Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
LANCASTER COLONY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Tabular dollars in thousands)
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 months ended September 30, 2008 and our financial condition as of September 30, 2008. 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, 2009 refers to fiscal 2009, which is the period from July 1, 2008 to June 30, 2009. In the discussion that follows, we analyze the results of our operations for the three months ended September 30, 2008, including the trends in our overall business, followed by a discussion of our financial condition.
The following discussion should be read in conjunction with 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
Lancaster Colony Corporation is primarily a manufacturer and marketer of consumer goods. Our focus is manufacturing and marketing specialty foods for the retail and foodservice markets. We also manufacture and market candles for the food, drug and mass markets. Less significantly, we have operations engaged in the distribution of various products, including glassware and candles, to commercial markets. Our operating businesses are organized in two reportable segments: Specialty Foods and Glassware and Candles. Over 90% of the sales of each segment are made to customers in the United States.
In recent years, our strategy has shifted away from operating businesses in a variety of industries towards emphasizing the growth and success we have achieved in our Specialty Foods segment. Fiscal 2008 marked another significant year in implementing this strategy as we continued to divest nonfood operations and focus our capital investment in the Specialty Foods segment. In June 2008, we sold substantially all of the assets of our remaining automotive operations. In November 2007, we sold most of our consumer and floral glass operating assets. These transactions, combined with other strategic dispositions and investments in 2007 and 2008, have resulted in transforming our company into a food-focused business.
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.

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 sales through the strength of our reputation in product development and quality; and

• pursuing acquisitions that meet our strategic criteria.

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We have made substantial capital investments to support our existing food operations and future growth opportunities. Based on our current plans and expectations, we believe that total capital expenditures for 2009 will be approximately $20 million.
Summary of 2009 Results
The following is an overview of our consolidated operating results for the three months ended September 30, 2008. The prior-year results reflect the classification of the sold automotive operations as discontinued operations.
Net sales for the three months ended September 30, 2008 increased 8% to approximately $263.8 million from the prior-year total of $244.0 million. This sales growth was driven by increased sales in the Specialty Foods segment as partially offset by a decline in sales of the Glassware and Candles segment. The Specialty Foods segment's growth reflected higher volumes of both retail and foodservice products, as well as price increases. The decrease in sales of the Glassware and Candles segment is primarily due to prior year sales attributable to divested and closed operations.
Gross margin decreased 12% to approximately $39.7 million from the prior-year comparable total of $44.8 million. Our manufacturing costs have been influenced by higher costs for various commodities and other raw materials. Within our Specialty Foods segment, we began implementing price increases in 2008, which have helped offset some of the higher costs.
Income from continuing operations for the current year was approximately $11.0 million, or $.39 per diluted share, compared to $14.6 million, or $.48 per diluted share, in the prior year. Net income totaled approximately $15.6 million in 2008, or $.51 per diluted share, which was net of after-tax income from discontinued operations of approximately $0.9 million, or $.03 per diluted share. There was no impact of discontinued operations in the current quarter of 2009.