Item 1B.
Unresolved Staff Comments
None.
We use approximately 2.7 million square feet of space for our operations. Of this space, approximately 0.5 million square feet are leased.
The following table summarizes our locations that in total exceed 75,000 square feet of space (including aggregation of multiple facilities) and that are considered our principal manufacturing and warehousing operations:
We have recently completed the expansion of our frozen yeast roll manufacturing facility in Horse Cave, Kentucky. The expansion added approximately 49,000 square feet to the original facility and is included in the table above.
As a result of our past strategic alternative activities, we also hold various parcels of real property that we do not currently use in our operations. The related facilities contain in excess of 1.5 million square feet.
We currently are a party to various legal proceedings. Such matters did not have a material effect on the current-year results of operations. While we believe that the ultimate outcome of these various proceedings, individually and in the aggregate, will not have a material effect on our financial position or future results of operations, litigation is always subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction prohibiting us from manufacturing or selling one or more products or could lead to us altering the manner in which we manufacture or sell one or more products, which could have a material impact on net income for the period in which the ruling occurs and future periods.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on The NASDAQ Global Select Market under the symbol LANC. The following table sets forth the high and low prices for Lancaster Colony Corporation common shares and the dividends paid for each quarter of 2011 and 2010. Stock prices were provided by The NASDAQ Stock Market LLC.
The number of shareholders as of August 17, 2011 was approximately 8,500. The highest and lowest prices for our common stock from July 1, 2011 to August 17, 2011 were $64.15 and $53.91.
We have paid dividends for 192 consecutive quarters. Future dividends will depend on our earnings, financial condition and other factors.
Issuer Purchases of Equity Securities
Our Board of Directors (“Board”) approved a share repurchase authorization of 2,000,000 shares in November 2010. Approximately 1,618,000 shares from this authorization remained authorized for future purchase at June 30, 2011. In the fourth quarter, we made the following repurchases of our common stock:
This share repurchase authorization does not have a stated expiration date.
PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN
OF LANCASTER COLONY CORPORATION, THE S&P MIDCAP 400 INDEX
AND THE DOW JONES U.S. FOOD PRODUCERS INDEX
The graph set forth below compares the five-year cumulative total return from investing $100 on June 30, 2006 in each of our Common Stock, the S&P Midcap 400 Index and the Dow Jones U.S. Food Producers Index. It is assumed that all dividends are reinvested.
Cumulative Total Return (Dollars)
There can be no assurance that our stock performance will continue into the future with the same or similar trends depicted in the above graph.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
(1)
2008 and 2007 amounts exclude the impact of certain discontinued automotive operations sold in those fiscal years.
(2)
Certain prior-year figures were restated in 2010 to reflect the adoption of the provisions of a Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) on the FASB’s Emerging Issues Task Force (“EITF”) Issue No. 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” See further discussion in Note 1 to the consolidated financial statements.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
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 years ended June 30, 2011, 2010 and 2009 and our liquidity and capital resources as of June 30, 2011 and 2010. Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2011 refers to fiscal 2011, which is the period from July 1, 2010 to June 30, 2011. In the discussion that follows, we analyze the results of our operations for the last three years, including the trends in our overall business, followed by a discussion of our cash flows and liquidity and contractual obligations. We then provide a review of the critical accounting policies and estimates that we believe are most important to an understanding of our MD&A and our consolidated financial statements. We conclude our MD&A with information on recently issued accounting pronouncements.
The following discussion should be read in conjunction with the “Selected Financial Data” and our consolidated financial statements and the notes thereto, all included elsewhere in this Annual Report on Form 10-K. The forward-looking statements in this section and other parts of this report involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Forward-Looking Statements.”
EXECUTIVE SUMMARY
Business Overview
Lancaster Colony Corporation is a diversified manufacturer and marketer of consumer products focusing primarily on specialty foods for the retail and foodservice markets. We also manufacture and market candles for the food, drug and mass markets. Although not material to our consolidated operations, we are also engaged in the distribution of various products, including glassware and candles, to commercial markets. Our operations are organized in two reportable segments: “Specialty Foods” and “Glassware and Candles.” Over 90% of the sales of each segment are made to customers in the United States.
In recent years, our strategy has shifted away from operating businesses in a variety of industries towards emphasizing the growth and success we have achieved in our Specialty Foods segment. Fiscal years prior to 2009 were significant years in implementing this strategy as we divested various nonfood operations and focused our capital investment in the Specialty Foods segment. These strategic dispositions and investments resulted in transforming our company into a predominately food-focused business. In 2011, approximately 85% of our consolidated net sales and effectively all of our operating income were derived from the Specialty Foods segment. For perspective, in 2001, our Specialty Foods segment comprised approximately 47% and 72% of our reported consolidated net sales and operating income, respectively.
We intend to periodically reassess the strategic fit and contribution of our remaining nonfood operations in light of market conditions, capital needs and other factors. Our current strategy focuses our efforts on the most profitable part of our business and minimizes the amount of financial and management resources devoted to our nonfood operations. We believe we are positioned to maximize the future potential of our Specialty Foods segment.
We view our food operations as having the potential to achieve future growth in sales and profitability due to attributes such as:
•
leading retail market positions in several branded products with a high-quality perception;
•
a broad customer base in both retail and foodservice accounts;
•
well-regarded culinary expertise among foodservice accounts;
•
recognized leadership in foodservice product development;
•
experience in integrating complementary business acquisitions; and
•
historically strong cash flow generation that supports growth opportunities.
Our goal is to grow our specialty foods retail and foodservice business over time by:
•
leveraging the strength of our retail brands to increase current product sales and introduce new products;
•
growing our foodservice sales through the strength of our reputation in product development and quality; and
•
pursuing acquisitions that meet our strategic criteria.
Within retail markets, our Specialty Foods segment utilizes numerous branded products to support growth and maintain market competitiveness. We place great emphasis on our product innovation and development efforts so as to enhance growth by providing distinctive new products meeting the evolving needs and preferences of consumers.
Our foodservice sales primarily consist of products sold to restaurant chains. Over the long-term, we have experienced broad-based growth in our foodservice sales, as we build on our strong reputation for product development and quality.
We expect that part of our future growth in the Specialty Foods segment will result from acquisitions. We continue to review potential acquisitions that we believe will provide good complements to our existing product lines, enhance our gross margins or offer good expansion opportunities in a manner that fits our overall goals.
As has occasionally been required to support future growth opportunities, we have historically made substantial capital investments to support our existing food operations, such as the construction of a new frozen yeast roll facility in Horse Cave, Kentucky that began operations in 2008 and was significantly expanded through a project that was completed in June 2011. At an adjoining location, we began production activities at a newly-constructed dressing facility in 2007. Both facilities helped accommodate potential future sales growth and also provided greater manufacturing efficiencies. Based on our current plans and expectations, we believe that our total capital expenditures for 2012 will be approximately $25 million.
Summary of 2011 Results
The following is an overview of our consolidated operating results for the year ended June 30, 2011.
Consolidated net sales reached approximately $1,090 million during 2011, increasing by approximately 3% as compared to prior-year net sales of $1,057 million, driven by growth coming from both operating segments. The Specialty Foods segment’s increase reflected higher foodservice sales, which were partially offset by lower retail sales. The increase in sales of the Glassware and Candles segment primarily reflected higher candle sales volumes from product placement into new accounts that began in the fourth quarter of 2010.
Gross margin decreased 10% to approximately $242.4 million from the prior-year comparable total of $270.3 million. Increasing raw-material costs, as well as a less favorable sales mix and higher freight costs within the Specialty Foods segment, contributed to the lower gross margin.
Overall results were also affected by the funds received under CDSOA. In 2011, we received approximately $14.4 million under CDSOA, as compared to approximately $0.9 million in 2010 and approximately $8.7 million in 2009. For a more-detailed discussion of CDSOA, see the subcaption “Other Income - Continued Dumping and Subsidy Offset Act” of this MD&A.
Net income totaled approximately $106.4 million in 2011, or $3.84 per diluted share, compared to net income of $115.0 million, or $4.07 per diluted share, in 2010. Net income in 2009 totaled approximately $89.1 million, or $3.17 per diluted share.
Looking Forward
We are anticipating continued growth in consolidated sales during 2012. Factors that we believe should contribute to our growth include the incremental impact of several recently-introduced retail food products, the implementation of higher pricing among various product lines, as well as the expansion of existing
product lines with current customers or into new geographic markets. We will also continue to review acquisition opportunities within the Specialty Foods segment that are consistent with our growth strategy and represent good value or otherwise provide significant strategic benefits. However, unsettled economic conditions affecting consumer and retailer buying patterns are among the many influences that may impact sales improvement and our ability to improve operating margins in the coming year.
