Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business context and period. Lamb Weston produces and markets value-added frozen potato products, with Global, Foodservice, Retail and Other reportable segments. This filing covers the 13 and 39 weeks ended February 23, 2020, the third quarter and first three quarters of fiscal 2020. Results are unaudited. The company identified COVID-19 as a significant emerging uncertainty.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | 39 weeks FY2020 | 39 weeks FY2019 |
|---|---|---|---|---|
| Net sales | $937.3M | $926.8M | $2,945.5M | $2,753.1M |
| Gross profit | $250.4M | $273.4M | $784.1M | $753.0M |
| Income from operations | $162.5M | $193.8M | $526.0M | $520.4M |
| Net income attributable to Lamb Weston | $111.4M | $141.4M | $367.5M | $368.2M |
| Diluted EPS | $0.76 | $0.95 | $2.50 | $2.42 |
| Operating cash flow | Not separately reported | Not separately reported | $435.7M | $444.4M |
Quarterly sales rose 1%, while operating income fell 16% and net income attributable to the company fell 21%. Gross margin was approximately 26.7%, down from 29.5%. For the 39-week period, sales increased 7%, operating income rose 1%, and net income attributable to the company declined slightly; gross margin was approximately 26.6%, versus 27.3%.
Management also reported Q3 adjusted diluted EPS of $0.77, down from $0.95, and adjusted EBITDA including unconsolidated joint ventures of $227.7M, down 10% from $253.2M. For the 39 weeks, adjusted diluted EPS was $2.51 versus $2.48, and adjusted EBITDA was $721.5M versus $688.9M. These are non-GAAP measures.
Segments and material changes
- Q3 Foodservice sales grew 7% to $283.0M and product contribution margin increased 5% to $99.8M. Retail sales increased 2% to $132.2M, while its contribution margin declined 1% to $28.8M.
- Global sales declined 2% to $487.1M and contribution margin fell 15% to $109.3M. Management cited timing and mix of customized and limited-time products, lower volume, China disruptions, and higher manufacturing costs.
- Across the quarter, higher price/mix was offset by flat volume. Input and fixed-cost inflation, transportation, depreciation, unfavorable customer mix, China production interruptions, and weaker commodity-hedge adjustments pressured profitability. SG&A rose 10% to $87.9M, including about $2M of non-recurring ERP implementation costs.
- For the 39 weeks, all segments recorded higher sales. The Australian processor acquisition added about 70 million pounds of capacity; the company also acquired a 50% interest in an Argentine joint venture.
Cash, debt and liquidity
At February 23, 2020, cash was $30.1M; current assets were $1,097.5M and current liabilities $593.7M. Debt and financing obligations had a carrying amount of approximately $2.25B, including $21.0M of short-term borrowings. Operating cash flow was $435.7M; capital expenditures were part of $127.8M of property, plant and equipment additions. The company paid $87.7M in dividends and repurchased $22.9M of shares during the 39 weeks.
At quarter-end, the revolving facility had no borrowings and $495.1M available after letters of credit. In late March, after the reporting date, the company borrowed $495M as a precaution amid COVID-19 uncertainty. Management said liquidity sources should cover requirements, including declared dividends, for at least 12 months; it planned to defer some capital spending and temporarily suspend share repurchases. Fiscal 2020 capital expenditures were expected to be approximately $200M, excluding acquisitions.
Outlook, risks and unusual items
- No earnings or sales guidance is provided. Management warned that the near-term COVID-19 impact on demand and volume was likely to be material. It reported a sharp but partially recovering decline in China fry demand, anticipated greater pressure on European demand, and described U.S. effects as uncertain. Retail frozen fry demand had risen, while foodservice orders were weakening; production schedules were being adjusted.
- Other notable items included a $2.6M joint-venture loss from a multiemployer pension-plan withdrawal and unfavorable quarterly commodity-hedge mark-to-market effects. The quarter also included $7.3M of unrealized currency and commodity hedge losses in equity-method investment earnings.
- Disclosure controls were deemed ineffective because of a previously reported material weakness in internal control over financial reporting. Management expected remediation before fiscal year-end, subject to successful testing.
- Risks include pandemic-related demand and supply disruption, input and transportation costs, commodity and currency exposure, customer concentration, leverage, execution of capital projects, and joint-venture performance. McDonald’s accounted for about 10% of sales. Management did not expect pending legal matters to materially affect the company.
Investor verification priorities
- Check subsequent filings for COVID-19 effects on foodservice demand, retail growth, production, and joint-venture earnings.
- Verify the use and repayment plans for the $495M revolving-facility draw and its impact on interest expense and covenant headroom.
- Track whether the $200M capital expenditure plan and share-repurchase suspension remain in effect.
- Review progress and testing of remediation for the material weakness in internal controls.
- Compare GAAP results with management’s adjusted measures and assess the persistence of cost inflation, hedge volatility, and segment margin pressure.