Lamb Weston Holdings, Inc. — Q2 FY2021 Form 10-Q
Business context and period. The filing covers the 13 weeks ended November 29, 2020 (second quarter of fiscal 2021) and the 26 weeks ended that date, compared with the corresponding prior-year periods. Lamb Weston produces and markets frozen potato products through Global, Foodservice, Retail, and Other segments. Management attributed weaker results primarily to COVID-19-related declines in food-away-from-home demand and operating disruption.
Financial performance
Amounts are in millions of dollars, except per-share figures. Percentages are approximate calculations from reported amounts.
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $896.1 | $1,019.2 | $1,767.6 | $2,008.2 |
| Gross profit / margin | $223.5 / 24.9% | $285.1 / 28.0% | $437.3 / 24.7% | $533.7 / 26.6% |
| Operating income / margin | $139.6 / 15.6% | $193.5 / 19.0% | $275.3 / 15.6% | $363.5 / 18.1% |
| Net income | $96.9 | $140.4 | $186.2 | $256.1 |
| Diluted EPS | $0.66 | $0.95 | $1.27 | $1.74 |
| Net interest expense | $30.0 | $25.4 | $60.3 | $53.6 |
| Equity method earnings | $19.2 | $15.0 | $31.1 | $25.6 |
| Operating cash flow | Not reported separately for the quarter | $318.8 | $345.3 |
- Q2 sales fell 12%; sales volume declined 14%, partly offset by 2% higher price/mix. Foodservice sales decreased 21%, Global 12%, and Retail increased 7%.
- Q2 operating income fell 28%, net income 31%, and diluted EPS 31%. EBITDA including unconsolidated joint ventures, a non-GAAP measure, declined 18% to $213.2 million. First-half EBITDA including joint ventures was $415.0 million versus $493.8 million.
- First-half operating cash flow decreased $26.5 million year over year. Capital expenditures and other investing used $53.3 million, compared with $240.2 million in the prior-year period, which included a $116.7 million acquisition.
Financial position and liquidity
- At November 29, 2020, cash was $763.9 million, down from $1,364.0 million at May 31, 2020. Current assets were $1,785.8 million and current liabilities $614.3 million.
- Total debt and financing obligations were $2,775.8 million, down from $3,568.3 million at May 31; reported long-term debt and financing obligations, excluding current portions, were $2,719.4 million. No revolving-credit borrowings were outstanding; availability was $745.1 million, net of letters of credit.
- In September, the company expanded its revolving facility from $500 million to $750 million and extended maturity to September 2023. It used cash to repay the $271.9 million term loan due in November 2021. The company reported compliance with its credit covenants.
- Financing activities used $867.2 million in the first half, principally reflecting repayment of short-term borrowings and debt, as well as $67.2 million of dividends. Cash declined by $600.1 million over the period.
Material changes, outlook, and risks
- COVID-19 restrictions and colder weather weakened restaurant traffic and outdoor dining, with the greatest pressure in Foodservice and full-service/non-commercial channels. Retail demand remained strong. Management said overall U.S. restaurant traffic and frozen-potato demand were around 90% of pre-pandemic levels in Q2; non-commercial demand was about 50% below prior-year levels.
- Lower volume, pandemic-related factory and supply-chain costs, processing potatoes from storage longer than usual, and input-cost inflation pressured margins. Lower SG&A partly offset the decline. Management expected COVID-related costs to continue at least through the remainder of fiscal 2021.
- Management anticipated volatile conditions and possible further demand weakness, particularly at full-service restaurants, but expected global restaurant traffic to improve through calendar 2021 and frozen-potato demand to approach pre-pandemic levels on a run-rate basis by year-end. This is qualitative outlook, not a quantified earnings forecast.
- Fiscal 2021 capital investment, including IT, was expected to be about $180 million. The company deferred the second phase of its ERP implementation; first-phase implementation included approximately $5 million of non-recurring expenses in Q2 and approximately $6 million in the first half.
- Management said cash, operating cash flow, and credit facilities should meet foreseeable requirements, while noting that insufficient operating cash or covenant noncompliance could require additional financing or waivers, which might not be available on acceptable terms.
- The quarterly dividend was increased by $0.02 per share to $0.235, payable March 5, 2021. Management also planned to resume share repurchases, subject to market conditions and other factors; no program repurchases occurred in the quarter.
- Unusual items included a $1.0 million debt-issuance-cost write-off in interest expense and commodity-hedging gains included in Other segment contribution margin ($4.3 million in Q2 and $12.1 million in the first half). McDonald’s accounted for approximately 11% of consolidated sales in both current-year periods.
- The company described ordinary-course legal claims and said pending or threatened matters were not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors. COVID-19, demand, input costs, supply constraints, leverage, customer relationships, and international operations remain among the stated uncertainties.
Important facts for investors to verify
- Whether foodservice demand, especially full-service and non-commercial demand, recovers as assumed and how renewed restrictions affect sales volume.
- Whether the company can sustain margins while absorbing pandemic-related operating costs, input inflation, and lower factory utilization.
- Cash generation, inventory levels, and liquidity after the substantial first-half cash decline; also monitor debt levels and compliance with facility covenants.
- Execution and costs of the ERP program, the expected $180 million capital investment, and the timing and scale of any resumed share repurchases.
- Exposure to McDonald’s concentration, joint-venture performance, commodity and currency movements, and the assumptions underlying management’s qualitative recovery outlook.