The following discussion and analysis of our financial condition and results of
operations, which we refer to as "MD&A," should be read in conjunction with our
condensed consolidated financial statements and related notes included in
"Financial Statements and Supplementary Data" of this Quarterly Report on Form
10-Q (this "Form 10-Q") and the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2020 (the "Form 10-K"), which we filed with the U.S.
Securities and Exchange Commission ("SEC") on July 28, 2020.
Forward-Looking Statements
This report, including the MD&A, contains forward-looking statements within the
meaning of the federal securities laws. Words such as "will," "continue," "may,"
"expect," "anticipate," "believe," "estimate," "support," "impact," "improve,"
"enhance," 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 expenditures and investments,
operational costs, and business outlook and 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
uncertainties 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 or facilities; 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 acquisitions or integrate
acquired businesses; our 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.
Overview
Lamb Weston Holdings, Inc. ("we," "us," "our," "the Company," or "Lamb Weston"),
along with our joint 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 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 value-added frozen potato product portfolio.
This MD&A is provided as a supplement to the 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 United States ("U.S.")
generally accepted accounting principles ("GAAP") and certain other financial
data (including Adjusted EBITDA and Adjusted EBITDA including unconsolidated
joint ventures) that is prepared using non-GAAP measures. Refer to "Non-GAAP
Financial Measures" below for the definitions of Adjusted EBITDA and Adjusted
EBITDA including unconsolidated joint ventures, and a reconciliation of these
non-GAAP financial measures to net income.
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Executive Summary
Lamb Weston's financial performance in the third quarter of fiscal 2021 reflects
the COVID-19 pandemic's negative impact on frozen potato demand in our
food-away-from-home sales channels. While demand and shipment trends have
improved in both our food-away-from-home and food-at-home sales channels since
the end of fiscal 2020, shipments to restaurants and other foodservice outlets
remain below pre-pandemic levels. However, COVID-19 significantly disrupted
manufacturing and distribution operations across our entire supply chain
network, which resulted in higher costs. As a result, our sales and earnings in
the third quarter of fiscal 2021 declined as compared to the third quarter of
fiscal 2020. Specifically:
? Net sales declined 4% to $895.8 million
? Income from operations declined 38% to $100.6 million
? Net income declined 41% to $66.1 million
? Diluted earnings per share declined 41% to $0.45
? Adjusted EBITDA including unconsolidated joint ventures declined 27% to $167.1
million
Compared with the third quarter of fiscal 2020, our sales volume declined as
demand for frozen potato products outside the home fell after government-imposed
social restrictions to slow the spread of COVID-19 reduced restaurant traffic
and included restrictions for on-premise dining. The volume decline was
partially offset by higher price/mix, which was largely due to higher prices in
our Retail and Foodservice segments, and favorable mix in our Retail segment.
Income from operations declined due to lower sales and higher manufacturing and
distribution costs, which were largely due to incremental costs resulting from
the pandemic's disruptive effect on our production, transportation, and
warehousing operations. We also incurred higher costs in the quarter related to
capital, repair and maintenance activities that we delayed at the onset of the
pandemic. In addition, higher manufacturing costs reflected input cost
inflation. The decline in income from operations was also due to higher selling,
general and administrative ("SG&A") expenses, reflecting investments to improve
our manufacturing and supply chain operations over the long term, and to a
lesser extent, investments to improve our information technology infrastructure.
We expect that we will continue to incur significant costs as a result of the
pandemic's ongoing impact on our manufacturing, distribution, commercial and
functional support operations until the COVID-19 virus is broadly contained.
These costs may include, but are not limited to: production inefficiencies and
labor retention costs arising from modifying production schedules, reducing
run-times, and lower overall factory utilization; costs to shut down, sanitize,
and restart production facilities after production is impacted by the virus;
costs to adopt and maintain enhanced employee safety and sanitation protocols,
such as purchasing personal protection and health screening equipment and
services; and incremental warehousing and transportation costs.
