended or mandated actions to slow the transmission of COVID-19. These measures included limitations on public gatherings, social distancing requirements, travel restrictions, closures of bars and dine-in restaurants, stay-at-home orders, quarantines and restrictions that prohibited many non-essential employees from going to work.

We have two major priorities while navigating through this period of volatility and uncertainty:

1.to ensure the health, safety and welfare of our employees; and

2.to continue to play our part in the vital food supply chain by adequately supplying our customers while maintaining the financial strength of our business.

With respect to our efforts to ensure the health, safety and welfare of our employees, we are complying with all guidelines issued by the Centers for Disease Control and Prevention as well as state and local health departments. We have also engaged a pulmonology and critical care physician to advise us on our employee safety protocols. Based on the advice of these experts, we have put in place a range of safety modifications and guidelines in our factories, distribution centers and offices to ensure that we can operate safely, including but not limited to:

•conducting employee temperature checks prior to entering our production facilities;

•conducting extensive cleaning and sanitation of workstations and common areas before, during, and after each shift;

•employing social distancing guidelines and modifications at workspaces and in break areas;

•staggering the timing of shift changes and breaks;

•relaxing attendance requirements and enhancing our paid leave policy;

•providing an extra vacation day to allow flexibility with scheduling COVID-19 vaccination appointments;

•implementing quarantine protocols in the event of confirmed or suspected cases of COVID-19;

•establishing business travel restrictions; and

•limiting capacity at office locations or working from home whenever possible.

In March 2020, we also began providing temporary incentive pay compensation (“hero pay”) to our front-line employees.

With respect to our second priority, as of the date of this filing, there has been no material adverse change in our ability to manufacture and distribute our products. We have not experienced any significant disruptions to our shipping or warehousing operations or sourcing of raw materials. We have also secured additional second-sourcing options as needed to help limit the risk of supply disruptions.

We continue to monitor the COVID-19 situation and related guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future. However, COVID-19 could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to higher-than-normal inventory levels, revised payment terms with certain of our customers, additional reserves for inventory and receivables, and higher plant operating costs.

The effects of COVID-19, including changes in consumer purchasing habits and actions undertaken in the U.S. to attempt to control the spread of COVID-19, most notably the restriction of restaurant dine-in purchases, have negatively impacted the operating results of our Foodservice segment. Our Foodservice segment net sales for the nine months ended March 31, 2021 declined 5% compared to the prior year.

With respect to our Retail segment, the impact of COVID-19 contributed to higher sales during the nine months ended March 31, 2021 as consumer demand in the retail channel remained elevated due to increased at-home food consumption.

We continue to operate from a position of financial strength and believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to our access to capital under our unsecured revolving credit facility, should be adequate to meet our liquidity needs over the next 12 months. We have placed a greater emphasis on tracking the financial strength of our customers and suppliers and taking actions, where determined necessary, to limit our financial exposure and operational risks. Additional details regarding our financial strength are provided in the “Financial Condition” section below.

RESULTS OF CONSOLIDATED OPERATIONS


(Dollars in thousands, except per share data)	Three Months Ended March 31,										Nine Months Ended March 31,
	2021			2020			Change				2021			2020			Change
Net Sales	$	357,249		$	321,363		$	35,886	11	%	$	1,081,501		$	1,013,534		$	67,967	7	%
Cost of Sales	266,699			244,401			22,298		9	%	791,452			744,575			46,877		6	%
Gross Profit	90,550			76,962			13,588		18	%	290,049			268,959			21,090		8	%
Gross Margin	25.3		%	23.9		%					26.8		%	26.5		%
Selling, General and Administrative Expenses	53,162			46,907			6,255		13	%	149,607			132,109			17,498		13	%
Change in Contingent Consideration	—			65			(65)		(100)	%	(5,687)			192			(5,879)		N/M
Restructuring and Impairment Charges	—			—			—		N/M		1,195			886			309		35	%
Operating Income	37,388			29,990			7,398		25	%	144,934			135,772			9,162		7	%
Operating Margin	10.5		%	9.3		%					13.4		%	13.4		%
Other, Net	(44)			727			(771)		(106)	%	(67)			3,031			(3,098)		(102)	%
Income Before Income Taxes	37,344			30,717			6,627		22	%	144,867			138,803			6,064		4	%
Taxes Based on Income	8,447			8,288			159		2	%	34,261			32,205			2,056		6	%
Effective Tax Rate	22.6		%	27.0		%					23.6		%	23.2		%
Net Income	$	28,897		$	22,429		$	6,468	29	%	$	110,606		$	106,598		$	4,008	4	%
Diluted Net Income Per Common Share	$	1.05		$	0.81		$	0.24	30	%	$	4.01		$	3.87		$	0.14	4	%