Within our Specialty Foods segment, with respect to material input and freight costs, we enter 2012 experiencing an elevation of such costs over 2011 levels. It is possible that future changes in the economy and regulatory environment could cause further increases in these costs. To help offset or stabilize the impact of such increases, we have pursued other operational strategies that we believe will aid our future results. For example, as part of our cost reduction efforts, we consolidated our Wilson, New York and Atlanta, Georgia production operations into our other existing facilities in the second quarter of 2010 and early 2009, respectively. Further, the 2011 expansion of our frozen roll capacity is expected to improve production throughput and reduce third party warehouse costs. We are also continuing to limit some of our exposure to volatile swings in food commodity costs through a structured purchasing program for certain future requirements. We do expect to realize higher pricing in 2012, but we believe that the related income may ultimately be less than the total increase in material and freight costs.
With respect to our Glassware and Candles segment, we expect lower 2012 sales levels, especially for holiday products, as some lower-margin business was not retained. Higher wax costs will continue to negatively impact the segment’s operating results, and it will be challenging to maintain operating efficiencies with the expected lower production levels. Accordingly, we currently expect this segment’s 2012 operating income will be challenged to reach the level of 2011.
For a more-detailed discussion of the effect of commodity costs, see the “Impact of Inflation” section of this MD&A below.
In order to ensure that our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and share repurchases, we will need to maintain sufficient flexibility in our future capital structure. We will continue to reassess our allocation of capital periodically to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders, whether through share repurchases or cash dividends, including special dividends, if appropriate.
REVIEW OF CONSOLIDATED OPERATIONS
Segment Sales Mix
The relative proportion of sales contributed by each of our business segments can impact a year-to-year comparison of the consolidated statements of income. The following table summarizes the sales mix over each of the last three years:
Net Sales and Gross Margin
Consolidated net sales for the year ended June 30, 2011 increased by approximately 3% to approximately $1,090 million from the prior-year total of approximately $1,057 million. This sales growth reflected improved results in both operating segments. The Specialty Foods segment’s increase reflected higher foodservice sales, which were partially offset by lower retail sales. The foodservice sales increase resulted from both higher pricing and new programs with some large restaurant chains. The decline in retail sales was influenced by the exiting of less profitable dressing lines midway through 2010, the loss of product placement for certain produce dips at one customer and generally weak retail market conditions. The increase in sales of the Glassware and Candles segment primarily reflected higher candle volumes from product placement into new accounts that began in the fourth quarter of 2010. Consolidated net sales for the year ended June 30, 2010 increased by less than 1% over the 2009 total of approximately $1,051 million. In 2010, increased sales within the Glassware and Candles segment were partially offset by lower sales within the Specialty Foods segment. The Specialty Foods segment’s sales decline reflected moderately lower foodservice sales, as partially offset by higher retail sales. The increase in net sales of the Glassware and Candles segment reflected higher unit volume on improved consumer demand for high-quality, value-priced candles and the introduction and success of various new products.
Our gross margin as a percentage of net sales was approximately 22.2% in 2011 compared with 25.6% in 2010 and 20.5% in 2009. As a percentage of net sales, higher material costs in 2011 are estimated to have impacted gross margin comparisons by approximately 3%. In the Specialty Foods segment, gross margin percentages declined in 2011, reflecting broadly-higher ingredient and freight costs and a less favorable sales mix. Gross margin percentages in the Glassware and Candles segment declined in 2011 due to higher wax costs and, to a lesser extent, lower production volumes. As a percentage of net sales, lower material costs in 2010 are estimated to have benefited gross margin comparisons to 2009 by over 4%. In 2010, the Specialty Foods segment’s gross margin percentages improved as a result of lower commodity costs, a stronger retail mix and operating efficiency improvements. Gross margin percentages in the Glassware and Candles segment improved in 2010 due to lower material costs, especially for paraffin wax, and higher sales and production levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2011 totaled approximately $95.4 million and increased 2% as compared with the 2010 total of $93.8 million, while the 2010 total had increased 11% from the 2009 total of $84.2 million. Higher sales-based expenses, increased compensation expense and greater consumer-directed marketing costs contributed to the overall increase for 2011, although as a percentage of sales the 2011 expenses were comparable to 2010. In 2010, increased costs in consumer-directed marketing initiatives to support retail sales and increased professional fees within the Specialty Foods segment contributed to the overall increase.
Restructuring and Impairment Charges
Specialty Foods Segment
In 2010, we closed our dressings and sauces manufacturing operation located in Wilson, New York. During 2010, we recorded restructuring charges of approximately $2.3 million ($1.5 million after taxes). This closure was essentially complete at December 31, 2009. We do not expect any other costs or cash expenditures related to this closure.
In 2009, we consolidated our Atlanta, Georgia dressing operation into our other existing food facilities. During 2009, we recorded restructuring and impairment charges of approximately $0.8 million ($0.5 million after taxes). This closure was essentially complete at September 30, 2008, and the disposition of the
associated real estate occurred in December 2008. We do not expect any other costs or cash expenditures related to this closure.
Other
In 2007, we closed our industrial glass operation that was located in Lancaster, Ohio. The majority of the total $5.7 million restructuring and impairment charge related to this closure was recorded in 2007, but we did incur approximately $0.8 million ($0.5 million after taxes) during the year ended June 30, 2009. The 2009 charge was recorded in Corporate expenses. We do not currently expect other significant restructuring costs related to this closure.
Operating Income (Loss)
Due to the factors discussed above, consolidated operating income for 2011 totaled approximately $147.0 million, a 16% decrease from 2010 operating income of $174.2 million. The 2010 total had increased 34% from 2009 operating income totaling approximately $129.6 million. See further discussion of operating results by segment following the discussion of “Net Income” below.
Interest Expense
We incurred no interest expense in 2011 and 2010 as there were no borrowings outstanding during these years. Interest expense of approximately $1.2 million recorded in 2009 related to long-term borrowings. We had no outstanding borrowings at June 30, 2011 and 2010.
Other Income - Continued Dumping and Subsidy Offset Act
CDSOA provides for the distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers. Our reported CDSOA receipts totaled approximately $14.4 million, $0.9 million and $8.7 million in 2011, 2010 and 2009, respectively. CDSOA remittances have related to certain candles being imported from the People’s Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of CDSOA to duties collected on products imported after September 2007. Accordingly, we may receive some level of annual distributions for an undetermined period of years in the future as the monies collected that relate to entries filed prior to October 2007 are administratively finalized by U.S. Customs. Without further legislative action, we expect these distributions will eventually cease.
In addition to this legislative development, cases have been brought in U.S. courts challenging CDSOA. In two separate cases, the U.S. Court of International Trade (“CIT”) ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. The U.S. Court of Appeals for the Federal Circuit reversed both CIT decisions and the U.S. Supreme Court did not hear either case. This effectively ended the constitutional challenges brought in these cases, but other cases challenging CDSOA remain active.
We are unable to determine, at this time, what the ultimate outcome of other litigation will be, and it is possible that further legal action, potential additional changes in the law and other factors could affect the amount of funds available for distribution, including funds relating to entries prior to October 2007. Accordingly, we cannot predict the amount of future distributions we may receive. Any change in CDSOA distributions could affect our earnings and cash flow.
Interest Income and Other - Net
Interest income and other was income of approximately $0.1 million, income of less than $0.1 million and expense of approximately $0.1 million in 2011, 2010 and 2009, respectively.
Income Before Income Taxes
As affected by the factors discussed above, our income before income taxes for 2011 of approximately $161.5 million decreased 8% from the 2010 total of $175.1 million. The 2009 total income before income taxes was approximately $137.0 million. Our effective tax rate was 34.1%, 34.4% and 35.0% in 2011, 2010 and 2009, respectively. The 2011 rate was primarily impacted by the domestic manufacturing deduction, for which there was a rate increase in the current year. As compared to 2009, the lower rate in 2010 reflected, in part, a favorable resolution of certain previously-reserved state and local tax matters in 2010, as further discussed in Note 5 to the consolidated financial statements.
Net Income
Net income for 2011 of approximately $106.4 million decreased from 2010 net income of $115.0 million. Net income was approximately $89.1 million in 2009. Diluted net income per share totaled approximately $3.84 in 2011, a 6% decrease from the prior-year total of $4.07. The latter amount was 28% higher than 2009 diluted earnings per share of $3.17. Income per share in each of the last three years has been beneficially affected by share repurchases, which have totaled approximately $64.4 million over the three-year period ended June 30, 2011.
SEGMENT REVIEW - SPECIALTY FOODS
During 2011, net sales of the Specialty Foods segment set a new record level, surpassing the previous record set in 2009, while operating income of approximately $155.2 million decreased 12% from the 2010 level of $176.2 million. Increasing material and freight costs, as well as a less favorable sales mix, contributed to the lower level of operating income. Net sales during 2011 totaled approximately $922.9 million, an increase from the prior-year total of $893.3 million. Sales for 2010 decreased 2% from the 2009 total of approximately $909.9 million. The percentage of retail customer sales within the segment was approximately 52% during 2011, as compared to 53% in 2010 and 51% in 2009.
