Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Lamb Weston produces and sells value-added frozen potato products, with operations reported in Global, Foodservice, Retail, and Other. This unaudited filing covers the 13 and 39 weeks ended February 24, 2019; comparisons are with periods ended February 25, 2018. Dollar amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q3 FY2019 | Q3 FY2018 | 39 weeks FY2019 | 39 weeks FY2018 |
|---|---|---|---|---|
| Net sales | $926.8 | $863.4 | $2,753.1 | $2,505.5 |
| Gross profit | $273.4 | $242.3 | $753.0 | $646.8 |
| Income from operations | $193.8 | $169.2 | $520.4 | $446.6 |
| Net income attributable to Lamb Weston | $141.4 | $156.8 | $368.2 | $316.8 |
| Diluted EPS | $0.95 | $1.06 | $2.42 | $2.14 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $444.4 | $310.2 |
- Quarterly sales rose 7%: volume increased 4% and price/mix 3%. Gross profit increased 13% and operating income 15%. Approximate gross and operating margins were 29.5% and 20.9%, versus 28.1% and 19.6% a year earlier.
- Quarterly attributable net income declined about 10%, despite higher operating income, largely because the prior-year quarter included a $24 million net Tax Act benefit. Excluding that benefit and prior-year separation costs, the company said net income increased $7.4 million.
- Management’s non-GAAP adjusted diluted EPS was $0.95 for Q3 versus $0.91, and $2.48 for the 39 weeks versus $2.01. Adjusted EBITDA including unconsolidated joint ventures was $253.2 million for Q3, up 7%, and $688.9 million year to date, versus $237.6 million and $617.9 million.
- Quarterly equity-method earnings fell to $14.2 million from $26.4 million. Excluding hedging mark-to-market effects, management attributed the decline primarily to higher raw potato prices and lower European joint-venture volumes following a poor crop.
- For the 39 weeks, operating cash flow was $444.4 million; capital expenditures were $244.2 million, and cash used for investing was $333.9 million, including the Australian acquisition. Cash used for financing was $147.3 million. Cash declined to $17.2 million from $55.6 million at fiscal year-end.
- At February 24, 2019, total debt and financing obligations were $2,451.7 million, including $98.7 million of short-term borrowings; cash was $17.2 million. The revolving facility had $411.7 million available. Current assets were $1,068.0 million and current liabilities $666.6 million. The company reported compliance with its debt covenants.
Material changes and notable items
- ASC 606 adoption increased Q3 sales by $18.5 million and attributable net income by $4.4 million; year-to-date sales increased $21.1 million and attributable net income $5.1 million. Management noted that about two percentage points of Q3 volume growth reflected the changed timing of customized-product revenue recognition. Prior-year comparisons were not restated.
- In November 2018, Lamb Weston agreed to acquire the remaining 50.01% of Lamb Weston BSW and began including 100% of its earnings. Cash paid was approximately $78.2 million, including an amount for expected earnings. The transaction reduced year-to-date EPS by $0.07 through noncontrolling-interest accretion, while adding an estimated approximately $3 million after-tax benefit to Q3 results.
- In December, the company acquired an Australian frozen-potato processor for $88.6 million net of cash acquired, adding about 50 million pounds of capacity. Purchase-price allocation remained preliminary and included $75.1 million of goodwill.
- The board authorized up to $250 million of share repurchases; $7.8 million of shares were repurchased during the period. Dividends paid in the first 39 weeks were $84.0 million.
Outlook, risks, and contingencies
- Management expected generally favorable demand and operating conditions in North America and key international markets for the rest of FY2019. It anticipated the Hermiston, Oregon production line, with annual capacity of about 300 million pounds, would be operational in Q4. Expected FY2019 capital expenditures were approximately $350 million, excluding acquisitions.
- Management cited higher inflation in manufacturing, commodity, transportation, and warehousing costs; increased SG&A from information-systems and capability investments; and a challenging European environment due to poor potato crops. Additional capacity across the industry could ease near-term supply constraints. Tariff and trade-barrier uncertainty could also affect international markets.
- Purchase obligations rose about 75% to $813.7 million, primarily due to a Hermiston-related operating service agreement; potato supply commitments were excluded because price and quantity were uncertain.
- Market exposures include commodity, currency, and interest-rate movements. A 1% rise in variable interest rates was estimated to increase annual interest expense by about $7.2 million. Management reported no material change in risk factors, legal matters, or off-balance-sheet arrangements, and did not expect pending legal actions to materially affect results.
- The company expected ASC 842 lease adoption in FY2020 to materially affect the balance sheet; it was still assessing income-statement and cash-flow effects. Bank covenants were not expected to be affected.
Most important facts for investors to verify
- How much reported sales and earnings growth reflects underlying volume and pricing versus ASC 606 timing, acquisitions, and hedging gains.
- Whether European crop conditions, raw potato costs, and lower joint-venture earnings persist or improve.
- Progress, cost, and timing of the Hermiston expansion, and whether expected capacity additions change industry pricing or utilization.
- Debt, cash generation, capital spending, dividends, and repurchases relative to the company’s substantial purchase obligations and liquidity needs.
- Final Australian acquisition valuation and the eventual balance-sheet impact of lease-standard adoption.