We also expect that the pandemic will continue to have a negative impact on the
U.S. and global economies, global consumer demand for frozen potato products,
and on our business and financial results until the COVID-19 virus is broadly
contained. While the degree of the impact of the pandemic on our business going
forward remains uncertain, we continue to closely monitor the global french fry
industry, including consumer reaction and demand. During the third quarter, we
observed the following:
In the U.S., overall restaurant traffic was between 85% and 90% of pre-pandemic
levels. Traffic at large, quick service chain restaurants ("QSRs") during the
third quarter remained essentially at prior-year levels by continuing to
leverage drive-thru and delivery formats. Traffic at full-service restaurants
was largely between 70% and 80% of prior-year levels during much of the quarter
as governments in most states and localities continued to impose at least
? partial social and on-premise indoor dining restrictions. Demand by our
non-commercial customers (i.e., lodging and hospitality, healthcare, schools
and universities, sports and entertainment, and workplace environments)
remained at approximately 50% of prior-year levels. In contrast, demand for
retail frozen potato products remained strong, generally following an increase
in overall food-at-home consumption following continued government-imposed
social restrictions.
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In Europe, which is served by our Lamb-Weston/Meijer joint venture, demand for
frozen potato products was 80% to 85% of prior-year levels, reflecting the
? continuation of government-imposed social restrictions. Unlike in the U.S.,
most french fry consumption in Europe is dine-in or carry-out, as QSR
drive-thru options are more limited.
Demand in our other key international markets was mixed. In China, demand for
frozen potatoes was strong versus last year, when demand was depressed
? following the imposition of social restrictions during the latter half of the
quarter. Although demand varied in our other key international markets, it
improved sequentially versus the second quarter of fiscal 2021, and was
generally stronger in developed markets than in emerging markets.
While the near-term impact of the pandemic on demand and sales volume is likely
to be material, we believe we have sufficient liquidity to manage through the
uncertainty. As of February 28, 2021, we had $714.3 million of cash and cash
equivalents. During the first three quarters of fiscal 2021, we generated $374.8
million of cash from operations, spent $106.7 million in capital expenditures,
including those on information technology initiatives, and paid $100.9 million
of cash dividends to shareholders. In addition, we resumed our share repurchase
program in January 2021, which we suspended at the onset of the COVID-19
pandemic to preserve liquidity, and repurchased 164,678 shares for $12.7
million, reflecting an average price per purchased share of $77.04.
As discussed above, the government-imposed social and business restrictions,
including closing or partially closing restaurants and other foodservice
operations, have led to a decrease in consumer and customer demand for our
products. In response, 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 modifying production
schedules to rebalance utilization rates across our manufacturing network.
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 manage their supply chains and inventories.
We believe that the possibility of wide availability of government-approved
COVID-19 vaccines by mid-calendar 2021 may allow governments to gradually ease
broad social restrictions in their respective jurisdictions, which would likely
have a favorable impact on restaurant traffic. While we expect to continue to
face challenging and volatile operating conditions until the virus is broadly
contained, we continue to believe that global restaurant traffic will improve
through calendar year 2021. Improvements in global restaurant traffic would, in
turn, lead to overall frozen potato demand approaching pre-pandemic levels, on a
run-rate basis, by the end of the calendar year.
Operating Results
We have four reportable segments: Global, Foodservice, Retail, and Other. We
report net sales and product contribution margin by segment and on a
consolidated basis. Product contribution margin, when presented on a
consolidated basis, is a non-GAAP financial measure. 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. Product contribution margin represents net sales
less cost of sales and advertising and promotion expenses. Product contribution
margin includes advertising and promotion expenses because those expenses are
directly associated with the performance of our segments. For additional
information on our reportable segments and product contribution margin, see
"Non-GAAP Financial Measures" below and Note 13, Segments, of the Condensed
Notes to Consolidated Financial Statements in "Part I, Item 1. Financial
Statements" of this report.
