10-K 1 lanc-2018630x10k.htm 10-K Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
Form 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
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.)
 
 
 
380 Polaris Parkway, Suite 400
Westerville, Ohio
 
43082
(Address of principal executive offices)
 
(Zip Code)
 
614-224-7141
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act: 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, without par value
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨
Indicate by check mark whether the registrant 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  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).     Yes  ¨    No  x
The aggregate market value of Common Stock held by non-affiliates of the registrant computed by reference to the price at which such Common Stock was last sold as of December 31, 2017 was $2,415.3 million.
As of August 2, 2018, there were 27,490,006 shares of Common Stock, without par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed for its November 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.



LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Item 15.

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PART I

Item 1. Business
GENERAL
Lancaster Colony Corporation, an Ohio corporation, is a manufacturer and marketer of specialty food products for the retail and foodservice channels. We began our operations in 1961 as a Delaware corporation. In 1992, we reincorporated as an Ohio corporation. Our principal executive offices are located at 380 Polaris Parkway, Suite 400, Westerville, Ohio 43082 and our telephone number is 614-224-7141.
As used in this Annual Report on Form 10-K and except as the context otherwise may require, the terms “we,” “us,” “our,” “registrant,” or “the Company” mean Lancaster Colony Corporation and its consolidated subsidiaries, except where it is clear that the term only means the parent company. Unless otherwise noted, references to “year” pertain to our fiscal year which ends on June 30; for example, 2018 refers to fiscal 2018, which is the period from July 1, 2017 to June 30, 2018.
Available Information
Our Internet web site address is http://www.lancastercolony.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on our web site or connected to it is not incorporated into this Annual Report on Form 10-K.
DESCRIPTION OF AND FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
Effective July 1, 2017, David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as our Chief Executive Officer (“CEO”). As President and CEO, Mr. Ciesinski became our principal executive officer and chief operating decision maker (“CODM”). This change resulted in modifications to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, beginning on July 1, 2017, our segment reporting structure was amended to align with these changes, and our financial results are now presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. All historical information was retroactively conformed to the current presentation. These segment changes had no effect on previously reported consolidated net sales, operating income, net income or earnings per share. The financial information relating to our business segments for the three years ended June 30, 2018, 2017 and 2016 is included in Note 10 to the consolidated financial statements, and located in Part II, Item 8 of this Annual Report on Form 10-K. Further description of each business segment within which we operate is provided below.
Retail Segment
The following table presents the primary Retail products we manufacture and sell under our brand names:
Products
 
Brand Names
Frozen Breads
 
 
Frozen garlic breads
 
New York BRAND Bakery
Frozen Parkerhouse style yeast rolls and dinner rolls
 
Sister Schubert’s
Refrigerated Dressings, Dips and Other
 
 
Salad dressings
 
Marzetti, Simply Dressed, Simply 60
Vegetable dips and fruit dips
 
Marzetti
Flatbread wraps and pizza crusts
 
Flatout
Sprouted grain bakery products
 
Angelic Bakehouse
Shelf-Stable Dressings and Croutons
 
 
Salad dressings
 
Marzetti, Cardini’s, Girard’s
Croutons and salad toppings
 
New York BRAND Bakery, Chatham Village, Marzetti
We also manufacture and sell other products pursuant to brand license agreements including Olive Garden® dressings and Buffalo Wild Wings® sauces. Additionally, a small portion of our Retail sales are products sold under private label to retailers.

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The vast majority of the products we sell in the Retail segment are sold through sales personnel, food brokers and distributors in the United States. We have placement of products in grocery produce departments through our refrigerated salad dressings, vegetable dips and fruit dips. Our flatbread products and sprouted grain bakery products are generally placed in the specialty bakery/deli section of the grocery store. We also have products typically marketed in the shelf-stable section of the grocery store, which include salad dressing, slaw dressing and croutons. Within the frozen food section of the grocery store, we have prominent market positions of frozen yeast rolls and garlic breads.
Our top five Retail customers accounted for 55%, 54% and 54% of this segment’s total net sales in 2018, 2017 and 2016, respectively.
We continue to rely upon our strong retail brands, innovation expertise, geographic and channel expansion and customer relationships for future growth. Our category-leading retail brands and commitment to new product development help drive increased consumer demand in our Retail segment. Strategic acquisitions are also part of our future growth plans, with a focus on fit and value.
Our quarterly Retail sales are affected by seasonal fluctuations, primarily in the fiscal second quarter and the Easter holiday season when sales of certain frozen retail products tend to be most pronounced. Our quarterly Retail sales can also be affected by the timing of seasonal shipments of certain fruit dips between the first and second quarters. The impacts on working capital are not significant. We do not utilize any franchises or concessions. In addition to the owned and licensed trademarked brands discussed above, we also own and operate under innumerable other intellectual property rights, including patents, copyrights, formulas, proprietary trade secrets, technologies, know-how processes and other unregistered rights. We consider our owned and licensed intellectual property rights to be essential to our Retail business.
Foodservice Segment
The majority of our Foodservice sales are products sold under private label to restaurants.
The following table presents the primary Foodservice products we manufacture and sell under our brand names:
Products
 
Brand Names
Dressings and Sauces
 
 
Salad dressings
 
Marzetti, Simply Dressed
Frozen Breads and Other
 
 
Frozen garlic breads
 
New York BRAND Bakery
Frozen Parkerhouse style yeast rolls and dinner rolls
 
Sister Schubert’s
Frozen pasta
 
Marzetti Frozen Pasta
The vast majority of the products we sell in the Foodservice segment are sold through sales personnel, food brokers and distributors in the United States. Most of the products we sell in the Foodservice segment are custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls.
Our top five Foodservice direct customers accounted for 64%, 68% and 69% of this segment’s total net sales in 2018, 2017 and 2016, respectively. Within our Foodservice segment, typically our largest direct customers are distributors that distribute our products primarily to foodservice national chain restaurant accounts.
In the Foodservice segment, sales growth results from general volume gains or geographic expansion of our established customer base, and we also grow our business with existing and new customers by leveraging our culinary skills and experience to support the development of new products and menu offerings.
The operations of this segment are not affected to any material extent by seasonal fluctuations. We do not utilize any franchises or concessions. We own and operate under innumerable intellectual property rights, including patents, copyrights, formulas, proprietary trade secrets, technologies, know-how processes and other unregistered rights. We consider our owned intellectual property rights to be essential to our Foodservice business.

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NET SALES BY CLASS OF PRODUCTS
The following table sets forth business segment information with respect to the percentage of net sales contributed by each class of similar products that account for at least 10% of our consolidated net sales in any year from 2016 through 2018:
 
2018
 
2017
 
2016
Retail Segment:
 
 
 
 
 
Frozen breads
21%
 
21%
 
20%
Refrigerated dressings, dips and other
18%
 
18%
 
18%
Shelf-stable dressings and croutons
14%
 
14%
 
14%
Foodservice Segment:
 
 
 
 
 
Dressings and sauces
35%
 
36%
 
37%
Frozen breads and other
12%
 
11%
 
11%
Net sales attributable to Walmart Inc. (“Walmart”) totaled 17%, 17% and 16% of consolidated net sales for 2018, 2017 and 2016, respectively. Net sales attributable to McLane Company, Inc. (“McLane”), a wholesale distribution subsidiary of Berkshire Hathaway, Inc., totaled 15%, 16% and 19% of consolidated net sales for 2018, 2017 and 2016, respectively. McLane is a large, national distributor that sells and distributes our products to several of our foodservice national chain restaurant accounts, principally in the quick service, fast casual and casual dining channels. In general, these national chain restaurants have direct relationships with us for culinary research and development, menu development and production needs, but choose to buy our products through McLane, who acts as their distributor. McLane orders our products on behalf of these national chain restaurants, and we invoice McLane for these sales. The decline in net sales to McLane in both 2018 and 2017 was primarily attributed to the choice of certain national chain restaurants to switch to a different distributor. The decline for 2017 was also influenced by our targeted business rationalization efforts with certain national chain restaurants that began in mid-2016. No other direct customer accounted for more than 10% of consolidated net sales during these years.
MANUFACTURING
The majority of our products are manufactured and packaged at our 16 food plants located throughout the United States. Most of these plants produce products for both the Retail and Foodservice segments. Efficient and cost-effective production remains a key focus as evidenced by our lean six sigma initiative. Certain items are also manufactured and packaged by third parties located in the United States, Canada and Europe.
BACKLOG
Orders are generally filled in five to ten days. We do not view the amount of backlog at any particular point in time as a meaningful indicator of longer-term shipments.
COMPETITION
All of the markets in which we sell food products are highly competitive in the areas of price, quality and customer service. We face competition from a number of manufacturers of various sizes and capabilities. Our ability to compete depends upon a variety of factors, including the position of our branded goods within various categories, product quality, product innovation, promotional and marketing activity, pricing and our ability to service customers.
ENVIRONMENTAL MATTERS
Our operations are subject to various federal, state and local environmental protection laws. Based upon available information, compliance with these laws and regulations did not have a material effect upon the level of capital expenditures, earnings or our competitive position in 2018 and is not expected to have a material impact in 2019.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 2018 we had 2,900 employees, 20% of which are represented under various collective bargaining contracts. 4% of our employees are represented under a collective bargaining contract that will expire within one year. While we believe that labor relations with all our employees are satisfactory, a prolonged labor dispute or an organizing attempt could have a material adverse effect on our business and results of operations.

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FOREIGN OPERATIONS AND EXPORT SALES
Over 95% of our products are sold in the United States. Foreign operations and export sales have not been significant in the past and are not expected to be significant in the future based upon existing operations. We do not have any fixed assets located outside of the United States.
RAW MATERIALS
During 2018, we obtained adequate supplies of raw materials and packaging. We rely on a variety of raw materials and packaging for the day-to-day production of our products, including soybean oil, various sweeteners, eggs, dairy-related products, flour, various films and plastic and paper packaging materials.
We purchase the majority of these materials on the open market to meet current requirements, but we also have some fixed-price contracts with terms generally one year or less. See further discussion in our “Risk Factors” section below and our contractual obligations disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). Although the availability and price of certain of these materials are influenced by weather, disease and the level of global demand, we anticipate that future sources of supply for 2019 will generally be available and adequate for our needs.

