LANC-2014.3.31-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
 
Form 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 000-04065 
 
 
 
Lancaster Colony Corporation
(Exact name of registrant as specified in its charter)
 
 
 
 
Ohio
 
13-1955943
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
37 West Broad Street
Columbus, Ohio
 
43215
(Address of principal executive offices)
 
(Zip Code)
 
614-224-7141
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated filer
 
ý
Accelerated filer
 
¨
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of April 28, 2014, there were approximately 27,338,000 shares of Common Stock, without par value, outstanding.




LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 

2



PART I – FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share data)
March 31, 
 2014
 
June 30, 
 2013
ASSETS
Current Assets:
 
 
 
Cash and equivalents
$
201,328

 
$
123,385

Receivables (less allowance for doubtful accounts, March-$417; June-$340)
61,756

 
56,337

Inventories:
 
 
 
Raw materials
27,460

 
25,782

Finished goods
40,277

 
42,027

Total inventories
67,737

 
67,809

Deferred income taxes and other current assets
33,312

 
22,550

Current assets of discontinued operations
—

 
55,977

Total current assets
364,133

 
326,058

Property, Plant and Equipment:
 
 
 
Land, buildings and improvements
106,207

 
105,302

Machinery and equipment
231,233

 
227,885

Total cost
337,440

 
333,187

Less accumulated depreciation
173,454

 
165,113

Property, plant and equipment-net
163,986

 
168,074

Other Assets:
 
 
 
Goodwill
89,840

 
89,840

Other intangible assets-net
5,613

 
6,322

Other noncurrent assets
6,693

 
7,069

Noncurrent assets of discontinued operations
—

 
22,601

Total
$
630,265

 
$
619,964

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Accounts payable
$
40,261

 
$
36,459

Accrued liabilities
30,452

 
32,602

Current liabilities of discontinued operations
—

 
8,116

Total current liabilities
70,713

 
77,177

Other Noncurrent Liabilities
22,454

 
23,291

Deferred Income Taxes
18,589

 
18,274

Shareholders’ Equity:
 
 
 
Preferred stock-authorized 3,050,000 shares; outstanding-none

 

Common stock-authorized 75,000,000 shares; outstanding – March-27,337,826 shares; June-27,323,721 shares
104,127

 
102,622

Retained earnings
1,157,912

 
1,139,213

Accumulated other comprehensive loss
(8,188
)
 
(8,391
)
Common stock in treasury, at cost
(735,342
)
 
(732,222
)
Total shareholders’ equity
518,509

 
501,222

Total
$
630,265

 
$
619,964

See accompanying notes to condensed consolidated financial statements.

3



LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
(Amounts in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Net Sales
$
241,849

 
$
247,098

 
$
782,267

 
$
768,613

Cost of Sales
189,941

 
193,265

 
591,565

 
581,613

Gross Margin
51,908

 
53,833

 
190,702

 
187,000

Selling, General and Administrative Expenses
23,073

 
23,113

 
69,251

 
69,305

Operating Income
28,835

 
30,720

 
121,451

 
117,695

Interest Income and Other-Net
(204
)
 
(15
)
 
(328
)
 
(6
)
Income From Continuing Operations Before Income Taxes
28,631

 
30,705

 
121,123

 
117,689

Taxes Based on Income
9,731

 
9,972

 
41,038

 
39,230

Income From Continuing Operations
18,900

 
20,733

 
80,085

 
78,459

Discontinued Operations, Net of Tax:
 
 
 
 
 
 
 
Income from discontinued operations
325

 
1,100

 
3,175

 
5,313

Loss on sale of discontinued operations
(29,601
)
 
—

 
(29,601
)
 
—

Total discontinued operations
(29,276
)
 
1,100

 
(26,426
)
 
5,313

Net (Loss) Income
$
(10,376
)
 
$
21,833

 
$
53,659

 
$
83,772

Income Per Common Share From Continuing Operations:
 
 
 
 
 
 
 
Basic and diluted
$
0.69

 
$
0.76

 
$
2.93

 
$
2.87

(Loss) Income Per Common Share From Discontinued Operations:
 
 
 
 
 
 
 
Basic
$
(1.07
)
 
$
0.04

 
$
(0.97
)
 
$
0.20

Diluted
$
(1.07
)
 
$
0.04

 
$
(0.97
)
 
$
0.19

Net (Loss) Income Per Common Share:
 
 
 
 
 
 
 
Basic
$
(0.38
)
 
$
0.80

 
$
1.97

 
$
3.06

Diluted
$
(0.38
)
 
$
0.80

 
$
1.96

 
$
3.06

 
 
 
 
 
 
 
 
Cash Dividends Per Common Share
$
0.44

 
$
0.38

 
$
1.28

 
$
6.12

Weighted Average Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
27,261

 
27,259

 
27,258

 
27,244

Diluted
27,297

 
27,287

 
27,303

 
27,275

See accompanying notes to condensed consolidated financial statements.


