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 30, 2021 are not necessarily indicative of results that may be attained in the future. The following generally discusses fiscal 2021 and 2020 items and fiscal year comparisons between fiscal 2021 and 2020. Discussions of fiscal 2019 items and fiscal year comparisons between fiscal 2020 and 2019 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 31, 2020 , which we filed with theSecurities and Exchange Commission onJuly 28, 2020 .
The fiscal years for the Consolidated Financial Statements presented consist of a 52-week period for fiscal 2021 and a 53-week period for fiscal 2020.
OverviewLamb Weston , along with our 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 (including product contribution margin on a consolidated basis, Adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"), Adjusted EBITDA including unconsolidated joint ventures, and Adjusted Diluted EPS) that is prepared using non-GAAP financial measures. Refer to "Non-GAAP Financial Measures" below for the definitions of product contribution margin, Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS, and a reconciliation of these non-GAAP financial measures to gross profit, net income or diluted earnings per share. Executive Summary In fiscal 2021, we navigated the impacts of the COVID-19 pandemic on our operations and global frozen potato demand, demonstrating the strength and resilience of our employees in a challenging environment. Throughout the pandemic, our primary focus and attention has been directed towards the health and well-being of our employees and contractors, while continuing to support our customers and to invest in our manufacturing, supply chain, commercial and information technology operations to meet our long-term strategic objectives. 28 Table of Contents Our fiscal 2021 financial performance reflects the negative impact on frozen potato demand in our food-away-from-home sales channels. While demand and shipment trends sequentially improved during the year in our food-away-from-home sales channels, shipments to restaurants and other foodservice outlets were below pre-pandemic levels. The pandemic also significantly disrupted manufacturing and distribution operations across all industries, including ours, which resulted in higher costs. As a result, our sales and earnings in fiscal 2021 declined as compared to fiscal 2020, which included the benefit of an additional week ("53rd week") of sales, earnings and cash flow. Specifically:
? Net sales declined 3% to
? Income from operations declined 15% to
? Net income declined 13% to
? Diluted earnings per share and Adjusted Diluted EPS each declined 13% and 14%,
respectively, to
? Adjusted EBITDA including unconsolidated joint ventures declined 6% to
million
? Net cash provided by operating activities declined 4% to
Compared with fiscal 2020, the decline in net sales was driven by lower sales volume. Our sales volume declined largely due to demand for frozen potato products outside the home falling after government-imposed social restrictions to slow the spread of COVID-19 reduced restaurant traffic and included restrictions for on-premise dining. The decline in sales volume was most pronounced in our Foodservice segment, which has a higher proportion of its sales to on-premise dining establishments, including independent restaurants and non-commercial operations, such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments. The decline in sales volumes in our Global segment was less pronounced as consumers leveraged drive-thru, carry-out and delivery options at quick service restaurants in theU.S. In our Retail segment, which sells products for food-at-home consumption, sales volume for our branded products was strong, but this was more than offset by lower sales volume of private label products resulting from losses of certain low-margin business. Overall, our sales volume decline was partially offset by higher price/mix, which was largely due to favorable pricing in our Foodservice segment and favorable mix in our Retail segment, while price/mix in our Global segment was flat. InEurope , which is served by ourLamb-Weston /Meijer joint venture, sales volumes also declined as demand fell following government-imposed social restrictions. Although a high percentage of our sales are to quick service restaurants, unlike theU.S. , most consumption inEurope is dine-in or carry-out as drive-thru options are more limited. As a result, the effect of government-imposed restrictions on french fry demand inEurope was similar to what we observed for full-service restaurants operations in theU.S. Overall international sales volumes, which are included in our Global segment, varied by market. While demand in many of our key markets improved as fiscal 2021 progressed, the rate of improvement generally lagged that in theU.S. In addition, our exports were hindered by pandemic-related congestion atU.S. West Coast ports as well as the availability of shipping containers. Income from operations declined due to lower sales, higher manufacturing and distribution costs, and higher selling, general and administrative ("SG&A") expenses. The increase in costs was largely due to incremental costs resulting from the pandemic's disruptive effect on our production, transportation, and warehousing operations, including costs to address the safety and welfare of our employees and costs associated with a tighter labor market due to COVID-19 related absenteeism and labor-related restrictions. The COVID-19 environment also caused freight rates to increase due to tighter capacity and stronger demand in the trucking and cargo container markets resulting from higher shipping volume of products. We also experienced higher input cost inflation, particularly for edible oils because of low supply as well as higher demand for raw materials by alternative end markets, such as biofuels. Despite these challenges, we continued to invest in our supply chain operations, and completed the initial phase of our new ERP system, which we expect will benefit our operations over the long term. We also announced capital expansions in theU.S. andChina , and with our joint venture inEurope , announced expansions inRussia andthe Netherlands .