Item 1A. Risk Factors
An investment in our common stock is subject to certain risks inherent in our business. Before making an investment decision, investors should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K.
If any of the following risks occur, our business, results of operations, financial condition and cash flows could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly.
We may be subject to business disruptions, product recalls or other claims for real or perceived safety issues regarding our food products.
We can be impacted by both real and unfounded claims regarding the safety of our operations, or concerns regarding mislabeled, adulterated, contaminated or spoiled food products. Any of these circumstances could necessitate a voluntary or mandatory recall due to a substantial product hazard, a need to change a product’s labeling or other consumer safety concerns. A pervasive product recall may result in significant loss due to the costs of a recall, related legal claims, including claims arising from bodily injury or illness caused by our products, the destruction of product inventory, or lost sales due to product unavailability. A highly publicized product recall, whether involving us or any related products made by third parties, also could result in a loss of customers or an unfavorable change in consumer sentiment regarding our products or any category in which we operate. In addition an allegation of noncompliance with federal or state food laws and regulations could force us to cease production, stop selling our products or create significant adverse publicity that could harm our credibility and decrease market acceptance of our products. Any of these events could have a material adverse effect on our business, results of operations, financial condition and cash flows. While we believe our insurance related to these matters is consistent with industry practice, any potential claim under our policies may exceed our insurance coverage, may be subject to certain exceptions or may not be honored fully, in a timely manner, or at all.
We may be subject to a loss of sales or increased costs due to adverse publicity or consumer concern regarding the safety, quality or healthfulness of food products, whether with our products, competing products or other related food products.
We are highly dependent upon consumers’ perception of the safety, quality and possible dietary attributes of our products. As a result, substantial negative publicity concerning one or more of our products, or other foods similar to or in the same food group as our products, could lead to lower demand for our products and/or reduced prices and lost sales. Substantial negative publicity, even when false or unfounded, could also hurt the image of our brands or cause consumers to choose other products or avoid categories in which we operate. Any of these events could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Certain negative publicity regarding the food industry or our products could also increase our cost of operations. The food industry has been subject to negative publicity concerning the health implications of genetically modified organisms, added sugars, trans fat, salt, artificial growth hormones, ingredients sourced from foreign suppliers and other supply chain concerns. Consumers may increasingly require that our products and processes meet stricter standards than are required by applicable governmental agencies, thereby increasing the cost of manufacturing our products. If we fail to adequately respond to any such consumer concerns, we could suffer lost sales and damage our brand image or our reputation. Any of these events could have a material adverse effect on our business, results of operations, financial condition and cash flows.

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A disruption of production at certain manufacturing facilities could result in an inability to provide adequate levels of customer service.
Because we source certain products from single manufacturing sites and use third party manufacturers for significant portions of our production needs for certain products, it is possible that we could experience a production disruption that results in a reduction or elimination of the availability of some of our products. If we are not able to obtain alternate production capability in a timely manner, or on favorable terms, it could have a negative impact on our business, results of operations, financial condition and cash flows, including the potential for long-term loss of product placement with various customers.
We are also subject to risks of other business disruptions associated with our dependence on production facilities and distribution systems. Natural disasters, terrorist activity or other unforeseen events could interrupt production or distribution and have a material adverse effect on our business, results of operations, financial condition and cash flows, including the potential for long-term loss of product placement with our customers.
Competitive conditions within our Retail and Foodservice markets could impact our sales volumes and operating profits.
Competition within all of our markets is expected to remain intense. Numerous competitors exist, many of which are larger than us in size. These competitive conditions could lead to significant downward pressure on the prices of our products, which could have a material adverse effect on our sales and profitability.
Competitive considerations in the various product categories in which we sell are numerous and include price, product innovation, product quality, brand recognition and loyalty, effectiveness of marketing, promotional activity and the ability to remain relevant to consumer preferences and trends. In order to maintain our existing market share or capture increased market share among our retail and foodservice channels, we may decide to increase our spending on marketing and promotional costs, advertising and new product innovation. The success of marketing, advertising and new product innovation is subject to risks, including uncertainties about trade and consumer acceptance. As a result, any such increased expenditures may not maintain or enhance market share and could result in lower profitability.
Walmart is our largest Retail customer. The loss of, or a significant reduction in, Walmart’s business, or an adverse change in the financial condition of Walmart, could result in a material adverse effect on our business, results of operations, financial condition and cash flows.
Our net sales to Walmart represented 17% of consolidated net sales for the year ended June 30, 2018. Our accounts receivable balance from Walmart as of June 30, 2018 was $20.1 million. While our relationship with Walmart has been long-standing and is believed to be good, it is important to recognize that we may not be able to maintain this relationship and Walmart is not contractually obligated to purchase from us. In addition, changes in Walmart’s general business model, such as reducing the shelf space devoted to the branded products we market, or devoting more shelf space to competing products, could adversely affect the profitability of our business with Walmart, even if we maintain a good relationship. The loss of, or a significant reduction in, this business could have a material adverse effect on our sales and profitability. Unfavorable changes in Walmart’s financial condition or other disruptions to Walmart, such as decreased consumer demand or stronger competition, could also have a material adverse effect on our business, results of operations, financial condition and cash flows.
McLane is our largest Foodservice customer. An adverse change in the financial condition of McLane could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our net sales to McLane represented 15% of consolidated net sales for the year ended June 30, 2018. Our accounts receivable balance from McLane as of June 30, 2018 was $7.8 million. McLane is a large, national distributor that sells and distributes our products to several of our foodservice national chain restaurant accounts, principally in the quick service, fast casual and casual dining channels. In general, these national chain restaurants have direct relationships with us for culinary research and development, menu development and production needs, but choose to buy our products through McLane, who acts as their distributor. McLane orders our products on behalf of these national chain restaurants, and we invoice McLane for these sales. Thus, unfavorable changes in the financial condition of McLane could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, the loss of, or significant reduction in our business with the underlying national chain restaurants, or other disruptions, such as decreased consumer demand or stronger competition, could also have a material adverse effect on our business, results of operations, financial condition and cash flows. We believe that our relationship with McLane and the underlying national chain restaurants is good, but we cannot ensure that we will be able to maintain these relationships. McLane and the underlying national chain restaurants are not typically committed to long-term contractual obligations with us, and they may switch to other suppliers that offer lower prices, differentiated products or customer service that McLane and/or the underlying national chain restaurants perceive to be more favorable. In addition, changes in the general business model of McLane, or the underlying national chain restaurants, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

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A single indirect national chain restaurant account represents a significant portion of our Foodservice segment sales. The loss of, or a significant reduction in this national chain restaurant’s business, or an adverse change in the financial condition of this national chain restaurant, could result in a material adverse effect on our business, results of operations, financial condition and cash flows.
Our net sales to a single national chain restaurant account, which are made indirectly through several foodservice distributors, represented 13% of consolidated net sales for the year ended June 30, 2018. While our relationship has been long-standing and is believed to be very good, it is recognized that we may not be able to maintain this relationship in the future. We do not have any long-term purchase commitments, and we may be unable to continue to sell our products in the same quantities or on the same terms as in the past. The loss of, or a significant reduction in, this business could have a material adverse effect on our sales and profitability. Further, unfavorable changes in this national chain restaurant’s financial condition or other disruptions, such as decreased consumer demand or stronger competition, could also have a material adverse effect on our business, results of operations, financial condition and cash flows.
We rely on the performance of major retailers, mass merchants, wholesalers, food brokers, distributors and foodservice customers for the success of our business and, should they perform poorly or give higher priority to other brands or products, our business could be adversely affected.
Within our Retail and Foodservice segments, we sell our products principally to retail and foodservice channels, including traditional supermarkets, mass merchants, warehouse clubs, specialty food distributors, foodservice distributors and national chain restaurants. Poor performance by our customers or our inability to collect accounts receivable from our customers, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In addition, our future growth and profitability may be unfavorably impacted by recent changes in the competitive landscape for our Retail segment customers. As consolidation in the retail grocery industry continues and our retail customers also grow larger and become more sophisticated, they may demand improved efficiency, lower pricing, increased promotional programs, or specifically tailored products. Further, these customers are reducing their inventories and increasing their emphasis on private label products and other products holding top market positions. Traditional retail grocers are also being pressured by the growing presence of deep discount retailers that emphasize private label product offerings and lower price points. If we fail to use our sales and marketing expertise to maintain our category leadership positions to respond to these trends, or if we lower our prices or increase promotional support of our products and are unable to increase the volume of our products sold, our business, results of operations, financial condition and cash flows could be adversely affected.
Furthermore, within our Retail segment, many of our customers offer competitor branded products and their own store branded products that compete directly with our products for shelf space and consumer purchases. Accordingly, there is a risk that these customers give higher priority or promotional support to their store branded products or to the products of our competitors or discontinue the use of our products in favor of their store branded products or other competing products. Failure to maintain our retail shelf space or priority with these customers could have a material adverse effect on our business, results of operations, financial condition and cash flows. Likewise, our foodservice distributors often offer their own branded products that compete directly with our products.
Emerging channels such as online retailers and home meal kit delivery services also continue to evolve and impact both the retail and foodservice industries. Our presence in these emerging channels is currently underdeveloped and while we have plans to pursue future opportunities in these emerging channels, our ultimate success and the resulting impacts to our financial results is uncertain.
We rely on the value of the brands we sell, and the failure to maintain and enhance these brands could adversely affect our business.
We rely on the success of our well-recognized brand names. Maintaining and enhancing our brand image and recognition is essential to our long-term success, and maintaining license agreements under which we market and sell certain brands is important to our business. The failure to do either could have a material adverse effect on our business, financial condition and results of operations. We seek to maintain and enhance our brands through a variety of efforts, including the delivery of quality products, extending our brands into new markets and new products and investing in marketing and advertising. The costs of maintaining and enhancing our brands, including maintaining our rights to brands under license agreements, may increase. These increased costs could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We manufacture and sell numerous products pursuant to brand license agreements including Olive Garden® dressings and Buffalo Wild Wings® sauces. We believe that our relationships with our brand licensors are good, but we cannot ensure that we will maintain those relationships. Many of our brand license agreements can be terminated or not renewed at the option of the licensor upon short notice to us. The termination of our brand license agreements, the failure to renew our brand license

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agreements on terms favorable to us, or the impairment of our relationship with our brand licensors could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In addition, we increasingly rely on electronic marketing, such as social media platforms and the use of online marketing strategies, to support and enhance our brands. This “e-commerce” marketplace is growing and evolving quickly and allows for the rapid dissemination of information regarding our brands by us and consumers. We may not be able to successfully adapt our marketing efforts to this rapidly changing marketplace, which could have a material adverse impact on our business, financial condition and results of operations. Further, negative opinions or commentary posted online regarding our brands, regardless of their underlying merits or accuracy, could diminish the value of our brands and have a material adverse effect on our business, results of operations, financial condition and cash flows.
Increases in the costs or limitations to the availability of raw materials we use to produce and package our products could adversely affect our business by increasing our costs to produce goods.
Our principal raw-material needs include soybean oil, various sweeteners, eggs, dairy-related products, flour, water and various films, plastic and paper packaging materials. Our ability to manufacture and/or sell our products may be impaired by damage or disruption to our manufacturing or distribution capabilities, or to the capabilities of our suppliers or contract manufacturers, due to factors that are hard to predict or beyond our control, such as adverse weather conditions, natural disasters, fire, terrorism, pandemics, strikes or other events. Production of the agricultural commodities used in our business may also be adversely affected by drought, water scarcity, temperature extremes, scarcity of suitable agricultural land, worldwide demand, changes in international trade arrangements, livestock disease (for example, avian influenza), crop disease and/or crop pests.
We purchase a majority of our key raw materials on the open market. Our ability to avoid the adverse effects of a pronounced, sustained price increase in our raw materials is limited. We have observed increased volatility in the costs of many of these raw materials in recent years, including 2018. In general, eggs have been our most volatile raw material over the past three years, principally due to an outbreak of avian influenza in late 2015 in the United States and certain issues affecting egg production in Europe beginning in our second quarter of 2018.
Similarly, fluctuating petroleum prices and transportation capacity have, from time to time, impacted our costs of resin-based packaging and our costs of inbound freight on all purchased materials. In 2018, we experienced dramatic changes in our freight costs due to several factors that placed constraints on our transportation capacity in the United States.
We try to limit our exposure to price fluctuations for raw materials by periodically entering into longer-term, fixed-price contracts for certain raw materials, but we cannot ensure success in limiting our exposure. We may experience further increases in the costs of raw materials, and we may try to offset such cost increases with higher prices or other measures. However, we may be unable to successfully implement offsetting measures or unable to do so in a timely manner. Such cost increases, as well as an inability to effectively implement additional measures to offset higher costs, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The availability and cost of transportation for our products is vital to our success, and the loss of availability or increase in the cost of transportation could have an unfavorable impact on our business, results of operations, financial condition and cash flows.
Our ability to obtain adequate and reasonably priced methods of transportation to distribute our products, including refrigerated trailers for many of our products, is a key factor to our success. Delays in transportation, including weather-related delays, could have a material adverse effect on our business and results of operations. Further, higher fuel costs and increased line haul costs due to industry capacity constraints, customer delivery requirements and a more restrictive regulatory environment could also negatively impact our financial results. We are often required to pay fuel surcharges that fluctuate with the price of diesel fuel to third-party transporters of our products, and such surcharges can be substantial. Any sudden or dramatic increases in the price of diesel fuel would serve to increase our fuel surcharges and our cost of goods sold. If we were unable to pass higher freight costs to our customers in the form of price increases, those higher costs could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are subject to federal, state and local government regulations that could adversely affect our business and results of operations.
Our business operations are subject to regulation by various federal, state and local government entities and agencies. As a producer of food products for human consumption, our operations are subject to stringent production, packaging, quality, labeling and distribution standards, including regulations promulgated under the Federal Food, Drug and Cosmetic Act and the Food Safety Modernization Act. We cannot predict whether future regulation by various federal, state and local governmental entities and agencies would adversely affect our business, results of operations, financial condition and cash flows.