4



LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Net (Loss) Income
$
(10,376
)
 
$
21,833

 
$
53,659

 
$
83,772

Other Comprehensive Income:
 
 
 
 
 
 
 
Defined Benefit Pension and Postretirement Benefit Plans:
 
 
 
 
 
 
 
Amortization of loss, before tax
109

 
166

 
325

 
500

Amortization of prior service asset, before tax
(1
)
 
(1
)
 
(3
)
 
(3
)
Total Other Comprehensive Income, Before Tax
108

 
165

 
322

 
497

Tax Attributes of Items in Other Comprehensive Income:
 
 
 
 
 
 
 
Amortization of loss, tax
(41
)
 
(62
)
 
(120
)
 
(186
)
Amortization of prior service asset, tax
1

 
1

 
1

 
1

Total Tax Expense
(40
)
 
(61
)
 
(119
)
 
(185
)
Other Comprehensive Income, Net of Tax
68

 
104

 
203

 
312

Comprehensive (Loss) Income
$
(10,308
)
 
$
21,937

 
$
53,862

 
$
84,084

See accompanying notes to condensed consolidated financial statements.


5



LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Nine Months Ended 
 March 31,
(Amounts in thousands)
2014
 
2013
Cash Flows From Operating Activities:
 
 
 
Net income
$
53,659

 
$
83,772

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
15,596

 
15,124

Deferred income taxes and other noncash changes
5,144

 
(652
)
Stock-based compensation expense
1,777

 
2,211

(Gain) loss on sale of property
(6
)
 
318

Loss on sale of discontinued operations
44,027

 
—

Pension plan activity
(182
)
 
(45
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(10,813
)
 
(19,463
)
Inventories
7,901

 
18,196

Other current assets
(14,529
)
 
(5,796
)
Accounts payable and accrued liabilities
(3,779
)
 
1,243

Net cash provided by operating activities
98,795

 
94,908

Cash Flows From Investing Activities:
 
 
 
Payments on property additions
(8,143
)
 
(19,125
)
Proceeds from sale of property
6

 
1,099

Proceeds from sale of discontinued operations
25,616

 
—

Other-net
(854
)
 
(788
)
Net cash provided by (used in) investing activities
16,625

 
(18,814
)
Cash Flows From Financing Activities:
 
 
 
Purchase of treasury stock
(3,120
)
 
(609
)
Payment of dividends
(34,960
)
 
(167,134
)
Excess tax benefit from stock-based compensation
927

 
624

Decrease in cash overdraft balance
(324
)
 
—

Net cash used in financing activities
(37,477
)
 
(167,119
)
Net change in cash and equivalents
77,943

 
(91,025
)
Cash and equivalents at beginning of year
123,385

 
191,635

Cash and equivalents at end of period
$
201,328

 
$
100,610

Supplemental Disclosure of Operating Cash Flows:
 
 
 
Cash paid during the period for income taxes
$
36,941

 
$
47,416

See accompanying notes to condensed consolidated financial statements.


6



LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements 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. 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 2013 Annual Report on Form 10-K. The current-year and prior-year results reflect the classification of the sold candle manufacturing and marketing operations as discontinued operations. See further discussion in Note 2. 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, 2014 refers to fiscal 2014, which is the period from July 1, 2013 to June 30, 2014.
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 Condensed Consolidated Statements of Cash Flows were as follows:
 
 
March 31,
 
2014
 
2013
Construction in progress in accounts payable
$
1,465

 
$
2,682

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.


7

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


Basic and diluted income per common share from continuing operations were calculated as follows:
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Income from continuing operations
$
18,900

 
$
20,733

 
$
80,085

 
$
78,459

Income from continuing operations available to participating securities
(21
)
 
(28
)
 
(139
)
 
(312
)
Income from continuing operations available to common shareholders
$
18,879

 
$
20,705

 
$
79,946

 
$
78,147

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
27,261

 
27,259

 
27,258

 
27,244

Incremental share effect from:
 
 
 
 
 
 
 
Nonparticipating restricted stock
2

 
2

 
3

 
3

Stock-settled stock appreciation rights
34

 
26

 
42

 
28

Weighted average common shares outstanding – diluted
27,297

 
27,287

 
27,303

 
27,275

 
 
 
 
 
 
 
 
Income per common share from continuing operations – basic and diluted
$
0.69

 
$
0.76

 
$
2.93

 
$
2.87

Reclassifications Out of Accumulated Other Comprehensive Loss
The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Accumulated other comprehensive loss at beginning of period
$
(8,256
)
 
$
(11,954
)
 
$
(8,391
)
 
$
(12,162
)
Defined Benefit Pension Plan Items:
 
 
 
 
 
 
 
Amortization of unrecognized net loss (1)
115

 
172

 
345

 
516

Postretirement Benefit Plan Items:
 
 
 
 
 
 
 
Amortization of unrecognized net gain (1)
(6
)
 
(6
)
 
(20
)
 
(16
)
Amortization of prior service asset (1)
(1
)
 
(1
)
 
(3
)
 
(3
)
Total other comprehensive income, before tax
108

 
165

 
322

 
497

Total tax expense
(40
)
 
(61
)
 
(119
)
 
(185
)
Other comprehensive income, net of tax
68

 
104

 
203

 
312

Accumulated other comprehensive loss at end of period
$
(8,188
)
 
$
(11,850
)
 
$
(8,188
)
 
$
(11,850
)
(1) Included in the computation of net periodic benefit income/cost. See Notes 8 and 9 for additional information.
Significant Accounting Policies
There were no changes to our Significant Accounting Policies from those disclosed in our 2013 Annual Report on Form 10-K.