In 2011, net sales of the Specialty Foods segment increased by approximately 3%. Contribution from higher pricing was approximately 1% of net sales. The segment’s foodservice net sales rose approximately 9% on increased volumes, particularly from new programs with existing large chain restaurants, and higher pricing. Retail net sales declined approximately 1% as influenced by the prior year rationalization of some product lines associated with the mid-year 2010 closing of one of our dressing facilities. Also, sales of produce dips declined, reflecting a weaker category and the loss of placement for certain products at one of our customers. Mitigating these declines were higher retail sales of frozen rolls and the success of several recently-introduced products. The decline in net sales of the Specialty Foods segment in 2010 reflected generally flat volumes and lower pricing to customers in foodservice channels. Higher sales to retail channel customers were more than offset by lower foodservice sales. Foodservice sales declined by approximately 7% for the year ended June 30, 2010, with contributing factors including weaker chain restaurant demand and downward pricing adjustments in certain of our customer supply arrangements that occurred as a result of lower key ingredient costs. Net sales to retail channel customers increased 3% in 2010 on volume growth from several product lines, as partially offset by the exiting of less profitable dressing lines with the closing of our Wilson, New York operation.
Operating income of the Specialty Foods segment in 2011 totaled approximately $155.2 million, a 12% decrease from the 2010 record level of $176.2 million. The 2010 level was 21% higher than the 2009 level of $145.8 million. The 2011 decrease reflected broadly higher ingredient and freight costs, a less favorable sales mix and increased marketing costs. We estimate that higher material costs adversely affected the segment’s
comparative results by approximately 3% of net sales. The 2010 increase reflected lower commodity costs, a stronger retail sales mix and operating efficiency improvements. We estimate that the favorable year-over-year impact of commodity costs approximated 5% of 2010 net sales.
SEGMENT REVIEW - GLASSWARE AND CANDLES
Glassware and Candles segment net sales totaled approximately $167.1 million during 2011, as compared to $163.4 million in 2010 and $141.6 million in 2009. The 2011 increase reflected higher candle sales volumes, mainly product placement into new accounts that began in the fourth quarter of 2010. In 2010, the increase in net sales reflected higher unit volume on improved consumer demand for high-quality, value-priced candles and the introduction, expanded product placement and the success of various new products.
The segment recorded operating income of approximately $3.8 million in 2011 and $9.4 million in 2010 compared to an operating loss of $5.7 million during 2009. Despite the benefits of achieving higher sales volumes in 2011, operating results were adversely affected by higher wax costs and, to a lesser extent, lower production volumes. We estimate that higher wax costs in the Glassware and Candles segment adversely affected the segment’s comparative results in 2011 by approximately 5% of net sales. Operating results of the Glassware and Candles segment improved in 2010 due to lower material costs, especially for paraffin wax, and higher sales and production levels. We estimate the favorable year-over-year impact of wax costs for the year ended June 30, 2010 approximated 4% of the segment’s net sales.
CORPORATE EXPENSES
The 2011 corporate expenses totaled approximately $12.0 million as compared to $11.4 million in 2010 and $10.5 million in 2009. The higher level of corporate expenses for 2011 and 2010 related to costs associated with our idle real estate holdings while the increase in expenses in 2011 from 2010 related to increased professional fees and personnel related costs.
FINANCIAL CONDITION
Liquidity and Capital Resources
In order to ensure that our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and share repurchases, we will need to maintain sufficient flexibility in our future capital structure. Our balance sheet retained fundamental financial strength during 2011, and we ended the year with approximately $132.3 million in cash and equivalents, along with shareholders’ equity of nearly $518 million and no debt.
Under our unsecured revolving credit facility, we may borrow up to a maximum of $160 million at any one time. Loans may be used for general corporate purposes. We had no borrowings outstanding under this facility at June 30, 2011. The facility expires in October 2012, and all outstanding amounts are then due and payable. At June 30, 2011, we had approximately $6.6 million of standby letters of credit outstanding, which reduced the amount available for borrowing on the unsecured revolving credit facility.
The facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At June 30, 2011, we were in compliance with all applicable provisions and covenants of the facility, and we met the requirements of the financial covenants by substantial margins.
We currently expect to remain in compliance with the facility’s covenants for the foreseeable future. A default under the facility could accelerate the repayment of any outstanding indebtedness and limit our access to additional credit available under the facility. Such an event could require curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due. At June 30, 2011, we were not aware of any event that would constitute a default under the facility.
We believe that internally generated funds and our existing aggregate balances in cash and equivalents, in addition to our currently available bank credit arrangements, should be adequate to meet our foreseeable cash requirements. If we were to borrow outside of our credit facility under current market terms, our average interest rate may increase significantly and have an adverse effect on our results of operations.
For additional information regarding our credit facility, see Note 4 to the consolidated financial statements.
Cash Flows
Our cash flows for the years 2009 through 2011 are presented in the Consolidated Statements of Cash Flows. Cash flow generated from operations remains the primary source of financing for our internal growth. Cash provided by operating activities in 2011 totaled approximately $147.5 million, an increase of 37% as compared with the prior-year total of $107.7 million, which decreased from the 2009 total of $133.2 million. The 2011 increase in cash provided by operating activities reflected favorable changes in working capital, especially within accounts receivable, inventory and other current assets, as partially offset by the decrease in net income. The 2010 decrease resulted from comparatively unfavorable changes in working capital components, especially inventory, prepaid Federal income taxes and receivables, as partially offset by a higher level of net income and comparatively favorable changes in accounts payable and accrued liabilities. Most notably, consolidated inventories increased approximately $19 million during 2010 primarily as a result of anticipating larger seasonal sales of candles and frozen breads in 2011. Conversely, despite broadly higher material costs, such inventories declined approximately $10 million in 2011 due to a reduced need for building seasonal inventories.
Cash used in investing activities totaled approximately $35.8 million in 2011, $14.1 million in 2010 and $11.0 million for 2009. The 2011 increase in cash used in investing activities reflected a higher level of capital expenditures in 2011 due to the expansion of our frozen yeast roll facility in Kentucky. The 2010 increase in cash used in investing activities reflected lower proceeds from the sale of property and an increase in capital expenditures in 2010. Capital expenditures totaled approximately $35.3 million in 2011, compared to $12.8 million in 2010 and $11.3 million in 2009. Capital spending allocations during 2011 by segment approximated 97% for Specialty Foods and 3% for Glassware and Candles. Based on our current plans and expectations, we believe that our total capital expenditures for 2012 will be approximately $25 million.
Financing activities used net cash totaling approximately $80.3 million, $31.2 million and $103.1 million in 2011, 2010 and 2009, respectively. The 2011 increase in cash used in financing activities reflected a higher level of share repurchases, lower proceeds from the exercise of stock awards and a lower cash overdraft balance. The 2010 decrease in cash used in financing activities was due primarily to a decrease in treasury share repurchases, the net change in borrowing activity and an increase in the cash overdraft balance. The total payment for cash dividends for the year ended June 30, 2011 was approximately $35.7 million. The dividend payout rate for 2011 was $1.29 per share as compared to $1.185 per share during 2010, and $1.135 per share in 2009. This past fiscal year marked the 48th consecutive year in which our dividend rate was increased. Cash utilized for share repurchases totaled approximately $43.1 million, $4.4 million and $16.9 million in 2011, 2010 and 2009, respectively. Our Board approved a share repurchase authorization of 2,000,000 shares in November 2010. Approximately 1,618,000 shares from this authorization remained authorized for future purchase at June 30, 2011.
The future levels of share repurchases and declared dividends are subject to the periodic review of our Board and are generally determined after an assessment is made of such factors as anticipated earnings levels, cash flow requirements and general business conditions.
Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various Federal, state and local agencies. With respect to
environmental matters, costs are incurred pertaining to regulatory compliance and, upon occasion, remediation. Such costs have not been, and are not anticipated to become, material.
We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. Except as discussed above, we do not have any related party transactions that materially affect our results of operations, cash flow or financial condition.
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMITMENTS
We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “Variable Interest Entities,” that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures.
We have various contractual obligations that are appropriately recorded as liabilities in our consolidated financial statements. Certain other items, such as purchase obligations, are not recognized as liabilities in our consolidated financial statements. Examples of items not recognized as liabilities in our consolidated financial statements are commitments to purchase raw materials or inventory that has not yet been received as of June 30, 2011 and future minimum lease payments for the use of property and equipment under operating lease agreements.
The following table summarizes our contractual obligations as of June 30, 2011 (dollars in thousands):
(1)
Operating leases are primarily entered into for warehouse and office facilities and certain equipment. See Note 10 to the consolidated financial statements for further information.
(2)
Purchase obligations represent purchase orders and longer-term purchase arrangements related to the procurement of raw materials, supplies, and property, plant and equipment.