We generated full-year cash from operations of$553.2 million and cash flow after investing activities, including information technology initiatives, of$390.7 million . Given the significant economic uncertainty, we took prudent and early actions to reinforce and enhance our financial strength (see "Liquidity and Capital Resources" in this MD&A for more information). We ended the year with$783.5 million of cash and cash equivalents and no borrowings on our 29
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revolving credit facility. In addition, we returned
Outlook We remain committed to prioritizing the health and well-being of our employees and contractors, to supporting our customers, and to maintaining our financial strength as the pandemic continues to impact the global economy. In fiscal 2022, while the degree of the impact of the pandemic on our business remains uncertain, we believe its effect on global frozen potato demand will continue to lessen as vaccination rates increase in theU.S. and our key international markets and as governments continue to ease social restrictions in their respective jurisdictions. We believe this will likely have a favorable impact on restaurant traffic, especially for full-service restaurants and other operations that have traditionally relied on on-premise dining, as well as for other non-commercial operations, such as hotels, schools and universities, and sporting venues. In theU.S. , by the end of fiscal 2021, we saw shipments to large chain restaurants as well as in our Foodservice segment, in aggregate, approach pre-pandemic levels as more governments eased social restrictions. Accordingly, we continue to believe that overall frozen potato demand may approach pre-pandemic levels, on a run-rate basis, by the end of the calendar year. However, we expect the ongoing effects of the pandemic and the rapid resurgence of the broader economy will pressure and disrupt our global supply chain operations in the near-term, which will result in volatile operating conditions and incremental manufacturing and distribution costs. In addition, in fiscal 2022, we expect the rate of inflation for many of our manufacturing, commodity and distribution costs, including, but not limited to edible oils, rail, trucking, ocean freight, and packaging, will increase compared to what we experienced in fiscal 2021. We expect to increase the selling price of our products to offset, in whole or in part, these higher costs. We expect overall SG&A to be higher as a result of increased compensation and benefits expense largely resulting from inflation, as well as continued investments to improve our manufacturing, supply chain, commercial and information technology operations over the long term. This includes resuming our efforts to implement the next phase of a new ERP system, which we deferred due to the disruptive impact of the pandemic on our operations, as well as the significant number of employees working remotely.
While the near-term impact of the pandemic on sales volume and costs is volatile, we believe we have sufficient liquidity to manage through the uncertainty, and remain focused on our business and plans to drive long-term value creation.
Results of Operations
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 the Company's segments. For
additional information on our reportable segments and product contribution
margin, see "Non-GAAP Financial Measures" below and 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.