8

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


Note 2 – Discontinued Operations
On January 30, 2014, we sold effectively all of the net operating assets of our candle manufacturing and marketing operations for approximately $28 million in cash. Net proceeds from the sale, after post-closing adjustments and transaction costs, totaled approximately $25.6 million. The transaction resulted in a pretax loss of approximately $44.0 million and a tax benefit of approximately $14.4 million, which were recorded in the quarter ended March 31, 2014. The financial results of these operations are reported as discontinued operations for all periods presented. Future discontinued operations results may be impacted by potential changes in certain estimated liabilities that were retained in the sale. The discontinued operations, previously included in our Glassware and Candles segment, had net sales of approximately $8.4 million and $89.4 million and $32.4 million and $128.0 million for the three and nine months ended March 31, 2014 and 2013, respectively, and pretax losses of approximately $43.7 million and $39.3 million, including the pretax loss on sale, and pretax income of $1.5 million and $8.0 million for the three and nine months ended March 31, 2014 and 2013, respectively.
At June 30, 2013, the assets and liabilities of our sold operations were as follows:
 
June 30, 
 2013
Cash
$
1

Receivables
14,061

Inventory
41,342

Other current assets
573

Current assets of discontinued operations
55,977

Property, plant and equipment
21,621

Other noncurrent assets
980

Noncurrent assets of discontinued operations
22,601

Total assets of discontinued operations
$
78,578

 
 
Accounts payable
$
5,431

Accrued liabilities
2,685

Current liabilities of discontinued operations
$
8,116

    
Note 3 – Impact of Recently Issued Accounting Standards
There were no recently issued accounting pronouncements that impact our consolidated financial statements.

Note 4 – Goodwill and Other Intangible Assets
Goodwill attributable to the Specialty Foods segment was approximately $89.8 million at March 31, 2014 and June 30, 2013.
 
The following table summarizes our identifiable other intangible assets, all included in the Specialty Foods segment:
 
 
March 31, 
 2014
 
June 30, 
 2013
Trademarks (40-year life)
 
 
 
Gross carrying value
$
370

 
$
370

Accumulated amortization
(211
)
 
(205
)
Net carrying value
$
159

 
$
165

Customer Relationships (12 to 15-year life)
 
 
 
Gross carrying value
$
13,020

 
$
13,020

Accumulated amortization
(7,566
)
 
(6,863
)
Net carrying value
$
5,454

 
$
6,157

Total net carrying value
$
5,613

 
$
6,322


9

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


Amortization expense for our intangible assets was as follows:
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Amortization expense
$
236

 
$
236

 
$
709

 
$
708

Total annual amortization expense for each of the next five years is estimated to be as follows:
 
 
 
2015
$
946

2016
$
775

2017
$
604

2018
$
604

2019
$
604


Note 5 – Long-Term Debt
At March 31, 2014 and June 30, 2013, we had an unsecured credit agreement under which we may borrow, on a revolving credit basis, up to a maximum of $120 million at any one time, with potential to expand the total credit availability to $200 million based on obtaining consent of the issuing banks and certain other conditions. The facility expires on April 18, 2017, 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 credit agreement, 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. Based on the long-term nature of this facility, when we have outstanding borrowings under this facility, we will classify the outstanding balance as long-term debt.
At March 31, 2014 and June 30, 2013, we had no borrowings outstanding under this facility. At March 31, 2014, we had approximately $3.7 million of standby letters of credit outstanding, which reduced the amount available for borrowing under the credit agreement. We paid no interest for the three and nine months ended March 31, 2014 and 2013. At March 31, 2014 and June 30, 2013, we were in compliance with all applicable provisions and covenants of this facility, and we exceeded the requirements of the financial covenants by substantial margins. At March 31, 2014, we were not aware of any event that would constitute a default under the facility.
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 (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).

Note 6 – Income Taxes
Prepaid Federal, state and local income taxes of approximately $21.4 million and $7.5 million were included in deferred income taxes and other current assets at March 31, 2014 and June 30, 2013, respectively. The change was due to the impact of the loss on the sale of our candle manufacturing and marketing operations.
The gross tax contingency reserve at March 31, 2014 was approximately $0.9 million and consisted of tax liabilities of approximately $0.5 million and penalties and interest of approximately $0.4 million. We have classified none of the gross tax contingency reserve as current liabilities as none of these amounts are expected to be resolved within the next 12 months. The entire liability of approximately $0.9 million was included in other noncurrent 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. We recognize interest and penalties related to these tax liabilities in income tax expense.


