Lamb Weston Holdings, Inc. - Quarter Report: 2018 August (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended August 26, 2018

OR

For the transition period from                 to 

Commission File Number: 1-37830

LAMB WESTON HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

(208) 938-1047

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐    No ☒

As of September 28, 2018, the Registrant had 146,454,635 shares of common stock, par value $1.00 per share, outstanding.

 

 

 

 

Table of Contents

 

 

All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC’s website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.lambweston.com as soon as reasonably practicable after filing such material with the SEC.

 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Lamb Weston Holdings, Inc.

Consolidated Statements of Earnings

(unaudited, dollars in millions, except per-share amounts)

 

 

See Condensed Notes to Consolidated Financial Statements.

 

Lamb Weston Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(unaudited, dollars in millions)

 

 

See Condensed Notes to Consolidated Financial Statements.

 

Lamb Weston Holdings, Inc.

Consolidated Balance Sheets

(unaudited, dollars in millions except share data)

 

 

See Condensed Notes to Consolidated Financial Statements.

 

 

Lamb Weston Holdings, Inc.

Consolidated Statements of Cash Flows

(unaudited, dollars in millions)

 

 

See Condensed Notes to Consolidated Financial Statements.

 

Condensed Notes to Consolidated Financial Statements

 

1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Lamb Weston Holdings, Inc. (“we,” “us,” “our,” the “Company,” or “Lamb Weston”), along with its joint venture partners, is a leading global producer, distributor, and marketer of value-added frozen potato products and is headquartered in Eagle, Idaho. We have four reportable segments: Global, Foodservice, Retail, and Other. See Note 16, Segments, for additional information on our reportable segments.

 

On November 9, 2016, Lamb Weston separated from Conagra Brands, Inc. (formerly, ConAgra Foods, Inc., “Conagra”) and became an independent publicly traded company through the pro rata distribution by Conagra of 100% of the outstanding common stock of Lamb Weston to Conagra stockholders (“Separation”). Approximately 146 million shares of Lamb Weston common stock were distributed on November 9, 2016, to Conagra stockholders.

 

Basis of Presentation

 

The unaudited quarterly Consolidated Financial Statements present the financial results of Lamb Weston for the thirteen weeks ended August 26, 2018 and August 27, 2017, and have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America. The financial statements are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. The preparation of financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. Results for interim periods should not be considered indicative of results for our full fiscal year, which ends the last Sunday in May. These quarterly financial statements and condensed notes should be read together with the combined and consolidated financial statements and notes in our Annual Report on Form 10-K for the fiscal year ended May 27, 2018 (the “Form 10-K”), which we filed with the Securities and Exchange Commission on July 26, 2018.

 

Our consolidated financial statements include the accounts of Lamb Weston and all of its majority-owned subsidiaries. In addition, the accounts of all variable interest entities for which we are the primary beneficiary are included in our consolidated financial statements from the date such determination was made. Intercompany investments, accounts, and transactions have been eliminated.

 

Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current period presentation.

 

New and Recently Issued Accounting Standards

 

Accounting Standards Adopted

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires employers to disaggregate the service cost component from the other components of net benefit cost and report it in the same line item(s) as other employee compensation costs arising from services rendered during the period. All other non-service components are required to be separate from the service cost component and outside a subtotal of income from operations. These non-service components are not eligible for capitalization. Changes to the presentation of benefit costs are required to be adopted retrospectively, while changes to the capitalization of service costs into inventories are required to be adopted prospectively. We adopted the provisions of this guidance in fiscal 2019 (beginning May 28, 2018). The adoption of this standard did not have a significant impact on our financial statements. See Note 10, Employee Benefit Plans and Other Post-Retirement Benefits, for the amount of each component of net periodic pension and other post-retirement benefit costs we reported historically.

 

Effective May 28, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, and its related amendments, collectively known as Accounting Standards Codification 606 (“ASC 606”), using the modified retrospective method. See Note 2, Revenue from Contracts with Customers, for more information.

