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O U R B R AN DS
The Company’s marquee brands include
Marzetti,® New York BRAND
® Bakery, Sister Schubert’s®
and Flatout.® Products sold under the long-
established Marzetti brand include salad
dressings, veggie dips, fruit dips and croutons.
New York Bakery is the recognized leader in
the frozen garlic toast and garlic breadstick
segments, while New York Bakery Texas Toast
croutons rank among the top retail crouton
brands in the United States. Sister Schubert’s
offers the top-selling lineup of dinner rolls in
the supermarket frozen section. Flatout is a
leading flatbread brand with placement in
the deli department and product offerings
that include oval-shaped flatbread wraps,
the unique Foldit® line of flatbreads and
Artisan Thin pizza crusts.
Whether in the home
kitchen or in our test
kitchens, members of
our culinary team can
be found creating
delicious recipes and
products that delight
our customers.
From left to right:
Daniel Morin, Director
of Retail R&D (dough/
grains); Lou LeMoine,
Director of Retail R&D;
Charlotte Wines, VP
of Foodservice R&D
TO OUR SHAREHOLDERS
Fiscal 2017 was a year of growth and change for Lancaster Colony. For the full year, net sales increased to
a record $1.2 billion. Retail net sales grew 3.6% led by our licensed Olive Garden® dressings, Sister Schubert’s®
dinner rolls, New York BRAND® Bakery garlic breads and the addition of Angelic Bakehouse, a producer of
sprouted grain bakery products we acquired in November 2016. As anticipated, foodservice sales were
pressured by our targeted customer rationalization efforts and deflationary pricing. Those factors, combined
with sluggish sales trends for the overall restaurant industry, resulted in a foodservice net sales decline of 2.0%.
Operating income for the full year decreased from $184.6 million to $174.7 million. Excluding the one-time
pre-tax charge of $17.6 million attributed to our withdrawal from an underfunded multiemployer pension plan,
fiscal 2017 operating income increased 4.2% to a record level of $192.3 million.
Fiscal 2017 also marked our 54th consecutive year of annual regular cash dividend increases, ranking us as
one of only 14 U.S. companies with such a long history of increased dividend payments.
During the last twelve months, we took major steps to strengthen our business and position ourselves for future
growth. In addition to acquiring and integrating Angelic Bakehouse and exiting a significantly underfunded
multiemployer pension plan, we successfully negotiated two union agreements and consolidated nearly 225
employees from three different central Ohio offices into one location.
Today, Lancaster Colony is big enough to have scale in our niche categories, yet small enough to be nimble
and move fast. We have a solid retail presence in the perimeter and center of grocery stores, a strong foodservice
position, excellent R&D capabilities and a successful innovation track record.
Building upon these strengths, we launched our growth strategy this past year. As with any strategy, winning
requires careful choices. In the retail channel, the first strategic choice is how we will play…our portfolio.
We organized our retail portfolio into Growth Brands with category dynamics to position them for stronger
top-line growth and Foundation Brands to provide solid operating income and cash flow contributions.
Correspondingly, in foodservice, we have some customers and channels demonstrating steady growth
while others are more foundational.
The second strategic choice is how we will win. To focus our efforts, we have launched three strategic
imperatives, each tied to one or more operating priorities:
• Accelerating our base business growth;
• Optimizing our supply chain and improving margins; and
• Expanding our base business with focused M&A.
To accelerate base business growth, our three priorities are: launching new innovation platforms; renovating
existing brands to ensure they maintain relevance; and investing in the tools and capabilities needed to win
at the shelf.
Supply chain optimization and margin improvement throughout operations will be accomplished through
our lean six sigma initiatives, integrated business planning and advancements in sourcing, production
and distribution.
Expanding our base business with focused M&A is nothing new at Lancaster Colony. We have a strong track
record of buying businesses and growing them—it’s in our DNA.
We also made leadership team additions and refinements in fiscal 2017 to successfully implement our new
growth strategy, and we look forward to working together to advance our business in the coming year.
As a demonstration of our innovation focus, we will introduce several new products to the retail and foodservice
channels in fiscal 2018, including the recently-launched Marzetti® Simply 60TM line of refrigerated dressings with 60
calories per serving made with simple ingredients such as buttermilk, extra virgin olive oil and other non-GMO oils.
Our foodservice team also developed a new line of dressings under the Marzetti Simply Dressed® label, featuring
eight flavors in 32-ounce bottles with an easy-to-pour spout designed for salad bars.
In closing, I want to recognize and thank Jay Gerlach for the support provided to me and the broader team
during the past 12 months. Over the last 20 years as Lancaster Colony’s CEO, he has had a tremendous run.
Jay has been an equally gracious coach, and I look forward to collaborating with him in his new capacity
as Executive Chairman.
Thank you for your ongoing interest and support.
David A. Ciesinski
President & Chief Executive Officer
September 25, 2017
From the Executive Chairman
It is my pleasure to welcome Dave Ciesinski to his new role as our President and Chief Executive Officer
beginning July 1 after spending the previous 14 months as President and Chief Operating Officer. Dave brings
new ideas and experiences to our business at a time of rapid industry change. Under his leadership, our team
has developed a focused strategy for future growth in both sales and income.
I would also like to welcome James and Jenny Marino and the team at Angelic Bakehouse to Lancaster
Colony’s family of companies. We look forward to working together to grow the Angelic Bakehouse business
and brand.
We appreciate the support of all our stakeholders and particularly thank our shareholders for their investment.
John B. Gerlach Jr.
Executive Chairman
September 25, 2017
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
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
(State or other jurisdiction of
incorporation or organization)
380 Polaris Parkway, Suite 400
Westerville, Ohio
(Address of principal executive offices)
13-1955943
(I.R.S. Employer
Identification No.)
43082
(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
Common Stock, without par value
Name of each exchange on which registered
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
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
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
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
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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
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
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, 2016 was $2,637.6 million.
As of August 3, 2017, there were 27,449,235 shares of Common Stock, without par value, outstanding.
Portions of the registrant’s definitive proxy statement to be filed for its November 2017 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Signatures
Index to Exhibits
3
5
11
11
12
12
13
15
16
23
23
51
51
53
53
53
53
53
53
54
55
56
[This page intentionally left blank]
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, 2017 refers to fiscal 2017, which is the period from July 1, 2016 to June 30, 2017.
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 SEGMENT
We operate in one business segment – “Specialty Foods.” The financial information relating to our business segment for
the three years ended June 30, 2017, 2016 and 2015 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 the business segment within which we operate is
provided below.
Specialty Foods Segment
The following table presents the primary food products we manufacture and sell under our brand names:
Food Products
Salad dressings and sauces
Vegetable dips and fruit dips
Frozen garlic breads
Frozen Parkerhouse style yeast rolls and dinner rolls
Premium dry egg noodles
Frozen specialty noodles
Croutons and salad toppings
Flatbread wraps and pizza crusts
Sprouted grain bakery products
Caviar
Brand Names
Marzetti, Marzetti Simply Dressed, Cardini’s, Girard’s
Marzetti
New York BRAND Bakery, Mamma Bella, Mamma Bella’s
Sister Schubert’s, Mary B’s
Inn Maid, Amish Kitchens
Reames, Aunt Vi’s
New York BRAND Bakery, New York BRAND Bakery Texas Toast,
Chatham Village, Cardini’s, Marzetti Simply Dressed, Marzetti
Flatout, ProteinUP
Angelic Bakehouse, Flatzza
Romanoff
We also manufacture and sell other products pursuant to brand license agreements including Olive Garden® dressings and
Jack Daniel’s® mustards, as well as endorsement agreements including Hungry Girl® flatbreads and Weight Watchers®
flatbreads. A portion of our sales are products sold under private label to retailers, distributors and restaurants primarily in the
United States. Additionally, a small portion of our sales are dressing packets, frozen specialty noodles, pasta and flatbreads sold
to industrial customers for use as ingredients or components in their products.
Sales are made to retail and foodservice channels. The vast majority of the products we sell in the retail and foodservice
channels are sold through sales personnel, food brokers and distributors. We have strong placement of products in U.S. grocery
produce departments through our refrigerated salad dressings, vegetable and fruit dips, and croutons. 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 grocery aisles, which include shelf-stable salad dressing, slaw dressing, dry egg noodles and
croutons. Within the frozen aisles of grocery retailers, we also have prominent market positions of frozen yeast rolls, garlic
breads and egg noodles. Products we sell in the foodservice channel are often custom-formulated and include salad dressings,
sandwich and dipping sauces, frozen breads and yeast rolls.
3
Net sales attributable to Wal-Mart Stores, Inc. (“Wal-Mart”) totaled 17%, 16% and 16% of consolidated net sales for
2017, 2016 and 2015, respectively. Net sales attributable to McLane Company, Inc. (“McLane”), a wholesale distribution
subsidiary of Berkshire Hathaway, Inc., totaled 16%, 19% and 18% of consolidated net sales for 2017, 2016 and 2015,
respectively. McLane is a large, national distributor that sells and distributes our products to several of our foodservice national
chain customers, principally in the quick service and casual dining channels. In general, our foodservice national chain
customers have direct relationships with us, but many choose to buy our products through McLane, who acts as their
distributor. McLane orders our products on behalf of these customers, and we invoice McLane for these sales. The decline in
net sales to McLane in 2017 was primarily attributed to the choice of certain foodservice national chain customers to switch to
a different distributor and the impact of our targeted business rationalization efforts in the foodservice channel that began in
mid-2016. Other than Wal-Mart and McLane, no customer accounted for more than 10% of our total net sales during these
years.
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 channel. In the foodservice channel, we grow our business with established customers
and pursue new opportunities by leveraging our culinary skills and experience to support the development of new products and
menu offerings. Strategic acquisitions are also part of our future growth plans, with a focus on fit and value.
The majority of our products are manufactured at our 16 food plants located throughout the United States. Certain items
are also manufactured and packaged by third parties located in the United States, Canada and Europe.
Efficient and cost-effective production remains a key focus as evidenced by our recent lean six sigma initiative. In 2015
we completed a significant processing capacity expansion at our Horse Cave, Kentucky dressing facility to help improve
throughput and meet demand for our dressing products.
Our 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. 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 business.
NET SALES BY CLASS OF PRODUCTS
The following table sets forth 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 2015 through 2017:
Specialty Foods
Non-frozen
Frozen
RESEARCH AND DEVELOPMENT
2017
68%
32%
2016
69%
31%
2015
67%
33%
The estimated amount spent during each of the last three years on research and development activities determined in
accordance with generally accepted accounting principles was less than 1% of net sales.
BACKLOG
Orders are generally filled in three to seven 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.
4
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 2017 and is not expected to have a material impact in 2018.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 2017 we had 2,800 employees, 19% of which are represented under various collective bargaining
contracts. There are no employees represented under collective bargaining contracts 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.
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 2017, 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 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, you 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 financial condition and results of operations could be materially and adversely
affected. If this were to happen, the value of our common stock could decline significantly.
Increases in the costs or limitations to the availability of raw materials we use to produce 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, various
films, plastic and paper packaging materials and water. 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. Beginning in the fourth quarter of 2015, we experienced a significant increase in our
egg-based ingredient costs as a direct result of a highly pathogenic strain of avian influenza that affected the primary egg-
producing region in the United States. This increase was very sudden and significant and it adversely affected our results for the
fourth quarter of 2015 and first half of 2016. Similarly, fluctuating petroleum prices have, from time to time, impacted our costs
of resin-based packaging and our costs of inbound freight on all purchased materials.
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 do so in a timely manner. Such cost increases, as well as an
5
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.
Wal-Mart is our largest customer and an adverse change in the financial condition of its business could have a material
adverse effect on our results of operations and cash flows. Additionally, the loss of, or a significant reduction in, its business
could cause our sales and profitability to decrease.
