NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lancaster Colony Corporation and our wholly-owned subsidiaries, collectively referred to as “we,” “us,” “our,” “registrant” or the “Company” and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and SEC Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the interim condensed consolidated financial statements are considered to be of a normal recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto contained in our
2016
Annual Report on Form 10-K. Unless otherwise noted, the term “year” and references to a particular year pertain to our fiscal year, which begins on July 1 and ends on June 30; for example,
2017
refers to fiscal
2017
, which is the period from
July 1, 2016
to
June 30, 2017
.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation, except for those acquired as part of a business combination, which are stated at fair value at the time of purchase. Purchases of property, plant and equipment included in Accounts Payable and excluded from the property additions and the change in accounts payable in the Condensed Consolidated Statements of Cash Flows were as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
Construction in progress in Accounts Payable
|
$
|
154
|
|
|
$
|
616
|
|
Accrued Distribution
Accrued distribution costs included in Accrued Liabilities were
$6.0 million
and
$4.5 million
at
September 30, 2016
and
June 30, 2016
, respectively.
Earnings Per Share
Earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock and common stock equivalents (restricted stock and stock-settled stock appreciation rights) outstanding during each period. Unvested shares of restricted stock granted to employees are considered participating securities since employees receive nonforfeitable dividends prior to vesting and, therefore, are included in the earnings allocation in computing EPS under the two-class method. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to common shareholders by the diluted weighted average number of common shares outstanding during the period, which includes the dilutive potential common shares associated with nonparticipating restricted stock and stock-settled stock appreciation rights.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Basic and diluted net income per common share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2016
|
|
2015
|
Net income
|
$
|
33,400
|
|
|
$
|
27,628
|
|
Net income available to participating securities
|
(66
|
)
|
|
(35
|
)
|
Net income available to common shareholders
|
$
|
33,334
|
|
|
$
|
27,593
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
27,363
|
|
|
27,319
|
|
Incremental share effect from:
|
|
|
|
Nonparticipating restricted stock
|
5
|
|
|
5
|
|
Stock-settled stock appreciation rights
|
62
|
|
|
20
|
|
Weighted average common shares outstanding – diluted
|
27,430
|
|
|
27,344
|
|
|
|
|
|
Net income per common share – basic and diluted
|
$
|
1.22
|
|
|
$
|
1.01
|
|
Accumulated Other Comprehensive Loss
The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2016
|
|
2015
|
Accumulated other comprehensive loss at beginning of period
|
$
|
(11,350
|
)
|
|
$
|
(10,057
|
)
|
Defined Benefit Pension Plan Items:
|
|
|
|
Amortization of unrecognized net loss
|
179
|
|
|
135
|
|
Postretirement Benefit Plan Items:
|
|
|
|
Amortization of unrecognized net gain
|
(9
|
)
|
|
(4
|
)
|
Amortization of prior service credit
|
(45
|
)
|
|
(1
|
)
|
Total other comprehensive income, before tax
|
125
|
|
|
130
|
|
Total tax expense
|
(47
|
)
|
|
(49
|
)
|
Other comprehensive income, net of tax
|
78
|
|
|
81
|
|
Accumulated other comprehensive loss at end of period
|
$
|
(11,272
|
)
|
|
$
|
(9,976
|
)
|
Significant Accounting Policies
There were no changes to our Significant Accounting Policies from those disclosed in our
2016
Annual Report on Form 10-K.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance to simplify the accounting for stock-based compensation. The amendments include changes to the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance will be effective for us in fiscal 2018 including interim periods. The transition method that will be applied on adoption varies for each of the amendments. We are currently evaluating the impact of this guidance.
In May 2014, the FASB issued new accounting guidance for the recognition of revenue under the principle: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The guidance will be effective for us in fiscal 2019 including interim periods and will require either retrospective application to each prior period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. The FASB issued subsequent clarifications of this new accounting guidance in 2016. We are currently evaluating the impact of this guidance.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
In February 2016, the FASB issued new accounting guidance to require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record a right-of-use asset and a lease liability based upon the present value of the lease payments. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the consolidated financial statements. The guidance will be effective for us in fiscal 2020 including interim periods using a modified retrospective approach. We are currently evaluating the impact of this guidance.
Recently Adopted Accounting Standards
In July 2015, the FASB issued new accounting guidance which requires entities to measure most inventory “at the lower of cost or net realizable value,” thereby simplifying current guidance. Under current guidance an entity must measure inventory at the lower of cost or market, where market is defined as one of three different measures, one of which is net realizable value. We adopted this guidance effective July 1, 2016 on a prospective basis, and it did not have a material impact on our condensed consolidated financial statements.
In August 2016, the FASB issued new accounting guidance to reduce diversity in practice in how certain cash receipts and cash payments are presented in the statement of cash flows. Current guidance is either unclear or does not include specific requirements for the classification of these transactions. The majority of the new provisions are not currently applicable to us, and those that are applicable are consistent with our current practice. The guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 using a retrospective transition method for all periods presented. Early adoption is permitted provided that all amendments are adopted in the same period. We adopted this guidance effective July 1, 2016, and it did not have an impact on our Condensed Consolidated Statements of Cash Flows.
