Lamb Weston Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2020 (53 weeks), compared primarily with the 52-week year ended May 26, 2019. Although the request metadata says “2019 Q4,” this filing reports fiscal 2020; its fourth quarter ended May 31, 2020. Amounts are in U.S. dollars.
Business context
Lamb Weston is a global producer and marketer of frozen potato products, operating through Global, Foodservice, Retail and Other segments and through joint ventures. French fries are its largest product category. The COVID-19 pandemic sharply reduced food-away-from-home demand in the fourth quarter, while retail demand increased.
Financial performance
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3,792.4 million | $3,756.5 million | Up 1%; down 1% excluding the extra week |
| Gross profit / margin | $895.2 million / 23.6% | $1,003.5 million / 26.7% | Down 11% |
| Operating income / margin | $556.9 million / 14.7% | $668.4 million / 17.8% | Down 17% |
| Net income attributable to Lamb Weston | $365.9 million | $478.6 million | Down 24% |
| Diluted EPS | $2.49 | $3.18 | Down 22% |
| Operating cash flow | $574.0 million | $680.9 million | Down 16% |
| Interest expense, net | $108.0 million | $107.1 million | Up $0.9 million |
Adjusted diluted EPS, a non-GAAP measure, was $2.50 versus $3.22. Adjusted EBITDA including unconsolidated joint ventures was $799.8 million versus $904.3 million, down 12%. Fiscal 2020 included approximately $74 million of pandemic-related costs across the company and unconsolidated joint ventures, net of employee retention credits and other labor incentives.
Segments and material changes
- Global: Sales rose 1% to $1,973.6 million; product contribution margin fell 16% to $374.5 million.
- Foodservice: Sales fell 8% to $1,069.1 million; product contribution margin fell 12% to $356.0 million. Restaurant restrictions and customer inventory reductions weighed on volume.
- Retail: Sales rose 20% to $595.5 million; product contribution margin rose 19% to $117.6 million, reflecting increased at-home consumption and favorable mix.
- Other: Sales rose 10% to $154.2 million; product contribution margin was $24.1 million, up 2%.
Overall volume was flat, but down 3% excluding the extra week. Price/mix increased 1%. Lower sales and pandemic-related operating disruption, input-cost inflation, production inefficiencies, higher depreciation and unfavorable mix reduced profitability. Equity-method earnings fell to $29.3 million from $59.5 million, reflecting pandemic impacts and lower joint-venture sales.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,364.0 million at year-end, compared with $12.2 million a year earlier. The increase principally reflected pandemic-period borrowing and note issuance.
- Short-term borrowings were $498.7 million; long-term debt and financing obligations, including current portions, were $3,041.4 million. Total debt and financing obligations before debt issuance costs were $3,568.3 million.
- During fiscal 2020, the company drew $495.0 million on its revolving facility, added a $325.0 million term loan and issued $500.0 million of 4.875% senior notes due 2028. It repaid the $495.0 million revolver borrowing in June and July 2020; as of July 2020, $495.1 million of borrowing capacity was available, net of letters of credit.
- Management reported compliance with debt covenants at May 31, 2020. The filing cites leverage and interest-coverage tests and restrictions on additional debt, dividends, repurchases and other actions.
- Fiscal 2020 dividends paid were $121.3 million. The company suspended future share repurchases amid uncertainty; $195.3 million remained authorized at year-end. A quarterly dividend of $0.23 per share was declared in July 2020.
- Capital expenditures were $208.4 million, reduced from a planned $300.0 million. Fiscal 2021 capital investment was expected to be approximately $140 million, excluding acquisitions; $36.5 million of capital commitments remained at year-end.
Outlook, risks and unusual items
The filing gives no firm earnings or sales guidance. Management said fiscal 2021 demand remained difficult to predict, particularly for full-service restaurants and other foodservice channels; shipment recovery could slow, stop or reverse if restrictions returned. The company reduced contracted potato purchases for the 2020 crop by approximately 20%–25%, was evaluating production adjustments and possible temporary facility closures, and expected continued pandemic-related costs. Near-term commodity and manufacturing cost inflation was expected to be similar to fiscal 2020.
Principal risks include prolonged pandemic effects on restaurant traffic, customer demand, operations and supply chains; commodity and crop volatility; competition and added industry capacity; customer concentration (McDonald’s represented about 10% of sales); international, currency and export exposure; substantial debt and covenant constraints; and execution of capital projects and the phased ERP implementation. The company deferred the ERP project’s second phase. It also reported a prior-year IT general-controls material weakness as remediated by May 31, 2020; management and the auditor concluded controls were effective at year-end. KPMG issued unqualified opinions on the financial statements and internal control. Management did not expect pending litigation or disclosed guarantees to materially affect results, while noting outcomes remain uncertain.
Other notable items: fiscal 2020 included a $2.6 million joint-venture pension withdrawal loss. Adoption of the lease standard added operating lease assets and liabilities and produced a $20.5 million after-tax opening-retained-earnings adjustment; it did not materially affect operations or cash flows. The fourth quarter recorded a net loss attributable to Lamb Weston of $1.6 million, versus net income of $110.4 million in the prior-year quarter.
Important facts for investors to verify
- Whether foodservice shipments and restaurant demand recover, and whether retail demand remains elevated.
- How much of the reported sales and earnings comparison reflects the extra fiscal week, pandemic costs, and other nonrecurring items.
- Post-year-end debt balances, revolver availability, covenant headroom and the use of elevated cash reserves.
- Whether the reduced potato contracting and lower capital program affect supply, production capacity or customer service.
- Progress and cost of ERP implementation, and continued effectiveness of remediated IT controls.
- Joint-venture earnings trends, commodity and crop conditions, and any material developments in litigation or contingencies.