UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended November 26, 2017August 30, 2020
OR
For
For the transition period from to
Commission File Number: 1-37830
LAMB WESTON HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 61-1797411 |
(State or other jurisdiction of |
| (I.R.S. Employer |
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599 S. Rivershore Lane |
| 83616 |
(Address of principal executive offices) |
| (Zip Code) |
(208) (208) 938-1047
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate
Securities registered pursuant to Section 12(b) of the Act:
| | | |||
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | |
Common Stock, $1.00 par value | | | LW | | New York Stock Exchange |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):
| | | | | | ||||
Large accelerated filer |
| | Accelerated filer | ☐ | | | |||
Non-accelerated filer |
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| Smaller reporting company | ☐ | | | |||
Emerging growth company | ☐ | | | | | |
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 December 29, 2017,September 30, 2020, the Registrant had 146,224,085146,339,062 shares of common stock, par value $1.00 per share, outstanding.
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| Management's Discussion and Analysis of Financial Condition and Results of Operations |
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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.
2
PART I — FINANCIAL INFORMATION
Lamb Weston Holdings, Inc.
Condensed Combined and Consolidated Statements of Earnings
(unaudited, dollars in millions, except per-shareper share amounts)
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| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
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| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net sales |
| $ | 824.6 |
| $ | 790.7 |
| $ | 1,642.1 |
| $ | 1,567.0 |
Cost of sales |
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| 615.4 |
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| 591.8 |
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| 1,236.2 |
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| 1,187.5 |
Gross profit |
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| 209.2 |
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| 198.9 |
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| 405.9 |
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| 379.5 |
Selling, general and administrative expenses |
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| 69.4 |
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| 73.4 |
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| 128.5 |
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| 129.0 |
Income from operations |
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| 139.8 |
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| 125.5 |
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| 277.4 |
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| 250.5 |
Interest expense, net |
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| 27.4 |
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| 6.8 |
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| 52.6 |
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| 8.3 |
Income before income taxes and equity method earnings |
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| 112.4 |
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| 118.7 |
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| 224.8 |
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| 242.2 |
Income tax expense |
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| 41.5 |
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| 33.9 |
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| 85.6 |
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| 84.9 |
Equity method investment earnings |
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| 12.1 |
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| 6.2 |
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| 32.1 |
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| 16.8 |
Net income |
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| 83.0 |
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| 91.0 |
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| 171.3 |
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| 174.1 |
Less: Income attributable to noncontrolling interests |
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| 6.4 |
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| 3.8 |
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| 11.3 |
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| 7.3 |
Net income attributable to Lamb Weston Holdings, Inc. |
| $ | 76.6 |
| $ | 87.2 |
| $ | 160.0 |
| $ | 166.8 |
Earnings per share |
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Basic |
| $ | 0.52 |
| $ | 0.59 |
| $ | 1.08 |
| $ | 1.14 |
Diluted |
| $ | 0.52 |
| $ | 0.59 |
| $ | 1.08 |
| $ | 1.13 |
Dividends declared per common share |
| $ | 0.1875 |
| $ | — |
| $ | 0.3750 |
| $ | — |
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| | Thirteen Weeks Ended | ||||
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| August 30, |
| August 25, | ||
| | 2020 | | 2019 | ||
Net sales | | $ | 871.5 | | $ | 989.0 |
Cost of sales | | | 657.7 | | | 740.4 |
Gross profit | | | 213.8 | | | 248.6 |
Selling, general and administrative expenses | | | 78.1 | | | 78.6 |
Income from operations | | | 135.7 | | | 170.0 |
Interest expense, net | | | 30.3 | | | 28.2 |
Income before income taxes and equity method earnings | |
| 105.4 | |
| 141.8 |
Income tax expense | | | 28.0 | | | 36.7 |
Equity method investment earnings | | | 11.9 | | | 10.6 |
Net income | | $ | 89.3 | | $ | 115.7 |
Earnings per share | | | | | | |
Basic | | $ | 0.61 | | $ | 0.79 |
Diluted | | $ | 0.61 | | $ | 0.79 |
See Condensed Notes to Condensed Combined and Consolidated Financial Statements.
3
Lamb Weston Holdings, Inc.
Condensed Combined and Consolidated Statements of Comprehensive Income (Loss)
(unaudited, dollars in millions)
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| Thirteen Weeks Ended |
| Thirteen Weeks Ended |
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| November 26, 2017 |
| November 27, 2016 |
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| Tax |
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| Tax |
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| Pre-Tax |
| (Expense) |
| After-Tax |
| Pre-Tax |
| (Expense) |
| After-Tax |
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| Amount |
| Benefit |
| Amount |
| Amount |
| Benefit |
| Amount |
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Net income |
| $ | 124.5 |
| $ | (41.5) |
| $ | 83.0 |
| $ | 124.9 |
| $ | (33.9) |
| $ | 91.0 |
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Other comprehensive income (loss): |
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Unrealized currency translation gains (losses) |
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| (0.4) |
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| — |
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| (0.4) |
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| (11.9) |
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| — |
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| (11.9) |
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Comprehensive income (loss) |
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| 124.1 |
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| (41.5) |
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| 82.6 |
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| 113.0 |
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| (33.9) |
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| 79.1 |
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Less: Comprehensive income attributable to noncontrolling interests |
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| 6.4 |
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| — |
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| 6.4 |
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| 3.8 |
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| — |
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| 3.8 |
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Comprehensive income (loss) attributable to Lamb Weston |
| $ | 117.7 |
| $ | (41.5) |
| $ | 76.2 |
| $ | 109.2 |
| $ | (33.9) |
| $ | 75.3 |
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| Twenty-Six Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||||||||
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| November 26, 2017 |
| November 27, 2016 | ||||||||||||||
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| Tax |
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| Tax |
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| Pre-Tax |
| (Expense) |
| After-Tax |
| Pre-Tax |
| (Expense) |
| After-Tax | ||||||
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| Amount |
| Benefit |
| Amount |
| Amount |
| Benefit |
| Amount | ||||||
Net income |
| $ | 256.9 |
| $ | (85.6) |
| $ | 171.3 |
| $ | 259.0 |
| $ | (84.9) |
| $ | 174.1 |
Other comprehensive income (loss): |
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Reclassification of pension and post-retirement benefits out of accumulated other comprehensive income (loss) |
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| (0.1) |
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| — |
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| (0.1) |
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| — |
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| — |
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| — |
Unrealized currency translation gains (losses) |
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| 14.8 |
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| — |
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| 14.8 |
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| (13.0) |
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| — |
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| (13.0) |
Comprehensive income (loss) |
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| 271.6 |
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| (85.6) |
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| 186.0 |
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| 246.0 |
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| (84.9) |
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| 161.1 |
Less: Comprehensive income attributable to noncontrolling interests |
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| 11.3 |
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| 11.3 |
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| 7.3 |
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| 7.3 |
Comprehensive income (loss) attributable to Lamb Weston |
| $ | 260.3 |
| $ | (85.6) |
| $ | 174.7 |
| $ | 238.7 |
| $ | (84.9) |
| $ | 153.8 |
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| | Thirteen Weeks Ended | | Thirteen Weeks Ended | ||||||||||||||
| | August 30, 2020 | | August 25, 2019 | ||||||||||||||
| | | | | Tax | | | | | | | | Tax | | | | ||
| | Pre-Tax | | (Expense) | | After-Tax | | Pre-Tax | | (Expense) | | After-Tax | ||||||
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| Amount |
| Benefit |
| Amount |
| Amount |
| Benefit |
| Amount | ||||||
Net income | | $ | 117.3 | | $ | (28.0) | | $ | 89.3 | | $ | 152.4 | | $ | (36.7) | | $ | 115.7 |
Other comprehensive income (loss): | |
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Reclassification of post-retirement benefits out of accumulated other comprehensive income | |
| 0.1 | | | — | |
| 0.1 | |
| 0.2 | | | — | |
| 0.2 |
Unrealized currency translation gains (losses) | |
| 41.9 | |
| (2.5) | |
| 39.4 | |
| (9.1) | |
| — | |
| (9.1) |
Comprehensive income (loss) | | $ | 159.3 | | $ | (30.5) | | $ | 128.8 | | $ | 143.5 | | $ | (36.7) | | $ | 106.8 |
See Condensed Notes to Condensed Combined and Consolidated Financial Statements.
4
Lamb Weston Holdings, Inc.
Condensed Consolidated Balance Sheets
(unaudited, dollars in millions, except share data)
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| November 26, |
| May 28, | ||
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| 2017 |
| 2017 | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 71.1 |
| $ | 57.1 |
Receivables, less allowance for doubtful accounts of $0.6 and $0.5 |
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| 224.4 |
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| 185.2 |
Inventories |
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| 662.9 |
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| 525.0 |
Prepaid expenses and other current assets |
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| 45.9 |
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| 90.9 |
Total current assets |
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| 1,004.3 |
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| 858.2 |
Property, plant and equipment, net |
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| 1,331.5 |
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| 1,271.2 |
Goodwill |
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| 134.4 |
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| 133.0 |
Intangible assets, net |
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| 36.3 |
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| 37.2 |
Equity method investments |
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| 198.6 |
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| 178.6 |
Other assets |
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| 9.8 |
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| 7.4 |
Total assets |
| $ | 2,714.9 |
| $ | 2,485.6 |
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
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Current liabilities: |
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Short-term borrowings |
| $ | 88.2 |
| $ | 22.0 |
Current portion of long-term debt and financing obligations |
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| 39.3 |
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| 37.9 |
Accounts payable |
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| 342.7 |
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| 295.0 |
Accrued liabilities |
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| 176.3 |
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| 200.5 |
Total current liabilities |
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| 646.5 |
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| 555.4 |
Long-term liabilities: |
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Long-term debt, excluding current portion |
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| 2,353.2 |
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| 2,365.0 |
Deferred income taxes |
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| 115.8 |
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| 90.5 |
Other noncurrent liabilities |
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| 74.3 |
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| 71.2 |
Total long-term liabilities |
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| 2,543.3 |
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| 2,526.7 |
Commitments and contingencies |
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Redeemable noncontrolling interest |
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| 56.5 |
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| 50.7 |
Stockholders' equity: |
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Common stock of $1.00 par value, 600,000,000 shares authorized; 146,257,130 and 146,080,901 shares issued |
|
| 146.3 |
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| 146.1 |
Additional distributed capital |
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| (906.7) |
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| (904.8) |
Retained earnings |
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| 225.8 |
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| 121.0 |
Accumulated other comprehensive income (loss) |
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| 5.4 |
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| (9.3) |
Treasury stock, at cost, 49,691 and 6,143 common shares |
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| (2.2) |
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| (0.2) |
Total stockholders' deficit |
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| (531.4) |
|
| (647.2) |
Total liabilities and stockholders’ equity |
| $ | 2,714.9 |
| $ | 2,485.6 |
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| | August 30, | | May 31, | ||
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| 2020 |
| 2020 | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 1,032.5 | | $ | 1,364.0 |
Receivables, less allowance for doubtful accounts of $1.1 and $1.3 | |
| 334.8 | |
| 342.1 |
Inventories | |
| 470.6 | |
| 486.7 |
Prepaid expenses and other current assets | |
| 53.1 | |
| 109.8 |
Total current assets | |
| 1,891.0 | |
| 2,302.6 |
Property, plant and equipment, net | |
| 1,511.5 | |
| 1,535.0 |
Operating lease assets | | | 158.4 | | | 167.0 |
Equity method investments | | | 275.0 | | | 250.2 |
Goodwill | |
| 323.3 | |
| 303.8 |
Intangible assets, net | |
| 38.5 | |
| 38.3 |
Other assets | |
| 74.9 | |
| 65.4 |
Total assets | | $ | 4,272.6 | | $ | 4,662.3 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Current liabilities: | |
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Short-term borrowings | | $ | 0.7 | | $ | 498.7 |
Current portion of long-term debt and financing obligations | | | 52.8 | | | 48.8 |
Accounts payable | |
| 259.3 | |
| 244.4 |
Accrued liabilities | |
| 236.8 | |
| 233.0 |
Total current liabilities | |
| 549.6 | |
| 1,024.9 |
Long-term liabilities: | | | | | | |
Long-term debt and financing obligations, excluding current portion | |
| 2,980.8 | |
| 2,992.6 |
Deferred income taxes | | | 157.2 | | | 152.5 |
Other noncurrent liabilities | |
| 253.0 | |
| 252.3 |
Total long-term liabilities | | | 3,391.0 | | | 3,397.4 |
Commitments and contingencies | | | | | | |
Stockholders' equity: | |
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Common stock of $1.00 par value, 600,000,000 shares authorized; 147,430,952 and 146,993,751 shares issued | |
| 147.4 | |
| 147.0 |
Additional distributed capital | |
| (856.5) | |
| (862.9) |
Retained earnings | |
| 1,119.9 | |
| 1,064.6 |
Accumulated other comprehensive loss | |
| (1.0) | |
| (40.5) |
Treasury stock, at cost, 1,106,009 and 954,858 common shares | | | (77.8) | | | (68.2) |
Total stockholders' equity | |
| 332.0 | |
| 240.0 |
Total liabilities and stockholders’ equity | | $ | 4,272.6 | | $ | 4,662.3 |
See Condensed Notes to Condensed Combined and Consolidated Financial Statements.
5
Lamb Weston Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(unaudited, dollars in millions, except shares and per share data)
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| | Thirteen Weeks Ended August 30, 2020 and August 25, 2019 | |||||||||||||||||||
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| Additional |
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| Accumulated |
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| | Common Stock, | | Common | | Treasury | | Paid-in | | | | | Other | | | | |||||
| | net of Treasury | | Stock | | Stock | | (Distributed) | | Retained | | Comprehensive | | Total | |||||||
| | Shares |
| Amount |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity | |||||||
Balance at May 31, 2020 | | | 146,038,893 | | $ | 147.0 | | $ | (68.2) | | $ | (862.9) | | $ | 1,064.6 |
| $ | (40.5) |
| $ | 240.0 |
Dividends declared, $0.23 per share | | | — | | | — | | | — | | | — | | | (33.7) | | | — | | | (33.7) |
Common stock issued | | | 437,201 | | | 0.4 | | | — | | | 0.2 | | | — | | | — | | | 0.6 |
Stock-settled, stock-based compensation expense | | | — | | | — | | | — | | | 6.0 | | | — | | | — | | | 6.0 |
Common stock withheld to cover taxes | | | (151,151) | | | — | | | (9.6) | | | — | | | — | | | — | | | (9.6) |
Other | | | — | | | — | | | — | | | 0.2 | | | (0.3) | | | — | | | (0.1) |
Comprehensive income | | | — | |
| — | | | — | | | — | | | 89.3 | | | 39.5 | | | 128.8 |
Balance at August 30, 2020 | | | 146,324,943 | | $ | 147.4 | | $ | (77.8) | | $ | (856.5) | | $ | 1,119.9 | | $ | (1.0) | | $ | 332.0 |
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Balance at May 26, 2019 | | | 146,069,033 | | $ | 146.7 | | $ | (39.3) | | $ | (890.3) | | $ | 803.6 | | $ | (25.3) | | $ | (4.6) |
Adoption of ASC 842 leases | | | — | | | — | | | — | | | — | | | 20.5 | | | — | | | 20.5 |
Dividends declared, $0.20 per share | | | — | | | — | | | — | | | — | | | (29.2) | | | — | | | (29.2) |
Common stock issued | | | 105,410 | | | 0.1 | | | — | | | (0.1) | | | — | | | — | | | — |
Stock-settled, stock-based compensation expense | | | — | | | — | | | — | | | 5.4 | | | — | | | — | | | 5.4 |
Repurchase of common stock and common stock withheld to cover taxes | | | (111,721) | | | — | | | (7.4) | | | — | | | — | | | — | | | (7.4) |
Other | | | — | | | — | | | — | | | 0.3 | | | 0.5 | | | — | | | 0.8 |
Comprehensive income (loss) | | | — | | | — | | | — | | | — | | | 115.7 | | | (8.9) | | | 106.8 |
Balance at August 25, 2019 | | | 146,062,722 | | $ | 146.8 | | $ | (46.7) | | $ | (884.7) | | $ | 911.1 | | $ | (34.2) | | $ | 92.3 |
See Condensed Combined and Notes to Consolidated Financial Statements
6
Lamb Weston Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited, dollars in millions)
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| Twenty-Six Weeks Ended | ||||
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| November 26, |
| November 27, | ||
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| 2017 |
| 2016 | ||
Cash flows from operating activities |
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Net income |
| $ | 171.3 |
| $ | 174.1 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization of intangibles and debt issuance costs |
|
| 66.6 |
|
| 52.1 |
Stock-based compensation expense |
|
| 10.2 |
|
| 5.2 |
Earnings of joint ventures in excess of distributions |
|
| (9.3) |
|
| (2.8) |
Deferred income taxes |
|
| 19.4 |
|
| (8.3) |
Other |
|
| (2.2) |
|
| (0.4) |
Changes in operating assets and liabilities: |
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|
|
Receivables |
|
| (39.2) |
|
| (45.8) |
Inventories |
|
| (137.9) |
|
| (117.0) |
Income taxes payable/receivable, net |
|
| 6.5 |
|
| — |
Prepaid expenses and other current assets |
|
| 36.3 |
|
| 41.4 |
Accounts payable |
|
| 89.1 |
|
| 59.8 |
Accrued liabilities |
|
| (28.6) |
|
| 4.1 |
Net cash provided by operating activities |
| $ | 182.2 |
| $ | 162.4 |
Cash flows from investing activities |
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Additions to property, plant and equipment |
|
| (154.0) |
|
| (127.8) |
Proceeds from sale of assets |
|
| 0.1 |
|
| 2.0 |
Additions to other long-term assets |
|
| (1.8) |
|
| — |
Net cash used for investing activities |
| $ | (155.7) |
| $ | (125.8) |
Cash flows from financing activities |
|
|
|
|
|
|
Proceeds from short-term borrowings, net |
|
| 66.1 |
|
| 80.0 |
Proceeds from issuance of debt |
|
| — |
|
| 798.1 |
Debt repayments |
|
| (19.3) |
|
| (3.4) |
Net transfers to Conagra |
|
| — |
|
| (38.8) |
Dividends paid |
|
| (54.8) |
|
| — |
Cash distributions paid to Conagra at Separation |
|
| — |
|
| (823.5) |
Payments of debt issuance costs |
|
| — |
|
| (9.6) |
Cash distributions paid to noncontrolling interest |
|
| (6.7) |
|
| (5.6) |
Other |
|
| (1.2) |
|
| — |
Net cash used for financing activities |
| $ | (15.9) |
| $ | (2.8) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 3.4 |
|
| (0.8) |
Net increase in cash and cash equivalents |
|
| 14.0 |
|
| 33.0 |
Cash and cash equivalents, beginning of the period |
|
| 57.1 |
|
| 36.4 |
Cash and cash equivalents, end of period |
| $ | 71.1 |
| $ | 69.4 |
| | | | | | |
| | Thirteen Weeks Ended | ||||
|
| August 30, |
| August 25, | ||
| | 2020 | | 2019 | ||
Cash flows from operating activities | | | | | | |
Net income | | $ | 89.3 | | $ | 115.7 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization of intangibles and debt issuance costs | | | 46.9 | | | 46.0 |
Stock-settled, stock-based compensation expense | | | 6.0 | | | 5.4 |
Earnings of joint ventures in excess of distributions | | | (9.2) | | | (0.5) |
Deferred income taxes | | | 1.9 | | | 10.3 |
Other | | | 10.8 | | | 5.6 |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
Receivables | | | 9.1 | | | (27.0) |
Inventories | | | 18.0 | | | 35.6 |
Income taxes payable/receivable, net | | | 29.0 | | | 24.8 |
Prepaid expenses and other current assets | | | 38.0 | | | 43.3 |
Accounts payable | | | 18.7 | | | 7.7 |
Accrued liabilities | | | (7.9) | | | (28.4) |
Net cash provided by operating activities | | $ | 250.6 | | $ | 238.5 |
Cash flows from investing activities | | | | | | |
Additions to property, plant and equipment | | | (20.6) | | | (50.3) |
Acquisition of business, net of cash acquired | | | — | | | (116.9) |
Other | | | (12.5) | | | (9.5) |
Net cash used for investing activities | | $ | (33.1) | | $ | (176.7) |
Cash flows from financing activities | | | | | | |
Repayments of short-term borrowings, net | |
| (498.1) | |
| (8.3) |
Dividends paid | | | (33.6) | | | (29.2) |
Repurchase of common stock and common stock withheld to cover taxes | | | (9.6) | | | (7.4) |
Repayments of debt and financing obligations | | | (9.2) | | | (309.0) |
Proceeds from issuance of debt | | | — | | | 299.3 |
Other | | | 0.3 | | | (0.3) |
Net cash used for financing activities | | $ | (550.2) | | $ | (54.9) |
Effect of exchange rate changes on cash and cash equivalents | | | 1.2 | | | (0.1) |
Net increase (decrease) in cash and cash equivalents | |
| (331.5) | |
| 6.8 |
Cash and cash equivalents, beginning of the period | | | 1,364.0 | | | 12.2 |
Cash and cash equivalents, end of period | | $ | 1,032.5 | | $ | 19.0 |
See Condensed Notes to Condensed Combined and Consolidated Financial Statements.