Net Sales

Consolidated net sales for the three months ended March 31, 2021 increased 11% to a third quarter record $357.2 million versus $321.4 million last year. Consolidated net sales for the nine months ended March 31, 2021 increased 7% to $1,081.5 million versus $1,013.5 million last year. Excluding all sales resulting from the November 2018 acquisition of Omni Baking Company LLC (“Omni”), consolidated net sales for the three and nine months ended March 31, 2021 increased 13% and 8%, respectively. Sales growth for the quarter reflected higher net sales for both the Retail and Foodservice segments while year-to-date sales growth was driven by an increase in Retail segment net sales partially offset by a decline in Foodservice segment net sales. See discussion of net sales by segment following the discussion of “Earnings Per Share” below.

Gross Profit

Consolidated gross profit for the three months ended March 31, 2021 increased 18% to $90.6 million compared to $77.0 million in the prior-year period. Gross profit benefited from the strong sales growth, a more favorable sales mix, lower employee benefit costs and our ongoing cost savings programs partially offset by higher manufacturing costs and commodity cost inflation. Gross profit in the prior-year quarter was unfavorably impacted by a $4.5 million inventory write-down attributed to the abrupt slowdown in Foodservice orders in mid-March 2020 due to the impacts of COVID-19. Manufacturing costs in the current-year quarter continue to reflect the impacts of COVID-19, including hero pay for our front-line employees, increased expenditures for personal protective equipment and lower operating efficiencies.

Consolidated gross profit for the nine months ended March 31, 2021 increased 8% to $290.0 million compared to $269.0 million in the prior-year period as influenced by the same factors noted above for the three-month period in addition to a lower level of Retail trade spending.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased 13% for both the quarter and year-to-date periods reaching $53.2 million and $149.6 million for the three and nine months ended March 31, 2021, respectively. These increases were driven by expenditures for Project Ascent, which increased $5.9 million to $10.8 million for the quarter and $15.1 million to $27.6 million for the year-to-date period. Excluding Project Ascent, SG&A expenses for the quarter and year-to-date periods ended March 31, 2021 were slightly higher than the prior-year periods. The current year-to-date period included some increased investments in IT infrastructure. Project Ascent expenses are included within Corporate Expenses. A portion of the costs that have been classified as Project Ascent expenses represent ongoing costs that will continue subsequent to the ERP implementation.


	Three Months Ended March 31,								Nine Months Ended March 31,
(Dollars in thousands)	2021		2020		Change				2021		2020		Change
SG&A Expenses - Excluding Project Ascent	$	42,367	$	42,030	$	337	1	%	$	122,020	$	119,617	$	2,403	2	%
Project Ascent Expenses	10,795		4,877		5,918		121	%	27,587		12,492		15,095		121	%
Total SG&A Expenses	$	53,162	$	46,907	$	6,255	13	%	$	149,607	$	132,109	$	17,498	13	%

Change in Contingent Consideration

The change in contingent consideration resulted in a benefit of $5.7 million for the nine months ended March 31, 2021 due to a reduction in the fair value of the contingent consideration liability for Bantam Bagels, LLC (“Bantam”) as a result of our September 30, 2020 fair value measurement. As the fair value adjustment resulted from the impact of a SKU rationalization by a Foodservice customer, the entire adjustment related to Bantam’s contingent consideration was reflected within the Foodservice segment. This adjustment was recorded during the three months ended September 30, 2020, and there were no other changes in contingent consideration during the current year-to-date period. See further discussion in Note 2 to the condensed consolidated financial statements. The change in contingent consideration resulted in expense of $0.1 million and $0.2 million for the three and nine months ended March 31, 2020, respectively.