9


In addition, our business operations and the past and present ownership and operation of our properties, including idle properties, are subject to extensive and changing federal, state and local environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Although most of our properties have been subjected to periodic environmental assessments, these assessments may be limited in scope and may not include or identify all potential environmental liabilities or risks associated with any particular property. We cannot be certain that our environmental assessments have identified all potential environmental liabilities or that we will not incur material environmental liabilities in the future.
We cannot be certain that environmental issues relating to presently known matters or identified sites, or to other matters or sites will not require additional, currently unanticipated investigation, assessment or expenditures. If we do incur or discover any material environmental liabilities or potential environmental liabilities in the future, we may face significant remediation costs and find it difficult to sell or lease any affected properties.
We may require significant capital expenditures to maintain, improve or replace aging infrastructure and facilities, which could adversely affect our cash flows.
Much of our infrastructure and facilities have been in service for many years, which may result in a higher level of future maintenance costs and unscheduled repairs. Further, our infrastructure and facilities may need to be improved or replaced to maintain or increase operational efficiency, sustain production capacity, or meet changing regulatory requirements. A significant increase in maintenance costs and capital expenditures could adversely affect our financial condition, results of operations and cash flows. In addition, a failure to operate our facilities optimally could result in declining customer service capabilities, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Manufacturing capacity constraints may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our current manufacturing resources may be inadequate to meet significantly increased demand for some of our food products. Our ability to increase our manufacturing capacity depends on many factors, including the availability of capital, steadily increasing consumer demand, equipment delivery, construction lead-times, installation, qualification, regulatory permitting and regulatory requirements. Increasing capacity through the use of third party manufacturers depends on our ability to develop and maintain such relationships and the ability of such third parties to devote additional capacity to fill our orders.
A lack of sufficient manufacturing capacity to meet demand could cause our customer service levels to decrease, which may negatively affect customer demand for our products and customer relations generally, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, operating facilities at or near capacity may also increase production and distribution costs and negatively affect relations with our employees or contractors, which could result in disruptions in our operations.
Technology failures could disrupt our operations and negatively impact our business.
We increasingly rely on information technology systems to conduct and manage our business operations, including the processing, transmitting, and storing of electronic information. For example, our sales group and our production and distribution facilities utilize information technology to increase efficiencies and limit costs. Furthermore, a significant portion of the communications between our personnel, customers, and suppliers depends on information technology and an uninterrupted and functioning infrastructure, including telecommunications. Our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures and other security issues. If we are unable to adequately protect against these vulnerabilities, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information.
Cyber attacks or other breaches of network or other information technology security could have an adverse effect on our business, results of operations, financial condition and cash flows.
Cyber attacks or other breaches of network or information technology security may cause equipment failures or disruptions to our operations. Our inability to operate our networks as a result of such events, even for a limited period of time, may result in significant expenses. Cyber attacks, which include the use of malware, computer viruses and other means for disruption or unauthorized access, have increased in frequency, scope and potential harm in recent years. To date, we have not been subject to cyber attacks or other cyber incidents that, individually or in the aggregate, have been material to our operations or financial condition. While we believe we take reasonable steps to protect the security of our information relative to our perceived risks, our preventative actions may be insufficient to defend against a major cyber attack in the future. The costs associated with a major cyber attack could include increased expenditures on cyber security measures, lost revenues from

10


business interruption, litigation, regulatory fines and penalties and damage to our reputation. If we fail to prevent the theft of valuable information such as financial data, sensitive information about the Company and intellectual property, or if we fail to protect the privacy of customer, consumer and employee confidential data against breaches of network or information technology security, it could result in damage to our reputation and brand image, which could adversely impact our employee, customer and investor relations. Any of these occurrences could have a material adverse effect on our business, results of operations, financial condition and cash flows. While we believe our insurance related to these matters is consistent with industry practice, any potential claim under our policies may be subject to certain exceptions; may not be honored fully, in a timely manner, or at all; and we may not have purchased sufficient insurance to cover all material losses.
We may not be able to successfully consummate proposed acquisitions or divestitures, and integrating acquired businesses may present financial, managerial and operational challenges.
We continually evaluate the acquisition of other businesses that would strategically fit within our operations. If we are unable to consummate, successfully integrate and grow these acquisitions and to realize contemplated revenue growth, synergies and cost savings, our financial results could be adversely affected. In addition, we may, from time to time, divest businesses, product lines or other operations that are less of a strategic fit within our portfolio or do not meet our growth or profitability targets. As a result, our profitability may be adversely affected by losses on the sales of divested assets or lost operating income or cash flows from those businesses.
We may incur asset impairment or restructuring charges related to acquired or divested assets, which may reduce our profitability and cash flows. These potential acquisitions or divestitures present financial, managerial and operational challenges, including diversion of management attention from ongoing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities, indemnities and potential disputes with the buyers or sellers.
Our inability to successfully renegotiate collective bargaining contracts and any prolonged work stoppages could have an adverse effect on our business, results of operations, financial condition and cash flows.
We believe that our labor relations with employees under collective bargaining contracts are satisfactory, but our inability to negotiate the renewal of any collective bargaining agreements, including the agreement at our Milpitas, California facility, which is currently scheduled to expire in December 2018, or any prolonged work stoppages could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may incur liabilities related to multiemployer pension plans which could adversely affect our financial results.
Through 2017, we contributed to two multiemployer pension plans under certain collective bargaining agreements that provide pension benefits to employees and retired employees who are part of the plans. On January 21, 2017, the employees at our Bedford Heights, Ohio plant voted to ratify a new collective bargaining agreement that provided for our complete withdrawal from the multiemployer pension plan associated with that facility. At this time, we still contribute to a multiemployer pension plan related to our facility in Milpitas, California.   
Because we have withdrawn from the multiemployer pension plan associated with our Bedford Heights plant, we are no longer subject to risks associated with increased contributions with respect to this pension fund. Nonetheless, certain future events related to this pension fund could result in incremental pension-related costs; however, the likelihood of these events occurring is indeterminate at this time.  
As a contributor to the multiemployer pension plan associated with our Milpitas, California facility, we are responsible for making periodic contributions to this plan. Our required contributions to this plan could increase; however, any increase would be dependent upon a number of factors, including our ability to renegotiate the collective bargaining contract successfully, current and future regulatory requirements, the performance of the pension plan’s investments, the number of participants who are entitled to receive benefits from the plan, the contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to this plan, the inability or failure of withdrawing companies to pay their withdrawal liability, low interest rates and other funding deficiencies. We may also be required to pay a withdrawal liability if we exit from this plan. While we cannot determine whether and to what extent our contributions may increase or what our withdrawal liability may be, we do not expect any payments related to this plan to have a material adverse effect on our business, financial condition, results of operations or cash flows.
Increases in energy-related costs could negatively affect our business by increasing our costs to produce goods.
We are subject to volatility in energy-related costs that affect the cost of producing and distributing our products, including our petroleum-derived packaging materials. Furthermore, any sudden and dramatic increases in electricity or natural gas costs could have a material adverse effect on our business, results of operations, financial condition and cash flows.

11


We limit our exposure to price fluctuations in energy-related costs by periodically entering into longer-term, fixed-price contracts for natural gas and electricity supply to some of our manufacturing facilities. However, due to the inherent variability of contractual terms and end dates, in addition to the extent to which the energy markets in which we operate have been deregulated to allow for contracted supply, we will retain some level of exposure to future price fluctuations for our energy-related costs.
The loss of the services of one or more members of our senior management team could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our operations and prospects depend in large part on the performance of our senior management team, several of which are long-serving employees with significant knowledge of our business model and operations. Should we not be able to find qualified replacements for any of these individuals if their services were no longer available, our ability to manage our operations or successfully execute our business strategy may be materially and adversely affected.
Mr. Gerlach, Executive Chairman of our Board of Directors, has a significant ownership interest in our Company.
As of June 30, 2018, Mr. Gerlach owned or controlled 30% of the outstanding shares of our common stock. Accordingly, Mr. Gerlach has significant influence on all matters submitted to a vote of the holders of our common stock, including the election of directors. Mr. Gerlach’s voting power may also have the effect of discouraging transactions involving an actual or a potential change of control of our Company, regardless of whether a premium is offered over then-current market prices.
The interests of Mr. Gerlach may conflict with the interests of other holders of our common stock. This conflict of interest may have an adverse effect on the price of our common stock.
Anti-takeover provisions could make it more difficult for a third party to acquire us.
Certain provisions of our charter documents, including provisions limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice and provisions classifying our Board of Directors, may make it more difficult for a third party to acquire us or influence our Board of Directors. This may have the effect of delaying or preventing changes of control or management, which could have an adverse effect on the market price of our stock.
Additionally, Ohio corporate law contains certain provisions that could have the effect of delaying or preventing a change of control. The Ohio Control Share Acquisition Act found in Chapter 1701 of the Ohio Revised Code provides that certain notice and informational filings and a special shareholder meeting and voting procedures must be followed prior to consummation of a proposed “control share acquisition,” as defined in the Ohio Revised Code. Assuming compliance with the prescribed notice and information filings, a proposed control share acquisition may be accomplished only if, at a special meeting of shareholders, the acquisition is approved by both a majority of the voting power represented at the meeting and a majority of the voting power remaining after excluding the combined voting power of the “interested shares,” as defined in the Ohio Revised Code. The Interested Shareholder Transactions Act found in Chapter 1704 of the Ohio Revised Code generally prohibits certain transactions, including mergers, majority share acquisitions and certain other control transactions, with an “interested shareholder,” as defined in the Ohio Revised Code, for a three-year period after becoming an interested shareholder, unless our Board of Directors approved the initial acquisition. After the three-year waiting period, such a transaction may require additional approvals under this Act, including approval by two-thirds of our voting shares and a majority of our voting shares not owned by the interested shareholder. The application of these provisions of the Ohio Revised Code, or any similar anti-takeover law adopted in Ohio, could have the effect of delaying or preventing a change of control, which could have an adverse effect on the market price of our stock.
Also, our Board of Directors has the authority to issue up to 1,150,000 shares of Class B Voting Preferred Stock and 1,150,000 shares of Class C Nonvoting Preferred Stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the shareholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any Class B Voting Preferred Stock and Class C Nonvoting Preferred Stock that may be issued in the future. The Company could use these rights to put in place a shareholder rights plan, or “poison pill,” that could be used in connection with a bid or proposal of acquisition for an inadequate price.