67
Condensed Notes to Condensed Combined and Consolidated Financial StatementsStatements
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lamb Weston Holdings, Inc. (“we,” “us,” “our,” the “Company,” or “Lamb Weston”), along with itsour 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 four4 reportable segments: Global, Foodservice, Retail, and Other. See Note 16,13, 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”). Each Conagra stockholder of record on November 1, 2016 (“record date”) received one share of Lamb Weston common stock for every three shares of Conagra common stock held on the record date. As a result, approximately 146 million shares of Lamb Weston common stock were distributed on November 9, 2016, to Conagra stockholders. Information related to the Separation and its effect on our financial statements are discussed throughout these Notes to Condensed Combined and Consolidated Financial Statements.
Basis of Presentation
The accompanying unaudited quarterly Condensed Combined and Consolidated Financial Statements present the financial results of Lamb Weston for the thirteen weeks ended August 30, 2020 and twenty-six week periods ended November 26, 2017 and November 27, 2016,August 25, 2019, and have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America. TheThese financial statements are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considerswe consider necessary for a fair presentation of such financial statements.statements and consist only of normal recurring adjustments. The preparation of financial statements involves the use of estimates and accruals. ActualThe inputs into our judgements and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. The actual results that we experience may varydiffer materially 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. In addition, the
These financial statements for periods prior to the Separation may not reflect what our results of operations would have been had we operated as a separate stand-alone company and may not be indicative of our future results of operations. These quarterly financial statements andcondensed 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 28, 201731, 2020 (the “Form 10-K”), which we filed with the Securities and Exchange Commission on July 25, 2017.28, 2020.
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 combined and consolidated financial statements from the date such determination was made. Intercompany investments, accounts, and transactions have been eliminated.
Certain amounts in the prior period combined financial statements have been reclassified to conform with the current period presentation.
Prior to Separation
Prior to the Separation from Conagra on November 9, 2016 (the “Separation Date”), the combined financial statements were prepared using the specific accounting records of the entities which comprise the business of Lamb Weston. In some cases, principally foreign locations, those business activities were contained within entities that were engaged in other business activities of Conagra. Because a direct ownership relationship did not exist among the various units comprising Lamb Weston, Conagra and its subsidiaries’ equity investment is shown in lieu of stockholders’ equity in the combined financial statements. Intercompany investments, accounts, and transactions between the various legal entities comprising Lamb Weston have been eliminated in the combined financial statements.
Prior to the Separation Date, Lamb Weston’s combined financial statements included accounts specifically attributed to Lamb Weston and a portion of Conagra’s shared corporate general and administrative expenses. These shared services included, but were not limited to, legal, finance, internal audit, financial reporting, income tax accounting and
7
advisory, insurance, information technology, treasury, and human resources functions. Shared corporate general and administrative expenses not specifically identifiable to Lamb Weston were allocated to Lamb Weston. The allocations were determined on a basis which we consider being reasonable reflections of the utilization of services provided by Conagra. However, these allocations may not reflect the costs and expenses that Lamb Weston would have incurred as a stand-alone public company. A more detailed discussion of the relationship with Conagra, including a description of the costs which have been allocated to Lamb Weston and the methods of cost allocation, is included in Note 3, Related Party Transactions.
As further described in Note 3, prior to the Separation Date, Lamb Weston engaged in various intercompany transactions with Conagra and its affiliates, including the sale and purchase of certain products, the procurement of certain materials and services, cash transfers related to Conagra’s centralized cash management process and expense allocations. Changes in parent companies’ equity investment arising from these cash transactions are presented as “Net transfers to Conagra” in financing activities in the Condensed Combined and Consolidated Statements of Cash Flows as of November 27, 2016, notwithstanding that advances from parent companies were utilized to fund Lamb Weston’s working capital requirements.
New and Recently Issued Accounting StandardsPronouncements
Recently Adopted Accounting Pronouncements
Receivables – Credit Losses
In March 2017,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Compensation—Retirement Benefits2016-13, Financial Instruments – Credit Losses (Topic 715)326): ImprovingMeasurement of Credit Losses on Financial Instruments. This guidance replaces the Presentationexisting incurred loss impairment model by requiring the use of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires employersforward-looking information 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. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. These components will not be eligible for capitalization in assets. Employers are also required to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. This ASU is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance.assess expected credit losses. We will adoptadopted this standard at theguidance on June 1, 2020 (the beginning of fiscal 20192021), and doit did not expect it to have a materialsignificant impact on our financial statements or condensed notes to consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In January 2017,March 2020, the FASB issued ASU 2017-04, Intangibles - Goodwill2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and Other (Topic 350): Simplifying the TestLondon Interbank Offered Rate (“LIBOR”). This guidance includes practical expedients for Goodwill Impairment.contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASUguidance is intended to simplify the accounting for goodwill impairment by removing the requirement to perform a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This new standard willeffective immediately and generally can be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning afterthrough December 15, 2019. Early adoption is permitted after January 1, 2017.31, 2022. We do not expectare currently evaluating the potential impact of this guidance to have a material impactstandard on our financial statements.
Defined Benefit Plans
In August 2016,2018, the FASB issued ASU 2016-15, Statement2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. This update removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of Cash Flows (Topic 230): Classification
8
disclosures, and Cash Payments.adds disclosure requirements identified as relevant to defined benefit pension and other postretirement plans. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. It is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with earlyour fiscal 2021. The adoption permitted. We doof this standard is not expect this guidanceexpected to have a materialsignificant impact on our notes to consolidated financial statements.
In February 2016, the FASB issued FASB Accounting Standard Codification (“ASC”) Topic 842, Leases, which requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018. Early adoption is permitted. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. We expect the adoption will result in a material increase in the assets and liabilities on our consolidated balance sheets due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. We are continuing to evaluate the magnitude and other potential impacts of the standard on our financial statements and notes to the financial statements.
8
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was issued to achieve a consistent application of revenue recognition within the United States, resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue, and cash flows arising from contracts with customers. We expect to adopt this ASU beginning May 28, 2018, using the modified retrospective transition method. We do not expect the net impact of the standard to have a material impact on our consolidated financial statements. While we are continuing to assess the impacts of the standard, we currently believe the most significant impact relates to our accounting for sales of customer-specific branded potato products. We expect revenue related to sales of Lamb Weston branded products to remain substantially unchanged. Specifically, under the new standard, we expect to recognize revenue when an enforceable right to payment arises, which for sales of our customer-specific branded products, is prior to recognition based on shipping terms under current GAAP. As part of our adoption, we are identifying and preparing to implement changes to our accounting policies and practices, business processes, and controls to support the new requirements for revenue recognition and disclosure.
There were no other accounting standardspronouncements recently issued that had or are expected to have a material impact on our financial statements.
2. 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)millions, except per share amounts):
| | | | | | |
| | Thirteen Weeks Ended | ||||
|
| August 30, |
| August 25, | ||
| | 2020 | | 2019 | ||
Numerator: |
| |
|
| |
|
Net income | | $ | 89.3 | | $ | 115.7 |
| | | | | | |
Denominator: | |
|
| |
|
|
Basic weighted average common shares outstanding | |
| 146.3 | |
| 146.2 |
Add: Dilutive effect of employee incentive plans (a) | |
| 0.8 | |
| 0.8 |
Diluted weighted average common shares outstanding | |
| 147.1 | |
| 147.0 |
| | | | | | |
Earnings per share | | | | | | |
Basic | | $ | 0.61 | | $ | 0.79 |
Diluted | | $ | 0.61 | | $ | 0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Lamb Weston Holdings, Inc. |
| $ | 76.6 |
| $ | 87.2 |
| $ | 160.0 |
| $ | 166.8 |
Less: Increase in redemption value of noncontrolling interests in excess of earnings allocated |
|
| 0.5 |
|
| 0.5 |
|
| 1.3 |
|
| 0.9 |
Net income available to Lamb Weston common stockholders |
| $ | 76.1 |
| $ | 86.7 |
| $ | 158.7 |
| $ | 165.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (a): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
| 146.3 |
|
| 146.0 |
|
| 146.3 |
|
| 146.0 |
Add: Dilutive effect of employee incentive plans (b) |
|
| 0.6 |
|
| 0.3 |
|
| 0.5 |
|
| 0.3 |
Diluted weighted average common shares outstanding |
|
| 146.9 |
|
| 146.3 |
|
| 146.8 |
|
| 146.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.52 |
| $ | 0.59 |
| $ | 1.08 |
| $ | 1.14 |
Diluted |
| $ | 0.52 |
| $ | 0.59 |
| $ | 1.08 |
| $ | 1.13 |
(a) |
|
|
| Potentially dilutive shares of common stock from employee incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of outstanding restricted stock units and performance awards. As of |
3. INCOME TAXES
9
3. RELATED PARTY TRANSACTIONS
Prior to the Separation, our businessIncome tax expense 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 govern our relationships with Conagra going forward, including a transition services agreement, tax matters agreement, employee matters agreement, and trademark license agreement. Under the transition services agreement, Conagra provides a number of corporate staff services to us based on direct and indirect costs associated with rendering those services. These services include information technology, accounting, and human resource services. The thirteen weeks ended November 26, 2017 and November 27, 2016, include $0.8$28.0 million and $0.4 million, respectively, of expenses related to the transition services agreement. The twenty-six weeks ended November 26, 2017 and November 27, 2016, include $2.1 million and $0.4 million, respectively, of expenses related to the transition services agreement. The transition services agreement expires in April 2018.
Prior to the Separation Date, Conagra allocated certain selling, general and administrative costs to Lamb Weston based on specific metrics correlated with the cost of services it provided or costs incurred on behalf of the Company (e.g., employee headcount, net sales, and square footage of office space). Allocations based upon these metrics resulted in $3.4 million and $7.7 million for the thirteen and twenty-six weeks ended November 27, 2016, respectively, of selling, general and administrative costs allocated to Lamb Weston. Beginning in fiscal 2017, certain departmental charges, which were previously allocated, were directly absorbed by Lamb Weston.
The above allocations were consistent with historical allocations for Lamb Weston; however, Conagra did not historically allocate certain other corporate costs to its various segments. For any remaining indirect corporate costs that supported Lamb Weston, Conagra allocated additional selling, general and administrative costs using an equal weighting between Lamb Weston product contribution margin (net sales less cost of sales and advertising and promotion expenses) and Lamb Weston total assets relative to consolidated Conagra product contribution margin and total assets. Allocations of indirect corporate costs were $8.4 million and $17.3 million for the thirteen and twenty-six weeks ended November 27, 2016, respectively, of selling, general and administrative costs. Lamb Weston considers such allocations to have been made on a reasonable basis. The allocations discussed above ceased after the Separation Date.
For the period up to the Separation Date, our Condensed Combined and Consolidated Statements of Earnings for the thirteen weeks and twenty-six weeks ended November 27, 2016, includes only the interest expense of the legal entities of Lamb Weston, and does not include any allocated interest expense or third-party debt of Conagra. See Note 11, Debt and Financing Obligations, for a discussion of indebtedness incurred in connection with the Separation. The interest expense included in Lamb Weston’s results of operations was $27.4 million and $6.8$36.7 million for the thirteen weeks ended November 26, 2017August 30, 2020 and November 27, 2016, respectively; and $52.6 million and $8.3 million for the twenty-six weeks ended November 26, 2017 and November 27, 2016, respectively.
Included in net sales are sales to Conagra of $4.0 million and $8.4 million for the thirteen and twenty-six weeks ended November 27, 2016,August 25, 2019, respectively. The related cost of sales were $3.4 million and $7.0 million for the thirteen and twenty-six weeks ended November 27, 2016, respectively. Lamb Weston also made purchases from Conagra of $2.6 million and $7.9 million during the thirteen and twenty-six weeks, ended November 27, 2016 respectively.
4. INCOME TAXES
For periods ended on or prior to the Separation Date, we were a member of Conagra’s consolidated group and our U.S. taxableeffective income was included in the consolidated U.S. federal income tax return of Conagra as well as in returns filed by Conagra with certain state and local taxing jurisdictions. Our foreign income tax returns are filed on a separate company basis.
In connection with the Separation, we entered into a tax matters agreement with Conagra. Under the tax matters agreement, Conagra is generally responsible for all taxes associated with consolidated federal and state filings (and will be entitled to all related refunds of taxes) imposed on Conagra and its subsidiaries (including subsidiaries that were transferred to Lamb Weston at Separation) with respect to the taxable periods (or portions thereof) ended on or prior to
10
November 9, 2016. Also, pursuant to this agreement, Lamb Weston is generally responsible for all taxes associated with separately filed foreign, state, and local tax filings (and will be entitled to all related refunds of taxes) imposed on Lamb Weston and its subsidiaries with respect to the taxable periods (or portions thereof) ended on or prior to November 9, 2016.
Income tax expense for the thirteen weeks ended November 26, 2017 and November 27, 2016, was $41.5 million and $33.9 million, respectively, and for the twenty-six weeks ended November 26, 2017 and November 27, 2016, was $85.6 million and $84.9 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 33%23.9% and 27%24.1% for the thirteen weeks ended November 26, 2017August 30, 2020 and November 27, 2016, respectively; and 33% for both the twenty-six weeks ended November 26, 2017 and November 27, 2016,August 25, 2019, respectively, in our Condensed Combined and Consolidated Statements of Earnings. The effective tax rate varies from the U.S. federal statutory tax rate of 35%21% principally due to the impact of U.S. state taxes, the domestic manufacturers’ deduction, foreign taxes, permanent differences, and other permanent differences. The lower rate indiscrete items.
Income Taxes Paid
Income tax refunds, net of taxes paid were $2.8 million during the thirteen weeks ended November 27, 2016, is primarily attributable to an increase in Separation-related costs determined to be deductible, as well as a discrete benefit arising from a change in estimate relating to fiscal 2016 foreign taxes.August 30, 2020. Income taxes paid, net of refunds, were $1.5 million during the thirteen weeks ended August 25, 2019.