10

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


Note 7 – Stock-Based Compensation
Our shareholders 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-Settled Stock Appreciation Rights
We use 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.
In the nine months ended March 31, 2014 and 2013, we granted SSSARs under the terms of our 2005 Plan. The following table summarizes information relating to these grants:
 
 
2014
 
2013
SSSARs granted
146

 
108

Weighted average grant date fair value per right
$
11.84

 
$
9.04

Weighted average assumptions used in fair value calculations:
 
 
 
Risk-free interest rate
0.75
%
 
0.33
%
Dividend yield
1.97
%
 
2.09
%
Volatility factor of the expected market price of our common stock
22.35
%
 
23.23
%
Weighted average expected life in years
3.12

 
2.67

Weighted average estimated forfeiture rate
3
%
 
2
%
For 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. The expected average life was determined based on historical exercise experience for this type of grant. The SSSARs from each grant 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 recognize compensation expense over the requisite service period. Compensation expense 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 Condensed Consolidated Statements of Cash Flows. The following table summarizes SSSARs compensation expense and tax benefits recorded:
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Compensation expense
$
304

 
$
253

 
$
804

 
$
973

Tax benefits
$
106

 
$
89

 
$
281

 
$
341

Intrinsic value of exercises
$
2,343

 
$
87

 
$
2,431

 
$
1,371

Gross windfall tax benefits
$
820

 
$
41

 
$
851

 
$
490

The total fair values of SSSARs vested were as follows:
 
Nine Months Ended 
 March 31,
 
2014
 
2013
Fair value of vested rights
$
1,138

 
$
1,469


11

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


The following table summarizes the activity relating to SSSARs granted under the 2005 Plan for the nine months ended March 31, 2014:
 
 
Number
of Rights
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life in
Years
 
Aggregate
Intrinsic
Value
Outstanding at beginning of period
374

 
$
66.42

 
 
 
 
Exercised
(136
)
 
$
63.59

 
 
 
 
Granted
146

 
$
89.16

 
 
 
 
Forfeited
(11
)
 
$
68.32

 
 
 
 
Outstanding at end of period
373

 
$
76.27

 
3.77
 
$
8,635

Exercisable and vested at end of period
98

 
$
64.62

 
2.47
 
$
3,410

Vested and expected to vest at end of period
366

 
$
76.23

 
3.76
 
$
8,485

At March 31, 2014, there was approximately $2.3 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of approximately 2.45 years.
Restricted Stock
We use 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 the nine months ended March 31, 2014 and 2013, we granted shares of restricted stock to various employees under the terms of the 2005 Plan. The following table summarizes information relating to these grants:
 
Nine Months Ended 
 March 31,
 
2014
 
2013
Employees
 
 
 
Restricted stock granted
24

 
8

Grant date fair value
$
2,190

 
$
572

Weighted average grant date fair value per award
$
89.21

 
$
72.67

Weighted average estimated forfeiture rate
5
%
 
3
%
The restricted stock under these employee grants vests on the third anniversary of the grant date. Under the terms of our grants, employees receive dividends on unforfeited restricted stock regardless of their vesting status. Approximately 6,000 and 23,000 shares of employee restricted stock vested in the nine months ended March 31, 2014 and 2013, respectively.
In November 2013 and 2012, we granted shares of restricted stock to our seven nonemployee directors under the terms of the 2005 Plan. The following table summarizes information relating to each of these grants:
 
Nine Months Ended 
 March 31,
 
2014
 
2013
Nonemployee directors
 
 
 
Restricted stock granted
6

 
7

Grant date fair value
$
490

 
$
490

Weighted average grant date fair value per award
$
84.42

 
$
73.29


12

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


The 2014 grant vests over a one-year period, and all of these shares are expected to vest. Dividends earned on the stock during the vesting period will be paid to the directors at the time the stock vests. Approximately 7,000 shares of nonemployee director restricted stock vested in the nine months ended March 31, 2014 and 2013 and the directors were paid the related dividends.
We recognize compensation expense over the requisite service period. Compensation expense 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 Condensed Consolidated Statements of Cash Flows. The following table summarizes restricted stock compensation expense and tax benefits recorded:
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Compensation expense
$
366

 
$
303

 
$
1,027

 
$
1,086

Tax benefits
$
155

 
$
106

 
$
386

 
$
380

Gross windfall tax benefits
$
68

 
$
124

 
$
76

 
$
134

 
The total fair values of restricted stock vested were as follows:

 
Nine Months Ended 
 March 31,
 
2014
 
2013
Fair value of vested shares
$
877

 
$
1,837

 
The following table summarizes the activity relating to restricted stock granted under the 2005 Plan for the nine months ended March 31, 2014:
 
 
Number of
Shares
 
Weighted Average
Grant Date Fair
Value
Unvested restricted stock at beginning of period
45

 
$
68.16

Granted
30

 
$
88.30

Vested
(13
)
 
$
65.80

Forfeited
(2
)
 
$
67.47

Unvested restricted stock at end of period
60

 
$
78.89

At March 31, 2014, there was approximately $3.1 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of approximately 2.28 years.

Note 8 – Pension Benefits
We sponsor multiple defined benefit pension plans that have covered certain union workers. However, as a result of prior-years' restructuring activities, for all periods presented, we no longer have any 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.

13

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


The following table summarizes the components of net periodic benefit income for our pension plans:
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit income
 
 
 
 
 
 
 
Interest cost
$
439

 
$
408

 
$
1,315

 
$
1,224

Expected return on plan assets
(614
)
 
(595
)
 
(1,842
)
 
(1,785
)
Amortization of unrecognized net loss
115

 
172

 
345

 
516

Net periodic benefit income
$
(60
)
 
$
(15
)
 
$
(182
)
 
$
(45
)
For the three and nine months ended March 31, 2014, we made no pension plan contributions and we do not expect to make any contributions to our pension plans during 2014.

