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Article by DailyStocks_admin    (06-26-08 10:22 AM)

Filed with the SEC from June 12 to June 18:

Lancaster Colony (LANC)
Barington Capital Group stepped up pressure on Lancaster Colony, saying that the company should live up to its agreement with the hedge fund to publicly disclose its plan to improve its operations and profitability. Barington, run by investor James Mitarotonda, said it intends to closely monitor the company's compliance with the terms of the agreement, as well as its financial and share-price performance. Barington recently cut its stake to about 1.4 million shares (4.9%), from the 1.7 million (5.6%) reported in October 2007.

BUSINESS OVERVIEW

GENERAL
Lancaster Colony Corporation, an Ohio corporation (reincorporated in 1992, successor to a Delaware corporation originally incorporated in 1961), is a diversified manufacturer and marketer of consumer products with a focus on specialty food products for the retail and foodservice markets. Other consumer products manufactured and marketed by Lancaster Colony Corporation include glassware and candles for the retail, floral, and foodservice markets and automotive accessories for the original equipment market and aftermarket. Our principal executive offices are located at 37 West Broad Street, Columbus, Ohio 43215 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 all entities owned or controlled by Lancaster Colony Corporation except where it is clear that the term only means the parent company. Unless otherwise noted, references to “year” pertain to our fiscal year; for example, 2007 refers to fiscal 2007, which is the period from July 1, 2006 to June 30, 2007.
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 through our Web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on our Web site or connected to it is not incorporated into this Annual Report on Form 10-K.
DESCRIPTION OF AND FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
We operate in three business segments – “Specialty Foods,” “Glassware and Candles” and “Automotive” – with continuing operations accounting for approximately 67%, 20% and 13%, respectively, of consolidated net sales for the year ended June 30, 2007. The financial information relating to business segments for the three years in the periods ended June 30, 2007, 2006 and 2005 is included in Note 18 to the consolidated financial statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Further description of each business segment within which we operate is provided below.
Specialty Foods
The food products we manufacture and sell include salad dressings and sauces marketed under the brand names “Marzetti,” “T. Marzetti,” “Cardini’s,” “Pfeiffer” and “Girard’s”; fruit glazes, vegetable dips and fruit dips marketed under the brand name “T. Marzetti”; frozen hearth-baked breads marketed under the brand names “New York BRAND ” and “Mamma Bella”; frozen Parkerhouse style yeast dinner rolls and sweet rolls marketed under the brand names “Sister Schubert’s,” “Marshall’s” and “Mary B’s”; premium dry egg noodles marketed under the brand names “Inn Maid” and “Amish Kitchen”; frozen specialty noodles and pastas marketed under the brand names “Reames” and “Aunt Vi’s”; croutons and related products marketed under the brand names “New York BRAND ,” “Chatham Village,” “Cardini’s” and “T. Marzetti” and caviar marketed under the brand name “Romanoff.” A portion of our sales in this segment is sold under private label to retailers, distributors and restaurants primarily in the United States. Additionally, a portion of our sales relates to frozen specialty noodles and pastas sold to industrial customers for use as ingredients in their products.
The dressings, sauces, croutons, fruit glazes, vegetable dips, fruit dips, frozen hearth-baked breads and yeast rolls are sold primarily through sales personnel, food brokers and distributors in various metropolitan areas in the United States with sales being made to retail, club stores and foodservice markets. We have strong placement of products in U.S. grocery produce departments through our refrigerated salad dressings, vegetable and fruit dips, and croutons. Within the frozen aisles of grocery retailers, we also have prominent market positions of frozen yeast rolls, as well as garlic breads. Products we sell in the foodservice markets are often custom-formulated and include salad dressings, sandwich and dipping sauces, frozen breads and yeast rolls. Similar to our retail efforts, we utilize our research and development resources to accommodate a strong desire for new and differentiated products among our foodservice users.
The dry egg noodles and frozen specialty noodles are sold through sales personnel, food brokers and distributors to retail, foodservice and industrial markets principally in the central and midwestern United States.
Sales attributable to one customer comprised approximately 13%, 12% and 11% of this segment’s total net sales in 2007, 2006 and 2005, respectively. No other customer accounted for more than 10% of this segment’s total net sales. Although we have the leading market share in several product categories, all of the markets in which we sell food products are highly competitive in the areas of price, quality and customer service.
The Specialty Foods segment reported its 37th consecutive year of record sales in 2007. Our strong retail brands and product development capabilities continue to be a source of future growth for this segment. In foodservice markets, we attempt to expand existing customer relationships and pursue new opportunities by leveraging our culinary skills and experience to support the development of new menu offerings. Acquisitions are also an important component of our future growth plans, with a focus on fit and value. The 2007 acquisition of Marshall Biscuit Company, Inc., a privately owned producer and marketer of frozen yeast rolls and biscuits, is the most recent example of this segment’s commitment to growth through complementary acquisitions.
A significant portion of this segment’s product lines is manufactured at our 16 plants located throughout the United States. Certain items are manufactured and packaged by third parties located in the United States, Canada and England under contractual agreements established by us.
Efficient and cost-effective production remains a key focus of the Specialty Foods segment. Beyond this segment’s ongoing initiatives for cost savings and operational improvements, we recently completed the construction of two new production facilities in Hart County, Kentucky. In 2007, we began production at our new salad dressing plant with the incremental capacity enabling us to achieve operating efficiencies at both the new and existing dressing plant locations. As we begin 2008, we are also starting production at a newly constructed facility for the manufacture of frozen yeast rolls. This new facility will help satisfy increased customer demand and improve operating efficiencies.
The operations of this segment are not affected to any material extent by seasonal fluctuations. We do not utilize any franchises or concessions in this business segment. The trademarks that we utilize are significant to the overall success of this segment. The patents and licenses under which we operate, however, are not essential to the overall success of this segment.
Glassware and Candles
We sell candles, candle accessories, and other home fragrance products in a variety of sizes, forms and fragrance in retail markets to mass merchants, supermarkets, drug stores and specialty shops under the “Candle-lite” brand name. A portion of our candle business is marketed under private label.
Our glass products include a broad range of machine-blown and pressed consumer glassware.
We offer a diverse line of decorative and ornamental consumer glassware products such as tumblers, bowls, pitchers, jars, barware, and candle accessories. We market these products under a variety of trademarks, the most important of which is “Indiana Glass.”
Glass vases and containers are sold to both the retail and wholesale floral markets under the brand names “Brody” and “Indiana Glass,” as well as to mass merchants and specialty craft stores.
We sell our consumer glassware products in retail markets to mass merchants, department stores, drug stores and specialty shops, as well as to wholesalers. We also sell products to customers in certain commercial markets, including restaurants, hotels, hospitals and schools.