Note 2 – Long-Term Debt
At
September 30, 2016
and
June 30, 2016
, we had an unsecured credit facility (“Facility”) under which we could borrow, on a revolving credit basis, up to a maximum of
$150 million
at any one time, with potential to expand the total credit availability to
$225 million
subject to us obtaining consent of the issuing banks and certain other conditions. The Facility expires on
April 8, 2021
, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an alternative base rate defined in the Facility, at our option. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have outstanding borrowings under the Facility, they will be classified as long-term debt.
At
September 30, 2016
and
June 30, 2016
, we had
no
borrowings outstanding under the Facility. At
September 30, 2016
, we had
$5.1 million
of standby letters of credit outstanding, which reduced the amount available for borrowing on the Facility. We paid
no
interest for the
three
months ended
September 30, 2016
and
2015
.
The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions. There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a consolidated leverage ratio not greater than 3 to 1 at all times. The interest coverage ratio is calculated by dividing Consolidated EBIT by Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Debt by Consolidated EBITDA. All financial terms used in the covenant calculations are defined more specifically in the Facility.
Note 3 – Commitments and Contingencies
At
September 30, 2016
, 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.
Note 4 – Goodwill and Other Intangible Assets
Goodwill attributable to the Specialty Foods segment was
$143.8 million
at
September 30, 2016
and
June 30, 2016
.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes our identifiable other intangible assets, all included in the Specialty Foods segment:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
June 30,
2016
|
Tradename (30-year life)
|
|
|
|
Gross carrying value
|
$
|
34,500
|
|
|
$
|
34,500
|
|
Accumulated amortization
|
(1,773
|
)
|
|
(1,485
|
)
|
Net carrying value
|
$
|
32,727
|
|
|
$
|
33,015
|
|
Trademarks (40-year life)
|
|
|
|
Gross carrying value
|
$
|
370
|
|
|
$
|
370
|
|
Accumulated amortization
|
(235
|
)
|
|
(232
|
)
|
Net carrying value
|
$
|
135
|
|
|
$
|
138
|
|
Customer Relationships (10 to 15-year life)
|
|
|
|
Gross carrying value
|
$
|
13,920
|
|
|
$
|
13,920
|
|
Accumulated amortization
|
(6,321
|
)
|
|
(6,048
|
)
|
Net carrying value
|
$
|
7,599
|
|
|
$
|
7,872
|
|
Technology / Know-how (10-year life)
|
|
|
|
Gross carrying value
|
$
|
3,900
|
|
|
$
|
3,900
|
|
Accumulated amortization
|
(601
|
)
|
|
(504
|
)
|
Net carrying value
|
$
|
3,299
|
|
|
$
|
3,396
|
|
Non-compete Agreements (5-year life)
|
|
|
|
Gross carrying value
|
$
|
600
|
|
|
$
|
600
|
|
Accumulated amortization
|
(185
|
)
|
|
(155
|
)
|
Net carrying value
|
$
|
415
|
|
|
$
|
445
|
|
Total net carrying value
|
$
|
44,175
|
|
|
$
|
44,866
|
|
Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses, was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2016
|
|
2015
|
Amortization expense
|
$
|
691
|
|
|
$
|
746
|
|
Total annual amortization expense for each of the next five years is estimated to be as follows:
|
|
|
|
|
|
|
2018
|
$
|
2,764
|
|
2019
|
$
|
2,764
|
|
2020
|
$
|
2,729
|
|
2021
|
$
|
2,644
|
|
2022
|
$
|
2,594
|
|
Note 5 – Income Taxes
Accrued federal income taxes of
$12.5 million
and accrued state and local income taxes of
$1.0 million
were included in Accrued Liabilities at
September 30, 2016
. Prepaid federal income taxes of
$4.3 million
and prepaid state and local income taxes of
$0.5 million
were included in Other Current Assets at
June 30, 2016
.
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 6 – Business Segment Information
The
September 30, 2016
identifiable assets by reportable segment are generally consistent with that of
June 30, 2016
. The following summary of financial information is consistent with the basis of segmentation and measurement of segment profit or loss presented in our
June 30, 2016
consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2016
|
|
2015
|
Net Sales
|
$
|
291,361
|
|
|
$
|
294,085
|
|
Operating Income
|
|
|
|
Specialty Foods
|
$
|
54,825
|
|
|
$
|
44,961
|
|
Corporate Expenses
|
(4,071
|
)
|
|
(3,073
|
)
|
Total
|
$
|
50,754
|
|
|
$
|
41,888
|
|
Note 7 – Stock-Based Compensation
There have been no changes to our stock-based compensation plans from those disclosed in our
2016
Annual Report on Form 10-K.
Our stock-settled stock appreciation rights (“SSSARs”) compensation expense was
$0.5 million
and
$0.3 million
for the three months ended
September 30, 2016
and
2015
, respectively. At
September 30, 2016
, there was
$2.6 million
of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of
2 years
.
Our restricted stock compensation expense was
$0.6 million
and
$0.4 million
for the three months ended
September 30, 2016
and
2015
, respectively. At
September 30, 2016
, there was
$2.9 million
of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of
2 years
.