Lamb Weston Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 26, 2019 (52 weeks). The filing also reports fiscal Q4 results; this is not a standalone quarterly filing. Dollar amounts are in millions except per-share data.
Business context and reporting period
Lamb Weston produces, distributes, and markets value-added frozen potato products, principally French fries, through Global, Foodservice, Retail, and Other segments. It operates in over 100 countries and conducts additional business through joint ventures. The company’s largest customer, McDonald’s, represented approximately 10% of FY2019 sales, down from 11% in FY2018.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $3,756.5 | $3,423.7 | +10% |
| Gross profit | $1,003.5 | $879.5 | +14% |
| Income from operations | $668.4 | $580.1 | +15% |
| Net income attributable to Lamb Weston | $478.6 | $416.8 | +15% |
| Diluted EPS | $3.18 | $2.82 | +$0.36 |
| Operating cash flow | $680.9 | $481.2 | +42% |
| Capital expenditures | $334.2 | $306.8 | +$27.4 |
- Sales growth reflected volume up 5% and price/mix up 5%. Gross margin was approximately 26.7% versus 25.7%; operating margin was approximately 17.8% versus 16.9%.
- Net income included $27.2 million of Tax Act benefits in FY2019. Adjusted diluted EPS, a non-GAAP measure, was $3.22 versus $2.66; adjusted EBITDA including unconsolidated joint ventures was $904.3 million versus $820.4 million.
- Equity-method investment earnings fell to $59.5 million from $83.6 million, primarily due to higher potato costs and lower European JV volumes following a poor crop.
- At May 26, 2019, cash was $12.2 million; total current assets were $961.5 million and current liabilities $552.8 million. Available revolving-credit capacity was $489.4 million. Long-term debt including current portion was $2,318.2 million; total debt and financing obligations were $2,352.4 million.
- Net cash used in investing and financing activities was $423.0 million and $299.6 million, respectively. The company paid $113.3 million in dividends and repurchased $31.8 million of shares under its new authorization.
Fourth-quarter results and changes versus comparable periods
Fiscal Q4 FY2019 sales were $1,003.4 million versus $918.2 million in Q4 FY2018; gross profit was $250.5 million versus $232.7 million; attributable net income was $110.4 million versus $100.0 million; and diluted EPS was $0.75 versus $0.68. Quarterly gross margin was approximately 25.0%, compared with 25.3% a year earlier.
Across FY2019, all four segments grew sales. Global sales increased 12%, Foodservice 5%, Retail 11%, and Other 7%. Favorable pricing, mix, volume, and supply-chain efficiencies more than offset input, transportation, warehousing, and manufacturing-cost inflation. SG&A increased 12%; excluding FY2018 Separation costs, it increased 15%, partly reflecting technology and commercial capability investment.
FY2019 operating cash flow rose $199.7 million, mainly from earnings growth and working-capital timing. The company acquired the remaining 50.01% of Lamb Weston BSW and a frozen potato processor in Australia; BSW earnings were fully included beginning November 2, 2018. Adoption of ASC 606 increased FY2019 reported sales by $13.2 million and net income by $3.5 million; comparative periods were not restated.
Outlook, risks, and unusual items
- Management expected generally favorable FY2020 conditions, continued solid demand growth, and more normalized production as new capacity comes online. It expected cost inflation broadly similar to FY2019, higher SG&A investment (including ERP and information systems), and approximately $275 million of FY2020 capital investments, excluding acquisitions. No quantified FY2020 sales or EPS guidance is provided in the filing.
- Capacity additions include a Hermiston, Oregon line with approximately 300 million pounds of annual capacity, operational in May 2019. A July 2019 Australian acquisition added approximately 70 million pounds; it was subsequent to the fiscal year-end.
- Key risks include increased industry capacity and pricing competition; potato crop and commodity-cost volatility; concentrated growing regions and the FY2019 European drought; export and international trade disruption; customer concentration; substantial debt; and food-safety, regulatory, labor, and climate-related exposures.
- Material control issue: Management and the auditor identified a material weakness in IT general controls involving temporary application-support access to a financial-reporting system. Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end; the auditor issued an adverse opinion on internal controls. No financial-statement misstatement was identified, and the financial-statement audit opinion was unqualified. Management targeted remediation before the end of FY2020.
- Unusual items include Tax Act benefits, commodity hedge losses, the BSW acquisition-related $9.4 million after-tax accretion that reduced EPS by $0.06, and FY2018 Separation expenses. Ordinary-course legal matters were not believed by management to be materially adverse. Supplier-loan guarantees totaled $26.4 million; management considered performance under them remote.
Important facts for investors to verify
- Progress and independent testing of the planned remediation of the material weakness, and whether controls become effective.
- Whether FY2020 demand, added industry capacity, potato availability, and input-cost inflation match management’s stated outlook.
- Cash conversion and working-capital trends, especially receivables, inventory, and the drivers of the FY2019 operating-cash-flow increase.
- Debt repayment, covenant headroom, and the effects of the June 2019 term-loan refinancing; verify that the refinancing did not increase principal.
- Returns and integration of the BSW and Australian acquisitions, and the impact of lower equity-method earnings from European joint ventures.
- Effects of ASC 606 and FY2019 tax benefits when comparing reported results with prior periods or assessing recurring earnings.