10-Q 1 l10298ae10vq.txt LANCASTER COLONY CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 OR [ ] 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 0-4065-1 ------------ LANCASTER COLONY CORPORATION (Exact name of registrant as specified in its charter) OHIO 13-1955943 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 37 WEST BROAD STREET 43215 COLUMBUS, OHIO (Zip Code) (Address of principal executive offices) 614-224-7141 (Registrant's telephone number, including area code) 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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of October 29, 2004, there were approximately 35,101,000 shares of Common Stock, no par value per share, outstanding. LANCASTER COLONY CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets - September 30, 2004 and June 30, 2004 Consolidated Statements of Income - Three Months Ended September 30, 2004 and 2003 Consolidated Statements of Cash Flows - Three Months Ended September 30, 2004 and 2003 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 4. Controls and Procedures PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 6. Exhibits SIGNATURES INDEX TO EXHIBITS 2 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 JUNE 30 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2004 2004 --------------------------------------- ------------ --------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and equivalents ........................................................ $ 168,136 $ 178,503 Receivables - (less allowance for doubtful accounts, September - $1,961 and June - $1,819) ..................................... 115,764 94,623 Inventories: Raw materials and supplies ................................................ 46,953 45,277 Finished goods and work in process ........................................ 107,140 109,799 --------- --------- Total inventories ....................................................... 154,093 155,076 Deferred income taxes and other current assets .............................. 26,774 22,803 --------- --------- Total current assets .................................................... 464,767 451,005 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements ............................................ 119,154 118,693 Machinery and equipment ..................................................... 355,698 354,112 --------- --------- Total cost .............................................................. 474,852 472,805 Less accumulated depreciation ............................................... 319,652 313,311 --------- --------- Property, plant and equipment - net ..................................... 155,200 159,494 OTHER ASSETS: Goodwill - (net of accumulated amortization, September and June - $15,136) ............................................. 79,218 79,187 Other intangible assets - net ............................................... 5,329 5,459 Other noncurrent assets ..................................................... 20,906 17,742 --------- --------- TOTAL ................................................................... $ 725,420 $ 712,887 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................................ $ 46,974 $ 47,383 Accrued liabilities ......................................................... 58,447 45,348 --------- --------- Total current liabilities ............................................... 105,421 92,731 OTHER NONCURRENT LIABILITIES ................................................... 22,609 21,576 DEFERRED INCOME TAXES .......................................................... 11,544 11,795 SHAREHOLDERS' EQUITY: Preferred stock - authorized 3,050,000 shares; outstanding - none Common stock - authorized 75,000,000 shares; outstanding - September 30, 2004 - 35,198,937 shares; June 30, 2004 - 35,472,163 shares ......................................... 70,836 69,809 Retained earnings ........................................................... 895,424 885,161 Accumulated other comprehensive loss ........................................ (5,544) (5,542) --------- --------- Total ................................................................... 960,716 949,428 Common stock in treasury, at cost ........................................... (374,870) (362,643) --------- --------- Total shareholders' equity .................................................. 585,846 586,785 --------- --------- TOTAL ................................................................... $ 725,420 $ 712,887 ========= =========