Our net sales to Wal-Mart represented 17% of consolidated net sales for the year ended June 30, 2017. Our accounts
receivable balance from Wal-Mart as of June 30, 2017 was $18.4 million. While our relationship with Wal-Mart has been long-
standing and is believed to be good, we may not be able to maintain this relationship. Wal-Mart is not contractually obligated to
purchase from us. In addition, changes in Wal-Mart’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 Wal-Mart, 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 Wal-Mart’s financial condition or other
disruptions to Wal-Mart, such as decreased consumer demand or stronger competition, could also have a material adverse effect
on our business, results of operations and cash flows.
McLane, a foodservice distributor, is our second largest customer and an adverse change in the financial condition of its
business could have a material adverse effect on our results of operations and cash flows. Additionally, the loss of, or a
significant reduction in, our business with the underlying foodservice customers could cause our sales and profitability to
decrease.
Our net sales to McLane represented 16% of consolidated net sales for the year ended June 30, 2017. Our accounts
receivable balance from McLane as of June 30, 2017 was $8.6 million. McLane is a large, national distributor that sells and
distributes our products to several of our foodservice national chain customers, principally in the quick service and casual
dining channels. In general, our foodservice national chain customers have direct relationships with us, but many choose to buy
our products through McLane, who acts as their distributor. McLane orders our products on behalf of these customers, and we
invoice McLane for these sales. Thus, unfavorable changes in the financial condition of McLane could have a material adverse
effect on our profitability. In addition, the loss of, or significant reduction in our business with the underlying foodservice
customers, or other disruptions, such as decreased consumer demand or stronger competition, could also have a material
adverse effect on our business and results of operations. We believe that our relationship with McLane and the underlying
foodservice customers is good, but we cannot ensure that we will be able to maintain these relationships. McLane and the
underlying foodservice customers 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
foodservice customers perceive to be more favorable. In addition, changes in the general business model of McLane, or the
underlying foodservice customers, could have a material adverse effect on our business, results of operations and cash flows.
Competitive conditions within our 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 protect 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.
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
unavailability of product. 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
6
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 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 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 unavailability of 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, 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 can also increase our cost of operations. The food
industry has recently 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.
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
Jack Daniel’s® mustards, as well as endorsement agreements including Hungry Girl® flatbreads and Weight Watchers®
flatbreads. 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 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 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 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.
We rely on the performance of major retailers, wholesalers, food brokers, distributors, foodservice customers and mass
merchants 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.
We sell our products principally to retail and foodservice channels, including traditional supermarkets, mass merchants,
warehouse clubs, specialty food distributors, foodservice distributors and national restaurant chain accounts. Poor performance
by our major wholesalers, retailers or chains, or our foodservice 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, many of our retail 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
7
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.
We may require significant capital expenditures to maintain, improve or replace aging facilities, which could adversely
affect our cash flows.
Most of our facilities have been in service for many years, which may result in a higher level of maintenance costs and
unscheduled repairs. Further, these facilities may need to be improved or replaced to maintain or increase operational
efficiency, sustain or expand 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 these 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.
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. While energy costs have generally trended lower over the past several
years, such costs have begun to trend higher recently. Any sudden and dramatic increases in these types of costs could have a
material adverse effect on our results of operations and cash flows.
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, but may not be successful in eliminating
our exposure to future price fluctuations.
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.
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. Should we not be able to obtain alternate production
capability in a timely manner, or on favorable terms, a negative impact on our business, results of operations, financial
condition and cash flows could result, 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.
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 and cash flows.
Our ability to obtain adequate and reasonably priced methods of transportation to distribute our products, including
refrigerated trailers for some 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 the 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 those
8
higher 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 and cash flows.
Our inability to successfully renegotiate collective bargaining contracts and any prolonged work stoppages could have an
adverse effect on our business and results of operations.
We believe that our labor relations with employees under collective bargaining contracts are satisfactory, but our inability
to negotiate the renewal of these contracts or any prolonged work stoppages could have a material adverse effect on our
business and results of 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. 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
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 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 and results of operations.
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.
9
We may incur liabilities related to multiemployer pension plans which could adversely affect our financial results.
Until recently, 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.
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.
The loss of the services of one or more members of our senior management team could have a material adverse effect on
our business, financial condition and results of operations.
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, 2017, 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 also may 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.
10
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.
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.
The following table summarizes our locations (including aggregation of multiple facilities) that are considered the
principal manufacturing and warehousing operations of our Specialty Foods segment:
Location
Altoona, IA (1)
Bedford Heights, OH
Columbus, OH (2)
Cudahy, WI
Grove City, OH
Horse Cave, KY
Luverne, AL
Milpitas, CA (3)
Saline, MI (4)
Wareham, MA (5)
Principal Products Involved
Frozen pasta
Frozen breads
Sauces, dressings, dips, distribution of frozen foods
Sprouted grain bakery products
Distribution of non-frozen foods
Sauces, dressings, dips, frozen rolls
Frozen rolls
Sauces and dressings
Flatbread wraps and pizza crusts
Croutons
Terms of Occupancy
Owned/Leased
Owned
Owned/Leased
Owned
Owned
Owned
Owned
Owned/Leased
Owned/Leased
Leased
(1) Part leased for term expiring in fiscal 2020
(2) Part leased for term expiring in fiscal 2022
(3) Part leased for term expiring in fiscal 2021
(4) Part leased for term expiring in fiscal 2018
(5) Fully leased for term expiring in fiscal 2019
11
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.
12
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 2017
and 2016. Stock prices were provided by The NASDAQ Stock Market LLC.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
2016
First Quarter
Second Quarter (includes special dividend of $5.00 per share)
Third Quarter
Fourth Quarter
Year
Stock Prices
High
Low
Dividends Paid
Per Share
$
$
$
$
$
$
$
$
137.71
143.67
149.30
131.79
101.63
118.74
119.80
128.07
$
$
$
$
$
$
$
$
117.50
125.71
125.82
119.38
89.62
95.47
95.78
107.29
$
$
$
$
0.50
0.55
0.55
0.55
2.15
0.46
5.50
0.50
0.50
6.96
The number of shareholders of record as of August 3, 2017 was approximately 760. 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, 2017 to August 3, 2017 were $127.90 and $120.78.
We have increased our regular cash dividends for 54 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 shares, of which
1,411,680 shares remained authorized for future repurchases at June 30, 2017. 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
April 1-30, 2017
May 1-31, 2017
June 1-30, 2017
Total
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
1,411,680
1,411,680
1,411,680
1,411,680
13
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, 2012 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.
Lancaster Colony Corporation
S&P Midcap 400
Dow Jones U.S. Food Producers
Cumulative Total Return (Dollars)
6/13
119.53
125.18
128.47
6/14
148.80
156.78
154.51
6/12
100.00
100.00
100.00
6/15
144.95
166.81
172.44
6/16
216.45
169.03
204.96
6/17
211.40
200.41
196.69
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.
14
Item 6. Selected Financial Data
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
(Thousands Except Per Share Figures)
Operations
Net Sales (1)
Gross Profit (1)
Percent of Net Sales
Multiemployer Pension Settlement and
Related Costs
Income From Continuing Operations Before
Income Taxes (1)
Percent of Net Sales
Taxes Based on Income (1)
Income From Continuing Operations (1)
Percent of Net Sales
Continuing Operations Diluted Net Income
Per Common Share (1)
Cash Dividends Per Common Share -
Regular
Cash Dividends Per Common Share -
Special
Financial Position
Total Assets (2)
Property, Plant and Equipment-Net (1)
Property Additions (1) (3)
Depreciation and Amortization (1)
Long-Term Debt
Shareholders’ Equity
Per Common Share
Weighted Average Common Shares
Outstanding-Diluted
2017
2016
2015
2014
2013
Years Ended June 30,
$ 1,201,842
318,764
$
$ 1,191,109
299,629
$
$ 1,104,514
257,692
$
$ 1,041,075
248,568
$
$ 1,013,803
244,707
$
26.5%
25.2%
23.3%
23.9%
24.1%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
17,635
175,516
14.6%
60,202
115,314
9.6%
4.20
2.15
$
$
$
$
$
$
— $
716,405
180,671
27,005
24,906
$
$
$
$
— $
$
$
575,977
20.98
— $
— $
— $
—
184,633
15.5%
62,869
121,764
10.2%
4.44
1.96
5.00
$
$
$
$
$
$
154,552
14.0%
52,866
101,686
9.2%
3.72
1.82
$
$
$
$
$
153,279
14.7%
52,293
100,986
9.7%
3.69
1.72
$
$
$
$
$
— $
— $
634,732
169,595
16,671
24,147
$
$
$
$
— $
$
$
513,598
18.73
702,156
172,311
18,298
21,111
$
$
$
$
— $
$
$
580,918
21.23
627,301
168,674
15,645
18,993
$
$
$
$
— $
$
$
528,597
19.33
153,818
15.2%
49,958
103,860
10.2%
3.79
1.52
5.00
606,260
168,074
23,460
17,617
—
501,222
18.34
27,440
27,373
27,327
27,308
27,285
(1) Amounts for 2013-2014 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).
15
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, 2017 refers to fiscal 2017, which is the period from July 1, 2016 to June 30, 2017.
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.
Consistent with our current 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. In March 2015 we acquired all of the issued and outstanding capital stock of Flatout Holdings, Inc. (“Flatout”), a
privately owned manufacturer and marketer of flatbread wraps and pizza crusts based in Saline, Michigan. These transactions
are discussed in further detail in Note 2 to the consolidated financial statements.
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.
Currently our operations are organized into one reportable segment: “Specialty Foods.” 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 sales over time by:
•
•
•
•
leveraging the strength of our retail brands to increase current product sales;
introducing new retail products and expanding distribution;
continuing to rely upon the strength of our reputation in foodservice product development and quality; and
pursuing acquisitions that meet our strategic criteria.
In our retail channel, we utilize numerous branded products to support growth and maintain market competitiveness. We
place great emphasis on our product innovation and development efforts to enhance growth by providing distinctive new
products or extensions of our current product lines to meet the evolving needs and preferences of consumers.
Our foodservice sales primarily consist of products sold to restaurant chains, either directly or through distributors. Over
the long-term, we have experienced broad-based growth in our foodservice sales as we build on our strong reputation for
product development and quality.
We have made substantial capital investments to support our existing food operations and future growth opportunities.
For example, in 2015 we completed a significant processing capacity expansion at our Horse Cave, Kentucky dressing facility
to help meet demand for our dressing products, and in 2018 we will be expanding processing and warehousing capacity at
Angelic to help meet anticipated growth of our sprouted grain bakery products. Based on our current plans and expectations, we
believe our capital expenditures for 2018 could total approximately $30 million. We anticipate we will be able to fund all of our
capital needs in 2018 with cash generated from operations.
16
Summary of 2017 Results
Consolidated net sales reached a record $1,202 million during 2017, increasing by 1% as compared to prior-year net sales
of $1,191 million, driven by higher retail net sales as partially offset by lower foodservice net sales. Foodservice net sales were
unfavorably impacted by deflationary pricing and our targeted business rationalization efforts. Angelic was not material to our
2017 results.
Gross profit increased 6% to $318.8 million from the prior-year total of $299.6 million. The increase resulted from
overall lower raw-material costs, primarily for eggs in the first half of the fiscal year, and a more favorable sales mix, partially
offset by higher retail trade spending and deflationary foodservice pricing.
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. Net income totaled $121.8 million, or $4.44 per diluted share, in 2016
compared to $101.7 million, or $3.72 per diluted share, in 2015.