(3)
This amount does not include approximately $11.4 million of other noncurrent liabilities recorded on the balance sheet, which consist of the underfunded pension liability, other post employment benefit obligations, tax liabilities, noncurrent workers compensation obligations, deferred compensation and interest on deferred compensation. These items are excluded, as it is not certain when these liabilities will become due. See Notes 5, 7, 8 and 9 to the consolidated financial statements for further information.
IMPACT OF INFLATION
In recent years, we have been exposed to significant fluctuations in certain manufacturing input costs, including materials such as food commodities and paraffin wax. In 2011, we experienced comparatively higher ingredient costs (including for soybean oil, dairy products, sugar, eggs and paraffin wax). We estimate that higher material costs adversely affected our results by approximately 3% of net sales. We also experienced higher distribution costs, which were, in part, influenced by higher diesel costs. For 2010, our overall manufacturing costs reflected favorable improvement over prior years, with the year-over-year contribution derived from lower materials costs approximating 5% of net sales. These lower costs occurred primarily in the first half of 2010, with our cost comparisons becoming progressively less favorable as the year progressed. As noted above, some of this benefit was offset by contractual adjustments existing within certain foodservice pricing arrangements. Entering 2012, we expect higher material and freight costs to persist.
Over the course of 2011 and 2009, we were generally able to adjust various selling prices of food products to offset the effects of increased raw-material costs. However, these adjustments generally lagged the increase in our costs, having a net negative impact on our 2011 operating margins and a net positive impact in 2009. Our 2012 operating results will also be impacted by our ability to offset any higher input costs through pricing adjustments with our customers. We do expect to realize higher pricing in 2012, but we believe that the related income may ultimately be less than the total increase from higher material and freight costs.
We also attempt to minimize the exposure to increased costs through our ongoing efforts to achieve greater manufacturing and distribution efficiencies through the improvement of work processes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This MD&A discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including, but not limited to, those related to accounts receivable, inventories, marketing and distribution costs, asset impairments and self-insurance reserves. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have typically not had a significant impact on our consolidated financial statements. While a summary of our significant accounting policies can be found in Note 1 to the consolidated financial statements, we believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue upon transfer of title and risk of loss, provided that evidence of an arrangement exists, pricing is fixed or determinable, and collectability is probable. Net sales are recorded net of estimated sales discounts, returns and certain sales incentives, including coupons and rebates.
Receivables and the Allowance for Doubtful Accounts
We provide an allowance for doubtful accounts based on the aging of accounts receivable balances, historical write-off experience and on-going reviews of our trade receivables. Measurement of potential losses requires credit review of existing customer relationships, consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the economic health of customers. In addition to credit concerns, we also evaluate the adequacy of our allowances for customer deductions considering several factors including historical losses and existing customer relationships.
Valuation of Inventory
When necessary, we provide allowances to adjust the carrying value of our inventory to the lower of cost or net realizable value, including any costs to sell or dispose. The determination of whether inventory items are slow moving, obsolete or in excess of needs requires estimates about the future demand for our products. The estimates as to future demand used in the valuation of inventory are subject to the ongoing success of our products and may differ from actual due to such factors as changes in customer and consumer demand. A decrease in product demand due to changing customer tastes, consumer buying patterns or loss of shelf space to competitors could significantly impact our evaluation of our excess and obsolete inventories.
Long-Lived Assets
We monitor the recoverability of the carrying value of our long-lived assets by periodically considering whether indicators of impairment are present. If such indicators are present, we determine if the assets are
recoverable by comparing the sum of the undiscounted future cash flows to the assets’ carrying amount. Our cash flows are based on historical results adjusted to reflect our best estimate of future market and operating conditions. If the carrying amounts are greater, then the assets are not recoverable. In that instance, we compare the carrying amounts to the fair value to determine the amount of the impairment to be recorded.
Goodwill and Intangible Assets
Goodwill is not amortized. It is evaluated annually at April 30, through asset impairment testing, as appropriate. Intangible assets with lives restricted by contractual, legal, or other means are amortized over their useful lives. We periodically evaluate the future economic benefit of the recorded goodwill and intangible assets when events or circumstances indicate potential recoverability concerns. Carrying amounts are adjusted appropriately when determined to have been impaired.
Accrued Marketing and Distribution
Various marketing programs are offered to customers to reimburse them for a portion or all of their promotional activities related to our products. Additionally, we often incur various costs associated with shipping products to the customer. We provide accruals for the costs of marketing and distribution based on historical information as may be modified by estimates of actual costs incurred. Actual costs may differ significantly if factors such as the level and success of the customers’ programs, changes in customer utilization practices, or other conditions differ from expectations.
Accruals for Self-Insurance
Self-insurance accruals are made for certain claims associated with employee health care, workers’ compensation and general liability insurance. These accruals include estimates that may be based on historical loss development factors. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual.
Accounting for Pension Plans and Other Postretirement Benefit Plans
To determine our ultimate obligation under our defined benefit pension plans and our other postretirement benefit plans, we must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. To record the related net assets and obligation of such benefit plans, we use assumptions related to inflation, investment returns, mortality, employee turnover, medical costs and discount rates. To determine the discount rate, we, along with our third-party actuaries, considered several factors, including the June 30, 2011 rates of various bond indices, such as the Moody’s Aa long-term bond index, yield curve analysis results from our actuaries based on expected cash flows of our plans, and the past history of discount rates used for the plan valuation. We, along with our third-party actuaries, review all of these assumptions on an ongoing basis to ensure that the most reasonable information available is being considered. Changes in assumptions and future investment returns could potentially have a material impact on pension expense and related funding requirements. We recognize the overfunded or underfunded status of our defined benefit plans as an asset or liability in our Consolidated Balance Sheet. Any changes in that funded status caused by subsequent plan revaluations are recognized through comprehensive income. We may also experience future plan settlements or curtailments having unanticipated effects on operating results.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 11-05”). This ASU amends current comprehensive income guidance to eliminate the option to present the components of other comprehensive income as part of the statement of shareholders equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 11-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption of this update to have a material impact on our financial position or results of operations.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective July 1, 2009, we adopted the provisions of a FASB FSP on the FASB’s EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which is now part of Accounting Standards Codification (“ASC”) Topic 260, “Earnings Per Share.” This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method. The restricted stock we previously granted to employees was deemed to meet the definition of a participating security as the employees receive nonforfeitable dividends before the stock becomes vested. Our adoption of this FSP required that we retrospectively restate EPS and diluted weighted average common shares outstanding for all periods presented. This resulted in a $.01 reduction in basic and diluted net income per common share for 2009. See further discussion in Note 1 to the consolidated financial statements.
In 2010, we adopted FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”), which is now part of ASC Topic 715, “Compensation-Retirement Benefits.” FSP FAS 132(R)-1 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP expands the disclosure for retirement benefits by adding required disclosures about (1) how investment allocation decisions are made by management, (2) major categories of plan assets, and (3) significant concentration of risk. Additionally, the FSP requires an employer to disclose information about the valuation of plan assets similar to that required for fair value measurements. See further discussion in Note 7 to the consolidated financial statements.
Forward-Looking Statements
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below. Management believes these forward-looking statements to be reasonable; however, you should not place undue reliance on such statements that are based on current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update such forward-looking statements, except as required by law.
Items which could impact these forward-looking statements include, but are not limited to:
•
the potential for loss of larger programs or key customer relationships;
•
the effect of consolidation of customers within key market channels;
•
the continued solvency of key customers;
•
the success and cost of new product development efforts;
•
the lack of market acceptance of new products;
•
the reaction of customers or consumers to the effect of price increases we may implement;
•
changes in demand for our products, which may result from loss of brand reputation or customer goodwill;
•
changes in market trends;
•
the extent to which future business acquisitions are completed and acceptably integrated;
•
the possible occurrence of product recalls or other defective or mislabeled product costs;
•
efficiencies in plant operations, including the ability to optimize overhead utilization in candle operations;
•
the overall strength of the economy;
•
changes in financial markets;
•
slower than anticipated sales growth;
•
the extent of operational efficiencies achieved;
•
price and product competition;
•
the uncertainty regarding the effect or outcome of any decision to explore further strategic alternatives among our nonfood operations;
•
fluctuations in the cost and availability of raw materials;
•
adverse changes in energy costs and other factors that may affect costs of producing, distributing or transporting our products;
•
the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs;
•
maintenance of competitive position with respect to other manufacturers, including import sources of production;
•
dependence on key personnel;
•
stability of labor relations;
•
dependence on contract copackers and limited or exclusive sources for certain goods;
•
effect of governmental regulations, including environmental matters;
•
legislation and litigation affecting the future administration of the Continued Dumping and Subsidy Offset Act of 2000;
•
access to any required financing;
•
changes in income tax laws;
•
unknown costs relating to the holding or disposition of idle real estate;
•
changes in estimates in critical accounting judgments;
•
the outcome of any litigation or arbitration; and
•
innumerable other factors.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We have exposure to market risks primarily from changes in interest rates and ingredient prices. We have not had exposure to market risk associated with derivative financial instruments or derivative commodity instruments.
