Lamb Weston Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended November 25, 2018 (13 and 26 weeks, respectively). Amounts are in U.S. dollars; financial figures are in millions except per-share amounts.
Business context and results
Lamb Weston produces and markets frozen potato products, with Global, Foodservice, Retail, and Other reportable segments. The company reported strong growth, led by pricing, improved mix, and volume gains in Global and Retail.
| Metric | Q2 FY2019 | Q2 FY2018 | First half FY2019 | First half FY2018 |
|---|---|---|---|---|
| Net sales | $911.4 | $824.6 | $1,826.3 | $1,642.1 |
| Gross profit | $249.0 | $208.2 | $479.6 | $404.5 |
| Income from operations | $174.0 | $139.8 | $326.6 | $277.4 |
| Net income attributable to Lamb Weston | $119.0 | $76.6 | $226.8 | $160.0 |
| Diluted EPS | $0.74 | $0.52 | $1.47 | $1.08 |
| Operating cash flow | Not presented separately | Not presented separately | $316.8 | $182.2 |
Q2 net sales rose 11%: price/mix increased 6% and volume 5%. First-half sales also increased 11%. Q2 gross margin was approximately 27.3% versus 25.2%; operating margin was 19.1% versus 17.0%. First-half gross margin was 26.3% versus 24.6%, and operating margin was 17.9% versus 16.9%.
- Q2 segment sales: Global $470.0 million (+13%); Foodservice $279.7 million (+3%); Retail $123.9 million (+21%); Other $37.8 million (+15%). Retail growth included distribution gains for Grown in Idaho, other branded, and private-label products.
- Q2 product contribution margin increased 20% to $242.9 million. This company-defined segment measure is sales less cost of sales and advertising and promotion expenses.
- Q2 net income attributable to Lamb Weston increased 55%. Management attributed roughly $15 million of the increase to the lower U.S. corporate tax rate; growth in operating income accounted for most of the remainder, partly offset by higher costs and SG&A.
Cash flow, liquidity, and debt
- First-half operating cash flow was $316.8 million, up from $182.2 million. Capital expenditures were $170.4 million; management expected approximately $360 million for FY2019, excluding acquisitions.
- Cash was $121.6 million at November 25, 2018, compared with $55.6 million at May 27, 2018. Cash increased $66.0 million during the half. Cash used in investing was $168.7 million and cash used in financing was $81.4 million.
- Current assets were $1,134.6 million and current liabilities $696.8 million. The revolving credit facility had no borrowings and $496.6 million of availability, net of letters of credit.
- Total debt and financing obligations were $2,402.6 million, including $2,309.2 million of long-term debt and $80.3 million of financing obligations. The company reported compliance with its credit-agreement covenants.
- Dividends paid in the first half were $56.0 million. The quarterly dividend declared during the period was $0.19125 per share.
Material changes, outlook, and notable items
- Outlook: Management expected generally favorable demand and operating conditions in North America and key international markets for the rest of FY2019, supported by volume growth and high industry capacity utilization. No specific full-year revenue or earnings guidance was provided in the filing text.
- Costs and risks: Management expected higher manufacturing, commodity, transportation, and warehousing inflation, as well as increased SG&A for technology, capabilities, labor, and stand-alone-company infrastructure. A poor European potato crop was expected to make that market challenging. Potential changes and uncertainty in tariffs and trade barriers were also identified as risks.
- Acquisitions: On November 2, the company agreed to acquire the remaining 50.01% of Lamb Weston BSW for approximately $78 million, including payment for expected earnings. The obligation recorded at quarter-end was $78.2 million; $50.0 million was paid in December 2018, with the balance due by February 1, 2019. Beginning November 2, the income statement included 100% of BSW earnings. A $9.5 million after-tax accretion charge reduced common-stockholder EPS by $0.06 but did not reduce reported net income.
- On December 21, 2018, the company acquired an Australian frozen potato processor for approximately A$125 million (about US$90 million), subject to working-capital adjustments, adding about 50 million pounds of capacity.
- Capital returns: On December 20, the board authorized a share repurchase program of up to $250 million with no expiration date and increased the quarterly dividend approximately 5% to $0.20 per share.
- Accounting and comparability: The company adopted ASC 606 using the modified retrospective method, recording a $13.7 million increase to opening retained earnings. The standard accelerated recognition for certain customized products; management said it was not expected to materially affect future results or cash flows. Q2 reported sales increased $5.1 million from adoption, and reported EPS increased $0.01.
- The effective tax rate was 21.5% in Q2 and 22.5% for the first half, versus 33.3% in both prior-year periods, primarily reflecting the Tax Act and certain foreign-related discrete items. Q2 gross profit included a $1.7 million commodity-hedging loss; equity-method earnings included a $1.1 million hedging-related loss. First-half results included unfavorable foreign exchange and higher incentive compensation, partly offset by an insurance settlement.
- Routine legal claims were disclosed; management did not believe they would materially adversely affect financial condition, results, or cash flows. The filing reported no material changes to risk factors, off-balance-sheet arrangements, or critical accounting estimates.
Important facts for investors to verify
- Whether pricing and volume gains, particularly in Global and Retail, continue to offset inflation and higher operating costs.
- Execution, cost, and capacity ramp-up for the Hermiston expansion, expected to be operational in Q4 FY2019, and the integration of the BSW and Australian acquisitions.
- Cash generation and funding needs given planned FY2019 capital spending, acquisition payments, dividends, and the new repurchase authorization.
- Exposure to European potato supply conditions, commodity and transportation costs, foreign exchange, and trade-policy changes.
- The effect of the BSW acquisition and related accretion on future earnings attributable to common shareholders; distinguish this from reported net income.
- Reported versus adjusted measures: adjusted EBITDA and adjusted diluted EPS are non-GAAP measures and should be considered alongside GAAP results.