Restructuring and Impairment Charges

We recorded impairment charges of $1.2 million for the nine months ended March 31, 2021 related to certain tradename and technology / know-how intangible assets for Bantam as a result of the impact of a SKU rationalization by a Foodservice customer. The impairment charges represent the excess of the carrying value over the fair value of estimated discounted cash flows for the remaining useful lives of the intangible assets and were reflected within our Foodservice segment. All of these charges were recorded in the three months ended September 30, 2020.

We recorded restructuring and impairment charges of $0.9 million for the nine months ended March 31, 2020, which primarily consisted of plant clean-up expenses and contract termination costs related to the closure of our frozen bread manufacturing plant located in Saraland, Alabama. These charges were not allocated to our two reportable segments due to their unusual nature. All of these charges were recorded in the three months ended September 30, 2019.

Operating Income

Operating income increased 25% to $37.4 million for the three months ended March 31, 2021 and increased 7% to $144.9 million for the nine months ended March 31, 2021. In the current-year quarter, operating income growth was driven by the increased sales, a more favorable sales mix, lower employee benefit costs and our ongoing cost savings programs, as partially offset by increased expenditures for Project Ascent, higher manufacturing costs attributed to the impacts of COVID-19 and increased commodity costs. The prior-year quarter also included the unfavorable $4.5 million inventory write-down. Operating income growth for the current year-to-date period was influenced by the same positive factors referenced for the quarter in addition to the favorable adjustment related to Bantam’s contingent consideration. Offsets to operating income growth in the current year-to-date period include the items referenced above in addition to increased investments in IT infrastructure. See discussion of operating results by segment following the discussion of “Earnings Per Share” below.

Other, Net

Other, net resulted in expense of less than $0.1 million and $0.1 million for the three and nine months ended March 31, 2021, respectively, compared to a benefit of $0.7 million and $3.0 million for the three and nine months ended March 31, 2020, respectively. These changes primarily reflect lower interest rates for our cash holdings.

Taxes Based on Income

Our effective tax rate was 23.6% and 23.2% for the nine months ended March 31, 2021 and 2020, respectively. For the nine months ended March 31, 2021 and 2020, our effective tax rate varied from the statutory federal income tax rate as a result of the following factors:


	Nine Months Ended March 31,
	2021		2020
Statutory rate	21.0	%	21.0	%
State and local income taxes	3.6		2.9
Net windfall tax benefits - stock-based compensation	(0.6)		(0.9)
Other	(0.4)		0.2
Effective rate	23.6	%	23.2	%

We include the tax consequences related to stock-based compensation within the computation of income tax expense. We may experience increased volatility to our income tax expense and resulting net income dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. For the nine months ended March 31, 2021 and 2020, the impact of net windfall tax benefits from stock-based compensation reduced our effective tax rate by 0.6% and 0.9%, respectively.

Earnings Per Share

As influenced by the factors noted above, particularly the strong sales growth partially offset by the increased expenditures for Project Ascent and higher manufacturing costs, diluted net income per share for the third quarter of 2021 totaled $1.05, as compared to $0.81 per diluted share in the prior year. Year-to-date net income was $4.01 per diluted share, as compared to $3.87 per diluted share for the prior-year period. Diluted weighted average common shares outstanding have remained relatively stable for the current and prior-year periods ended March 31.

In 2021, expenditures for Project Ascent reduced diluted earnings per share by $0.30 and $0.76 for the third quarter and year-to-date periods, respectively, compared to $0.13 and $0.34 in the prior-year comparative periods. The favorable adjustment related to Bantam’s contingent consideration increased diluted earnings per share by $0.16 for the current year-to-date period. Restructuring and impairment charges had an unfavorable impact of $0.03 and $0.02 per diluted share for the nine months ended March 31, 2021 and 2020, respectively. The prior-year Foodservice inventory write-down reduced diluted earnings per share by $0.12 for the three and nine months ended March 31, 2020.