INTEREST RATE RISK
We are subject to interest rate risk primarily associated with our borrowings. Interest rate risk is the risk that changes in interest rates could adversely affect earnings and cash flows. Rates under our credit facility are set at the time of each borrowing and are based on predetermined formulas connected to certain benchmark rates. Increases in these rates could have an adverse impact on our earnings and cash flows. At the end of 2011, we had no borrowings outstanding under our credit facility. The nature and amount of our borrowings may vary as a result of business requirements, acquisitions, market conditions and other factors.
COMMODITY PRICE RISK
We purchase a variety of commodities and other materials, such as soybean oil, flour, wax and packaging materials, which we use to manufacture our products. The market prices for these commodities are subject to fluctuation based upon a number of economic factors and may become volatile at times. While we do not use any derivative commodity instruments to hedge against commodity price risk, we do actively
manage a portion of the risk through a structured purchasing program for certain future requirements. This program gives us more predictable input costs, which may help stabilize our margins during periods of volatility in commodity markets.
Item 8.
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lancaster Colony Corporation:
We have audited the accompanying consolidated balance sheets of Lancaster Colony Corporation and subsidiaries (the “Company”) as of June 30, 2011 and 2010, and the related consolidated statements of income, cash flows, and shareholders’ equity for each of the three years in the period ended June 30, 2011. Our audits also included the financial statement schedule listed in the table of contents at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
August 29, 2011
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Lancaster Colony Corporation and our wholly-owned subsidiaries, collectively referred to as “we,” “us,” “our,” “registrant,” or the “Company.” Intercompany transactions and accounts have been eliminated in consolidation. Our fiscal year begins on July 1 and ends on June 30. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2011 refers to fiscal 2011, which is the period from July 1, 2010 to June 30, 2011.
Subsequent Events
We have evaluated events occurring between the end of our most recent fiscal year and the date the financial statements were issued and noted no events that would require recognition or disclosure in these financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires that we make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates included in these consolidated financial statements include allowance for doubtful accounts receivable, net realizable value of inventories, useful lives for the calculation of depreciation and amortization, impairments of long-lived assets, accruals for marketing and merchandising programs, tax contingency reserves for uncertain tax positions, pension and postretirement assumptions, as well as expenses related to distribution and self-insurance accruals. Actual results could differ from these estimates.
Cash and Equivalents
We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The carrying amounts of our cash and equivalents approximate fair value due to their short maturities. As a result of our cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. Such negative balances are included in other accrued liabilities. These June 30 balances were as follows:
Receivables and the Allowance for Doubtful Accounts
The carrying amounts of our accounts receivable approximate fair value. We provide an allowance for doubtful accounts based on the aging of accounts receivable balances, historical write-off experience and on-going reviews of our trade receivables. Measurement of potential losses requires credit review of existing customer relationships, consideration of historical effects of relevant observable data, including present economic conditions such as delinquency rates, and the economic health of customers.
Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and equivalents and trade accounts receivable. By policy, we limit the amount of credit exposure to any one institution or issuer. Our concentration of credit risk with respect to trade accounts receivable is mitigated by our credit evaluation process and by having a large and diverse customer base. However, see Note 13 with respect to our accounts receivable with Wal-Mart Stores, Inc.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Inventories
Inventories are valued at the lower of cost or market and are costed by various methods that approximate actual cost on a first-in, first-out basis. It is not practicable to segregate work in process from finished goods inventories. We estimate that work in process inventories as a percentage of the combined total of finished goods and work in process inventories at June 30 are as follows:
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Purchases of property, plant and equipment included in accounts payable and excluded from the property additions and the change in accounts payable in the Consolidated Statement of Cash Flows at June 30 are as follows:
We use the straight-line method of computing depreciation for financial reporting purposes based on the estimated useful lives of the corresponding assets. Estimated useful lives for buildings and improvements range generally from two to 45 years while machinery and equipment range generally from two to 20 years. For tax purposes, we generally compute depreciation using accelerated methods.
The following table sets forth depreciation expense in each of the years ending June 30:
Held for Sale
As a result of various prior-years restructuring and divestiture activities, we have certain “held for sale” properties with a total net book value of approximately $2.8 million at June 30, 2011. This balance is included in Other Noncurrent Assets on the Consolidated Balance Sheet. In accordance with GAAP for property, plant and equipment, we are no longer depreciating these “held for sale” assets and they are being actively marketed for sale.
Long-Lived Assets
We monitor the recoverability of the carrying value of our long-lived assets by periodically considering whether indicators of impairment are present. If such indicators are present, we determine if the assets are recoverable by comparing the sum of the undiscounted future cash flows to the assets’ carrying amount. Our cash flows are based on historical results adjusted to reflect our best estimate of future market and operating conditions. If the carrying amounts are greater, then the assets are not recoverable. In that instance, we compare the carrying amounts to the fair value to determine the amount of the impairment to be recorded. See Note 12 for discussion of recent asset impairments.
Goodwill and Intangible Assets
As of July 1, 2002, goodwill is no longer being amortized. Intangible assets with lives restricted by contractual, legal, or other means continue to be amortized on a straight-line basis over their useful lives to general and administrative expense. As of April 30, 2011 and 2010, as appropriate, we completed our goodwill impairment testing, and have determined that our estimated fair value was substantially in excess of the related carrying value. We periodically evaluate the future economic benefit of the recorded goodwill and intangible assets when events or circumstances indicate potential recoverability concerns. Carrying amounts
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
are adjusted appropriately when determined to have been impaired. See further discussion regarding year-end balances and disclosure in Note 2.
Accrued Marketing and Distribution
Various marketing programs are offered to customers to reimburse them for a portion or all of their promotional activities related to our products. Additionally, we often incur various costs associated with shipping products to the customer. We provide accruals for the costs of marketing and distribution based on historical information as may be modified by estimates of actual costs incurred. Actual costs may differ significantly if factors such as the level and success of the customers’ programs, changes in customer utilization practices, or other conditions differ from expectations.
Accruals for Self-Insurance
Self-insurance accruals are made for certain claims associated with employee health care, workers’ compensation and general liability insurance. These accruals include estimates that are primarily based on historical loss development factors. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual.
Shareholders’ Equity
We are authorized to issue 3,050,000 shares of preferred stock consisting of 750,000 shares of Class A Participating Preferred Stock with $1.00 par value, 1,150,000 shares of Class B Voting Preferred Stock without par value and 1,150,000 shares of Class C Nonvoting Preferred Stock without par value. Our Board approved a share repurchase authorization of 2,000,000 shares in November 2010. Approximately 1,618,000 shares remained authorized for future purchase at June 30, 2011.
Revenue Recognition
We recognize revenue upon transfer of title and risk of loss, provided that evidence of an arrangement exists, pricing is fixed or determinable, and collectability is probable. Net sales are recorded net of estimated sales discounts, returns and certain sales incentives, including coupons and rebates.
Advertising Expense
We expense advertising as it is incurred. The following table summarizes advertising expense as a percentage of net sales in each of the years ending June 30:
Shipping and Handling
Shipping and handling fees billed to customers are recorded as sales, while our shipping and handling costs are included in cost of sales.
Stock-Based Employee Compensation Plans
We account for our stock-based employee compensation plans in accordance with GAAP for stock-based compensation, which requires the measurement and recognition of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of the employee services is recognized as compensation expense over the period that an employee provides service in exchange for the award, which is typically the vesting period. See further discussion and disclosure in Note 6.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Other Income
During 2011, we received approximately $14.4 million from the U.S. government under the Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) compared to $0.9 million received in 2010 and $8.7 million received in 2009. We recognize CDSOA-related income upon receiving notice from the U.S. Department of Homeland Security regarding its intent to remit a specific amount to us. These amounts are recorded as other income in the accompanying consolidated financial statements. See further discussion in Note 11.
Income Taxes
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in numerous domestic jurisdictions.
Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not that our deferred tax assets will be realized and thus we have not recorded any valuation allowance for the years ended June 30, 2011 or 2010.
In accordance with accounting literature related to uncertainty in income taxes, tax benefits from uncertain tax positions that are recognized in the financial statements are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on our results of operations, cash flow or financial position. See further discussions in Note 5.
Earnings Per Share
Earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock and common stock equivalents (stock options, restricted stock and stock-settled stock appreciation rights) outstanding during each period. Effective July 1, 2009, we adopted the provisions of a Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) on the FASB’s Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which is now part of Accounting Standards Codification (“ASC”) Topic 260, “Earnings Per Share.” This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing EPS under the two-class method. The restricted stock we previously granted to employees was deemed to meet the definition of a participating security as the employees receive nonforfeitable dividends before the stock becomes vested. Our adoption of this FSP required that we retrospectively restate EPS and diluted weighted average common shares outstanding for all periods presented. This resulted in a $.01 reduction in basic and diluted net income per common share for 2009.
Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with outstanding stock options, restricted stock and stock-settled stock appreciation rights.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Basic and diluted net income per common share were calculated as follows:
Comprehensive Income and Accumulated Other Comprehensive Loss
Comprehensive income includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income is composed of two subsets - net income and other comprehensive income (loss). Included in other comprehensive income (loss) are pension and postretirement benefits adjustments.
Recently Issued Accounting Standards
In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 11-05”). This ASU amends current comprehensive income guidance to eliminate the option to present the components of other comprehensive income as part of the statement of shareholders equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 11-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption of this update to have a material impact on our financial position or results of operations.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 2 - Goodwill and Other Intangible Assets
Goodwill attributable to the Specialty Foods segment was approximately $89.8 million at June 30, 2011 and 2010.
The following table summarizes our identifiable other intangible assets, all included in the Specialty Foods segment, at June 30:
Amortization expense relating to these assets in each of the years ending June 30 was as follows:
Total annual amortization expense for each of the next five years is estimated to be as follows:
Note 3 - Accrued Liabilities
Accrued liabilities at June 30 are composed of:
Note 4 - Long-Term Debt
At June 30, 2011 and 2010, we had an unsecured revolving credit facility under which we may borrow up to a maximum of $160 million at any one time, with the potential to expand the total credit availability to $260 million based on obtaining consent of the issuing bank and certain other conditions. The facility expires in October 2012, and all outstanding amounts are then due and payable. At June 30, 2011 and 2010, we had no borrowings outstanding under this facility. Loans may be used for general corporate purposes. At June 30,
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
2011, we had approximately $6.6 million of standby letters of credit outstanding, which reduced the amount available for borrowing on the unsecured revolving credit facility.
Based on the long-term nature of this facility, when we have outstanding borrowings under this facility, we classify the outstanding balance as long-term debt. We paid no interest in 2011 and 2010.
The facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions. There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a leverage ratio not greater than 3 to 1 at all times. The interest coverage ratio is calculated by dividing Consolidated EBIT (as defined more specifically in the credit agreement) by Consolidated Interest Expense (as defined more specifically in the credit agreement), and the leverage ratio is calculated by dividing Consolidated Debt (as defined more specifically in the credit agreement) by Consolidated EBITDA (as defined more specifically in the credit agreement). At June 30, 2011 and 2010, we were in compliance with all applicable provisions and covenants of the facility, and we met the requirements of the financial covenants by substantial margins.
We currently expect to remain in compliance with the facility’s covenants for the foreseeable future. A default under the facility could accelerate the repayment of any outstanding indebtedness and limit our access to additional credit available under the facility. Such an event could require curtailment of cash dividends or share repurchases, reduce or delay beneficial expansion or investment plans, or otherwise impact our ability to meet our obligations when due. At June 30, 2011, we were not aware of any event that would constitute a default under the facility.
Note 5 - Income Taxes
We and our domestic subsidiaries file a consolidated Federal income tax return. Taxes based on income for the years ended June 30 have been provided as follows:
Certain tax benefits recorded directly to common stock for each of the years ending June 30 were as follows:
For the years ended June 30, our effective tax rate varied from the statutory Federal income tax rate as a result of the following factors:
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30 are comprised of:
Net current deferred tax assets and prepaid Federal, state and local income taxes were included in Deferred Income Taxes and Other Current Assets on the Consolidated Balance Sheet. The related balances at June 30 are as follows:
Cash payments for income taxes for each of the years ending June 30 were as follows:
The gross tax contingency reserve at June 30, 2011 was approximately $1.8 million. The unrecognized tax benefits recorded as the gross tax contingency reserve noted in the following table for June 30, 2011 and 2010 would affect our effective tax rate, if recognized.
The following table sets forth changes in our total gross tax contingency reserve (including interest and penalties):
We have classified approximately $0.1 million of the gross tax contingency reserve at June 30, 2011 as current liabilities as these amounts are expected to be resolved within the next 12 months. The remaining liability of approximately $1.7 million is included in long-term liabilities. We expect that the amount of these liabilities will change within the next 12 months; however, we do not expect the change to have a significant effect on our financial position or results of operations.
During 2010, we executed several state tax voluntary disclosure agreements. The settlement of these liabilities resulted in pre-tax income of approximately $0.9 million, which impacted our effective tax rate for 2010 by approximately 0.4%.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
We recognize interest and penalties related to these tax liabilities in income tax expense. For each of the years ended June 30, we recognized the change in the accrual for net tax-related interest and penalties as follows:
We had accrued interest and penalties at June 30 as follows:
We file income tax returns in the U.S. and various state and local jurisdictions. With limited exceptions, we are no longer subject to examination of U.S. Federal or state and local income taxes for years prior to 2008.
The American Jobs Creation Act provided a tax deduction calculated as a percentage of qualified income from manufacturing in the United States. The deduction percentage for 2011 was 9%. In accordance with FASB guidance, this deduction is treated as a special deduction, as opposed to a tax rate reduction.
Note 6 - Stock-Based Compensation
As approved by our shareholders in November 1995, the terms of the 1995 Key Employee Stock Option Plan (the “1995 Plan”) reserved 3,000,000 common shares for issuance to qualified key employees. All options granted under the 1995 Plan were exercisable at prices not less than fair market value as of the date of grant. In general, options granted under the 1995 Plan vested immediately and had a maximum term of five years. The 1995 Plan expired in August 2005, but there were options issued under this plan that were exercisable through February 2010. There were no options outstanding under this plan at June 30, 2011.
Our shareholders have approved the adoption of and subsequent amendments to the Lancaster Colony Corporation 2005 Stock Plan (the “2005 Plan”). The 2005 Plan reserved 2,000,000 common shares for issuance to our employees and directors, and all awards granted under the 2005 Plan will be exercisable at prices not less than fair market value as of the date of the grant. The vesting period for awards granted under the 2005 Plan varies as to the type of award granted, but generally these awards have a maximum term of five years.
Stock Options
Until 2008, we used stock options as the primary vehicle for rewarding certain employees with long-term incentives for their efforts in helping to create long-term shareholder value. We calculated the fair value of option grants using the Black-Scholes option-pricing model. There were no grants of stock options in 2011, 2010, or 2009. Total compensation cost related to stock options was zero in 2011, 2010 and 2009.
There were no stock option exercises in 2011. During the year ended June 30, 2010, we received approximately $4.0 million in cash from the exercise of stock options. The aggregate intrinsic value of these options was approximately $0.9 million. A related tax benefit of approximately $0.3 million was recorded in 2010. This tax benefit was included in the financing section of the Consolidated Statements of Cash Flows and resulted from incentive stock option disqualifying dispositions and exercises of non-qualified options. The benefits included approximately $44,000 of gross windfall tax benefits for the year ended June 30, 2010.
Stock-Settled Stock Appreciation Rights
Since 2008, we have used periodic grants of stock-settled stock appreciation rights (“SSSARs”) as a vehicle for rewarding certain employees with long-term incentives for their efforts in helping to create long-term shareholder value. We calculate the fair value of SSSARs grants using the Black-Scholes option-pricing model. Our policy is to issue shares upon SSSARs exercise from new shares that had been previously authorized.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
In February 2011, 2010 and 2009, we granted SSSARs to various employees under the terms of the 2005 Plan. The following table summarizes information relating to each of these grants:
For each of these grants, the volatility factor was estimated based on actual historical volatility of our stock for a time period equal to the term of the SSSARs. For the 2011 SSSARs grant, the expected average life was determined based on historical exercise experience for this type of grant. For the 2010 and 2009 SSSARs grants, the expected average life was calculated using the simplified method as defined in the Securities and Exchange Commission’s Staff Accounting Bulletin 110, as we did not yet have sufficient historical exercise experience for this type of grant. The SSSARs from each of these grants vest one-third on the first anniversary of the grant date, one-third on the second anniversary of the grant date and one-third on the third anniversary of the grant date. We are assuming a forfeiture rate of four percent for each of these grants.
We recognize compensation expense over the requisite service period. Compensation cost was reflected in Cost of Sales or Selling, General and Administrative Expenses based on the grantees’ salaries expense classification and was allocated to each segment appropriately. We recorded tax benefits and gross windfall tax benefits related to SSSARs. These windfall tax benefits were included in the financing section of the Consolidated Statements of Cash Flows. The following table summarizes SSSARs compensation expense and tax benefits recorded for each of the years ending June 30:
The total fair values of SSSARs vested for each of the years ended June 30 are as follows:
The following table summarizes the activity relating to SSSARs granted under the 2005 Plan for the year ended June 30, 2011:
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes information about the SSSARs outstanding by grant year at June 30, 2011:
At June 30, 2011, there was approximately $2.0 million of unrecognized compensation cost related to SSSARs that we will recognize over a weighted-average period of approximately 2.01 years.