Note 9 – Postretirement Benefits
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.
The following table summarizes the components of net periodic benefit cost for our postretirement plans:
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
8

 
$
8

 
$
24

 
$
24

Interest cost
33

 
28

 
97

 
84

Amortization of unrecognized net gain
(6
)
 
(6
)
 
(20
)
 
(16
)
Amortization of prior service asset
(1
)
 
(1
)
 
(3
)
 
(3
)
Net periodic benefit cost
$
34

 
$
29

 
$
98

 
$
89

For the three and nine months ended March 31, 2014, we made approximately $28,000 and $93,000, respectively, in contributions to our postretirement medical and life insurance benefit plans. We expect to make approximately $0.1 million more in contributions to our postretirement medical and life insurance benefit plans during the remainder of 2014.

Note 10 – Commitments and Contingencies
At March 31, 2014, 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.
The Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) provides for the distribution of monies collected by U.S. Customs from anti-dumping cases to qualifying domestic producers. Our CDSOA receipts totaled approximately $0.1 million in the second quarter of 2014, as compared to approximately $0.3 million in the second quarter of 2013. These receipts are included in income from discontinued operations in the Condensed Consolidated Statements of Income.
As of January 30, 2014, we sold substantially all of the net operating assets of our candle manufacturing and marketing operations to an unaffiliated buyer. While we retained the right to seek further CDSOA remittances relating to past periods, we are currently unaware of any funds made available to manufacturers who may have otherwise qualified for CDSOA remittances but have exited the applicable business. Accordingly, we cannot predict the amount of future distributions, if any, we may receive. U.S. Customs has advised affected domestic producers that it is possible that CDSOA distributions which we received could be subject to clawback until the resolution of outstanding litigation. We believe that the likelihood of clawback is remote. Any change in CDSOA distributions could affect our earnings and cash flow.


14

LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)


Note 11 – Business Segments Information
The following summary of financial information by business segment is consistent with the basis of segmentation and measurement of segment profit or loss presented in our June 30, 2013 consolidated financial statements and excludes the results of the Glassware and Candles segment, which are classified as discontinued operations. The March 31, 2014 identifiable assets by reportable segment are generally consistent with that of June 30, 2013, as reflective of discontinued operations.
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
2014
 
2013
 
2014
 
2013
Net Sales
 
 
 
 
 
 
 
Specialty Foods
$
241,849

 
$
247,098

 
$
782,267

 
$
768,613

Operating Income
 
 
 
 
 
 
 
Specialty Foods
$
31,408

 
$
33,648

 
$
130,364

 
$
126,790

Corporate Expenses
(2,573
)
 
(2,928
)
 
(8,913
)
 
(9,095
)
Total
$
28,835

 
$
30,720

 
$
121,451

 
$
117,695



15




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2014 refers to fiscal 2014, which is the period from July 1, 2013 to June 30, 2014.
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto, all included elsewhere in this report. The forward-looking statements in this section and other parts of this report involve risks, uncertainties and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements due to these factors. For more information, see the section below entitled “Forward-Looking Statements.”
OVERVIEW
Business Overview
Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice markets.
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. Consistent with this strategy, on January 30, 2014, we sold effectively all of the net operating assets of our candle manufacturing and marketing operations for approximately $28 million in cash. Net proceeds from the sale, after post-closing adjustments and transaction costs, totaled approximately $25.6 million. The transaction resulted in a pretax loss of approximately $44.0 million and a tax benefit of approximately $14.4 million, which were recorded in the quarter ended March 31, 2014. The financial results of these operations are reported as discontinued operations for all periods presented.
Prior to the divestiture noted above, our operations were organized in two reportable segments: “Specialty Foods” and “Glassware and Candles.” With the completion of the sale, our business operations are now exclusive to the manufacturing and marketing of specialty food products. Our sales are predominately domestic.
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.
The objective of our food operations is to grow both retail and foodservice sales over time by:
•
leveraging the strength of our retail brands to increase current product sales, introduce new products and expand to new channels;
•
growing our foodservice sales through the strength of our reputation in product development and quality; and
•
pursuing acquisitions that meet our strategic criteria.
We have made substantial capital investments to support our existing food operations and future growth opportunities. Based on our current plans and expectations, we believe that our total capital expenditures for 2014 could total approximately $15 million, depending on the timing and approval of certain projects currently being evaluated.
Summary of 2014 Results
The following is a comparative overview of our consolidated operating results for the three and nine months ended March 31, 2014 and 2013. The current-year and prior-year results reflect the classification of the Glassware and Candles segment as discontinued operations.
Net sales for the three months ended March 31, 2014 decreased 2% to approximately $241.8 million from the prior-year total of $247.1 million. This sales decrease reflects lower retail sales. The third quarter gross margin decreased 4% to