Unrecognized Tax Benefits
There have been no material changes to the unrecognized tax benefits disclosed in Note 4,3, 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. Income taxes paid, net
9
4. INVENTORIES
On December 22, 2017, the President signed tax reform legislation (the “Act”), which is generally effective January 1, 2018. The Act lowers the U.S. corporate tax rate from 35 percent to 21 percent, which will result in a blended effective tax rate for us in fiscal 2018; allows for immediate write-off of qualified property placed in service after September 27, 2017, and before January 1, 2023, with a five year phase down by 20 percent per calendar year beginning in 2023; repeals the domestic production deduction for tax years after our fiscal 2018; and alters the landscape of taxation of foreign operations, executive compensation and employer provided benefits, among other provisions. In addition, the legislation has one-time financial statement tax effects including a tax benefit from remeasuring our net U.S. deferred tax liabilities on our balance sheet and a transition tax on post-1986 unremitted earnings of our non-U.S. subsidiaries. We are currently evaluating the impact of the Act. While we have not completed our evaluation of the potential impacts, we expect it to decrease our fiscal 2018 effective tax rate and cash taxes.
5. INVENTORIES
Inventories are valued at the lower of cost (determined using the first-in, first-out method) or marketnet 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):
|
|
|
|
|
|
| ||||||
|
| November 26, |
| May 28, | ||||||||
|
| 2017 |
| 2017 | ||||||||
| | | | | | | ||||||
|
| August 30, | | May 31, | ||||||||
| | 2020 |
| 2020 | ||||||||
Raw materials and packaging |
| $ | 205.9 |
| $ | 84.5 | | $ | 67.2 |
| $ | 106.2 |
Finished goods |
|
| 426.4 |
|
| 409.7 | |
| 363.2 |
|
| 339.2 |
Supplies and other |
|
| 30.6 |
|
| 30.8 | |
| 40.2 |
|
| 41.3 |
Inventories |
| $ | 662.9 |
| $ | 525.0 | | $ | 470.6 |
| $ | 486.7 |
11
6.5. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment were as follows (dollars in millions):
|
|
|
|
|
|
| ||||||
|
| November 26, |
| May 28, | ||||||||
|
| 2017 |
| 2017 | ||||||||
| | | | | | | ||||||
|
| August 30, | | May 31, | ||||||||
| | 2020 |
| 2020 | ||||||||
Land and land improvements |
| $ | 138.9 |
| $ | 139.8 | | $ | 107.2 | | $ | 107.2 |
Buildings, machinery, and equipment |
|
| 2,169.9 |
|
| 1,917.7 | |
| 2,688.9 | |
| 2,670.1 |
Furniture, fixtures, office equipment, and other |
|
| 65.6 |
|
| 62.6 | |
| 112.1 | |
| 107.1 |
Construction in progress |
|
| 71.9 |
|
| 229.4 | |
| 60.0 | |
| 58.3 |
Property, plant and equipment, at cost |
|
| 2,446.3 |
|
| 2,349.5 | |
| 2,968.2 | |
| 2,942.7 |
Less accumulated depreciation |
|
| (1,114.8) |
|
| (1,078.3) | |
| (1,456.7) | |
| (1,407.7) |
Property, plant and equipment, net |
| $ | 1,331.5 |
| $ | 1,271.2 | | $ | 1,511.5 | | $ | 1,535.0 |
Depreciation expense was $33.9$44.9 million and $25.8$42.6 million for the thirteen weeks ended November 26, 2017August 30, 2020 and November 27, 2016, respectively; and $63.2 million and $50.6 million for the twenty-six weeks ended November 26, 2017 and November 27, 2016,August 25, 2019, respectively. At November 26, 2017August 30, 2020 and May 28, 2017,31, 2020, purchases of property, plant and equipment included in accounts payable were $19.0 $6.2million and $60.4$9.9 million, respectively.
The amounts of interestInterest capitalized inwithin construction in progress for the thirteen weeks ended November 26, 2017 and November 27, 2016, were $0.5 million and $1.2 million, respectively, and $2.8 million and $1.9 million for the twenty-six weeks ended November 26, 2017 and November 27, 2016, respectively.
7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Changes in the carrying amount of goodwill were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Global |
| Foodservice |
| Retail |
| Other |
| Total | |||||
Balance at May 28, 2017 |
| $ | 74.8 |
| $ | 42.8 |
| $ | 10.9 |
| $ | 4.5 |
| $ | 133.0 |
Foreign currency translation adjustment |
|
| 1.4 |
|
| — |
|
| — |
|
| — |
|
| 1.4 |
Balance at November 26, 2017 |
| $ | 76.2 |
| $ | 42.8 |
| $ | 10.9 |
| $ | 4.5 |
| $ | 134.4 |
Other identifiable intangible assets were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 26, 2017 |
| May 28, 2017 | ||||||||||||
|
| Weighted |
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Average |
| Gross |
|
|
|
| Average |
| Gross |
|
|
| ||
|
| Useful Life |
| Carrying |
| Accumulated |
| Useful Life |
| Carrying |
| Accumulated | ||||
|
| (in years) |
| Amount |
| Amortization |
| (in years) |
| Amount |
| Amortization | ||||
Non-amortizing intangible assets (a) |
| n/a |
| $ | 18.0 |
| $ | — |
| n/a |
| $ | 18.0 |
| $ | — |
Amortizing intangible assets (b) |
| 14 |
|
| 35.0 |
|
| 16.7 |
| 14 |
|
| 34.9 |
|
| 15.7 |
|
|
|
| $ | 53.0 |
| $ | 16.7 |
|
|
| $ | 52.9 |
| $ | 15.7 |
|
|
|
|
Total intangible assets, net of amortization, excluding goodwill, as of November 26, 2017 and May 28, 2017, were $36.3 million and $37.2 million, respectively. Foreign intangible assets are affected by foreign currency translation.
12
8. INVESTMENTS IN JOINT VENTURES
Variable Interest Entity - Consolidated
We hold a 49.99% interest in Lamb Weston BSW, LLC (“Lamb Weston BSW”), a potato processing venture with Ochoa Ag Unlimited Foods, Inc. (“Ochoa”). 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. Commencing on June 1, 2018, or on an earlier date under certain circumstances, we have a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (the “call option”). We are 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.
Our variable interests in Lamb Weston BSW include an equity investment in the venture, the options, certain fees paid to Lamb Weston by Lamb Weston BSW for sales and marketing services, the contingent obligation related to production shortfalls and the contingent obligation to fund additional equity contributions or purchase the underlying notes associated with certain Lamb Weston BSW financings. Our maximum exposure to loss as a result of our involvement with this venture is equal to our equity investment in the venture, the balance of any promissory notes extended to the venture which are subject to our purchase obligation, and the amount, if any, by which the put option exercise price exceeds the fair value of the non-controlling interest in Lamb Weston BSW upon its exercise. Also, in the event of a production shortfall, we could be required to compensate Ochoa for lost profits. It is not possible to determine the maximum exposure to losses from the potential exercise of the put option or from potential production shortfalls. However, we do not currently expect to incur material losses resulting from these potential exposures.
Lamb Weston and Lamb Weston BSW purchase potatoes from a shareholder of Ochoa. The aggregate amounts of such purchases were $12.5 million for both the thirteen weeks ended November 26, 2017August 30, 2020 and November 27, 2016; and $29.3 million and $36.6 million for the twenty-six weeks ended November 26, 2017 and November 27, 2016, 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 for both the thirteen weeks ended November 26, 2017 and November 27, 2016; and $2.5 million and $2.4 million for the twenty-six weeks ended November 26, 2017 and November 27, 2016, respectively.August 25, 2019, was $0.5million.
Lamb Weston BSW is a variable interest entity, and we have determined that we are the primary beneficiary of the entity. We consolidate the financial statements of Lamb Weston BSW. The amounts presented for Lamb Weston BSW in the table below exclude intercompany balances eliminated in consolidation and include the non-controlling interest at
13
redemption value as reported in our Condensed Consolidated Balance Sheets (dollars in millions):
|
|
|
|
|
|
|
|
| November 26, |
| May 28, | ||
|
| 2017 |
| 2017 | ||
Cash and equivalents |
| $ | 19.8 |
| $ | 10.9 |
Receivables, less allowance for doubtful accounts (a) |
|
| 0.2 |
|
| 0.1 |
Inventories |
|
| 2.0 |
|
| 1.9 |
Prepaid expenses and other current assets |
|
| 0.1 |
|
| 0.4 |
Property, plant and equipment, net |
|
| 48.2 |
|
| 49.4 |
Goodwill |
|
| 18.8 |
|
| 18.8 |
Intangible assets, net |
|
| 4.1 |
|
| 4.5 |
Total assets |
| $ | 93.2 |
| $ | 86.0 |
Current portion of long-term debt |
| $ | 1.6 |
| $ | 1.5 |
Accounts payable |
|
| 14.2 |
|
| 11.6 |
Accrued liabilities |
|
| 2.0 |
|
| 2.0 |
Long-term debt, excluding current portion |
|
| 27.2 |
|
| 28.0 |
Total liabilities |
| $ | 45.0 |
| $ | 43.1 |
Redeemable noncontrolling interest (b) |
| $ | 56.5 |
| $ | 50.7 |
|
|
|
|
6. INVESTMENTS IN JOINT VENTURES
The liabilities recognized as a result of consolidating the Lamb Weston BSW entity do not represent additional claims on Lamb Weston’s general assets. In connection with the Lamb Weston BSW long-term debt, we have entered into an agreement with the financial institution, which provides that in the event that Lamb Weston BSW fails to comply with certain financial covenants or repayment terms, we are required to either make certain additional equity contributions to Lamb Weston BSW or to purchase the underlying notes. The assets recognized as a result of consolidating Lamb Weston BSW are the property of the venture and are not available to Lamb Weston for any other purpose.
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 provide all sales and marketing services to Lamb Weston RDO, and we receive a fee for these services based on a percentage of the net sales of the venture. The fees received were $3.4 million for both the thirteen weeks ended November 26, 2017 and November 27, 2016 and $6.9 million for both the twenty-six weeks ended November 26, 2017 and November 27, 2016. These fees are recorded as a reduction to selling, general, and administrative expense. Our ownership interest in this venture is included in “Equity method investments” in the Condensed Consolidated Balance Sheets. The balance of Lamb Weston’s investment was $17.4 million and $17.2 million at November 26, 2017 and May 28, 2017, respectively, representing our maximum exposure to loss as a result of our involvement with this venture. The capital structure of Lamb Weston RDO includes owners’ equity of $34.9 million and $34.4 million as of November 26, 2017 and May 28, 2017, respectively; and term borrowings from banks of $38.8 million and $59.3 million as of November 26, 2017 and May 28, 2017, respectively.
We have determined that Lamb Weston RDO is a variable interest entity, 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 venture. Accordingly, we do not consolidate the financial statements of this entity. We use equity method accounting to account for our ownership in Lamb Weston RDO.
14
Other Investments
We 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 accounthold 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% interest in Lamb Weston Alimentos Modernos S.A. (“LWAMSA”), a joint venture with Sociedad Commercial del Plata, which is headquartered in Argentina. This joint venture manufactures and sells frozen potato products principally in South America. These investments are accounted for this investment using equity method accounting.
Transactions with Joint Ventures
The carrying value of our equity method investments, which includeincludes Lamb-Weston/Meijer, Lamb Weston RDO, and Lamb-Weston/Meijer,LWAMSA at November 26, 2017August 30, 2020 and May 28, 2017,31, 2020, was $198.6$275.0 million and $178.6$250.2 million, respectively. These amountsrespectively, and are included in “Equity method investments” inon our Condensed Consolidated Balance Sheets. For the thirteen weeks ended November 26, 2017August 30, 2020 and November 27, 2016,August 25, 2019, we had sales to our equity method investments of $3.0 million and $7.3 million, respectively, and payments to our equity method investments of $5.9$1.1 million and $3.0 million, respectively, and $7.2 million and $3.6 million, respectively; and for the twenty-six weeks ended November 26, 2017 and November 27, 2016, we had sales and payments to our equity method investments of $11.0 million and $5.5 million, respectively, and $14.7 million and $6.7$3.2 million, respectively. Total dividends from our equity method investments were $9.9$2.7 million and $5.6$10.2 million for the thirteen weeks ended November 26, 2017August 30, 2020 and November 27, 2016, respectively;August 25, 2019, respectively.
10
We have an agreement to share the costs of our global enterprise resource planning (“ERP”) system and $22.8related software and services with Lamb-Weston/Meijer. Under the terms of the agreement, Lamb-Weston/Meijer will pay us for the majority of their portion of the ERP costs in 5 equal annual payments, plus interest, beginning in the period the system is deployed at Lamb-Weston/Meijer. As of August 30, 2020, Lamb-Weston/Meijer’s portion of the ERP costs totaled $15.7 million. During fiscal 2021 and 2020, we received $2.0 million and $13.9$1.0 million forfrom Lamb-Weston/Meijer, and we had $12.6 million and $12.0 million of receivables recorded on our Consolidated Balance Sheets as of August 30, 2020 and May 31, 2020. Of the twenty-six$12.6 million and $12.0 million of receivables, $0.3 and $1.8 million were recorded in “Receivables, net” and $12.3 million and $10.2 million were recorded in “Other assets,” respectively. We expect the total receivable from Lamb-Weston/Meijer to increase as development and implementation of the ERP system progresses.
7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The following table presents changes in goodwill balances, by segment, during the thirteen weeks ended November 26, 2017 and November 27, 2016, respectively.August 30, 2020 (dollars in millions):
| | | | | | | | | | | | | | | |
|
| Global |
| Foodservice |
| Retail |
| Other |
| Total | |||||
Balance at May 31, 2020 | | $ | 245.6 | | $ | 42.8 | | $ | 10.9 | | $ | 4.5 | | $ | 303.8 |
Foreign currency translation adjustment | | | 19.5 | | | — | | | — | | | — | |
| 19.5 |
Balance at August 30, 2020 | | $ | 265.1 | | $ | 42.8 | | $ | 10.9 | | $ | 4.5 | | $ | 323.3 |
9. EMPLOYEE BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFITS
Prior to Separation
Prior to the Separation Date, Conagra offered plans that were shared amongst its businesses, including Lamb Weston. The participation of Lamb Weston employees in Conagra’s plans until the Separation Date, is reflected in the financial statements as though Lamb Weston participated in a multiemployer plan with Conagra. Accordingly, a proportionate share of the service cost associated with these plans is reflected in the combined and consolidated financial statements. Additionally, the remaining cost elements (e.g., interest) are included in Conagra’s allocations of indirect costs (see Note 3, Related Party Transactions).
In Connection With and/or After Separation
In connection with the Separation, Conagra retained the pension liabilities related to Lamb Weston participants in the Conagra salaried employee pension plan and the vested benefits attributable to Lamb Weston hourly employee plan participants. On the Separation Date, Conagra transferred $7.4 million of qualified and nonqualified pension liabilities related to nonqualified benefits and Lamb Weston hourly participants’ unvested benefits. The liabilities were transferred to a new defined benefit pension plan for certain hourly employees that continue to accrue benefits and a new nonqualified defined benefit pension plan that provides unfunded supplemental retirement benefits to certain executives. The hourly plan is open to new participants. NoOther identifiable intangible assets were transferred to the plans.
For the period after the Separation Date, the components of net periodic benefit cost for our pension plan was as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | August 30, 2020 | | May 31, 2020 | ||||||||||||||||||
|
| Weighted |
| | |
| | |
| | |
| Weighted |
| | |
| | |
| | |
| | Average | | Gross | | | | | | | | Average | | Gross | | | | | | | ||
| | Useful Life | | Carrying | | Accumulated | | Intangible | | Useful Life | | Carrying | | Accumulated | | Intangible | ||||||
| | (in years) | | Amount | | Amortization | | Assets, Net | | (in years) | | Amount | | Amortization | | Assets, Net | ||||||
Non-amortizing intangible assets (a) |
| n/a |
| $ | 18.0 |
| $ | — |
| $ | 18.0 |
| n/a |
| $ | 18.0 |
| $ | — |
| $ | 18.0 |
Amortizing intangible assets (b) |
| 11 |
| | 43.3 |
| | (22.8) |
| | 20.5 |
| 11 |
| | 42.4 |
| | (22.1) |
| | 20.3 |
|
| |
| $ | 61.3 |
| $ | (22.8) |
| $ | 38.5 |
| |
| $ | 60.4 |
| $ | (22.1) |
| $ | 38.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Service cost |
| $ | 1.9 |
| $ | 0.4 |
| $ | 3.9 |
| $ | 0.4 |
Interest cost |
|
| 0.1 |
|
| — |
|
| 0.2 |
|
| — |
Expected return on plan assets |
|
| (0.1) |
|
| — |
|
| (0.2) |
|
| — |
Net periodic benefit cost |
| $ | 1.9 |
| $ | 0.4 |
| $ | 3.9 |
| $ | 0.4 |
Components of net periodic benefit cost for our post-retirement benefits were insignificant for the periods after the Separation Date.
15
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 are required to make $1.7 million of minimum qualified contributions during the remainder of fiscal 2018.
Pension Cost Financial Statement Presentation
Allocated pension costs (benefits) incurred by Conagra prior to November 9, 2016 and pension costs recognized after the Separation Date are included in the Condensed Combined and Consolidated Statements of Earnings as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Cost of sales (a) |
| $ | 1.9 |
| $ | 2.6 |
| $ | 3.9 |
| $ | 5.5 |
Selling, general and administrative expenses (a) |
|
| — |
|
| (2.8) |
|
| — |
|
| (5.5) |
Total |
| $ | 1.9 |
| $ | (0.2) |
| $ | 3.9 |
| $ | — |
(a) |
|
|
(b) | Amortizing intangible assets are principally composed of licensing agreements, brands, and customer relationships. Amortization expense was $0.7 million and $0.5 million for the thirteen weeks ended August 30, 2020 and August 25, 2019, respectively. Foreign intangible assets are affected by foreign currency translation. |
10.
