LAMB WESTON HOLDINGS, INC. 
The following discussion and analysis is intended to provide a summary of significant factors relevant to our financial performance and condition. The discussion and analysis should be read together with our consolidated financial statements and related notes in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K. Results for the fiscal year endedMay 31, 2020 are not necessarily indicative of results that may be attained in the future. The following generally discusses fiscal 2020 and 2019 items and fiscal year comparisons between fiscal 2020 and 2019. Discussions of fiscal 2018 items and fiscal year comparisons between fiscal 2019 and 2018 that are not included in this Form 10-K can be found in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedMay 26, 2019 , which we filed with theSecurities and Exchange Commission onJuly 25, 2019 .
The fiscal years for the Consolidated Financial Statements presented consist of a 53-week period for fiscal 2020 and a 52-week period for fiscal 2019.
OverviewLamb Weston , along with its joint venture partners, is a leading global producer, distributor, and marketer of value-added frozen potato products. We, along with our joint venture partners, are the number one supplier of value-added frozen potato products inNorth America . We, along with our joint venture partners, are also 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 venture partners, offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our value-added frozen potato product portfolio. OnNovember 9, 2016 , we separated fromConagra and became an independent publicly traded company through the pro rata distribution byConagra of 100% of our outstanding common stock toConagra stockholders. In connection with the Separation,Conagra transferred substantially all of the assets and liabilities and operations of theLamb Weston business to us. Management's discussion and analysis of our results of operations and financial condition, which we refer to in this filing as "MD&A," is provided as a supplement to the consolidated financial statements and related notes included elsewhere in this Form 10-K 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 withU.S. generally accepted accounting principles ("GAAP") and certain other financial data (Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS) that is prepared using non-GAAP financial measures. See "Reconciliations of Non-GAAP Financial Measures to Reported Amounts" below for the definitions of Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS, and a reconciliation of these non-GAAP financial measures to net income or diluted earnings per share. Executive Summary OnMarch 11, 2020 (during our fiscal fourth quarter), theWorld Health Organization declared that the spread of COVID-19 qualified as a global pandemic. Local, state, and national governments emphasized the importance of food supply and asked that food manufacturers and retailers remain open to meet the needs of their communities. Throughout 25
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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 facility at which the employee works in order to sanitize and disinfect the facility before allowing employees to return to the facility and restart operations.Lamb Weston delivered solid sales and earnings growth through the first three quarters of fiscal 2020. However, efforts by governments worldwide to control the spread of COVID-19 have resulted in significant social and economic restrictions, which included quarantines, travel bans, shutdowns, closures of many sit down restaurants, and shelter-in-place or stay-at-home orders. These restrictions have had, and continue to have, a negative effect on portions of our business and theU.S. and global economy. As a result, our sales in the fiscal fourth quarter declined, offsetting most of the growth that we generated earlier in our fiscal year. Following the government-imposed restrictions on restaurants and other foodservice operations and stay-at-home orders, we saw significant changes in french fry consumption and purchasing patterns. As a result, we experienced favorable revenue and earnings impacts within our Retail segment, which has historically contributed approximately 13% of totalLamb Weston sales, but these favorable impacts were more than offset by the unfavorable impacts within our food-away-from-home businesses in our Global and Foodservice segments. Specifically, through the end of fiscal 2020, we observed the following:
In
restrictions, approximately 65% of all french fries were purchased at quick
service restaurants ("QSRs"), with another approximately 20% purchased at
full-service restaurants. The remaining approximately 15% of french fries were
purchased at retail locations. Of the french fries purchased at QSRs,
approximately two-thirds are purchased by consumers through drive-thru,
carry-out or delivery options, with the remaining one-third consumed while
dining in at restaurants. The availability of a drive-thru option has enabled
QSRs to better weather the impact of government-imposed shelter-in-place
restrictions than restaurants without that option. After pandemic-related
restrictions were adopted, our weekly shipments to QSRs, in aggregate, fell to
approximately 50% of pre-COVID levels in late-March through mid-April, then
gradually recovered to approximately 85% of weekly pre-COVID levels by the end
of May as consumer demand returned and customers restocked inventories as
states began easing restrictions. While many full-service restaurants and other
? foodservice operations, which together represent approximately 80% of our
Foodservice segment's sales, have taken steps to increase take-out and delivery
sales, consumer traffic at these operations, in aggregate, was significantly
more affected. Our weekly shipments to these operations fell to approximately
20% of pre-COVID levels in late-March through mid-April, then gradually
recovered to approximately 70% of weekly pre-COVID levels by the end of May. In
contrast, retail demand for frozen french fries, in aggregate, has
significantly increased as food-at-home consumption rose. Our weekly shipments
to retail customers increased approximately 50% in late-March through
mid-April, and gradually slowed to increasing approximately 30% by the end of
May. During our fiscal fourth quarter for fiscal 2020, we increased production
of our retail products in order to meet this higher demand. While we have
realized improvements in shipments in each of our primary sales channels since
year end, we believe these improvements may become less pronounced, cease or
reverse as the spread of COVID-19 continues and states reinstate or otherwise
postpone on-premises dining.
In
percentage of our sales are to QSRs. Unlike the
result, the effect of government-imposed restrictions on french fry demand in
?
foodservice operations in the
April were approximately 35% of pre-COVID levels, and recovered to
approximately 60% by the end of May. This negatively impacted
earnings, in our fiscal fourth quarter.
