| LANCASTER COLONY CORP Item 1A Risk Factors An investment in our common stock is subject to certain risks inherent in our business |
| The material risks and uncertainties that we believe affect us are described below |
| 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 into this annual report on Form 10-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial may also impair our business operations |
| 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 |
| Competitive conditions within our markets could impact our sales volumes and operating margins |
| Competition within all our markets is intense and is expected to remain so |
| Numerous competitors exist, many of which are larger in size than we are |
| Global production overcapacity has also had an impact on our nonfood operations, particularly within our Glassware and Candles segment |
| These competitive conditions could lead to significant downward pressure on the prices of our products, which could have a material adverse effect on our revenues and profitability |
| Competitive considerations in the various product categories in which we sell are multifaceted and include price, product innovation, product quality, brand recognition and loyalty, effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences |
| In order to protect existing market share or capture increased market share among our retail channels, we may decide to increase our spending on marketing, 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 increased expenditures we make may not maintain or enhance market share and could result in lower profitability |
| Wal-Mart is our largest customer, and the loss of its business could cause our sales and net income to decrease |
| Our net sales to Wal-Mart represented approximately 13prca of consolidated net sales for the year ended June 30, 2006 |
| We believe that our relationship with Wal-Mart is good, but we cannot assure that we will be able to maintain this 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 could also have a material adverse effect on our business and results of operations |
| 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 |
| 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 |
| However, we try to limit our exposure to price fluctuations for raw materials by occasionally entering into longer-term, fixed-price contracts for certain raw materials |
| Our principal raw-material needs include soybean oil, various dairy-related products, flour, paper and plastic packaging materials, paraffin wax, synthetic rubber, resins, steel and aluminum |
| We have observed increased pricing on many of these raw materials in recent years |
| We anticipate that future sources of supply will generally be adequate for our needs, but disruptions in 6 _________________________________________________________________ [33]Table of Contents availability and increased prices could have a material adverse effect on our business and results of operations |
| We may be subject to product recalls or product liability claims for misbranded, adulterated, contaminated or spoiled food products or defective consumer products |
| Under adverse circumstances, we may need to recall some of our products if they become adulterated, misbranded, contaminated, or contain a defect, which could create a substantial product hazard or create an unreasonable risk of serious injury or death, and we may also be liable if the consumption of any of our products causes injury |
| Any claim or product recall could result in noncompliance with regulations of the Food and Drug Administration, the US Consumer Product Safety Commission or the National Highway Traffic Safety Administration, force us to stop selling our products and create significant adverse publicity that could harm our credibility and decrease market acceptance of our products |
| If we are required to defend against a product liability claim, whether or not we are found liable under the claim, we could incur substantial costs, our reputation could suffer and our customers might substantially reduce their existing or future orders from us |
| Increases in energy-related costs could negatively affect our business by increasing our costs to produce goods |
| Recently, we have been subject to unfavorable changes in energy-related costs that affect the cost of producing our products |
| This is especially true in our Glassware and Candles segment, where we use large amounts of natural gas and paraffin wax, and in our Automotive segment, where we use synthetic rubber and various resins |
| High energy costs, like those we experienced in the first half of fiscal 2006, increase our costs to produce goods and decrease our operating margins |
| Continuing increases in these types of costs could have a material adverse effect on our business and results of operations |
| 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 and results of operations |
| Our ability to obtain adequate and reasonably priced methods of transportation to distribute our products is a key factor to our success |
| Our Specialty Foods segment requires the use of refrigerated trailers to ship many of its products |
| Delays in transportation, especially in our Specialty Foods segment where orders are generally filled in three to seven days following the receipt of the order, could have a material adverse effect on our business and results of operations |
| Further, high fuel costs also impact our financial results |
| We are often required to pay fuel surcharges to third-party transporters of our products |
| If we are unable to pass those high costs to our customers in the form of price increases, those higher costs could have a material adverse effect on our business and results of operations |
| Our inability to bring production online and efficiently operate our new salad dressing facility could have a material adverse effect on our business and results of operations |
| We have recently completed construction of a salad dressing facility in southern Kentucky |
| The failure to efficiently bring production online, employ an adequate number of skilled workers, or operate the facility in an efficient manner could have a material adverse effect on our business and results of operations |
| Our inability to successfully renegotiate union contracts and any prolonged work stoppages could have an adverse effect on our business and results of operations |
| Several of our union contracts will be subject to renegotiation during 2007 |
| We believe that our labor relations with unionized employees are good, but our inability to successfully negotiate the renewal of these contracts could have a material adverse effect on our business and results of operations |
| Any prolonged work stoppages could also have an adverse effect on our results of operations |
| 7 _________________________________________________________________ [34]Table of Contents Any reduction of CDSOA distributions in the future would reduce our earnings |
| The Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) provides for the distribution of monies collected by US Customs from antidumping cases to qualifying domestic producers |
| Our reported CDSOA receipts totaled dlra11dtta4 million, dlra26dtta2 million, and dlra2dtta0 million in 2006, 2005 and 2004, respectively |
| These remittances related to certain candles being imported from the People’s Republic of China |
| In February 2006, US legislation was enacted that would end CDSOA distributions for imports covered by antidumping duty orders entering the US after September 30, 2007 |
| Instead, any such antidumping duties collected would remain with the US Treasury |
| This legislation is not expected to have a significant effect on potential CDSOA distributions in 2007, but would be expected to reduce likely distributions in years beyond 2007, with distributions eventually ceasing |
| In July 2006, the US Court of International Trade (“CIT”) ruled unconstitutional CDSOA’s requirement that a company that is not a petitioner must indicate its support for an antidumping petition in order to be eligible for a distribution |
| The CIT has not ruled on other matters, including any remedy as a result of its ruling |
| 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 |
| Impairment charges could have a material adverse effect on our financial results |
| We recorded restructuring and/or impairment charges of approximately dlra0dtta6 million, dlra2dtta1 million, and dlra1dtta1 million in fiscals 2006, 2005 and 2004, respectively |
| Likewise, future events may occur that would adversely affect the reported value of our assets and require impairment charges |
| Such events may include, but are not limited to, strategic decisions made in response to changes in economic and competitive conditions, the impact of the economic environment on our customer base, or a material adverse change in our relationship with significant customers |
| We may not be able to successfully consummate proposed acquisitions or divestitures or integrate acquired businesses |
| From time to time, we evaluate acquiring other businesses that would strategically fit within our various operations |
| If we are unable to consummate, successfully integrate and grow these acquisitions and to realize contemplated revenue synergies and cost savings, our financial results could be adversely affected |
| In addition, we may, from time to time, divest businesses 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 impacted by either gains or losses on the sales of those businesses or lost operating income or cash flows from those businesses |
| We may also not be able to divest businesses that are not core businesses or may not be able to do so on terms that are favorable to us |
| In addition, we may be required to incur asset impairment charges related to acquired or divested businesses, 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 existing 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 |
| We are subject to federal, state and local government regulations that could adversely affect our business and results of operations |
| Certain of 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 mandated by the Federal Food, Drug and Cosmetic Act |
| We cannot predict if 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 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 8 _________________________________________________________________ [35]Table of Contents and hazardous wastes) or otherwise relating to protection of the environment |
| We cannot assure 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 |