All the markets in which we sell glass products are highly competitive in the areas of design, price, quality and customer service. Sales attributable to one customer comprised approximately 31%, 30% and 31% of this segment’s total net sales in 2007, 2006 and 2005, respectively. No other customer accounted for more than 10% of this segment’s total net sales.
Seasonal retail stocking patterns cause certain of this segment’s products to experience increased sales in the first half of the fiscal year. We do not use any franchises or concessions in this segment. The patents and licenses under which we operate are not essential to the overall success of this segment. Certain trademarks are important, however, to this segment’s marketing efforts.
In March 2007, we announced the closing of our industrial glass operation located in Lancaster, Ohio. Production at this facility was largely phased out by May 31, 2007, and it is expected that business operations, including final sell-through of industrial glass products, will effectively cease by December 31, 2007.
Automotive
We manufacture and sell running boards, tube steps, toolboxes and other accessories for pickup trucks, vans and sport utility vehicles to original equipment manufacturers (“OEM”) and aftermarket retailers. The items sold to aftermarket retailers are marketed under the “Dee Zee” brand name and are also subject to marketing under private labels. Sales attributable to one customer comprised approximately 41% of this segment’s total net sales in 2007. In 2006, three customers, each with sales greater than 10% of total segment sales, accounted for approximately 60% of this segment’s total net sales. In 2005, four customers, each with sales greater than 10% of total segment sales, accounted for approximately 61% of this segment’s total net sales. No other customer accounted for more than 10% of this segment’s total net sales. Although we are among the market leaders in many of our product lines, all the markets in which we sell automotive products are highly competitive in the areas of design, price, quality and customer service.
The operations of this segment are not affected to any material extent by seasonal fluctuations. We do not utilize any significant franchises or concessions in this segment. The patents and licenses under which we operate are generally not essential to the overall success of this segment. Certain trademarks, however, are valuable to the segment’s marketing efforts.
In March 2007, as part of our strategic alternative review of nonfood operations, we announced the sale of substantially all the operating assets of our automotive accessory operations located in Wapakoneta, Ohio. Products manufactured at this location included pickup truck bed mats as well as truck and trailer splashguards. This operation generated net sales of approximately $26 million in 2006.
In June 2007, also as part of our strategic alternative review of nonfood operations, we announced the sale of substantially all the operating assets of our automotive accessory operations located in Coshocton, Ohio and LaGrange, Georgia. The primary products manufactured at these locations were automotive floor mats. These operations generated net sales of approximately $76 million in 2006.

Net sales attributable to Wal-Mart Stores, Inc. (“Wal-Mart”) totaled approximately 15%, 14% and 14% of consolidated net sales for 2007, 2006 and 2005, respectively.
RESEARCH AND DEVELOPMENT
The estimated amount spent during each of the last three years on research and development activities determined in accordance with generally accepted accounting principles is not considered material.
BACKLOG
The nature of our backlog varies by segment. Orders in our Specialty Foods segment are generally filled in three to seven days following the receipt of the order. In our Glassware and Candles segment, certain orders are received in a highly seasonal manner, and the timing of the receipt of several large customer orders can materially impact the amount of the backlog at any point in time without being an indication of longer-term sales. In the aftermarket sector of our Automotive segment, orders are generally filled within four to six weeks following the receipt of the order, while orders from OEMs are generally filled within four to eight weeks. Our Automotive segment backlog is impacted by general market conditions in the automobile industry and is subject to general economic conditions and changes in consumer demand. Due to these variables, we do not view the amount of backlog at any particular point in time as a meaningful indicator of longer-term shipments.
ENVIRONMENTAL MATTERS
Certain of our operations are subject to various Federal, state and local environmental protection laws. Based upon available information, compliance with these laws and regulations is not expected to have a material adverse effect upon the level of capital expenditures, earnings or our competitive position for the remainder of the current and succeeding year.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 2007, we had approximately 4,800 employees. Approximately 21% of these employees are represented under various collective bargaining agreements, which expire at various times through calendar year 2010. While we believe that labor relations with unionized employees are good, a prolonged labor dispute could have a material adverse effect on our business and results of operations.
FOREIGN OPERATIONS AND EXPORT SALES
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.
RAW MATERIALS
During 2007, we obtained adequate supplies of raw materials for all of our segments. We rely on a variety of raw materials for the day-to-day production of our products, including soybean oil, certain dairy-related products, flour, fragrances and colorant agents, soda ash, sand, paraffin wax, plastic and paper packaging materials, plastics, resins, aluminum and steel.
We purchase the majority of these materials on the open market to meet current requirements, but we also have some longer-term, fixed-price contracts. See further discussion in our contractual obligations disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although the availability of certain of these materials has become more influenced by the level of global demand, we anticipate that future sources of supply will generally be adequate for our needs.