RESULTS OF OPERATIONS - SEGMENTS

Retail Segment


	Three Months Ended March 31,										Nine Months Ended March 31,
(Dollars in thousands)	2021			2020			Change				2021			2020			Change
Net Sales	$	198,358		$	169,414		$	28,944	17	%	$	614,653		$	521,701		$	92,952	18	%
Operating Income	$	41,179		$	34,150		$	7,029	21	%	$	144,557		$	116,628		$	27,929	24	%
Operating Margin	20.8		%	20.2		%					23.5		%	22.4		%

For the three months ended March 31, 2021, Retail segment net sales reached $198.4 million, a 17% increase from the prior-year total of $169.4 million. Year-to-date net sales for the Retail segment increased 18% to $614.7 million compared to the prior-year total of $521.7 million. The increases for both periods reflect the impacts of the COVID-19 outbreak, which has driven higher demand for at-home food consumption. The strength of our licensing program was also a significant contributor to the sales growth, led by Chick-fil-A® sauces, Olive Garden® dressings and Buffalo Wild Wings® sauces. Other products contributing to the growth in Retail net sales included frozen garlic bread in both the quarter and year-to-date periods and frozen dinner rolls in the year-to-date period. Year-to-date sales also reflect a reduced level of Retail trade spending.

For the three months ended March 31, 2021, Retail segment operating income increased 21% to $41.2 million, reflecting the increase in sales, lower employee benefit costs and our ongoing cost savings programs, as partially offset by higher manufacturing costs, including expenses directly attributed to the impacts of COVID-19, and increased commodity costs.

For the nine months ended March 31, 2021, Retail segment operating income increased 24% to $144.6 million, reflecting the increase in sales, improved net price realization, reduced consumer spending and our ongoing cost savings programs, as partially offset by higher manufacturing costs, including expenses directly attributed to the impacts of COVID-19, and increased commodity costs.

Foodservice Segment


	Three Months Ended March 31,										Nine Months Ended March 31,
(Dollars in thousands)	2021			2020			Change				2021			2020			Change
Net Sales	$	158,891		$	151,949		$	6,942	5	%	$	466,848		$	491,833		$	(24,985)	(5)	%
Operating Income	$	21,088		$	12,765		$	8,323	65	%	$	66,845		$	66,660		$	185	—	%
Operating Margin	13.3		%	8.4		%					14.3		%	13.6		%

For the three months ended March 31, 2021, Foodservice segment net sales grew 5% to $158.9 million compared to $151.9 million in the prior-year period as quick-service restaurant and pizza chain customers in our mix of national chain restaurant accounts continued to perform well and we began to lap the significant declines in consumer demand in the prior year due to the impacts of COVID-19. Inflationary pricing also contributed to the increase in Foodservice segment net sales. Excluding all sales resulting from the November 2018 acquisition of Omni, Foodservice segment net sales increased 8%. Omni sales attributed to a temporary supply agreement totaled $5.3 million in the prior-year quarter. There were no such sales in the current-year quarter as the temporary supply agreement was terminated effective October 31, 2020.

For the nine months ended March 31, 2021, Foodservice segment net sales decreased 5% to $466.8 million from the prior-year total of $491.8 million as influenced by the impacts of COVID-19 and the decline in Omni sales. Excluding all sales attributed to Omni, Foodservice segment net sales declined 2%. Omni sales totaled $3.7 million in the current year compared to $19.5 million in the prior year.

The increase in Foodservice segment operating income for the three months ended March 31, 2021 reflects the higher net sales, a more favorable sales mix and lower employee benefit costs in addition to the impact of last year’s unfavorable $4.5 million inventory write-down, as partially offset by higher manufacturing costs, including expenses directly attributed to the impacts of COVID-19.

The slight increase in Foodservice segment operating income for the nine months ended March 31, 2021 reflects a more favorable sales mix, the current-year $5.7 million favorable adjustment related to Bantam’s contingent consideration and last year’s unfavorable $4.5 million inventory write-down, which were largely offset by higher manufacturing costs, reduced overhead recovery resulting from lower production volumes and the current-year Bantam impairment charges for certain intangible assets.

Corporate Expenses

For the three months ended March 31, 2021 and 2020, corporate expenses totaled $24.9 million and $16.9 million, respectively. For the nine months ended March 31, 2021 and 2020, corporate expenses totaled $66.5 million and $46.6 million, respectively. These increases were driven by expenditures for Project Ascent, which totaled $10.8 million and $4.9 million, for the three months ended March 31, 2021 and 2020, respectively, and $27.6 million and $12.5 million for the nine months ended March 31, 2021 and 2020, respectively. For the nine months ended March 31, 2021 and 2020, we also capitalized an additional $3.2 million and $4.9 million, respectively, of ERP-related expenditures for application development stage activities.