 

Accounting Standards Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update provides guidance on when implementation costs may be capitalized as an asset related to service contracts and which costs should be expensed using the same model as if the cloud computing arrangement included a software license. The amendments in this update also require companies to expense capitalized implementation costs over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. This guidance is effective for our fiscal 2021 (beginning May 30, 2021) and early adoption is permitted. The adoption of this standard is not expected to have a significant impact on our financial statements.

 

In February 2016, the FASB issued Accounting Standard Codification (“ASC”) Topic 842, Leases, which requires lessees to reflect most leases on their balance sheet as assets and obligations. We will adopt this standard on May 27, 2019, the beginning of our fiscal year 2020. The primary impact upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases as right of use assets and obligations on our Consolidated Balance Sheet. This will result in a significant increase in assets and liabilities on our Consolidated Balance Sheet. We expect to adopt this guidance using a modified retrospective transition approach on the effective date without adjusting comparative periods. We are currently implementing process changes in order to comply with the measurement and disclosure requirements.

 

There were no other accounting standards recently issued that had or are expected to have a material impact on our financial statements.

 

2.    REVENUE FROM CONTRACTS WITH CUSTOMERS

 

On May 28, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (new revenue standard),  using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to opening retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

We recorded a net increase to opening retained earnings of $13.7 million as of May 28, 2018, due to the cumulative impact of adopting the new revenue standard, with the impact related to our customized products. The impacts of the adoption of the new revenue standard on our consolidated financial statements were as follows (in millions):

 

Consolidated Statements of Earnings

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Cash Flows

 

 

Historically, we recognized revenue on a point-in-time basis in all of our segments. The trigger for point-in-time recognition is when the customer takes title to the goods and assumes the risks and rewards for the goods. The adoption of ASC 606 did not have a material impact on our revenue recognition for point-in-time product sales. However, there are certain products that we manufacture to customers’ unique recipes (customized products). Due to costs associated with reworking, transporting, and repackaging these products, we concluded that these products do not have an alternative future use at a reasonable profit margin under ASC 606.

 

The customized product sales are covered by purchase orders. Once the customized product is manufactured per the purchase order, we have an enforceable right to payment for the products. As such, the adoption of ASC 606 resulted in the acceleration of revenue for customized products at the time we have a legally enforceable right to payment since these products do not have an alternative use at a reasonable profit margin. Sales of customized products are recurring, thereby limiting the net impact of the adoption of ASC 606, and we do not expect it to have a material impact on future results of operations and cash flows.

 

Segment Information

 

Our operations are principally in the United States. With respect to operations outside of the United States, no single foreign country or geographic region was significant to consolidated operations in fiscal 2018, 2017, and 2016. While the nature of our contracts can vary based on the business, customer type, and region, in all instances it is our customary business practice to receive a valid order from the customer, in which each parties’ rights and related payment terms are clearly identifiable. The adoption of ASC 606 had the following impact on segment net sales (in millions):

 

 

Performance Obligations and Significant Judgments

 

Our principal business is to manufacture and sell frozen potato products. We also sell frozen vegetables, commercial ingredients, and appetizers. As a general rule, none of our businesses provide equipment installation or other ancillary services outside producing, packaging, and shipping products to customers.

 

Our revenue is primarily derived from fixed consideration; however, we do have contract terms that give rise to variable consideration, primarily cash discounts, coupons, and rebates, as well as other sales incentives and trade promotion allowances described in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Notes to Combined and Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K. We estimate sales incentives and trade promotions based on historical experience to record reductions in revenue which is consistent with methods outlined in ASC 606. 

 

Contracts or purchase orders with customers could include a single type of product or multiple types or grades of products. Regardless, the contracted price with the customer is agreed to at the individual product level outlined in the customer contracts or purchase orders. We do not bundle prices; however, we do negotiate with customers on pricing and rebates for the same products based on a variety of factors (e.g. level of contractual volume). We’ve concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.