CEO BACKGROUND

John L. Boylan

Chief Financial Officer and Vice President of the Corporation since 1996; and Treasurer of the Corporation since 1990

Henry M. O’Neill, Jr.

Chairman and Chief Executive Officer of IRTH Solutions, Inc., a voice response systems company, since 1988

Zuheir Sofia

Chairman of Sofia & Company, Inc., a financial advisory firm, since 1998; and President, Chief Operating Officer and Treasurer of Huntington Bancshares Incorporated from 1984 to 1998 (1)

Robert L. Fox

Financial Consultant for A.G. Edwards & Sons, Inc., a stock brokerage firm, since December 2005; and Financial Adviser for Advest, Inc., a stock brokerage firm, from 1978 to November 2005

John B. Gerlach, Jr.

Chairman of the Board, Chief Executive Officer and President of the Corporation since 1997 (1)

Edward H. Jennings

Retired since 2002; President Emeritus of The Ohio State University since 1990; Interim President of The Ohio State University from July 1, 2002 to September 30, 2002; and Professor of Finance at The Ohio State University from 1990 to 2002(2)

James B. Bachmann

Retired since 2003; and Managing Partner of the Columbus, Ohio office of Ernst & Young LLP, a registered independent public accounting firm, from 1992 to 2003(3)

Neeli Bendapudi

Executive Vice President and Chief Customer Officer of Huntington National Bank since April 2007; and Associate Professor of Marketing at The Ohio State University from 1996 to March 2007

Robert S. Hamilton

Retired since 2000; Vice Chairman Emeritus of Liqui-Box Corporation, a plastic packaging manufacturer, from April 2000 to October 2000; and President, Chief Operating Officer and Vice Chairman of Liqui-Box Corporation from 1989 to April 2000(4)

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes the matters that we consider to be important in understanding the results of our operations for the three years in the periods ended June 30, 2007, 2006 and 2005 and our liquidity and capital resources as of June 30, 2007 and 2006. 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, 2007 refers to fiscal 2007, which is the period from July 1, 2006 to June 30, 2007. In the discussion that follows, we analyze the results of our operations for the last three years, including the trends in our overall business, followed by a discussion of our cash flows and liquidity and contractual obligations. We then provide a review of the critical accounting policies and estimates that we have made, which we believe are most important to an understanding of our MD&A and our consolidated financial statements. We conclude our MD&A with information on recently issued accounting pronouncements.
The following discussion should be read in conjunction with the “Selected Financial Data” and our consolidated financial statements and the notes thereto, all included elsewhere in this report. The forward-looking statements in this section and other parts of this report involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Forward-Looking Statements.”
EXECUTIVE SUMMARY
Business Overview
We are primarily a manufacturer and marketer of specialty foods for the retail and foodservice markets. We also manufacture and market candles for the food, drug and mass markets; glassware for the retail, floral, and foodservice markets; and automotive accessories for the original equipment market and aftermarket. Our operating businesses are organized in three reportable segments – Specialty Foods, Glassware and Candles, and Automotive. Over 90% of the sales of each segment are made to customers in the United States.
We have seen our growth in recent years come from our Specialty Foods segment. In 2007, approximately 67% of our consolidated net sales and effectively all of our operating income was derived from the Specialty Foods segment. For perspective, in 1997, our Specialty Foods segment comprised approximately 38% and 33% of our reported consolidated net sales and operating income, respectively.
As we focus more on opportunities presented by our Specialty Foods segment, we continue to review various alternatives with respect to our nonfood operations. In 2007, we sold substantially all of the operating assets of our automotive accessory division based in Coshocton, Ohio and LaGrange, Georgia, as well as our automotive accessory division based in Wapakoneta, Ohio. We also initiated closure activities at our industrial glass operation located in Lancaster, Ohio. The details of these transactions are discussed below. Similar actions may occur in the future, as we continue to review our alternatives for the remaining nonfood operations with the assistance of outside financial advisors. Should our continuing review result in additional divestitures, closures or other forms of restructuring of any of our operations, we could incur significant charges. We believe that a prudent conclusion to our review is achievable within fiscal 2008.
Our strategy for growth within our specialty foods operations involves expanding our market presence within both retail and foodservice markets, developing and introducing new products, and adding additional business through complementary acquisitions. Over time, we believe our evolving, more food-focused strategy will best enhance our long-term shareholder value. Our goal is to continue to grow our Specialty Foods retail and foodservice business by:
• leveraging the strength of our retail brands to increase current product sales and introduce new products;

• continuing to grow our foodservice business through the strength of our reputation in product development and quality; and

• pursuing acquisitions that meet our strategic criteria.
This strategy focuses our efforts on the most profitable part of our business and minimizes the amount of financial and management resources devoted to sectors that have trended toward lower growth potential and operating margins.
We view our food operations as having the potential to achieve future growth in sales and profitability due to attributes such as:
• leading retail market positions in several branded products with a high-quality perception;