8. ACCRUED LIABILITIES
The components of accrued liabilities were as follows (dollars in millions):
|
|
|
|
|
|
| ||||||
|
| November 26, |
| May 28, | ||||||||
|
| 2017 |
| 2017 | ||||||||
| | | | | | | ||||||
|
| August 30, | | May 31, | ||||||||
| | 2020 |
| 2020 | ||||||||
Compensation and benefits |
| $ | 56.5 |
| $ | 80.1 | | $ | 51.5 |
| $ | 74.5 |
Accrued trade promotions |
|
| 42.8 |
|
| 40.5 | | | 36.7 | | | 42.5 |
Dividends payable |
|
| 27.4 |
|
| 27.4 | ||||||
Accrued interest | | | 34.0 | | | 8.7 | ||||||
Dividends payable to shareholders | | | 33.7 | | | 33.6 | ||||||
Current portion of operating lease liabilities | | | 28.8 | | | 28.4 | ||||||
Franchise, property, and sales and use taxes |
|
| 10.9 |
|
| 9.8 | |
| 12.1 |
|
| 9.4 |
Accrued interest |
|
| 10.0 |
|
| 10.2 | ||||||
Income taxes payable |
|
| 4.4 |
|
| 4.7 | | | 11.0 | | | 1.3 |
Other |
|
| 24.3 |
|
| 27.8 | |
| 29.0 |
|
| 34.6 |
Accrued liabilities |
| $ | 176.3 |
| $ | 200.5 | | $ | 236.8 |
| $ | 233.0 |
1611
11.9. DEBT AND FINANCING OBLIGATIONS
At November 26, 2017August 30, 2020 and May 28, 2017,31, 2020, our debt, including financing obligations was as follows (dollars in millions):
| | | | | | |
|
| August 30, |
| May 31, | ||
| | 2020 | | 2020 | ||
Short-term borrowings: | | | | | | |
Revolving credit facility | | $ | — | | $ | 495.0 |
Other credit facilities | | | 0.7 | | | 3.7 |
| | | 0.7 | | | 498.7 |
Long-term debt: | | | | | | |
Term loan facility, due 2021 | | | 271.9 |
| | 276.6 |
Term A-1 loan facility, due 2024 | | | 285.0 | | | 288.7 |
Term A-2 loan facility, due 2025 | | | 325.0 | | | 325.0 |
4.625% senior notes, due 2024 | |
| 833.0 |
|
| 833.0 |
4.875% senior notes, due 2026 | | | 833.0 | | | 833.0 |
4.875% senior notes, due 2028 | | | 500.0 | | | 500.0 |
| | | 3,047.9 | | | 3,056.3 |
Financing obligations: | | | | | | |
Lease financing obligations due on various dates through 2040 (a) | |
| 12.7 |
|
| 13.3 |
| | | 12.7 | | | 13.3 |
| | | | | | |
Total debt and financing obligations | |
| 3,061.3 |
|
| 3,568.3 |
Debt issuance costs | | | (27.0) | | | (28.2) |
Short-term borrowings | | | (0.7) | | | (498.7) |
Current portion of long-term debt and financing obligations | |
| (52.8) |
|
| (48.8) |
Long-term debt and financing obligations, excluding current portion | | $ | 2,980.8 |
| $ | 2,992.6 |
|
|
|
|
|
|
|
|
| November 26, |
| May 28, | ||
|
| 2017 |
| 2017 | ||
Short-term borrowings: |
|
|
|
|
|
|
Revolving credit facility |
| $ | 62.2 |
| $ | 4.5 |
Other credit facilities |
|
| 26.0 |
|
| 17.5 |
|
|
| 88.2 |
|
| 22.0 |
Long-term debt: |
|
|
|
|
|
|
Term loan facility, due 2021 |
|
| 649.7 |
|
| 666.6 |
4.625% senior notes, due 2024 |
|
| 833.0 |
|
| 833.0 |
4.875% senior notes, due 2026 |
|
| 833.0 |
|
| 833.0 |
LIBOR plus a margin (1.90% to 2.30%) and 4.34%, installment notes due on various dates through June 2031 |
|
| 28.8 |
|
| 29.5 |
|
|
| 2,344.5 |
|
| 2,362.1 |
Financing obligations: |
|
|
|
|
|
|
4.35% lease financing obligation due May 2030 |
|
| 67.5 |
|
| 68.2 |
2.00% to 3.32% lease financing obligations due on various dates through 2040 |
|
| 13.3 |
|
| 7.7 |
|
|
| 80.8 |
|
| 75.9 |
|
|
|
|
|
|
|
Total debt and financing obligations |
|
| 2,513.5 |
|
| 2,460.0 |
Debt issuance costs |
|
| (32.8) |
|
| (35.1) |
Short-term borrowings |
|
| (88.2) |
|
| (22.0) |
Current portion of long-term debt and financing obligations |
|
| (39.3) |
|
| (37.9) |
Long-term debt, excluding current portion |
| $ | 2,353.2 |
| $ | 2,365.0 |
(a) | The interest rates on our lease financing obligations range from 2.31% to 4.10%at both August 30, 2020 and May 31, 2020. |
Revolving Credit Facility
At November 26, 2017,August 30, 2020, we had $62.2 million of0 borrowings outstanding under our Revolving Credit Facility (the “Facility”). At November 26, 2017, we had $436.0revolving credit facility and $495.1 million of availability under the Facility,facility, which is net of outstanding letters of credit of $1.8$4.9 million. For the twenty-sixthirteen weeks ended November 26, 2017,August 30, 2020, borrowings under the Facilityfacility ranged from $0.0 million0 to $77.8$495.0 million and the weighted average interest rate for our outstanding borrowings under the Facilityfacility was 3.5%1.68%.
For the thirteen and twenty-six weeks ended November 26, 2017, weWe paid $45.5 million and $51.6$5.7 million of interest on debt respectively.for both the thirteen weeks ended August 30, 2020 and August 25, 2019.
For more informationOn September 17, 2020, we amended our credit agreement, dated as of November 9, 2016, relating to our existing revolving credit facility discussed above (“Amended Revolving Credit Facility”). The Amended Revolving Credit Facility, among other things, increases the aggregate principal amount to $750.0 million and extends the maturity date to September 17, 2023. In addition, we may add incremental term loan facilities, increase commitments and/or add new revolving commitments in an aggregate principal amount not to exceed the sum of (A) the greater of $600.0 million or 75% of our Consolidated EBITDA (as defined in the Amended Revolving Credit Facility) and (B) an amount based on our debtconsolidated net leverage ratio. Borrowings under the Amended Revolving Credit Facility bear interest at LIBOR or the Base Rate (each as defined in the Amended Revolving Credit Facility) plus an applicable rate ranging from 1.25% to 2.25% for LIBOR-based loans and financing obligations,from 0.25% to 1.25% for Base Rate-based loans, depending upon our consolidated net leverage ratio. In addition to paying interest, rates,we will pay an annual commitment fee for undrawn amounts at a rate of 0.20% to 0.40%, depending on our consolidated net leverage ratio. The Amended Revolving Credit Facility requires us to maintain a consolidated net leverage ratio no greater than 5.25 to 1.00, decreasing ratably to 4.50 to 1.00 on February 26, 2022 through maturity; and debt covenants, see Note 9, Debtan interest coverage ratio no less than 2.75 to 1.00.
12
In connection with the Amended Revolving Credit Facility, we repaid the outstanding $271.9 million term loan facility due in November 2021 with cash on hand. As of our fiscal month ended September 27, 2020, 0 borrowings were outstanding under the Amended Revolving Credit Facility.
Term A-1 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.A-2 Loan Facilities
12. STOCK-BASED COMPENSATION
On October 29, 2016,September 23, 2020, in connection with the Amended Revolving Credit Facility, we amended the credit agreement, dated as of June 28, 2019, relating to our Term A-1 and A-2 Loan Facilities (“Term Loan Facilities”), to, among other things, modify the Term Loan Facilities to make conforming changes to the affirmative and negative covenants under the Term Loan Facilities. The financial covenants under the Term Loan Facilities remain unchanged, requiring a consolidated net leverage ratio no greater than 4.50 to 1.00 and an interest coverage ratio no less than 2.75 to 1.00.
10. STOCK-BASED COMPENSATION
The Compensation Committee (“the Committee”) of 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 awardsadministers our stock compensation plan. The Committee, in its discretion, authorizes grants of stock options, cash, and stock-settled restricted stock units (“RSUs”), restricted stockperformance awards other awards based on our common stock, and performance-based long-term incentive awardspayable upon the attainment of specified performance goals (“Performance shares”Shares”). At November 26, 2017,, dividend equivalents, and other stock-based awards. During the thirteen weeks ended August 30, 2020, we had 10.0granted 0.2 million shares authorized under the Stock Plan, and 7.9RSUs at an average grant date fair value of $59.45. As of August 30, 2020, 7.4 million shares were available for future grant.grant under the plan.
17
The weighted average Black-Scholes assumptions for stock options granted during the twenty-six weeks ended November 26, 2017 were:
|
| ||
|
| ||
|
| ||
|
|
|
|
The following table summarizes stock option activity for the twenty-six weeks ended November 26, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
| Weighted- |
|
|
| ||
|
|
|
|
| Average |
| Average |
| Aggregate | |||
|
|
|
|
| Exercise |
| Remaining |
| Intrinsic | |||
|
|
|
|
| Price |
| Contractual |
| Value (a) | |||
|
| Shares |
| (per share) |
| Term (Years) |
| (in millions) | ||||
Outstanding at May 28, 2017 |
|
| 720,827 |
|
| 25.90 |
|
|
|
|
|
|
Granted |
|
| 56,496 |
|
| 43.82 |
|
|
|
|
|
|
Exercised |
|
| (39,887) |
|
| 18.71 |
|
|
|
|
|
|
Forfeited/cancelled |
|
| — |
|
| — |
|
|
|
|
|
|
Outstanding at November 26, 2017 |
|
| 737,436 |
| $ | 27.66 |
|
| 7.3 |
| $ | 19.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at November 26, 2017 |
|
| 486,394 |
| $ | 24.20 |
|
| 6.6 |
| $ | 14.7 |
|
|
The following table summarizes RSU and Performance Share activity for the twenty-six weeks ended November 26, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-Settled |
| Cash-Settled |
| Performance Shares | ||||||||||||
|
|
|
|
| Weighted- |
|
|
|
| Weighted- |
|
|
|
| Weighted- | |||
|
|
|
|
| Average |
|
|
|
| Average |
|
|
|
| Average | |||
|
|
|
|
| Grant- |
|
|
|
| Grant- |
|
|
|
| Grant- | |||
|
|
|
|
| Date Fair |
|
|
|
| Date Fair |
|
|
|
| Date Fair | |||
|
| Shares |
| Value |
| Shares |
| Value |
| Shares |
| Value | ||||||
Outstanding at May 28, 2017 |
|
| 489,604 |
| $ | 26.92 |
|
| 462,612 |
| $ | 25.33 |
|
| 57,690 |
| $ | 25.84 |
Granted (a) |
|
| 276,369 |
|
| 44.34 |
|
| — |
|
| — |
|
| 124,341 |
|
| 43.83 |
Performance condition adjustment (b) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (818) |
|
| 19.70 |
Vested (c) |
|
| (119,913) |
|
| 20.99 |
|
| (169,335) |
|
| 19.76 |
|
| (15,228) |
|
| 19.70 |
Forfeited/expired/cancelled |
|
| (456) |
|
| 43.82 |
|
| (3,198) |
|
| 27.75 |
|
| — |
|
| — |
Outstanding at November 26, 2017 |
|
| 645,604 |
| $ | 35.47 |
|
| 290,079 |
| $ | 28.55 |
|
| 165,985 |
| $ | 39.91 |
|
|
|
|
|
|
18
|
Compensation Expense
Prior to the Separation Date, Conagra charged us for the costs related to the portion of Conagra’s incentive plans in which Lamb Weston employees participated and an allocation ofOur stock-based compensation costs of certain Conagra employees who provided general and administrative services on our behalf (see Note 3, Related Party Transactions). Our share-based compensation expense is recorded in “Selling, general and administrative expenses.” Compensation expense for share-basedstock-based awards recognized in the Condensed Combined and Consolidated Statements of Earnings, net of forfeitures, was as follows (dollars in millions):
| | | | | | |
| | Thirteen Weeks Ended | ||||
| | August 30, | | August 25, | ||
| | 2020 | | 2019 | ||
Stock-settled RSUs | | $ | 3.5 | | $ | 2.8 |
Performance Shares | | | 2.5 | | | 2.5 |
Stock options | | | — | | | 0.1 |
Stock-settled compensation expense | | | 6.0 | | | 5.4 |
Cash-settled RSUs (a) | | | — | | | 1.0 |
Total compensation expense | | | 6.0 | | | 6.4 |
Income tax benefit (b) | | | (1.1) | | | (1.2) |
Total compensation expense, net of tax benefit | | $ | 4.9 | | $ | 5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Stock options |
| $ | 0.4 |
| $ | 0.1 |
| $ | 1.0 |
| $ | 0.3 |
Stock-settled RSUs |
|
| 2.5 |
|
| 0.9 |
|
| 4.4 |
|
| 1.6 |
Cash-settled RSUs (a) |
|
| 2.8 |
|
| 1.8 |
|
| 3.7 |
|
| 3.3 |
Performance shares |
|
| 0.9 |
|
| (0.3) |
|
| 1.1 |
|
| — |
Total compensation expense |
|
| 6.6 |
|
| 2.5 |
|
| 10.2 |
|
| 5.2 |
Income tax benefit (b) |
|
| (2.4) |
|
| (0.9) |
|
| (3.8) |
|
| (1.9) |
Total compensation expense, net of tax benefit |
| $ | 4.2 |
| $ | 1.6 |
| $ | 6.4 |
| $ | 3.3 |
(a) |
| All cash-settled RSUs are marked-to-market and presented within “Accrued liabilities” |
(b) |
| Income tax benefit represents the marginal tax |
Based on estimates at November 26, 2017,August 30, 2020, total unrecognized compensation expense related to share-based paymentsstock-based awards was as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
| Remaining | |
|
|
|
|
| Weighted | |
|
| Unrecognized |
| Average | ||
|
| Compensation |
| Recognition | ||
|
| Expense |
| Period (in years) | ||
Stock options |
| $ | 0.6 |
|
| 1.3 |
Stock-settled RSUs |
|
| 14.8 |
|
| 2.4 |
Cash-settled RSUs |
|
| 5.6 |
|
| 1.3 |
Performance shares |
|
| 8.8 |
|
| 2.5 |
Total unrecognized stock-based compensation expense |
| $ | 29.8 |
|
| 2.2 |
| | | | | | |
|
| | |
| Remaining | |
| | | | | Weighted | |
| | Unrecognized | | Average | ||
| | Compensation | | Recognition | ||
| | Expense | | Period (in years) | ||
Stock-settled RSUs | | $ | 26.1 |
| | 2.3 |
Performance Shares | | | 6.3 |
| | 1.4 |
Total unrecognized stock-based expense | | $ | 32.4 |
| | 2.1 |
13.13
11. FAIR VALUE MEASUREMENTS
For information about our fair value policies, methods and assumptions used in estimating the fair value of our financial assets and liabilities, see Note 1, Nature of Operations and Summary of Significant Accounting Policies and Note
19
11, 12, Fair Value Measurements, of the Notes to Combined and Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K.
The fair values of cash and cash equivalents, receivables, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following table presents our financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall as of November 26, 2017 and May 28, 2017 (dollars in millions):
| | | | | | | | | | | | |
| | As of August 30, 2020 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: |
| |
|
| |
|
| |
|
| |
|
Deferred compensation assets | | $ | 0.1 | | $ | — | | $ | — | | $ | 0.1 |
Derivative assets (a) | | | — | | | 2.6 | | | — | | | 2.6 |
Total assets | | $ | 0.1 | | $ | 2.6 | | $ | — | | $ | 2.7 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Deferred compensation liabilities (b) | | | — |
| | 21.1 |
| | — |
| | 21.1 |
Total liabilities | | $ | — | | $ | 21.1 | | $ | — | | $ | 21.1 |
| | | | | | | | | | | | |
| | As of May 31, 2020 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: |
| |
|
| |
|
| |
|
| |
|
Deferred compensation assets | | $ | 0.1 | | $ | — | | $ | — | | $ | 0.1 |
Total assets | | $ | 0.1 | | $ | — | | $ | — | | $ | 0.1 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Derivative liabilities (a) | | $ | — | | $ | 4.7 | | $ | — | | $ | 4.7 |
Deferred compensation liabilities (b) | |
| — |
|
| 18.0 |
|
| — |
|
| 18.0 |
Total liabilities | | $ | — | | $ | 22.7 | | $ | — | | $ | 22.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of November 26, 2017 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation assets |
| $ | 0.6 |
| $ | — |
| $ | — |
| $ | 0.6 |
Pension plan assets (a) |
|
| — |
|
| 3.9 |
|
| — |
|
| 3.9 |
Derivative assets (b) |
|
| — |
|
| 0.6 |
|
| — |
|
| 0.6 |
Total assets |
|
| 0.6 |
|
| 4.5 |
|
| — |
|
| 5.1 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities (c) |
|
| — |
|
| 11.3 |
|
| — |
|
| 11.3 |
Total liabilities |
| $ | — |
| $ | 11.3 |
| $ | — |
| $ | 11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of May 28, 2017 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan assets (d) |
| $ | 4.5 |
| $ | — |
| $ | — |
| $ | 4.5 |
Deferred compensation assets |
|
| 0.6 |
|
| — |
|
| — |
|
| 0.6 |
Total assets |
|
| 5.1 |
|
| — |
|
| — |
|
| 5.1 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (b) |
|
| — |
|
| 2.4 |
|
| — |
|
| 2.4 |
Deferred compensation liabilities (c) |
|
| — |
|
| 8.8 |
|
| — |
|
| 8.8 |
Total liabilities |
| $ | — |
| $ | 11.2 |
| $ | — |
| $ | 11.2 |
(a) |
|
|
| primarily represent commodity swap and option contracts. The fair values of our Level 2 derivative assets and liabilities were determined using valuation models that use market observable inputs including interest rate curves and both forward and spot prices for |
(b) |
| The fair values of our Level 2 deferred compensation liabilities were valued using third-party valuations, which are based on the net asset values of mutual funds in our retirement plans. While the underlying assets are actively traded on an exchange, the funds are not. |
|
|
Certain
Non-financial assets such as property, plant and liabilities, including long-lived assets,equipment, and intangible assets goodwill, asset retirement obligations, and costare recorded at fair value only if an impairment is recognized. Cost and equity investments are measured at fair value on a non-recurring basis.