Looking Forward
For 2018, we expect volume-driven growth in our retail sales channel with support from upcoming new product
introductions along with a full year of sales contribution from Angelic. In the foodservice channel, despite an increasingly
competitive business environment, we anticipate sales growth from our existing customer base in addition to the potential
benefit from new business relationships, with modest impact from pricing.
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
incremental sales from Angelic and the extent of efficiency gains and cost savings resulting from our lean six sigma program
and other recent supply chain initiatives.
Based on current market conditions, we foresee modestly unfavorable material cost comparisons in the coming year,
particularly in the first half of 2018, due mainly to the impact of higher soybean oil, garlic and dairy costs. Future changes in
ingredient costs, as well as other material costs, will be influenced by the size of agricultural harvests in both the U.S. and other
parts of the world and related global demand, economic conditions 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.
We will adopt new accounting guidance for stock-based compensation on July 1, 2017. The adoption may result in
increased volatility to our income tax expense and resulting net income in future periods 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.
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.
On July 1, 2017 David A. Ciesinski, our President and Chief Operating Officer, succeeded John B. Gerlach, Jr. as Chief
Executive Officer. As President and Chief Executive Officer, Mr. Ciesinski became our principal executive officer and chief
operating decision maker. Due to this organizational change, we will evaluate our current reportable segments to ensure they
are aligned with the management of our business going forward.
RESULTS OF CONSOLIDATED OPERATIONS
Net Sales and Gross Profit
(Dollars in thousands)
Net Sales
Gross Profit
Gross Margin
Year Ended June 30,
Change
2017
$1,201,842
$ 318,764
2016
$ 1,191,109
$ 299,629
2015
$ 1,104,514
$ 257,692
2017 vs. 2016
10,733
19,135
$
$
1% $
6% $
2016 vs. 2015
86,595
41,937
8%
16%
26.5%
25.2%
23.3%
In November 2016 we acquired Angelic and its results of operations have been included in our consolidated financial
statements from the date of acquisition. Such results were not material. In March 2015 we acquired Flatout and its results of
operations were included in our consolidated financial statements from the date of acquisition.
17
2017 to 2016
Consolidated net sales for the year ended June 30, 2017 increased 1% to a new 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.
Retail net sales increased 4% with Angelic Bakehouse® sprouted grain bakery products, Olive Garden® dressings, New
® Bakery frozen garlic bread products and Sister Schubert’s® frozen dinner rolls among the most notable
York BRAND
contributing product lines. Higher trade promotion costs served to limit retail sales growth. Foodservice net sales declined 2%
as influenced by our targeted customer rationalization efforts that began in the third quarter of 2016 and deflationary pricing,
primarily from lower egg costs. 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 channel.
Excluding pricing actions, total raw-material costs were estimated to have positively affected our gross margins by 2% of net
sales.
2016 to 2015
Consolidated net sales for the year ended June 30, 2016 increased 8% to a then record of $1,191 million from the prior-
year record total of $1,105 million. This growth was driven by the contribution from Flatout, increased retail and foodservice
volumes and pricing actions. Our overall sales volume, as measured by pounds shipped, improved by 5%. Pricing actions were
taken in response to significantly higher egg costs incurred in our first half. In general, the net impact of higher pricing
represented more than 1% of net sales for 2016.
Retail net sales increased 10% due to the addition of Flatout and higher sales of certain product lines including Olive
Garden® retail dressings and Marzetti® refrigerated dressings, including Simply Dressed®. Foodservice net sales improved 6%
as demand from national chain restaurants remained strong. As a percentage of total net sales, retail net sales increased slightly
to 52% from 51% in 2015.
Excluding sales contributed by Flatout, consolidated net sales increased 5% in 2016.
Our gross margin increased to 25.2% in 2016 compared with 23.3% in 2015 due to the influence of our net pricing
actions and lower commodity and freight costs. The significantly higher egg costs attributed to the avian influenza outbreak we
experienced in the first half of the year were more than offset by lower costs of certain other raw materials throughout the year,
specifically soybean oil, dairy-based products, flour and resin packaging. Excluding any pricing actions, total raw-material
costs positively affected our gross margins by less than 1% of net sales.
Selling, General and Administrative Expenses
(Dollars in thousands)
SG&A Expenses
SG&A Expenses as a Percentage
of Net Sales
Year Ended June 30,
Change
2017
$ 126,381
2016
$ 115,059
2015
$ 102,831
2017 vs. 2016
11,322
$
10% $
2016 vs. 2015
12,228
12%
10.5%
9.7%
9.3%
The 2017 increase in selling, general and administrative (“SG&A”) expenses reflected recent investments in key
leadership personnel and strategic business initiatives during the second half to support future growth. Transaction costs,
incremental amortization expense and other recurring non-cash charges attributed to the Angelic business acquired in
November 2016 also impacted SG&A expenses in 2017. The 2016 increase in SG&A expenses reflected the influence of
overall higher sales volumes, higher levels of consumer spending on our key retail product lines, as well as the new consumer
and trade activities related to Flatout and amortization expense attributable to the Flatout intangible assets.
Multiemployer Pension Settlement and Related Costs
In January 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 will make non-elective contributions for
the union employees at the Bedford Heights, Ohio plant into a union-sponsored 401(k) plan. We agreed to initially fund the new
401(k) plan for current union employees and pay 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. This event was detailed in our Form 8-K filing, which was issued on January 24,
2017.
18
Operating Income
(Dollars in thousands)
Operating Income
Specialty Foods
Corporate Expenses
Total
Operating Income as a
Percentage of Net Sales
Specialty Foods
Total
Year Ended June 30,
Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
$ 187,051
(12,303)
$ 174,748
$ 196,592
(12,022)
$ 184,570
$ 167,095
(12,234)
$ 154,861
$
$
(9,541)
(281)
(9,822)
(5)% $
2 %
(5)% $
29,497
212
29,709
18 %
(2)%
19 %
15.6%
14.5%
16.5%
15.5%
15.1%
14.0%
Due to the factors discussed above, the Specialty Foods segment’s operating income for 2017 totaled $187.1 million, a
5% decrease from 2016 operating income of $196.6 million. The 2016 total was 18% higher than 2015 operating income of
$167.1 million.
The level of the 2017 corporate expenses presented above was consistent with our expectations and was similar to those
of 2016 and 2015.
Income Before Income Taxes
As impacted by the factors discussed above, most notably the one-time charge of $17.6 million for the multiemployer
pension settlement and related costs, income before income taxes for 2017 of $175.5 million decreased 5% from the 2016 total
of $184.6 million. The 2015 income before income taxes was $154.6 million.
Taxes Based on Income
Our effective tax rate was 34.3%, 34.1% and 34.2% in 2017, 2016 and 2015, respectively. Given the nature of our
operations (predominately U.S. based for both sales and manufacturing), our effective tax rates typically stay within a fairly
narrow range. See Note 9 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate
for each year.
Net Income
As influenced by the factors discussed above, net income for 2017 of $115.3 million decreased from the 2016 net income
of $121.8 million, which had increased from 2015 net income of $101.7 million. Diluted weighted average common shares
outstanding for each of the years ended June 30, 2017, 2016 and 2015 have remained relatively stable. As a result, and due to
the change in net income for each year, diluted net income per share totaled $4.20 in 2017, a decrease from the 2016 total of
$4.44 per diluted share. The 2015 net income per share totaled $3.72 per diluted share.
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 2017 as we ended the year with $143 million in cash and equivalents, along with shareholders’ equity of
$576 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, 2017. At June 30, 2017, 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, 2017, 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, 2017, we were not aware of any event that would constitute a default under this facility.
19
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 2018. 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
(Dollars in thousands)
Provided By Operating Activities
Used In Investing Activities
Used In Financing Activities
Year Ended June 30,
Change
2016
$ 142,585
2017 vs. 2016
2017
$ 144,355
1,770
$ (60,608) $ (17,423) $(112,325) $ (43,185)
$ (58,723) $(189,284) $ (49,784) $ 130,561
2015
$ 132,772
1% $
2016 vs. 2015
9,813
N/M $ 94,902
69% $(139,500)
$
7%
84%
N/M
Cash provided by operating activities remains the primary source of financing for our internal growth.
Cash provided by operating activities in 2017 totaled $144.4 million, an increase of 1% as compared with the 2016 total
of $142.6 million, which increased 7% from the 2015 total of $132.8 million. 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. The 2016 increase was due to an increase in net income and
depreciation and amortization as partially offset by higher working capital requirements. In general, the increased levels of
working capital requirements in 2016 reflected higher sales volumes and the impact of our Flatout acquisition. Additionally, the
changes in other current assets and accounts payable and accrued liabilities from 2015 to 2016 reflected the timing of estimated
tax payments and the favorable tax impact of the loss on sale of discontinued operations in prior years. The 2016 increase in
depreciation and amortization reflected the amortization of intangibles relating to the Flatout acquisition and the related
depreciation on its acquired fixed assets, as well as additional depreciation on recent capital expenditures.
Cash used in investing activities totaled $60.6 million in 2017 as compared to $17.4 million in 2016 and $112.3 million in
2015. The 2017 increase in cash used in investing activities primarily reflected the $35.2 million 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. The 2016 decrease
in cash used in investing activities reflected the $92.2 million paid for the acquisition of Flatout in March 2015, as well as a
planned lower level of capital expenditures in 2016. Our 2015 capital expenditures included a processing capacity expansion
project at our Horse Cave, Kentucky dressing facility which was essentially complete at December 31, 2014. Capital
expenditures totaled $27.0 million in 2017, compared to $16.7 million in 2016 and $18.3 million in 2015. Based on our current
plans and expectations, we believe our capital expenditures for 2018 could total approximately $30 million.
Financing activities used net cash totaling $58.7 million, $189.3 million and $49.8 million in 2017, 2016 and 2015,
respectively. In general, cash used in financing activities reflects the payment of dividends. The regular dividend payout rate for
2017 was $2.15 per share, as compared to $1.96 per share in 2016 and $1.82 per share in 2015. This past fiscal year marked the
54th 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. Cash utilized for share repurchases totaled $0.9 million, $0.2 million and $0.6 million in 2017,
2016 and 2015, respectively. These share repurchases were for shares repurchased in satisfaction of tax withholding obligations
arising from the vesting of restricted stock granted to employees. Our Board of Directors approved a share repurchase
authorization of 2,000,000 shares in November 2010. At June 30, 2017, 1,411,680 shares from this authorization remained
authorized for future purchase.
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.
20
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, 2017 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, 2017 (dollars in thousands):
Contractual Obligations
Operating Lease Obligations (1)
Purchase Obligations (2)
Other Noncurrent Liabilities (as reflected on
Consolidated Balance Sheet) (3)
Total
Payment Due by Period
Total
27,209
181,109
15,515
223,833
$
$
Less than 1
Year
$
$
6,446
160,444
—
166,890
$
$
1-3 Years
3-5 Years
More than 5
Years
10,744
19,130
487
30,361
$
$
5,402
1,185
15,028
21,615
$
$
4,617
350
—
4,967
(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 $23.1 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. 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.
For 2015, the net impact of inflation was not significant. 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 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 customers 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. Entering 2018, under current market conditions, we foresee unfavorable material cost comparisons in the coming year,
particularly in the first half of the year. We expect modest impact from pricing in 2018.
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, the improvement of work processes and strategic investments in
plant equipment.
21
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.
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, as appropriate.
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.
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:
•
•
•
•
price and product competition;
the impact of customer store brands on our branded retail volumes;
the effect of consolidation of customers within key market channels;
fluctuations in the cost and availability of ingredients and packaging;
22
•
•
•
•
•
•
•
•
•
the reaction of customers or consumers to the effect of price increases we may implement;
adverse changes in freight, energy or other costs of producing, distributing or transporting our products;
the success and cost of new product development efforts;
the lack of market acceptance of new products;
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;
dependence on key personnel and changes in key personnel;
the impact of any regulatory matters affecting our food business, including any required labeling changes and
their impact on consumer demand;
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;
•
•
•
•
•
•
capacity constraints that may affect our ability to meet demand or may increase our costs;
dependence on contract manufacturers;
efficiencies in plant operations;
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.
