Lamb Weston Holdings, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2023, the 13 weeks ended February 26, 2023; year-to-date covers 39 weeks. Comparisons are with the corresponding periods ended February 27, 2022, unless noted. Amounts are in millions except per-share data.
Business context
Lamb Weston produces and markets value-added frozen potato products, principally french fries, through Global, Foodservice, Retail, and Other segments. The company cited ongoing input-cost inflation, capacity constraints, and supply-chain challenges. On February 28, 2023, two days after quarter-end, it acquired the remaining 50% of its LW EMEA joint venture, bringing ownership to 100%.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | 39 weeks FY2023 | 39 weeks FY2022 |
|---|---|---|---|---|
| Net sales | $1,253.6 | $955.0 | $3,655.7 | $2,945.8 |
| Gross profit | $397.8 | $221.0 | $1,052.7 | $577.8 |
| Income from operations | $266.3 | $133.8 | $695.1 | $308.4 |
| Net income | $175.1 | $106.6 | $510.1 | $168.9 |
| Diluted EPS | $1.21 | $0.73 | $3.53 | $1.16 |
| Operating cash flow | Not reported separately | Not reported separately | $335.1 | $174.0 |
| Capital expenditures | Not reported separately | Not reported separately | $429.4 | $217.8 |
Q3 gross margin was approximately 31.7% versus 23.1%; operating margin was approximately 21.2% versus 14.0%. Year-to-date gross margin was approximately 28.8% versus 19.6%, and operating margin approximately 19.0% versus 10.5%. Year-to-date operating cash flow less capital expenditures was negative $94.3 million, compared with negative $43.8 million a year earlier.
- Q3 sales rose 31%; price/mix increased 31% while overall volume was flat. Gross profit increased 80%, as pricing more than offset higher manufacturing costs.
- Q3 segment sales increased 33% in Global, 22% in Foodservice, and 50% in Retail. Other was essentially flat. Retail volume rose 6%; Foodservice volume declined 3%.
- Reported Q3 earnings included a $47.3 million unrealized loss on European natural-gas and electricity derivatives, partly offset by a $4.3 million net acquisition-related gain in SG&A. Management reported adjusted net income of $207.4 million and adjusted diluted EPS of $1.43; these are non-GAAP measures.
- Year-to-date sales grew 24%, driven by 27% price/mix, while volume declined 3%, reflecting service disruptions and exits from lower-priced, lower-margin business. Year-to-date reported income also benefited from comparison with the prior-year $53.3 million debt-extinguishment loss.
Liquidity, debt, and capital allocation
- At February 26, cash was $675.0 million and current assets were $2,117.9 million against current liabilities of $817.3 million. Inventory was $837.4 million, up from $574.4 million at May 29, 2022.
- Debt and financing obligations totaled $3,242.0 million, including $6.2 million of short-term borrowings; long-term debt and financing obligations, net of issuance costs and current portions, were reported at $3,163.9 million. Debt and financing obligations were $2,752.0 million at May 29, 2022. The company had no revolving-credit borrowings and $994.6 million of availability at quarter-end.
- Cash increased $150.0 million during the 39-week period. Investing used $535.7 million, including $429.4 million for property, plant, and equipment; financing provided $331.3 million. The company paid $105.8 million in dividends and used $47.2 million for repurchases and employee tax withholding.
- The February 28 LW EMEA purchase consideration was €531.6 million ($564.0 million) in cash, subject to closing adjustments, plus 1,952,421 shares. The cash portion was funded with a $450.0 million term loan and $114.0 million of cash on hand. Purchase-price allocation was not complete when the filing was issued.
- Fiscal 2023 capital spending was expected to be approximately $700 million to $725 million, including LW EMEA capital expenditures and excluding joint-venture purchase prices. Management said it had sufficient liquidity for projected needs for at least 12 months and reported compliance with debt covenants.
Outlook, commentary, and risks
Management expected the challenging macroeconomic environment to persist. For fiscal Q4, excluding LW EMEA consolidation, it expected sales growth to be driven primarily by price/mix, with volume pressured by continued exits from lower-priced, lower-margin business. It expected gross-margin expansion versus the prior year from pricing actions, partly offset by higher SG&A. No numeric full-year revenue or earnings guidance is provided in the filing text.
Management cited inflation in potatoes and other inputs, labor, energy, and transportation; volatile consumer demand; supply-chain and production constraints; and softer traffic at some full-service restaurants. Key risks include commodity and foreign-exchange exposure, interest-rate changes, execution and integration of the LW EMEA acquisition, large capital-project delivery, and international operating conditions. The filing reported no material changes to previously disclosed risk factors or contingencies, other than the LW EMEA transaction and related assumed liabilities.
Most important facts for investors to verify
- Whether pricing continues to offset inflation without further material volume losses or customer-service constraints.
- The effect of consolidating LW EMEA from fiscal Q4, including integration progress, acquisition accounting, financing costs, and realized synergies.
- Whether inventory growth and planned capital spending convert into stronger cash generation and returns on investment.
- The magnitude and timing of earnings volatility from European energy derivatives and other commodity and currency exposures.
- Debt levels and interest-rate sensitivity after the LW EMEA acquisition; the filing estimated that a 1% rate increase would raise annual interest expense by $10.8 million before tax at quarter-end.