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
2017
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,
2018
refers to fiscal
2018
, which is the period from
July 1, 2017
to
June 30, 2018
.
Effective July 1, 2017, David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as Chief Executive Officer (“CEO”). As President and CEO, Mr. Ciesinski became our principal executive officer and chief operating decision maker (“CODM”). This change resulted in modifications to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, our segment reporting structure has been amended to align with these changes, and our financial results will now be presented as two reportable segments: Retail and Foodservice. See Note 8 for additional details. All historical information has been retroactively conformed to the current presentation.
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:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2017
|
|
2016
|
Construction in progress in Accounts Payable
|
$
|
590
|
|
|
$
|
154
|
|
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
September 30,
|
|
2017
|
|
2016
|
Net income
|
$
|
29,386
|
|
|
$
|
33,400
|
|
Net income available to participating securities
|
(47
|
)
|
|
(66
|
)
|
Net income available to common shareholders
|
$
|
29,339
|
|
|
$
|
33,334
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
27,396
|
|
|
27,363
|
|
Incremental share effect from:
|
|
|
|
Nonparticipating restricted stock
|
4
|
|
|
5
|
|
Stock-settled stock appreciation rights
|
51
|
|
|
62
|
|
Weighted average common shares outstanding – diluted
|
27,451
|
|
|
27,430
|
|
|
|
|
|
Net income per common share – basic and diluted
|
$
|
1.07
|
|
|
$
|
1.22
|
|
Accumulated Other Comprehensive Loss
The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2017
|
|
2016
|
Accumulated other comprehensive loss at beginning of period
|
$
|
(8,936
|
)
|
|
$
|
(11,350
|
)
|
Defined Benefit Pension Plan Items:
|
|
|
|
Amortization of unrecognized net loss
|
143
|
|
|
179
|
|
Postretirement Benefit Plan Items:
|
|
|
|
Amortization of unrecognized net gain
|
(9
|
)
|
|
(9
|
)
|
Amortization of prior service credit
|
(45
|
)
|
|
(45
|
)
|
Total other comprehensive income, before tax
|
89
|
|
|
125
|
|
Total tax expense
|
(33
|
)
|
|
(47
|
)
|
Other comprehensive income, net of tax
|
56
|
|
|
78
|
|
Accumulated other comprehensive loss at end of period
|
$
|
(8,880
|
)
|
|
$
|
(11,272
|
)
|
Significant Accounting Policies
There were no changes to our Significant Accounting Policies from those disclosed in our
2017
Annual Report on Form 10-K.
Recently Issued Accounting Standards
In March 2017, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by disaggregating the service cost component from the other components of net periodic benefit cost. The amendments require an employer to present service cost in the same line item(s) as compensation costs for the pertinent employees whereas the other components of net periodic benefit cost must be reported separately from service cost and outside of income from operations. The amendments also allow only the service cost component to be eligible for capitalization. The amendments require retrospective application for the income statement presentation provisions and prospective application for the capitalization of the service cost component. However, as a result of prior years’ restructuring activities, we no longer have any active employees continuing to accrue service cost. Therefore, the service cost provisions are not applicable to us, and we expect only changes in classification on the income statement. The guidance will be effective for us in fiscal 2019 including interim periods.
In May 2014, the FASB issued new accounting guidance for the recognition of revenue and issued subsequent clarifications of this new guidance in 2016 and 2017. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
the entity expects to be entitled in exchange for those goods or services. This model is based on a control approach rather than the current risks and rewards model. The new guidance would also require expanded disclosures. Since we do not plan to early adopt this standard, the guidance will be effective for us in fiscal 2019 including interim periods and will require either retrospective application to each prior period presented or modified retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. We are currently evaluating the method of adoption but believe that we will apply the modified retrospective approach. We are currently assessing the impact that this standard will have on our accounting policies, processes, system requirements, internal controls and disclosures using internal resources and the assistance of a third party. We have established a project plan, completed an initial review of selected customer contracts and are evaluating the impact of the new standard on certain common practices currently employed by us and by other manufacturers of consumer products. We have not yet determined the impact that this standard will have on our financial position, results of operations and the related notes to the consolidated financial statements.
In February 2016, the FASB issued new accounting guidance to require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record a right-of-use asset and a lease liability based upon the present value of the lease payments. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the consolidated financial statements. The guidance will be effective for us in fiscal 2020 including interim periods using a modified retrospective approach. We are currently evaluating the impact of this guidance.
