Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Global producer and marketer of value-added frozen potato products, with Global, Foodservice, Retail, and Other reportable segments. This filing covers the 13 weeks ended November 24, 2019 (fiscal 2020 second quarter) and the 26 weeks ended that date; comparisons are to the corresponding periods of fiscal 2019. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | First half FY2020 | First half FY2019 |
|---|---|---|---|---|
| Net sales | $1,019.2m | $911.4m | $2,008.2m | $1,826.3m |
| Gross profit | $285.1m | $249.0m | $533.7m | $479.6m |
| Income from operations | $193.5m | $174.0m | $363.5m | $326.6m |
| Net income attributable to Lamb Weston | $140.4m | $119.0m | $256.1m | $226.8m |
| Diluted EPS | $0.95 | $0.74 | $1.74 | $1.47 |
Q2 sales grew 12%, with volume up 10% and price/mix up 2%. Management attributed about 1.5 percentage points of volume growth to acquisitions and about 1 point to additional shipping days around Thanksgiving. Q2 gross profit increased 14%; gross margin was approximately 28.0%, versus 27.3% a year earlier. Operating margin was approximately 19.0%, versus 19.1%. Q2 adjusted diluted EPS, a non-GAAP measure, was $0.95 versus $0.80, up 19%; reported prior-year EPS included a $0.06-per-share noncontrolling-interest accretion charge. EBITDA including unconsolidated joint ventures, also non-GAAP, rose 17% to $260.9m.
All four segments reported higher Q2 sales: Global $539.6m (+15%), Foodservice $304.9m (+9%), Retail $132.1m (+7%), and Other $42.6m (+13%). Segment product contribution margin totaled $279.1m, up 15%. First-half sales grew 10%, operating income 11%, and diluted EPS 18%.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $345.3m, up from $316.8m. Investing used $240.2m, including $116.7m for an Australian processor and $17.1m paid toward the Argentina joint-venture investment. Financing used $93.6m. Cash ended at $23.8m.
- First-half capital spending, including information technology, was $107.4m; the company expected approximately $300m for fiscal 2020, excluding acquisitions.
- At November 24, cash was $23.8m and current assets were $1,107.3m versus current liabilities of $669.4m (about 1.65x current ratio). Revolving-credit availability was $496.6m, net of letters of credit.
- Debt and financing obligations were $2,272.6m before $22.9m of debt issuance costs; balance-sheet carrying value was approximately $2,249.7m, including current amounts. The company reported no revolver borrowings and said it was in compliance with credit covenants.
- Stockholders’ equity was $201.1m, compared with a $4.6m deficit at May 26, 2019. The company paid $58.5m in dividends and spent $13.4m on share repurchases in the first half.
Material changes, outlook, and risks
Management cited volume growth, pricing and favorable mix, lower transportation costs, and higher equity-method earnings as contributors to results. These more than offset input-cost inflation, factory inefficiencies, and higher depreciation, particularly from the new Hermiston production line. SG&A rose 22% in Q2, reflecting higher incentive compensation, business-capability investments, and more than $2m of ERP implementation expense; the prior-year quarter included an approximately $4m insurance settlement benefit. Q2 Other-segment margin included $4.2m of commodity-hedging gains; equity-method earnings included a $2.7m unrealized currency and commodity hedging loss.
The company described fiscal 2020’s operating environment as generally favorable, with continued global demand growth. It expected cost inflation similar to the first half and higher SG&A from ERP and other capability investments. Management said raw potatoes should be adequate for its needs, but tight North American and European supply following poor late-season weather could constrain frozen-product supply until the next crop begins in summer 2020. No full-year earnings or sales guidance is provided in the supplied filing text. Management expected liquidity to meet requirements, including declared dividends, for at least 12 months.
In July 2019, Lamb Weston acquired an Australian processor for $116.7m, adding about 70m pounds of capacity. It also acquired a 50% interest in an Argentine joint venture for $27.3m, with further payments scheduled. The quarterly dividend was raised 15% to $0.23 per share, payable February 28, 2020. The filing identifies risks including raw-material costs and availability, competition, international conditions, execution of capital projects and acquisitions, customer and grower relationships, debt, and litigation.
A material weakness in internal control over financial reporting remained unremediated; disclosure controls were therefore deemed ineffective. Management said the financial statements fairly present the company’s results and expected remediation before fiscal 2020 year-end, subject to testing. The company said pending or threatened legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether reported volume growth persists after adjusting for acquisition contributions and the Thanksgiving shipping-day benefit.
- Whether tight potato supply, input inflation, and factory inefficiencies pressure margins in subsequent quarters.
- Progress on ERP and other investments, related SG&A costs, and remediation of the material control weakness.
- Debt, interest-rate exposure, capital spending, and cash available after acquisitions, dividends, and repurchases.
- Underlying performance excluding commodity-hedging effects and other non-GAAP adjustments; compare those measures with GAAP results.