At November 26, 2017,August 30, 2020, we had $1,688.1$2,166.0 million of fixed-rate and $744.6$882.6 million of variable-rate debt outstanding. Based on current market rates, the fair value of our fixed-rate debt at November 26, 2017,August 30, 2020, was estimated to be $1,758.9$2,297.5 million. Any differences between the book value and fair value are due to the difference between the period-end market interest rate and the stated rate of our fixed-rate debt. We estimated the fair value of our fixed-rate debt using quoted market prices (Level 2 inputs) within the fair value hierarchy. The fair value of our variable-rate term debt approximates the carrying amount as our cost of borrowing is variable and approximates current market prices.
2014
12. STOCKHOLDERS’ EQUITY
14. DERIVATIVE FINANCIAL INSTRUMENTS
Share Repurchase Program
We use derivatives and other financial instruments
In December 2018, our Board of Directors authorized a program, with no expiration date, to hedge exposuresrepurchase shares of our common stock in an amount not to commodity and currency risks. We do not hold or issue derivatives and other financial instruments for trading purposes. Prior to the Separation, Conagra exited all derivative instruments related to our businesses. The effect of exiting the positions was not significant to our financial results.
Certain raw materials used in our production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To address the volatility due to price fluctuations, we may utilize swap contracts, option contracts, or forward purchase contracts.
Derivative instruments are reported in our Condensed Consolidated Balance Sheets at their fair values, unless the derivative instruments qualify for the normal purchase normal sale exception (“NPNS”) under GAAP and such exception has been elected. If the NPNS exception is elected, the fair values of such contracts are not recognized.
We do not designate commodity derivatives to achieve hedge accounting treatment. The changeexceed $250.0 million in the fair value ofaggregate, on an opportunistic basis. During the instruments used to reduce commodity price volatility is immediately recognized in earnings in cost of sales. In accordance with GAAP,thirteen weeks ended August 30, 2020, we offset our derivative asset and liability balances where master netting arrangements with various counterparties provide for legal right of setoff. Our contracts are subject to enforceable master netting arrangements that provide rights of offset with each counterparty when amounts are payable on the same date in the same currency or in the case of certain specified defaults. As a result, we offset the fair value of recognized derivative assets and derivative liabilities in our Condensed Consolidated Balance Sheets. No collateral was received or pledged in connection with these agreements.
The following table presents the fair value of derivatives at November 26, 2017 and May 28, 2017 (dollars in millions) in our Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
| November 26, 2017 | |||||||
|
|
|
|
|
|
|
| Net Amounts | |
|
| Gross Amounts |
| Gross Amounts Offset |
| Presented in the | |||
Derivative subject to master netting arrangements |
| Recognized |
| in the Balance Sheet |
| Balance Sheet | |||
Assets: |
|
|
|
|
|
|
|
|
|
Commodity contracts |
| $ | 1.1 |
| $ | 0.5 |
| $ | 0.6 |
Prepaid expenses and other current assets |
| $ | 1.1 |
| $ | 0.5 |
| $ | 0.6 |
|
|
|
|
|
|
|
|
|
|
|
| May 28, 2017 | |||||||
|
|
|
|
|
|
|
| Net Amounts | |
|
| Gross Amounts |
| Gross Amounts Offset |
| Presented in the | |||
Derivative subject to master netting arrangements |
| Recognized |
| in the Balance Sheet |
| Balance Sheet | |||
Liabilities: |
|
|
|
|
|
|
|
|
|
Commodity contracts |
| $ | 3.8 |
| $ | 1.4 |
| $ | 2.4 |
Accrued liabilities |
| $ | 3.8 |
| $ | 1.4 |
| $ | 2.4 |
21
The location and amount of gains (losses) from derivatives in our Condensed Combined and Consolidated Statements of Earnings were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of Loss Recognized on |
| ||||
|
|
|
| Derivatives in Condensed Combined |
| ||||
|
|
|
| and Consolidated Statement of Earnings |
| ||||
|
| Location in Condensed Combined and |
| for the Thirteen Weeks Ended |
| ||||
Derivatives Not Designated as Hedging |
| Consolidated Statement of Earnings of Loss |
| November 26, |
| November 27, |
| ||
Instruments |
| Recognized on Derivatives |
| 2017 |
| 2016 |
| ||
Commodity contracts |
| Cost of sales |
| $ | (0.7) |
| $ | (0.5) |
|
Foreign exchange contracts |
| Selling, general and administrative expenses |
|
| — |
|
| (0.1) |
|
Total loss from derivative instruments not designed as hedging instruments |
|
|
| $ | (0.7) |
| $ | (0.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of Gain (Loss) Recognized on | ||||
|
|
|
| Derivatives in Condensed Combined | ||||
|
|
|
| and Consolidated Statement of Earnings | ||||
|
| Location in Condensed Combined and |
| for the Twenty-Six Weeks Ended | ||||
Derivatives Not Designated as Hedging |
| Consolidated Statement of Earnings of Gain |
| November 26, |
| November 27, | ||
Instruments |
| (Loss) Recognized on Derivatives |
| 2017 |
| 2016 | ||
Commodity contracts |
| Cost of sales |
| $ | 2.5 |
| $ | (0.1) |
Foreign exchange contracts |
| Selling, general and administrative expenses |
|
| — |
|
| (0.1) |
Total gain (loss) from derivative instruments not designed as hedging instruments |
|
|
| $ | 2.5 |
| $ | (0.2) |
Presentation of Derivative Gains (Losses) in our Segment Results
Our derivatives are recognized at fair market value with realized and unrealized gains and losses recognized in cost of sales of our Other segment. The gains and losses are subsequently recognized in cost of sales of the reporting segments in the period in which the underlying transaction being economically hedged is included in earnings.
The following table presents the net derivative gains (losses) from commodity contracts under this methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net derivative gains (losses) incurred |
| $ | (0.7) |
| $ | (0.6) |
| $ | 2.5 |
| $ | (0.2) |
Less: Net derivative gains (losses) allocated to reportable segments |
|
| (0.3) |
|
| 0.4 |
|
| (0.6) |
|
| 0.6 |
Net derivative gains (losses) recognized in our Other segment |
| $ | (0.4) |
| $ | (1.0) |
| $ | 3.1 |
| $ | (0.8) |
Open Commodity Contracts
did not repurchase any shares. As of November 26, 2017, our open commodity contracts had a gross notional value (defined as notional quantity times market value per notional quantity unit) of $41.5August 30, 2020, $195.3 million and $30.7 millionremained authorized for purchase and sales contracts, respectively. As of May 28, 2017, our open commodity contracts had a gross notional value of $56.0 million and $88.6 million for purchase and sales contracts, respectively.repurchase under the program.
15. STOCKHOLDERS’ EQUITYDividends
In connection with the Separation, we amended and restated our certificate of incorporation to authorize 600,000,000 shares of common stock and 60,000,000 shares of preferred stock. We had 146,257,130 shares of common stock issued and outstanding as of November 26, 2017. Each share of common stock entitles the holder to one vote on matters to be voted on by our stockholders. No preferred stock was issued or outstanding on November 26, 2017.
22
Dividends
During the first half of fiscal 2018,thirteen weeks ended August 30, 2020, we paid $54.8$33.6 million of dividends to common stockholders.
On December 21, 2017,September 4, 2020, we paid$33.7 million of dividends to stockholders of record as of the close of business on August 7, 2020. On September 24, 2020, our Board of Directors declared a dividend of $0.19125$0.23 per share of common stock. The dividend will be paid on March 2, 2018December 4, 2020, to stockholders of record as of the close of business on February 2, 2018.November 6, 2020.
Accumulated Other Comprehensive Income (Loss) (“AOCI”)
Comprehensive income includes net income, currency translation adjustments, and changes in prior service cost and net actuarial gains (losses) from pension and post-retirement plans. We generally deem our foreign investments to be essentially permanent in nature and we do not provide for taxes on currency translation adjustments arising from converting the investment denominated in a foreign currency to the U.S. dollar. When we determine that a foreign investment, as well as undistributed earnings, are no longer permanent in nature, estimated taxes are provided for the related deferred tax liability (asset), if any, resulting from currency translation adjustments.
The following table details the accumulated balances for each component of other comprehensive income (loss), net of tax (except for currency translation adjustments):
Changes in AOCI, net of taxes, by componentas of August 30, 2020 were as follows (dollars in millions). Amounts in parentheses indicate losses.
| | | | | | | | | |
| | Foreign | | | | | Accumulated | ||
| | Currency | | Pension and | | Other | |||
| | Translation | | Post-Retirement | | Comprehensive | |||
|
| Gains (Losses) |
| Benefits |
| Loss | |||
Balance as of May 31, 2020 | | $ | (36.3) |
| $ | (4.2) |
| $ | (40.5) |
Other comprehensive income before reclassifications, net of tax | | | 39.4 | | | — | | | 39.4 |
Amounts reclassified out of AOCI, net of tax | | | — | | | 0.1 | (a) | | 0.1 |
Net current-period other comprehensive income (loss) | |
| 39.4 |
|
| 0.1 | |
| 39.5 |
Balance as of August 30, 2020 | | $ | 3.1 |
| $ | (4.1) |
| $ | (1.0) |
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
| |
|
| Currency |
| Pension and |
|
|
| ||
|
| Translation |
| Post-Retirement |
|
|
| ||
|
| Gains (Losses) |
| Benefits |
| Total | |||
Balance as of May 28, 2017 |
| $ | (10.3) |
| $ | 1.0 |
| $ | (9.3) |
Other comprehensive income before reclassifications, net of tax |
|
| 14.8 |
|
| — |
|
| 14.8 |
Amounts reclassified out of AOCI, net of tax |
|
| — |
|
| (0.1) |
|
| (0.1) |
Net current-period other comprehensive income |
|
| 14.8 |
|
| (0.1) |
|
| 14.7 |
Balance as of November 26, 2017 |
| $ | 4.5 |
| $ | 0.9 |
| $ | 5.4 |
(a) | Actuarial losses on pension and post-retirement benefits included in AOCI to be amortized over the next 12 months is a net loss of $0.3 million ($0.2 million after tax). |
The net amount
15
13. SEGMENTS
16. SEGMENTS
We have four4 operating segments, each of which is a reportable segment: Global, Foodservice, Retail, and Other. Our chief operating decision maker receives periodic management reports under this structure that generally focus on the nature and scope of our customers’ businesses, which enables operating decisions, performance assessment, and resource allocation decisions at the segment level. The reportable segments are each managed by a general manager and supported by a cross functional team assigned to support the segment. We measure our segments’ product contribution margin, which is defined as net sales, less cost of sales and advertising and promotion expenses and excludes general corporate expenses, interest, and taxes. See Note 14, Segments, of the Notes to Combined and Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K for more information.
| | | | | | |
| | Thirteen Weeks Ended | ||||
|
| August 30, |
| August 25, | ||
(in millions) | | 2020 (a) | | 2019 | ||
Net sales | |
|
| |
|
|
Global | | $ | 447.5 | | $ | 517.6 |
Foodservice | |
| 236.7 | |
| 305.4 |
Retail | |
| 153.9 | |
| 129.3 |
Other | | | 33.4 | | | 36.7 |
Total net sales | | | 871.5 | | | 989.0 |
Product contribution margin (b) | | |
| | |
|
Global | | | 77.8 | | | 102.7 |
Foodservice | | | 85.8 | | | 102.5 |
Retail | | | 35.8 | | | 28.9 |
Other (c) | | | 13.2 | | | 9.7 |
| | | 212.6 | | | 243.8 |
Advertising and promotion expenses (b) | | | 1.2 | | | 4.8 |
Gross profit | | | 213.8 | | | 248.6 |
Selling, general and administrative expenses | | | 78.1 | | | 78.6 |
Income from operations | | | 135.7 | | | 170.0 |
Interest expense, net | | | 30.3 | | | 28.2 |
Income tax expense | | | 28.0 | | | 36.7 |
Equity method investment earnings | | | 11.9 | | | 10.6 |
Net income | | $ | 89.3 | | $ | 115.7 |
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
(in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Global |
| $ | 416.9 |
| $ | 412.6 |
| $ | 830.8 |
| $ | 811.8 |
Foodservice |
|
| 272.8 |
|
| 250.6 |
|
| 552.2 |
|
| 510.9 |
Retail |
|
| 102.0 |
|
| 96.5 |
|
| 194.0 |
|
| 186.1 |
Other |
|
| 32.9 |
|
| 31.0 |
|
| 65.1 |
|
| 58.2 |
Total net sales |
|
| 824.6 |
|
| 790.7 |
|
| 1,642.1 |
|
| 1,567.0 |
Product contribution margin (a): |
|
|
|
|
|
|
|
|
|
|
|
|
Global |
|
| 88.2 |
|
| 92.3 |
|
| 162.9 |
|
| 165.9 |
Foodservice |
|
| 92.2 |
|
| 80.2 |
|
| 183.1 |
|
| 159.7 |
Retail |
|
| 19.4 |
|
| 20.9 |
|
| 35.9 |
|
| 40.5 |
Other |
|
| 3.9 |
|
| (0.4) |
|
| 15.0 |
|
| 2.8 |
Total product contribution margin |
|
| 203.7 |
|
| 193.0 |
|
| 396.9 |
|
| 368.9 |
Equity method investment earnings |
|
| 12.1 |
|
| 6.2 |
|
| 32.1 |
|
| 16.8 |
Total product contribution margin plus equity method investment earnings |
|
| 215.8 |
|
| 199.2 |
|
| 429.0 |
|
| 385.7 |
Other selling, general and administrative expenses (a) (b) |
|
| 63.9 |
|
| 67.5 |
|
| 119.5 |
|
| 118.4 |
Interest expense, net |
|
| 27.4 |
|
| 6.8 |
|
| 52.6 |
|
| 8.3 |
Income tax expense |
|
| 41.5 |
|
| 33.9 |
|
| 85.6 |
|
| 84.9 |
Net income |
|
| 83.0 |
|
| 91.0 |
|
| 171.3 |
|
| 174.1 |
Less: Income attributable to noncontrolling interests |
|
| 6.4 |
|
| 3.8 |
|
| 11.3 |
|
| 7.3 |
Net income attributable to Lamb Weston Holdings, Inc. |
| $ | 76.6 |
| $ | 87.2 |
| $ | 160.0 |
| $ | 166.8 |
(a) |
|
(b) | Product contribution margin |
(c) |
| The |
Assets by Segment
The manufacturing assets of Lamb Weston are shared across all reporting segments. Output from these facilities used by each reporting segment can change from fiscal year to fiscal year. Therefore, it is impracticable to allocate those assets to the reporting segments, as well as disclose total assets by segment.
Other Information
Lamb Weston’s largest customer, McDonald’s Corporation, accounted for approximately 11%and 10% of consolidated “Net sales” in all periods presented infor the thirteen weeks ended August 30, 2020 and August 25, 2019, respectively. No customer accounted for more than 10% of our Condensed Combined and Consolidated Statementsconsolidated accounts receivable as of Earnings.August 30, 2020 or May 31, 2020.
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17.14. COMMITMENTS, CONTINGENCIES, GUARANTEES AND LEGAL PROCEEDINGS
We have financial commitments and obligations that arise in the ordinary course of our business. These include long-term debt, (discussed in Note 11, Debt and Financing Obligations), lease obligations, purchase commitments for goods and services, and legal proceedings. There have been no material changes to the guarantees and indemnifications disclosed in Note 15, Commitments, Contingencies, Guarantees, and Legal Proceedings, 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 are a party to legal actions arising in the ordinary course of our business. These claims, legal actions include commercialproceedings and litigation principally arise from alleged casualty, product liability, claims, premisesemployment, and other disputes. In determining loss contingencies, we consider the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recognized when it is considered probable that a liability claims,has been incurred and employment-related claims, among others. Aswhen the amount of loss can be reasonably estimated. While any claim, proceeding or litigation has an element of uncertainty, we believe the dateoutcome of this filing, we do not believe that any of the legal actions against us would, either individuallythese that are pending or in the aggregate,threatened will not have a material adverse effect on our financial condition, results of operations, or cash flows. Costs of legal services associated with the foregoing matters are recognized in earnings as services are provided.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as “MD&A,” contains forward-looking statements within the meaning of the federal securities laws. Words such as “will,” “continue,” “may,” “expect,” “anticipate,” “believe,” “will,“estimate,” “intend,“support,” “impact,” “remain,” “outlook,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding our plans, execution, liquidity, dividends, share repurchases, capital investments, dividends, taxes,expenditures, operational costs, ERP implementation and business outlook and prospects.prospects, as well as the impact of the COVID-19 pandemic on the industry and consumer demand. These forward-looking statements are based on management’s current expectations and are subject to uncertaintyuncertainties and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These risks and uncertainties include, among other things: impacts on our business due to health pandemics or other contagious outbreaks, such as the current COVID-19 pandemic, including impacts on demand for our products, increased costs, disruption of supply or other constraints in the availability of key commodities and other necessary services; our ability to successfully execute our long-term value creation strategies; our ability to execute on large capital projects, including construction of new production lines; the competitive environment and related conditions in the markets in which we and our joint ventures operate; political and economic conditions of the countries in which we and our joint ventures conduct business and other factors related to our international operations; disruption of our access to export mechanisms; risks associated with possible acquisitions, including our ability to complete proposed acquisitions or integrate acquired businesses or execute on large capital projects;businesses; our future debt levels; the availability and prices of raw materials; changes in our relationships with our growers or significant customers; the success of our joint ventures; actions of governments and regulatory factors affecting our businesses or joint ventures; the ultimate outcome of litigation or any product recalls; levels of pension, labor and people-related expenses; our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and other risks described in our reports filed from time to time with the U.S. Securities and Exchange Commission (“SEC”). We caution readers not to place undue reliance on any forward-looking statements included in this report, which speak only as of the date of this report. We undertake no responsibility for updating these statements, except as required by law.