• a broad customer base in both retail and foodservice accounts;

• well-regarded culinary expertise among foodservice accounts;

• recognized leadership in foodservice product development;

• demonstrated experience in integrating complementary business acquisitions; and

• historically strong cash flow generation that supports growth opportunities.
Within retail markets, our Specialty Foods group utilizes numerous branded products to support growth and maintain market competitiveness. We place great emphasis on our product innovation and development efforts so as to enhance growth by providing distinctive new products meeting the evolving needs and preferences of consumers.
Our foodservice sales primarily consist of products sold to restaurant chains. We have experienced broad-based growth in our foodservice sales, as we build on our strong reputation for product development and quality.
We expect that part of our growth in the Specialty Foods segment will result from acquisitions. We continue to review potential acquisitions that we believe will provide good complements to our existing product lines, enhance our gross margins or offer good expansion opportunities in a manner that fits our overall goals. Consistent with our current acquisition strategy, in June 2007, we acquired the principal assets of Marshall Biscuit Company, Inc. (“Marshall Biscuit”), a privately owned producer and marketer of frozen yeast rolls and biscuits based in Saraland, Alabama. The purchase price was approximately $22.9 million, and the transaction is discussed in further detail in Note 3 to the consolidated financial statements. We believe this acquisition will complement our Sister Schubert’s product lines, enhance existing manufacturing flexibility and provide us with future product development opportunities.
We have made substantial capital investments to support our existing food operations and future growth opportunities. In 2007, we began production activities at a newly constructed dressing facility located in Kentucky. Since 2006, we have invested over $45 million in this facility. During 2007, we also commenced construction of an adjacent facility that will manufacture frozen yeast rolls. This facility will require a slightly smaller total investment and began operation in early 2008. Both projects will help accommodate potential future sales growth and also provide greater manufacturing efficiencies than existing facilities. Each project has generally progressed in accordance with our expectations; however, start-up costs have been incurred and will likely persist into 2008. Based on our current plans and expectations, we believe that total capital expenditures for 2008 will be approximately $30 million.
Summary of 2007 Results
The following is an overview of our consolidated operating results for the year ended June 30, 2007. The current- and prior-year results reflect the classification of the sold automotive operations as discontinued operations.
Net sales for the year ended June 30, 2007 increased 2% to approximately $1,091 million from the prior-year total of $1,074 million. This sales growth was driven by increased sales in the Specialty Foods segment. Gross margin declined 6% to approximately $193.6 million from the prior-year comparable total of $205.5 million. Our manufacturing costs have been influenced by higher raw-material costs, especially for various key food commodities, paraffin wax, and aluminum; but energy costs were lower as compared to the prior-year levels. We were able to offset only a limited amount of the higher raw-material costs through price increases implemented in 2007. We are striving to implement additional selected price increases to reduce the impact of these higher costs. We are also working to mitigate the impact of these increased costs by other means, including changing various manufacturing processes, but these efforts may lag the adverse effect of the higher costs.
Overall results were also affected by the funds received under the Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”). In 2007, we received approximately $0.7 million under CDSOA, as compared to $11.4 million in 2006 and $26.2 million in 2005. For a more-detailed discussion of CDSOA, see the subcaption “Other Income – Continued Dumping and Subsidy Offset Act” of this MD&A.
Income from continuing operations for the current year was approximately $64.7 million or $2.05 per diluted share, compared to $84.4 million, or $2.52 per diluted share, in the prior year. Net of after-tax loss from discontinued operations in 2007 of approximately $19.0 million, or $.60 per diluted share, net income totaled $45.7 million, or $1.45 per diluted share, compared to net income of $83.0 million, or $2.48 per diluted share, in 2006, which was net of an after-tax loss from discontinued operations of approximately $1.5 million, or $.04 per diluted share. The current-year loss from discontinued operations included approximately $15.1 million, or $.48 per diluted share, attributable to the after-tax loss on two automotive divestitures discussed below. Net income in 2005 totaled approximately $93.1 million, or $2.67 per diluted share, and was inclusive of after-tax income from discontinued operations of approximately $2.3 million, or $.07 per diluted share.
Business Divestitures/Closure
In June 2007, as part of our strategic alternative review of nonfood operations, we sold substantially all of the operating assets of our automotive accessory operations located in Coshocton, Ohio and LaGrange, Georgia. The cash transaction resulted in a pretax loss of approximately $24.3 million in the fourth quarter of 2007. Similarly, in March 2007, we sold substantially all of the operating assets of our automotive accessory operations located in Wapakoneta, Ohio. The cash transaction resulted in a pretax gain of approximately $1.2 million in the third quarter of 2007. The businesses included in both of these transactions were previously included in our Automotive segment. See further discussion of these divestitures in Note 2 to the consolidated financial statements. We have reflected the results of these divested businesses in the “Discontinued Operations, Net of Tax” section of the consolidated statements of income for all periods presented.
In March 2007, we announced that we were closing our industrial glass operation located in Lancaster, Ohio. Production at the manufacturing facility was largely phased out by May 31, 2007. We anticipate that active business operations at this facility will cease, in all material respects, by the end of the 2007 calendar year upon the expected completion of certain sales and distribution activities. The decision to close this operation resulted from continuing declines in volume and profitability. We expect to incur total pretax charges in the range of $5 to $7 million for this closure. The charges will include costs such as one-time termination benefits and other employee benefits costs, including those related to the union defined benefit pension plan, charges for asset write-offs, costs associated with disposal-related activities and accelerated depreciation of certain property, plant and equipment. In 2007, we recorded pretax closing charges of approximately $3.5 million, including $1.4 million recorded in cost of sales for the write-down of inventories. The remaining charges are expected to be incurred during 2008. See further discussion in Note 17 to the consolidated financial statements.
Looking Forward
Based on current conditions, we expect to attain growth in consolidated sales during 2008, primarily by introducing new products and expanding market presence, implementing price increases among various product lines and taking advantage of the opportunities provided by the acquisition of Marshall Biscuit. We will continue to review acquisition opportunities within the Specialty Foods segment that are consistent with our growth strategy and represent good value. Operating margins of our continuing operations will be challenged by higher overall levels of ingredient, commodity and raw-material costs. In particular, we expect to experience increased ingredient and commodity costs in our Specialty Foods segment, where the general growth in ethanol production has indirectly led to many of our key ingredients and commodities approaching historically high levels. We may also experience additional costs in connection with our start-up of a new frozen yeast roll manufacturing facility.

