Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business and period: Lamb Weston produces and sells value-added frozen potato products, including french fries, through Global, Foodservice, Retail and Other segments. This unaudited report covers the 13 weeks ended August 29, 2021 (first quarter of fiscal 2022), compared with the 13 weeks ended August 30, 2020.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $984.2 million | $871.5 million |
| Gross profit / gross margin | $151.3 million / 15.4% | $213.8 million / 24.5% |
| Income from operations / operating margin | $60.2 million / 6.1% | $135.7 million / 15.6% |
| Net income | $29.8 million | $89.3 million |
| Diluted EPS | $0.20 | $0.61 |
| Operating cash flow | $161.8 million | $250.6 million |
| Capital expenditures | $78.9 million | $20.6 million |
Sales rose 13%, with volume up 11% and price/mix up 2%. Net income fell 67%; adjusted EBITDA including unconsolidated joint ventures, a non-GAAP measure, declined 39% to $123.4 million from $201.8 million. The effective tax rate was 22.6%, versus 23.9%.
Segments: Global sales increased 12% to $501.2 million, while product contribution margin fell 45% to $42.6 million. Foodservice sales rose 36% to $321.4 million and contribution margin rose 12% to $96.4 million. Retail sales declined 14% to $132.5 million and contribution margin fell 59% to $14.8 million. Other sales declined 13% to $29.1 million; contribution margin was a $6.6 million loss, including commodity-hedging effects.
Liquidity, debt and capital allocation
At August 29, 2021, cash and cash equivalents were $789.7 million; total debt and financing obligations were $2.752 billion, including $32.0 million current. The company had no borrowings under its amended $1.0 billion revolving facility and reported $994.6 million available, net of letters of credit. It stated it was in compliance with debt covenants. The facility was amended in August 2021, extending maturity to August 11, 2026. Stockholders’ equity was $427.4 million.
Cash from operations decreased by $88.8 million year over year, reflecting lower operating earnings and unfavorable working-capital movements. Cash increased $6.2 million during the quarter. The company paid $34.4 million in dividends and repurchased 395,361 shares for $26.0 million under its authorization.
Changes, outlook and risks
- Management attributed the sales recovery mainly to improving restaurant and foodservice demand, particularly in North America. Retail sales weakened as private-label shipments declined and at-home demand normalized.
- Earnings and margins were pressured by double-digit inflation in key inputs and transportation, labor availability and operating inefficiencies, and higher SG&A. Management also cited pandemic-related supply-chain disruption, shipping congestion and container availability constraints.
- Management expected fiscal 2022 sales to increase as global demand recovered, but expected earnings to be pressured by inflation and operational challenges. It anticipated demand could approach pre-pandemic levels on a run-rate basis by calendar year-end, while noting uncertainty from COVID-19.
- Management cited pricing actions, freight-policy changes, production and staffing adjustments, employee-retention efforts and product-portfolio rationalization as mitigation measures. Fiscal 2022 capital expenditure guidance was reduced to approximately $450 million from a prior estimate of $650–$700 million, primarily due to project timing.
- The company was pursuing a subsidiary credit facility of up to $180 million for its China expansion, subject to market conditions and final documentation; alternative funding would be pursued if it did not close. Major investments include capacity expansion in Idaho and a greenfield processing facility in Inner Mongolia.
- Key risks include continued pandemic effects, inflation in potatoes and other inputs, labor and supply-chain constraints, execution of capital projects, foreign-currency and interest-rate exposure, debt levels, and customer or joint-venture developments. Management said pending or threatened ordinary-course legal matters were not expected to materially adversely affect results, financial condition or cash flows.
Important facts for investors to verify
- Whether pricing and volume recovery can offset rising potato, commodity, freight, labor and manufacturing costs—and whether margins stabilize.
- Actual progress and spending on the Idaho and China projects, the revised capital-expenditure plan, and the proposed China-related financing.
- Liquidity, debt covenant headroom and sensitivity to variable interest rates; the filing estimates a 1% rate increase would add about $5.9 million of annual pretax interest expense.
- Exposure to commodity and currency movements: a hypothetical 10% decline in relevant commodity prices would produce an estimated $5.7 million charge before tax on open hedge positions, substantially offset by the underlying hedged items.
- Performance of the Foodservice recovery, Retail volume trends, joint-venture earnings and customer concentration; McDonald’s accounted for approximately 10% of quarterly sales.