•
•
•
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. A recent example of such volatility occurred as we transitioned
from 2015 to 2016 and the price of egg-based ingredients increased suddenly and dramatically due to a major outbreak of avian
influenza in the United States which sharply curtailed supply. 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
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lancaster Colony Corporation
Westerville, Ohio
We have audited the accompanying consolidated balance sheets of Lancaster Colony Corporation and subsidiaries (the
“Company”) as of June 30, 2017 and 2016, and 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, 2017. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of June 30, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended June 30, 2017, 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), the Company’s internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated August 24, 2017, expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
August 24, 2017
24
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
ASSETS
June 30,
2017
2016
$
143,104
69,922
$
Current Assets:
Cash and equivalents
Receivables
Inventories:
Raw materials
Finished goods
Total inventories
Other current assets
Total current assets
Property, Plant and Equipment:
Land, buildings and improvements
Machinery and equipment
Total cost
Less accumulated depreciation
Property, plant and equipment-net
Other Assets:
Goodwill
Other intangible assets-net
Other noncurrent assets
Total
LIABILITIES AND SHAREHOLDERS’ EQUITY
$
Current Liabilities:
Accounts payable
Accrued liabilities
Total current liabilities
Other Noncurrent Liabilities
Deferred Income Taxes
Commitments and Contingencies
Shareholders’ Equity:
Preferred stock-authorized 3,050,000 shares; outstanding-none
Common stock-authorized 75,000,000 shares; outstanding-2017-27,448,424
shares; 2016-27,423,550 shares
Retained earnings
Accumulated other comprehensive loss
Common stock in treasury, at cost
Total shareholders’ equity
Total
$
$
See accompanying notes to consolidated financial statements.
25
118,080
66,006
26,153
49,944
76,097
7,644
267,827
116,858
263,336
380,194
210,599
169,595
143,788
44,866
8,656
634,732
39,931
33,072
73,003
26,698
21,433
110,677
1,150,337
(11,350)
(736,066)
513,598
634,732
28,447
47,929
76,376
11,744
301,146
124,673
272,582
397,255
216,584
180,671
168,030
60,162
6,396
716,405
41,353
35,270
76,623
38,598
25,207
115,174
1,206,671
(8,936)
(736,932)
575,977
716,405
$
$
$
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Net Sales
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Multiemployer Pension Settlement and Related Costs
Operating Income
Other, Net
Income Before Income Taxes
Taxes Based on Income
Net Income
Net Income Per Common Share:
Basic
Diluted
Weighted Average Common Shares Outstanding:
Basic
Diluted
$
$
$
$
Years Ended June 30,
$
$
$
$
2017
1,201,842
883,078
318,764
126,381
17,635
174,748
768
175,516
60,202
115,314
4.21
4.20
27,376
27,440
$
$
$
$
2016
1,191,109
891,480
299,629
115,059
—
184,570
63
184,633
62,869
121,764
4.45
4.44
27,336
27,373
2015
1,104,514
846,822
257,692
102,831
—
154,861
(309)
154,552
52,866
101,686
3.72
3.72
27,300
27,327
See accompanying notes to consolidated financial statements.
26
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net Income
Other Comprehensive Income (Loss):
Defined Benefit Pension and Postretirement Benefit Plans:
Net gain (loss) arising during the period, before tax
Prior service credit arising during the period, before tax
Amortization of loss, before tax
Amortization of prior service credit, before tax
Total Other Comprehensive Income (Loss), Before Tax
Tax Attributes of Items in Other Comprehensive Income (Loss):
Net gain (loss) arising during the period, tax
Prior service credit arising during the period, tax
Amortization of loss, tax
Amortization of prior service credit, tax
Total Tax (Expense) Benefit
Other Comprehensive Income (Loss), Net of Tax
Comprehensive Income
$
Years Ended June 30,
2017
2016
2015
$
115,314
$
121,764
$
101,686
3,334
—
677
(182)
3,829
(1,231)
—
(250)
66
(1,415)
2,414
117,728
$
(4,200)
1,770
505
(126)
(2,051)
1,551
(654)
(186)
47
758
(1,293)
120,471
$
(3,563)
—
401
(5)
(3,167)
1,318
—
(149)
2
1,171
(1,996)
99,690
See accompanying notes to consolidated financial statements.
27
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Impacts of noncash items:
Depreciation and amortization
Change in acquisition-related contingent consideration
Deferred income taxes and other changes
Stock-based compensation expense
Excess tax benefit from stock-based compensation
Gain on sale of property
Pension plan activity
Changes in operating assets and liabilities:
Receivables
Inventories
Other current assets
Accounts payable and accrued liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities:
Cash paid for acquisitions, net of cash acquired
Payments for property additions
Proceeds from sale of property
Other-net
Net cash used in investing activities
Cash Flows From Financing Activities:
Purchase of treasury stock
Payment of dividends (including special dividend payment,
2017-$0; 2016-$136,677; 2015-$0)
Excess tax benefit from stock-based compensation
Net cash used in financing activities
Net change in cash and equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year
Years Ended June 30,
2017
2016
2015
$
115,314
$
121,764
$
101,686
24,906
1,156
2,347
4,248
(1,123)
(629)
(244)
(2,598)
150
(2,958)
3,786
144,355
(35,169)
(27,005)
1,475
91
(60,608)
24,147
—
(525)
3,326
(1,417)
—
(296)
(3,547)
1,802
1,445
(4,114)
142,585
(12)
(16,671)
—
(740)
(17,423)
21,111
—
306
3,040
(563)
—
(591)
(1,900)
366
5,229
4,088
132,772
(92,217)
(18,298)
—
(1,810)
(112,325)
(866)
(155)
(569)
(58,980)
1,123
(58,723)
25,024
118,080
143,104
$
(190,546)
1,417
(189,284)
(64,122)
182,202
118,080
$
(49,778)
563
(49,784)
(29,337)
211,539
182,202
$
See accompanying notes to consolidated financial statements.
28
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock
Outstanding
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
Shareholders’
Equity
Shares
27,339
Amount
$ 104,789
$ 1,167,211
101,686
$
(8,061) $ (735,342) $
(Amounts in thousands,
except per share data)
Balance, June 30, 2014
Net income
Net pension and postretirement benefit
losses, net of ($1,171) tax effect
Cash dividends - common stock ($1.82
per share)
Purchase of treasury stock
Stock-based plans, including excess
tax benefits
Stock-based compensation expense
Balance, June 30, 2015
Net income
Net pension and postretirement benefit
losses, net of ($758) tax effect
Cash dividends - common stock ($6.96
per share)
Purchase of treasury stock
Stock-based plans, including excess
tax benefits
Stock-based compensation expense
Balance, June 30, 2016
Net income
Net pension and postretirement
benefit gains, net of $1,415 tax effect
Cash dividends - common stock
($2.15 per share)
Purchase of treasury stock
Stock-based plans, including excess
tax benefits
Stock-based compensation expense
Balance, June 30, 2017
(1,996)
(569)
(10,057)
(735,911)
(1,293)
(11,350)
(736,066)
2,414
(866)
(190,546)
(155)
(155)
528,597
101,686
(1,996)
(49,778)
(569)
(62)
3,040
580,918
121,764
(1,293)
(416)
3,326
513,598
115,314
2,414
(58,980)
(866)
249
4,248
575,977
(49,778)
1,219,119
121,764
(190,546)
1,150,337
115,314
(58,980)
(6)
28
27,361
(2)
65
27,424
(62)
3,040
107,767
(416)
3,326
110,677
(6)
30
27,448
249
4,248
$ 115,174
$ 1,206,671
$
(8,936) $ (736,932) $
See accompanying notes to consolidated financial statements.
29
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, 2017 refers to fiscal 2017, which is the period from
July 1, 2016 to June 30, 2017.
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, including money market funds and commercial paper,
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 Wal-Mart Stores, 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.
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 while machinery and equipment range generally from 3 to 15 years. For tax purposes, we
generally compute depreciation using accelerated methods.
30
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
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:
Construction in progress in Accounts Payable
2017
2016
2015
$
622
$
1,000
$
189
The following table sets forth depreciation expense in each of the years ended June 30:
Depreciation expense
Long-Lived Assets
2017
2016
2015
$
20,430
$
20,114
$
18,867
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, as appropriate.
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 shares in November 2010. At June 30, 2017, 1,411,680 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.
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:
Advertising expense as a percentage of net sales
2017
2016
2015
3%
3%
2%
31
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
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 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. 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, 2017 or 2016.
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.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is
not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.
See further discussion in Note 9.
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.
32
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:
Net income
Net income available to participating securities
Net income available to common shareholders
Weighted average common shares outstanding - basic
Incremental share effect from:
Nonparticipating restricted stock
Stock-settled stock appreciation rights
Weighted average common shares outstanding - diluted
Net income per common share - basic
Net income per common share - diluted
2017
2016
2015
115,314
(196)
115,118
$
$
121,764
(242)
121,522
$
$
101,686
(143)
101,543
27,376
27,336
27,300
3
61
27,440
3
34
27,373
4.21
4.20
$
$
4.45
4.44
$
$
3
24
27,327
3.72
3.72
$
$
$
$
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:
Accumulated other comprehensive loss at beginning of year
Defined Benefit Pension Plan Items:
Net gain (loss) arising during the period
Amortization of unrecognized net loss (1)
Postretirement Benefit Plan Items:
Net (loss) gain arising during the period (2)
Prior service credit arising during the period (2)
Amortization of unrecognized net gain
Amortization of prior service credit
Total other comprehensive income (loss), before tax
Total tax (expense) benefit
Other comprehensive income (loss), net of tax
Accumulated other comprehensive loss at end of year
2017
2016
$
(11,350) $
(10,057)
3,339
715
(5)
—
(38)
(182)
3,829
(1,415)
2,414
(8,936) $
(4,409)
539
209
1,770
(34)
(126)
(2,051)
758
(1,293)
(11,350)
$
(1) Included in the computation of net periodic benefit income/cost. See Note 12 for additional information.
(2) Amounts for 2016 include a negative plan amendment and subsequent remeasurement. Additional disclosures for
postretirement benefits are not included as they are not considered material.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance to simplify the
accounting for stock-based compensation. The amendments include changes to the accounting for share-based payment
transactions, including: the inclusion of the tax consequences related to stock-based compensation within the computation of
income tax expense versus equity; the classification of awards as either equity or liabilities; and the classification of share-
based activity on the statement of cash flows. We will adopt the new guidance on July 1, 2017 and will elect to continue to
estimate forfeitures. The adoption may result in increased volatility to our income tax expense and resulting net income in
future periods 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. The transition method that will be applied on adoption varies for each of the amendments.
33
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
In March 2017, the FASB issued new accounting guidance to improve the presentation of net periodic pension cost and
net periodic postretirement benefit cost by disaggregating the service cost component from the other components of net periodic
benefit cost. The amendments require an employer to present service cost in the same line item(s) as compensation costs for the
pertinent employees whereas the other components of net periodic benefit cost must be reported separately from service cost
and outside of income from operations. The amendments also allow only the service cost component to be eligible for
capitalization. The amendments require retrospective application for the income statement presentation provisions and
prospective application for the capitalization of the service cost component. However, as a result of prior years’ restructuring
activities, we no longer have any active employees continuing to accrue service cost. Therefore, the service cost provisions are
not applicable to us, and we expect only changes in classification on the income statement. The guidance will be effective for us
in fiscal 2019 including interim periods.