In order to ensure that our capitalization is adequate to support our future internal growth prospects, acquire food businesses consistent with our strategic goals, and maintain cash returns to our shareholders through cash dividends and share repurchases, we will need to maintain sufficient flexibility in our future capital structure. We believe that we will utilize somewhat higher levels of leverage in 2008 than in recent years. This would likely result in higher levels of interest expense than we have incurred in each of the last three years. We will continue to reassess our allocation of capital periodically, as well as the timing, nature and extent of our share repurchase activities, to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to shareholders.
REVIEW OF CONSOLIDATED OPERATIONS
Segment Sales Mix

Consolidated net sales reached approximately $1,091 million during 2007, increasing 2% as compared to prior-year sales of $1,074 million, driven by growth coming from the Specialty Foods segment. This segment’s growth reflected higher volumes of foodservice products. Our nonfood segments faced generally lackluster market conditions for many of their products. The 4% consolidated sales growth achieved in 2006 relative to 2005 reflected growth coming from the Specialty Foods and Automotive segments. In the Specialty Foods segment, the 2006 increase in sales reflected internal growth, particularly in refrigerated dressings and frozen breads and rolls. In the Automotive segment, growth benefited from increased sales of aluminum tube steps. Competitive market conditions contributed to lower sales in the Glassware and Candles segment.
Our gross margin as a percentage of net sales was approximately 17.7% in 2007 compared with 19.1% in 2006 and 19.9% in 2005. In the current year, we experienced higher raw-material costs, especially for various key food commodities, paraffin wax, and aluminum; but energy costs were lower as compared to the prior-year levels. Other factors influencing this fluctuation included start-up costs associated with a new food manufacturing facility as well as approximately $1.4 million of inventory write-downs associated with the closure of our industrial glass operation. Significant influences affecting the decline in margins between 2006 and 2005 were the presence of higher levels of freight, energy and nonfood raw-material costs.

Selling, general and administrative expenses for 2007 totaled approximately $91.0 million and increased 1%, as compared with the 2006 total of $90.1 million, while the 2006 total had increased 1% from the 2005 total of $89.5 million. Included in these totals were recoveries of bad debt associated with the 2002 bankruptcy filing of Kmart Corporation totaling approximately $1.0 million, $1.2 million and $1.5 million for 2007, 2006 and 2005, respectively. We wrote off approximately $14.3 million related to this bankruptcy in 2002. Selling, general and administrative expenses were relatively stable as a percentage of sales for the years ended June 30, 2007, 2006 and 2005.
Restructuring and Impairment Charge
In 2007, we recorded a restructuring and impairment charge of approximately $3.5 million ($2.3 million after taxes) including $1.4 million recorded in cost of sales for the write-down of inventories. This charge is related to the planned closing of our industrial glass operations located in Lancaster, Ohio. The charge consists of asset write-offs, accelerated depreciation of certain property, plant and equipment, a pension curtailment charge, one-time termination benefits and other costs. Production at the manufacturing facility was largely phased out by May 31, 2007. We anticipate that active business operations will effectively cease by the end of the calendar year upon the expected completion of certain sales and distribution activities. The decision to close this operation resulted from continuing declines in volume and profitability.
The total estimated costs associated with this plant closure are expected to be between $5 and $7 million and include the above-noted costs and other costs associated with disposal-related activities. Total remaining cash expenditures are estimated to be approximately $3 million and are expected to occur over the balance of calendar 2007.