 

Generally, we recognize revenue on a point in time basis when the customer takes title to the goods and assumes the risks, rewards, or control of the goods. We recognize revenue over time for customized products as they are produced and we have a purchase order providing legally enforceable right to payment for the goods.

 

Practical Expedients and Exemptions

 

As part of our adoption of the new revenue standard, the Company has elected to account for shipping and handling activities as fulfillment activities and recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset we would recognize is one year or less. The election of these practical expedients results in accounting treatments consistent with our historical accounting policies and therefore, these elections and expedients do not have a material impact on the comparability of our financial statements.

 

3.    EARNINGS PER SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share for the periods presented (dollars and shares in millions):

 

 

 

4.    RELATED PARTY TRANSACTIONS

 

Prior to the Separation, our business was included in the Commercial Foods segment of Conagra. As a result, our transactions with Conagra were considered related party transactions. In connection with the Separation, we entered into a separation and distribution agreement, as well as various other agreements that governed our relationships with Conagra following the Separation, including a transition services agreement, tax matters agreement, employee matters agreement, and trademark license agreement. Under the transition services agreement, Conagra provided a number of corporate staff services to us based on direct and indirect costs associated with rendering those services. These services included information technology, accounting, and human resource services. The thirteen weeks ended August 27, 2017, include $1.3 million of expenses related to the transition services agreement. In April 2018, we concluded our transition services agreement with Conagra.  

 

5.    INCOME TAXES

 

Income tax expense for the thirteen weeks ended August 26, 2018 and August 27, 2017, was $34.3 million and $44.1 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was approximately 23.5% and 33.3% for the thirteen weeks ended August 26, 2018 and August 27, 2017, respectively, in our Consolidated Statements of Earnings. The lower rate in the thirteen weeks ended August 26, 2018, is primarily attributable to the U.S. Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017. Notably, the Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%, assessed a one-time transition tax on earnings of non-U.S. subsidiaries that have not been taxed previously in the U.S., limited the tax deductibility of interest, provided for immediate deductions for certain new investments instead of deductions for depreciation expense over time, modified or repealed many business deductions and credits, and created new taxes on certain future foreign sourced earnings.

 

In connection with our initial analysis of the Tax Act, we recorded a provisional net tax benefit of $28.4 million in fiscal 2018. The net tax benefit consisted of a net tax benefit for the re-measurement of U.S. deferred taxes of $39.9

million and an expense for the transition tax of $11.5 million. The estimates reported in fiscal 2018 were not adjusted in the period ended August 26, 2018. There have been no changes or clarification in guidance issued or interpretations or assumptions we have made that caused a change to the estimates reported in fiscal 2018. These estimates may change due to, among other things, further clarification of existing guidance that may be issued by U.S. taxing authorities or regulatory bodies and/or changes in interpretations and assumptions we have preliminarily made. We will continue to analyze the Tax Act to finalize its financial statement impact, including the mandatory deemed repatriation of foreign earnings, re-measurement of deferred taxes and all other provisions of the legislation and will record the effects of any changes to provisional amounts in the period we complete our analysis or are able to make a reasonable estimate, but no later than the measurement period allowed by Staff Accounting Bulletin 118, or December 2018.

 

Income Taxes Paid

 

Income taxes paid, net of refunds, were $10.5 million and $30.0 million in the thirteen weeks ended August 26, 2018 and August 27, 2017, respectively.

 

Unrecognized Tax Benefits

 

There have been no material changes to the unrecognized tax benefits disclosed in Note 4, Income Taxes, of the Notes to Combined and Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K, and we do not expect any significant changes to unrecognized tax benefits in the next 12 months. 