In May 2014, the FASB issued new accounting guidance for the recognition of revenue and issued subsequent
clarifications of this new guidance in 2016 and 2017. The core principle of the new guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This model is based on a control approach rather than
the current risks and rewards model. The new guidance would also require expanded disclosures. Since we do not plan to early
adopt this standard, the guidance will be effective for us in fiscal 2019 including interim periods and will require either
retrospective application to each prior period presented or modified retrospective application with the cumulative effect of
initially applying the standard recognized at the date of adoption. We are currently evaluating the method of adoption but
believe that we will apply the modified retrospective approach. We are currently assessing the impact that this standard will
have on our accounting policies, processes, system requirements, internal controls and disclosures using internal resources and
the assistance of a third party. We have established a project plan, completed an initial review of selected customer contracts
and are evaluating the impact of the new standard on certain common practices currently employed by us and by other
manufacturers of consumer products. We have not yet determined the impact that this standard will have on our financial
position and results of operations.
In February 2016, the FASB issued new accounting guidance to require lessees to recognize a right-of-use asset and a
lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as
either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to
record a right-of-use asset and a lease liability based upon the present value of the lease payments. Finance leases will reflect
the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the
right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-
line basis over the term of the lease. The updated guidance requires expanded qualitative and quantitative disclosures, including
additional information about the amounts recorded in the consolidated financial statements. The guidance will be effective for
us in fiscal 2020 including interim periods using a modified retrospective approach. We are currently evaluating the impact of
this guidance.
Recently Adopted Accounting Standards
In July 2015, the FASB issued new accounting guidance which requires entities to measure most inventory “at the lower
of cost or net realizable value,” thereby simplifying current guidance. Under current guidance an entity must measure inventory
at the lower of cost or market, where market is defined as one of three different measures, one of which is net realizable value.
We adopted this guidance effective July 1, 2016 on a prospective basis, and it did not have a material impact on our
consolidated financial statements.
In August 2016, the FASB issued new accounting guidance to reduce diversity in practice in how certain cash receipts and
cash payments are presented in the statement of cash flows. Current guidance is either unclear or does not include specific
requirements for the classification of these transactions. The majority of the new provisions are not currently applicable to us,
and those that are applicable are consistent with our current practice. The guidance will be effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017 using a retrospective transition method for all periods presented.
Early adoption is permitted provided that all amendments are adopted in the same period. We adopted this guidance effective
July 1, 2016, and it did not have an impact on our Consolidated Statements of Cash Flows.
34
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 2 – Acquisitions
Angelic Bakehouse, Inc.
On November 17, 2016, we acquired substantially all of the assets of Angelic Bakehouse, Inc. (“Angelic”). Angelic, a
privately owned manufacturer and marketer of premium sprouted grain bakery products, is based near Milwaukee, Wisconsin.
The purchase price of $35.5 million was funded by cash on hand and includes immaterial post-closing adjustments, which were
paid in April 2017 and July 2017, but excludes contingent consideration relating to an additional earn-out payment which is tied
to performance-based conditions. In general, the terms of the acquisition specify that the sellers will receive an earn-out based
upon a pre-determined multiple of the defined adjusted EBITDA of Angelic in fiscal 2021. We are unable to provide a range for
the amount of this earn-out because it is based on the future adjusted EBITDA of Angelic, and the earn-out does not contain a
minimum or maximum value. See further discussion of the earn-out in Note 3.
Angelic is reported in our Specialty Foods segment, and its results of operations have been included in our consolidated
financial statements from the date of acquisition. Such results were not material.
The following table summarizes the consideration related to the acquisition and the final purchase price allocation based
on the fair value of the net assets acquired, as adjusted for the final net working capital adjustment. The initial fair value of the
contingent consideration is a noncash investing activity for the purposes of the Consolidated Statements of Cash Flows.
Consideration
Purchase price
Contingent consideration - fair value of earn-out at date of closing
Fair value of total consideration
Purchase Price Allocation
Trade receivables
Other receivables
Inventories
Other current assets
Property, plant and equipment
Goodwill (tax deductible)
Other intangible assets
Current liabilities
Net assets acquired
$
$
$
$
35,487
13,872
49,359
831
550
430
19
5,083
24,242
18,749
(545)
49,359
Further adjustments are not expected to the allocation above.
The goodwill recognized above arose because the purchase price for Angelic reflects a number of factors including the
future earnings and cash flow potential of Angelic, as well as the impact of the inclusion of the initial fair value of the earn-out
associated with the acquisition. Angelic is a fast growing, on-trend business with placement in the specialty bakery/deli section
of the grocery store and provides innovation opportunities within and beyond our present product lines. Goodwill also resulted
from the workforce acquired with Angelic.
We have determined the values and lives of the other intangible assets listed in the allocation above as: $15.8 million for
the tradename with a 20-year life; $0.3 million for the customer relationships with a 10-year life; $2.4 million for the
technology / know-how with a 10-year life and $0.2 million for the non-compete agreements with a 5-year life.
Pro forma results of operations have not been presented herein as the acquisition was not material to our results of
operations.
Flatout Holdings, Inc.
In March 2015, we acquired all of the issued and outstanding capital stock of Flatout Holdings, Inc. (“Flatout”), a
privately owned manufacturer and marketer of flatbread wraps and pizza crusts based in Saline, Michigan. The purchase price,
net of cash acquired, was $92.2 million and was funded by cash on hand. Flatout is reported in our Specialty Foods segment,
and its results of operations were included in our consolidated financial statements from the date of acquisition.
35
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 3 – Fair Value
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value
hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:
Level 1 – defined as observable inputs, such as quoted market prices in active markets.
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable.
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to
develop its own assumptions.
Our financial assets and liabilities consist principally of cash, accounts receivable, accounts payable and contingent
consideration payable. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying
value.
Our contingent consideration, which is measured at fair value on a recurring basis and did not have a balance at June 30,
2016, is included in Other Noncurrent Liabilities on the Consolidated Balance Sheets. The following table summarizes our
contingent consideration as of June 30, 2017:
Fair Value Measurements at June 30, 2017
Level 1
Level 2
Level 3
Total
Acquisition-related contingent consideration
$
— $
— $
15,028 $
15,028
The contingent consideration resulted from the earn-out associated with our November 17, 2016 acquisition of Angelic.
The purchase price of $35.5 million did not include the future earn-out payment which is tied to performance-based conditions.
In general, the terms of the acquisition specify that the sellers will receive an earn-out based upon a pre-determined multiple of
the defined adjusted EBITDA of Angelic in fiscal 2021. The fair value of the contingent consideration was estimated using a
present value approach, which incorporates factors such as business risks and projections, to estimate an expected value. This
fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement
within the fair value hierarchy. Using this valuation technique, the fair value of the contingent consideration was determined to
be $13.9 million at November 17, 2016.
The following table represents our Level 3 fair value measurements using significant other unobservable inputs for
acquisition-related contingent consideration:
Acquisition-related contingent consideration at beginning of year
Additions
Changes in fair value included in Selling, General and Administrative Expenses
Acquisition-related contingent consideration at end of year
See Note 12 for fair value disclosures related to our defined benefit pension plans.
Note 4 – Long-Term Debt
2017
—
13,872
1,156
15,028
$
$
At June 30, 2017 and 2016, we had an unsecured credit facility (“Facility”) under which we could borrow, on a revolving
credit basis, up to a maximum of $150 million at any one time, with potential to expand the total credit availability to
$225 million subject to us obtaining consent of the issuing banks and certain other conditions. The Facility expires on April 8,
2021, and all outstanding amounts are then due and payable. Interest is variable based upon formulas tied to LIBOR or an
alternative base rate defined in the Facility, at our option. We must also pay facility fees that are tied to our then-applicable
consolidated leverage ratio. Loans may be used for general corporate purposes. Due to the nature of its terms, when we have
outstanding borrowings under the Facility, they will be classified as long-term debt.
At June 30, 2017 and 2016, we had no borrowings outstanding under the Facility. At June 30, 2017, we had $5.1 million
of standby letters of credit outstanding, which reduced the amount available for borrowing on the Facility. We paid no interest
in 2017 and 2016.
36
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The Facility contains certain restrictive covenants, including limitations on indebtedness, asset sales and acquisitions.
There are two principal financial covenants: an interest expense test that requires us to maintain an interest coverage ratio not
less than 2.5 to 1 at the end of each fiscal quarter; and an indebtedness test that requires us to maintain a consolidated leverage
ratio not greater than 3 to 1 at all times. The interest coverage ratio is calculated by dividing Consolidated EBIT by
Consolidated Interest Expense, and the leverage ratio is calculated by dividing Consolidated Debt by Consolidated EBITDA.
All financial terms used in the covenant calculations are defined more specifically in the Facility.
Note 5 – Commitments
We have operating leases with initial noncancelable lease terms in excess of one year covering the rental of various
facilities and equipment, which expire at various dates through fiscal year 2027. Certain of these leases contain renewal options,
some provide options to purchase during the lease term and some require contingent rentals. The future minimum rental
commitments due under these leases are summarized as follows:
2018
2019
2020
2021
2022
Thereafter
$
$
$
$
$
$
6,446
6,505
4,239
3,030
2,372
4,617
Total rent expense, including short-term cancelable leases, during the years ended June 30 is summarized as follows:
Operating leases:
Minimum rentals
Contingent rentals
Short-term cancelable leases
Total
Note 6 – Contingencies
2017
2016
2015
$
$
6,529
4
1,508
8,041
$
$
5,298
11
1,611
6,920
$
$
5,036
6
900
5,942
In addition to the items discussed below, at June 30, 2017, we were a party to various claims and litigation matters arising
in the ordinary course of business. Such matters did not have a material effect on the current-year results of operations and, in
our opinion, their ultimate disposition will not have a material effect on our consolidated financial statements.
With our recent acquisition of Angelic, we have a contingent liability recorded for the earn-out associated with the
transaction. See further discussion in Note 3.
19% of our employees are represented under various collective bargaining contracts. There are no employees represented
under collective bargaining contracts that will expire within one year.
Note 7 – Goodwill and Other Intangible Assets
Goodwill attributable to the Specialty Foods segment was $168.0 million and $143.8 million at June 30, 2017 and 2016,
respectively. The increase in goodwill is the result of the acquisition of Angelic in November 2016. See further discussion in
Note 2.
The following table is a rollforward of goodwill from June 30, 2016 to June 30, 2017:
Goodwill at beginning of year
Goodwill acquired during the year
Goodwill at end of year
Carrying Value
$
$
143,788
24,242
168,030
37
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes our identifiable other intangible assets, all included in the Specialty Foods segment, at
June 30. The intangible asset values and lives related to the Angelic acquisition, which are included in the table below, are final.
See further discussion in Note 2.