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Thirteen Weeks Ended February 28, 2021 compared to Thirteen Weeks Ended February
23, 2020 (dollars in millions)
Net Sales and Product Contribution Margin
Thirteen Weeks Ended
February 28, February 23, %
2021 2020 Inc/(Dec)
Segment sales
Global $ 478.5 $ 487.1 (2%)
Foodservice 219.5 283.0 (22%)
Retail 162.5 132.2 23%
Other 35.3 35.0 1%
$ 895.8 $ 937.3 (4%)
Segment product contribution margin
Global $ 79.3 $ 109.3 (27%)
Foodservice 70.2 99.8 (30%)
Retail 33.1 28.8 15%
Other 8.7 5.9 47%
191.3 243.8 (22%)
Add: Advertising and promotion expenses 5.4 6.6 (18%)
Gross profit $ 196.7 $ 250.4 (21%)
Net Sales
Compared to the prior-year quarter, Lamb Weston's net sales for the third
quarter of fiscal 2021 declined $41.5 million, or 4%, to $895.8 million. Volume
declined 6%, predominantly reflecting lower demand for frozen potato products
outside the home related to government-imposed restrictions on restaurants and
other foodservice operations to slow the spread of the COVID-19 virus. The rate
of the decline in shipments improved sequentially as compared to the 14% decline
that we realized during the first half of fiscal 2021, reflecting the steady
recovery in demand, particularly in our Global segment. Price/mix increased 2
percent, driven primarily by improved price in our Retail and Foodservice
segments, and favorable mix in our Retail segment.
Global segment net sales declined $8.6 million, or 2%, to $478.5 million. Volume
declined 2%, reflecting lower 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 some of our key international markets. Our
shipments to North American chain restaurant customers increased nominally
compared to the prior year period, and included the benefit of increased sales
volumes of limited time offering products. The segment's overall 2% rate of
decline is an improvement from the 12% rate of decline that the segment realized
during the first half of fiscal 2021 compared to the first half of fiscal 2020,
largely due to a recovery in international shipments in the third quarter.
Price/mix was flat versus the prior year quarter as favorable price was offset
by unfavorable mix.
Foodservice segment net sales declined $63.5 million, or 22%, to $219.5 million.
Volume declined 24% due to lower demand for frozen potato products outside the
home as a result of the pandemic's negative impact on traffic at restaurants and
non-commercial customers, such as lodging and hospitality, healthcare, schools
and universities, sports and entertainment, and workplace environments. Shipment
and order trends improved as the quarter progressed, reflecting the positive and
anticipated effect on restaurant traffic, especially at full-service
restaurants, of governments easing social restrictions, as well as the benefit
of relatively mild winter weather. Price/mix increased 2%, reflecting the
carryover benefit of a pricing action implemented during the second half of
fiscal 2020, partially offset by unfavorable mix as sales of Lamb Weston branded
and premium products softened.
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Retail segment net sales increased $30.3 million, or 23%, to $162.5 million.
Volume increased 13% as strong growth in shipments of premium and mainstream
branded offerings, which have historically comprised approximately 40% of the
segment's volume, was partially offset by a decline in shipments of private
label products, which reflects incremental losses of certain low-margin private
label business. Price/mix increased 10 percent, largely driven by favorable mix
from higher sales of branded products.
Net sales in our Other segment increased $0.3 million, or 1%, to $35.3 million,
as favorable price/mix more than offset lower volumes in our vegetable business.
Gross Profit and Product Contribution Margin
Gross profit declined $53.7 million, or 21%, to $196.7 million in the third
quarter of fiscal 2021. The decline was driven by lower sales and higher
manufacturing and distribution costs. These higher costs were largely due to
incremental costs and inefficiencies related to the pandemic's disruptive effect
on our production, transportation, and warehousing operations. We also incurred
higher costs in the quarter related to capital, repair and maintenance
activities that we delayed at the onset of the pandemic. In addition, higher
manufacturing costs reflected input cost inflation. The decline in gross profit
was partially offset by a $7.5 million change in unrealized mark-to-market
adjustments associated with commodity hedging contracts, which includes a $7.2
million gain in the current quarter, compared with a $0.3 million loss related
to these items in the prior year quarter.