This Item 2 is intended to supplement, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended May 28, 201731, 2020 (the “Form 10-K”), which we filed with the SEC on July 25, 2017. 28, 2020.
Overview
Lamb Weston Holdings, Inc. (“we,” “us,” “our,” “the Company,” or “Lamb Weston”), along with our joint venture partners,ventures, is a leading global producer, distributor, and marketer of value-added frozen potato products. We, along with our joint ventures, are the number one supplier of value-added frozen potato products in North America—the largest market for frozen potato products in the world. We are alsoAmerica and a leading supplier of value-added frozen potato products internationally, with a strong and growing presence in high-growth emerging markets. We, along with our joint ventures, offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our valued-addedvalue-added frozen potato product portfolio.
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”). Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company” and “Lamb Weston” refer to Lamb Weston Holdings, Inc. and its consolidated subsidiaries or, in the case of information as of dates or for periods prior to the Separation, the combined and consolidated entities of the Lamb Weston business of Conagra and certain other assets and liabilities that had been historically held at the Conagra corporate level but were specifically identifiable and attributable to the Lamb Weston business.
26
Management’s discussion and analysis of our results of operations and financial condition is provided as a supplement to the condensed combined and consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. Our MD&A is based on financial data derived from the financial statements prepared in accordance with the United States (“U.S.”) generally accepted accounting principles (“GAAP”) and certain other financial data (Adjusted EBITDA(EBITDA and Adjusted EBITDA including unconsolidated joint ventures) that is prepared using non-GAAP measures. Refer to “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” below for the definitiondefinitions of Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures, and a reconciliation of these non-GAAP financial measures to net income.
18
Executive Summary
On March 11, 2020 (during the fourth quarter of fiscal 2020), the World Health Organization declared that the spread of COVID-19 qualified as a global pandemic. Throughout this pandemic, our primary focus and attention has remained directed towards the health and well-being of our employees, and we have taken numerous steps to keep our employees safe, including implementing enhanced sanitation protocols and preventative screenings at all our manufacturing facilities, providing masks and requiring social distancing for employees across all our facilities, providing benefits that help support our employees and their families, and implementing remote work arrangements for functional support areas to comply with shelter-in-place orders and federal and local government recommendations. If an employee at one of our manufacturing facilities tests positive for COVID-19, we have developed plans to temporarily close the area where the employee works in order to sanitize and disinfect the facility before allowing employees to return to the facility and restart operations.
Lamb Weston’s financial performance in the first quarter of fiscal 2021 reflects the effect on frozen potato demand and restaurant traffic following the significant government-imposed social and economic restrictions to control the spread of COVID-19. While demand trends have improved in each of our U.S. sales channels since the end of fiscal 2020, demand for our products remain below pre-pandemic levels. As a result, our sales and earnings in the fiscal first quarter declined as compared to the first quarter of fiscal 2020. Specifically:
● | Net sales declined 12% to $871.5 million |
● | Income from operations declined 20% to $135.7 million |
● | Net income declined 23% to $89.3 million |
● | Diluted earnings per share declined 23% to $0.61 |
● | EBITDA including unconsolidated joint ventures declined 13%, to $201.8 million |
● | Income from operations and EBITDA including unconsolidated joint ventures included approximately $20 million and $21 million of net costs, respectively, related to the pandemic’s impact on our operations, as described below |
In the first quarter of fiscal 2021, our net cash provided by operating activities was $250.6 million, up 5% as compared to the first quarter of fiscal 2020. We also paid $33.6 million of cash dividends to shareholders.
As compared to the first quarter of fiscal 2020, price/mix increased, largely due to higher prices and improved mix in our Foodservice and Retail segments, while our volume declined as demand for frozen potato products outside the home fell following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19. Income from operations declined due to lower sales as well as approximately $20 million of costs, net of employee retention credits provided by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and other labor incentives, related to the pandemic’s impact on operations, which included:
● | Approximately $6 million of factory utilization-related production costs and inefficiencies, such as labor retention costs; costs to shut down, sanitize, and restart manufacturing facilities after a production employee was infected by the virus; costs arising from modifying production schedules and reducing run-times; and additional costs and inefficiencies related to manufacturing retail products on lines primarily designed for foodservice products; |
● | Approximately $10 million of non-utilization-related costs, of which approximately $3 million relates to expensing the remaining crop year 2019 contracts for raw potatoes that could not be used due to the pandemic’s near-term effect on demand, and approximately $7 million of expense for enhanced employee safety and sanitation protocols as well as incremental warehousing, transportation and other supply chain costs; and |
● | Approximately $4 million of selling, general and administrative expenses (“SG&A”), largely comprised of costs to retain certain sales employees, net of CARES Act retention credits and other labor incentives. |
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The amount of COVID-19 related costs sequentially decreased from fourth quarter of fiscal 2020, however, we expect that we will continue to incur some of these costs until the pandemic no longer has an impact on our manufacturing, supply chain, commercial and functional support operations.
We expect that we will continue to realize the impact of the pandemic on the U.S. and global economies, global consumer demand for frozen potato products, and on our business and financial results for the remainder of fiscal 2021. While the impact is uncertain, we continue to closely monitor the global french fry industry, including consumer reaction and demand. During the first quarter, we observed the following:
● | In the U.S., overall restaurant traffic and demand for frozen potato products steadily improved early in the quarter, then largely stabilized at below pre-pandemic levels during the latter half of our first quarter. Traffic at large, quick service chain restaurants (“QSRs”) approached prior-year levels by leveraging drive-thru and delivery formats. Full-service restaurant traffic recovered to 70% to 80% of prior-year levels by the end of the quarter, aided by the relaxing of government-imposed restrictions for on-premise dining, as well as increased carry-out and delivery. Demand by our non-commercial customers (i.e., lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) was significantly below prior-year levels. We continue to expect traffic and demand at full-service restaurants and non-commercial operations to be more vulnerable than at QSRs, especially as options for outdoor dining become more limited with the onset of colder weather beginning in our second quarter. In contrast, demand for retail frozen potato products significantly increased along with overall food-at-home consumption with the adoption of social distancing policies and government-imposed shelter-in-place restrictions. Retail demand growth peaked early in the quarter, and steadily moderated as the quarter progressed. |
● | In Europe, which is served by our Lamb-Weston/Meijer joint venture, demand for frozen potato products steadily approached prior-year levels by the end of the quarter, although demand at this time last year was tempered due to a poor potato crop. Since most consumption in Europe isdine-in or carry-out as QSR drive-thru options are more limited, we anticipate that demand may be tempered as options for outdoor dining decline with the onset of colder weather beginning in our second quarter. |
● | Demand improvement in our other key international markets was mixed. In China and Australia, demand for frozen potato products steadily improved and was approaching prior-year levels by the end of the quarter. In our other key markets, which are primarily in Asia and Latin America, the improvement in restaurant traffic and demand for frozen potato products has been uneven as governments employ differing approaches to contain the spread of COVID-19. |
In response to the decline in consumer and customer demand related to the pandemic, we have taken actions, and will continue to evaluate various options, to lower our cost structure and maximize the efficiency of our manufacturing and commercial operations, including temporarily closing facilities and/or modifying production schedules to rebalance utilization rates across our manufacturing network.
As discussed above, the government-imposed severe social and business restrictions, including closing or partially closing restaurants and other foodservice operations, have decreased the demand for our products. The outlook for the spread and eventual containment of COVID-19 remains unpredictable, as does its potential impact on the global economy, restaurant traffic, customer and consumer demand, our supply chain, and availability of key commodities and other necessary services. During these uncertain times, our top priorities are to ensure the health and welfare of our employees, maintain product safety, and continue to support our customers as they work to manage their supply chains and inventories. While the near-term impact of the pandemic on consumer demand and sales volume is likely to be material, we believe we have sufficient liquidity to manage through the uncertainty. See “Liquidity and Capital Resources” in this MD&A for more information.
Operating Results
We have four reportable segments: Global, Foodservice, Retail, and Other. We report product contribution margin by segment. Product contribution margin is the primary measure reported to our chief operating decision maker for
20
purposes of allocating resources to our segments and assessing their performance. Product contribution margin represents net sales less cost of sales and advertising and promotion expenses. Product contribution margin includes advertising and promotion expenses because the amounts are directly associated with segment performance; it excludes general corporate expenses and interest expense because management believes these amounts are not directly associated with segment performance. For additional information on our reportable segments and product contribution margin, see Note 13, Segments, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report.
Thirteen Weeks Ended August 30, 2020 compared to Thirteen Weeks Ended August 25, 2019 (dollars in millions)
Net Sales and Product Contribution Margin
| | | | | | | | |
| | Thirteen Weeks Ended | ||||||
|
| August 30, |
| August 25, |
| % | ||
| | 2020 | | 2019 | | Inc/(Dec) | ||
Segment sales | | | | | | | | |
Global | | $ | 447.5 | | $ | 517.6 |
| (14%) |
Foodservice | |
| 236.7 |
| | 305.4 |
| (22%) |
Retail | |
| 153.9 | |
| 129.3 |
| 19% |
Other | |
| 33.4 | |
| 36.7 |
| (9%) |
| | $ | 871.5 | | $ | 989.0 |
| (12%) |
| | | | | | | | |
Segment product contribution margin | | | | | | | | |
Global | | $ | 77.8 | | $ | 102.7 |
| (24%) |
Foodservice | | | 85.8 |
| | 102.5 |
| (16%) |
Retail | |
| 35.8 | |
| 28.9 |
| 24% |
Other | |
| 13.2 | |
| 9.7 |
| 36% |
| | | 212.6 | | | 243.8 |
| (13%) |
Advertising and promotion expenses | | | 1.2 | | | 4.8 | | (75%) |
Gross profit | | $ | 213.8 | | $ | 248.6 | | (14%) |
Net Sales
Lamb Weston’s net sales for the first quarter of fiscal 2021 were $871.5 million, a decline of $117.5 million, or 12%, compared to the first quarter of fiscal 2020. Price/mix increased 2% due to improved price/mix in the Foodservice and Retail segments. Volume declined 14%, reflecting the decline in demand for frozen potato products outside the home following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19. The decline was partially offset by increased sales of frozen potato products for in-home consumption.
Global segment net sales decreased $70.1 million, or 14%, to $447.5 million, compared with $517.6 million in the first quarter of fiscal 2020. Price/mix decreased 1% as a result of negative mix. Volume declined 13%, primarily due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and other foodservice-related traffic in the U.S. and in most of our key international markets.
Foodservice segment net sales declined $68.7 million, or 22%, to $236.7 million, compared with $305.4 million in the first quarter of fiscal 2020. Price/mix increased 6%, reflecting the carryover benefit of pricing actions implemented during fiscal 2020, partially offset by unfavorable mix as sales of Lamb Weston branded and premium products softened. Volume decreased 28% due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and non-commercial customers, such as lodging and hospitality, schools and universities, sports and entertainment, and workplace environments.
Retail segment net sales increased $24.6 million, or 19%, to $153.9 million, compared with $129.3 million in the first quarter of fiscal 2020. Volume increased 11% due to increased sales of frozen potato products for in-home consumption following government-imposed stay-at-home orders. Shipments of our premium and mainstream branded
21
offerings, which have historically comprised approximately 40% of the segment’s shipments, were strong, but were partially offset by a decline in private label product shipments, reflecting the loss of certain low-margin private label business beginning in the second quarter of fiscal 2020. Price/mix increased 8%, largely driven by favorable mix from increased sales of branded products.
Net sales in our Other segment declined $3.3 million, or 9%, to $33.4 million, compared with $36.7 million in the first quarter of fiscal 2020, largely due to lower volumes in our vegetable business.
Product Contribution Margin
Lamb Weston’s product contribution margin for the first quarter of fiscal 2021 was $212.6 million, a decline of $31.2 million, or 13%, compared to the first quarter of fiscal 2020. The decline primarily related to lower sales due to the pandemic and approximately $16 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives, resulting from lower factory utilization and production inefficiencies, manufacturing and operational disruptions directly attributable to the pandemic, and other supply chain costs discussed above.
Global segment product contribution margin declined $24.9 million, or 24%, to $77.8 million in the first quarter of fiscal 2021. Pandemic-related costs accounted for approximately $9 million of the decline, with the remainder driven by lower sales. Global segment cost of sales was $369.3 million, down 11% compared to the first quarter of fiscal 2020, primarily due to lower sales, partially offset by the pandemic costs cited above. Advertising and promotion expense was lower in the first quarter of fiscal 2021, as compared to prior year period.
Foodservice segment product contribution margin declined $16.7 million, or 16%, to $85.8 million in the first quarter of fiscal 2021. Pandemic-related costs accounted for approximately $4 million of the decline, with the remainder driven by lower sales volume, partially offset by favorable price/mix. Cost of sales was $150.3 million, down 25% compared to the first quarter of fiscal 2020, due to lower sales volumes. Advertising and promotion expense was lower in the first quarter of fiscal 2021, as compared with the prior year period.
Retail segment product contribution margin increased $6.9 million, or 24%, to $35.8 million. Higher sales volumes, favorable mix and a $1.9 million decline in advertising and promotional expenses drove the increase, which was partially offset by approximately $3 million of pandemic-related costs. Cost of sales was $118.1 million, up 20% compared to the first quarter of fiscal 2020, primarily due to higher sales volume.
Other segment product contribution margin was $13.2 million, an increase of $3.5 million as compared with $9.7 million in the first quarter of fiscal 2020. These amounts include a $7.7 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the first quarter of fiscal 2021, and a $3.1 million gain related to the contracts in the prior year period. Excluding these adjustments, Other segment product contribution margin declined $1.1 million, largely due to higher costs in our vegetable business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses declined $0.5 million, or less than 1%, to $78.1 million in the first quarter of fiscal 2021 compared with the same period in 2020, as cost management efforts and a $3.7 million decline in advertising and promotional expenses offset approximately $4 million of pandemic-related expenses described above, as well as approximately $1 million of non-recurring expenses (primarily consulting expenses) associated with developing and implementing a new enterprise resource planning (“ERP”) system.
Interest Expense, Net
Interest expense, net was $30.3 million for the first quarter of fiscal 2021, an increase of $2.1 million compared with the same period in fiscal 2020. The increase in “Interest expense, net” was the result of higher average total debt versus the prior year. For more information on this refinance see “Liquidity and Capital Resources” in this MD&A.
22
Income Tax Expense
Income tax expense for the first quarter of fiscal 2021 and 2020 was $28.0 million and $36.7 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.9% and 24.1% for the first quarter of fiscal 2021 and 2020, respectively, in our Consolidated Statements of Earnings. The effective tax rate varies from the U.S. statutory tax rate of 21% principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items.
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in Europe, the U.S., and South America and include our share of the earnings based on our economic ownership interest in them. Our share of earnings from our equity method investments was $11.9 million and $10.6 million for the first quarter of fiscal 2021 and 2020, respectively. Equity method investment earnings included a $4.7 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the first quarter of fiscal 2021, compared to a $1.1 million unrealized gain related to the contracts in the first quarter of fiscal 2020. Excluding the mark-to-market adjustments, earnings from equity method investments declined $2.3 million compared to the prior year period. Pandemic-related manufacturing costs and SG&A expenses accounted for approximately $1 million of the decline, with the remainder largely driven by lower sales following government-imposed restrictions on restaurant and other foodservice operations.
Liquidity and Capital Resources
Sources and Uses of Cash
The current COVID-19 pandemic has disrupted our business and operating results. As a result of the uncertainties caused by the pandemic, we have taken, and are continuing to take, actions to enhance liquidity. We limited discretionary expenses across the Company; implemented a hiring and salary freeze for our U.S. salaried positions; suspended future share repurchases, and received benefits under the CARES Act and other labor incentives. In addition, in September 2020, we amended our credit agreement to increase available borrowings under our revolving credit facility from $500.0 million to $750.0 million and extended the maturity date to September 2023. In connection with the amendment, we used cash on hand to repay the $271.9 million term loan facility due in November 2021. Considering the current environment, with a significant number of employees working remotely, we have also deferred the second phase of our new ERP system implementation. As a result of our actions, our cash and cash equivalents balance was $1,032.5 million and approximately $800 million at August 30, 2020 and at the end of our fiscal month ended September 27, 2020, respectively.
We believe our cash on hand, cash flows from operations and our current credit facilities will be sufficient to satisfy our future working capital requirements, interest payments, capital expenditures, dividends on our common stock, and other financing requirements for the foreseeable future. We continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. If we are unable to generate sufficient cash flows from operations, or are otherwise unable to comply with the terms of our credit facilities, we may be required to seek additional financing alternatives, which may require waivers under our credit agreements governing our senior secured debt and indentures governing our senior notes, in order to generate additional cash. There can be no assurance that we would be able to obtain additional financing or any such waivers on terms acceptable to us or at all. For additional information on our debt, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report.