16



approximately $51.9 million from the prior-year total of $53.8 million. The lower level of net retail sales led to this decline. Income from continuing operations for the three months ended March 31, 2014 totaled approximately $18.9 million, or $0.69 per diluted share. Income from continuing operations totaled approximately $20.7 million in the third quarter of the prior year, or $0.76 per diluted share.
Year-to-date net sales for the period ended March 31, 2014 increased 2% to approximately $782.3 million from the prior-year total of $768.6 million. Greater sales volumes to the foodservice channel drove this increase. Consistent with the growth in net sales, gross margin increased 2% to approximately $190.7 million from the prior year-to-date total of $187.0 million. Income from continuing operations for the nine months ended March 31, 2014 totaled approximately $80.1 million, or $2.93 per diluted share. Income from continuing operations totaled approximately $78.5 million in the nine months ended March 31, 2013, or $2.87 per diluted share.
RESULTS OF CONSOLIDATED OPERATIONS
Net Sales and Gross Margin
 
 
Three Months Ended 
 March 31,
 
 
 
 
 
Nine Months Ended 
 March 31,
 
 
 
 
(Dollars in thousands)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Sales - Specialty Foods
$
241,849

 
$
247,098

 
$
(5,249
)
 
(2
)%
 
$
782,267

 
$
768,613

 
$
13,654

 
2
%
Gross Margin
$
51,908

 
$
53,833

 
$
(1,925
)
 
(4
)%
 
$
190,702

 
$
187,000

 
$
3,702

 
2
%
Gross Margin as a Percentage of Net Sales
21.5
%
 
21.8
%
 
 
 
 
 
24.4
%
 
24.3
%
 
 
 
 
Net sales for the third quarter and nine months ended March 31, 2014 decreased 2% and increased 2%, respectively. Retail sales declined approximately 8% during the quarter ended March 31, 2014 on lower sales of frozen retail products, influenced in part by the later Easter holiday as well as by challenging market conditions. Year to date, retail sales declined less than 1%. Foodservice sales improved in both comparative periods, primarily due to higher volume, especially to larger chain restaurants, and in spite of lower pricing, which totaled approximately 1% of segment net sales. The segment's overall sales volume, as measured by pounds shipped, is estimated to have improved by approximately 2% and 3% for the three and nine months ended March 31, 2014, respectively.
Gross margin percentages were generally flat for the three and nine months ended March 31, 2014, as the benefit from lower raw-material costs was largely offset by a less favorable sales mix, the reduced foodservice pricing and higher freight costs associated with adverse weather conditions occurring during the most recent three-month period. For the nine months ended March 31, 2014, margins were also adversely affected by higher levels of trade promotional costs. We estimate that lower material costs beneficially affected the segment's gross margins by approximately two percent and one percent of net sales for the three and nine months ended March 31, 2014, respectively.
Selling, General and Administrative Expenses
 
 
Three Months Ended 
 March 31,
 
 
 
 
 
Nine Months Ended 
 March 31,
 
 
 
 
(Dollars in thousands)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
SG&A Expenses
$
23,073

 
$
23,113

 
$
(40
)
 
—
 %
 
$
69,251

 
$
69,305

 
$
(54
)
 
—
 %
SG&A Expenses as a Percentage of Net Sales
9.5
%
 
9.4
%
 
 
 
 
 
8.9
%
 
9.0
%
 
 
 
 
Consolidated selling, general and administrative costs totaled approximately $23.1 million and $69.3 million for the three and nine months ended March 31, 2014, respectively, compared to the $23.1 million and $69.3 million incurred for the three and nine months ended March 31, 2013. These costs were generally consistent as a percentage of net sales compared to the same periods in the prior year.

17



Operating Income
The foregoing factors contributed to consolidated operating income totaling approximately $28.8 million and $121.5 million for the three and nine months ended March 31, 2014, respectively. Our operating income can be summarized as follows:
 
 
Three Months Ended 
 March 31,
 
 
 
 
 
Nine Months Ended 
 March 31,
 
 
 
 
(Dollars in thousands)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specialty Foods
$
31,408

 
$
33,648

 
$
(2,240
)
 
(7
)%
 
$
130,364

 
$
126,790

 
$
3,574

 
3
 %
Corporate Expenses
(2,573
)
 
(2,928
)
 
355

 
(12
)%
 
(8,913
)
 
(9,095
)
 
182

 
(2
)%
Total
$
28,835

 
$
30,720

 
$
(1,885
)
 
(6
)%
 
$
121,451

 
$
117,695

 
$
3,756

 
3
 %
Operating Income as a Percentage of Net Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specialty Foods
13.0
%
 
13.6
%
 
 
 
 
 
16.7
%
 
16.5
%
 
 
 
 
Total
11.9
%
 
12.4
%
 
 
 
 
 
15.5
%
 
15.3
%
 
 
 