Restricted Stock
Since 2008, we have used periodic grants of restricted stock as a vehicle for rewarding our nonemployee directors and certain employees with long-term incentives for their efforts in helping to create long-term shareholder value.
In February 2011, 2010 and 2009, we granted shares of restricted stock to various employees under the terms of the 2005 Plan. The following table summarizes information relating to each of these grants:
The restricted stock under each of these grants vests on the third anniversary of the grant date. We are assuming a forfeiture rate of four percent for each of these grants. Under the terms of the grants, employees receive dividends on unforfeited restricted stock regardless of their vesting status. An additional 21,500 shares of restricted stock that were granted to various key employees in February 2008 vested in 2011.
In November 2010, we granted a total of 8,155 shares of restricted stock to our seven nonemployee directors under the terms of the 2005 Plan. The restricted stock had a grant date fair value of approximately $0.4 million based on a per share closing stock price of $51.52. This restricted stock vests over a one-year period, and all of these shares are expected to vest. Dividends earned on the stock during the vesting period are held in escrow and will be paid to the directors at the time the stock vests. An additional 8,435, 14,000 and 3,000 shares of restricted stock that were granted to our nonemployee directors in November 2009, 2008 and 2007, respectively, vested during the second quarter of 2011, 2010 and 2009, respectively, and the directors were paid the related dividends that had been held in escrow.
We recognize compensation expense over the requisite service period. Compensation cost was reflected in Cost of Sales or Selling, General and Administrative Expenses based on the grantees’ salaries expense classification and was allocated to each segment appropriately. We recorded tax benefits and gross windfall tax benefits related to restricted stock. These windfall tax benefits were included in the financing section of the Consolidated Statements of Cash Flows. The following table summarizes restricted stock compensation expense and tax benefits recorded for each of the years ending June 30:
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The total fair values of restricted stock vested for each of the years ended June 30 are as follows:
The following table summarizes the activity related to restricted stock granted under the 2005 Plan for the year ended June 30, 2011:
At June 30, 2011, there was approximately $1.3 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of approximately 1.72 years.
Note 7 - Pension Benefits
Defined Benefit Pension Plans
We and certain of our operating subsidiaries have sponsored multiple defined benefit pension plans covering union workers at certain locations. As a result of restructuring activities in recent years, at June 30, 2011 there were no active employees continuing to accrue service cost or otherwise eligible to receive plan benefits. Benefits being paid under the plans are primarily based on negotiated rates and years of service. We contribute to these plans at least the minimum amount required by regulation or contract.
At the end of the year, we discount our plan liabilities using an assumed discount rate. In estimating this rate, we, along with our third-party actuaries, review bond indices, consider yield curve analysis results and the past history of discount rates.
The actuarial present value of benefit obligations summarized below was based on the following assumption:
The net periodic benefit costs were determined utilizing the following beginning-of-the-year assumptions:
In determining the long-term expected return on plan assets, we consider our related investment guidelines, our expectations of long-term rates of return by asset category, our target asset allocation weighting and historical rates of return and volatility for equity and fixed income investments. The investment strategy for plan assets is to control and manage investment risk through diversification among asset classes, investment managers/funds and investment styles. The plans’ investment guidelines have been designed to meet the intended objective that plan assets earn at least nominal returns equal to or in excess of the plans’ liability growth rate. In consideration of the current average age of the plans’ participants, the investment guidelines are based upon an investment horizon of at least 10 years.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The target and actual asset allocations for our plans at June 30 by asset category are as follows:
Our target asset allocations are maintained through ongoing review and periodic rebalancing of equity and fixed income investments with assistance from an independent outside investment consultant. Also, the plan assets are diversified among asset classes, asset managers or funds and investment styles to avoid concentrations of risk. We expect that a modest allocation to cash will exist within the plans, because each investment manager is likely to hold limited cash in a portfolio.
There were no plan asset investments in shares of our common stock at June 30, 2011 and 2010.
In 2010, we adopted FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”), which is now part of ASC Topic 715, “Compensation-Retirement Benefits.” FSP FAS 132(R)-1 provides guidance on our disclosures about the plan assets of our defined benefit pension plans. FSP FAS 132(R)-1 requires us to categorize our plan assets within a three-level fair value hierarchy as follows:
Level 1 - Quoted market prices in active markets for identical assets.
Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 - Unobservable inputs that are not corroborated by market data.
The following table summarizes the fair values and levels, within the fair value hierarchy, for our plan assets at June 30, 2011 and 2010:
The plan assets classified at Level 1 include money market funds, common stock and mutual funds. Quoted market prices in active markets for identical assets are available for investments in this category.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The plan assets classified at Level 2 include fixed income securities consisting of U.S. Government securities, corporate obligations and mortgage obligations. In valuing Level 2 assets, we apply a market or income approach utilizing a number of observable standard inputs. These inputs may be prioritized differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security on any given day.
Relevant information with respect to our pension benefits as of June 30 can be summarized as follows:
The following table discloses, in the aggregate, those plans with benefit obligations in excess of the fair value of plan assets at the June 30 measurement date:
Amounts recognized in accumulated other comprehensive loss at June 30 are as follows:
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during the next fiscal year are as follows:
The following table summarizes the components of net periodic benefit cost at June 30:
In 2010, one of our plans became subject to curtailment accounting. This resulted in the immediate recognition of all of the outstanding prior service cost of the plan, which was approximately $0.3 million. This charge was included in our Specialty Foods segment.
In 2009, one of our plans became subject to curtailment accounting. This resulted in the immediate recognition of all of the outstanding prior service cost of the plan, which was approximately $0.3 million. This charge was included in our corporate expenses within continuing operations because the costs related to the retained liabilities of sold operations.
We have not yet finalized our anticipated funding level for 2012, but, based on initial estimates, we anticipate funding approximately $1.0 million.
Benefit payments estimated for future years are as follows:
Note 8 - Postretirement Benefits
Postretirement Medical and Life Insurance Benefit Plans
We and certain of our operating subsidiaries provide multiple postretirement medical and life insurance benefit plans. We recognize the cost of benefits as the employees render service. Postretirement benefits are funded as incurred. At the end of the year, we discount our plan liabilities using an assumed discount rate. In estimating this rate, we, along with our third-party actuaries, review bond indices, consider yield curve analysis results and the past history of discount rates.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The actuarial present value of benefit obligations summarized below was based on the following assumption:
The net periodic benefit costs were determined utilizing the following beginning-of-the-year assumptions:
Relevant information with respect to our postretirement medical and life insurance benefits as of June 30, can be summarized as follows:
Amounts recognized in accumulated other comprehensive loss at June 30 are as follows:
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during the next fiscal year are as follows:
The following table summarizes the components of net periodic benefit cost at June 30:
We expect to contribute approximately $0.2 million to our postretirement benefit plans in 2012.
Benefit payments estimated for future years are as follows:
For other postretirement benefit measurement purposes, annual increases in medical costs for 2011 are assumed to total approximately 10% per year and gradually decline to 5% by approximately the year 2016 and remain level thereafter. Annual increases in medical costs for 2010 were assumed to total approximately 10% per year and gradually decline to 5% by approximately the year 2015 and remain level thereafter.
Assumed health care cost rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect:
Note 9 - Defined Contribution and Other Employee Plans
We sponsored four defined contribution plans established pursuant to Section 401(k) of the Internal Revenue Code during 2011. Contributions are determined under various formulas, and we contributed to three of the plans in 2011. Costs related to such plans for each of the years ending June 30 were as follows:
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Certain of our subsidiaries also participate in multiemployer plans that provide pension and postretirement health and welfare benefits to the union workers at such locations. The contributions required by our participation in the multiemployer plans for each of the years ending June 30 were as follows:
We offer a deferred compensation plan for select employees who may elect to defer a certain percentage of annual compensation. We do not match any contributions. Each participant earns interest based upon the prime rate of interest, adjusted semi-annually, on their respective deferred compensation balance. Participants are paid out upon retirement or termination. The following table summarizes our liability for total deferred compensation and accrued interest at June 30:
Deferred compensation expense for each of the years ending June 30 was as follows:
Note 10 - Commitments
We have operating leases with initial noncancelable lease terms in excess of one year covering the rental of various facilities and equipment, which expire at various dates through fiscal year 2016. Certain of these leases contain renewal options, some provide options to purchase during the lease term and some require contingent rentals based on usage. The future minimum rental commitments due under these leases are summarized as follows:
Total rent expense, including short-term cancelable leases, during the years ended June 30 is summarized as follows:
Note 11 - Contingencies
In addition to the items discussed below, at June 30, 2011, we were a party to various claims and litigation matters arising in the ordinary course of business. Such matters did not have a material effect on the current-year results of operations and, in our opinion, their ultimate disposition will not have a material effect on our consolidated financial statements.
