Lamb Weston Holdings, Inc. — Form 10-K Summary
Business context and reporting period
Lamb Weston produces, distributes, and markets value-added frozen potato products, primarily french fries, through Global, Foodservice, Retail, and Other segments. This is the annual report for the 52-week fiscal year ended May 30, 2021—not a stand-alone 2020 fourth-quarter filing. Comparisons are with the 53-week fiscal year ended May 31, 2020.
Financial performance and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $3,670.9 million | $3,792.4 million | Down 3% |
| Gross profit | $832.0 million | $895.2 million | Down 7% |
| Income from operations | $474.8 million | $556.9 million | Down 15% |
| Net income | $317.8 million | $365.9 million | Down 13% |
| Diluted EPS | $2.16 | $2.49 | Down 13% |
| Adjusted EBITDA including unconsolidated joint ventures | $748.4 million | $799.8 million | Down 6% |
| Cash from operating activities | $553.2 million | $574.0 million | Down 4% |
Gross margin was approximately 22.7%, versus 23.6% in fiscal 2020; operating margin was approximately 12.9%, versus 14.7%. Consolidated product contribution margin, a non-GAAP measure, was $814.2 million, down 7%.
Sales volume declined 6%, while price/mix increased 3%; excluding the prior-year extra week, sales declined 2%. Foodservice sales fell 5% (volume down 12%, price/mix up 7%); Global sales fell 3%; Retail sales increased 1%; and Other sales fell 10%. Foodservice and Global margins weakened, while Retail contribution margin rose 2%. Other contribution margin benefited from commodity-hedge mark-to-market items.
Cash and cash equivalents were $783.5 million at year-end, and availability under the revolving credit facility was $744.6 million, with no revolver borrowings outstanding. Operating cash flow less cash used for investing activities was $390.7 million. Balance-sheet debt and financing obligations, including the current portion, were approximately $2.74 billion. The company reported compliance with its credit covenants.
Material changes, outlook, and risks
COVID-19 restrictions reduced restaurant and other food-away-from-home demand and disrupted manufacturing, labor, transportation, and warehousing. Demand and shipments improved during the year, but foodservice shipments remained below pre-pandemic levels. Higher manufacturing and distribution costs, pandemic-related inefficiencies, labor pressures, and input inflation weighed on earnings. Fiscal 2021 also included a $37.9 million gain from commodity hedge adjustments and settlements, compared with a $2.5 million loss in fiscal 2020; the filing notes a $40.4 million year-over-year change in these items.
Management expected pandemic effects on demand to lessen as vaccination rates rose and restrictions eased, and said U.S. shipments to large chains and Foodservice were approaching pre-pandemic levels by fiscal year-end. It believed overall frozen potato demand could approach pre-pandemic levels on a run-rate basis by calendar year-end. This is an outlook, not a quantified earnings forecast. Management anticipated near-term supply-chain disruption and higher inflation in costs including edible oils, freight, and packaging, and expected price increases to offset some or all of those costs. Fiscal 2022 capital investment was projected at approximately $650–$700 million, including U.S. and China capacity projects.
Key risks include renewed pandemic impacts, commodity and freight cost volatility and supply constraints, concentrated potato-growing regions and crop risk, customer concentration (McDonald’s was 11% of fiscal 2021 sales), export and logistics disruption, competition and pricing pressure, significant debt, and execution risk in large capital projects and the ERP implementation. The next ERP phase was deferred during the pandemic and planned to resume in fiscal 2022. The company reported ordinary-course legal proceedings and supplier-loan guarantees of $35.6 million; management considered a material adverse outcome from these matters unlikely. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified estimation of certain sales incentives and trade-promotion accruals as a critical audit matter.
Important facts for investors to verify
- Whether foodservice and international demand recovery continued, and how quickly sales volumes returned toward pre-pandemic levels.
- Whether price increases and productivity savings offset higher input, labor, transportation, and warehousing costs without harming volume or mix.
- Execution, timing, and funding of the planned $650–$700 million fiscal 2022 capital program, alongside dividends and any share repurchases.
- Debt maturities and covenant headroom, particularly the scheduled $1.33 billion maturity in fiscal 2025 shown in the debt maturity schedule.
- The sustainability of earnings excluding commodity-hedge gains and other unusual or volatile items, and the accuracy of trade-promotion accrual estimates.