Lamb Weston Holdings, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended November 28, 2021; comparative periods ended November 29, 2020. Unaudited results. Lamb Weston produces and markets frozen potato products through Global, Foodservice, Retail, and Other segments.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net sales | $1,006.6 million | $896.1 million | $1,990.8 million | $1,767.6 million |
| Gross profit | $205.5 million | $223.5 million | $356.8 million | $437.3 million |
| Income from operations | $114.4 million | $139.6 million | $174.6 million | $275.3 million |
| Net income | $32.5 million | $96.9 million | $62.3 million | $186.2 million |
| Diluted EPS | $0.22 | $0.66 | $0.42 | $1.27 |
| Adjusted diluted EPS (non-GAAP) | $0.50 | $0.66 | $0.70 | $1.27 |
- Q2 sales rose 12%; volume and price/mix each increased 6%. Gross margin was approximately 20.4%, versus 24.9% a year earlier; operating margin was approximately 11.4%, versus 15.6%.
- Q2 adjusted EBITDA including unconsolidated joint ventures was $180.9 million, down 15% from $213.2 million. First-half adjusted EBITDA including joint ventures was $304.3 million, versus $415.0 million.
- First-half operating cash flow was $207.5 million, down from $318.8 million. Capital expenditures were $147.1 million; cash and cash equivalents ended at $621.9 million, down from $783.5 million at fiscal year-end.
- At November 28, total debt and financing obligations were $2,748.5 million before debt issuance costs; the balance sheet reported $2,692.1 million of long-term obligations excluding the current portion. Cash was $621.9 million. The amended $1.0 billion revolver was undrawn, with $994.6 million available after letters of credit.
- Current assets were $1,717.8 million and current liabilities $693.0 million. Inventories increased to $613.9 million from $513.5 million at May 30, 2021.
Material changes and business drivers
- Sales growth reflected recovery in restaurant and foodservice demand and pricing actions. Foodservice sales rose 30% in Q2, while Global sales increased 9%; Retail sales were up 1% and Other sales declined 13%.
- Despite higher sales, Q2 gross profit fell 8%, chiefly because of double-digit inflation in inputs, transportation, and packaging, labor shortages that reduced production throughput, and lower potato utilization following a poor crop. First-half gross profit fell 18%.
- Foodservice segment contribution margin increased to $104.4 million in Q2, but Global fell 13% to $80.9 million and Retail fell 29% to $21.4 million. Other recorded a $6.2 million contribution loss, including commodity-hedging effects.
- Net income was substantially affected by a $53.3 million pretax debt-extinguishment loss ($40.5 million after tax, or $0.28 per diluted share). Excluding this item, adjusted diluted EPS was $0.50 for Q2.
Outlook, risks, and unusual items
- Management expected fiscal 2022 sales to increase, supported by price/mix and volume, but did not provide a specific earnings or EPS range in this filing. Management expected earnings pressure from input-cost inflation, higher potato costs, labor shortages, and supply-chain disruption.
- Mitigation actions included pricing, freight-policy changes, production and staffing adjustments, employee recruitment and retention measures, and supply-chain productivity initiatives. Management expected fiscal 2022 SG&A to rise and planned to resume the next phase of its ERP implementation in the second half.
- Fiscal 2022 capital expenditures were expected to be approximately $450 million, excluding acquisitions, including capacity expansion in Idaho and a new processing facility in China. A subsidiary was pursuing up to $180 million in financing for the China project; completion was not assured.
- Management stated liquidity was sufficient for at least the next 12 months. The company reported compliance with debt covenants. It had refinanced $1.666 billion of 2024 and 2026 notes with $1.670 billion of 2030 and 2032 notes, alongside cash, extending maturities; the refinancing produced the unusual extinguishment charge.
- Additional risks include pandemic-related demand and operating volatility, commodity and freight costs, crop quality and yields, labor availability, export shipping constraints, and foreign-exchange exposure. McDonald’s represented approximately 11% of consolidated sales. Management did not expect pending or threatened legal matters to materially harm financial condition, results, or cash flows.
- The board authorized an additional $250 million of share repurchases in December 2021, bringing remaining authorization to $343.6 million. It also increased the quarterly dividend approximately 4% to $0.245 per share, payable in March 2022.
Most important facts for investors to verify
- Whether pricing and productivity measures can offset continuing inflation, labor constraints, and higher potato costs without materially reducing demand.
- Whether production throughput, crop yields, and international shipping availability improve enough to support projected sales volumes.
- Actual capital spending and progress, funding, and execution risks for the Idaho and China projects, including the contemplated China financing.
- Debt refinancing economics, future interest expense, covenant headroom, and the company’s capacity to sustain dividends and repurchases alongside investment needs.
- Reported versus adjusted earnings: adjusted measures exclude the debt-extinguishment charge and are non-GAAP; first-half cash generation also declined year over year.