Lamb Weston's overall product contribution margin, defined as gross profit less
advertising and promotion expenses, declined $52.5 million, or 22%, to $191.3
million. The decline was largely due to lower sales and higher manufacturing and
distribution costs (as described above).
Global segment product contribution margin declined $30.0 million, or 27%, to
$79.3 million. Higher manufacturing and distribution costs, as well as
unfavorable mix, drove the decline. Global segment cost of sales was $398.2
million, up 6% compared to the third quarter of fiscal 2020, primarily due to
higher manufacturing and distribution costs.
Foodservice segment product contribution margin declined $29.6 million, or 30%,
to $70.2 million. Lower sales volumes, higher manufacturing and distribution
costs, and unfavorable mix drove the decline, partially offset by favorable
price. Cost of sales was $147.9 million, down 18% compared to the third quarter
of fiscal 2020, due to lower sales volumes, partially offset by higher
manufacturing and distribution costs.
Retail segment product contribution margin increased $4.3 million, or 15%, to
$33.1 million. Favorable mix drove the increase, partially offset by higher
manufacturing and distribution costs, and an $0.8 million increase in
advertising and promotional expenses. Cost of sales was $126.4 million, up 25%
compared to the third quarter of fiscal 2020, primarily due to higher sales
volume and higher manufacturing and distribution costs.
Other segment product contribution margin increased $2.8 million, or 47%, to
$8.7 million. These amounts include a $4.3 million gain related to unrealized
mark-to-market adjustments and realized settlements associated with commodity
hedging contracts in the third quarter of fiscal 2021, and a $0.7 million loss
related to the contracts in the prior year period. Excluding these adjustments,
Other segment product contribution margin decreased $2.2 million due to higher
manufacturing and distribution costs, partially offset by favorable price/mix in
our vegetable business.
Selling, General and Administrative Expenses
Compared with the prior-year period, SG&A expenses increased $8.2 million, or
9%, to $96.1 million. The increase was largely due to investments to improve our
manufacturing and supply chain operations over the long term, and to a lesser
extent, our information technology infrastructure, which included approximately
$1 million of non-recurring expenses, primarily related to consulting expenses
associated with a new enterprise resource planning ("ERP") system. The increase
in SG&A was partially offset by cost management efforts.
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Interest Expense, Net
Compared with the prior-year quarter, interest expense, net increased $4.1
million to $29.3 million. The increase reflected higher average total debt
versus the prior year resulting from our actions in late fiscal 2020 and early
fiscal 2021 to enhance our liquidity position. For more information see
"Liquidity and Capital Resources" in this MD&A.
Income Tax Expense
Income tax expense for the third quarter of fiscal 2021 and 2020 was $16.3
million and $35.7 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 19.8% and 24.3% for the third quarter of
fiscal 2021 and 2020, respectively, in our Consolidated Statements of Earnings.
The lower effective tax rate for the third quarter fiscal 2021, as compared to
the prior year period is primarily due to discrete items originating during the
third quarter and a slightly lower annual effective tax rate. 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 $11.1 million and $9.8 million for the third quarter of fiscal
2021 and 2020, respectively. Equity method investment earnings included a $2.2
million unrealized gain related to mark-to-market adjustments associated with
currency and commodity hedging contracts in the current quarter, compared to a
$7.3 million unrealized loss related to these items in the prior year quarter.
In addition, in December 2020, Lamb-Weston/Meijer v.o.f. ("Lamb-Weston/Meijer")
increased its interest in its Russian joint venture from 35.5% to 74.9%, and now
consolidates that joint venture in its results. Earnings in the prior year
quarter also included a $2.6 million loss related to the withdrawal from a
multiemployer pension plan by Lamb-Weston/RDO Frozen ("Lamb Weston RDO").
Excluding the mark-to-market adjustments and the Lamb Weston RDO pension-related
comparability item, earnings from equity method investments decreased $10.8
million compared to the prior year period. Lower frozen potato demand in Europe
resulting from the continuation of government-imposed social restrictions, as
well as higher production costs related to the COVID pandemic, largely drove the
earnings decline.
