Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business and period: Lamb Weston produces and markets frozen potato products, with Global, Foodservice, Retail, and Other reportable segments. This report covers the 13 weeks ended August 26, 2018, the first quarter of fiscal 2019, compared with the 13 weeks ended August 27, 2017. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $914.9 | $817.5 | +12% |
| Gross profit | $230.6 | $196.3 | +17% |
| Gross margin | 25.2% | 24.0% | +1.2 percentage points |
| Income from operations | $152.6 | $137.6 | +11% |
| Net income attributable to Lamb Weston | $107.8 | $83.4 | +29% |
| Diluted EPS | $0.73 | $0.56 | +$0.17 |
| Operating cash flow | $227.9 | $143.5 | +$84.4 |
Sales growth reflected 8% higher price/mix and 4% higher volume overall. Global sales rose 13%, Foodservice 7%, Retail 26%, and Other 6%. Product contribution margin, the company’s segment performance measure, increased 16% to $224.2. Adjusted EBITDA including unconsolidated joint ventures, a non-GAAP measure, rose 11% to $212.9; adjusted diluted EPS was $0.73 versus $0.57.
Higher pricing/mix and volume supported gross profit, partly offset by inflation in transportation, warehousing, manufacturing, and input costs, plus higher depreciation. Gross profit included a $5.6 loss from commodity hedge mark-to-market adjustments and settlements, compared with a $3.2 gain a year earlier. SG&A rose 33% to $78.0; excluding prior-year separation costs, it increased 38%, reflecting foreign exchange, incentive compensation, advertising, and investments in systems and capabilities.
Liquidity, debt, and investment
- Cash was $150.5 at quarter-end, up from $55.6 at fiscal year-end. Current assets were $984.8 and current liabilities $518.3.
- Total debt and financing obligations were $2,406.3, including $2,317.5 of long-term debt and $80.0 of financing obligations. The company had no revolver borrowings and $496.6 of availability, net of letters of credit.
- Operating cash flow of $227.9 was offset by $86.8 of investing outflows and $45.9 of financing outflows; cash increased $94.9. Capital expenditures were $87.0 in the quarter.
- Management expects fiscal 2019 capital expenditures of approximately $360, including about $200 to complete a 300-million-pound Hermiston, Oregon production line, expected to operate in May 2019.
- Management said cash generation, cash on hand, revolver availability, and capital-market access should cover liquidity and capital needs, including declared dividends, for at least 12 months. The company reported compliance with its credit-agreement covenants.
Material changes, outlook, and risks
- The effective tax rate fell to 23.5% from 33.3%, primarily due to the U.S. Tax Cuts and Jobs Act. Management attributed approximately $14.3 of the year-over-year net income increase to the lower U.S. corporate tax rate. Fiscal 2018 included a provisional $28.4 net tax benefit; the company continued reviewing the Act’s effects, with finalization due no later than December 2018.
- ASC 606 was adopted using the modified retrospective method. It increased opening retained earnings by $13.7; adoption reduced reported quarterly sales by $2.5 and attributable net income by $0.7 versus balances without adoption. Comparative-period figures were not restated.
- Management expected generally favorable demand and operating conditions in North America and key export markets, but flagged higher input, transportation, warehousing, and SG&A costs. It expected a challenging European environment due to the likelihood of a poor potato crop and cited possible tariff and trade-barrier changes as a risk. The filing gives no specific full-year earnings or sales guidance.
- Risks identified include execution of capacity projects, competition, raw-material availability and prices, customer and grower relationships, international conditions and export access, debt levels, joint-venture performance, litigation or recalls, and the ability to maintain dividends. A 1% increase in rates on variable-rate debt would raise annual interest expense by approximately $6.5; a hypothetical 10% fall in commodity prices would produce an estimated $10.5 charge, substantially offset by the underlying hedged items.
- The company gave notice to exercise its option to buy Ochoa’s interest in Lamb Weston BSW for approximately $65, but final terms remained under negotiation; the quarter-end redeemable noncontrolling interest was $57.2. Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no material changes to disclosed risk factors or commitments.
Important facts for investors to verify
- Whether sales and margin growth persist as inflation, capacity additions across the industry, and pricing/mix evolve.
- Whether the Hermiston project meets its expected timing and budget, and how the planned fiscal 2019 capital spending affects cash and debt.
- The final tax effects of the Tax Act and the comparability of reported results following ASC 606 adoption.
- Resolution, price, and timing of the proposed Lamb Weston BSW interest purchase, including any impact on EPS and liquidity.
- European potato-crop conditions, changes in trade barriers, and exposure to variable interest rates and commodity prices.