 
Looking forward, for the final quarter of 2014, we foresee the benefit of higher sales from the shift in Easter-related retail sales as well as modestly favorable material-cost comparisons positively affecting operating margins. However, we also anticipate that the quarter’s operating margins will be adversely affected by continued lower levels of pricing to the foodservice channel, significant introductory costs associated with new retail products being introduced, and a higher level of consumer marketing programs being incurred than a year ago.
Interest Income and Other – Net
Interest income and other was expense of approximately $0.2 million and $0.3 million for the three and nine months ended March 31, 2014, respectively, as compared to expense of less than $0.1 million for the three and nine months ended March 31, 2013.
Income From Continuing Operations Before Income Taxes
As impacted by the factors discussed above, income from continuing operations before income taxes for the three months ended March 31, 2014 decreased by approximately $2.1 million to $28.6 million from the prior-year total of $30.7 million. Income from continuing operations before income taxes for the nine months ended March 31, 2014 and 2013 was approximately $121.1 million and $117.7 million, respectively. Our effective tax rate of 34.0% and 33.9% for the three and nine months ended March 31, 2014, respectively, increased over the comparable prior-year rates of 32.5% and 33.3%. This increase reflects the prior-year period having been influenced by an increased deduction for dividends paid to our frozen ESOP Plan due to the $5.00 per share special dividend paid in December 2012.
Income From Continuing Operations
Third quarter income from continuing operations for 2014 of approximately $18.9 million decreased from the preceding year's income from continuing operations for the quarter of $20.7 million, as influenced by the factors noted above. Income from continuing operations per share for the third quarter of 2014 totaled approximately $0.69 per basic and diluted share, as compared to $0.76 per basic and diluted share recorded in the prior year. Year-to-date income from continuing operations of approximately $80.1 million increased from the prior year-to-date total of $78.5 million. Year-to-date income from continuing operations per share was approximately $2.93 per basic and diluted share compared to $2.87 per basic and diluted share for the prior-year period.

18



Discontinued Operations
Loss from discontinued operations, net of tax, totaled approximately $29.3 million and $26.4 million for the three and nine months ended March 31, 2014, respectively. These amounts included an after-tax loss of approximately $29.6 million on the January 2014 sale of our candle manufacturing and marketing operations. Income from discontinued operations, net of tax, totaled approximately $1.1 million and $5.3 million for the three and nine months ended March 31, 2013, respectively. The current-year decline in such income from that of the comparable prior-year periods generally reflected lower seasonal sales volumes of candles. Loss from discontinued operations per share for the third quarter of 2014 totaled approximately $1.07 per basic and diluted share, as compared to income of $0.04 per basic and diluted share in the third quarter of 2013. Year-to-date loss from discontinued operations per share was approximately $0.97 per basic and diluted share compared to income of $0.20 per basic share and $0.19 per diluted share for the prior-year period.
Net (Loss) Income
The third quarter results reflected a net loss for 2014 of approximately $10.4 million compared to the preceding year’s net income for the quarter of $21.8 million, as influenced by the factors noted above. Year-to-date net income of approximately $53.7 million was lower than the prior year-to-date total of $83.8 million. Net loss per share for the third quarter of 2014 totaled approximately $0.38 per basic and diluted share, as compared to net income of $0.80 per basic and diluted share in the prior year. Year-to-date net income per share was approximately $1.97 and $1.96 per basic and diluted share, respectively, as compared to $3.06 per basic and diluted share for the prior-year period.
FINANCIAL CONDITION
The current-year and prior-year balance sheets reflect the classification of the Glassware and Candles segment as discontinued operations.
For the nine months ended March 31, 2014, net cash provided by operating activities totaled approximately $98.8 million as compared to $94.9 million in the prior-year period. Not considering tax benefits to be realized due to the loss on the sale, cash provided by operating activities related to discontinued operations was approximately $5.0 million and $9.0 million for the nine months ended March 31, 2014 and 2013, respectively, including approximately $1.4 million and $1.9 million of depreciation and amortization for those periods. See Note 2 for further information regarding the sale of our candle manufacturing and marketing operations. Cash provided by continuing operations was also impacted by the relative changes in working capital, particularly prepaid assets and accrued liabilities and the change in net income.
Cash provided by investing activities for the nine months ended March 31, 2014 was approximately $16.6 million as compared to cash used of $18.8 million in the prior year. This increase resulted from the impact of the proceeds received on the sale of our discontinued operations as well as a lower level of capital expenditures in 2014. Cash used in investing activities related to discontinued operations was approximately $1.0 million for both of the nine months ended March 31, 2014 and 2013.
Cash used in financing activities for the nine months ended March 31, 2014 of approximately $37.5 million decreased from the prior-year total of $167.1 million. This decrease was primarily due to lower dividend payments in the current year. Prior-year dividend payments included a $5.00 per share special dividend that was paid in December 2012. The special dividend payment totaled in excess of $136 million. The lower dividend payments were partially offset by a higher level of share repurchases in the current year. At March 31, 2014, approximately 1,426,000 shares remained authorized for future buyback under the existing share repurchase program.
Under our unsecured revolving credit facility, we may borrow up to a maximum of $120 million at any one time. Loans may be used for general corporate purposes. We had no borrowings outstanding under this facility at March 31, 2014. At March 31, 2014, we had approximately $3.7 million of standby letters of credit outstanding, which reduced the amount available for borrowing on the unsecured revolving credit facility. The facility expires in April 2017, 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 credit agreement, at our option. We must also pay facility fees that are tied to our then-applicable consolidated leverage ratio. Based on the long-term nature of this facility, when we have outstanding borrowings under this facility, we will classify the outstanding balance as long-term debt.
The facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions, and financial covenants relating to interest coverage and leverage. At March 31, 2014, we were in compliance with all applicable provisions and covenants of the facility, and we exceeded 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