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In
that significantly reduced restaurant traffic, our monthly shipments declined
? approximately 50% in February, and recovered to approximately 70% of pre-COVID
levels by the end of March. By the end of May, our monthly shipments recovered
to approximately 80% of pre-COVID levels.
In
?
largely 70%-80% of pre-COVID levels through late April. Our shipments began to
soften at the end of May in certain markets due to inventory destocking.
For the full fiscal year, our earnings declined, largely due to lower sales and higher costs related to the pandemic.
Our fiscal 2020 financial results include the benefit of an additional week ("53rd week") of sales, earnings and cash flow versus fiscal 2019. Compared with fiscal 2019:
? Net sales increased 1% to
? Income from operations declined 17% to
? Net income attributable to
? Diluted earnings per share declined 22% to
declined 22% to
Income from operations and Adjusted EBITDA including unconsolidated joint
? ventures included approximately
pandemic's impact on our operations, as described below
? Adjusted EBITDA including unconsolidated joint ventures declined 12% to
million
? Net cash provided by operating activities declined 16% to
Comparing performance with fiscal 2019, the increase in net sales was driven by improved price/mix, largely due to pricing actions in our Foodservice and Retail segments. Volume was flat, as declines in our Foodservice segment, which was disproportionately affected by the government-imposed restrictions on restaurants and other foodservice operations, offset growth in our Retail and Global segments. Volume in both our Global and Foodservice segments was also negatively affected by customers destocking inventories as they adjusted to the abrupt change in the operating environment during our fiscal fourth quarter. Income from operations declined, largely due to costs related to the pandemic's impact on our operations, and higher manufacturing costs due to input cost inflation, inefficiencies, higher depreciation expense and unfavorable mix. The effect of higher SG&A expenses was modest relative to the decline in gross profit. In fiscal 2020, we and our unconsolidated joint ventures incurred approximately$74 million of costs, net of employee retention credits provided by the CARES Act and other labor incentives, related to the pandemic's impact on operations as follows:
Approximately
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 costs to shift certain manufacturing lines from producing foodservice-oriented products to retail-oriented products;
Approximately
consisting of expensing crop year 2019 contracts for raw potatoes that could
? not be used due to the pandemic's near-term effect on demand for frozen potato
products, as well as incremental warehousing, transportation and supply chain
costs due to lower product throughput;
Approximately
("SG&A") and other expenses, largely comprised of costs to adopt and maintain
enhanced employee safety and sanitation protocols, including purchases of
? safety and health screening equipment, costs to retain certain sales employees,
net of CARES Act retention credits and other labor incentives, and expensing
certain capitalized costs for manufacturing facility expansion projects that
were stopped; and
Approximately
? SG&A costs (including
factory utilization-related and$12 million that were non-factory utilization-related) at our unconsolidated joint ventures. 27 Table of Contents
We expect that we will continue to incur some of these costs until the COVID-19 pandemic no longer has an impact on our operations.
During the fourth quarter, in response to the significant decrease in demand as the COVID-19 virus spread throughout the world, we reduced production at our factories to align with demand, instituted a company-wide hiring freeze, and delayed non-essential expenditures. We took actions to enhance our liquidity, including working capital management; significantly reducing our capital program; raising over$1 billion of liquidity, including borrowing$495.0 million from our previously undrawn revolving credit facility, entering into a new$325.0 million term loan facility, issuing$500.0 million of senior notes, and suspending future share repurchases. In addition, atMay 31, 2020 , we qualified for and recorded a$9.5 million receivable for employee retention credits under the CARES Act and other labor incentives. The CARES Act also allows us to defer payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount dueDecember 31, 2021 , and the remaining 50% dueDecember 31, 2022 . Considering the current environment, with a significant number of employees working remotely, we deferred work on the second phase of our new enterprise resource planning ("ERP") system. As a result of these actions, our cash and cash equivalents balance atMay 31, 2020 , was$1,364.0 million . See Liquidity and Capital Resources in this MD&A below for more information. Outlook As discussed above, following the government-imposed restrictions on restaurants and other foodservice operations, which largely began during the fourth quarter of fiscal 2020, the demand for frozen potato products decreased inNorth America ,Europe , and most of our key international markets. The outlook for the spread of COVID-19, as well as governments' efforts to contain the virus, 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. Because of uncertainty around government actions and consumer behaviors related to the virus, we expect the impact of the COVID-19 pandemic on consumer demand and our sales volume may be pronounced in fiscal 2021, especially for full-service restaurants and other operations that have traditionally relied on on-premise dining traffic, and other non-commercial foodservice operations, such as hotels, schools and universities, and sporting venues. While governments began easing restrictions on restaurants, and we realized improvements in our shipments in each of our primary sales channels through the first seven weeks of the first quarter of fiscal 2021, we believe these improvements may become less pronounced, cease or reverse as the spread of COVID-19 continues and government authorities reinstate or otherwise postpone on-premises dining restrictions. 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. As we disclosed in our Form 8-K filed with theSEC onMay 7, 2020 , we reduced contracting of raw potatoes by approximately 20%-25% for the 2020 crop year, compared with our 2019 crop year purchases. We believe that there will likely be adequate non-contracted processing potatoes available for purchase in the event that frozen potato demand exceeds our initial forecast. We will continue to evaluate various options to adjust our operations, including temporarily closing facilities and/or modifying production schedules to rebalance utilization rates across our manufacturing network. We expect that we will continue to incur costs as a result of the COVID-19 pandemic's impact on our manufacturing, supply chain, commercial and functional support operations. For example, these may include: costs to adopt and maintain enhanced employee safety and sanitation protocols, such as purchasing personal protection and health screening equipment and services; costs to shut down, sanitize, and restart production facilities after a production employee has been infected by the virus; production inefficiencies and labor retention costs arising from modifying production schedules, reducing run-times, and lower overall factory utilization; incremental warehousing and transportation costs; and costs to retain sales and functional support employees. In fiscal 2021, we expect the rate of inflation for many of our commodity and manufacturing costs in the near term will be similar to what we experienced in fiscal 2020. While we have implemented a hiring and salary freeze for ourU.S. salaried positions in the near term, we expect overall SG&A may be higher as a result of the completion of the first phase of our ERP project, as well as for continued investments in operations and other functional capabilities, which are designed to drive operating efficiencies and support growth over the long term. 28 Table of Contents Results of Operations We have four reportable segments: Global, Foodservice, Retail, and Other. For each period presented, we report net sales and product contribution margin by segment. Net sales and product contribution margin are the primary measures 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. Product contribution margin excludes general corporate expenses and interest expense because management believes these amounts are not directly associated with segment performance for the period. For additional information on our reportable segments, see Note 14, Segments, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in this Form 10-K.