LOOKING FORWARD

Looking forward to our fiscal fourth quarter, net sales are expected to benefit from continued gains in Retail for dressings and sauces sold under exclusive license agreements. We anticipate the rollout of Chick-fil-A® sauces to reach national distribution by the end of June. We also foresee a notable pickup in Foodservice sales as many of our national chain restaurant customers have indicated expectations for increasing consumer demand as vaccine distribution expands, stimulus dollars are spent, and warmer weather accommodates more outdoor dining. The impacts of COVID-19 will remain a headwind for our manufacturing costs, and the upward trend in commodity costs is projected to accelerate throughout the quarter. Our ongoing cost savings programs and net price realization efforts will help to offset these higher costs. Finally, with the distribution of COVID-19 vaccines now broadly expanded and available throughout the United States, we plan to discontinue the temporary hero pay for our front-line employees on June 30.

FINANCIAL CONDITION

For the nine months ended March 31, 2021, net cash provided by operating activities totaled $138.7 million, as compared to $119.1 million in the prior-year period. This increase was primarily due to the year-over-year changes in net working capital, particularly accounts payable and accrued liabilities, as well as other current assets.

Cash used in investing activities for the nine months ended March 31, 2021 was $56.2 million, as compared to $72.4 million in the prior year. This decrease primarily reflects a lower level of payments for property additions in the current year. Our prior-year capital expenditures included spending on a capacity expansion project at our frozen dinner roll facility in Horse Cave, Kentucky that was completed in January 2020 and the purchase of the Omni manufacturing facility that was previously leased.

Cash used in financing activities for the nine months ended March 31, 2021 of $69.7 million increased from the prior-year total of $65.2 million. This increase was primarily due to higher dividend payments.

Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at March 31, 2021. At March 31, 2021, we had $2.8 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the Facility. The Facility expires in March 2025, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternate base rate defined in the Facility. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.

The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At March 31, 2021, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At March 31, 2021, there were no events that would constitute a default under this facility.

We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or 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.

We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our liquidity needs over the next 12 months, including the projected levels of capital expenditures and dividend payments. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase and have an adverse effect on our results of operations. Based on our current plans and expectations, we believe our capital expenditures for 2021 will total approximately $110 million, which includes approximately $30 million in initial expenditures attributed to a substantial investment for a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky that we expect to complete in the first quarter of fiscal 2023.

CONTRACTUAL OBLIGATIONS

We have various contractual obligations that are appropriately recorded as liabilities in our condensed consolidated financial statements. Certain other contractual obligations are not recognized as liabilities in our condensed consolidated financial statements. Examples of such items are commitments to purchase raw materials or packaging inventory that has not yet been received as of March 31, 2021. There have been no significant changes to the contractual obligations disclosed in our 2020 Annual Report on Form 10-K aside from expected changes in raw-material costs associated with changes in product demand or pricing, our obligation related to a capacity expansion project at our dressing and sauce facility in Horse Cave, Kentucky as further discussed below, and obligations for other capital projects and IT service agreements.

In November 2020, T. Marzetti Company (“T. Marzetti”), a wholly-owned subsidiary of ours, entered into a Design/Build Agreement (the “Agreement”) with Gray Construction, Inc. (“Gray”) under which Gray will design, coordinate and build additional dressing and sauce manufacturing and warehousing capacity for the T. Marzetti facility in Hart County, Kentucky (the “Project”). The Project will result in an expansion of the current facility footprint. Subject to certain conditions in the Agreement, T. Marzetti will pay Gray no more than the guaranteed maximum price of approximately $113 million for the Project. The Agreement contains other terms and conditions that are customary for this type of project. Expected to be completed in the first quarter of fiscal 2023, the Project is in its early stages, thus we are still obligated for the majority of the guaranteed maximum price.