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Fiscal Year Ended
Year Ended
May 30, May 31, %
2021 2020 Inc/(Dec)
Segment sales
Global $ 1,911.5 $ 1,973.6 (3%)
Foodservice 1,017.3 1,069.1 (5%)
Retail 603.4 595.5 1%
Other 138.7 154.2 (10%)
$ 3,670.9 $ 3,792.4 (3%)
Segment product contribution margin
Global $ 306.2 $ 374.5 (18%)
Foodservice 340.0 356.0 (4%)
Retail 120.2 117.6 2%
Other 47.8 24.1 98%
814.2 872.2 (7%)
Add: Advertising and promotion expenses 17.8 23.0 (23%)
Gross profit $ 832.0 $ 895.2 (7%)
Net Sales
Lamb Weston's net sales for fiscal 2021 declined$121.5 million , or 3%, to$3,670.9 million , compared with$3,792.4 million in fiscal 2020. Volume declined 6% while price/mix increased 3%. Net sales and volume declined 2% and 6%, respectively, excluding the benefit of the 53rd week in the prior year. The decline in sales volume reflected soft demand for much of the first three fiscal quarters following government-imposed pandemic-related social restrictions, including on restaurants and other foodservice operations. Sales volumes increased in the fiscal fourth quarter due to a recovery in demand, as well as a comparison to reduced shipments in the prior year quarter when customers were destocking inventories as they adjusted to the abrupt change in the business environment. The increase in price/mix was driven primarily by favorable pricing in our Foodservice segment and favorable mix in our Retail segment, while price/mix in our Global segment was flat. Global net sales declined$62.1 million , or 3%, to$1,911.5 million , compared with$1,973.6 million in fiscal 2020. Volume declined 3% while price/mix was flat. Net sales and volume each declined 2% excluding the benefit of the 53rd week in the prior year. Sales volumes in the first half of the year declined as compared to the prior year, but largely stabilized beginning in the fiscal third quarter behind strength in shipments to large, quick service chain restaurant customers in theU.S. Sales volumes for the segment increased in the fiscal fourth quarter due to a recovery in demand in theU.S. and in our key international markets, as well as a comparison to reduced shipments in the prior year quarter when customers were destocking inventories. Price/mix was flat as positive pricing actions were offset by unfavorable customer mix. Foodservice net sales declined$51.8 million , or 5%, to$1,017.3 million , compared with$1,069.1 million in fiscal 2020. Volume declined 12% while price/mix increased 7%. Net sales and volume declined 4% and 11%, respectively, excluding the benefit of the 53rd week in the prior year. Sales volumes during the first three quarters of the year declined as compared to the prior year as demand at full-service restaurants and non-commercial customers were significantly affected by government-imposed social restrictions. Sales volumes for the segment increased in the fiscal fourth quarter due to a recovery in most of the segment's customer channels, as well as a comparison to reduced shipments in the prior year quarter when customers were destocking inventories. The increase in price/mix primarily reflected the carryover benefit of pricing actions implemented during fiscal 2020, partially offset by unfavorable mix as sales ofLamb Weston branded and premium products softened during the height of the pandemic. 31 Table of Contents
Retail net sales increased$7.9 million , or 1%, to$603.4 million , compared with$595.5 million in fiscal 2020. Price/mix increased 5% while volume declined 4%. Excluding the benefit of the 53rd week in the prior year, net sales increased 4% and volume declined 2%. The increase in price/mix was largely driven by favorable mix from higher sales of premium and mainstream branded offerings. The decline in sales volumes reflected lower shipments of private label products resulting from incremental losses of certain low-margin business, partially offset by strong growth in branded products, which have historically comprised approximately 40 percent of the segment's volume. In addition, the sales volume decline reflects a comparison to the fourth quarter of fiscal 2020 which included a surge in demand for in-home consumption of frozen potato products following government-imposed social restrictions.
Net sales in our Other segment declined
Gross Profit and Product Contribution Margin
Gross profit declined$63.2 million , or 7%, to$832.0 million in fiscal 2021. The decline was driven by lower sales and higher manufacturing and distribution costs on a per pound basis, which largely included: incremental costs and inefficiencies related to the pandemic's disruptive effect on our production, transportation, and warehousing operations; and input and transportation cost inflation. The increase in costs was partially offset by supply chain productivity savings. In addition, gross profit included a$40.4 million change in unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, which reflects a$37.9 million gain in the current year, compared with a$2.5 million loss related to these items in the prior year.Lamb Weston's overall product contribution margin in fiscal 2021 declined$58.0 million , or 7%, to$814.2 million , compared with$872.2 million in fiscal 2020. The decline was driven by lower sales and higher manufacturing and distribution costs, as described above.
Global segment product contribution margin declined$68.3 million , or 18%, to$306.2 million in fiscal 2021. Higher manufacturing and distribution costs, as well as lower sales volumes, largely drove the decline. Global segment cost of sales was$1,601.4 million , up 1% compared to fiscal 2020, as higher manufacturing and distribution costs were largely offset by the impact of lower sales volumes. Advertising and promotion spending declined$2.4 million in fiscal 2021, as compared to fiscal 2020. Foodservice product contribution margin declined$16.0 million , or 4%, to$340.0 million in fiscal 2021. Lower sales volumes and higher manufacturing and distribution costs more than offset the benefit of favorable price/mix. Cost of sales was$672.4 million , down 5% compared to fiscal 2020, due to lower sales volumes, partially offset by higher manufacturing and distribution costs. Advertising and promotion spending declined$2.3 million in fiscal 2021, as compared with fiscal 2020. Retail product contribution margin increased$2.6 million , or 2%, to$120.2 million in fiscal 2021. Favorable product mix and a$0.4 million decrease in advertising and promotion spending more than offset the impact of higher manufacturing and distribution costs and lower sales volumes of private label products. Cost of sales was$474.3 million , up 1% compared to fiscal 2020, primarily due to higher manufacturing and distribution costs, partially offset by lower sales volumes.