Fiscal Year Ended
Year Ended
May 31, May 26, %
2020 2019 Inc/(Dec)
Segment sales
Global $ 1,973.6 $ 1,961.5 1%
Foodservice 1,069.1 1,156.1 (8%)
Retail 595.5 498.3 20%
Other 154.2 140.6 10%
$ 3,792.4 $ 3,756.5 1%
Segment product contribution margin
Global $ 374.5 $ 446.3 (16%)
Foodservice 356.0 402.4 (12%)
Retail 117.6 98.8 19%
Other 24.1 23.6 2%
872.2 971.1 (10%)
Advertising and promotion expenses 23.0 32.4 (29%)
Gross profit $ 895.2 $ 1,003.5 (11%)
Net Sales
Lamb Weston's net sales for fiscal 2020 increased$35.9 million , or 1%, to$3,792.4 million , compared with$3,756.5 million in fiscal 2019. Excluding the benefit of the 53rd week, net sales declined 1%. Price/mix increased 1% due to pricing actions and favorable mix, largely due to pricing actions in our Foodservice and Retail segments. Volume was flat, or down 3% excluding the benefit of the 53rd week, as strong growth through the first three fiscal quarters was offset by the sharp and abrupt decline in demand for frozen potato products outside the home during the fiscal fourth quarter as a result of government-imposed restrictions on restaurants and other foodservice operations to slow the spread of the COVID-19 virus, as well as customers destocking inventories as they adjusted to abrupt change in the business environment. Global net sales increased$12.1 million , or 1%, to$1,973.6 million , compared with$1,961.5 million in fiscal 2019. Excluding the benefit of the 53rd week, net sales declined 1%. Volume increased 1%, or down 1% excluding the benefit of the 53rd week, driven by growth in sales to strategic customers in theU.S. and key international markets during the first three quarters of the fiscal year. Volume growth was partially offset by the sharp decline in demand for frozen potato products outside the home during the fourth quarter, primarily attributable to government-imposed restrictions on restaurant and other foodservice-related operations. Price/mix was flat as positive pricing actions were offset by unfavorable customer mix. 29 Table of Contents
Foodservice net sales decreased$87.0 million , or 8%, to$1,069.1 million , compared with$1,156.1 million in fiscal 2019. Excluding the benefit of the 53rd week, net sales declined 8%. Price/mix increased 2%, primarily reflecting pricing actions initiated in the fall of 2019. Volume decreased 10%, or 10% excluding the benefit of the 53rd week. Volume growth of distributor private label andLamb Weston branded products was solid during the first three quarters of the fiscal year, but fell as demand for frozen potato products outside the home, especially at full-service restaurants and non-commercial operations (e.g., hotels, schools and universities, sporting venues) dropped sharply during the fourth quarter following government-imposed restrictions on restaurant and other foodservice operations, as well as customers destocking inventories as they adjusted to the abrupt change in the business environment. Retail net sales increased$97.2 million , or 20%, to$595.5 million , compared with$498.3 million in fiscal 2019. Excluding the benefit of the 53rd week, net sales increased 16%. Volume increased 13%, or 10% excluding the benefit of the 53rd week, due to increased in-home consumption of frozen potato products following government-imposed stay-at-home orders during the fiscal fourth quarter. Demand was strong across our premium and mainstream branded offerings, as well as for our private label products. Price/mix increased 7%, largely driven by favorable mix from increased sales of branded products, and pricing actions.