Item 1B. Unresolved Staff Comments
None.


12


Item 2. Properties
We use 1.9 million square feet of space for our operations. Of this space, 0.6 million square feet are leased. These amounts exclude facilities operated by third-party service providers.
The following table summarizes our principal manufacturing locations (including aggregation of multiple facilities):
Location
  
Principal Products Produced
 
Business Segment(s)
  
Terms of Occupancy
Altoona, IA
  
Frozen pasta
 
Retail and Foodservice
  
Owned
Bedford Heights, OH
  
Frozen breads
 
Retail and Foodservice
  
Owned
Columbus, OH
  
Sauces, dressings, dips
 
Retail and Foodservice
  
Owned
Cudahy, WI
 
Sprouted grain bakery products
 
Retail
 
Owned
Horse Cave, KY
  
Sauces, dressings, frozen rolls
 
Retail and Foodservice
  
Owned
Luverne, AL
  
Frozen rolls
 
Retail and Foodservice
  
Owned
Milpitas, CA
  
Sauces and dressings
 
Retail and Foodservice
  
Owned
Saline, MI
 
Flatbread products
 
Retail and Foodservice
 
Owned
Wareham, MA (1)
  
Croutons
 
Retail and Foodservice
  
Leased
(1)
Fully leased for terms expiring in fiscal 2019 and fiscal 2024.

The following table summarizes our principal warehouses, which are used to distribute products to our customers:
Location
  
Business Segment(s)
  
Terms of Occupancy
Altoona, IA (1)
  
Retail and Foodservice
  
Leased
Attalla, AL
  
Retail and Foodservice
  
Third-party service
Columbus, OH (2)
  
Retail and Foodservice
  
Leased
Grove City, OH
  
Retail and Foodservice
  
Owned
Horse Cave, KY
 
Retail and Foodservice
 
Owned
Milpitas, CA (3)
  
Retail and Foodservice
  
Leased
(1)
Fully leased for term expiring in fiscal 2020.
(2)
Fully leased for term expiring in fiscal 2022.
(3)
Fully leased for term expiring in fiscal 2021.

Item 3. Legal Proceedings
From time to time we are a party to various legal proceedings. While we believe that the ultimate outcome of these various proceedings, individually and in the aggregate, will not have a material effect on our consolidated financial statements, 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.

Item 4. Mine Safety Disclosures
Not applicable.


13


PART II

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 stock and the dividends paid for each quarter of 2018 and 2017. Stock prices were provided by The NASDAQ Stock Market LLC.
 
Stock Prices
 
Dividends Paid Per Share
 
High
 
Low
 
 
2018
 
 
 
 
 
First Quarter
$
127.90

 
$
113.34

 
$
0.55

Second Quarter
$
135.86

 
$
116.25

 
0.60

Third Quarter
$
132.35

 
$
115.81

 
0.60

Fourth Quarter
$
141.58

 
$
118.91

 
0.60

Year
 
 
 
 
$
2.35

 
 
 
 
 
 
2017
 
 
 
 
 
First Quarter
$
137.71

 
$
117.50

 
$
0.50

Second Quarter
$
143.67

 
$
125.71

 
0.55

Third Quarter
$
149.30

 
$
125.82

 
0.55

Fourth Quarter
$
131.79

 
$
119.38

 
0.55

Year
 
 
 
 
$
2.15

The number of shareholders of record as of August 2, 2018 was approximately 770. This is not the actual number of beneficial owners of our common stock, as shares are held in “street name” by brokers and others on behalf of individual owners. The highest and lowest prices for our common stock from July 1, 2018 to August 2, 2018 were $147.59 and $137.97.
We have increased our regular cash dividends for 55 consecutive years. Future dividends will depend on our earnings, financial condition and other factors.
Issuer Purchases of Equity Securities
In November 2010, our Board of Directors approved a share repurchase authorization of 2,000,000 common shares, of which 1,402,219 common shares remained authorized for future repurchases at June 30, 2018. This share repurchase authorization does not have a stated expiration date. In the fourth quarter, we did not repurchase any 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
April 1-30, 2018

 
$

 

 
1,402,219

May 1-31, 2018

 
$

 

 
1,402,219

June 1-30, 2018

 
$

 

 
1,402,219

Total

 
$

 

 
1,402,219



14


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, 2013 in each of our Common Stock, the S&P Midcap 400 Index and the Dow Jones U.S. Food Producers Index. The total return calculation assumes that all dividends are reinvested, including any special dividends.

lanc-201663_chartx19589a02.jpg
 
Cumulative Total Return (Dollars)
 
 
6/13
 
6/14
 
6/15
 
6/16
 
6/17
 
6/18
Lancaster Colony Corporation
 
100.00
 
124.48
 
121.26
 
181.08
 
176.86
 
203.43
S&P Midcap 400
 
100.00
 
125.24
 
133.25
 
135.02
 
160.09
 
181.71
Dow Jones U.S. Food Producers
 
100.00
 
120.27
 
134.23
 
159.55
 
153.11
 
150.01
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.


15


Item 6. Selected Financial Data
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
 
 
Years Ended June 30,
(Thousands Except Per Share Figures)
2018
 
2017
 
2016
 
2015
 
2014
Operations
 
 
 
 
 
 
 
 
 
Net Sales (1)
$
1,222,925

 
$
1,201,842

 
$
1,191,109

 
$
1,104,514

 
$
1,041,075

Gross Profit (1)
$
303,513

 
$
318,764

 
$
299,629

 
$
257,692

 
$
248,568

Percent of Net Sales
24.8
%
 
26.5
%
 
25.2
%
 
23.3
%
 
23.9
%
Multiemployer Pension Settlement and Related Costs
$

 
$
17,635

 
$

 
$

 
$

Income From Continuing Operations Before Income Taxes (1)
$
174,203

 
$
175,516

 
$
184,633

 
$
154,552

 
$
153,279

Percent of Net Sales
14.2
%
 
14.6
%
 
15.5
%
 
14.0
%
 
14.7
%
Taxes Based on Income (1) (4)
$
38,889

 
$
60,202

 
$
62,869

 
$
52,866

 
$
52,293

Income From Continuing Operations (1) (4)
$
135,314

 
$
115,314

 
$
121,764

 
$
101,686

 
$
100,986

Percent of Net Sales
11.1
%
 
9.6
%
 
10.2
%
 
9.2
%
 
9.7
%
Continuing Operations Diluted Net Income Per Common Share (1) (4)
$
4.92

 
$
4.20

 
$
4.44

 
$
3.72

 
$
3.69

Cash Dividends Per Common Share - Regular
$
2.35

 
$
2.15

 
$
1.96

 
$
1.82

 
$
1.72

Cash Dividends Per Common Share - Special
$

 
$

 
$
5.00

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
Total Assets (2)
$
804,491

 
$
716,405

 
$
634,732

 
$
702,156

 
$
627,301

Property, Plant and Equipment-Net (1)
$
190,813

 
$
180,671

 
$
169,595

 
$
172,311

 
$
168,674

Property Additions (1) (3)
$
31,025

 
$
27,005

 
$
16,671

 
$
18,298

 
$
15,645

Depreciation and Amortization (1)
$
26,896

 
$
24,906

 
$
24,147

 
$
21,111

 
$
18,993

Long-Term Debt
$

 
$

 
$

 
$

 
$

Shareholders’ Equity (4)
$
652,282

 
$
575,977

 
$
513,598

 
$
580,918

 
$
528,597

Per Common Share
$
23.73

 
$
20.98

 
$
18.73

 
$
21.23

 
$
19.33

Weighted Average Common Shares Outstanding-Diluted (4)
27,459

 
27,440

 
27,373

 
27,327

 
27,308

 
(1)
Amounts for 2014 exclude the impact of the discontinued Glassware & Candles segment operations.
(2)
Certain prior-year balances were reclassified in 2016 to reflect the impact of the adoption of new accounting guidance about the presentation of deferred tax assets and liabilities. With the adoption, our net deferred tax liability for all periods presented has been classified as noncurrent.
(3)
Amounts for 2017 and 2015 exclude property obtained in acquisitions ($5.1 million in the 2017 acquisition of Angelic Bakehouse and $6.9 million in the 2015 acquisition of Flatout).
(4)
Amounts for 2018 reflect the impact of the adoption of new accounting guidance for stock-based compensation, including the following provisions that were applied on a prospective basis: (a) the inclusion of the tax consequences related to stock-based compensation within the computation of income tax expense versus equity and (b) assumed proceeds used in the calculation of weighted average shares no longer include the amount of excess tax benefits. As a result, the amounts for 2018 may not be comparable to amounts for prior years.

16


Item 7. 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, 2018 refers to fiscal 2018, which is the period from July 1, 2017 to June 30, 2018.
The following discussion should be read in conjunction with the “Selected Financial Data” in Item 6 and our consolidated financial statements and the notes thereto in Item 8 of this Annual Report on Form 10-K. 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 as a result of factors set forth under the caption “Forward-Looking Statements” and those set forth in Item 1A of this Annual Report on Form 10-K.
OVERVIEW
Business Overview
Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and foodservice channels.
Effective July 1, 2017, David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as our CEO. As President and CEO, Mr. Ciesinski became our principal executive officer and CODM. This change resulted in modifications to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, beginning on July 1, 2017, our segment reporting structure was amended to align with these changes, and our financial results are now presented as two reportable segments: Retail and Foodservice. Costs that are directly attributable to either Retail or Foodservice are charged directly to the appropriate segment. Costs that are deemed to be indirect, excluding corporate expenses and other unusual significant transactions, are allocated to the two reportable segments using a reasonable methodology that is consistently applied. All historical information was retroactively conformed to the current presentation. These segment changes had no effect on previously reported consolidated net sales, operating income, net income or earnings per share. See Note 10 to the consolidated financial statements for further information about our segments.
Our sales are predominately domestic.
Our business has the potential to achieve future growth in sales and profitability due to attributes such as:
leading Retail market positions in several product categories with a high-quality perception;
recognized innovation in Retail products;
a broad customer base in both Retail and Foodservice accounts;
well-regarded culinary expertise among Foodservice customers;
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 both Retail and Foodservice segment sales over time by:
leveraging the strength of our Retail brands to increase current product sales;
introducing new products and expanding distribution; and
continuing to rely upon the strength of our reputation in Foodservice product development and quality.
Part of our future growth may result from acquisitions. We continue to review potential acquisitions that we believe will complement our existing product lines, enhance our profitability and/or offer good expansion opportunities in a manner that fits our overall strategic goals.
Consistent with this acquisition strategy, in November 2016 we acquired substantially all of the assets of Angelic Bakehouse, Inc. (“Angelic”), a manufacturer and marketer of premium sprouted grain bakery products based near Milwaukee, Wisconsin. This transaction is discussed in further detail in Note 2 to the consolidated financial statements.
We have made substantial capital investments to support our existing operations and future growth opportunities. For example, we recently expanded our warehousing capacity at Angelic to help meet anticipated growth in demand for our sprouted grain bakery products. Based on our current plans and expectations, we believe our capital expenditures for 2019 could total between $60 and $80 million, which includes a substantial investment for a frozen dinner roll capacity expansion project that we expect to complete in mid-2020. We anticipate we will be able to fund all of our capital needs in 2019 with cash generated from operations and cash on hand.