Interest Expense
Unlike 2006 and 2005, we had short-term borrowings during 2007, which resulted in interest expense of less than $0.2 million.
Other Income – Continued Dumping and Subsidy Offset Act
We received a distribution of approximately $0.7 million from the U.S. government under CDSOA in the second quarter of 2007, as compared to distributions of approximately $11.4 million and $26.2 million in the corresponding periods of 2006 and 2005, respectively. CDSOA, which applies to our candle operations, is intended to redress unfair dumping of imported products through cash payments to eligible affected companies. Such payments are in part dependent upon the amount of antidumping duties collected by the U.S. government on those products. The World Trade Organization has previously ruled that such payments are inconsistent with international trade rules. In February 2006, legislation was enacted to repeal the applicability of CDSOA to duties collected on imported products entered into the United States after September 2007. In July 2006, the U.S. Court of International Trade (“CIT”) ruled unconstitutional, on First Amendment grounds, CDSOA’s requirement that a company that is not a petitioner must have indicated its support for an antidumping petition in order to be eligible for a distribution. In July 2007, the CIT found the statute was severable to make all domestic producers eligible for benefits and remanded to the agencies for a determination of moneys owed to the plaintiff. The remand is ongoing as of mid-August 2007. In September 2006, the CIT, in a separate case, ruled the requirement unconstitutional on equal protection grounds; following a remand, the CIT issued a final judgment in July 2007 affirming the agencies’ decisions on remand. An appeal can be taken by any of the parties to that case until late September 2007. Other cases challenging the constitutionality of CDSOA are pending before the CIT, most of which have been assigned to a panel of three CIT judges and consolidated or stayed. We expect that the rulings of the CIT, once finalized, will be appealed. The ultimate resolution of the pending litigation, its timing and what, if any, effects the litigation will have on our receipt of future CDSOA distributions is uncertain. In addition to the CIT ruling, there are a number of factors that can affect whether we receive any CDSOA distributions and the amount of such distributions in any year. These factors include, among other things, potential changes in the law, other ongoing or potential legal challenges to the law, the administrative operation of the law and the status of the underlying antidumping orders.

Interest Income and Other – Net
Interest income and other for 2007 totaled approximately $1.0 million as compared to $3.9 million in 2006 and $3.8 million in 2005. The current-year decrease was primarily due to lower interest income, despite higher interest rates, as our aggregate level of cash, cash equivalents, and short-term investments decreased significantly as compared to the prior year due to the extent of current- and prior-year share repurchases, dividend payments and capital expenditures.
Income from Continuing Operations Before Income Taxes
As affected by the factors discussed above, including the approximately $10.7 million reduction in CDSOA receipts, our income from continuing operations before income taxes for 2007 of approximately $102.0 million decreased 22% from the 2006 total of $130.7 million. The 2005 total income from continuing operations before income taxes was approximately $144.2 million. Our effective tax rate on income from continuing operations was 36.6%, 35.4% and 37.1% in 2007, 2006 and 2005, respectively. The 2007 rate was influenced by lower levels of tax-free income than the prior two years. The 2006 rate benefited from changes in state tax laws within Ohio, an increased deduction for dividends paid to the ESOP Plan due to the $2.00 per share special dividend paid in December 2005, and the new federal deduction created by the American Jobs Creation Act related to domestic manufacturing activities.
Income from Continuing Operations
Income from continuing operations totaled approximately $64.7 million, $84.4 million and $90.8 million for 2007, 2006 and 2005, respectively, as influenced by the level of CDSOA receipts. Income from continuing operations per share totaled approximately $2.05 per basic and diluted share in 2007, as compared to $2.52 per basic and diluted share in 2006 and $2.60 per basic and diluted share in 2005. Income per share in each of the last three years has been beneficially affected by share repurchases, which have totaled approximately $206.9 million over the three-year period ended June 30, 2007.
Discontinued Operations
In 2007, we recorded a loss from discontinued operations of approximately $19.0 million, net of tax, including a net after-tax loss of approximately $15.1 million on the sales of our automotive accessory operations located in Wapakoneta, Ohio; Coshocton, Ohio; and LaGrange, Georgia. Loss from discontinued operations per share totaled approximately $.60 per basic and diluted share in 2007. In 2006, we recorded a loss from discontinued operations, net of tax, of approximately $1.5 million, or $.04 per basic and diluted share. In 2005, income from discontinued operations totaled approximately $2.3 million, or $.07 per basic and diluted share.
Net Income
Net income for 2007 of approximately $45.7 million decreased from 2006 net income of approximately $83.0 million. Net income was approximately $93.1 million in 2005. Diluted net income per share totaled approximately $1.45, a 42% decrease from the prior-year total of $2.48. The latter amount was 7% lower than 2005 diluted earnings per share of $2.67.
SEGMENT REVIEW – SPECIALTY FOODS
Net sales of the Specialty Foods segment during 2007 surpassed the record level achieved in 2006, although operating income of approximately $101.5 million decreased 11% from the 2006 level of $113.8 million. The benefits from the higher sales volumes were offset primarily by higher ingredient costs. Net sales during 2007 totaled approximately $728.7 million, a 3% increase over the prior-year total of $708.0 million. Sales for 2006 increased 5% over the 2005 total of approximately $673.8 million. The percentage of retail customer sales was approximately 52% during 2007 compared to 53% in 2006 and 51% in 2005.
The increased sales of the Specialty Foods segment during 2007 primarily reflected higher foodservice volumes. Retail-channel increases occurred primarily within certain frozen product lines, particularly yeast rolls. The demand for retail salad dressings and related products was constrained in 2007 by consumer demand for bagged salads and lettuce being adversely affected by lingering consumer concerns over food safety issues and pathogen contamination occurring in the first half of the fiscal year. It is uncertain whether or not consumer demand for bagged salad and lettuce will return to normal levels during 2008. Net pricing relief gained in 2007 to help offset higher material costs was not significant. Sales recorded from the Marshall Biscuit operations acquired in June 2007 were immaterial. The foodservice increases in 2007 occurred broadly across many product lines and customers. The sales increase experienced in 2006 was volume-driven, although we did implement a limited level of price increases on retail product primarily benefiting the second half of the fiscal year. Among retail products, the growth was primarily in refrigerated produce dressings (with new packaging and flavors introduced in 2005), produce dips, and frozen breads and rolls. The level of foodservice sales in 2006 benefited from the growth in several frozen products.
Operating income of the Specialty Foods segment in 2007 totaled approximately $101.5 million, an 11% decrease from the 2006 total of $113.8 million. The 2006 level was 2% above the 2005 level of $111.4 million. Despite the higher sales volumes achieved in 2007, operating income was adversely affected by higher ingredient costs, such as for soybean oil, dairy-derived products, eggs and flour, and costs associated with plant start-up and customer rollouts at the new salad dressing manufacturing facility located in Kentucky. We also experienced competitive market conditions for certain garlic bread items. In 2006, the benefits from the higher sales volumes, a more favorable sales mix and relatively stable ingredient costs were somewhat offset by higher freight and energy costs than in 2005. Entering 2008, the substantially higher levels of commodity costs we face are likely to adversely affect results for at least the first half of the fiscal year. We have implemented various retail price increases during the first quarter of 2008 with the expectation that this action should help mitigate the higher costs we are experiencing. Results during 2008 may also be impacted by start-up costs associated with the segment’s new frozen yeast roll facility in Kentucky.
MANAGEMENT DISCUSSION FOR LATEST QUARTER