Net sales in our Other segment increased
Product Contribution MarginLamb Weston's product contribution margin for fiscal 2020 decreased$98.9 million , or 10%, to$872.2 million , compared with$971.1 million in fiscal 2019. The decline primarily related to lower sales due to the pandemic and approximately$47 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, expensing of excess crop year 2019 raw potato purchase contracts, and other supply chain costs discussed above. The remainder of the decline was driven by higher manufacturing costs due to input cost inflation, inefficiencies, higher depreciation expense primarily associated with our new french fry production line inHermiston, Oregon , and unfavorable mix. Global product contribution margin decreased$71.8 million , or 16%, to$374.5 million in fiscal 2020. The decline primarily related to lower sales due to the pandemic and approximately$29 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives. The remainder of the decline was largely driven by an increase in cost of sales, which rose 6% to$1,592.8 million , reflecting unfavorable mix, inefficiencies and input cost inflation, as well as higher depreciation expense primarily associated with the addition of the new production line inHermiston, Oregon . Advertising and promotion spending was modestly lower in 2020, as compared to fiscal 2019. Foodservice product contribution margin decreased$46.4 million , or 12%, to$356.0 million in fiscal 2020. Lower sales due to the pandemic and approximately$8 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives. Cost of sales declined 5% to$705.9 million due to lower sales volumes, partially offset by inefficiencies and input cost inflation, as well as higher depreciation expense primarily associated with the addition of the new production line inHermiston, Oregon . Advertising and promotion spending was modestly lower in fiscal 2020, as compared with fiscal 2019. Retail product contribution margin increased$18.8 million , or 19%, to$117.6 million in fiscal 2020 due to higher sales volumes as consumers modified their purchasing habits in response to the imposition of stay-at-home orders, favorable product mix and an$8.3 million decline in advertising and promotional expenses as we stopped all non-essential expenditures in response to the pandemic. The increase was partially offset by approximately$10 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives. Cost of sales was$468.6 million , or 23% higher in fiscal 2020 as compared to fiscal 2019, largely due to higher sales volume and input cost inflation. Other product contribution margin increased$0.5 million to$24.1 million in fiscal 2020, as compared to$23.6 million in fiscal 2019. These amounts include a$0.2 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in fiscal 2020, and a$3.3 million loss related to the 30
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contracts in fiscal 2019. Excluding these adjustments, Other segment product contribution margin decreased$2.6 million , largely due to unfavorable price/mix in our vegetable business.
Selling, General and Administrative Expenses
SG&A expenses were$338.3 million , up$3.2 million , or 1%, in fiscal 2020 compared with fiscal 2019. The increase in SG&A was largely driven by approximately$11 million of net pandemic-related SG&A and other expenses described above, higher expenses related to our information technology services and infrastructure (including approximately$8 million of non-recurring expenses, excluding expenses payable to us byLamb-Weston /Meijer under the cost sharing agreement, that primarily relates to consulting expenses associated with developing and implementing a new ERP system), and investments in our sales, marketing and operating capabilities. The increase was partially offset by lower incentive compensation accruals, a$9.5 million reduction in advertising and promotional expenses, lower travel and meeting expenses, and suspending contributions to our charitable foundation. For more information related to the agreement withLamb-Weston /Meijer to share the costs of a single, global ERP platform, and related software and services, see Note 6, Investments in Joint Ventures, of the Notes to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K. Interest Expense, Net Interest expense, net was$108.0 million in fiscal 2020, an increase of$0.9 million compared with fiscal 2019. The increase in interest expense, net was the result of higher average total debt versus the prior year. For more information, see Note 9, Debt and Financing Obligations, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in this Form 10-K. Income Taxes Our effective tax rate was 23.5% for fiscal 2020, compared to 21.5% in fiscal 2019. Fiscal 2019 includes a$2.4 million decrease in income tax expense related to the true-up of the transition tax on previously untaxed foreign earnings under the Tax Act. Excluding this comparability item, our effective tax rate for fiscal 2019 was 21.9%. The difference between our effective tax rates in fiscal 2020 and 2019 is primarily due to permanent differences and discrete items. The effective tax rate varies from theU.S. statutory tax rate of 21% principally due to the impact ofU.S. state taxes, foreign taxes, permanent differences, and discrete items. For further information on the Tax Act and its impact, see Note 3, Income Taxes, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in this Form 10-K.
Equity Method Investment Earnings
We conduct meaningful business through unconsolidated joint ventures 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$29.3 million and$59.5 million for fiscal 2020 and 2019, respectively. Earnings in fiscal 2020 included a$2.6 million loss related to the withdrawal from a multiemployer pension plan by Lamb Weston RDO. Equity method investment earnings also included a$6.3 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in fiscal 2020 and a$2.6 million loss related to these items in fiscal 2019. Excluding the Lamb Weston RDO pension-related comparability item and the mark-to-market adjustments, earnings from equity method investments declined$23.9 million compared to the prior year period. Pandemic-related costs accounted for approximately$16 million of the decline, with the remainder largely driven by lower sales as a result of government-imposed restrictions on restaurant and other foodservice operations. 31 Table of Contents
Impact of New Lease Standard
The adoption of the new lease standard resulted in the recognition of approximately$155 million of operating lease assets and short-term and long-term operating lease obligations recorded on our consolidated balance sheet related to operating leases. The adoption also resulted in a$26.6 million ($20.5 million , net of tax) cumulative-effect adjustment to the opening balance of retained earnings for the elimination of$38.7 million of land and$65.3 million of finance lease obligations related to a sale leaseback. See Note 4, Leases, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in this Form 10-K. Acquisitions
OnJuly 2, 2019 andDecember 21, 2018 , we acquired 100% of the outstanding shares of two different frozen potato processors inAustralia for$116.7 million and$88.6 million , respectively, net of cash acquired. These acquisitions added approximately 70 million and 50 million pounds of production capacity, respectively, to our manufacturing network and expanded our geographic reach. Net sales, income from operations, and total assets from either of these acquisitions are not material to our consolidated net sales, income from operations, and total assets. The operating results for the acquisitions are included in our Global segment. We allocated the purchase price of theJuly 2019 andDecember 2018 acquisitions to the assets acquired and liabilities assumed based on estimates of the fair value at the dates of the acquisitions, of which$106.1 million and$75.1 million , after final working capital adjustments, was allocated to goodwill (which is not deductible for tax purposes).