See accompanying notes to consolidated financial statements. 3 LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 ------------------------------------------- -------- -------- NET SALES ..................................... $281,484 $266,652 COST OF SALES ................................. 227,467 210,845 -------- -------- GROSS MARGIN .................................. 54,017 55,807 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 24,776 24,169 RESTRUCTURING AND IMPAIRMENT CHARGE ........... 442 - -------- -------- OPERATING INCOME .............................. 28,799 31,638 INTEREST INCOME AND OTHER - NET ............... 627 346 -------- -------- INCOME BEFORE INCOME TAXES .................... 29,426 31,984 TAXES BASED ON INCOME ......................... 11,048 12,284 -------- -------- NET INCOME .................................... $ 18,378 $ 19,700 ======== ======== NET INCOME PER COMMON SHARE: Basic and Diluted .......................... $ .52 $ .55 CASH DIVIDENDS PER COMMON SHARE ............... $ .23 $ .20 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic ...................................... 35,355 35,763 Diluted .................................... 35,408 35,831
See accompanying notes to consolidated financial statements. 4 LANCASTER COLONY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 (AMOUNTS IN THOUSANDS) 2004 2003 -------------------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................... $ 18,378 $ 19,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................. 8,499 7,432 (Recovery of) provision for losses on accounts receivable... (688) 201 Deferred income taxes and other noncash charges ............ 382 1,087 Restructuring and impairment charge ........................ 45 (48) Gain on sale of property ................................... (42) (744) Changes in operating assets and liabilities: Receivables .............................................. (20,453) (17,130) Inventories .............................................. 920 (8,249) Other current assets ..................................... (2,853) (2,175) Accounts payable and accrued liabilities ................. 9,613 15,651 --------- --------- Net cash provided by operating activities .............. 13,801 15,725 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments on property additions ............................... (2,866) (6,677) Proceeds from sale of property ............................... 304 1,128 Other - net .................................................. (5,356) (923) --------- --------- Net cash used in investing activities .................. (7,918) (6,472) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock ................................... (12,227) (1,056) Payment of dividends ......................................... (8,115) (7,150) Increase in cash overdraft balance ........................... 3,104 1,309 Proceeds from the exercise of stock options .................. 990 420 --------- --------- Net cash used in financing activities .................. (16,248) (6,477) --------- --------- Effect of exchange rate changes on cash ......................... (2) 10 --------- --------- Net change in cash and equivalents .............................. (10,367) 2,786 Cash and equivalents at beginning of year ....................... 178,503 142,847 --------- --------- Cash and equivalents at end of period ........................... $ 168,136 $ 145,633 ========= ========= SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS: Cash paid during the period for income taxes ................. $ 822 $ 1,254 ========= =========
See accompanying notes to consolidated financial statements. 5 LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 - BASIS OF PRESENTATION The interim consolidated financial statements are unaudited but, in our opinion, 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 consolidated financial statements are considered to be of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended June 30, 2004. Certain prior year amounts have been reclassified to conform with the current year presentation. During the three months ended September 30, 2004 and 2003, certain inventory quantity reductions resulted in a liquidation of LIFO inventory layers carried at lower costs which prevailed in prior years. The effect of the liquidation for the three months ended September 30, 2004 was an increase in pretax income of approximately $0.4 million, or approximately $.01 per share after taxes. The effect of the liquidation for the three months ended September 30, 2003 was an increase in pretax income of approximately $1.6 million, or approximately $.03 per share after taxes. We account for our stock option plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, no compensation cost is reflected in net income, as all options granted under those plans had an exercise price at least equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per common share as if we had applied the fair-value-based method under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, to record expense for stock option compensation:
THREE MONTHS ENDED SEPTEMBER 30 2004 2003 -------- -------- Net income as reported ............................. $ 18,378 $ 19,700 Less: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects ........ (32) (102) -------- -------- Pro forma net income ............................... $ 18,346 $ 19,598 ======== ======== Net income per common share - basic and diluted as reported and pro forma ......................... $ .52 $ .55