Tradenames (20 to 30-year life)
Gross carrying value
Accumulated amortization
Net carrying value
Trademarks (40-year life)
Gross carrying value
Accumulated amortization
Net carrying value
Customer Relationships (10 to 15-year life)
Gross carrying value
Accumulated amortization
Net carrying value
Technology / Know-how (10-year life)
Gross carrying value
Accumulated amortization
Net carrying value
Non-compete Agreements (5-year life)
Gross carrying value
Accumulated amortization
Net carrying value
Total net carrying value
2017
2016
50,321
(3,130)
47,191
370
(241)
129
14,207
(7,160)
7,047
6,350
(1,047)
5,303
791
(299)
492
60,162
$
$
$
$
$
$
$
$
$
$
$
34,500
(1,485)
33,015
370
(232)
138
18,020
(10,148)
7,872
3,900
(504)
3,396
600
(155)
445
44,866
$
$
$
$
$
$
$
$
$
$
$
Amortization expense for our other intangible assets, which is reflected in Selling, General and Administrative Expenses,
was as follows in each of the years ended June 30:
Amortization expense
2017
2016
2015
$
3,453
$
2,905
$
1,605
Total annual amortization expense for each of the next five years is estimated to be as follows:
2018
2019
2020
2021
2022
Note 8 – Liabilities
Accrued liabilities at June 30 were composed of:
Compensation and employee benefits
Distribution
Other taxes
Marketing
Other
Total accrued liabilities
38
$
$
$
$
$
$
$
3,867
3,867
3,832
3,747
3,673
2016
21,565
4,450
1,266
1,107
4,684
33,072
2017
21,864
7,711
1,266
1,197
3,232
35,270
$
$
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Other noncurrent liabilities at June 30 were composed of:
Acquisition-related contingent consideration
Workers compensation
Deferred compensation and accrued interest
Pension benefit liability
Gross tax contingency reserve
Postretirement benefit liability
Other
Total other noncurrent liabilities
Note 9 – Income Taxes
2017
2016
$
$
15,028
8,492
4,968
4,344
1,241
968
3,557
38,598
$
$
—
9,534
4,655
8,613
1,599
939
1,358
26,698
We file a consolidated federal income tax return. Taxes based on income for the years ended June 30 have been provided
as follows:
Currently payable:
Federal
State and local
Total current provision
Deferred federal, state and local provision (benefit)
Total taxes based on income
2017
2016
2015
$
$
51,524
6,319
57,843
2,359
60,202
$
$
57,116
6,502
63,618
(749)
62,869
$
$
47,601
5,229
52,830
36
52,866
Certain tax benefits recorded directly to common stock for each of the years ended June 30 were as follows:
Tax benefits recorded directly to common stock
$
1,123
$
1,417
$
563
2017
2016
2015
For the years ended June 30, our effective tax rate varied from the statutory federal income tax rate as a result of the
following factors:
Statutory rate
State and local income taxes
ESOP dividend deduction
Domestic manufacturing deduction for qualified income
Other
Effective rate
2017
2016
2015
35.0%
2.4
(0.1)
(2.8)
(0.2)
34.3%
35.0%
2.3
(0.4)
(3.0)
0.2
34.1%
35.0%
2.2
(0.2)
(3.0)
0.2
34.2%
39
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Our net deferred tax liability for all periods presented in the Consolidated Balance Sheets has been classified as
noncurrent. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at June 30 were comprised of:
Deferred tax assets:
Employee medical and other benefits
Receivable and other allowances
Inventories
Other accrued liabilities
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Intangible assets
Goodwill
Other
Total deferred tax liabilities
Net deferred tax liability
2017
2016
$
$
$
10,349
5,314
1,041
1,905
18,609
(22,188)
(14,070)
(7,092)
(466)
(43,816)
(25,207) $
12,533
5,626
1,034
1,740
20,933
(21,573)
(14,555)
(6,117)
(121)
(42,366)
(21,433)
Prepaid federal income taxes of $6.1 million and $4.3 million were included in Other Current Assets at June 30, 2017 and
2016, respectively. Prepaid state and local income taxes of $0.9 million and $0.5 million were included in Other Current Assets
at June 30, 2017 and 2016, respectively.
Net cash payments for income taxes for each of the years ended June 30 were as follows:
Net cash payments for income taxes
2017
2016
2015
$
59,008
$
62,901
$
43,027
The gross tax contingency reserve at June 30, 2017 was $1.8 million and consisted of estimated tax liabilities of
$1.1 million and interest and penalties of $0.7 million. The unrecognized tax benefits recorded as the gross tax contingency
reserve noted in the following table for June 30, 2017 and 2016 would affect our effective tax rate, if recognized.
The following table sets forth changes in our total gross tax contingency reserve (including interest and penalties):
Balance, beginning of year
Tax positions related to the current year:
Additions
Reductions
Tax positions related to prior years:
Additions
Reductions
Settlements
2017
2016
$
1,599
$
1,487
82
—
153
(26)
—
1,808
$
54
—
121
(63)
—
1,599
Balance, end of year
$
We included $0.6 million of the gross tax contingency reserve at June 30, 2017 in Accrued Liabilities as these amounts
are expected to be resolved within the next 12 months. The remaining liability of $1.2 million was included in Other
Noncurrent Liabilities. We expect that the amount of these liabilities will change within the next 12 months; however, we do not
expect the change to have a significant effect on our financial position or results of operations.
We recognize interest and penalties related to these tax liabilities in income tax expense. For each of the years ended
June 30, we recognized the change in the accrual for net tax-related interest and penalties as follows:
Expense recognized for net tax-related interest and penalties
2017
2016
$
112
$
92
40
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
We had accrued interest and penalties at June 30 as follows:
Accrued interest and penalties included in the gross tax contingency reserve
$
683
$
571
2017
2016
We file income tax returns in the U.S. and various state and local jurisdictions. With limited exceptions, we are no longer
subject to examination of U.S. federal or state and local income taxes for years prior to 2014.
The American Jobs Creation Act provided a tax deduction calculated as a percentage of qualified income from
manufacturing in the United States. The deduction percentage for 2017 was 9%. In accordance with FASB guidance, this
deduction is treated as a special deduction, as opposed to a tax rate reduction and is properly reflected in the effective tax rate
table.
Note 10 – Business Segment Information
We operate our business in one reportable segment, “Specialty Foods.” Our management evaluates segment performance
based on sales and operating income.
The following table sets forth net sales contributed by each class of similar products in each of the years ended June 30:
Specialty Foods
Non-frozen
Frozen
Total
2017
2016
2015
$
$
817,700
384,142
1,201,842
$
$
818,716
372,393
1,191,109
$
$
741,726
362,788
1,104,514
Our Corporate Expenses include various expenses of a general corporate nature, as well as costs related to certain
divested or closed nonfood operations, including the expense associated with retirement plans applicable to those closed units,
and therefore have not been allocated to the Specialty Foods segment.
41
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following sets forth certain additional financial segment information for the years ended June 30 and certain items
retained at the corporate level:
Net Sales (1) (2)
Operating Income (2)
Specialty Foods
Corporate Expenses
Total
Identifiable Assets (1) (3)
Specialty Foods
Corporate
Total
Capital Expenditures
Specialty Foods
Corporate
Total
Depreciation and Amortization
Specialty Foods
Corporate
Total
2017
1,201,842
187,051
(12,303)
174,748
577,509
138,896
716,405
26,031
974
27,005
24,752
154
24,906
$
$
$
$
$
$
$
$
$
2016
1,191,109
196,592
(12,022)
184,570
515,553
119,179
634,732
16,652
19
16,671
24,001
146
24,147
$
$
$
$
$
$
$
$
$
2015
1,104,514
167,095
(12,234)
154,861
514,605
187,551
702,156
18,230
68
18,298
20,929
182
21,111
$
$
$
$
$
$
$
$
$
(1) Net sales and long-lived assets are predominately domestic.
(2) All intercompany transactions have been eliminated.
(3) Segment identifiable assets include those assets used in its operations and other intangible assets allocated to purchased
businesses. Corporate assets consist principally of cash and equivalents. The increase in Specialty Foods assets from June
30, 2016 to June 30, 2017 was due to the acquisition of Angelic. The decline in Corporate assets from June 30, 2015 to
June 30, 2016 was due to the decrease in cash resulting from the payment of the December 2015 special dividend.
Net sales attributable to Wal-Mart Stores, Inc. (“Wal-Mart”) and McLane Company, Inc. (“McLane”), a wholesale
distribution subsidiary of Berkshire Hathaway, Inc., for each of the years ended June 30 were as follows:
Net sales to Wal-Mart
As a percentage of consolidated net sales
Net sales to McLane
As a percentage of consolidated net sales
$
$
2017
201,484
17%
198,153
16%
$
$
2016
189,417
16%
232,241
19%
$
$
2015
177,354
16%
202,218
18%
Accounts receivable attributable to Wal-Mart and McLane at June 30 as a percentage of consolidated accounts receivable
were as follows:
Wal-Mart
McLane
2017
2016
26%
12%
25%
17%
42
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Note 11 – Stock-Based Compensation
Our shareholders previously approved the adoption of and subsequent amendments to the Lancaster Colony Corporation
2005 Stock Plan (the “2005 Plan”). The 2005 Plan reserved 2,000,000 common shares for issuance to our employees and
directors. As the 2005 Plan expired in May 2015, we obtained shareholder approval of the Lancaster Colony Corporation 2015
Omnibus Incentive Plan (the “2015 Plan”) at our November 2015 Annual Meeting of Shareholders. The 2015 Plan did not
affect any currently outstanding equity awards granted under the 2005 Plan. The 2015 Plan reserved 1,500,000 common shares
for issuance to our employees and directors. All awards granted under these plans will be exercisable at prices not less than fair
market value as of the date of the grant. The vesting period for awards granted under these plans varies as to the type of award
granted, but generally these awards have a maximum term of five years.
We recognize compensation expense over the requisite service period of the grant. Compensation expense is reflected in
Cost of Sales or Selling, General and Administrative Expenses based on the grantees’ salaries expense classification. We record
tax benefits and excess tax benefits related to stock-settled stock appreciation rights (“SSSARs”) and restricted stock awards.
These excess tax benefits are included in the financing section of the Consolidated Statements of Cash Flows. As needed, we
estimate a forfeiture rate for our SSSARs and restricted stock grants based on historical experience.
Stock-Settled Stock Appreciation Rights
We use periodic grants of SSSARs as a vehicle for rewarding certain employees with long-term incentives for their efforts
in helping to create long-term shareholder value. We calculate the fair value of SSSARs grants using the Black-Scholes option-
pricing model. Our policy is to issue shares upon SSSARs exercise from new shares that had been previously authorized.
In 2017, 2016 and 2015, we granted SSSARs to various employees under the terms of the plans. The following table
summarizes information relating to these grants:
SSSARs granted
Weighted average grant date fair value per right
Weighted average assumptions used in fair value calculations:
2017
2016
2015
166
17.59
$
240
12.23
$
$
149
9.94
Risk-free interest rate
Dividend yield
Volatility factor of the expected market price of our common stock
Expected life in years
1.36%
1.64%
22.41%
2.47
0.86%
1.93%
20.88%
2.69
0.86%
2.02%
19.62%
2.71
For these grants, the volatility factor was estimated based on actual historical volatility of our stock for a time period
equal to the term of the SSSARs. The expected average life was determined based on historical exercise experience for this type
of grant. The SSSARs we grant vest one-third on the first anniversary of the grant date, one-third on the second anniversary of
the grant date and one-third on the third anniversary of the grant date.
The following table summarizes our SSSARs compensation expense and tax benefits recorded for each of the years ended
June 30:
Compensation expense
Tax benefits
Intrinsic value of exercises
Excess tax benefits
2017
2016
2015
$
$
$
$
1,882
659
2,281
798
$
$
$
$
1,472
515
3,788
1,341
$
$
$
$
1,288
451
1,162
410
The total fair values of SSSARs vested for each of the years ended June 30 were as follows:
Fair value of vested rights
2017
2016
2015
$
1,916
$
1,192
$
1,252
43
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes the activity relating to SSSARs granted under the plans for the year ended June 30,
2017:
Number of
Rights
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life in
Years
Aggregate
Intrinsic
Value
Outstanding at beginning of year
Exercised
Granted
Forfeited
Outstanding at end of year
Exercisable and vested at end of year
Vested and expected to vest at end of year
435
$
(74) $
$
166
(6) $
$
$
$
521
155
493
97.01
89.52
134.06
110.77
109.70
95.25
109.81
3.62
2.73
3.61
$
$
$
8,603
4,229
8,119
The following table summarizes information about the SSSARs outstanding by grant year at June 30, 2017:
Outstanding
Exercisable
Weighted Average
Grant Years
2017
2016
2015
2014
2013
Range of
Exercise Prices
$121.54-$138.96
$101.70-$112.62
$91.13
$79.78-$89.29
$72.67
Number
Outstanding
164
217
94
41
5
Remaining
Contractual
Life in
Years
4.67
3.69
2.65
1.64
0.66
Exercise
Price
$134.04
$104.10
$91.13
$89.01
$72.67
Number
Exercisable
—
60
49
41
5
Weighted
Average
Exercise
Price
$—
$104.59
$91.13
$89.01
$72.67
At June 30, 2017, there was $4.0 million of unrecognized compensation expense related to SSSARs that we will
recognize over a weighted-average period of 2 years.