Liquidity and Capital Resources
The recent COVID-19 pandemic has disrupted our business and operating results. As a result of the uncertainties caused by the COVID-19 pandemic, we have taken, and are continuing to take, actions to enhance liquidity including: working capital management and limiting discretionary expenses across the Company; implementing a hiring and salary freeze for ourU.S. salaried positions; significantly reducing our capital program; raising over$1 billion of liquidity, including borrowing$495.0 million from our previously undrawn revolving credit facility, entering into a new$325.0 million term loan facility, and issuing$500.0 million of senior notes; and suspending future share repurchases. In addition, atMay 31, 2020 , we qualified for and recorded a$9.5 million receivable for employee retention credits under the CARES Act and other labor incentives. The CARES Act also allows us to defer payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount dueDecember 31, 2021 , and the remaining 50% dueDecember 31, 2022 . This is expected to provide us with approximately$14 million of additional liquidity during fiscal 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. As a result of our actions, our cash and cash equivalents balance atMay 31, 2020 , was$1,364.0 million . 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 agreement 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, of the Notes to Consolidated Financial Statements in "Part II. Item 8. Financial Statements and Supplementary Data" in this Form
10-K."
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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
(dollars in millions):
For the Fiscal Years Ended May
2020 2019 2018
Net cash flows provided by (used for):
Operating activities $ 574.0 $ 680.9 $ 481.2
Investing activities (346.0) (423.0) (306.8)
Financing activities 1,125.0 (299.6) (178.9)
1,353.0 (41.7) (4.5)
Effect of exchange rate changes on cash and cash
equivalents (1.2)
(1.7) 3.0
Net increase (decrease) in cash and cash equivalents
Operating Activities
Fiscal 2020 Compared with Fiscal 2019
The major components of cash provided by operations are earnings from operations adjusted for non-cash income and expense items and changes in working capital. Cash generated from operating activities decreased$106.9 million to$574.0 million in fiscal 2020, compared with$680.9 million in fiscal 2019. Earnings from continuing operations, adjusted for non-cash income and expenses, decreased$84.2 million , primarily due to lower sales during the pandemic and approximately$74 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives. See Results of Operations in this MD&A for more information. Changes in operating assets and liabilities used$17.3 million more cash in fiscal 2020, compared with fiscal 2019. The increase in cash used for changes in operating assets and liabilities was driven primarily by the timing of payments for accounts payable, and lower expected payments for incentive compensation and trade programs. These cash outflows were partially offset by lower receivables due to fewer sales at the end of fiscal 2020, compared with the end of fiscal 2019, the timing of payments for income taxes, and lower finished goods inventory due to declines in demand during the fiscal fourth quarter as a result of the pandemic-related government-imposed restrictions. Investing Activities
Fiscal 2020 Compared with Fiscal 2019
Investing activities used$346.0 million of cash in fiscal 2020, compared with$423.0 million in fiscal 2019. Fiscal 2020 includes the acquisition of a frozen potato processor inAustralia for$116.7 million . We also acquired a 50% ownership interest inLamb Weston Alimentos Modernos S.A. , a manufacturer of frozen potato products inSouth America , for$27.3 million . We paid$22.6 million in fiscal year 2020 and will pay the remaining$4.7 million , less any amounts for indemnified losses, inOctober 2024 . In response to the COVID-19 pandemic, we reduced capital expenditures, including information technology, from a planned level of$300.0 million to$208.4 million . In order to preserve liquidity throughout the COVID-19 pandemic, we deferred substantially all of our previously planned fiscal 2021 strategic capital expenditures. We expect capital investments in fiscal 2021 to be approximately$140 million , excluding acquisitions. 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. AtMay 31, 2020 , we had commitments for capital expenditures of$36.5 million . Investing activities used$423.0 million of cash in fiscal 2019. These expenditures included the plant capacity expansions inHermiston, Oregon in fiscal 2019. Additionally, inDecember 2018 , we acquired 100% of the outstanding shares of a frozen potato processor inAustralia for$88.6 million , net of
cash
acquired.