17


Summary of 2018 Results
Consolidated net sales reached a record $1,223 million during 2018, increasing by 2% as compared to prior-year net sales of $1,202 million, with both the Retail and Foodservice segments contributing to this growth.
Gross profit decreased 5% to $303.5 million from the prior-year total of $318.8 million. This decline resulted from considerably higher commodity and freight costs, partially offset by supply chain savings realized from our lean six sigma program and pricing actions taken beginning in the third quarter of 2018 in response to the cost increases. The prior-year results reflected a notable benefit from significantly lower ingredient costs in the first half of 2017 with only a modest offset from deflationary pricing.
In 2018, net income totaled $135.3 million, or $4.92 per diluted share, including a one-time benefit of $9.5 million, or $0.35 per diluted share, for the re-measurement of our net deferred tax liability due to the Tax Cuts and Jobs Act of 2017 (“Tax Act”). In 2017, net income totaled $115.3 million, or $4.20 per diluted share, including the multiemployer pension after-tax charge of $11.5 million, or $0.42 per diluted share, compared to $121.8 million, or $4.44 per diluted share, in 2016.
Looking Forward
For 2019, we expect volume-driven growth in our Retail segment with support from recent and upcoming new product introductions. We also anticipate continued progress with net price realization from the price increases that began in the second half of 2018 and better-optimized trade spending in the Retail segment. In the Foodservice segment, we anticipate volume growth from select national chain restaurant accounts and distributors of our branded products, as well as continued benefits from Foodservice segment price increases that were implemented early in the third quarter of 2018.
We will also continue to consider acquisition opportunities that are consistent with our growth strategy and represent good value or otherwise provide significant strategic benefits.
Among the many factors that may impact our ability to improve sales and operating margins in the coming year are the success of our continued investment in innovation and new products, growth from existing product lines, the level of net price realization in the Retail segment and the extent of efficiency gains and cost savings resulting from our lean six sigma program and other supply chain initiatives.
Based on current market conditions, commodity costs are projected to remain unfavorable in fiscal 2019, although to a lesser extent than we experienced in fiscal 2018. Freight costs are also expected to persist as a headwind through the first half of the fiscal year. We have initiatives in place or planned for both the short- and long-term to address these higher freight and commodity costs including pricing actions, a more optimized distribution network and tactical procurement. Future changes in ingredient costs, as well as other material costs, will be influenced by the size of agricultural harvests in both the United States and other parts of the world and related global demand, economic conditions, tariffs and the regulatory environment.
Overall, we continue to limit some of our exposure to volatile swings in food commodity costs through a structured forward purchasing program for certain key materials such as soybean oil and flour. For a more-detailed discussion of the effect of commodity costs, see the “Impact of Inflation” section of this MD&A below. Changes in other notable recurring costs, such as marketing, transportation, production costs and introductory costs for new products, may also impact our overall results.
The Tax Act was signed into law on December 22, 2017 with an effective date of January 1, 2018. Most notably, the Tax Act reduced the statutory federal income tax rate for corporations from 35% to 21%. The statutory federal income tax rate for our 2019 tax return will be 21%, a reduction from the blended rate of 28.1% for our 2018 federal tax return. We expect an overall effective tax rate of approximately 24% for 2019.
We will adopt new accounting guidance for revenue recognition on July 1, 2018. The adoption of this standard will not have a material impact on our financial position or results of operations. However, there will be additional required disclosures in the notes to the consolidated financial statements upon adoption. See further discussion in Note 1 to the consolidated financial statements.
We will adopt new accounting guidance for changes in the presentation of net periodic pension cost and net periodic postretirement benefit cost on July 1, 2018. The amendments will require retrospective application for the income statement presentation provisions. We expect only changes in classification on the income statement. See further discussion in Note 1 to the consolidated financial statements.
We will continue to periodically reassess our allocation of capital to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders.

18


RESULTS 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:
 
2018
 
2017
 
2016
Segment Sales Mix:
 
 
 
 
 
Retail
53%
 
53%
 
52%
Foodservice
47%
 
47%
 
48%
Net Sales and Gross Profit
  
Year Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Net Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
650,234

 
$
641,417

 
$
619,384

 
$
8,817

 
1
 %
 
$
22,033

 
4
 %
Foodservice
572,691

 
560,425

 
571,725

 
12,266

 
2
 %
 
(11,300
)
 
(2
)%
Total
$
1,222,925

 
$
1,201,842

 
$
1,191,109

 
$
21,083

 
2
 %
 
$
10,733

 
1
 %
Gross Profit
$
303,513

 
$
318,764

 
$
299,629

 
$
(15,251
)
 
(5
)%
 
$
19,135

 
6
 %
Gross Margin
24.8
%
 
26.5
%
 
25.2
%
 
 
 
 
 
 
 
 
In November 2016, we acquired Angelic and its results of operations have been included in the Retail segment within our consolidated financial statements from the date of acquisition.
2018 to 2017
Consolidated net sales for the year ended June 30, 2018 increased 2% to a new record of $1,223 million from the prior-year record total of $1,202 million. This growth was driven by increases in both Retail and Foodservice net sales and resulted from pricing actions, which were taken during the second half of 2018 in response to higher freight and commodity costs, as well as reduced retail trade spending and lower coupon expense. Our sales volume, as measured by pounds shipped, was essentially flat. Retail net sales represented 53% of total net sales in both 2018 and 2017.
Our gross margin declined to 24.8% in 2018 compared to 26.5% in 2017 due to the impact of increased commodity costs, most notably eggs, as well as soybean oil, flour and dairy ingredients, and higher freight costs. The increase in freight costs resulted from several factors adversely affecting transportation capacity within the United States, including severe weather, rising diesel fuel costs, new regulations, driver availability and a growing U.S. economy. These increased costs were partially offset by supply chain savings realized from our lean six sigma program and pricing actions taken in our Retail and Foodservice segments primarily in the second half of 2018. Excluding the impact of pricing, total raw-material costs were estimated to have negatively affected our gross margins by 1% of net sales. We estimate higher freight costs to have negatively affected our gross margins by nearly 1% of net sales. The prior-year results reflected a notable benefit from significantly lower ingredient costs in the first half of 2017 with only a modest offset from deflationary pricing.
2017 to 2016
Consolidated net sales for the year ended June 30, 2017 increased 1% to a then record of $1,202 million from the prior-year record total of $1,191 million. This growth was driven by higher Retail net sales as partially offset by lower Foodservice net sales. Excluding Angelic, our overall sales volume, as measured by pounds shipped, improved by 1%. Pricing had a net deflationary impact of nearly 1% of net sales for 2017. As a percentage of total net sales, Retail net sales increased slightly to 53% from 52% in 2016.
Our gross margin increased to 26.5% in 2017 compared with 25.2% in 2016 due to the influence of overall lower raw-material costs, primarily for eggs, but also for flour, honey and certain packaging materials. Margins also benefited from a more favorable sales mix, partially offset by higher retail trade spending and deflationary pricing in the Foodservice segment. Excluding pricing actions, total raw-material costs were estimated to have positively affected our gross margins by 2% of net sales.

19


Selling, General and Administrative Expenses
  
Year Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
SG&A Expenses
$
131,406

 
$
126,381

 
$
115,059

 
$
5,025

 
4
%
 
$
11,322

 
10
%
SG&A Expenses as a Percentage of Net Sales
10.7
%
 
10.5
%
 
9.7
%
 
 
 
 
 
 
 
 
The 2018 increase in selling, general and administrative (“SG&A”) expenses reflected a higher level of investments in personnel and business growth initiatives, incremental amortization expense and other recurring noncash charges attributed to Angelic during the first half of 2018, and the impact of a prior-year one-time benefit from the full settlement of a class-action lawsuit related to a provider of in-store promotional advertising. The higher level of SG&A expenses was partially offset by lower promotional spending and savings gained through the realignment of our retail broker network beginning in the second half of 2018. The 2017 increase in SG&A expenses reflected investments in key leadership personnel and strategic business initiatives during the second half of 2017 to support future growth. Transaction costs, incremental amortization expense and other recurring noncash charges attributed to the Angelic business acquired in November 2016 also impacted SG&A expenses in 2017.
Multiemployer Pension Settlement and Related Costs
In 2017 the employees at our Bedford Heights, Ohio plant voted to ratify a new collective bargaining agreement. Among other terms, the new agreement provided for our complete withdrawal from the underfunded multiemployer Cleveland Bakers and Teamsters Pension Fund. In lieu of contributions to the pension fund, we are making non-elective contributions for the union employees at the Bedford Heights, Ohio plant into a union-sponsored 401(k) plan. We initially funded the new 401(k) plan and paid a withdrawal liability as settlement of our portion of underfunded pension benefits of the multiemployer plan. We recorded a one-time charge of $17.6 million in 2017 for the multiemployer pension settlement and other benefit-related costs. Given the unusual nature of these significant indirect costs, this charge was not allocated to our two reportable segments.
Operating Income
  
Year Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
126,391

 
$
138,470

 
$
134,900

 
$
(12,079
)
 
(9
)%
 
$
3,570

 
3
 %
Foodservice
58,432

 
66,216

 
61,692

 
(7,784
)
 
(12
)%
 
4,524

 
7
 %
Multiemployer Pension Settlement and Related Costs

 
(17,635
)
 

 
17,635

 
(100
)%
 
(17,635
)
 
N/M

Corporate Expenses
(12,716
)
 
(12,303
)
 
(12,022
)
 
(413
)
 
3
 %
 
(281
)
 
2
 %
Total
$
172,107

 
$
174,748

 
$
184,570

 
$
(2,641
)
 
(2
)%
 
$
(9,822
)
 
(5
)%
Operating Margin
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
19.4
%
 
21.6
%
 
21.8
%
 
 
 
 
 
 
 
 
Foodservice
10.2
%
 
11.8
%
 
10.8
%
 
 
 
 
 
 
 
 
Total
14.1
%
 
14.5
%
 
15.5
%
 
 
 
 
 
 
 