NOTE 2 - ACQUISITION On December 12, 2003, we completed the acquisition of substantially all the operating assets of Warren Frozen Foods, Inc. ("Warren"), a privately owned producer and marketer of frozen noodle and pasta products based in Altoona, Iowa. Warren has a well-recognized presence in the industrial and foodservice markets and complements our existing frozen noodle operation, which has a greater presence in retail markets. Warren is reported in our Specialty Foods segment, and its results of operations have been included in our consolidated statement of income since December 12, 2003. Under the terms of the purchase agreement, we acquired certain personal and real property including fixed assets, inventory and accounts receivable, and assumed certain liabilities. The purchase price was approximately $21.1 million, including a net asset adjustment of approximately $492,000 as determined under the terms of the purchase agreement. The initial estimate of the net asset adjustment was $461,000 and was recorded in accounts payable on the Consolidated Balance Sheet at June 30, 2004. This estimate was subject to the review by and agreement of the seller. As a result of this review, an additional $31,000 was included in accounts payable on the Consolidated Balance Sheet at September 30, 2004. No further adjustments to the purchase price are expected. 6 LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 3 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with Financial Accounting Standards Board ("FASB") Staff Position No. 106-1, we elected to defer recognizing the effect of the Act on the accounting for our postretirement benefit plans until authoritative accounting guidance was issued. In May 2004, the FASB issued Staff Position No. 106-2, which provided final guidance on accounting for the Act. We adopted the provisions of the Staff Position No. 106-2 as of July 1, 2004. The provisions of the Act did not have a material effect on our results of operations, cash flow or financial position. NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill attributable to the Specialty Foods and Automotive segments was $78.2 million and $1.0 million, respectively, at September 30, 2004. The following table summarizes our segment identifiable other intangible assets as of September 30, 2004 and June 30, 2004:
SEPTEMBER 30 JUNE 30 2004 2004 ------------ ------- SPECIALTY FOODS Trademarks Gross carrying value ............. $ 370 $ 370 Accumulated amortization ......... (124) (121) ------- ------- Net Carrying Value ............... $ 246 $ 249 ======= ======= Customer Lists Gross carrying value ............. $ 4,100 $ 4,100 Accumulated amortization ......... (256) (171) ------- ------- Net Carrying Value ............... $ 3,844 $ 3,929 ======= ======= Non-compete Agreements Gross carrying value ............. $ 1,200 $ 1,200 Accumulated amortization ......... (112) (75) ------- ------- Net Carrying Value ............... $ 1,088 $ 1,125 ======= ======= GLASSWARE AND CANDLES - CUSTOMER LISTS Gross carrying value ............... $ 250 $ 250 Accumulated amortization ........... (99) (94) ------- ------- Net Carrying Value ................. $ 151 $ 156 ======= ======= Total Net Carrying Value ............. $ 5,329 $ 5,459 ======= =======
Amortization expense relating to these assets was approximately $130,000 and $7,000 for the quarters ended September 30, 2004 and 2003, respectively. Total annual amortization expense is estimated to be approximately $522,000 for each of the next five fiscal years. NOTE 5 - PENSION AND OTHER POSTRETIREMENT BENEFITS We and certain of our operating subsidiaries provide multiple defined benefit pension and postretirement medical and life insurance benefit plans. Benefits under the defined benefit pension plans are primarily based on negotiated rates and years of service and cover the union workers at such locations. We contribute to these 7 LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) pension plans at least the minimum amount required by regulation or contract. We recognize the cost of pension plans and postretirement medical and life insurance benefits as the employees render service. Postretirement benefits are funded as incurred. The following chart discloses net periodic benefit cost for our pension and postretirement plans:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ---------------- ----------------------- THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30 SEPTEMBER 30 2004 2003 2004 2003 ----- ----- ----- ----- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ................................ $ 138 $ 151 $ 34 $ 63 Interest cost ............................... 633 594 81 60 Expected return on plan assets .............. (694) (627) - - Amortization of unrecognized net loss ....... 102 175 19 9 Amortization of prior service cost (asset)... 59 58 (2) (2) Amortization of unrecognized net obligation existing at transition ......... 9 9 - - ----- ----- ----- ----- Net periodic benefit cost ................... $ 247 $ 360 $ 132 $ 130 ===== ===== ===== =====