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Financing Activities
Fiscal 2020 Compared with Fiscal 2019
During fiscal 2020, cash provided by financing activities totaled$1,125.0 million , compared with cash used for financing activities of$299.6 million in fiscal 2019. In light of the current uncertainty in the global economy resulting from the COVID-19 pandemic, in the fourth quarter of fiscal 2020, we raised over$1 billion of liquidity including borrowing$495.0 million on our revolving credit facility, entering into a new$325.0 million term loan facility, and issuing$500.0 million of senior notes due in 2028. In addition, inJune 2019 , we entered into a new$300.0 million term loan facility due inJune 2024 and used the proceeds to repay$300.0 million of the term loan facility that was due in 2021. Repayments in fiscal 2020 also included$36.3 million of quarterly installments due under our debt and financing obligations. In July, we paid the balance on our revolving credit facility and have$495.1 million of available borrowing under the credit facility, net of$4.9 million of outstanding letters of credit. During fiscal 2020, we returned$144.2 million of capital to our shareholders, including$121.3 million in dividends on our common stock and$22.9 million related to 287,239 shares we repurchased for a weighted-average price of$79.56 per share. Financing activities also included$5.9 million for the repurchase of 80,673 shares of our common stock for restricted stock tax withholdings. Economic conditions, changes in cash flows, tax laws and other laws, and the market price of our common stock can limit or alter the amount and frequency of our stock repurchases. Given the uncertainty of demand with the COVID-19 pandemic, we temporarily suspended share repurchases to provide us with additional liquidity. As ofMay 31, 2020 ,$195.3 million remained authorized for repurchase under the program. During fiscal 2019, financing activities primarily related to the payment of$113.3 million in dividends on our common stock,$78.2 million to acquire the noncontrolling interest in Lamb Weston BSW, and$66.7 million of debt payments, primarily scheduled payments under our term loan facility and the repayment of the Lamb Weston BSW installment notes. Financing activities during 2019 also included the repurchase of 522,260 shares of our common stock, including restricted stock tax withholdings. Repurchases of common stock and payments of restricted stock withholding taxes totaled$36.4 million , including$31.8 million related to shares repurchased at an average price of$69.40 per share under our share repurchase program. For more information about our debt, including among other items, interest rates, maturity dates, and covenants, see Note 9, Debt and Financing Obligations, of the Notes to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K. AtMay 31, 2020 , we were in compliance with the financial covenant ratios and other covenants contained in our credit agreement.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as ofMay 31, 2020 that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Investments in Joint Ventures
We conduct some of our business through three unconsolidated joint ventures and account for these investments using equity method accounting. For more information about our investments in joint ventures, see Note 6, Investments in Joint Ventures, of the Notes to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
Obligations and Commitments
As part of our ongoing operations, we enter into arrangements that obligate us
to make future payments under contracts such as lease agreements, debt
agreements, potato supply agreements, and unconditional purchase obligations
(i.e., obligations to transfer funds in the future for fixed or minimum
quantities of goods or services at fixed or minimum
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prices). The unconditional purchase obligation arrangements are entered into in the normal course of business in order to ensure adequate levels of sourced product are available.
A summary of our contractual obligations as ofMay 31, 2020 are as follows. The expected timing of payments of the obligations in the table are estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. Payments Due by Period (a) Less than After 5 Contractual Obligations Total 1 Year 1-3 Years 3-5 Years Years Short-term borrowings (b)$ 498.7 $ 498.7 $ - $ - $ - Long-term debt, including current portion, excluding financing obligations (c) 3,056.3 45.9 320.3 1,357.1 1,333.0 Interest on long-term debt (d) 685.4 120.9
232.7 201.2 130.6 Purchase obligations (e) 827.6 74.5 117.0 106.1 530.0 Capital commitments (f) 36.5 36.5 - - - Other long-term liabilities reflected on our Consolidated Balance Sheet (g): Operating leases (h) 201.4 32.7 50.9 39.6 78.2 Financing obligations, including current portion (i) 15.8 3.2 4.9 2.0 5.7 Compensation and benefits (j) 39.0 2.1
10.8 6.1 20.0 Other 19.6 1.1 3.5 9.9 5.1 Total$ 5,380.3 $ 815.6 $ 740.1 $ 1,722.0 $ 2,102.6
The table assumes amounts included in the "Less than 1 Year" column represent
obligations for our fiscal year 2021. The remaining columns correspond to our (a) fiscal years as follows: "1-3 Years" represents fiscal 2022 and 2023, "3-5
Years" represents fiscal 2024 and 2025, and "After 5 Years" represents fiscal
2026 and thereafter.
(b) The
repaid in July 2020 .
The table is based on our long-term debt maturities at
Balances have not been reduced by the $28.2 million of unamortized debt
issuance costs at May 31, 2020 .
Amounts represent estimated future interest payments as of
and using interest rates in effect at May 31, 2020 .
Amounts exclude purchase commitments under potato supply agreements due touncertainty of pricing and quantity. Potato supply agreements have maximum
contracted pricing with deductions for certain quality attributes, and (e) quantities purchased are determined by the yields produced on contracted
acres. Total purchases under all our potato supply agreements were
million,
respectively.
Capital commitments represent commitments for the construction or purchase of (f) property, plant and equipment. They were not recorded as liabilities on our
Consolidated Balance Sheet as of
related goods nor taken title to the property.
Deferred income taxes of
million, and long-term workers compensation of
This amount also excludes $9.9 million of a deferred gain as the amount is
non-cash.
We enter into operating leases in the normal course of business. We lease (h) some of our warehouses and operating facilities, as well as other property
and equipment, under operating leases. This amount includes estimated
interest costs of $28.4 million .
This table is based on our financing obligation maturities at
and assumes our financing obligations are held to maturity, includes the
(i) current portion of financing obligations, and includes
interest payments associated with financing obligations. Amounts are reported
gross.
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Amounts consist of our pension, post-retirement benefit obligations, deferred
compensation liabilities, and deferred payments for the employer portion of
social security taxes under the CARES Act. Actuarially determined liabilities
related to pension benefits are recorded based on estimates and assumptions.