19



expansion or investment plans, or otherwise impact our ability to meet our obligations when due. At March 31, 2014, we were not aware of any event that would constitute a default under the facility.
We believe that internally generated funds and our existing balances in cash and equivalents, in addition to our currently available bank credit arrangements, should be adequate to meet our cash requirements through calendar 2014. 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 5 to the condensed consolidated financial statements.
CONTRACTUAL OBLIGATIONS
We have various contractual obligations that are appropriately recorded as liabilities in our condensed consolidated financial statements. Certain other items, such as purchase obligations, are not recognized as liabilities in our condensed consolidated financial statements. Examples of items not recognized as liabilities in our condensed consolidated financial statements are commitments to purchase raw materials or inventory that has not yet been received as of March 31, 2014 and future minimum lease payments for the use of property and equipment under operating lease agreements. Aside from expected changes in raw-material needs due to changes in product demand, there have been no significant changes to the contractual obligations disclosed in our 2013 Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
There have been no changes in critical accounting policies from those disclosed in our 2013 Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
There were no recently issued accounting pronouncements that impact our consolidated financial statements.

RECENTLY ADOPTED ACCOUNTING STANDARDS
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 13-02”) which added new disclosure requirements for items reclassified out of accumulated other comprehensive income. ASU 13-02 effectively replaced the requirements outlined in previous ASUs. The requirements of ASU 13-02 were effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. We adopted this guidance in the quarter ended September 30, 2013. The adoption did not have an impact on our financial position, results of operations or cash flows because it related to disclosures only.
FORWARD-LOOKING STATEMENTS
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). This Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of the PSLRA and other applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “plan,” “expect,” “hope” or similar words. These statements discuss future expectations; contain projections regarding future developments, operations or financial conditions; or state other forward-looking information. Such statements are based upon assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. These forward-looking statements involve various important risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results may differ as a result of factors over which we have no, or limited, control including, without limitation, the specific influences outlined below. 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 success and cost of new product development efforts;

20



•
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;
•
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;
•
price and product competition;
•
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;
•
dependence on key personnel;
•
stability of labor relations;
•
dependence on contract copackers and limited or exclusive sources for certain goods;
•
access to any required financing;
•
changes in estimates in critical accounting judgments;
•
the outcome of any litigation or arbitration; and
•
certain other factors, including the information disclosed in our discussion of risk factors under Item 1A of our 2013 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks have not changed materially from those disclosed in our 2013 Annual Report on Form 10-K.
 
Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2014 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is 1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and 2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. No changes were made to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

21



PART II – OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed under Item 1A in our 2013 Annual Report on Form 10-K.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) In November 2010, our Board of Directors approved a share repurchase authorization of 2,000,000 shares, of which approximately 1,426,000 shares remained authorized for future repurchases at March 31, 2014. This share repurchase authorization does not have a stated expiration date. In the third quarter, we made the following repurchases of our common stock:
 
Period
Total
Number of
Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans
 
Maximum
Number of
Shares that
May Yet be
Purchased
Under the
Plans
January 1-31, 2014
—

 
$
—

 
—

 
1,427,776

February 1-28, 2014 (1)
1,827

 
$
89.01

 
1,827

 
1,425,949

March 1-31, 2014
—

 
$
—

 
—

 
1,425,949

Total
1,827

 
$
89.01

 
1,827

 
1,425,949

 
(1) Represents shares that were repurchased in satisfaction of tax withholding obligations arising from the vesting of restricted stock granted to employees under the Lancaster Colony Corporation 2005 stock plan.
 
Item 6. Exhibits
See Index to Exhibits following Signatures.


22



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
LANCASTER COLONY CORPORATION
 
 
 
 
 
(Registrant)
Date:
May 12, 2014
 
By:
 
/s/ JOHN B. GERLACH, JR.
 
 
 
 
 
John B. Gerlach, Jr.
 
 
 
 
 
    Chairman, Chief Executive Officer,
 
 
 
 
 
    President and Director
 
 
 
 
 
    (Principal Executive Officer)
 
 
 
 
 
 
Date:
May 12, 2014
 
By:
 
/s/ JOHN L. BOYLAN
 
 
 
 
 
John L. Boylan
 
 
 
 
 
    Treasurer, Vice President,
 
 
 
 
 
    Assistant Secretary,
 
 
 
 
 
    Chief Financial Officer
 
 
 
 
 
    and Director
 
 
 
 
 
    (Principal Financial and Accounting Officer)


23



LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2014
INDEX TO EXHIBITS
 
 
 
 
 
 
Exhibit
Number
  
Description
  
Located at
 
 
 
 
 
10.1*
 
Form of Restricted Stock Award Agreement for employees and consultants under the Lancaster Colony Corporation 2005 Stock Plan
 
Filed herewith
 
 
 
 
 
10.2*
 
Form of Stock Appreciation Rights Award Agreement for employees and consultants under the Lancaster Colony Corporation 2005 Stock Plan
 
Filed herewith
 
 
 
 
31.1
  
Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002
  
Filed herewith
 
 
 
 
31.2
  
Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002
  
Filed herewith
 
 
 
 
32
  
Certification of CEO and CFO under Section 906 of the Sarbanes-Oxley Act of 2002
  
Filed herewith
 
 
 
 
101.INS
  
XBRL Instance Document
  
Filed herewith
 
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
  
Filed herewith
 
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
  
Filed herewith
 
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
  
Filed herewith
 
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
  
Filed herewith
 
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
  
Filed herewith
 
 
 
 
 
*Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates.

24