For the three months ended September 30, 2004, we have made $0.1 million in contributions to our pension plans. We expect to make approximately $0.9 million more in contributions to our pension plans during the remainder of this fiscal year. For the three months ended September 30, 2004, we have made approximately $0.1 million in contributions to our postretirement medical and life insurance benefit plans. We expect to make approximately $0.3 million more in contributions to our postretirement medical and life insurance benefit plans during the remainder of this fiscal year. NOTE 6 - RESTRUCTURING AND IMPAIRMENT CHARGE In the fourth quarter of fiscal 2004, we recorded a restructuring and impairment charge of approximately $1.1 million ($0.7 million after taxes) for costs incurred as of June 30, 2004 related to the closing of our automotive floor mat manufacturing facility located in Waycross, Georgia. Manufacturing effectively ceased as of June 30, 2004. The decision to close the plant was brought on by a decline in demand for compression molded rubber floor mats that resulted in excess segment capacity. During the three months ended September 30, 2004, we recorded an additional restructuring and impairment charge of $0.4 million for costs incurred during that period. Approximately $0.3 million of this charge results in cash outlays and consists of other closing costs, such as costs to remove and relocate certain equipment, costs to prepare the building for sale, and various other charges. An analysis of our first quarter fiscal 2005 restructuring activity and the related remaining liability within the Automotive segment is as follows:
THREE MONTHS ENDED SEPTEMBER 30 ACCRUAL AT ---------------------- ACCRUAL AT JUNE 30, 2004 CHARGE CASH OUTLAYS SEPT. 30, 2004 ------------- ------ ------------ -------------- RESTRUCTURING AND IMPAIRMENT CHARGE Employee Separation Costs .................... $105 $ - $ (94) $11 Other Costs .................................. 34 307 (298) 43 ---- ---- ----- --- Subtotal ..................................... $139 307 $(392) $54 ==== ===== === Asset Impairment and Other Noncash Charges.... 135 ---- Total Restructuring and Impairment Charge... $442 ====
8 LANCASTER COLONY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The restructuring accrual is located in accounts payable and accrued liabilities at September 30, 2004. We expect that the remaining cash outlays for this plan will occur over this fiscal year. NOTE 7 - BUSINESS SEGMENT INFORMATION The following summary financial information by business segment is consistent with the basis of segmentation and measurement of segment profit or loss presented in our June 30, 2004 consolidated financial statements:
THREE MONTHS ENDED SEPTEMBER 30 2004 2003 --------- --------- NET SALES Specialty Foods ........ $ 160,609 $ 154,817 Glassware and Candles... 63,732 56,126 Automotive ............. 57,143 55,709 --------- --------- Total ................ $ 281,484 $ 266,652 ========= ========= OPERATING INCOME Specialty Foods ........ $ 27,379 $ 26,313 Glassware and Candles... 1,079 3,106 Automotive ............. 2,256 3,651 Corporate Expenses ..... (1,915) (1,432) --------- --------- Total ................ $ 28,799 $ 31,638 ========= =========
NOTE 8 - COMMITMENTS AND CONTINGENCIES At September 30, 2004, we are a party to various claims and litigation which have arisen in the ordinary course of business. Such matters did not have a material effect on the current fiscal year-to-date results of operations and, in our opinion, their ultimate disposition will not have a material adverse effect on our consolidated financial statements. Certain of our automotive accessory products carry explicit limited warranties that extend from twelve months to the life of the product, based on terms that are generally accepted in the marketplace. Our policy is to record a provision for the expected cost of the warranty-related claims at the time of the sale, and periodically adjust the provision to reflect actual experience. The amount of warranty liability accrued reflects our best estimate of the expected future cost of honoring our obligations under the warranty plans. The warranty accrual as of September 30, 2004 and June 30, 2004 is immaterial to our financial condition, and the change in the accrual for the current quarter of fiscal 2005 is immaterial to our results of operations and cash flows. NOTE 9 - COMPREHENSIVE INCOME Total comprehensive income for the quarters ended September 30, 2004 and 2003 was approximately $18.4 million and $19.9 million, respectively. The September 30, 2004 and 2003 comprehensive income primarily consists of net income and foreign currency translation adjustments. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LANCASTER COLONY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (TABULAR DOLLARS IN THOUSANDS) OVERVIEW We are a diversified manufacturer and marketer of consumer products including specialty foods for the retail and foodservice markets; glassware and candles for the retail, industrial, floral and foodservice markets; and automotive accessories for the original equipment market and aftermarket. This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes the matters that we consider to be important in understanding the results of our operations for the three months in the period ended September 30, 2004 and our financial condition as of September 30, 2004. Our fiscal year begins on July 1 and ends on June 30. In the discussion that follows, we analyze the results of our operations for the last three months, including the trends in the overall business, followed by a discussion of our financial condition. The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto, all included elsewhere herein. The forward-looking statements in this section and other parts of this document involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995." On December 12, 2003, we purchased substantially all the operating assets of Warren Frozen Foods, Inc. ("Warren"), a privately owned producer and marketer of frozen noodle and pasta products. Warren is reported in our Specialty Foods segment. This acquisition's final purchase price was approximately $21.1 million, including a net asset adjustment of approximately $492,000 as determined under the terms of the purchase agreement, and this transaction is discussed in further detail in Note 2 to the consolidated financial statements. On April 27, 2004, we announced our intent to close our automotive floor mat manufacturing facility located in Waycross, Georgia. In fiscal 2004, we recorded a restructuring and impairment charge of approximately $1.1 million ($0.7 million after taxes). During the three months ended September 30, 2004, we recorded an additional restructuring and impairment charge of $0.4 million for costs incurred during that period. See further discussion in Note 6 to the consolidated financial statements. The following is an overview of our consolidated operating results for the three months ended September 30, 2004. Net sales for the first quarter ended September 30, 2004 increased 6% to a record level of $281.5 million from the prior year first quarter total of $266.7 million. Gross margin decreased 3% to $54.0 million from the prior year comparable total of $55.8 million. Net income for the current year first quarter was $18.4 million or $.52 per diluted share. Our first quarter results continue to reflect an environment of generally heightened competition and higher raw material costs. To date, we have found our opportunities to increase prices to be limited and generally not sufficient to offset the impact of higher raw material costs. We have been able to maintain a strong balance sheet with no debt throughout this period. 10 RESULTS OF CONSOLIDATED OPERATIONS NET SALES AND GROSS MARGIN
THREE MONTHS ENDED SEPTEMBER 30 2004 2003 CHANGE -------- -------- --------------------- NET SALES Specialty Foods ................... $160,609 $154,817 $ 5,792 4% Glassware and Candles ............. 63,732 56,126 7,606 14% Automotive ........................ 57,143 55,709 1,434 3% -------- -------- -------- -- Total ........................... $281,484 $266,652 $ 14,832 6% ======== ======== ======== == GROSS MARGIN ........................ $ 54,017 $ 55,807 $ (1,790) (3)% ======== ======== ======== == GROSS MARGIN AS A PERCENT OF SALES... 19.2% 20.9% ==== ====
For the first quarter, consolidated net sales increased 6% compared to the prior year period due to positive sales growth achieved by all three segments. For the quarter ended September 30, 2004, net sales of the Specialty Foods segment totaled $160.6 million, which was $5.8 million higher than the prior year total of $154.8 million. Warren Frozen Foods, which is discussed in Note 2 to the accompanying consolidated financial statements, contributed over $4 million to the higher first quarter sales. The remaining increase resulted from modest growth in both the retail and foodservice markets. Net sales of the Glassware and Candles segment for the first quarter ended September 30, 2004 totaled $63.7 million, a 14% increase from the comparable prior year quarter total of $56.1 million. This segment's sales growth resulted from improved sales of candles, primarily through gains among existing customers. Candle sales associated with several new customer programs also contributed to the segment's growth. Sales of glassware products declined, as broadly impacted by continuing lackluster demand in consumer and industrial markets. Automotive segment net sales for the first quarter ended September 30, 2004 totaled $57.1 million, a 3% increase from the prior year first quarter total of $55.7 million. Sales of original equipment products benefited from growth in aluminum accessories, partially offset by lower floor mat volume. As a percentage of sales, our consolidated gross margins for the three months ended September 30, 2004 totaled 19.2%, as compared to the prior year level of 20.9% for the first quarter ended September 30, 2003. Margins within the Specialty Foods segment increased slightly, despite being constrained by increases in ingredient costs, especially soybean oil and cream. The net impact of higher ingredient costs on the segment's comparative quarterly results somewhat exceeded $1 million. Gross margins of the Glassware and Candles segment were adversely affected by competitive pricing conditions, higher material costs, and a lower level of income from the reduction of LIFO inventory (see Note 1 to the consolidated financial statements). In the Automotive segment, higher material costs, such as for aluminum, steel and synthetic rubber, contributed to lower margins as compared to the prior year. Further affecting the comparative results for this segment were costs of approximately $0.4 million incurred in the current quarter for the closing of a manufacturing facility (see Note 2 to the consolidated financial statements) and the inclusion of a gain of approximately $0.4 million in the prior year related to the sale of an idle manufacturing facility. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED SEPTEMBER 30 2004 2003 CHANGE --------- --------- -------------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... $ 24,776 $ 24,169 $607 3% ========= ========= ==== = SG&A EXPENSES AS A PERCENT OF SALES ........... 8.8% 9.1% === ===
11 As a percentage of sales, selling, general and administrative expenses were relatively stable as compared to the corresponding period of a year ago. RESTRUCTURING AND IMPAIRMENT CHARGE In fiscal 2004, we recorded a restructuring and impairment charge of approximately $1.1 million ($0.7 million after taxes) for costs incurred as of June 30, 2004 related to the closing of our automotive floor mat manufacturing facility located in Waycross, Georgia. Manufacturing effectively ceased as of June 30, 2004. The decision to close the plant was brought on by a decline in demand for compression molded rubber floor mats that resulted in excess segment capacity. During the three months ended September 30, 2004, we recorded an additional restructuring and impairment charge of $0.4 million for costs incurred during that period. Approximately $0.3 million of this charge results in cash outlays and consists of other closing costs, such as costs to remove and relocate certain equipment, costs to prepare the building for sale, and various other charges. An analysis of our first quarter fiscal 2005 restructuring activity and the related remaining liability within the Automotive segment is as follows:
THREE MONTHS ENDED SEPTEMBER 30 ACCRUAL AT -------------------------- ACCRUAL AT JUNE 30, 2004 CHARGE CASH OUTLAYS SEPT. 30, 2004 ------------- ------ ------------ -------------- RESTRUCTURING AND IMPAIRMENT CHARGE Employee Separation Costs ................... $105 $ - $ (94) $11 Other Costs ................................. 34 307 (298) 43 ---- ---- ----- --- Subtotal .................................... $139 307 $(392) $54 ==== ===== === Asset Impairment and Other Noncash Charges... 135 ---- Total Restructuring and Impairment Charge.. $442 ====
The restructuring accrual is located in accounts payable and accrued liabilities at September 30, 2004. We expect that the remaining cash outlays for this plan will occur over this fiscal year. OPERATING INCOME The foregoing factors contributed to consolidated operating income totaling $28.8 million for the three months ended September 30, 2004. These amounts represent a decrease of 9% from the prior year quarter. By segment, our operating income can be summarized as follows:
THREE MONTHS ENDED SEPTEMBER 30 2004 2003 CHANGE -------- -------- --------------- OPERATING INCOME Specialty Foods.................................... $ 27,379 $ 26,313 $ 1,066 4% Glassware and Candles.............................. 1,079 3,106 (2,027) (65)% Automotive......................................... 2,256 3,651 (1,395) (38)% Corporate Expenses................................. (1,915) (1,432) (483) 34% -------- -------- -------- -- Total............................................ $ 28,799 $ 31,638 $ (2,839) (9)% ======== ======== ======== == OPERATING INCOME AS A PERCENT OF SALES Specialty Foods.................................... 17.0% 17.0% Glassware and Candles.............................. 1.7% 5.5% Automotive......................................... 3.9% 6.6% Consolidated....................................... 10.2% 11.9%
INTEREST INCOME AND OTHER - NET The first quarter of fiscal 2005 included interest and other income of $0.6 million, as compared to $0.3 million in the same quarter of the prior year. This increase was primarily due to higher interest income, as our cash balances and interest rates have been higher than they were in the prior year. 12 NET INCOME Consistent with the decline in operating income, first quarter net income of $18.4 million decreased 7% from the preceding year's net income for the quarter of $19.7 million. The decline in earnings per share for the fiscal 2005 first quarter to $.52 per basic and diluted share from $.55 per basic and diluted share recorded in the prior year first quarter reflects the decline in net income partially offset by the extent of share repurchases under our share repurchase program. FINANCIAL CONDITION For the three months ended September 30, 2004, net cash provided by operating activities totaled $13.8 million, which compares to $15.7 million provided in the corresponding prior year period. This decline results from the decrease in net income, as