23
Cash Flows
Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities:
| | | | | | | | | |
| | Thirteen Weeks Ended | |||||||
| | August 30, | | August 25, | | | Provided by | ||
|
| 2020 |
| 2019 |
| | (Used for) | ||
Net cash flows provided by (used for): |
| |
|
| |
|
| |
|
Operating activities | | $ | 250.6 | | $ | 238.5 |
| $ | 12.1 |
Investing activities | |
| (33.1) | |
| (176.7) |
|
| 143.6 |
Financing activities | |
| (550.2) | |
| (54.9) |
|
| (495.3) |
| |
| (332.7) | |
| 6.9 |
|
| (339.6) |
Effect of exchange rate changes on cash and cash equivalents | |
| 1.2 |
|
| (0.1) |
|
| 1.3 |
Net increase (decrease) in cash and cash equivalents | | $ | (331.5) | | $ | 6.8 |
| $ | (338.3) |
Operating Activities
In the first quarter of fiscal 2021, cash provided by operating activities increased $12.1 million to $250.6 million, compared with $238.5 million in the same period a year ago. The increase related to $48.9 million of cash provided by favorable changes in working capital, partially offset by a $36.8 million decrease in income from operations, adjusted for non-cash income and expenses. Favorable changes in working capital primarily related to lower sales and therefore, lower receivables in first quarter 2021, compared with the same period in fiscal 2020, and the timing of the collection of accounts receivable. A lower incentive compensation payout in fiscal 2020, relative to fiscal 2019, also contributed to the favorable changes in working capital. These increases in working capital were partially offset by a larger finished goods inventory build in first quarter of fiscal 2021, compared with fiscal 2020, due to the abnormally low finished goods inventories at the end of fiscal 2020, as we balanced production with declining demand resulting from the impact of the COVID-19 pandemic. Lower earnings from operations in first quarter of fiscal 2021 related to government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19 and approximately $21 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives. See “Operating Results” in this MD&A for more information.
Investing Activities
Investing activities used $33.1 million of cash in the first quarter of fiscal 2021, compared with $176.7 million in the same period in the prior year. The decrease related to our efforts to preserve liquidity and defer strategic capital expenditures. We increased our estimate of fiscal 2021 capital expenditures from $140 million to $180 million, reflecting investments in productivity, optimization and growth capacity projects. These expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, including the impact of COVID-19, and our regulatory compliance requirements.
Financing Activities
During the first quarter of fiscal 2021, cash used for financing activities increased $495.3 million to $550.2 million, compared with $54.9 million during the same period a year ago. During the first quarter of fiscal 2021, financing activities primarily related to the repayment of $498.1 million of short-term borrowings, the payment of $33.6 million in cash dividends to common stockholders, and $9.2 million of debt and financing obligations repayments. Financing activities also included $9.6 million for the repurchase of 151,151 shares for restricted stock tax withholdings. Given the uncertainty of the COVID-19 pandemic, we have temporarily suspended share repurchases in the near-term to provide us with additional liquidity. In September 2020, we amended our credit agreement to increase available borrowings under our revolving credit facility from $500.0 million to $750.0 million and extended the maturity to September 2023. In addition, we used cash on hand to repay the $271.9 million term loan facility due in November 2021. As of our fiscal month ended September 27, 2020, no borrowings were outstanding under the amended revolving credit facility.
24
During the first quarter of fiscal 2020, financing activities primarily related to $309.0 million of debt and financing obligation repayments, $299.3 million of net proceeds from the issuance of debt related to our refinancing $300.0 million of the $599.1 million term loan facility outstanding at May 26, 2019, the payment of $29.2 million in cash dividends to common stockholders, $8.3 million of short-term borrowing repayments and a $3.5 million increase in cash used to repurchase 111,721 shares of our common stock, including tax withholdings in connection with vesting of restricted stock.
For more information about our debt, interest rates, maturity dates, and covenants, see Note 9, Debt and Financing Obligations of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of the Form 10-K. At August 30, 2020, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.
Obligations and Commitments
Except for the $271.9 million repayment in September 2020 of the term loan facility due in 2021, there have been no material changes to the contractual obligations disclosed in “Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
To supplement the financial information included in this report, we have presented EBITDA and EBITDA including unconsolidated joint ventures, each of which is considered a non-GAAP financial measure.
Lamb Weston’s management uses Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures to evaluate the Company’s performance excluding the impact of certain non-cash charges and other special items in order to have comparable financial results to analyze changes in our underlying business between reporting periods.performance. The Company includes these non-GAAP financial measures because management believes it isthey are useful to investors in that it providesthey provide for greater transparency with respect to supplemental information used by management in its financial and operational decision making. We believe that the presentation of these non-GAAP financial measures, when readused in conjunction with GAAP financial measures, is a useful financial analysis tool that can assist investors in assessing the Company’s operating performance and underlying prospects. Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures should not be considered a substitute for net income.
Executive Summary
In the second quarter of fiscal 2018:
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27
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Demand for frozen potato products continues to grow around the world. We expect to address the increase in demand by investing in additional capacity. We began operating a new line in Boardman, Oregon during the third quarter of fiscal 2017 as well as a new line in Richland, Washington during the second quarter of fiscal 2018. In December 2017, we announced our plan to construct a new processing line in Hermiston, Oregon with a total production capacity of approximately 300 million pounds. We anticipate this new line to be operational in the fourth quarter of fiscal 2019. Additionally, through our Lamb-Weston/Meijer joint venture, we recently expanded capacity in our facility at Bergen op Zoom, the Netherlands. Lamb-Weston/Meijer is participating in a joint venture that is constructing a new production facility in Lipetsk, a special economic zone in south Moscow, the Russian Federation. We expect the Lipetsk plant to be operational in the second half of fiscal 2018. In June 2017, our Lamb-Weston/Meijer joint venture also acquired the potato processing business of Oerlemans Foods, which included a potato processing facility located in Broekhuizenvorst, the Netherlands.
Outlook
For the remainder of fiscal 2018, we expect the operating environment to be generally favorable given the continued growth in volume demand and high industry manufacturing capacity utilization levels. A number of manufacturers, including Lamb Weston, have announced intentions to add production capacity over the next five years, largely in Europe, North America and China, which is likely to ease the industry’s near-term production constraints. In addition, compared with fiscal 2017, we are experiencing a higher rate of inflation for many of our commodity and input costs, such as packaging and edible oils, as well as for other manufacturing, transportation and warehousing costs. We also have higher interest expense associated with our capital structure after the Separation and higher selling, general and administrative costs as a result of a full year of stand-alone public company costs.
Based on actual yields, processing quality and indications of storability, we consider the potato crop in the Columbia River Basin and Idaho, where the majority of our production capacity resides, that was harvested in the fall of fiscal 2018, to be consistent overall with historical averages.
On December 22, 2017, the President signed tax reform legislation (the “Act”), which is generally effective January 1, 2018. The Act lowers the U.S. corporate tax rate from 35 percent to 21 percent, which will result in a blended effective tax rate for us in fiscal 2018; allows for immediate write-off of qualified property placed in service after September 27, 2017, and before January 1, 2023, with a five year phase down by 20 percent per calendar year beginning in 2023; repeals the domestic production deduction for tax years after our fiscal 2018; and alters the landscape of taxation of foreign operations, executive compensation and employer provided benefits, among other provisions. In addition, the legislation has one-time financial statement tax effects including a tax benefit from remeasuring our net U.S. deferred tax liabilities on our balance sheet and a transition tax on post-1986 unremitted earnings of our non-U.S. subsidiaries. We are currently evaluating the impact of the Act. While we have not completed our evaluation of the potential impacts, we expect it to decrease our fiscal 2018 effective tax rate and cash taxes.
Operating Results
We have four reportable segments: Global, Foodservice, Retail, and Other. For each period presented, we report product contribution margin by segment. Product contribution margin is the primary measure reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. We define product contribution margin as net sales less cost of sales and advertising and promotion expenses. For additional information on our reportable segments, see Note 14, Segments, of the Notes to Combined and Consolidated Financial Statements in the Form 10-K.
28
Thirteen Weeks Ended November 26, 2017 compared to Thirteen Weeks Ended November 27, 2016
Net Sales and Product Contribution Margin
(dollars in millions)
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| Thirteen Weeks Ended | ||||||||||||||
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| Net Sales |
| Product Contribution Margin | ||||||||||||
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| November 26, |
| November 27, |
| % Inc |
| November 26, |
| November 27, |
| % Inc | ||||
|
| 2017 |
| 2016 |
| (Dec) |
| 2017 |
| 2016 |
| (Dec) | ||||
Global |
| $ | 416.9 |
| $ | 412.6 |
| 1% |
| $ | 88.2 |
| $ | 92.3 |
| (4%) |
Foodservice |
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| 272.8 |
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| 250.6 |
| 9% |
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| 92.2 |
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| 80.2 |
| 15% |
Retail |
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| 102.0 |
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| 96.5 |
| 6% |
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| 19.4 |
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| 20.9 |
| (7%) |
Other |
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| 32.9 |
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| 31.0 |
| 6% |
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| 3.9 |
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| (0.4) |
| NM |
Total |
| $ | 824.6 |
| $ | 790.7 |
| 4% |
| $ | 203.7 |
| $ | 193.0 |
| 6% |
Net Sales
Lamb Weston’s net sales for the second quarter of fiscal 2018 were $824.6 million, an increase of $33.9 million, or 4%, compared to the second quarter of fiscal 2017.
Global net sales increased $4.3 million, or 1%, to $416.9 million, compared with $412.6 million in the second quarter of fiscal 2017. Fiscal 2018 second quarter net sales reflect a 3% increase in price/mix associated with actions to increase prices across the customer base, as well as actions to improve customer and product mix. Volume declined 2 percent, as compared to a 5 percent increase in the prior year quarter. The decline in volume is attributable to our elimination of less-profitable volume in North America and international as well as lower shipments to certain export markets. This was partially offset by increased shipments to strategic customers in the U.S.
Foodservice net sales increased $22.2 million, or 9%, to $272.8 million, compared with $250.6 million in the second quarter of fiscal 2017. Fiscal 2018 second quarter net sales reflect an 8% increase in price/mix, primarily reflecting the favorable carryover effect of pricing actions taken in fiscal 2017, pricing actions implemented in the current year, and improvement in customer and product mix. Additionally, fiscal 2018 second quarter net sales reflect a 1% increase in sales volume, as compared to a 5 percent increase in the prior year quarter, driven by broad-based growth across the segment’s customer base.
Retail net sales increased $5.5 million, or 6%, to $102.0 million, compared with $96.5 million in the second quarter of fiscal 2017. Fiscal 2018 second quarter net sales reflect a 4% increase in price/mix, due to higher prices across the branded and private label portfolio, as well as improved mix, partially offset by higher trade spending in support of Grown in Idaho branded products. Volume increased 2 percent, primarily driven by distribution gains of Grown in Idaho as well as growth of Alexia and other branded products.
Net sales in our Other segment increased $1.9 million, or 6%, to $32.9 million, compared with $31.0 million in the second quarter of fiscal 2017. The increase primarily reflects improved pricing and sales mix in our vegetable business.
Product Contribution Margin
Lamb Weston’s product contribution margin for the second quarter of fiscal 2018 was $203.7 million, an increase of $10.7 million, or 6%, compared to the second quarter of fiscal 2017.
Global product contribution margin declined $4.1 million, or 4%, to $88.2 million in the second quarter of fiscal 2018. Global cost of sales was $327.7 million, up 3% compared to the second quarter of fiscal 2017, due to commodity, manufacturing, transportation and warehousing cost inflation, as well as higher depreciation expense and start-up costs associated with the new Richland production line, partially offset by lower sales volumes. While favorable price/mix offset product cost inflation, the additional costs related to the new Richland line drove the earnings decline. In addition,
29
advertising and promotion spending decreased in the second quarter of 2018 as compared to the second quarter of fiscal 2017.
Foodservice product contribution margin increased $12.0 million, or 15%, to $92.2 million in the second quarter of fiscal 2018, largely as a result of favorable price/mix. Cost of sales was $179.2 million, or 6% higher than in the second quarter of fiscal 2017, primarily driven by commodity, manufacturing, transportation and warehousing cost inflation; higher depreciation expense and start-up costs associated with the new Richland production line; and an increase in sales volumes. Advertising and promotion spending decreased in the second quarter of fiscal 2018 as compared to the second quarter of fiscal 2017.
Retail product contribution margin decreased $1.5 million, or 7%, to $19.4 million, mainly due to higher trade spending as well as commodity, manufacturing, transportation and warehousing cost inflation. Cost of sales was $79.7 million, up 9% compared to the second quarter of fiscal 2017, primarily due to commodity, manufacturing, transportation and warehousing cost inflation, as well as an increase in sales volumes. Advertising and promotion spending increased in the second quarter of fiscal 2018 as compared to the second quarter of fiscal 2017, driven by marketing spend in support of Grown in Idaho.
Other product contribution margin was $3.9 million, an increase of $4.3 million as compared to a $0.4 million loss in the second quarter of fiscal 2017. The increase primarily relates to an expense in the prior year related to a recall of some vegetable products that were produced by a third party, as well as improved pricing in the vegetable business.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased $4.0 million, or 5%, to $69.4 million in the second quarter of fiscal 2018 compared with the same period in 2017. The second quarter of fiscal 2018 and fiscal 2017 included $4.0 million and $9.0 million, respectively, of expense for costs related to the Separation. Excluding these costs, selling, general and administrative expenses increased $1.0 million, or 2%, largely due to incremental costs associated with being a stand-alone public company.
Interest Expense, Net
Interest expense, net was $27.4 million for the second quarter of fiscal 2018, an increase of $20.6 million compared with the same period in fiscal 2017. The increase in interest expense, net was the result of the debt incurred in connection with the Separation. For more information, see Note 11, Debt and Financing Obligations in the Notes to Condensed Combined and Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report. For the period prior to the Separation, interest expense was included only for the legal entities that comprised Lamb Weston, and did not include any allocated interest expense from Conagra.
Income Taxes
Income tax expense for the second quarter of fiscal 2018 and 2017 was $41.5 million and $33.9 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 33% for the second quarter of fiscal 2018 and 27% for the second quarter of fiscal 2017. The lower rate in the second quarter of fiscal 2017 is primarily attributable to an increase in Separation-related costs determined to be deductible, as well as a discrete benefit from fiscal 2016 foreign taxes. The effective tax rate varies from the U.S. federal statutory tax rate of 35% principally due to the impact of U.S. state taxes, the domestic manufacturers’ deduction, foreign taxes and other permanent differences.
Equity Method Investment Earnings
We conduct meaningful business through unconsolidated joint ventures in the U.S. and Europe and include our share of the earnings based on our economic ownership interest in them. Lamb Weston’s share of earnings from its equity method investments was $12.1 million and $6.2 million for the second quarter of fiscal 2018 and 2017, respectively. These amounts included a $2.7 million unrealized loss related to mark-to-market adjustments associated with currency hedging
30
contracts in the current quarter, and a $0.7 million gain related to the contracts in the prior year period. Excluding these adjustments, earnings from equity method investments increased $9.3 million, largely due to favorable price/mix in the U.S. and Europe, as well as the benefit of lower raw potato costs in Europe. For more information about our joint ventures, see Note 8, Investments in Joint Ventures, of the Notes to Condensed Combined and Consolidated Financial Statements in “Part, Item 1. Financial Statements” of this report.
Twenty-Six Weeks Ended November 26, 2017 compared to Twenty-Six Weeks Ended November 27, 2016
Net Sales and Product Contribution Margin
(dollars in millions)
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| Net Sales |
| Product Contribution Margin | ||||||||||||
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| November 26, |
| November 27, |
| % Inc |
| November 26, |
| November 27, |
| % Inc | ||||
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| 2017 |
| 2016 |
| Inc/(Dec) |
| 2017 |
| 2016 |
| Inc/(Dec) | ||||
Global |
| $ | 830.8 |
| $ | 811.8 |
| 2% |
| $ | 162.9 |
| $ | 165.9 |
| (2%) |
Foodservice |
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| 552.2 |
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| 510.9 |
| 8% |
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| 183.1 |
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| 159.7 |
| 15% |
Retail |
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| 194.0 |
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| 186.1 |
| 4% |
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| 35.9 |
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| 40.5 |
| (11%) |
Other |
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| 65.1 |
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| 58.2 |
| 12% |
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| 15.0 |
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| 2.8 |
| NM |
Total |
| $ | 1,642.1 |
| $ | 1,567.0 |
| 5% |
| $ | 396.9 |
| $ | 368.9 |
| 8% |
Net Sales
Lamb Weston’s net sales for the first half of fiscal 2018 were $1,642.1 million, an increase of $75.1 million, or 5%, compared to the first half of fiscal 2017.
Global net sales increased $19.0 million, or 2%, to $830.8 million, compared with $811.8 million in the first half of fiscal 2017. Fiscal 2018 first half net sales reflect a 2% increase in price/mix associated with actions to increase prices across the customer base, as well as actions to improve customer and product mix. Sales volumes were flat, with volume growth in the U.S. largely driven by strategic customers offset by the elimination of less-profitable volume in North America and international as well as lower shipments to certain export markets.
Foodservice net sales increased $41.3 million, or 8%, to $552.2 million, compared with $510.9 million in the first half of fiscal 2017. Fiscal 2018 first half net sales reflect a 7% increase in price/mix, primarily reflecting the favorable carryover effect of pricing actions taken in fiscal 2017, pricing actions implemented in the current year, and improvement in customer and product mix. Additionally, fiscal 2018 first half net sales reflect a 1% increase in sales volume, driven by broad-based growth across the segment’s customer base.
Retail net sales increased $7.9 million, or 4%, to $194.0 million, compared with $186.1 million in the first half of fiscal 2017. Fiscal 2018 first half net sales reflect a 5% increase in sales volume, largely reflecting distribution gains of Grown in Idaho branded products and growth of Alexia branded, other branded and private label products. Price/mix declined 1%, with higher trade spending behind Grown in Idaho, partially offset by higher prices across our branded and private label products.
