Lamb Weston Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 27, 2022 (13 weeks), with year-to-date results for the 39 weeks ended February 27, 2022. Comparisons are to the corresponding periods ended February 28, 2021. The filing’s fiscal-year period is 2022; “2021 Q3” in the request metadata does not match the filing period.
Business: Lamb Weston produces, distributes, and markets value-added frozen potato products. It reports Global, Foodservice, Retail, and Other segments.
Financial performance
| Metric | Third quarter | 39 weeks year to date |
|---|---|---|
| Net sales | $955.0 million, up 7% | $2,945.8 million, up 11% |
| Gross profit / margin | $221.0 million / 23.1%; up 12% | $577.8 million / 19.6%; down 9% |
| Operating income / margin | $133.8 million / 14.0%; up 33% | $308.4 million; down 18% |
| Net income | $106.6 million, up 61% | $168.9 million, down 33% |
| Diluted EPS | $0.73, versus $0.45 | $1.16, versus $1.72 |
| Operating cash flow | Not presented for the quarter | $174.0 million, versus $374.8 million |
| Capital expenditures | Not presented for the quarter | $217.8 million, versus $92.1 million |
| Adjusted EBITDA including unconsolidated joint ventures | $219.6 million, up 31% | $523.9 million, versus $582.1 million |
Material changes and segment trends
- Quarterly sales growth reflected price/mix up 12%, partly offset by volume down 5%. Year-to-date, price/mix rose 7% and volume rose 4%.
- Foodservice was the strongest quarterly segment: sales rose 34% to $294.5 million and product contribution margin rose 52% to $106.7 million, reflecting recovering restaurant and foodservice demand and pricing.
- Global quarterly sales increased 2%, but contribution margin fell 8% to $73.0 million as higher costs and lower export volumes outweighed pricing. Retail sales fell 12% and volume fell 24%, including lower shipments amid supply constraints and the exit from certain low-margin private-label business.
- For the 39-week period, gross profit and product contribution margin declined despite higher sales. Input, labor, transportation, and other manufacturing costs, lower production efficiency, and reduced potato utilization weighed on margins. Global, Retail, and Other contribution margins declined; Foodservice improved.
- Quarterly operating income also benefited from lower SG&A, down $8.9 million to $87.2 million. Year-to-date SG&A increased $11.3 million to $269.4 million, partly due to technology, recruiting, temporary labor, and product-launch spending.
Cash, debt, and liquidity
- Cash was $428.6 million at February 27, 2022, down from $783.5 million at May 30, 2021. Current assets were $1,610.7 million and current liabilities $612.9 million.
- Long-term debt and financing obligations were $2,729.2 million, including $32.2 million current and $2,697.0 million noncurrent. The company reported $994.6 million available on its $1.0 billion revolving credit facility, net of letters of credit, with no revolver borrowings outstanding.
- Year-to-date operating cash flow of $174.0 million was below capital expenditures of $217.8 million. Cash used for investing was $226.2 million and cash used for financing was $302.2 million; cash declined by $354.9 million.
- The company issued $970 million of 4.125% notes due 2030 and $700 million of 4.375% notes due 2032, and redeemed its $833 million notes due 2024 and $833 million notes due 2026. The redemptions generated a $53.3 million year-to-date debt-extinguishment loss, including $39.6 million in call premiums and $13.7 million of written-off issuance costs.
- Management said liquidity was sufficient for projected capital expenditures, debt service, and working capital needs for at least the next 12 months. It expected approximately $325 million of fiscal 2022 capital expenditures.
Outlook, risks, and unusual items
- Management expected fiscal 2022 sales to increase through higher price/mix and volume, but provided no specific numerical sales or earnings guidance in this filing. It cautioned that demand growth could be constrained by production and logistics disruptions, COVID-19 effects, and consumer inflation pressures.
- Management expected earnings to remain pressured by inflation—including potatoes, edible oils, ingredients, energy, labor, packaging, and freight—and industry supply-chain constraints. It described pricing actions, freight-policy changes, production and staffing adjustments, hiring and retention measures, and product-portfolio optimization as mitigation efforts.
- Russia’s invasion of Ukraine added uncertainty. In March 2022, the Lamb-Weston/Meijer joint venture paused expansion in Russia, began winding down Lamb Weston-branded production there, and ceased shipments into Russia. The Russian operation’s ability to continue operating may be affected by sanctions and actions of customers, suppliers, or other stakeholders. About 2% of Lamb Weston’s year-to-date net income was attributable to business conducted through the joint venture; the portion of its interest related to Russian operations was approximately $55 million at quarter-end.
- Quarterly equity-method earnings included a $19.6 million unrealized gain from currency and commodity hedge mark-to-market adjustments, primarily natural-gas derivatives at Lamb-Weston/Meijer. Year-to-date equity-method earnings included $27.5 million of such gains. These items make reported earnings more volatile.
- Other risks include raw-material availability and prices, labor shortages, freight and production constraints, foreign-exchange and interest-rate exposure, and execution of major capital projects. The company reported compliance with debt covenants and no material adverse effect expected from pending or threatened ordinary-course legal matters.
Most important facts for investors to verify
- Whether pricing can continue to offset input and distribution inflation without materially weakening demand.
- Whether supply-chain, labor, potato-crop, and export-shipping constraints ease enough to support volume recovery and improved margins.
- The potential financial and operational effects of the Russia-related disruption on Lamb-Weston/Meijer and its Russian joint venture.
- How much reported earnings depend on hedge mark-to-market movements and the one-time debt-extinguishment charge.
- Whether operating cash generation can support planned capital spending, dividends, share repurchases, and debt obligations; year-to-date capital expenditures exceeded operating cash flow.
- The pace and cost of the planned ERP and capacity projects, and the effect of refinancing on interest expense and leverage.