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Thirty-Nine Weeks Ended February 28, 2021 compared to Thirty-Nine Weeks Ended
February 23, 2020 (dollars in millions)
Net Sales and Product Contribution Margin
Thirty-Nine Weeks Ended
February 28, February 23, %
2021 2020 Inc/(Dec)
Segment sales
Global $ 1,401.9 $ 1,544.3 (9%)
Foodservice 697.3 893.3 (22%)
Retail 457.1 393.6 16%
Other 107.1 114.3 (6%)
$ 2,663.4 $ 2,945.5 (10%)
Segment product contribution margin
Global $ 249.8 $ 341.0 (27%)
Foodservice 243.7 313.5 (22%)
Retail 99.0 86.2 15%
Other 32.4 26.0 25%
624.9 766.7 (18%)
Add: Advertising and promotion expenses 9.1 17.4 (48%)
Gross profit $ 634.0 $ 784.1 (19%)
Net Sales
Compared with the prior-year period, Lamb Weston's net sales for the first three
quarters of fiscal 2021 declined $282.1 million, or 10%, to $2,663.4 million.
Volume declined 12%, reflecting lower demand for frozen potato products outside
the home related to government-imposed restrictions on restaurants and other
foodservice operations to slow the spread of COVID-19. The decline was partially
offset by higher sales volume in our Retail segment. Price/mix increased 2% due
to improved price in the Foodservice and Retail segments, and favorable mix in
the Retail segment.
Global segment net sales declined $142.4 million, or 9%, to $1,401.9 million.
Volume declined 9%, primarily due to lower 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. Price/mix was flat as favorable price was offset by
unfavorable mix.
Foodservice segment net sales declined $196.0 million, or 22%, to $697.3
million. Volume declined 26% due to lower 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, healthcare, schools
and universities, sports and entertainment, and workplace environments.
Price/mix increased 4%, 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.
Retail segment net sales increased $63.5 million, or 16%, to $457.1 million.
Volume increased 8% due to higher sales of frozen potato products for in-home
consumption following government-imposed social restrictions. Sales volumes of
premium and mainstream branded offerings more than offset the decline in sales
volumes of private label products, which reflects incremental losses of certain
low-margin private label business. Price/mix increased 8%, largely driven by
favorable mix from higher sales of branded products.
Net sales in our Other segment declined $7.2 million, or 6%, to $107.1 million,
largely due to lower volumes in our vegetable business, partially offset by
favorable price/mix.
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Gross Profit and Product Contribution Margin
Gross profit declined $150.1 million, or 19%, to $634.0 million in the first
three quarters of fiscal 2021. The decline was driven by lower sales and higher
manufacturing and distribution costs. These higher costs were largely due to
incremental costs and inefficiencies related to the pandemic's disruptive effect
on our production, transportation, and warehousing operations. We also incurred
higher costs in the third quarter related to capital, repair and maintenance
activities that we delayed at the onset of the pandemic. In addition, higher
costs reflected input cost inflation, as well as costs related to processing raw
potatoes out of storage longer than in prior years. The decline in gross profit
was partially offset by a $13.7 million change in unrealized mark-to-market
adjustments associated with commodity hedging contracts, which includes a $19.1
million gain in the first three quarters of fiscal 2021, compared with a $5.4
million gain related to these items in the prior year period.
Compared with the prior-year period, Lamb Weston's overall product contribution
margin for the first three quarters of fiscal 2021 declined $141.8 million, or
18%, to $624.9 million. The decline was driven by lower sales and higher
manufacturing and distribution costs (as described above).
Global segment product contribution margin declined $91.2 million, or 27%, to
$249.8 million in the first three quarters of fiscal 2021. Lower sales volumes,
higher manufacturing and distribution costs, and unfavorable mix drove the
decline. Global segment cost of sales was $1,150.0 million, down 4% compared to
the first three quarters of fiscal 2020, primarily due to lower sales, partially
offset by higher manufacturing and distribution costs.