Recently Adopted Accounting Standards
In March 2016, the FASB issued new accounting guidance to simplify the accounting for stock-based compensation. The amendments include changes to the accounting for share-based payment transactions, including: the inclusion of the tax consequences related to stock-based compensation within the computation of income tax expense versus equity; the classification of awards as either equity or liabilities; and the classification of share-based activity on the statement of cash flows. The adoption may result in increased volatility to our income tax expense and resulting net income in future periods 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. We adopted the new guidance on July 1, 2017 and elected to continue to estimate forfeitures. The adoption of this guidance resulted in 1) the prospective recognition of windfall tax benefits and shortfall tax deficiencies in income tax expense; 2) the retrospective reclassification of windfall tax benefits on the Condensed Consolidated Statements of Cash Flows from financing activities to operating activities; and 3) the retrospective reclassification of employee tax withholdings on the Condensed Consolidated Statements of Cash Flows from operating activities to financing activities. There was no material impact on our condensed consolidated financial statements as a result of this adoption.
Note 2 – Acquisition
On November 17, 2016, we acquired substantially all of the assets of Angelic Bakehouse, Inc. (“Angelic”). Angelic, a privately owned manufacturer and marketer of premium sprouted grain bakery products, is based near Milwaukee, Wisconsin. The purchase price of
$35.5 million
was funded by cash on hand and includes immaterial post-closing adjustments, which were paid in April 2017 and July 2017, but excludes contingent consideration relating to an additional earn-out payment which is tied to performance-based conditions. In general, the terms of the acquisition specify that the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021. We are unable to provide a range for the amount of this earn-out because it is based on the future adjusted EBITDA of Angelic, and the earn-out does not contain a minimum or maximum value. See further discussion of the earn-out in Note 3. Angelic is reported in our Retail segment, and its results of operations have been included in our condensed consolidated financial statements from the date of acquisition.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 3 – 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 consist principally of cash, accounts receivable, accounts payable and contingent consideration payable. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value.
Our contingent consideration, which is measured at fair value on a recurring basis, is included in Other Noncurrent Liabilities on the Condensed Consolidated Balance Sheets. The following table summarizes our contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2017
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Acquisition-related contingent consideration
|
$
|
—
|
|
$
|
—
|
|
$
|
15,516
|
|
$
|
15,516
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2017
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Acquisition-related contingent consideration
|
$
|
—
|
|
$
|
—
|
|
$
|
15,028
|
|
$
|
15,028
|
|
The contingent consideration resulted from the earn-out associated with our November 17, 2016 acquisition of Angelic. The purchase price did not include the future earn-out payment which is tied to performance-based conditions. In general, the terms of the acquisition specify that the sellers will receive an earn-out based upon a pre-determined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021. The fair value of the contingent consideration was estimated using a present value approach, which incorporates factors such as business risks and projections, to estimate an expected value. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. Using this valuation technique, the fair value of the contingent consideration was determined to be
$13.9 million
at November 17, 2016.
The following table represents our Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent consideration:
|
|
|
|
|
|
Three Months Ended
September 30, 2017
|
Acquisition-related contingent consideration at beginning of period
|
$
|
15,028
|
|
Additions
|
—
|
|
Changes in fair value included in Selling, General and Administrative Expenses
|
488
|
|
Acquisition-related contingent consideration at end of period
|
$
|
15,516
|
|
Note 4 – Long-Term Debt
At
September 30, 2017
and
June 30, 2017
, 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
subject to us obtaining consent of the issuing banks and certain other conditions. The Facility expires on
April 8, 2021
, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternative base rate defined in the Facility, at our option. 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.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
At
September 30, 2017
and
June 30, 2017
, we had
no
borrowings outstanding under the Facility. At
September 30, 2017
, we had
$5.1 million
of standby letters of credit outstanding, which reduced the amount available for borrowing on the Facility. We paid
no
interest for the
three
months ended
September 30, 2017
and
2016
.
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 to 1 at all times. The interest coverage ratio is calculated by dividing Consolidated EBIT by Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Debt by Consolidated EBITDA. All financial terms used in the covenant calculations are defined more specifically in the Facility.
Note 5 – Commitments and Contingencies
At
September 30, 2017
, 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.
With our acquisition of Angelic, we have a contingent liability recorded for the earn-out associated with the transaction. See further discussion in Note 3.
Note 6 – Goodwill and Other Intangible Assets
As described in Notes 1 and 8, we changed our reportable segments as of July 1, 2017 when our organizational structure changed. Using a relative fair value approach, we reassigned our existing goodwill balance to the two new reporting units that directly align with our new Retail and Foodservice reportable segments. Based on this approach, goodwill attributable to the Retail and Foodservice segments was
$119.3 million
and
$48.7 million
, respectively, at
September 30, 2017
and
June 30, 2017
.
The following table summarizes our identifiable other intangible assets.