 
See discussion of operating results by segment following the discussion of “Net Income” below.
The level of the 2018 corporate expenses presented above was consistent with our expectations and was similar to those of 2017 and 2016.
Income Before Income Taxes
As impacted by the factors discussed above, income before income taxes for 2018 of $174.2 million decreased 1% from the 2017 total of $175.5 million. The 2016 income before income taxes was $184.6 million.
Taxes Based on Income
Our effective tax rate was 22.3%, 34.3% and 34.1% in 2018, 2017 and 2016, respectively. The current-year rate was impacted by the Tax Act, which was signed into law on December 22, 2017 with an effective date of January 1, 2018. Most notably, the Tax Act reduced the statutory federal income tax rate for corporations from 35% to 21%. Since we file our tax return based on our fiscal year, the statutory federal income tax rate for our 2018 tax return will be a blended rate of 28.1%. In addition to the effect of the lower overall federal tax rate, the Tax Act resulted in a $9.5 million one-time benefit for the re-

20


measurement of our net deferred tax liability in 2018. Looking ahead to 2019, we expect an overall effective tax rate of approximately 24%. See Note 9 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate for 2018, 2017 and 2016.
Our taxes based on income for the year ended June 30, 2018 consisted of the following components:
(Dollars in thousands)
2018
Federal, state and local provision
$
49,186

 
28.2
 %
One-time benefit on re-measurement of net deferred tax liability
(9,542
)
 
(5.5
)%
Net windfall tax benefits - stock-based compensation
(755
)
 
(0.4
)%
Taxes Based on Income
$
38,889

 
22.3
 %
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. We recorded an estimate of the impact of the Tax Act within our December 31, 2017 financial statements, including the impact of items recorded within accumulated other comprehensive loss. There were no material changes to these estimates in the six months ended June 30, 2018. We will continue to evaluate the impacts of the Tax Act and record adjustments, as needed, including adjustments related to the filing of our 2018 federal tax return, but do not expect material changes to the amounts recorded. In February 2018, the Financial Accounting Standards Board issued new accounting guidance to allow a reclassification from accumulated other comprehensive income/loss to retained earnings for stranded tax effects resulting from the Tax Act. We recorded this reclassification in the quarter ended March 31, 2018. See further discussion under the caption “Recently Adopted Accounting Standards” in Note 1 to the consolidated financial statements.
On July 1, 2017, we adopted new accounting guidance for stock-based compensation that, among other things, requires the recognition of windfall tax benefits and shortfall tax deficiencies in our income tax expense, instead of equity. For 2018, the impact of net windfall tax benefits reduced our effective tax rate by 0.4%. This adoption may result in increased volatility to our quarterly and annual income tax expense and resulting net income, dependent upon, among other variables, the price of our common stock and the timing and volume of share-based payment award activity such as employee exercises of stock-settled stock appreciation rights and vesting of restricted stock awards. This adoption is discussed in further detail under the caption “Recently Adopted Accounting Standards” in Note 1 to the consolidated financial statements.
Net Income
As influenced by the factors discussed above, particularly the impact of the Tax Act in 2018 and the multiemployer pension charge in 2017, net income for 2018 of $135.3 million increased from the 2017 net income of $115.3 million, which had decreased from 2016 net income of $121.8 million. Diluted weighted average common shares outstanding for each of the years ended June 30, 2018, 2017 and 2016 have remained relatively stable. As a result, and due to the change in net income for each year, diluted net income per share totaled $4.92 in 2018, an increase from the 2017 total of $4.20 per diluted share. The 2016 net income per share totaled $4.44 per diluted share.
In 2018, the Tax Act resulted in a one-time deferred tax benefit of $0.35 per diluted share. In 2017, the estimated impact of the multiemployer pension charge was $0.42 per diluted share.
RESULTS OF OPERATIONS - SEGMENTS
Retail Segment
 
Year Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Net Sales
$
650,234

 
$
641,417

 
$
619,384

 
$
8,817

 
1
 %
 
$
22,033

 
4
%
Operating Income
$
126,391

 
$
138,470

 
$
134,900

 
$
(12,079
)
 
(9
)%
 
$
3,570

 
3
%
Operating Margin
19.4
%
 
21.6
%
 
21.8
%
 
 
 
 
 
 
 
 
2018 to 2017
In 2018, net sales for the Retail segment reached $650.2 million, a 1% increase from the prior-year total of $641.4 million. This increase was driven by increased sales volumes for shelf-stable dressings and sauces sold under license agreements, the incremental sales from the Angelic Bakehouse business acquired in November 2016, pricing actions, reduced trade spending and lower coupon expense, partially offset by reduced sales of frozen garlic bread products in the second and

21


third quarters of 2018 due to a supply disruption. Pricing actions were implemented starting in the second half of 2018 with a resulting net impact of less than 1% of Retail net sales for 2018.
In 2018, Retail segment operating income and related margins decreased due to the impact of increased commodity and freight costs, investments in personnel and business growth initiatives and incremental amortization expense and other recurring noncash charges attributed to Angelic during the first half of the year. These higher costs were partially offset by supply chain savings realized from our lean six sigma program, some net price realization, lower consumer promotional and other trade spending and lower brokerage costs due to the mid-year realignment of our retail broker network. The prior-year operating income and related margins reflected a significant benefit from lower ingredient costs in the first half of the year.
2017 to 2016
In 2017, net sales for the Retail segment reached $641.4 million, a 4% increase from the 2016 total of $619.4 million with sprouted grain bakery products, shelf-stable dressings sold under license agreements and frozen bread products among the most notable contributing product lines. Higher trade promotion costs served to limit Retail sales growth. The impact of pricing on Retail net sales was minimal for 2017.
In 2017, Retail segment operating income increased while related margins were essentially flat as the influence of overall lower raw-material costs, primarily for eggs, but also for flour, honey and certain packaging materials, were partially offset by higher retail trade spending, investments in key leadership personnel and strategic business initiatives during the second half of 2017 and the transaction costs, incremental amortization expense and other recurring noncash charges attributed to the Angelic business.
Foodservice Segment
 
Year Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Net Sales
$
572,691

 
$
560,425

 
$
571,725

 
$
12,266

 
2
 %
 
$
(11,300
)
 
(2
)%
Operating Income
$
58,432

 
$
66,216

 
$
61,692

 
$
(7,784
)
 
(12
)%
 
$
4,524

 
7
 %
Operating Margin
10.2
%
 
11.8
%
 
10.8
%
 
 
 
 
 
 
 
 
2018 to 2017
In 2018, Foodservice net sales increased 2% to $572.7 million from the 2017 total of $560.4 million reflecting improvements due to pricing actions that were taken beginning in the third quarter and higher volumes for frozen breads and frozen pasta. This increase was partially offset by the impact of general softness in the restaurant industry in the first half of 2018. Inflationary pricing totaled 1% of Foodservice net sales for 2018.
In 2018, the decline in Foodservice segment operating income and related margins was driven by increased commodity and freight costs and our investments in personnel and business growth initiatives. These higher costs were partially offset by supply chain savings realized from our lean six sigma program and inflationary pricing. The 2017 operating income and related margins reflected a significant benefit from lower ingredient costs in the first half of the year.
With regard to the impact of commodity and freight costs on Foodservice segment operating income, most of our supply contracts with national chain restaurant accounts incorporate pricing adjustments to account for changes in ingredient and freight costs. These supply contracts may vary by account with regard to the time lapse between the actual change in ingredient and freight costs we incur and the effective date of the associated price increase or decrease. As a result, the reported operating margins of the Foodservice segment are subject to increased volatility during periods of rapidly rising or falling ingredient and/or freight costs because at least some portion of the change in ingredient and/or freight costs is reflected in the segment’s results prior to the impact of any associated change in pricing. In addition, the Foodservice segment has an inherently higher degree of margin volatility from changes in ingredient costs when compared to the Retail segment due to its overall lower margin profile and higher ratio of ingredient pounds to net sales.
2017 to 2016
In 2017, net sales for the Foodservice segment reached $560.4 million, a 2% decrease from the 2016 total of $571.7 million as influenced by our targeted business rationalization efforts with certain national chain restaurants that began in the third quarter of 2016 and deflationary pricing, primarily from lower egg costs.
In 2017, Foodservice segment operating income and related margins increased due to the influence of overall lower raw-material costs, primarily for eggs, but also for flour, honey and certain packaging materials, partially offset by deflationary pricing and investments in key leadership personnel and strategic business initiatives during the second half of 2017.

22


FINANCIAL CONDITION
Liquidity and Capital Resources
We maintain sufficient flexibility in our capital structure to ensure 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 opportunistic share repurchases. Our balance sheet maintained fundamental financial strength during 2018 as we ended the year with $206 million in cash and equivalents, along with shareholders’ equity of $652 million and no debt.
Under our unsecured revolving credit facility (“Facility”), we may borrow up to a maximum of $150 million at any one time. We had no borrowings outstanding under the Facility at June 30, 2018. At June 30, 2018, we had $5.1 million of standby letters of credit outstanding, which reduced the amount available for borrowing on the Facility. The Facility expires in April 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.
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, 2018, 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 June 30, 2018, there were no events that would constitute a default under this facility.
We currently expect to remain in compliance with the Facility’s covenants for the foreseeable future. However, a default under the Facility could accelerate the repayment of any then outstanding indebtedness and limit our access to $75 million of additional credit available under the Facility. Such an event could require a reduction in or 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.
We believe that cash provided by operating activities and our existing balances in cash and equivalents, in addition to that available under the Facility, should be adequate to meet our cash requirements through 2019. If we were to borrow outside of the Facility under current market terms, our average interest rate may increase significantly and have an adverse effect on our results of operations.
Cash Flows
  
Year Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Provided By Operating Activities
$
160,714

 
$
146,385

 
$
145,903

 
$
14,329

 
10
 %
 
$
482

 
%
Used In Investing Activities
$
(31,452
)
 
$
(60,608
)
 
$
(17,423
)
 
$
29,156

 
48
 %
 
$
(43,185
)
 
N/M

Used In Financing Activities
$
(66,614
)
 
$
(60,753
)
 
$
(192,602
)
 
$
(5,861
)
 
(10
)%
 
$
131,849

 
68
%
Cash provided by operating activities remains the primary source for funding our investing and financing activities, as well as financing our organic growth initiatives.
Cash provided by operating activities in 2018 totaled $160.7 million, an increase of 10% as compared with the 2017 total of $146.4 million, which increased less than 1% as compared to the 2016 total of $145.9 million. The 2018 increase was primarily due to higher net income, including the benefit from the lower tax rate resulting from the Tax Act. The 2017 increase reflected lower working capital requirements, primarily in accounts payable and accrued liabilities, an increase in deferred tax liabilities related to property and increases in noncash charges for depreciation and amortization and the noncash change in acquisition-related contingent consideration. These changes were largely offset by lower net income in 2017, which included the one-time multiemployer pension charge. The increase in amortization and the change in acquisition-related contingent consideration were the result of the November 2016 acquisition of Angelic.
Cash used in investing activities totaled $31.5 million in 2018 as compared to $60.6 million in 2017 and $17.4 million in 2016. The 2018 decrease in cash used in investing activities was due to the $35.2 million paid for the acquisition of Angelic in November 2016, as partially offset by a higher level of capital expenditures in 2018, with the largest amounts spent on warehousing and new equipment to increase capacity and/or improve operational efficiencies. The 2017 increase in cash used in investing activities primarily reflected the cash paid for the acquisition of Angelic in November 2016, as well as a higher level of capital expenditures in 2017, with the largest amounts spent on packaging equipment to accommodate growth and build-out costs related to our corporate office relocation. Capital expenditures totaled $31.0 million in 2018, compared to $27.0 million in 2017 and $16.7 million in 2016.