 

 

6.    INVENTORIES

 

Inventories are valued at the lower of cost (determined using the first-in, first-out method) or net realizable value and include all costs directly associated with manufacturing products: materials, labor, and manufacturing overhead. The components of inventories were as follows (dollars in millions):

 

 

 

 

7.    PROPERTY, PLANT AND EQUIPMENT

 

The components of property, plant, and equipment were as follows (dollars in millions):

 

 

Depreciation expense was $36.8 million and $29.3 million for the thirteen weeks ended August 26, 2018 and August 27, 2017. At August 26, 2018 and May 27, 2018, purchases of property, plant and equipment included in accounts payable were $29.2 million and $27.9 million, respectively.

 

The amounts of interest capitalized in construction in progress for the thirteen weeks ended August 26, 2018 and August 27, 2017, were $1.4 million and $2.3 million, respectively.

 

8.    GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

 

Changes in the carrying amount of goodwill as allocated to each segment were as follows (dollars in millions):

 

 

Other identifiable intangible assets were as follows (dollars in millions):

 

 

 

 

 

 

 

9.    INVESTMENTS IN JOINT VENTURES

 

Variable Interest Entity - Consolidated

 

We hold a 49.99% interest in Lamb Weston BSW, a potato processing venture with Ochoa Ag Unlimited Foods, Inc. (“Ochoa”). Commencing on June 1, 2018, we have a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (the “call option”). We are also currently subject to a contractual obligation to purchase all of Ochoa’s equity investment in Lamb Weston BSW at the option of Ochoa (the “put option”). The purchase prices under the call option and the put option (collectively, the “options”) are based on the book value of Ochoa’s equity interest at the date of exercise, as modified by an agreed-upon rate of return for the holding period of the investment balance. The agreed-upon rate of return varies depending on the circumstances under which the options are exercised. In June 2018, we provided notice to exercise the call option for approximately $65 million, however, we continue to negotiate final terms and the noncontrolling interest has not been conveyed. At August 26, 2018, we recorded $57.2 million on our consolidated balance sheet for the redeemable noncontrolling interest, which was based on the value of Ochoa’s put option. Amounts we pay above the current recorded value will result in accretion of the redemption value. The accretion will not impact net income, but for purposes of calculating earnings per share, will reduce net income available to common shareholders. 

 

Lamb Weston and Lamb Weston BSW purchase potatoes from a shareholder of Ochoa. The aggregate amounts of such purchases were $17.5 million and $16.8 million for the thirteen weeks ended August 26, 2018 and August 27, 2017, respectively. Additionally, Lamb Weston and Lamb Weston BSW utilize storage facilities and water treatment services from a shareholder of Ochoa. The aggregate amounts of such costs were $1.2 million and $1.3 million for the thirteen weeks ended August 26, 2018 and August 27, 2017, respectively. We provide all sales and marketing services to Lamb Weston BSW. Under certain circumstances, we could be required to compensate Ochoa for lost profits resulting from significant production shortfalls.

 

Lamb Weston BSW is a variable interest entity, and we have determined that we are the primary beneficiary of the entity. Accordingly, we consolidate the financial statements of Lamb Weston BSW. The carrying amounts of Lamb Weston BSW’s assets were $85.5 million and $94.2 million, and liabilities were $42.4 million and $47.0 million, at August 26, 2018 and May 27, 2018, respectively. As of August 26, 2018 and May 27, 2018, the carrying amounts of Lamb Weston BSW’s redeemable noncontrolling interest was $57.2 million and $55.6 million, respectively.

 

Variable Interest Entity - Not Consolidated

 

We hold a 50% interest in Lamb-Weston/RDO Frozen (“Lamb Weston RDO”), a potato processing venture based in the United States. We also hold a 50% ownership interest in Lamb-Weston/Meijer v.o.f. (“Lamb-Weston/Meijer”), a joint venture with Meijer Frozen Foods B.V., which is headquartered in the Netherlands and manufactures and sells frozen potato products principally in Europe. We have determined that Lamb Weston RDO and Lamb-Weston/Meijer are variable interest entities, but Lamb Weston is not the primary beneficiary. Lamb Weston does not have the power to direct the activities that most significantly impact the economic performance of the joint ventures. Accordingly, we do not consolidate the financial statements of these entities. We use equity method accounting to account for our ownership in these entities.