Foodservice segment product contribution margin declined $69.8 million, or 22%,
to $243.7 million. Lower sales volumes, higher manufacturing and distribution
costs, and unfavorable mix drove the decline, partially offset by favorable
price. Cost of sales was $450.8 million, down 22% compared to the first three
quarters of fiscal 2020, due to lower sales volumes, partially offset by higher
manufacturing and distribution costs.
Retail segment product contribution margin increased $12.8 million, or 15%, to
$99.0 million in the first three quarters of fiscal 2021. Higher sales volumes,
favorable mix and a $3.5 million decline in advertising and promotional expenses
drove the increase, which was partially offset by higher manufacturing and
distribution costs. Cost of sales was $354.2 million, up 18% compared to the
first three quarters of fiscal 2020, primarily due to higher sales volume and
higher manufacturing and distribution costs.
Other segment product contribution margin increased $6.4 million, or 25%, to
$32.4 million. These amounts include a $16.3 million gain related to unrealized
mark-to-market adjustments and realized settlements associated with commodity
hedging contracts in the first three quarters of fiscal 2021, and a $6.6 million
gain related to the contracts in the first three quarters of fiscal 2020.
Excluding these mark-to-market adjustments, Other segment product contribution
margin declined $3.3 million, largely due to higher manufacturing and
distribution costs in our vegetable business.
Selling, General and Administrative Expenses
Compared with the prior-year period, selling, general and administrative
expenses was flat at $258.1 million. Lower incentive compensation expense, cost
management efforts, and an $8.3 million decline in advertising and promotional
expenses offset investments to improve our manufacturing and supply chain
operations over the long term, as well as investments in our information
technology infrastructure, which included approximately $7 million of
non-recurring expenses, primarily related to consulting and employee training
expenses associated with a new ERP system.
Interest Expense, Net
Compared with the prior-year period, interest expense, net increased $10.8
million to $89.6 million. The increase reflected higher average total debt
versus the prior year resulting from our actions to enhance our liquidity
position, as well as the write-off of $1.0 million of debt issuance costs
related to paying off a term loan facility that was due in November 2021. For
more information see "Liquidity and Capital Resources" in this MD&A.
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Income Tax Expense
Income tax expense for the first three quarters of fiscal 2021 and 2020 was
$76.2 million and $115.1 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 23.2% and 23.8% for the first three
quarters 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 $42.2 million and $35.4 million for the first three quarters of
fiscal 2021 and 2020, respectively. Equity method investment earnings included a
$6.8 million unrealized gain related to mark-to-market adjustments associated
with currency and commodity hedging contracts in the first three quarters of
fiscal 2021, compared to a $8.9 million unrealized loss related to the contracts
in the first three quarters of fiscal 2020. In addition, in December 2020,
Lamb-Weston/Meijer increased its interest in its Russian joint venture from
35.5% to 74.9%, and now consolidates that joint venture in its results. Earnings
in the prior year also included a $2.6 million loss related to the withdrawal
from a multiemployer pension plan by Lamb Weston RDO.
Excluding the mark-to-market adjustments and the Lamb Weston RDO pension-related
comparability item, earnings from equity method investments declined $11.5
million compared to the prior year period. Lower frozen potato demand in Europe
as well as higher manufacturing and distribution costs related to the COVID
pandemic largely drove the earnings decline.
Liquidity and Capital Resources
Sources and Uses of Cash
The ongoing COVID-19 pandemic has disrupted our business and operating results.
As a result of the uncertainties caused by the pandemic, we took actions to
enhance our 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 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 also deferred the
second phase of our new ERP system implementation. Our cash and cash equivalents
balance was $714.3 million at February 28, 2021.
We believe our cash on hand, cash flows from operations and available borrowings
under 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. While we expect increased availability of COVID-19 vaccines to enable a
gradual return of consumer french fry demand as our fiscal year progresses, 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 to
generate additional cash, which may require waivers under our credit agreements
governing our revolving credit and term loan facilities and indentures governing
our senior notes. There can be no assurance that we would be able to obtain
additional financing or any required 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 and 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.
27
Table of Contents
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):
© Edgar Online, source Glimpses
LAMB WESTON HOLDINGS, INC. 