23


Financing activities used net cash totaling $66.6 million, $60.8 million and $192.6 million in 2018, 2017 and 2016, respectively. In general, cash used in financing activities reflects the payment of dividends. The regular dividend payout rate for 2018 was $2.35 per share, as compared to $2.15 per share in 2017 and $1.96 per share in 2016. This past fiscal year marked the 55th consecutive year in which our dividend rate was increased. A $5.00 per share special dividend was paid in December 2015, which totaled $136.7 million.
The future levels of share repurchases and declared dividends are subject to the periodic review of our Board of Directors and are generally determined after an assessment is made of various factors, such 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. We do not have any related party transactions that materially affect our results of operations, cash flows 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 contractual obligations are not recognized as liabilities in our consolidated financial statements. Examples of such items are commitments to purchase raw materials or packaging inventory that has not yet been received as of June 30, 2018 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, 2018 (dollars in thousands):
 
Payment Due by Period
Contractual Obligations
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
Operating Lease Obligations (1)
$
23,152

 
$
6,839

 
$
8,211

 
$
4,274

 
$
3,828

Purchase Obligations (2)
199,737

 
180,944

 
17,472

 
971

 
350

Other Noncurrent Liabilities (as reflected on Consolidated Balance Sheet) (3)
17,720

 

 
640

 
17,080

 

Total
$
240,609

 
$
187,783

 
$
26,323

 
$
22,325

 
$
4,178

 
(1)
Operating leases are primarily entered into for warehouse and office facilities and certain equipment. See Note 5 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, services, and property, plant and equipment.
(3)
This amount does not include $23.9 million of other noncurrent liabilities recorded on the balance sheet, which largely consist of the underfunded defined benefit 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 9, 12 and 13 to the consolidated financial statements for further information.
IMPACT OF INFLATION
Our business results can be influenced by significant changes in the costs of our raw materials. We attempt to mitigate the impact of inflation on our raw materials by entering into longer-term fixed-price contracts for a portion of our most significant commodities, soybean oil and flour. As we enter 2019, we will begin to implement a new procurement strategy for a portion of our egg needs through the use of grain-based pricing contracts to reduce our exposure to egg market spot prices. However, we remain exposed to events and trends in the marketplace for our other raw-material and packaging costs. While we attempt to pass through sustained increases in raw-material costs via price adjustments on our retail and foodservice products, such price adjustments will often lag the changes in the related input costs.

24


As we transitioned from 2015 to 2016, we saw a significant increase in the price of egg-based ingredients due to a major outbreak of avian influenza in the United States. Due to timing and the degree of the increase in egg costs, we lagged obtaining cost recovery during the first half of 2016, but we had largely recovered such costs as we exited our then third fiscal quarter. During the first half of 2017, we experienced a deflationary pricing environment within our foodservice channel as the cost of eggs had retreated to historical prices, and we adjusted pricing charged to our foodservice national chain restaurant accounts to reflect the lower input cost of eggs and other key ingredients. Consequently, while the deflationary pricing was more than offset by lower egg costs during the first half of 2017, the deflationary pricing negatively impacted net sales growth from our foodservice channel during the period. During the second half of 2017, the net impact of inflation was not significant, but some residual deflationary pricing did impact Foodservice net sales and gross profit in the period.
In 2018, we experienced increased commodity costs across many ingredient and packaging materials, most notably for eggs. The increase in egg costs was principally due to egg-producing issues in Europe which resulted in significantly higher exports from the United States. Additionally, freight costs increased significantly due to capacity constraints in the transportation industry. We implemented pricing actions in both our Retail and Foodservice segments in the second half of 2018. Entering 2019, under current market conditions, we foresee unfavorable material and freight cost comparisons, although to a lesser extent than in 2018. We expect net price realization in 2019 to offset the impact of material and freight cost inflation.
Although typically less notable, we are also exposed to the impacts of general inflation beyond material costs, especially in the areas of annual wage adjustments and benefit costs. Over time, we attempt to minimize the exposure to such cost increases through greater manufacturing and distribution efficiencies via our lean six sigma program and strategic investments in plant equipment.
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 allowances, 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 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 reflect those areas in which more significant judgments and estimates are 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, trade promotions and certain other sales incentives, including coupon redemptions and rebates. See discussion of new accounting guidance for revenue recognition, which will be applicable for us beginning on July 1, 2018, under the caption “Recently Issued Accounting Standards” in Note 1 to the consolidated financial statements.
Receivables and Related Allowances
We evaluate the adequacy of our allowances for customer deductions considering several factors including historical experience, specific trade programs and existing customer relationships.
Goodwill and Other Intangible Assets
Goodwill is not amortized. It is evaluated annually at April 30 by applying impairment testing procedures. Other intangible assets are amortized on a straight-line basis over their estimated useful lives to Selling, General and Administrative Expenses. We evaluate the future economic benefit of the recorded goodwill and other intangible assets when events or circumstances indicate potential recoverability concerns. Carrying amounts are adjusted appropriately when determined to have been impaired.

25


RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements and their impact on our consolidated financial statements are disclosed in Note 1 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, one 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, those risk factors identified in Item 1A and:
adverse changes in freight, energy or other costs of producing, distributing or transporting our products;
fluctuations in the cost and availability of ingredients and packaging;
the reaction of customers or consumers to price increases we may implement;
price and product competition;
the impact of customer store brands on our branded retail volumes;
the lack of market acceptance of new products;
dependence on contract manufacturers, distributors and freight transporters;
capacity constraints that may affect our ability to meet demand or may increase our costs;
the success and cost of new product development efforts;
dependence on key personnel and changes in key personnel;
the effect of consolidation of customers within key market channels;
the ability to successfully grow recently acquired businesses;
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;
the potential for loss of larger programs or key customer relationships;
changes in demand for our products, which may result from loss of brand reputation or customer goodwill;
maintenance of competitive position with respect to other manufacturers;
efficiencies in plant operations;
the impact of any regulatory matters affecting our food business, including any required labeling changes and their impact on consumer demand;
stability of labor relations;
the outcome of any litigation or arbitration;
the impact, if any, of certain contingent liabilities associated with our withdrawal from a multiemployer pension plan;
the impact of fluctuations in our pension plan asset values on funding levels, contributions required and benefit costs;
changes in estimates in critical accounting judgments; and
certain other risk factors, including those discussed in other filings we have submitted to the Securities and Exchange Commission.


26


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to market risks primarily from changes in raw material prices. In recent years, due to the absence of any borrowings, we have not had exposure to changes in interest rates. We also have not had exposure to market risk associated with derivative financial instruments or derivative commodity instruments as we do not utilize any such instruments.
RAW MATERIAL PRICE RISK
We purchase a variety of commodities and other raw materials, such as soybean oil, flour, eggs and dairy-based 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 forward purchasing program for certain key materials such as soybean oil and flour. This program, coupled with short-term fixed price arrangements on other significant raw materials, gives us more predictable input costs, which may help stabilize our short-term margins during periods of volatility in commodity markets.

Item 8. Financial Statements and Supplementary Data


27


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Lancaster Colony Corporation

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lancaster Colony Corporation and Subsidiaries (the “Company”) as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 27, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
August 27, 2018

We have served as the Company’s auditor since 1961.

28


LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
  
June 30,
(Amounts in thousands, except share data)
2018
 
2017
ASSETS
Current Assets:
 
 
 
Cash and equivalents
$
205,752

 
$
143,104

Receivables
72,960

 
69,922

Inventories:
 
 
 
Raw materials
32,673

 
28,447

Finished goods
58,188

 
47,929

Total inventories
90,861

 
76,376

Other current assets
9,304

 
11,744

Total current assets
378,877

 
301,146

Property, Plant and Equipment:
 
 
 
Land, buildings and improvements
132,318

 
124,673

Machinery and equipment
293,409

 
272,582

Total cost
425,727

 
397,255

Less accumulated depreciation
234,914

 
216,584

Property, plant and equipment-net
190,813

 
180,671

Other Assets:
 
 
 
Goodwill
168,030

 
168,030

Other intangible assets-net
56,176

 
60,162

Other noncurrent assets
10,595

 
6,396

Total
$
804,491

 
$
716,405

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Accounts payable
$
57,978

 
$
41,353

Accrued liabilities
35,789

 
35,270

Total current liabilities
93,767

 
76,623

Other Noncurrent Liabilities
41,638

 
38,598

Deferred Income Taxes
16,804

 
25,207

Commitments and Contingencies

 

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

 

Common stock-authorized 75,000,000 shares; outstanding-2018-27,487,989 shares; 2017-27,448,424 shares
119,232

 
115,174

Retained earnings
1,279,343

 
1,206,671

Accumulated other comprehensive loss
(8,259
)
 
(8,936
)
Common stock in treasury, at cost
(738,034
)
 
(736,932
)
Total shareholders’ equity
652,282

 
575,977

Total
$
804,491

 
$
716,405

See accompanying notes to consolidated financial statements.

29


LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
  
Years Ended June 30,
(Amounts in thousands, except per share data)
2018
 
2017
 
2016
Net Sales
$
1,222,925

 
$
1,201,842

 
$
1,191,109

Cost of Sales
919,412

 
883,078

 
891,480

Gross Profit
303,513

 
318,764

 
299,629

Selling, General and Administrative Expenses
131,406

 
126,381

 
115,059

Multiemployer Pension Settlement and Related Costs

 
17,635

 

Operating Income
172,107

 
174,748

 
184,570

Other, Net
2,096

 
768

 
63

Income Before Income Taxes
174,203

 
175,516

 
184,633

Taxes Based on Income
38,889

 
60,202

 
62,869

Net Income
$
135,314

 
$
115,314

 
$
121,764

Net Income Per Common Share:
 
 
 
 
 
Basic
$
4.93

 
$
4.21

 
$
4.45

Diluted
$
4.92

 
$
4.20

 
$
4.44

Weighted Average Common Shares Outstanding:
 
 
 
 
 
Basic
27,403

 
27,376

 
27,336

Diluted
27,459

 
27,440

 
27,373

See accompanying notes to consolidated financial statements.

30


LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
  
Years Ended June 30,
(Amounts in thousands)
2018
 
2017
 
2016
Net Income
$
135,314

 
$
115,314

 
$
121,764

Other Comprehensive Income (Loss):
 
 
 
 
 
Defined Benefit Pension and Postretirement Benefit Plans:
 
 
 
 
 
Net gain (loss) arising during the period, before tax
3,041

 
3,334

 
(4,200
)
Prior service credit arising during the period, before tax

 

 
1,770

Amortization of loss, before tax
536

 
677

 
505

Amortization of prior service credit, before tax
(182
)
 
(182
)
 
(126
)
Total Other Comprehensive Income (Loss), Before Tax
3,395

 
3,829

 
(2,051
)
Tax Attributes of Items in Other Comprehensive Income (Loss):
 
 
 
 
 
Net gain (loss) arising during the period, tax
(710
)
 
(1,231
)
 
1,551

Prior service credit arising during the period, tax

 

 
(654
)
Amortization of loss, tax
(180
)
 
(250
)
 
(186
)
Amortization of prior service credit, tax
61

 
66

 
47

Total Tax (Expense) Benefit
(829
)
 
(1,415
)
 
758

Other Comprehensive Income (Loss), Net of Tax
2,566

 
2,414

 
(1,293
)
Comprehensive Income
$
137,880

 
$
117,728

 
$
120,471

See accompanying notes to consolidated financial statements.