well as relative changes in working capital components, particularly accounts receivable and accounts payable and accrued liabilities, partially offset by inventories. The increase in accounts receivable at September 30 was most influenced by higher sales, seasonality and a greater nonfood mix, as payment terms associated with nonfood sales tend to be longer than with sales of specialty foods. Cash used in investing activities for the three months ended September 30, 2004 increased to $7.9 million from the prior year amount of $6.5 million, largely due to increases in other assets offset somewhat by the decrease in property additions, as there were no major capital projects completed this quarter. Cash used in financing activities for the three months ended September 30, 2004 increased to $16.2 million from the prior year total of $6.5 million due to higher dividend payments and increases in the purchase of treasury stock. At September 30, 2004, approximately 2,075,000 shares remain authorized for future buyback. These shares reflect the impact of the August 2004 Board of Directors approval of a share repurchase authorization of an additional 2,000,000 shares. Total dividends paid during the current quarter increased approximately 14% as compared to the prior year period due to the effects of a 15% increase in the stated dividend rate being somewhat offset by the extent of share repurchases. We believe that cash provided from operations, our existing cash balances, and the currently available bank credit arrangements should be adequate to meet our foreseeable cash requirements over fiscal 2005. There have been no changes in critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended June 30, 2004. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q contains forward-looking statements related to future growth and earnings opportunities. Such statements are based upon certain assumptions and assessments made by management of the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. Actual results may differ as a result of factors over which the Company has no, or limited, control including the strength of the economy, slower than anticipated sales growth, the extent of operational efficiencies achieved, the success of new product introductions, price and product competition, and increases in raw materials costs. Management believes these forward-looking statements to be reasonable; however, undue reliance should not be placed on such statements, which are based on current expectations. The Company undertakes no obligation to publicly update such forward-looking statements. More detailed statements regarding significant events which could affect the Company's financial results are included in the Company's Forms 10-Q and 10-K filed with the Securities and Exchange Commission. 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 Chief Executive Officer and Chief Financial Officer evaluated, with the participation of management, 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 have concluded that our disclosure controls and procedures were effective as of September 30, 2004 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. 13 (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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (c) In May 2000 and August 2004, the Board of Directors approved share repurchase authorizations of 3,000,000 and 2,000,000 shares, respectively, of which approximately 2,075,000 shares remain authorized for future repurchases. In the first quarter, we made the following repurchases of our common stock:
TOTAL NUMBER MAXIMUM NUMBER TOTAL AVERAGE OF SHARES OF SHARES THAT MAY NUMBER PRICE PURCHASED AS YET BE PURCHASED OF SHARES PAID PER PART OF PUBLICLY UNDER THE PLANS OR PERIOD PURCHASED SHARE ANNOUNCED PLANS PROGRAMS ------ --------- -------- ---------------- ------------------ July 1-31, 2004...................... 85,000 $39.53 85,000 289,732 August 1-31, 2004.................... 95,000 $40.39 95,000 2,194,732 September 1-30, 2004................. 120,000 $41.91 120,000 2,074,732
These share repurchase authorizations do not have a stated expiration date. ITEM 6. EXHIBITS. See Index to Exhibits following Signatures. 14 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: November 9, 2004 By: /s/JOHN B. GERLACH, JR. ---------------------------------------- John B. Gerlach, Jr. Chairman, Chief Executive Officer and President Date: November 9, 2004 By: /s/JOHN L. BOYLAN ---------------------------------------- John L. Boylan Treasurer, Vice President, Assistant Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) 15 LANCASTER COLONY CORPORATION AND SUBSIDIARIES FORM 10-Q SEPTEMBER 30, 2004 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION LOCATED AT ------- ----------- ---------- 31.1 Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002..... Filed herewith 31.2 Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002..... Filed herewith 32. Certification of CEO and CFO under Section 906 of the Sarbanes-Oxley Act of 2002................................................................. Filed herewith
16