Other product contribution margin increased$23.7 million to$47.8 million in fiscal 2021, as compared to$24.1 million in fiscal 2020. These amounts include a$27.8 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, and a$0.2 million loss related to the contracts in fiscal 2020. Excluding these mark-to-market adjustments, Other segment product contribution margin declined$4.3 million , largely due to higher manufacturing costs and lower sales volumes in our vegetable business.
Selling, General and Administrative Expenses
SG&A expenses were
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technology operations over the long term, and included approximately$9 million of non-recurring expenses (primarily consulting and employee training expenses) associated with implementing the first phase of a new ERP system, compared to approximately$8 million in the prior year. The increase in SG&A was also driven by higher compensation and benefits expense, partially offset by a$5.2 million decline in A&P expense, as well as by cost management efforts. Interest Expense, Net Interest expense, net was$118.3 million in fiscal 2021, an increase of$10.3 million compared with fiscal 2020. The increase in interest expense, net was the result of a higher level of average total debt versus the prior year resulting from our actions in late fiscal 2020 and early fiscal 2021 to enhance our liquidity position during the pandemic. For more information, see Note 8, 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 22.2% for fiscal 2021, compared to 23.5% in fiscal 2020. The difference between our effective tax rates in fiscal 2021 and 2020 is primarily due to permanent differences and discrete items. Our 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 income taxes, 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$51.8 million and$29.3 million for fiscal 2021 and 2020, 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 an$11.3 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in fiscal 2021 and a$6.3 million loss related to these items in fiscal 2020. In addition, inDecember 2020 ,Lamb-Weston /Meijer increased its ownership interest in its Russian joint venture from 35.5% to 74.9%, and now consolidates that joint venture in its results. Excluding the Lamb Weston RDO pension-related comparability item and the mark-to-market adjustments, earnings from equity method investments increased$2.3 million compared to the prior year period, largely driven byLamb-Weston /Meijer's increased ownership interest in its Russian joint venture and higher manufacturing costs per pound in the prior year, partially offset by lower frozen potato demand inEurope following government-imposed restrictions on restaurant and other foodservice operations.
Liquidity and Capital Resources
We ended fiscal 2021 in a strong financial position with resources available for reinvesting in our business, including our strategic growth initiatives, pursuing acquisition opportunities that we may identify, and managing our capital structure on a short-term and long-term basis. AtMay 30, 2021 , we had$783.5 million of cash and cash equivalents and$744.6 million of availability under our revolving credit facility. While we expect the near-term impact of the pandemic on sales volume and costs to remain volatile, we believe we have sufficient liquidity to meet projected capital expenditures, service existing debt and meet working capital requirements for the next 12 months with current cash balances and cash from operations, supplemented as necessary by available borrowings under our existing revolving credit facility. 33 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): For the Fiscal Years Ended May 2021 2020 Net cash flows provided by (used for): Operating activities $ 553.2 $ 574.0 Investing activities (162.5) (346.0) Financing activities (974.0) 1,125.0 (583.3) 1,353.0
Effect of exchange rate changes on cash and cash equivalents 2.8 (1.2) Net increase (decrease) in cash and cash equivalents$ (580.5) $ 1,351.8 Operating Activities During fiscal 2021, cash provided by operating activities decreased$20.8 million to$553.2 million , compared with$574.0 million in the same period a year ago. The decrease related to a$99.2 million decrease in net income, adjusted for non-cash income and expenses, partially offset by$78.4 million of cash provided by favorable changes in working capital. Lower income from operations related to government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19. See "Results of Operations" in this MD&A for more information. Favorable changes in working capital primarily related to an increase in accounts payable, due to timing, and an increase in our accrued liabilities, primarily related to higher compensation and benefits accruals. This favorability was partially offset by higher finished goods inventory due to building more pounds of inventory to meet expected demand as sales began to reach pre-pandemic levels, compared with lower inventories at the end of fiscal 