31


LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  
Years Ended June 30,
(Amounts in thousands)
2018
 
2017
 
2016
Cash Flows From Operating Activities:
 
 
 
 
 
Net income
$
135,314

 
$
115,314

 
$
121,764

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Impacts of noncash items:
 
 
 
 
 
Depreciation and amortization
26,896

 
24,906

 
24,147

Change in acquisition-related contingent consideration
2,052

 
1,156

 

Deferred income taxes and other changes
(8,502
)
 
2,347

 
(525
)
Stock-based compensation expense
5,039

 
4,248

 
3,326

Gain on sale of property
(10
)
 
(629
)
 

Pension plan activity
(434
)
 
(244
)
 
(296
)
Changes in operating assets and liabilities:
 
 
 
 
 
Receivables
(3,040
)
 
(2,598
)
 
(3,547
)
Inventories
(14,485
)
 
150

 
1,802

Other current assets
2,164

 
(2,958
)
 
1,445

Accounts payable and accrued liabilities
15,720

 
4,693

 
(2,213
)
Net cash provided by operating activities
160,714

 
146,385

 
145,903

Cash Flows From Investing Activities:
 
 
 
 
 
Cash paid for acquisitions, net of cash acquired
(318
)
 
(35,169
)
 
(12
)
Payments for property additions
(31,025
)
 
(27,005
)
 
(16,671
)
Proceeds from sale of property
38

 
1,475

 

Other-net
(147
)
 
91

 
(740
)
Net cash used in investing activities
(31,452
)
 
(60,608
)
 
(17,423
)
Cash Flows From Financing Activities:
 
 
 
 
 
Purchase of treasury stock
(1,102
)
 
(866
)
 
(155
)
Payment of dividends (including special dividend payment, 2018-$0; 2017-$0; 2016-$136,677)
(64,531
)
 
(58,980
)
 
(190,546
)
Tax withholdings for stock-based compensation
(981
)
 
(907
)
 
(1,901
)
Net cash used in financing activities
(66,614
)
 
(60,753
)
 
(192,602
)
Net change in cash and equivalents
62,648

 
25,024

 
(64,122
)
Cash and equivalents at beginning of year
143,104

 
118,080

 
182,202

Cash and equivalents at end of year
$
205,752

 
$
143,104

 
$
118,080

See accompanying notes to consolidated financial statements.

32


LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
(Amounts in thousands,
except per share data)
 
Common Stock
Outstanding
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance, June 30, 2015
 
27,361

 
$
107,767

 
$
1,219,119

 
$
(10,057
)
 
$
(735,911
)
 
$
580,918

Net income
 
 
 
 
 
121,764

 
 
 
 
 
121,764

Net pension and postretirement benefit losses, net of ($758) tax effect
 
 
 
 
 
 
 
(1,293
)
 
 
 
(1,293
)
Cash dividends - common stock ($6.96 per share)
 
 
 
 
 
(190,546
)
 
 
 
 
 
(190,546
)
Purchase of treasury stock
 
(2
)
 
 
 
 
 
 
 
(155
)
 
(155
)
Stock-based plans, including excess tax benefits
 
65

 
(416
)
 
 
 
 
 
 
 
(416
)
Stock-based compensation expense
 
 
 
3,326

 
 
 
 
 
 
 
3,326

Balance, June 30, 2016
 
27,424

 
110,677

 
1,150,337

 
(11,350
)
 
(736,066
)
 
513,598

Net income
 
 
 
 
 
115,314

 
 
 
 
 
115,314

Net pension and postretirement benefit gains, net of $1,415 tax effect
 
 
 
 
 
 
 
2,414

 
 
 
2,414

Cash dividends - common stock ($2.15 per share)
 
 
 
 
 
(58,980
)
 
 
 
 
 
(58,980
)
Purchase of treasury stock
 
(6
)
 
 
 
 
 
 
 
(866
)
 
(866
)
Stock-based plans, including excess tax benefits
 
30

 
249

 
 
 
 
 
 
 
249

Stock-based compensation expense
 
 
 
4,248

 
 
 
 
 
 
 
4,248

Balance, June 30, 2017
 
27,448

 
115,174

 
1,206,671

 
(8,936
)
 
(736,932
)
 
575,977

Net income
 
 
 
 
 
135,314

 
 
 
 
 
135,314

Net pension and postretirement benefit gains, net of $829 tax effect
 
 
 
 
 
 
 
2,566

 
 
 
2,566

Tax Cuts and Jobs Act of 2017, Reclassification from accumulated other comprehensive loss to retained earnings
 
 
 
 
 
1,889

 
(1,889
)
 
 
 

Cash dividends - common stock ($2.35 per share)
 
 
 
 
 
(64,531
)
 
 
 
 
 
(64,531
)
Purchase of treasury stock
 
(9
)
 
 
 
 
 
 
 
(1,102
)
 
(1,102
)
Stock-based plans
 
49

 
(981
)
 
 
 
 
 
 
 
(981
)
Stock-based compensation expense
 
 
 
5,039

 
 
 
 
 
 
 
5,039

Balance, June 30, 2018
 
27,488

 
$
119,232

 
$
1,279,343

 
$
(8,259
)
 
$
(738,034
)
 
$
652,282

See accompanying notes to consolidated financial statements.

33


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, 2018 refers to fiscal 2018, which is the period from July 1, 2017 to June 30, 2018.
Effective July 1, 2017, David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as Chief Executive Officer (“CEO”). As President and CEO, Mr. Ciesinski became our principal executive officer and chief operating decision maker (“CODM”). This change resulted in modifications to the CODM’s approach to managing the business, assessing performance and allocating resources. Consequently, beginning on July 1, 2017, our segment reporting structure was amended to align with these changes, and our financial results are now presented as two reportable segments: Retail and Foodservice. See Note 10 for additional details. All historical information was retroactively conformed to the current presentation.
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. Estimates included in these consolidated financial statements include allowances for customer deductions, net realizable value of inventories, useful lives for the calculation of depreciation and amortization, distribution accruals, pension and postretirement assumptions 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 and are considered level 1 investments, which have quoted market prices in active markets for identical assets. As a result of our cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. When such negative balances exist, they are included in Accrued Liabilities.
Receivables and Related Allowances
We evaluate the adequacy of our allowances for customer deductions considering several factors including historical experience, specific trade programs and existing customer relationships. We also 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. Our allowance for doubtful accounts was immaterial for all periods presented.
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 10 with respect to our accounts receivable with Walmart Inc. and McLane Company, Inc., a wholesale distribution subsidiary of Berkshire Hathaway, Inc.
 Inventories
Inventories are valued at the lower of cost or net realizable value and are costed by various methods that approximate actual cost on a first-in, first-out basis. Due to the nature of our business, work in process inventory is not a material component 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 factors such as changes in customer and consumer demand.

34

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


Property, Plant and Equipment
Property, plant and equipment are recorded at cost, except for those acquired as part of a business combination, which are recorded at fair value at the time of purchase. We use the straight-line method of computing depreciation for financial reporting purposes based on the estimated useful lives of the corresponding assets. Estimated useful lives for buildings and improvements range generally from 10 to 40 years, machinery and equipment, excluding technology-related equipment, range generally from 3 to 15 years and technology-related equipment range generally from 3 to 5 years. For tax purposes, we generally compute depreciation using accelerated methods.
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 Statements of Cash Flows at June 30 were as follows:
 
2018
 
2017
 
2016
Construction in progress in Accounts Payable
$
2,070

 
$
622

 
$
1,000

The following table sets forth depreciation expense in each of the years ended June 30:
 
2018
 
2017
 
2016
Depreciation expense
$
22,168

 
$
20,430

 
$
20,114

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 amounts. 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 Other Intangible Assets
Goodwill is not amortized. It is evaluated annually at April 30 by applying impairment testing procedures. Other intangible assets are amortized on a straight-line basis over their estimated useful lives to Selling, General and Administrative Expenses. We evaluate the future economic benefit of the recorded goodwill and other intangible assets when events or circumstances indicate potential recoverability concerns. Carrying amounts are adjusted appropriately when determined to have been impaired. See further discussion regarding goodwill and other intangible assets in Note 7.
Accrued Distribution
We incur various freight and other related costs associated with shipping products to our customers and warehouses. We provide accruals for unbilled shipments from carriers utilizing historical or projected freight rates and other relevant information.
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.
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 of Directors approved a share repurchase authorization of 2,000,000 common shares in November 2010. At June 30, 2018, 1,402,219 common shares remained authorized for future purchase.
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, trade promotions and certain other sales incentives, including coupon redemptions and rebates. See discussion of new accounting guidance for revenue recognition, which will be applicable for us beginning on July 1, 2018, under the caption “Recently Issued Accounting Standards” below.

35

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


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 ended June 30:
 
2018
 
2017
 
2016
Advertising expense as a percentage of net sales
2
%
 
3
%
 
3
%
Research and Development Costs
We expense research and development costs as they are incurred. The estimated amount spent during each of the last three years on research and development activities was less than 1% of net sales.
Distribution Costs
Distribution fees billed to customers are included in Net Sales, while our distribution costs incurred 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 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 effective tax rate is determined based on our income, statutory tax rates and the permanent 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. See further discussion in Note 9.
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, 2018 or 2017.
In accordance with accounting literature related to uncertainty in income taxes, tax benefits and liabilities from uncertain tax positions that are recognized in the financial statements are measured based on the largest attribute that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
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.

36

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:
 
2018
 
2017
 
2016
Net income
$
135,314

 
$
115,314

 
$
121,764

Net income available to participating securities
(271
)
 
(196
)
 
(242
)
Net income available to common shareholders
$
135,043

 
$
115,118

 
$
121,522

 
 
 
 
 
 
Weighted average common shares outstanding - basic
27,403

 
27,376

 
27,336

Incremental share effect from:
 
 
 
 
 
Nonparticipating restricted stock
3

 
3

 
3

Stock-settled stock appreciation rights
53

 
61

 
34

Weighted average common shares outstanding - diluted
27,459

 
27,440

 
27,373

 
 
 
 
 
 
Net income per common share - basic
$
4.93

 
$
4.21

 
$
4.45

Net income per common share - diluted
$
4.92

 
$
4.20

 
$
4.44

Comprehensive Income and Accumulated Other Comprehensive Income (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.
The following table presents the amounts reclassified out of accumulated other comprehensive loss by component:
 
2018
 
2017
Accumulated other comprehensive loss at beginning of year
$
(8,936
)
 
$
(11,350
)
Defined Benefit Pension Plan Items:
 
 
 
Net gain arising during the period
2,987

 
3,339

Amortization of unrecognized net loss (1)
572

 
715

Postretirement Benefit Plan Items: (2)