CRITICAL ACCOUNTING POLICIES

There have been no changes in critical accounting policies from those policies disclosed in our 2020 Annual Report on Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 to the condensed 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 Quarterly Report on Form 10-Q 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, many of which could be amplified by the COVID-19 pandemic. Management believes these forward-looking statements to be reasonable; however, one 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:

•significant shifts in consumer demand and disruptions to our employees, communities, customers, supply chains, operations, and production processes resulting from COVID-19 and other epidemics, pandemics or similar widespread public health concerns and disease outbreaks;

•complexities related to the design and implementation of our new enterprise resource planning system;

•fluctuations in the cost and availability of ingredients and packaging;

•capacity constraints that may affect our ability to meet demand or may increase our costs;

•efficiencies in plant operations;

•dependence on contract manufacturers, distributors and freight transporters, including their financial strength in continuing to support our business;

•cyber-security incidents, information technology disruptions, and data breaches;

•the reaction of customers or consumers to price increases we may implement;

•adverse changes in freight, energy or other costs of producing, distributing or transporting our products;

•the potential for loss of larger programs or key customer relationships;

•the ability to successfully grow recently acquired businesses;

•changes in demand for our products, which may result from loss of brand reputation or customer goodwill;

•price and product competition;

•the success and cost of new product development efforts;

•adequate supply of labor for our manufacturing facilities;

•the lack of market acceptance of new products;

•the impact of customer store brands on our branded retail volumes;

•the extent to which recent and future business acquisitions are completed and acceptably integrated;

•dependence on key personnel and changes in key personnel;

•the effect of consolidation of customers within key market channels;

•the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs;

•the possible occurrence of product recalls or other defective or mislabeled product costs;

•maintenance of competitive position with respect to other manufacturers;

•changes in estimates in critical accounting judgments;

•the impact of any regulatory matters affecting our food business, including any required labeling changes and their impact on consumer demand;

•the outcome of any litigation or arbitration;

•stability of labor relations; and

•certain other factors, including the information disclosed in our discussion of risk factors under Item 1A of our 2020 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks have not changed materially from those disclosed in our 2020 Annual Report on Form 10-K.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is 1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and 2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting. No changes were made to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed under Item 1A in our 2020 Annual Report on Form 10-K.

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

(c) In November 2010, our Board of Directors approved a share repurchase authorization of 2,000,000 common shares, of which 1,289,701 common shares remained authorized for future repurchases at March 31, 2021. This share repurchase authorization does not have a stated expiration date. In the third quarter, we made the following repurchases of our common stock:


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet be Purchased Under the Plans
January 1-31, 2021 (1)	22	$	180.04	22	1,315,778
February 1-28, 2021 (1)	15,379	$	176.33	15,379	1,300,399
March 1-31, 2021	10,698	$	176.57	10,698	1,289,701
Total	26,099	$	176.43	26,099	1,289,701

(1)Includes 22 shares in January 2021 and 6,077 shares in February 2021 that were repurchased in satisfaction of tax withholding obligations arising from the vesting of restricted stock granted to employees under the Lancaster Colony Corporation 2015 Omnibus Incentive Plan.

Item 6. Exhibits

See Index to Exhibits following Signatures.

SIGNATURES

Pursuant to the requirements 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)

Date:

May 4, 2021

By:

/s/ DAVID A. CIESINSKI

David A. Ciesinski

President, Chief Executive Officer

and Director

(Principal Executive Officer)

Date:

May 4, 2021

By:

/s/ THOMAS K. PIGOTT

Thomas K. Pigott

Vice President, Chief Financial Officer

and Assistant Secretary

(Principal Financial and Accounting Officer)

LANCASTER COLONY CORPORATION AND SUBSIDIARIES

FORM 10-Q

MARCH 31, 2021

INDEX TO EXHIBITS



Exhibit Number						Description

31.1(a)						Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002

31.2(a)						Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002

32(b)						Certification of CEO and CFO under Section 906 of the Sarbanes-Oxley Act of 2002

101.INS(a)						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH(a)						Inline XBRL Taxonomy Extension Schema Document

101.CAL(a)						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF(a)						Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB(a)						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE(a)						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104(a)						The cover page of Lancaster Colony Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (included within Exhibit 101 attachments)

(a)						Filed herewith

(b)						Furnished herewith