Restricted Stock
We use periodic grants of restricted stock as a vehicle for rewarding our nonemployee directors and certain employees
with long-term incentives for their efforts in helping to create long-term shareholder value.
In 2017, 2016 and 2015, we granted shares of restricted stock to various employees under the terms of the plans. The
following table summarizes information relating to these grants:
Employees
Restricted stock granted
Grant date fair value
Weighted average grant date fair value per award
2017
2016
2015
12
1,591
134.07
$
$
28
2,923
102.89
$
$
$
$
9
845
91.13
The restricted stock under these employee grants vests on the third anniversary of the grant date. Under the terms of our
grants, employees receive dividends on unforfeited restricted stock regardless of their vesting status.
In 2017, 2016 and 2015, we also granted shares of restricted stock to our nonemployee directors under the terms of the
plans. The following table summarizes information relating to each of these grants:
Nonemployee directors
Restricted stock granted
Grant date fair value
Weighted average grant date fair value per award
2017
2016
2015
5
759
138.96
$
$
6
639
112.05
$
$
$
$
7
639
92.92
The 2017 grant vests over a one-year period, and all of these shares are expected to vest. Dividends earned on the stock
during the vesting period will be paid to the directors at the time the stock vests.
44
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes our restricted stock compensation expense and tax benefits recorded for each of the years
ended June 30:
Compensation expense
Tax benefits
Excess tax benefits
2017
2016
2015
$
$
$
2,366
828
325
$
$
$
1,854
649
76
$
$
$
1,752
613
153
The total fair values of restricted stock vested for each of the years ended June 30 were as follows:
Fair value of vested shares
2017
2016
2015
$
2,420
$
1,124
$
1,836
The following table summarizes the activity relating to restricted stock granted under the plans for the year ended
June 30, 2017:
Unvested restricted stock at beginning of year
Granted
Vested
Forfeited
Unvested restricted stock at end of year
Number of
Shares
Weighted
Average Grant
Date Fair Value
97.71
$
63
135.61
17
$
(26) $
94.32
(2) $
99.18
111.87
$
52
At June 30, 2017, there was $3.3 million of unrecognized compensation expense related to restricted stock that we will
recognize over a weighted-average period of 2 years.
Note 12 – Pension Benefits
Defined Benefit Pension Plans
We sponsor multiple defined benefit pension plans that covered certain workers under collective bargaining contracts.
However, as a result of prior-years’ restructuring activities, for all periods presented, we no longer have any active employees
continuing to accrue service cost or otherwise eligible to receive plan benefits. Benefits being paid under the plans are primarily
based on negotiated rates and years of service. We contribute to these plans at least the minimum amount required by
regulation.
At the end of the year, we discount our plan liabilities using an assumed discount rate. In estimating this rate, we, along
with our third-party actuaries, review the timing of future benefit payments, bond indices, consider yield curve analysis results
and the past history of discount rates.
The actuarial present value of benefit obligations summarized below was based on the following assumption:
Weighted-average assumption as of June 30
Discount rate
2017
2016
3.68%
3.39%
The net periodic benefit costs were determined utilizing the following beginning-of-the-year assumptions:
Discount rate
Expected long-term return on plan assets
2017
2016
2015
3.39%
7.00%
4.12%
7.00%
4.02%
7.00%
In determining the long-term expected return on plan assets, we consider our related investment guidelines, our
expectations of long-term rates of return by asset category, our target asset allocation weighting and historical rates of return
and volatility for equity and fixed income investments. The investment strategy for plan assets is to control and manage
investment risk through diversification among asset classes, investment managers/funds and investment styles. The plans’
investment guidelines have been designed to meet the intended objective that plan assets earn at least nominal returns equal to
or in excess of the plans’ liability growth rate. In consideration of the current average age of the plans’ participants, the
investment guidelines are based upon an investment horizon of at least 10 years.
45
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The target and actual asset allocations for our plans at June 30 by asset category were as follows:
Cash and equivalents
Equity securities
Fixed income
Total
Target Percentage
of Plan Assets at
June 30
2017
0%-10%
30%-70%
30%-70%
Actual Percentage of Plan Assets
2017
2016
3%
49
48
100%
2%
50
48
100%
Our target asset allocations are maintained through ongoing review and periodic rebalancing of equity and fixed income
investments with assistance from an independent outside investment consultant. Also, the plan assets are diversified among
asset classes, asset managers or funds and investment styles to avoid concentrations of risk. We expect that a modest allocation
to cash will exist within the plans because each investment manager is likely to hold limited cash in a portfolio.
We categorize our plan assets within a three-level fair value hierarchy, as previously defined in Note 3. The following
table summarizes the fair values and levels, within the fair value hierarchy, for our plan assets at June 30:
Asset Category
Cash and equivalents
Money market funds
U.S. government obligations
Municipal obligations
Corporate obligations
Mortgage obligations
Mutual funds fixed income
Mutual funds equity
Total
Asset Category
Cash and equivalents
Money market funds
U.S. government obligations
Municipal obligations
Corporate obligations
Mortgage obligations
Mutual funds fixed income
Mutual funds equity
Total
Level 1
Level 2
Level 3
Total
June 30, 2017
$
$
$
$
472
599
—
—
—
—
8,109
17,951
27,131
Level 1
557
267
—
—
—
—
7,135
17,874
25,833
$
$
$
$
— $
—
3,598
36
3,805
2,199
—
—
9,638
$
— $
—
—
—
—
—
—
—
— $
472
599
3,598
36
3,805
2,199
8,109
17,951
36,769
June 30, 2016
Level 2
Level 3
Total
— $
—
4,785
139
2,927
1,998
—
—
9,849
$
— $
—
—
—
—
—
—
—
— $
557
267
4,785
139
2,927
1,998
7,135
17,874
35,682
The plan assets classified at Level 1 include money market funds and mutual funds. Quoted market prices in active
markets for identical assets are available for investments in this category.
The plan assets classified at Level 2 include fixed income securities consisting of government securities, municipal
obligations, corporate obligations and mortgage obligations. For these types of securities, market prices are observable for
identical or similar investment securities but not readily accessible for each of those investments individually at the
measurement date. For these assets, we obtain pricing information from an independent pricing service. The pricing service
uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs
and assumptions to the model of the pricing service are derived from market observable sources including as applicable:
benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers
and reference data including market research publications.
46
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Relevant information with respect to our pension benefits as of June 30 can be summarized as follows:
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Reconciliation of funded status
Net accrued benefit cost
Amounts recognized in the Consolidated Balance Sheets consist of
Prepaid benefit cost (Other Noncurrent Assets)
Accrued benefit liability (Other Noncurrent Liabilities)
Net amount recognized
Accumulated benefit obligation
2017
2016
44,152
1,457
(2,297)
(2,371)
40,941
2017
35,682
3,458
—
(2,371)
36,769
$
$
$
$
42,042
1,685
2,683
(2,258)
44,152
2016
37,146
794
—
(2,258)
35,682
2017
2016
(4,172) $
(8,470)
2017
2016
$
172
(4,344)
(4,172) $
143
(8,613)
(8,470)
2017
2016
40,941
$
44,152
$
$
$
$
$
$
$
$
The following table discloses, in the aggregate, those plans with benefit obligations in excess of the fair value of plan
assets at the June 30 measurement date:
Benefit obligations
Fair value of plan assets at end of year
2017
2016
$
$
38,236
33,892
$
$
$
$
41,301
32,688
2016
20,434
(7,550)
12,884
Amounts recognized in accumulated other comprehensive loss at June 30 were as follows:
Net actuarial loss
Income taxes
Total
2017
16,380
(6,052)
10,328
$
$
The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic benefit
cost during the next fiscal year is as follows:
Net actuarial loss
2018
$
572
47
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
The following table summarizes the components of net periodic benefit income for our pension plans at June 30:
Components of net periodic benefit income
Interest cost
Expected return on plan assets
Amortization of unrecognized net loss
Net periodic benefit income
2017
2016
2015
$
$
$
1,457
(2,416)
715
(244) $
$
1,685
(2,520)
539
(296) $
1,612
(2,632)
429
(591)
We have not yet finalized our anticipated funding level for 2018, but based on initial estimates, we do not expect our 2018
contributions to our pension plans to be material.
Benefit payments estimated for future years are as follows:
2018
2019
2020
2021
2022
2023 - 2027
$
$
$
$
$
$
2,348
2,348
2,376
2,399
2,441
12,394
Note 13 – Defined Contribution and Other Employee Plans
Company-Sponsored Defined Contribution Plans
We sponsored four defined contribution plans established pursuant to Section 401(k) of the Internal Revenue Code during
2017. Contributions are determined under various formulas, and we contributed to two of these plans in 2017. Costs related to
such plans for each of the years ended June 30 were as follows:
Costs related to company-sponsored defined contribution plans
$
1,111
$
992
$
888
2017
2016
2015
Multiemployer Plans
Certain of our subsidiaries participate in multiemployer plans that provide pension benefits to retiree workers under
collective bargaining contracts at such locations. These plans generally provide for retirement, death and/or termination benefits
for eligible employees within the applicable collective bargaining contract, based on specific eligibility/participation
requirements, vesting periods and benefit formulas. The risks of participating in these multiemployer plans are different from
single-employer plans in the following aspects: (1) assets contributed to the multiemployer plan by one employer may be used
to provide benefits to employees of other participating employers, (2) if a participating employer stops contributing to the plan,
the unfunded obligations of the plan may be borne by the remaining participating employers and (3) if we choose to stop
participating in any of our multiemployer plans, we may be required to pay those plans an amount based on the underfunded
status of the plan, referred to as a withdrawal liability.
48
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Our participation in these plans for the annual period ended June 30, 2017 is reflected in the following table. All
information in the table is as of December 31 of the relevant year, except contributions which are based on our fiscal year, or
except as otherwise noted. The EIN-PN column provides the Employer Identification Number (“EIN”) and the Plan Number
(“PN”). The pension protection act zone status is based on information that we received from the plan. Among other factors,
generally, plans in critical status (red zone) are less than 65 percent funded, plans in endangered or seriously endangered status
(yellow zone or orange zone, respectively) are less than 80 percent funded, and plans at least 80 percent funded are said to be in
the green zone. The FIP/RP status pending/implemented column indicates plans for which a funding improvement plan (“FIP”)
or a rehabilitation plan (“RP”) is either pending or has been implemented by the trustees of each plan. Except as noted below
regarding 2017 contributions to the Cleveland Bakers and Teamsters Pension Fund, there have been no significant changes that
affect the comparability of 2017, 2016 or 2015 contributions.
Pension Protection
Act Zone Status
Fiscal Year
Contributions (1) (3)
EIN/PN
2016
2015
FIP/RP Status
Pending /
Implemented
2017
2016
2015
Surcharge
Imposed
Expiration
Date of
Collective
Bargaining
Agreement
34-0904419-
001
Red
12/31/15
Red
12/31/14
Yes,
Implemented
$ 2,098
$ 1,605
$ 1,501
No
n/a
91-6145047-
001
Green
12/31/15
Green
12/31/14
No
409
420
440
No
12/15/2018
$ 2,507
$ 2,025
$ 1,941
Plan Name
Cleveland Bakers and
Teamsters Pension
Fund (2)
Western Conference
of Teamsters Pension
Plan
Total contributions to
multiemployer plans
(1) Contributions do not include payments related to multiemployer pension withdrawals/settlements.