 

The carrying value of our equity method investments, which include Lamb Weston RDO and Lamb-Weston/Meijer, at August 26, 2018 and May 27, 2018, was $221.7 million and $219.8 million, respectively. These amounts are included in “Equity method investments” in our Consolidated Balance Sheets. For the thirteen weeks ended August 26, 2018 and August 27, 2017, we had sales to our equity method investments of $6.5 million and $5.0 million and payments to our equity method investments of $2.7 million and $1.0 million, respectively. Total dividends from our equity method investments were $16.6 million and $12.9 million for the thirteen weeks ended August 26, 2018 and August 27, 2017, respectively.

 

For more information about our investments in joint ventures, see Note 6, Investments in Joint Ventures, of the Notes to Combined and Consolidated Financial statements in “Part II, Item 8. Financial Statements and Supplementary Data” of the Form 10-K.

 

10.   EMPLOYEE BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFITS

 

Lamb Weston has defined pension benefit plans for certain hourly employees. The plans covering these hourly employees are open to new participants. We also have a plan for retiree health care benefits that is closed to new entrants with only certain current active participants being eligible for benefits upon retirement and completion of a specified number of years of creditable service.

 

We also have a nonqualified defined benefit pension plan that provides unfunded supplemental retirement benefits to certain executives. This plan is closed to new participants and pension benefit accruals are frozen for active participants.

 

The components of net periodic benefit cost were as follows (dollars in millions):

 

 

We will make pension plan contributions sufficient to fund our actuarially determined requirements, generally equal to the minimum amounts required by the Employee Retirement Income Security Act. We may also elect to make additional voluntary contributions. During the thirteen weeks ended August 26, 2018, we made $0.1 million of contributions to our qualified plan. We are required to make $0.3 million of minimum qualified contributions during the remainder of fiscal 2019.

 

Pension Cost Financial Statement Presentation

 

Pension costs recognized in the Consolidated Statements of Earnings were as follows (dollars in millions):

 

 

 

11.   ACCRUED LIABILITIES

 

The components of accrued liabilities were as follows (dollars in millions):

 

 

 

12.   DEBT AND FINANCING OBLIGATIONS

 

At August 26, 2018 and May 27, 2018, our debt, including financing obligations was as follows (dollars in millions):

 

 

At August 26, 2018, we had no borrowings outstanding under our Revolving Credit Facility (the “Facility”) and $496.6 million of availability under the Facility, which is net of outstanding letters of credit of $3.4 million. For the thirteen weeks ended August 26, 2018, borrowings under the Facility ranged from zero to $29.5 million and the weighted average interest rate for our outstanding borrowings under the Facility was 3.6%.

 

For the thirteen weeks ended August 26, 2018 and August 27, 2017, we paid $7.3 million and $6.1 million of interest on debt, respectively.

 

For more information on our debt and financing obligations, interest rates, and debt covenants, see Note 9, Debt and Financing Obligations, of the Notes to Combined and Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K.

 

13.   STOCK-BASED COMPENSATION

 

On October 29, 2016, our Board of Directors adopted the Lamb Weston Holdings, Inc. 2016 Stock Plan (“Stock Plan”). Under the Stock Plan, we may grant eligible employees and non-employee directors awards of stock options, cash, and stock-settled restricted stock units (“RSUs”), restricted stock awards, other awards based on our common stock, and performance-based long-term incentive awards (“Performance Shares”). At August 26, 2018, we had 10.0 million shares authorized under the Stock Plan, and 7.8 million shares were available for future grant.

 

 

The following table summarizes stock option activity for the thirteen weeks ended August 26, 2018:

 

 

 

The following table summarizes RSU and Performance Share activity for the thirteen weeks ended August 26, 2018: