Lamb Weston Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended November 26, 2017 (13 and 26 weeks), compared with periods ended November 27, 2016. Lamb Weston produces and sells value-added frozen potato products and reports Global, Foodservice, Retail, and Other segments. The company separated from Conagra on November 9, 2016; therefore, prior-period results include pre-separation accounting and are not fully comparable, particularly for interest and corporate costs.
Financial performance
| Metric | 13 weeks 2017 | 13 weeks 2016 | 26 weeks 2017 | 26 weeks 2016 |
|---|---|---|---|---|
| Net sales | $824.6M | $790.7M | $1,642.1M | $1,567.0M |
| Gross profit | $209.2M | $198.9M | $405.9M | $379.5M |
| Income from operations | $139.8M | $125.5M | $277.4M | $250.5M |
| Net income attributable to Lamb Weston | $76.6M | $87.2M | $160.0M | $166.8M |
| Diluted EPS | $0.52 | $0.59 | $1.08 | $1.13 |
| Interest expense, net | $27.4M | $6.8M | $52.6M | $8.3M |
| Equity method investment earnings | $12.1M | $6.2M | $32.1M | $16.8M |
- Second-quarter sales rose 4%, with price/mix up 5% and volume down 1%. First-half sales rose 5%.
- Gross margin was approximately 25.4% in the quarter versus 25.2% a year earlier; operating margin was approximately 17.0% versus 15.9%.
- Management-reported Adjusted EBITDA including unconsolidated joint ventures increased 12% to $188.9M in the quarter and rose to $380.3M from $339.9M for the first half. These are non-GAAP measures.
- First-half operating cash flow was $182.2M, up from $162.4M. Investing activities used $155.7M, including $154.0M of capital expenditures. Cash increased $14.0M to $71.1M.
- At November 26, total debt and financing obligations were $2,513.5M, including $88.2M of short-term borrowings; cash was $71.1M. The revolving facility had $436.0M of availability. The company reported compliance with its debt covenants.
- Current assets were $1,004.3M and current liabilities $646.5M. Stockholders’ deficit was $531.4M.
Changes, drivers, and segment results
- Quarterly net income attributable to Lamb Weston fell 12% and diluted EPS declined $0.07. Higher interest expense, input and logistics inflation, depreciation, taxes, and about $3M of Richland production-line start-up costs more than offset sales growth and higher joint-venture earnings.
- Quarterly selling, general and administrative expense declined to $69.4M, partly because separation-related costs fell to $4.0M from $9.0M. Excluding those costs, SG&A increased 2%; first-half SG&A excluding separation costs increased 11%, reflecting stand-alone public-company costs.
- Foodservice led quarterly segment growth: sales increased 9% to $272.8M and product contribution margin rose 15% to $92.2M. Global sales rose 1%, but margin declined 4% to $88.2M; Retail sales rose 6%, while margin declined 7% to $19.4M. Other margin improved to $3.9M from a $0.4M loss, partly because the prior-year period included a third-party vegetable-product recall expense.
- McDonald’s accounted for approximately 11% of consolidated sales in all periods presented.
Outlook, risks, and contingencies
- Management expected generally favorable demand and high industry capacity utilization for the remainder of fiscal 2018, while noting rising commodity, packaging, edible-oil, manufacturing, transportation, and warehousing costs, as well as higher stand-alone costs and interest expense.
- Fiscal 2018 capital expenditures were expected to be approximately $250M, increased from the prior estimate of $225M, including initial work on a planned Hermiston, Oregon production line. The line is expected to operate in the fourth quarter of fiscal 2019; the Richland line began operating in the quarter.
- The fall potato crop in the Columbia River Basin and Idaho was assessed as broadly consistent with historical averages. Capacity additions by Lamb Weston and competitors could ease near-term industry production constraints.
- Tax legislation signed December 22, 2017 lowered the U.S. corporate rate to 21% beginning in 2018. The company was evaluating the effects and expected lower fiscal 2018 effective tax and cash-tax rates; the impact was not yet fully determined.
- Risks include input-price and currency volatility, customer and grower relationships, international-market and export disruption, competition, execution of capital projects, joint-venture performance, debt levels, litigation, and product recalls. Commodity and currency derivatives are used for risk management, not trading; commodity derivative changes are generally recognized in earnings without hedge accounting.
- The company disclosed ordinary-course legal claims and stated it did not expect them, individually or in aggregate, to have a material adverse effect. It also noted potential Lamb Weston BSW joint-venture exposures involving a partner put option, production shortfalls, and financing support; the maximum exposure cannot be determined, though material losses were not expected.
- Management stated liquidity sources should be adequate for at least the next 12 months, including declared dividends. No material changes to reported risk factors or contractual obligations were noted.
Important facts for investors to verify
- How much of continued sales growth and margin performance reflects sustainable pricing and mix versus volume, and whether inflation can be offset.
- The cost, timing, utilization, and returns of the Richland, Boardman, Hermiston, and joint-venture capacity projects; fiscal 2018 capital spending guidance was approximately $250M.
- Debt-service and interest-rate sensitivity: a 1% increase in rates on variable-rate debt was estimated to increase annual interest expense by approximately $7.5M.
- The final earnings, cash-tax, and deferred-tax effects of the tax legislation, which were still under evaluation at filing.
- Joint-venture earnings quality and contingent exposures, including the BSW put option and financing arrangements.
- Comparability of year-over-year results given the November 2016 separation, debt issuance, and changes in stand-alone operating costs.