Summary of 2008 Results
The following is an overview of our consolidated operating results for the three and nine months ended March 31, 2008. The prior-year results reflect the classification of the sold automotive operations as discontinued operations.
Net sales for the third quarter ended March 31, 2008 increased 2% to approximately $270.3 million from the prior-year total of $265.7 million. This sales growth was driven by increased sales in the Specialty Foods and Automotive segments. The November 2007 sale of our consumer and floral glass operations contributed to the decline in sales of the Glassware and Candles segment. Gross margin decreased 21% to approximately $36.2 million from the prior-year third quarter total of $45.7 million, primarily due to the impact of higher commodity costs experienced by our Specialty Foods segment. These increases have occurred among many key food ingredients such as soybean oil, flour, eggs and dairy-derived items. We were able to offset some of the higher commodity costs through price increases. We currently expect these trends to also influence the results of our fourth quarter. Income from continuing operations for the current-year third quarter was approximately $8.8 million, or $.30 per diluted share, compared to $13.6 million, or $.43 per diluted share, in the comparable period of 2007. Net income for the three months ended March 31, 2008 totaled approximately $8.6 million, or $.30 per diluted share, net of an after-tax loss from discontinued operations of approximately $0.2 million, or $.01 per diluted share. Net income totaled approximately $13.5 million for the three months ended March 31, 2007, or $.43 per diluted share, which was net of an overall after-tax loss from discontinued operations of approximately $0.1 million, or less than $.01 per diluted share.
Year-to-date net sales for the period ended March 31, 2008 increased 5% to approximately $861.5 million from the prior year-to-date total of $820.1 million. Gross margin decreased to approximately $133.0 million from the prior year-to-date total of $145.3 million. Income from continuing operations for the current year-to-date period was approximately $40.4 million or $1.35 per diluted share, compared to $48.4 million, or $1.53 per diluted share, in the prior year. Net income for the nine months ended March 31, 2008 totaled approximately $40.2 million, or $1.35 per diluted share, net of an after-tax loss from discontinued operations of approximately $0.2 million, or $.01 per diluted share. Net income totaled approximately $45.1 million in the nine months ended March 31, 2007, or $1.42 per diluted share, which was net of an overall after-tax loss from discontinued operations of approximately $3.3 million, or $.11 per diluted share.

CONF CALL

Earl Brown

Let me also say thank you for joining us today for the Lancaster Colony third quarter fiscal year 2008 conference call. Now, please bear with me while we take care of a few details. As with other presentations of this type today’s discussion by Jay Gerlach, Chairman and CEO and John Boyland, Vice President, Treasurer and CFO will contain forward-looking statements of what may happen in the future including statements related to Lancaster Colony’s sales, prospects, growth rates, expected future levels of profitability as well as the extent of share repurchases and business acquisitions to be made by the company.

These forward-looking statements are based on numerous assumptions and are subject to uncertainties and risks. Accordingly, investors are cautioned not to place undue reliance on such statements.

Factors that might cause Lancaster’s results to differ materially from forward-looking statements include but are not limited to risks relating to the economy, competitive challenges, changes in raw materials costs, the success of new product introductions, the effect of any restructurings and other factors as are discussed from time-to-time in more detail in the company’s filings with the SEC including Lancaster Colony’s report on Form 10-K. Please note that the cautionary statements contained in the Safe Harbor paragraph of today’s news release also applies to this conference call.

Now, here is Jay Gerlach.

John B. Gerlach, Jr.

While we were with the strong sales in our specialty food segment for the third quarter commodity cost have virally impacted our operating margins. Overall, our food commodity costs were up over $18 million in the quarter while we recovered approximately $9 million in pricing. Two of our key ingredients soy bean oil and flour saw second to third quarter average costs increases of approximately 25% each. Retail pricing previously increased last July was again increased on March 1 with a further increase planned for the upcoming July 1.

Food service pricing among our larger restaurant chain accounts has also been subject to adjustment although with some lag affects. I’ll come back to our segments but first, here’s an update on our capital uses. During the March quarter we repurchased 725,862 shares for $26.9 million and year to date we have repurchased 2,070,000 for $80.6 million leaving 28,000,723 shares currently outstanding and 1,275,000 shares authorized for repurchase. Our capital expenditures for the quarter were $3.6 million and totaled approximately $16 million for the nine months. For the year, capital expenditures will likely come in between $20 and $23 million.

