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, 2009 and our financial condition as of September 30, 2009. 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, 2010 refers to fiscal 2010, which is the period from July 1, 2009 to June 30, 2010. In the discussion that follows, we analyze the results of our operations for the three months ended September 30, 2009, 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 a diversified manufacturer and marketer of consumer products focusing primarily on specialty foods for the retail and foodservice markets. We also manufacture and market candles for the food, drug and mass markets. Less significantly, we are also engaged in the distribution of various products, including glassware and candles, to commercial markets. Our operations 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. Fiscals 2008 and 2007 were significant years in implementing this strategy as we divested nonfood operations and focused our capital investment in the Specialty Foods segment.
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 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;

• growing 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 2010 will be approximately $15 million.
Summary of 2010 Results
The following is an overview of our consolidated operating results for the three months ended September 30, 2009.
Net sales for the three months ended September 30, 2009 decreased nearly 4% to approximately $254.2 million from the prior-year total of $263.8 million. This sales decline reflects lower sales in both operating segments. The Specialty Foods segment's decline reflects a decline in foodservice sales that was not fully offset by growth in retail sales. The decrease in sales of the Glassware and Candles segment reflects generally weaker retail markets, competitive factors and the shifting of some seasonal sales to the second fiscal quarter. Gross margin increased nearly 61% to approximately $63.7 million from the prior-year total of $39.7 million. A more favorable trend in raw-material costs contributed to the higher gross margin.
Net income for the current year was approximately $28.4 million, or $1.01 per diluted share, compared to $11.0 million, or $.39 per diluted share, in the prior year.