Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Lamb Weston produces, distributes, and markets value-added frozen potato products, with four reportable segments: Global, Foodservice, Retail, and Other. This filing covers the 13 weeks ended August 25, 2019, the first quarter of fiscal 2020, compared with the 13 weeks ended August 26, 2018.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $989.0 million | $914.9 million | +8% |
| Gross profit | $248.6 million | $230.6 million | +8% |
| Income from operations | $170.0 million | $152.6 million | +11% |
| Net income attributable to Lamb Weston | $115.7 million | $107.8 million | +7% |
| Diluted EPS | $0.79 | $0.73 | +$0.06 |
| Net cash from operating activities | $238.5 million | $227.9 million | +$10.6 million |
Gross margin was approximately 25.1%, versus 25.2% a year earlier; operating margin was approximately 17.2%, versus 16.7%. Reported net income was $115.7 million, compared with $111.4 million, which included $3.6 million attributable to noncontrolling interests.
- Sales volume increased 6%, including an approximately one-percentage-point acquisition benefit; price/mix increased 2%.
- Product contribution margin rose 9% to $243.8 million. Global sales increased 11%, Foodservice 3%, Retail 11%, and Other 8%.
- Equity-method investment earnings declined to $10.6 million from $19.9 million. Excluding hedge-related mark-to-market gains, the decline was $9.7 million, primarily reflecting higher raw potato prices and manufacturing costs associated with the prior year’s poor European crop.
- Cash and cash equivalents were $19.0 million. Current assets were $906.2 million and current liabilities $540.1 million. The revolving facility had $496.6 million of available capacity, net of letters of credit.
- Long-term debt and financing obligations were reported at $2,210.1 million, excluding the current portion; the balance sheet also showed $36.5 million current. The debt note lists $2,256.6 million of debt before issuance costs and current classification, plus $14.0 million of financing obligations. The company was in compliance with its credit covenants.
- Investing activities used $176.7 million, including $116.9 million for an Australian acquisition; property, plant and equipment additions were $50.3 million. Cash increased $6.8 million during the quarter.
Material changes and unusual items
- On July 2, 2019, Lamb Weston acquired an Australian frozen potato processor for $116.9 million, adding approximately 70 million pounds of production capacity. The preliminary purchase-price allocation included $106.3 million of goodwill. A separate Australian acquisition in December 2018 added approximately 50 million pounds of capacity.
- Following the November 2018 acquisition of the remaining 50.01% of Lamb Weston BSW, the company now includes 100% of that venture’s earnings. Management estimated this contributed approximately $4 million to year-over-year net income and approximately $0.03 to diluted EPS.
- Gross profit benefited from favorable price/mix and volume, but was pressured by manufacturing inefficiencies, higher maintenance costs, input-cost inflation, and depreciation from the new Hermiston, Oregon line. Commodity hedge-related gains were $1.8 million in the current quarter, versus a $5.6 million loss in the prior-year quarter.
- The company adopted the new lease standard, recognizing operating lease assets of $154.1 million and liabilities of $155.5 million. Adoption increased retained earnings by $20.5 million net of tax and did not materially affect operating results or cash flows.
- Interest expense increased $1.4 million to $28.2 million, including a $1.7 million write-off of debt issuance costs tied to refinancing. The new $300 million term loan has a June 2024 maturity and was arranged to lower the overall interest rate.
Outlook, risks, and contingencies
Management described the operating environment as generally favorable, citing continued solid demand in North America and key international markets. It cautioned that softer macroeconomic conditions and potential changes to tariffs or other trade barriers could moderate global demand growth. New industry capacity may ease near-term constraints, while commodity and manufacturing cost inflation was expected to be similar to fiscal 2019. SG&A was expected to increase with investments in enterprise resource planning, information systems, sales, marketing, innovation, and operations. Fiscal 2020 capital spending was expected to be approximately $300 million, excluding acquisitions.
Key stated risks include execution of capital projects and growth strategies, competition, international political and economic conditions, export access, acquisition integration, debt levels, raw-material availability and pricing, customer and grower relationships, joint-venture performance, regulation, litigation or product recalls, and labor and pension costs. The company disclosed that its disclosure controls were not effective because of a previously reported material weakness in internal control over financial reporting; management expected remediation before fiscal year-end 2020, subject to successful testing. Management nevertheless concluded the financial statements fairly present the company’s financial position and results. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether price/mix and volume growth can continue as global demand, macroeconomic conditions, and trade policies evolve.
- Whether higher maintenance, manufacturing, and input costs are offset by pricing, operating improvements, and capacity utilization.
- The contribution and integration progress of the Australian acquisitions and the realized benefits of the BSW consolidation.
- Debt, interest-rate exposure, liquidity, and execution of the planned approximately $300 million fiscal 2020 capital program.
- Whether management remediates and validates the disclosed material weakness in internal controls by fiscal year-end 2020.
- How much reported earnings are affected by joint-venture results and commodity or currency hedge-related gains and losses.