(2) In January 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. As settlement of our portion of underfunded pension benefits of the
multiemployer plan, we paid $17.0 million in 2017 for a full withdrawal from the plan.
(3) Our 2017 contributions to the Cleveland Bakers and Teamsters Pension Fund included amounts related to a new collective
bargaining contract.
Our contributions to the Cleveland Bakers and Teamsters Pension Fund exceeded 5% of the total contributions to the plan
in the plan year ended December 31, 2015.
In addition to pension benefits provided under these two multiemployer plans, we also contribute amounts for health and
welfare benefits that are defined by each plan. These benefits are not vested. The contributions required by our participation in
these plans for each of the years ended June 30 were as follows:
Multiemployer health and welfare plan contributions
$
3,570
$
3,559
$
3,796
2017
2016
2015
We also began to make non-elective contributions for the union employees at our Bedford Heights, Ohio plant into a
union-sponsored multiemployer 401(k) plan following our withdrawal from the underfunded Cleveland Bakers and Teamsters
Pension Fund in 2017. Our 2017 contributions were $0.8 million, including $0.6 million to initially fund this 401(k) plan.
Deferred Compensation Plan
We offer a deferred compensation plan for select employees who may elect to defer a certain percentage of annual
compensation. We do not match any contributions. Each participant earns interest based upon the prime rate of interest,
adjusted semi-annually, on their respective deferred compensation balance. Participants are paid out upon retirement or
termination.
The following table summarizes our liability for total deferred compensation and accrued interest at June 30:
Liability for deferred compensation and accrued interest
2017
2016
$
4,968
$
4,655
49
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
Deferred compensation expense for each of the years ended June 30 was as follows:
Deferred compensation expense
2017
2016
2015
$
170
$
151
$
136
Note 14 – Selected Quarterly Financial Data (Unaudited)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year
2017
Net Sales
Gross Profit
Net Income (1)
Diluted Net Income Per Common Share (1) (2)
$ 291,361
80,634
$
$ 326,773
93,739
$
$ 293,834
71,905
$
$ 289,874
72,486
$
$ 1,201,842
318,764
$
$
$
33,400
1.22
$
$
38,956
1.42
$
$
14,471
0.53
$
$
28,487
1.04
$
$
115,314
4.20
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year
2016
Net Sales
Gross Profit
Net Income
Diluted Net Income Per Common Share (2)
$ 294,085
67,967
$
27,628
$
1.01
$
$ 324,769
83,594
$
34,511
$
1.25
$
$ 287,765
72,924
$
29,011
$
1.06
$
$ 284,490
75,144
$
30,614
$
1.12
$
$ 1,191,109
299,629
$
121,764
$
4.44
$
(1) Included in the third quarter and fiscal year net income is expense of $11.5 million, net of taxes, or approximately $0.42
per diluted share, related to a multiemployer pension settlement and other benefit-related costs.
(2) Diluted net income per common share amounts are calculated independently for each of the quarters presented.
Accordingly, the sum of the quarterly net income per common share amounts may not agree with the fiscal year.
50
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures, no matter how well-designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management must apply its judgment in
evaluating the cost–benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level as of June 30, 2017.
REPORT OF MANAGEMENT
Internal control over financial reporting refers to the process designed by, or under the supervision of, our management,
including our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and
procedures that:
1.
2.
3.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of management and our directors; and
Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is only possible to
design into the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Management has used the framework set forth in the report entitled Internal Control – Integrated Framework (2013) published
by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission to evaluate the effectiveness of our
internal control over financial reporting. Management has concluded that our internal control over financial reporting was
effective as of the end of the most recent year.
Our internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm. Their opinion, as to the effectiveness of our internal control over financial reporting, is stated in their
report, which is set forth on the following page.
There has been no change in our internal control over financial reporting during our most recent quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lancaster Colony Corporation
Westerville, Ohio
We have audited the internal control over financial reporting of Lancaster Colony Corporation and subsidiaries (the
“Company”) as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report of Management. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
June 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended June 30, 2017, of the Company and our report dated
August 24, 2017, expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
August 24, 2017
52
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding our directors and executive officers, including the identification of the Audit Committee and
the Audit Committee financial expert, is incorporated by reference to the information contained in our definitive proxy
statement for our November 2017 Annual Meeting of Shareholders (“2017 Proxy Statement”) to be filed with the SEC pursuant
to Regulation 14A promulgated under the Exchange Act.
The information regarding Section 16(a) beneficial ownership reporting compliance is incorporated by reference to the
material under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2017 Proxy Statement.
The information regarding changes, if any, in procedures by which shareholders may recommend nominees to our Board
of Directors is incorporated by reference to the information contained in our 2017 Proxy Statement.
The information regarding our Code of Business Ethics is incorporated by reference to the information contained in our
2017 Proxy Statement.
Item 11. Executive Compensation
The information regarding executive officer and director compensation is incorporated by reference to the information
contained in our 2017 Proxy Statement.
The information regarding Compensation Committee interlocks and insider participation and the Compensation
Committee Report is incorporated by reference to the information contained in our 2017 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information regarding security ownership of certain beneficial owners and management and securities authorized for
issuance under our equity compensation plans is incorporated by reference to the information contained in our 2017 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information regarding certain relationships and related transactions and director independence is incorporated by
reference to the information contained in our 2017 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information regarding fees paid to and services provided by our independent registered public accounting firm during the
fiscal years ended June 30, 2017 and 2016 and the pre-approval policies and procedures of the Audit Committee is incorporated
by reference to the information contained in our 2017 Proxy Statement.
53
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements. The following consolidated financial statements as of June 30, 2017 and 2016 and for each
of the three years in the period ended June 30, 2017, together with the report thereon of Deloitte & Touche LLP dated
August 24, 2017, are included in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2017 and 2016
Consolidated Statements of Income for the years ended June 30, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended June 30, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended June 30, 2017, 2016 and 2015
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules. Supplemental schedules not included with the additional financial data have been
omitted because they are not applicable or the related amounts are immaterial for all periods presented.
(a) (3) Exhibits Required by Item 601 of Regulation S-K and Item 15(b). See Index to Exhibits.
54
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
LANCASTER COLONY CORPORATION
(Registrant)
By:
/s/ DAVID A. CIESINSKI
David A. Ciesinski
President, Chief Executive Officer
and Director
Date:
August 24, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
/s/ DAVID A. CIESINSKI
David A. Ciesinski
/s/ JOHN B. GERLACH, JR.
John B. Gerlach, Jr.
/s/ DOUGLAS A. FELL
Douglas A. Fell
/s/ JAMES B. BACHMANN
James B. Bachmann
/s/ NEELI BENDAPUDI
Neeli Bendapudi
/s/ WILLIAM H. CARTER
William H. Carter
/s/ KENNETH L. COOKE
Kenneth L. Cooke
/s/ ROBERT L. FOX
Robert L. Fox
/s/ ALAN F. HARRIS
Alan F. Harris
/s/ ROBERT P. OSTRYNIEC
Robert P. Ostryniec
/s/ ZUHEIR SOFIA
Zuheir Sofia
Title
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Executive Chairman of the Board
and Director
Treasurer, Vice President,
Assistant Secretary
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
55
Date
August 24, 2017
August 24, 2017
August 24, 2017
August 15, 2017
August 15, 2017
August 15, 2017
August 15, 2017
August 15, 2017
August 15, 2017
August 15, 2017
August 15, 2017
LANCASTER COLONY CORPORATION AND SUBSIDIARIES
FORM 10-K
JUNE 30, 2017
INDEX TO EXHIBITS
Description
Stock Purchase Agreement, dated as of March 13, 2015 by and among T. Marzetti Company, as Buyer, Flatout
Holdings, Inc., as the Company, the shareholders of the Company, as Sellers, and NCP-Flatout Seller Rep LLC
as Sellers’ Representative (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
(000-04065), filed March 16, 2015).
First Amendment, dated as of September 30, 2015, to Stock Purchase Agreement, dated as of March 13, 2015,
by and among T. Marzetti Company, as Buyer, Flatout Holdings, Inc., as the Company, the shareholders of the
Company, as Sellers, and NCP-Flatout Seller Rep LLC, as Sellers’ Representative (incorporated by reference to
Exhibit 2.1 to the Quarterly Report on Form 10-Q (000-04065), filed November 3, 2015).
Certificate of Amendment to the Amended and Restated Articles of Incorporation of Lancaster Colony
Corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (000-04065), filed
February 3, 2017).
Amended and Restated Regulations of Lancaster Colony Corporation, dated as of April 18, 2016 (incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K (000-04065), filed April 19, 2016).
Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the Annual Report on
Form 10-K (000-04065), filed August 28, 2015).
Description of Common Stock (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K
(000-04065), filed October 29, 2015).
Credit Agreement, dated as of April 8, 2016, among Lancaster Colony Corporation, the Lenders, The
Huntington National Bank as Syndication Agent and JPMorgan Chase Bank, N.A. as Administrative Agent
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (000-04065), filed April 11,
2016).
Lancaster Colony Corporation Executive Employee Deferred Compensation Plan (incorporated by reference to
Exhibit 10.9 to the Annual Report on Form 10-K (000-04065), filed September 26, 2000).
2004 Amendment to Lancaster Colony Corporation Executive Employee Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (000-04065), filed January 3,
2005).
Lancaster Colony Corporation 2005 Executive Employee Deferred Compensation Plan (incorporated by
reference to Exhibit 99.2 to the Current Report on Form 8-K (000-04065), filed February 25, 2005).
Lancaster Colony Corporation 2015 Omnibus Incentive Plan (incorporated by reference to Appendix A to the
Company’s Definitive Proxy Statement (000-04065), filed October 9, 2015).
Lancaster Colony Corporation Amended and Restated 2005 Stock Plan (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K (000-04065), filed November 19, 2010).
Form of Restricted Stock Award Agreement for Directors under the Lancaster Colony Corporation 2015
Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K
(000-04065), filed November 17, 2015).
Form of Stock Appreciation Rights Award Agreement for Employees and Consultants under the Lancaster
Colony Corporation 2015 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q (000-04065), filed May 3, 2016).
Form of Restricted Stock Award Agreement for Employees and Consultants under the Lancaster Colony
Corporation 2015 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q (000-04065), filed May 3, 2016).
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
4.2
10.1
10.2(a)
10.3(a)
10.4(a)
10.5(a)
10.6(a)
10.7(a)
10.8(a)
10.9(a)
10.10(a)
Description of Executive Bonus Arrangements (incorporated by reference to Exhibit 10.9 to the Annual Report
on Form 10-K (000-04065), filed September 10, 2004).
56
Exhibit
Number
10.11(a)
10.12(a)
10.13(a)
21*
23*
31.1*
31.2*
32**
Description
Employment Agreement, dated April 18, 2016, between Lancaster Colony Corporation and David A. Ciesinski
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (000-04065), filed April 19,
2016).
First Amendment to Employment Agreement, dated October 27, 2016, between Lancaster Colony Corporation
and David A. Ciesinski (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
(000-04065), filed October 31, 2016).
Lancaster Colony Corporation Form of Change in Control Agreement (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q (000-04065), filed October 31, 2016).
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
(a)
*
**
Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any
Executive Officer participates.
Filed herewith
Furnished herewith
57
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380 Polaris Parkway, Suite 400
Westerville, Ohio 43082
www.lancastercolony.com