Key factors used in developing estimates of these liabilities include
assumptions related to discount rates, expected rate of compensation (j) increases, retirement and mortality rates, and other factors. Changes in
estimates and assumptions related to the measurement of funded status will
impact the amounts reported. In the table above, we allocated our pension
obligations by year based on the future required minimum pension
contributions, as determined by our actuaries. See Note 10, Employee Benefit
Plans and Other Post-Retirement Benefits, of the Notes to the Consolidated
Financial Statements in "Part II, Item 8. Financial Statements and
Supplementary Data" of this Form 10-K.
For the majority of restricted stock units ("RSUs") granted, the number of
shares of common stock issued on the date the RSUs vest is net of the minimum
statutory withholding requirements that we pay in cash to the appropriate taxing
authorities on behalf of our employees. The obligation to pay the relevant
taxing authority is excluded from the table above, as the amount is contingent
upon continued employment. In addition, the amount of the obligation is unknown,
as it is based in part on the market price of our common stock when the awards
vest.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
To supplement the financial information included in this report, we have presented Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS, each of which is considered a non-GAAP financial measure.
Our management uses Adjusted EBITDA, Adjusted EBITDA including unconsolidated
joint ventures and Adjusted Diluted EPS 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. We include these non-GAAP financial measures
because management believes they are useful to investors in that they 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 used 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. These non-GAAP financial measures should be viewed in addition to,
and not as alternatives 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 measures, such as net
income (loss) or diluted earnings per share, and there are limitations to using
non-GAAP financial measures.
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The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures.
For the Fiscal Years Ended May
2020 (a)
2019 2018 2017 2016
Net income attributable to
- 8.6 16.9 13.3 9.3
Equity method investment earnings (29.3)
(59.5) (83.6) (53.3) (71.7)
Interest expense, net 108.0 107.1 108.8 61.2 5.9
Income tax expense 112.3 133.6 121.2 170.2 144.5
Income from operations 556.9 668.4 580.1 518.3 373.3 Depreciation and amortization
177.8 157.7 138.7 106.6 95.9 Items impacting comparability (b) Expenses related to the Separation
- - 8.7 26.5 5.3
Non-cash gain on assets - - - (3.1) -
Expense related to actuarial losses in excess of 10% of
related pension liability - - - - 59.5
Expenses related to SCAE Plan - - - - 0.1
Adjusted EBITDA (b) (c) 734.7 826.1 727.5 648.3 534.1
Unconsolidated Joint Ventures Equity method investment earnings 29.3
59.5 83.6 53.3 71.7 Interest expense, income tax expense, and depreciation and amortization included in equity method investment earnings
33.2 29.0 30.3 22.5 18.2 Items impacting comparability Loss on withdrawal from multiemployer pension plan (d)
2.6 - - - -
Gain related to pension plan settlement (e) - - - - (17.7)
Add: Adjusted EBITDA from unconsolidated joint ventures 65.1 88.5 113.9 75.8 72.2
Consolidated Joint Ventures Income attributable to noncontrolling interests -
(8.6) (16.9) (13.3) (9.3) Interest expense, income tax expense, and depreciation and amortization included in equity method investment earnings
- (1.7) (4.1) (3.7) (3.6) Subtract: EBITDA from consolidated joint ventures
- (10.3) (21.0) (17.0) (12.9)
Adjusted EBITDA including unconsolidated joint ventures
See Results of Operations in this MD&A for a discussion of the impact of (a) government efforts to control the spread of COVID-19, including restrictions
on restaurants and other foodservice operations and stay-at-home orders, on
our financial results.
Fiscal 2018, 2017 and 2016 include $8.7 million , $26.5 million and $5.3 million, respectively, of expenses related to the Separation. In fiscal 2018, (b) the expenses related primarily to professional fees and other
employee-related costs. In fiscal 2017 and 2016, the expenses related
primarily to professional fees.
Fiscal 2017 includes a
Fiscal 2016 includes$59.5 million of charges reflectingLamb Weston's portion of actuarial losses in excess of 10% ofConagra's pension liability forConagra sponsored plans. Fiscal 2016 includes$0.1 million related to costs incurred in connection withConagra's initiative to improve selling, general and administrative effectiveness and efficiencies, which is referred to as the Supply Chain and Administrative Efficiency Plan ("SCAE Plan").
(c) Adjusted EBITDA includes EBITDA from consolidated joint ventures.
(d) Fiscal 2020 includes a
multiemployer pension plan by Lamb Weston RDO.
(e) Fiscal 2016 includes a
of a pension plan at our Lamb-Weston /Meijer joint venture.
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The following table reconciles diluted earnings per share to Adjusted Diluted
EPS:
For the Fiscal Years Ended May
2020 (a) 2019 (a) 2018 (a)
As reported $ 2.49 $ 3.18 $ 2.82
Items impacting comparability:
Loss on withdrawal from multiemployer pension plan (b) 0.01 - -
Increase in redemption value of noncontrolling
interests, net of tax benefits (c) - 0.06 -
Expenses related to the Separation (d) - - 0.03
Tax reform (e) - (0.02) (0.19)
Total items impacting comparability 0.01
0.04 (0.16)
Adjusted $ 2.50 $ 3.22 $ 2.66 Diluted weighted average common shares were 147.1 million, 147.3 million, and (a) 147.0 million for fiscal 2020, 2019, and 2018, respectively.
(b) Fiscal 2020 included a
multiemployer pension plan by Lamb Weston RDO.