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
June 30,
2017
|
Tradenames (20 to 30-year life)
|
|
|
|
Gross carrying value
|
$
|
50,321
|
|
|
$
|
50,321
|
|
Accumulated amortization
|
(3,615
|
)
|
|
(3,130
|
)
|
Net carrying value
|
$
|
46,706
|
|
|
$
|
47,191
|
|
Trademarks (40-year life)
|
|
|
|
Gross carrying value
|
$
|
370
|
|
|
$
|
370
|
|
Accumulated amortization
|
(244
|
)
|
|
(241
|
)
|
Net carrying value
|
$
|
126
|
|
|
$
|
129
|
|
Customer Relationships (10 to 15-year life)
|
|
|
|
Gross carrying value
|
$
|
14,207
|
|
|
$
|
14,207
|
|
Accumulated amortization
|
(7,441
|
)
|
|
(7,160
|
)
|
Net carrying value
|
$
|
6,766
|
|
|
$
|
7,047
|
|
Technology / Know-how (10-year life)
|
|
|
|
Gross carrying value
|
$
|
6,350
|
|
|
$
|
6,350
|
|
Accumulated amortization
|
(1,206
|
)
|
|
(1,047
|
)
|
Net carrying value
|
$
|
5,144
|
|
|
$
|
5,303
|
|
Non-compete Agreements (5-year life)
|
|
|
|
Gross carrying value
|
$
|
791
|
|
|
$
|
791
|
|
Accumulated amortization
|
(338
|
)
|
|
(299
|
)
|
Net carrying value
|
$
|
453
|
|
|
$
|
492
|
|
Total net carrying value
|
$
|
59,195
|
|
|
$
|
60,162
|
|
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses, was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2017
|
|
2016
|
Amortization expense
|
$
|
967
|
|
|
$
|
691
|
|
Total annual amortization expense for each of the next five years is estimated to be as follows:
|
|
|
|
|
|
|
2019
|
$
|
3,867
|
|
2020
|
$
|
3,832
|
|
2021
|
$
|
3,747
|
|
2022
|
$
|
3,673
|
|
2023
|
$
|
3,114
|
|
Note 7 – Income Taxes
Accrued federal income taxes of
$9.2 million
and accrued state and local income taxes of
$0.5 million
were included in Accrued Liabilities at
September 30, 2017
. Prepaid federal income taxes of
$6.1 million
and prepaid state and local income taxes of
$0.9 million
were included in Other Current Assets at
June 30, 2017
.
Note 8 – Business Segment Information
Effective July 1, 2017, David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as CEO. As President and CEO, Mr. Ciesinski became our principal executive officer and CODM. This change resulted in modifications to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, our segment reporting structure has been amended to align with these changes, and our financial results will now be 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. All historical information has been retroactively conformed to the current presentation. These segment 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. We have placement of products in U.S. grocery produce departments through our refrigerated salad dressings, vegetable and fruit dips, and croutons. 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 grocery aisles, which include shelf-stable salad dressing, slaw dressing, dry egg noodles and croutons. Within the frozen aisles of grocery retailers, we also have prominent market positions of frozen yeast rolls, garlic breads and egg noodles.
Foodservice - The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors. Products we sell in the Foodservice segment are often 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 branded and private label to distributors and restaurants primarily in the United States. Additionally, a portion of our sales are dressing packets, frozen specialty noodles, pasta and flatbreads sold to industrial customers for use as ingredients or components in their products.
Within our organization, our procurement, manufacturing, warehousing and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity, as many of our products are similar between the two segments. Consequently, we do not prepare, and the CODM does not review, separate balance sheets for the reportable segments. As such, our external reporting will not include the presentation of identifiable assets by reportable segment. The composition of our identifiable assets at
September 30, 2017
is generally consistent with that of
June 30, 2017
.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
We continue to evaluate our segments based on net sales and operating income. The following summary of financial information has been realigned for all periods presented to reflect the results of the Retail and Foodservice segments:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2017
|
|
2016
|
Net Sales
|
|
|
|
Retail
|
$
|
162,144
|
|
|
$
|
152,662
|
|
Foodservice
|
136,772
|
|
|
138,699
|
|
Total
|
$
|
298,916
|
|
|
$
|
291,361
|
|
Operating Income
|
|
|
|
Retail
|
$
|
32,867
|
|
|
$
|
34,806
|
|
Foodservice
|
14,688
|
|
|
20,019
|
|
Corporate Expenses
|
(3,229
|
)
|
|
(4,071
|
)
|
Total
|
$
|
44,326
|
|
|
$
|
50,754
|
|
Note 9 – Stock-Based Compensation
There have been no changes to our stock-based compensation plans from those disclosed in our
2017
Annual Report on Form 10-K.
Our stock-settled stock appreciation rights (“SSSARs”) compensation expense was
$0.6 million
and
$0.5 million
for the three months ended
September 30, 2017
and
2016
, respectively. At
September 30, 2017
, there was
$3.5 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
$0.6 million
for the three months ended
September 30, 2017
and
2016
. At
September 30, 2017
, there was
$2.7 million
of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of
2 years
.