Approximately 20% of our employees are represented under various collective bargaining agreements, which expire at various times through calendar year 2013. While we believe that labor relations with unionized employees are good, a prolonged labor dispute could have a material effect on our business and results of operations.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
CDSOA provides for the distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers. Our reported CDSOA receipts totaled approximately $14.4 million, $0.9 million and $8.7 million in 2011, 2010 and 2009, respectively. CDSOA remittances have related to certain candles being imported from the People’s Republic of China.
Legislation was enacted in February 2006 to repeal the applicability of CDSOA to duties collected on products imported after September 2007. Accordingly, we may receive some level of annual distributions for an undetermined period of years in the future as the monies collected that relate to entries filed prior to October 2007 are administratively finalized by U.S. Customs. Without further legislative action, we expect these distributions will eventually cease.
In addition to this legislative development, cases have been brought in U.S. courts challenging CDSOA. In two separate cases, the U.S. Court of International Trade (“CIT”) ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. The U.S. Court of Appeals for the Federal Circuit reversed both CIT decisions and the U.S. Supreme Court did not hear either case. This effectively ended the constitutional challenges brought in these cases, but other cases challenging CDSOA remain active.
We are unable to determine, at this time, what the ultimate outcome of other litigation will be, and it is possible that further legal action, potential additional changes in the law and other factors could affect the amount of funds available for distribution, including funds relating to entries prior to October 2007. Accordingly, we cannot predict the amount of future distributions we may receive. Any change in CDSOA distributions could affect our earnings and cash flow.
Note 12 - Restructuring and Impairment Charges
Specialty Foods Segment
In 2010, we closed our dressings and sauces manufacturing operation located in Wilson, New York. During 2010, we recorded restructuring charges of approximately $2.3 million ($1.5 million after taxes). This closure was essentially complete at December 31, 2009. We do not expect any other costs or cash expenditures related to this closure.
In 2009, we consolidated our Atlanta, Georgia dressing operation into our other existing food facilities. During 2009, we recorded restructuring and impairment charges of approximately $0.8 million ($0.5 million after taxes). This closure was essentially complete at September 30, 2008, and the disposition of the associated real estate occurred in December 2008. We do not expect any other costs or cash expenditures related to this closure.
Other
In 2007, we closed our industrial glass operation that was located in Lancaster, Ohio. The majority of the total $5.7 million restructuring and impairment charge related to this closure was recorded in 2007, but we did incur approximately $0.8 million ($0.5 million after taxes) during the year ended June 30, 2009. The 2009 charge was recorded in Corporate expenses. We do not currently expect other significant restructuring costs related to this closure.
Note 13 - Business Segments Information
We have evaluated our operations and have determined that the business is separated into two distinct operating and reportable segments: “Specialty Foods” and “Glassware and Candles.”
Specialty Foods-includes the production, marketing and sale of a family of pourable and refrigerated produce salad dressings, croutons, sauces, fruit glazes, refrigerated produce vegetable and fruit dips, chip dips, dry and frozen pasta and egg noodles, caviar, frozen hearth-baked breads, frozen yeast rolls, sweet rolls and biscuits. Salad dressings, sauces, croutons, frozen pasta and egg noodles, frozen bread products and
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
frozen yeast rolls are sold to both retail and foodservice markets. The remaining products of this business segment are primarily directed to retail markets.
Glassware and Candles-includes the production and marketing of candles in a variety of popular sizes, shapes and scents and other home fragrance products, as well as the distribution of various commercial products, including glassware and candles. This segment’s products are sold primarily to retail markets such as mass merchandisers and food and drug stores, but also, to a lesser extent, to commercial markets.
The following table sets forth reportable segment information with respect to the amount of net sales contributed by each class of similar products of our consolidated net sales in each of the years ending June 30:
Corporate Expenses-include various expenses of a general corporate nature, as well as costs related to certain divested or closed nonfood operations, including the expense associated with retirement plans applicable to those closed units and any real property held for sale. These corporate expenses are generally not directly attributable to the reportable operating segments and therefore have not been allocated to those segments.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following sets forth certain additional financial information attributable to our reportable segments for the years ended June 30 and certain items retained at the corporate level:
(1)
Net sales and long-lived assets are predominantly domestic.
(2)
Operating income represents net sales less operating expenses related to the business segments. All intercompany transactions have been eliminated, and intersegment revenues are not significant.
(3)
Identifiable assets for each segment include those assets used in its operations and intangible assets allocated to purchased businesses. Corporate assets consist principally of cash and equivalents, deferred income taxes and certain real property that is held for sale.
Combined net sales from the two segments attributable to Wal-Mart Stores, Inc. (“Wal-Mart”) for each of the years ending June 30 were as follows:
Combined accounts receivable for the two segments attributable to Wal-Mart at June 30 as a percentage of consolidated accounts receivable were as follows:
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 14 - Selected Quarterly Financial Data (Unaudited)
(1)
Included in the second quarter earnings is income of approximately $0.6 million, net of taxes, or approximately $.02 per share, related to funds received under CDSOA.
(2)
Included in the fourth quarter earnings is income of approximately $8.9 million, net of taxes, or approximately $.33 per share, related to additional funds received under CDSOA.
(3)
Diluted earnings per share are calculated independently for each of the quarters presented. Accordingly, the sum of the quarterly earnings per share amounts may not agree with the fiscal year.
(4)
Included in the first quarter earnings is expense of approximately $0.6 million, net of taxes, or approximately $.02 per share, related to the closing of our dressings and sauces manufacturing operation located in Wilson, New York.
(5)
Included in the second quarter earnings are (A) expense of approximately $0.8 million, net of taxes, or approximately $.03 per share, related to the closing of our dressings and sauces manufacturing operation located in Wilson, New York and (B) income of approximately $0.6 million, net of taxes, or approximately $.02 per share, related to funds received under CDSOA.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management must apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2011.
REPORT OF MANAGEMENT
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
1.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
2.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and
3.
Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has used the framework set forth in the report entitled Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. Management has concluded that our internal control over financial reporting was effective as of the end of the most recent year. Deloitte & Touche LLP has issued a report on the effectiveness of our internal control over financial reporting. This report is set forth on the following page.
There has been no change in our internal control over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lancaster Colony Corporation:
We have audited the internal control over financial reporting of Lancaster Colony Corporation and subsidiaries (the “Company”) as of June 30, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2011 of the Company and our report dated August 29, 2011, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
August 29, 2011
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The information regarding our directors and executive officers, including the identification of the Audit Committee and the Audit Committee financial expert, is incorporated by reference to the information contained in our definitive proxy statement for our November 2011 Annual Meeting of Shareholders (“2011 Proxy Statement”).
The information regarding Section 16(a) beneficial ownership reporting compliance is incorporated by reference to the material under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2011 Proxy Statement.
The information regarding changes, if any, in procedures by which shareholders may recommend nominees to our Board of Directors is incorporated by reference to the information contained in our 2011 Proxy Statement.
The information regarding our Code of Business Ethics is incorporated by reference to the information contained in our 2011 Proxy Statement.
The information regarding executive officer and director compensation is incorporated by reference to the information contained in our 2011 Proxy Statement.
The information regarding Compensation Committee interlocks and insider participation and the Compensation Committee Report is incorporated by reference to the information contained in our 2011 Proxy Statement.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information regarding security ownership of certain beneficial owners and management and securities authorized for issuance under our equity compensation plans is incorporated by reference to the information contained in our 2011 Proxy Statement.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information regarding certain relationships and related transactions and director independence is incorporated by reference to the information contained in our 2011 Proxy Statement.
Item 14.
Item 14.
Principal Accounting Fees and Services
Information regarding fees paid to and services provided by our independent registered public accounting firm during the fiscal years ended June 30, 2011 and 2010 and the pre-approval policies and procedures of the Audit Committee is incorporated by reference to the information contained in our 2011 Proxy Statement.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
(a) (1) Financial Statements. The following consolidated financial statements as of June 30, 2011 and 2010 and for each of the three years in the period ended June 30, 2011, together with the report thereon of Deloitte & Touche LLP dated August 29, 2011, are included in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2011 and 2010
Consolidated Statements of Income for the years ended June 30, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended June 30, 2011, 2010 and 2009
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2011, 2010 and
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules. Included in Part IV of this report is the following additional financial data that should be read in conjunction with the consolidated financial statements included in Item 8 of this report:
Schedule II - Valuation and Qualifying Accounts.
Supplemental schedules not included with the additional financial data have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(a) (3) Exhibits Required by Item 601 of Regulation S-K and Item 15(b). See Index to Exhibits following “Schedule II - Valuation and Qualifying Accounts.”
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
For each of the three years in the period ended June 30, 2011
Notes:
(A)
Represents uncollectible accounts written-off net of recoveries.
(B)
For 2009, includes recovery of previously written-off bad debt of approximately $0.7 million related to a customer within the Glassware and Candles segment.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-K
JUNE 30, 2011
INDEX TO EXHIBITS
(a)
Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates.
(b)
To be furnished by amendment pursuant to Rule 405 of Regulation S-T within 30 days of the filing of this report.