Fiscal 2019 included accretion, net of tax benefits, of
interest to the amount we paid to acquire the remaining 50.01% interest in
Lamb Weston BSW. While the accretion, net of tax benefits, reduced net income
available to
includes 100% of Lamb Weston BSW's earnings beginning
more information about our investments in joint ventures, see Note 6,
Investments in Joint Ventures, of the Notes to the Consolidated Financial
Statements in "Part II, Item 8. Financial Statements and Supplementary Data"
of this Form 10-K.
Fiscal 2018 included
professional fees and other employee-related costs.
In fiscal 2019, we recorded a
under the Tax Act. We completed our analysis of the one-time impacts of the
Tax Act in fiscal 2019.
In connection with our initial analysis of the impact of the Tax Act in fiscal
2018, we decreased income tax expense and increased net income $28.4 million , or
$0.19 per share for one-time items, including a $39.9 million net provisional
tax benefit from the estimated impact of remeasuring our net U.S. deferred tax
liabilities with a new lower U.S. federal statutory rate, partially offset by an
$11.5 million transition tax on our previously untaxed foreign earnings.
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to our trade promotions, income taxes, and acquisitions, among others. We base our estimates on historical experiences combined with management's understanding of current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions. Critical accounting estimates are those that are most important to the portrayal of our financial condition and operating results. These estimates require management's most difficult, subjective, or complex judgments. We review the development, selection, and disclosure of our critical accounting estimates with theAudit and Finance Committee of our Board of Directors. We believe that of our significant accounting policies, the following involve a higher degree
of
judgment and/or complexity.
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Sales Incentives and Trade Promotion Allowances
We promote our products with advertising, consumer incentives, and trade promotions. Sales promotions include, but are not limited to, discounts, coupons, rebates, and volume-based incentives. The estimates for sales incentives are based principally on historical sales and redemption rates, influenced by judgments about current market conditions such as competitive activity in specific product categories.
Trade promotion programs include introductory marketing funds such as slotting fees, cooperative marketing programs, temporary price reductions, and other activities conducted by our customers to promote our products. The costs of these programs are recognized as a reduction to revenue with a corresponding accrued liability. The estimate of trade promotions is inherently difficult due to information limitations as the products move beyond distributors and through the supply chain to operators. Estimates made by management in accounting for these costs are based primarily on our historical experience with marketing programs, with consideration given to current circumstances and industry trends and include the following: quantity of customer sales, timing of promotional activities, current and past trade-promotion spending patterns, the interpretation of historical spending trends by customer and category, and forecasted costs for activities within the promotional programs. The determination of sales incentive and trade promotion costs requires judgment and may change in the future as a result of changes in customer promotion participation, particularly for new programs related to the introduction of new products. Final determination of the total cost of promotion is dependent upon customers providing information about proof of performance and other information related to the promotional event. Because of the complexity of some of these trade promotions, the ultimate resolution may result in payments that are different from our estimates. As additional information becomes known, we may change our estimates. AtMay 31, 2020 andMay 26, 2019 , we had$42.5 million and$48.6 million , respectively, of sales incentives and trade promotions payable recorded in "Accrued liabilities" on our Consolidated Balance Sheets. Income Taxes We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
Inherent in determining the annual tax rate are judgments regarding business plans, planning opportunities, and expectations about future outcomes. Management judgments are required for the following items:
Management reviews deferred tax assets for realizability. Valuation allowances
? are established when management believes that it is more likely than not that
some portion of the deferred tax assets will not be realized. Changes in
valuation allowances from period to period are included in the tax provision.
We establish accruals for unrecognized tax benefits when, despite the belief
that our tax return positions are fully supported, we believe that an uncertain
tax position does not meet the recognition threshold of Accounting Standards
Codification ("ASC") 740, Income Taxes. These contingency accruals are adjusted
in light of changing facts and circumstances, such as the progress of tax
? audits, the expiration of the statute of limitations for the relevant taxing
authority to examine a tax return, case law and emerging legislation. While it
is difficult to predict the final outcome or timing of resolution for any
particular matter, we believe that the accruals for unrecognized tax benefits
at
such date in accordance with accounting for uncertainty in income taxes under
ASC 740.
We recognize the tax impact of including certain foreign earnings in
taxable income as a period cost. We have not recognized deferred income taxes
? for local country income and withholding taxes that could be incurred on
distributions of certain non-
our subsidiaries, because we plan to indefinitely reinvest such earnings and
basis differences. Remittances of non-U.S. earnings are based on 39 Table of Contents
estimates and judgments of projected cash flow needs, as well as the working
capital and investment requirements of our non-
Material changes in our estimates of cash, working capital, and investment needs
in various jurisdictions could require repatriation of indefinitely reinvested
non-
withholding taxes. While we believe the judgements and estimates discussed above and made by management are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts. Further information on income taxes is provided in Note 3, Income Taxes, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K. Acquisitions
From time to time, we may enter into business combinations. We allocate the total purchase price of a business combination to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, with the excess purchase price recorded as goodwill. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values (fair value is determined using the income approach, cost approach and or market approach) of inventory, property, plant and equipment, identifiable intangible assets, deferred tax asset valuation allowances, and liabilities related to uncertain tax positions, among others. This method also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations. Additionally, we expense any acquisition-related costs as incurred in connection with each business combination. Significant estimates and assumptions in estimating the fair value of brands and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could increase or decrease.
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
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