Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business and period: Global producer and marketer of value-added frozen potato products, reporting results for the 13 weeks ended August 30, 2020 (first quarter of fiscal 2021), compared with the 13 weeks ended August 25, 2019. The quarter was materially affected by COVID-19-related restrictions on restaurants and foodservice.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $871.5 million | $989.0 million | Down 12% |
| Gross profit | $213.8 million | $248.6 million | Down 14% |
| Gross margin | 24.5% | 25.1% | Down 0.6 percentage points |
| Income from operations | $135.7 million | $170.0 million | Down 20% |
| Operating margin | 15.6% | 17.2% | Down 1.6 percentage points |
| Net income | $89.3 million | $115.7 million | Down 23% |
| Diluted EPS | $0.61 | $0.79 | Down 23% |
| Net cash from operating activities | $250.6 million | $238.5 million | Up $12.1 million |
| Capital expenditures | $20.6 million | $50.3 million | Down $29.7 million |
| EBITDA including unconsolidated joint ventures | $201.8 million | $232.9 million | Down 13% |
Price/mix increased 2%, but volume declined 14%. Income from operations included approximately $20 million in net pandemic-related costs; the company reported approximately $21 million of such costs in EBITDA including joint ventures. Net interest expense was $30.3 million, versus $28.2 million. Equity-method earnings were $11.9 million, including a $4.7 million unrealized currency and commodity hedging gain.
Segments and material comparisons
- Global: Sales fell 14% to $447.5 million; product contribution margin fell 24% to $77.8 million, reflecting lower volume and pandemic costs.
- Foodservice: Sales fell 22% to $236.7 million; volume declined 28%, partly offset by 6% higher price/mix. Contribution margin declined 16% to $85.8 million.
- Retail: Sales rose 19% to $153.9 million, driven by increased at-home consumption and favorable mix; contribution margin rose 24% to $35.8 million.
- Other: Sales fell 9% to $33.4 million. Contribution margin increased to $13.2 million, including $7.7 million of commodity-hedging gains; excluding those adjustments, margin declined $1.1 million.
Consolidated sales fell despite improved price/mix because reduced restaurant and other out-of-home demand outweighed stronger retail demand. McDonald’s accounted for approximately 11% of sales, compared with 10% in the prior-year quarter.
Liquidity, debt, and cash flows
- Cash and cash equivalents were $1,032.5 million at August 30, down from $1,364.0 million at May 31, 2020. The company said cash was approximately $800 million at September 27.
- Short-term borrowings were $0.7 million at quarter-end, versus $498.7 million at May 31. Total debt and financing obligations were $3,061.3 million, including $52.8 million current and $2,980.8 million long-term carrying amounts after debt issuance costs.
- Operating cash flow was $250.6 million. Investing activities used $33.1 million; financing activities used $550.2 million, principally reflecting $498.1 million in net repayments of short-term borrowings and $33.6 million in dividends. Cash declined by $331.5 million overall.
- At August 30, the revolving facility had no borrowings and $495.1 million of availability, net of letters of credit. In September, the company amended the facility, increasing commitments to $750 million and extending maturity to September 2023; it used cash to repay the $271.9 million term loan due in 2021. No borrowings were outstanding under the amended facility at September 27.
- Fiscal 2021 capital expenditure estimate was increased from $140 million to $180 million. The company paid $33.6 million in quarterly dividends, temporarily suspended discretionary share repurchases, and stated it believed cash, operating cash flows, and credit facilities would meet foreseeable needs.
Outlook, risks, and notable items
Management expected COVID-19 to continue affecting demand and results through the remainder of fiscal 2021, with near-term sales volume impact likely to be material. Demand improved during the quarter but remained below pre-pandemic levels; QSR traffic recovered more strongly than full-service restaurants and non-commercial channels. Management warned that full-service and non-commercial demand could be more vulnerable as colder weather limits outdoor dining. Retail demand growth moderated during the quarter, while international recovery varied by market.
The company continued employee safety measures and actions to manage costs, including adjusting production schedules and potentially temporarily closing facilities. Pandemic costs included production inefficiencies, unused raw-potato crop contracts, employee safety and sanitation, supply-chain expenses, and sales-employee retention costs. Management reported no material changes to stated risk factors. Risks include pandemic-driven demand and supply disruption, raw-material and commodity prices, foreign exchange and interest rates, leverage and covenant compliance, customer and grower relationships, international markets, capital projects, joint ventures, and litigation.
In September, the company also amended its term-loan agreement; financial covenants remained a maximum 4.50-to-1.00 consolidated net leverage ratio and minimum 2.75-to-1.00 interest coverage ratio. At August 30, it reported compliance with its credit covenants. Ordinary-course legal claims principally involve casualty, product liability, employment, and other disputes; management did not expect pending or threatened matters to materially affect financial condition, results, or cash flows. The filing provides no numerical earnings or sales guidance.
Important facts for investors to verify
- Whether restaurant and non-commercial demand recovered or weakened after quarter-end, particularly with seasonal changes and renewed restrictions.
- Whether retail demand, volume, pricing/mix, and segment margins sustained the trends reported for the quarter.
- Cash use and debt levels following the term-loan repayment, as well as compliance with leverage and interest-coverage covenants.
- Whether the $180 million capital expenditure estimate, dividend payments, and liquidity remain consistent with operating conditions.
- The persistence and accounting effects of pandemic-related costs, hedging gains, and joint-venture earnings.