Touching briefly on our remaining non-food operations glassware and candles, saw sizeable sales decline after our consumer glass divestiture in the second quarter. Candles sales were almost flat in the off season third quarter. Earnings will off about $1 million in the segment reflecting the loss contributions from the divested entities and for candles lower capacity utilization and higher was costs.

Our automotive segment now made up of just our DZ Aluminum Truck Accessory business saw decent 6% sales growth in the slow market due to new and existing programs. Operating income was up about $900,000 from improved operations and some pricing.

In our primary business, specialty foods, net sales increased $19 million or almost 11% with nearly one half the growth from pricing and the other half from new products, the Marshall’s acquisition and base business growth. Among our newer products, Newark brand Texas Toast Croutons and Pizzeria Dipping Sticks were good contributors. The early Easter likely helped volume a bit in the quarter as well. While pressured by unprecedented ingredient costs we continued to support our key brand and product line through promotional spending, marketing and new product development investment. We were pleased to see sales improve in this challenging environment for the consumer.

Let me ask John to give you a brief update and then I’ll finish with some comments about the upcoming quarter and year.

John L. Boylan

I thought I’d start out by discussing several key components of our consolidated balance sheet. Lancaster’s consolidated accounts receivable at March 31, 2008 totaled $89,831,000. This amount represented a 3% decline since last June and 7% since last March. Our exiting various class manufacturing led to these declines although the strength of our food segment sales have somewhat offset this affect. With respect to our inventories we have a somewhat similar story. Here, our consolidated total of approximately $130 million at the end of this March decreased about $19 million or 13% from the level of this past June. Year-over-year our March inventory declined about $10 million or 7%. While we were pleased with progress made in reducing automotive segment inventories the decline primarily reflected lower glass inventory. Higher volumes and costs contributed to increased food inventory levels as well.

Moving down the balance sheet to our net property balance at March 31st I’d point out that this total also declined by over $14 million since last June is influenced by the actions involving our glass operations. However, total capital expenditures during the nine-month period were $16,003,000 with the most significant project by far related to the completion of our new frozen roll manufacturing facility in Kentucky.

With respect to borrowings our net debt of roughly $65 million has increased about $31 million since June 30 in part reflecting the extent of cash returned to shareholders in the form of share repurchases which totaled $76,759,000 for the nine months ended March. Such repurchases contributed to the greater than 6% reduction in shares outstanding at March 31st compared to June 30th. Still, our gross debt outstanding remains a relatively modest 17% of total capitalization. Except for the items I’ve already discussed I believe the other changes in our balance sheet components are relatively unremarkable.

Turning to cash flows, I’d like to share a few items for your consideration. For the nine months ended March 31, 2008, Lancaster’s consolidated cash flows provided by operating activities of continuing operations totaled approximately $72 million which is somewhat above the $70 million level a year ago. Comparatively favorable changes in working capital components and non-cash charges such as the loss on the glass divestitures more than offset the impact of the lower level of consolidated net income through March. Within the current fiscal year depreciation and amortization for the first nine months totaled $22,276,000 and shareholder dividends were $24,603,000.

In concluding my remarks just a brief comment on our tax provision for the quarter. Our effective tax rate for the quarter of 33.9% was a tad lower than normal reflecting an estimation change relating to certain of our state and local provisions. We anticipate a fourth quarter rate closer to that of the effective year-to-date rate.

I appreciate your attention this morning. I’ll now turn the call back to Jay.

John B. Gerlach, Jr.

We began our fourth quarter with commodity costs remaining at high levels. Our forward buys on key ingredients plus price increases would suggest a better quarter for specialty foods than our third but still a challenge versus last year. Our July 1 price increases should let us get to better comparisons in fiscal ‘09 if commodity costs are reasonably stable at current levels. Demand is the other big concern with much speculations on what consumer spending will be like in coming months. We share that concern as so much food and energy inflation is hitting the consumer.

New product and marketing programs happening in the fourth quarter include under the Marzetti brand new light refrigerated salad dressings and veggie dips, a new cinnamon caramel apple dip. We’ve also begun a transition of our Marzetti refrigerated salad dressing to all natural which should be complete by June. Also being introduced under the New York brand is a ciabatta cheese roll.

We’ve also recently introduced a 100-calorie pack versions of a couple of our veggie and fruit dip product lines. Shortly we’ll be rolling out to co-branding relationships, one each in the food service and retail channels that we are very excited about. The one we can talk about today is a new line of all natural no preservative dressings for our long time customer Wendy’s. The individual dressing packets in this program will be branded with the Marzetti and Wendy’s name. The product should be reaching stores over the next several weeks.

Demand is at least of as great a concern in our non-food product lines with lower plant utilization levels likely to be with us through the quarter. We continue to focus on cost productions throughout our operations which include things like SKU reductions, tighter control of product waste, manning throughout the organization and automation and efficiency projects. In our specialty food group we’ve also supplemented our internal efforts to improve our operational effectiveness and address escalating input costs by utilizing some outside operational and systems consultants to provide some objective insights.

Having addressed our most pressing capacity needs with significant capital investment over the last couple of years we are now anticipating a return to more historically typical capital expenditure levels for the foreseeable future. Our strategic alternative work is very much continuing yet with no specific news this morning. Acquisitions are very much on our agenda and while still not seeing a lot of deal flow we are finding at least a couple of new things to consider.

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