Net sales in our Other segment increased $6.9 million, or 12%, to $65.1 million, compared with $58.2 million in the first half of fiscal 2017. Compared with the first half of fiscal 2017, the increase in net sales primarily reflects improved sales volume and mix in our vegetable business.
Product Contribution Margin
Lamb Weston’s product contribution margin for the first half of fiscal 2018 was $396.9 million, an increase of $28.0 million, or 8%, compared to the first half of fiscal 2017.
31
Global product contribution margin decreased $3.0 million, or 2%, to $162.9 million in the first half of fiscal 2018, with higher manufacturing and supply chain costs more than offsetting favorable price/mix. Global cost of sales was $666.2 million, up 4% as compared to the first half of fiscal 2017, primarily driven by inflation on commodity, manufacturing, transportation and warehousing costs, as well as higher depreciation expense and start-up costs associated with the new Richland production line. Advertising and promotion spending decreased in the first half of 2018 as compared to the first half of fiscal 2017.
Foodservice product contribution margin increased $23.4 million, or 15%, to $183.1 million in the first half of fiscal 2018, largely as a result of favorable price/mix. Cost of sales was $366.2 million, or 5% higher than in the first half of fiscal 2017, primarily driven by inflation on commodity, manufacturing, transportation and warehousing costs; higher depreciation expense and start-up costs associated with the new Richland production line; and an increase in sales volumes. Advertising and promotion spending decreased in the first half of fiscal 2018 as compared to the first half of fiscal 2017.
Retail product contribution margin decreased $4.6 million, or 11%, to $35.9 million, largely due to higher trade spending in support of distribution gains of Grown in Idaho branded products. Cost of sales was $150.0 million, up 9% as compared to the first half of fiscal 2017, primarily due to commodity, manufacturing transportation and warehousing cost inflation, as well as an increase in sales volumes. Advertising and promotion spending increased modestly in the first half of fiscal 2018 as compared to the first half of fiscal 2017, driven by marketing spend in support of Grown in Idaho.
Other product contribution margin increased $12.2 million to $15.0 million. The increase primarily relates to an expense in the prior year related to a recall of some vegetable products that were produced by a third party, a change in mark-to-market adjustments of approximately $4 million associated with commodity contracts, and improved pricing in the vegetable business.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased $0.5 million, or less than 1%, to $128.5 million in the first half of fiscal 2018 compared with the same period in 2017. The first half of fiscal 2018 and fiscal 2017 included $6.2 million and $18.7 million, respectively, of expense for costs related to the Separation. Excluding costs recorded in connection with the Separation, selling, general and administrative expenses increased $12.0 million, or 11%, largely due to incremental costs associated with being a stand-alone public company.
Interest Expense, Net
Interest expense, net was $52.6 million for the first half of fiscal 2018, an increase of $44.3 million compared with the same period in fiscal 2017. The increase in interest expense, net was the result of the debt incurred in connection with the Separation. For more information, see Note 11, Debt and Financing Obligations in the Notes to Condensed Combined and Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report. For the period prior to the Separation, interest expense was included only for the legal entities that comprised Lamb Weston, and did not include any allocated interest expense from Conagra.
Income Taxes
Income tax expense for the first half of fiscal 2018 and 2017 was $85.6 million and $84.9 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 33% for both the first half of fiscal 2018 and 2017. The effective tax rate varies from the U.S. federal statutory tax rate of 35% principally due to the impact of U.S. state taxes, the domestic manufacturers’ deduction, foreign taxes and other permanent differences.
Equity Method Investment Earnings
Lamb Weston’s share of earnings from its equity method investments was $32.1 million and $16.8 million for the first half of fiscal 2018 and 2017, respectively. The increase was due to favorable price/mix in the U.S. and Europe, and the benefit of lower raw potato costs in Europe. The year-over-year increase in unrealized gains related to mark-to-
32
market adjustments associated with currency hedging contracts was insignificant. For more information about our joint ventures, see Note 8, Investments in Joint Ventures, of the Notes to Condensed Combined and Consolidated Financial Statements in “Part, Item 1. Financial Statements” of this report.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of liquidity are net cash provided by operating activities and borrowings under our revolving credit facility. At November 26, 2017, we had $71.1 million of cash and cash equivalents, which included $48.7 million and $35.1 million, respectively, of cash at our operations outside the United States, and $436.0 million of available borrowing capacity. Currently, our primary uses of cash are for operations, capital expenditures, dividends on our common stock and debt service. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility, and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payment of any dividends declared for at least the next twelve months.
Cash Flows
Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities:
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| November 27, |
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| 2017 |
| 2016 |
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| Inc (Dec) | ||
Net cash flows provided by (used for): |
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Operating activities |
| $ | 182.2 |
| $ | 162.4 |
| $ | 19.8 |
Investing activities |
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| (155.7) |
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| (125.8) |
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| (29.9) |
Financing activities |
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| (15.9) |
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| (2.8) |
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| (13.1) |
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| 10.6 |
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| 33.8 |
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| (23.2) |
Effect of exchange rate changes on cash and cash equivalents |
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| 3.4 |
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| (0.8) |
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| 4.2 |
Net increase (decrease) in cash and cash equivalents |
| $ | 14.0 |
| $ | 33.0 |
| $ | (19.0) |
Operating Activities
In the first half of fiscal 2018, cash provided by operating activities increased $19.8 million to $182.2 million, compared with $162.4 million in the same period a year ago. Compared with the first half of fiscal 2017, earnings from operations, adjusted for non-cash income and expense and other items, increased $36.1 million due primarily to favorable price/mix, volume, and an increase in earnings from our equity method investments. Changes in operating assets and liabilities used $16.3 million more cash in the first half of fiscal 2018, compared with 2017. The decrease in cash provided by changes in operating assets and liabilities was driven primarily by the timing of payments for accrued expenses relating to employee compensation and interest in fiscal 2018, as well as the build-up of raw product and finished goods inventories, largely due to the start-up of the Richland french fry production line. These cash outflows were offset partially by the timing of payments for accounts payable.
Investing Activities
Investing activities used $155.7 million of cash in the first half of fiscal 2018, compared with $125.8 million in the same period in the prior year. The increase related primarily to our plant capacity expansions at our Boardman, Oregon and Richland, Washington facilities in fiscal 2018, compared with fiscal 2017. Cash used for capital expenditures is expected to be approximately $250 million for fiscal 2018, an increase of $25 million versus our previous estimate of $225 million. This increase primarily relates to costs associated with the initial phase of construction of a new production line at our Hermiston, Oregon facility announced on December 21, 2017.
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Financing Activities
During the first half of fiscal 2018, cash used for financing activities totaled $15.9 million, compared with cash used for financing activities of $2.8 million during the same period a year ago. During the first half of fiscal 2018, financing activities primarily related to the payment of $54.8 million to stockholders for dividends and $19.3 million of debt payments, primarily under our term loan facility, offset partially by $66.1 million of short-term borrowings.
During the first half of fiscal 2017, cash used for financing activities primarily related to the Separation. In fiscal 2017, we issued $2,341.0 million of debt in connection with the Separation, of which $1,542.9 million of proceeds were distributed directly to Conagra (including $25.4 million that Conagra used to pay debt issuance costs) and are considered a noncash financing activity for Lamb Weston. We received $798.1 million of cash proceeds from the debt issuance. We used the $798.1 million of proceeds, together with borrowings on the revolving credit facility, to fund an $823.5 million cash payment to Conagra on the Separation Date. At November 27, 2016, we had $80.0 million of borrowings outstanding under the revolving credit facility. We paid $9.6 million of debt issuance costs and accrued another $2.3 million in our Condensed Combined and Consolidated Balance Sheet at November 27, 2016. Cash distributions to noncontrolling interests were $5.6 million in the first half of fiscal 2017, and we made $3.4 million of debt repayments.
For more information about our debt, interest rates, maturity dates, and covenants, see Note 11, Debt and Financing Obligations of the Notes to Condensed Combined and Consolidated Financial Statements in “Part I., Item 1. Financial Statements” of this report. At November 26, 2017, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreement.
Obligations and Commitments
There have been no material changes to the contractual obligations disclosed in “Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
To supplement the financial information included in this report, we have presented Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures, each of which is considered a non-GAAP financial measure. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternativealternatives for, financial measures prepared in accordance with GAAP. These non-GAAP financial measures may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures the same way. These measures are not a substitute for their comparable GAAP financial measure,measures, such as net income, (loss), and there are limitations to using non-GAAP financial measures.
34
The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures. ventures.
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| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| November 26, |
| November 27, |
| November 26, |
| November 27, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net income attributable to Lamb Weston Holdings, Inc. |
| $ | 76.6 |
| $ | 87.2 |
| $ | 160.0 |
| $ | 166.8 |
Income attributable to noncontrolling interests |
|
| 6.4 |
|
| 3.8 |
|
| 11.3 |
|
| 7.3 |
Equity method investment earnings |
|
| (12.1) |
|
| (6.2) |
|
| (32.1) |
|
| (16.8) |
Interest expense, net |
|
| 27.4 |
|
| 6.8 |
|
| 52.6 |
|
| 8.3 |
Income tax expense |
|
| 41.5 |
|
| 33.9 |
|
| 85.6 |
|
| 84.9 |
Income from operations |
|
| 139.8 |
|
| 125.5 |
|
| 277.4 |
|
| 250.5 |
Depreciation and amortization |
|
| 34.5 |
|
| 26.4 |
|
| 64.3 |
|
| 51.8 |
Items impacting comparability (a) |
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|
|
Expenses related to the Separation |
|
| 4.0 |
|
| 9.0 |
|
| 6.2 |
|
| 18.7 |
Adjusted EBITDA (b) |
|
| 178.3 |
|
| 160.9 |
|
| 347.9 |
|
| 321.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated Joint Ventures |
|
|
|
|
| — |
|
|
|
|
|
|
Equity method investment earnings |
|
| 12.1 |
|
| 6.2 |
|
| 32.1 |
|
| 16.8 |
Interest expense, income tax expense, and depreciation and amortization |
|
|
|
|
| — |
|
|
|
|
|
|
included in equity method investment earnings |
|
| 5.9 |
|
| 5.7 |
|
| 13.6 |
|
| 11.2 |
Add: EBITDA from unconsolidated joint ventures |
|
| 18.0 |
|
| 11.9 |
|
| 45.7 |
|
| 28.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Joint Ventures |
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to noncontrolling interests |
|
| (6.4) |
|
| (3.8) |
|
| (11.3) |
|
| (7.3) |
Interest expense, income tax expense, and depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
included in income attributable to noncontrolling interests |
|
| (1.0) |
|
| (0.9) |
|
| (2.0) |
|
| (1.8) |
Subtract: EBITDA from consolidated joint ventures |
|
| (7.4) |
|
| (4.7) |
|
| (13.3) |
|
| (9.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA including unconsolidated joint ventures |
| $ | 188.9 |
| $ | 168.1 |
| $ | 380.3 |
| $ | 339.9 |
| | | | | |
| Thirteen Weeks Ended | ||||
| August 30, |
| August 25, | ||
| 2020 | | 2019 | ||
Net income | $ | 89.3 | | $ | 115.7 |
Equity method investment earnings | | (11.9) | | | (10.6) |
Interest expense, net | | 30.3 | | | 28.2 |
Income tax expense | | 28.0 | | | 36.7 |
Income from operations | | 135.7 | | | 170.0 |
Depreciation and amortization | | 45.6 | | | 43.1 |
EBITDA | | 181.3 | | | 213.1 |
| | | | | |
Unconsolidated Joint Ventures | | | | | |
Equity method investment earnings | | 11.9 | | | 10.6 |
Interest expense, income tax expense, and depreciation and | | | | | |
amortization included in equity method investment earnings | | 8.6 | | | 9.2 |
Add: EBITDA from unconsolidated joint ventures | | 20.5 | | | 19.8 |
| | | | | |
EBITDA including unconsolidated joint ventures | $ | 201.8 | | $ | 232.9 |
25
|
|
|
|
Off-Balance Sheet Arrangements
There have been no material changes to the off-balance sheet arrangements disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Form 10-K.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K. There were no material changes to these critical accounting estimates during the first halfquarter of fiscal 2018. 2021.
New and Recently Adopted Accounting StandardsPronouncements
For a listinglist of our new and recently adopted accounting standards,pronouncements, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Condensed Notes to Condensed Combined and Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Lamb Weston’sOur operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, we periodically enter into derivatives to minimize these risks, but not for trading purposes. The COVID-19 pandemic has resulted in significant volatility and uncertainty in the markets in which we operate. At the time of this filing, we are unable to predict or determine the impacts that the COVID-19 pandemic may have on our exposure to market risk from commodity prices, foreign currency exchange rates and interest rates, among other factors.
Based on our open commodity contract hedge positions as of November 26, 2017,August 30, 2020, a hypothetical 10 percent decline in market prices applied to the fair value of the instruments would result in a charge to “Cost of sales” of approximately $3.2 $1.4million ($2.0 1.1million net of income tax benefit)benefits). It should be noted that any change in the fair value of the contracts, real or hypothetical, would be substantially offset by an inverse change in the value of the underlying hedged item.
At November 26, 2017,August 30, 2020, we had $1,688.1$2,166.0 million of fixed-rate and $744.6$882.6 million of variable-rate debt outstanding. We have interest rate risk associated with our variable-rate debt. A one percent increase in interest rates related to variable-rate debt would have resulted in an increase in interest expense and a corresponding decrease in income before taxes of approximately $7.5$8.9 million annually.annually ($6.9 million net of income tax benefit).
See Note 14, Derivative Financial Instruments, and Note 11,9, Debt and Financing Obligations, of the Condensed Notes to Condensed Combined and Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report. Additionally, 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.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company'sOur management, carried out an evaluation, with the participation of the Company'sour Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company'sour disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of November 26, 2017.August 30, 2020. Based upon that evaluation, theour Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, the Company'sour disclosure controls and procedures were effective.effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
26
Changes in Internal Control over Financial Reporting
The Company'sOur management, with the participation of the Company'sour Chief Executive Officer and Chief Financial Officer, evaluated any change in the Company'sour internal control over financial reporting that occurred during the quarter covered by this report and determined that there was no change in our internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II — OTHER INFORMATION
See Note 17,14, Commitments, Contingencies, Guarantees and Legal Proceedings, of the Condensed Notes to Condensed Combined and Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report for information regarding our legal proceedings.
We are subject to various risks and uncertainties in the course of our business. The discussion of these risks and uncertainties may be found under “Risk“Part I, Item 1A. Risk Factors” in the Form 10-K. There have been no material changes to the risk factors.
36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information related to our repurchases of common stock madeTotal shares purchased during the thirteen weeks ended November 26, 2017:August 30, 2020 were as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | Approximate Dollar | |
| | | | | | | | Total Number of | | Value of Maximum | ||
| | Total Number | | Average | | Shares (or Units) | | Number of Shares that | ||||
| | of Shares (or | | Price Paid | | Purchased as Part of | | May Yet be Purchased | ||||
| | Units) | | Per Share | | Publicly Announced | | Under Plans or Programs | ||||
Period |
| Purchased (a) |
| (or Unit) |
| Plans or Programs (b) |
| (in millions) (b) | ||||
June 1, 2020 through June 28, 2020 | | | — | | $ | — | | | — | | $ | 195.3 |
June 29, 2020 through July 26, 2020 | | | — | | $ | — | | | — | | $ | 195.3 |
July 27, 2020 through August 30, 2020 | | | 151,151 | | $ | 63.74 | | | — | | $ | 195.3 |
Total | | | 151,151 | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Number of |
| Approximate Dollar | ||
|
| Total Number |
| Average |
| Shares |
| Value of Maximum | ||||
|
| of Shares (or |
| Price Paid |
| Purchased as Part of |
| Number of Shares that | ||||
|
| units) |
| per Share |
| Publicly Announced |
| May Yet be Purchased | ||||
Period |
| Purchased (a) |
| (or unit) |
| Plans or Programs |
| Under the Program | ||||
August 28, 2017 through September 24, 2017 |
|
| — |
|
| — |
|
| — |
|
| — |
September 25, 2017 through October 22, 2017 |
|
| 1,616 |
|
| 50.00 |
|
| — |
|
| — |
October 23, 2017 through November 26, 2017 |
|
| 483 |
|
| 50.72 |
|
| — |
|
| — |
Total |
|
| 2,099 |
| $ | 50.17 |
|
| — |
|
| — |
(a) |
| Represents shares withheld from employees to cover income and payroll taxes on equity awards that vested during the period. |
(b) | In December 2018, our Board of Directors authorized a $250.0 million share repurchase program with no expiration date. Repurchases may be made at our discretion from time to time on the open market, subject to applicable laws, or through privately negotiated transactions. No repurchases were made during the quarter ended August 30, 2020. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
3727
Exhibit Number |
| Exhibit Description | |
| | ||
10.1 |
| ||
|
| ||
| |||
| | ||
|
| Form of Lamb Weston Holdings, Inc. Performance Share Agreement (post-July 2020)* | |
| | ||
31.1 |
| ||
| | | |
31.2 |
| ||
| | | |
32.1 |
| ||
| | | |
32.2 |
| ||
| | | |
101.INS |
| XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| | | |
101.SCH |
|
| |
| | | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
| | | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
| | | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
| | | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
| | | |
104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in | ||
| | |
* Management contract or compensatory plan.
3828
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LAMB WESTON HOLDINGS, INC. | |
| | |
| By: | /s/ ROBERT M. MCNUTT |
| | ROBERT M. MCNUTT |
| | Senior Vice President and Chief Financial Officer |
| | |
| | |
| | |
| | |
Dated this | | |
3929