Lamb Weston Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first 39 weeks ended February 25, 2018, compared with periods ended February 26, 2017. The filing identifies this as fiscal 2018; the prior-year comparison includes periods before and after the November 2016 separation from Conagra, so some comparisons are not fully like-for-like.
Business context
Lamb Weston produces, distributes, and markets value-added frozen potato products, principally french fries. It reports Global, Foodservice, Retail, and Other segments and also earns income from joint ventures.
Financial performance
| Metric | 13 weeks ended Feb. 25, 2018 | 13 weeks ended Feb. 26, 2017 | 39 weeks ended Feb. 25, 2018 | 39 weeks ended Feb. 26, 2017 |
|---|---|---|---|---|
| Net sales | $863.4 million | $768.5 million | $2,505.5 million | $2,335.5 million |
| Gross profit | $243.9 million | $207.0 million | $649.8 million | $586.5 million |
| Income from operations | $169.2 million | $145.2 million | $446.6 million | $395.7 million |
| Net income attributable to Lamb Weston | $156.8 million | $84.2 million | $316.8 million | $251.0 million |
| Diluted EPS | $1.06 | $0.57 | $2.14 | $1.70 |
| Net cash from operating activities | Not provided for quarter alone | Not provided for quarter alone | $310.2 million | $254.1 million |
- Third-quarter sales rose 12%; price/mix increased 7% and volume increased 5%. Gross margin was approximately 28.3%, versus 26.9% a year earlier. Operating margin was approximately 19.6%, versus 18.9%.
- For the first 39 weeks, sales rose 7%, gross profit 11%, and operating income 13%. Gross margin was approximately 25.9%, versus 25.1%.
- Management reported third-quarter Adjusted EBITDA including unconsolidated joint ventures of $237.6 million, up 25%, and Adjusted Diluted EPS of $0.91, up from $0.59. These are non-GAAP measures.
- Equity-method investment earnings were $26.4 million in the quarter and $58.5 million year to date, versus $12.7 million and $29.5 million, respectively, in the prior-year periods. Current-quarter earnings included a $2.5 million unrealized currency and commodity hedge gain.
Balance sheet, liquidity, and capital allocation
- At February 25, 2018, cash was $49.4 million; current assets were $998.2 million and current liabilities $579.3 million. Long-term debt, excluding current maturities, was $2,344.4 million; short-term borrowings were $31.6 million. Total debt and financing obligations were $2,447.0 million.
- Revolving-credit availability was $487.8 million, net of letters of credit. The company said it was in compliance with its credit covenants and believed available cash, operating cash flow, borrowing capacity, and capital-market access would meet needs for at least 12 months.
- Year-to-date capital spending was $204.4 million. The company raised its fiscal 2018 capital-expenditure expectation to $270–$280 million, primarily reflecting accelerated spending on the Hermiston expansion. Cash dividends paid year to date were $82.2 million.
- Stockholders’ deficit was $392.2 million. Cash fell by $7.7 million from fiscal year-end May 28, 2017, to $49.4 million.
Changes, outlook, and notable items
- Quarterly sales gains were broad-based: Global sales rose 15%, Foodservice 5%, and Retail 31%; Other declined 11%. Favorable pricing/mix and volume supported margins, while higher packaging, commodity, production, transportation, and warehousing costs, plus depreciation on the new Richland line, were offsets.
- Net income growth was substantially affected by approximately $47 million of Tax Act benefits, including a provisional $24 million net discrete benefit and approximately $23 million from the lower corporate tax rate. The quarter’s effective tax rate was 4.5%; excluding the $24 million discrete items, it was 18.9%. Management estimated a fiscal 2018 full-year effective tax rate of approximately 28%, excluding discrete items, and expected about $20 million lower cash tax payments in fiscal 2018.
- Management described the near-term operating environment as generally favorable, citing volume demand and high industry capacity utilization. It also noted higher input-cost inflation, interest expense, and stand-alone public-company and promotional costs. It expected capacity additions across the industry to ease near-term production constraints.
- The company planned a roughly 300-million-pound Hermiston, Oregon, production line, expected to be operational in fiscal 2019’s fourth quarter; the project was estimated at $250 million. The new Richland line began operating in the quarter.
- Interest expense for the first 39 weeks increased to $81.1 million from $34.5 million, largely reflecting debt incurred in connection with the separation; the comparison period does not include allocated Conagra interest for pre-separation periods.
- Risks include commodity and input-price volatility, customer and grower relationships, competition, international and export-market conditions, debt, joint-venture performance, large capital projects, litigation or recalls, and uncertainty in final Tax Act accounting. The company reported no material change in risk factors and no legal matters expected to materially affect its financial condition, results, or cash flows.
Investor verification points
- Check how much of reported earnings growth is attributable to Tax Act benefits, joint-venture results, and other nonrecurring or mark-to-market items.
- Review segment pricing, volume, and margin trends against continuing input-cost inflation and the impact of new production capacity.
- Track Hermiston project spending, completion timing, and expected capacity utilization, alongside the revised capital-spending outlook.
- Assess debt-service costs, variable-rate exposure, and liquidity; the filing estimates that a 1 percentage-point rate increase would add about $6.9 million in annual pretax interest expense.
- Monitor working-capital needs, particularly inventory, which increased to $630.5 million from $525.0 million at fiscal year-end.
- Confirm final Tax Act transition accounting and the durability of cash generation and dividends, noting the company’s forward-looking statements are subject to risks and uncertainty.