2020, when demand decreased due to the COVID-19 pandemic, as well as incremental costs related to rising input and other costs, higher receivables due to more sales at the end of fiscal 2021, compared with the end of fiscal 2020, and an increase in prepaid and other current assets primarily due to an increase in favorable open commodity contract hedge positions at the end of fiscal 2021, driven by a rise in edible oil prices. Investing Activities Investing activities used$162.5 million of cash in fiscal 2021, compared with$346.0 million in fiscal 2020. Excluding cash used for the acquisition of a frozen potato processor inAustralia and for an investment in an equity method joint venture in the prior year, cash used for investing activities decreased$44.2 million , compared to fiscal 2020. The decrease represents our concerted effort to control spending at the onset of the pandemic to preserve liquidity. We expect capital investments in fiscal 2022 to be approximately$650 million to$700 million , depending on timing of projects, which include among other items: completion of our chopped and formed capacity expansion inAmerican Falls, Idaho ; initial construction of a new french fry processing line and plant modernization investments inAmerican Falls, Idaho ; and initial construction of a greenfield french fry processing facility in Ulanqab,Inner Mongolia ,China . 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 30, 2021 , we had commitments for capital expenditures of$75.0 million . Financing Activities We took various actions to further strengthen our liquidity position in response to the COVID-19 pandemic, which included raising over$1 billion of liquidity in the last quarter of fiscal 2020, including borrowing$495.0 million under 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. These actions also included deferring the payment of our payroll taxes as allowed under the Coronavirus Aid, Relief and Economic Security Act ("CARES") Act. The CARES Act allows for the deferral of the payment of the employer portion ofSocial Security taxes accrued betweenMarch 27, 2020 , andDecember 31, 2020 . 34
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Under the CARES Act, 50% of the deferred payroll taxes will be paid byDecember 31, 2021 and the remainder will be paid byDecember 31, 2022 . 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. During fiscal 2021, we repaid the$495.0 million we borrowed under our revolving credit facility at the onset of the pandemic, and we repaid$305.5 million of other debt and financing obligations (including the repayment of the$271.9 million term loan facility that was scheduled to mature inNovember 2021 ). We also paid$135.3 million in cash dividends to common stockholders. During fiscal 2021, we repurchased 328,918 shares of our common stock at an average price of$78.19 and withheld 164,992 shares of common stock from employees to cover income and payroll taxes on equity awards that vested during the period. As ofMay 30, 2021 ,$169.6 million remained authorized for repurchase under our share repurchase program. During fiscal 2020, we paid$121.3 million in cash dividends to common stockholders. We also repurchased 287,239 shares of our common stock at an average price of$79.56 per share and withheld 80,673 shares of common stock from employees to cover income and payroll taxes on equity awards that vested during the period. We assess our financing alternatives periodically and expect to access credit or debt capital markets opportunistically, within targeted levels, as part of our plans to fund our capital programs, including capital expenditures and cash returns to stockholders through dividends and share repurchases. These transactions may include refinancing of existing debt or the incurrence of new debt, subject to financing options that may be available to us from time to time, as well as conditions in the credit and debt capital markets generally. For more information about our debt, including among other items, interest rates, maturity dates, and covenants, see Note 8, 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 30, 2021 , we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as ofMay 30, 2021 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 4, 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 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.
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A summary of our contractual obligations as ofMay 30, 2021 are as follows (dollars in millions). 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 Fiscal Year Contractual Obligations Total 2022 2023-2024 2025-2026 Thereafter Long-term debt, including current portion, excluding financing obligations (a)$ 2,752.6 $ 31.3 $ 62.6 $ 1,325.7 $ 1,333.0 Interest on long-term debt (b) 560.1 114.9 227.6 153.1 64.5 Leases (c) 179.8 32.6 44.5 35.5 67.2 Purchase obligations and capital commitments (d) (e) 883.1 150.2 138.0 103.0 491.9 Other (f) 72.0 2.6 18.0 18.6 32.8 Total$ 4,447.6 $ 331.6 $ 490.7 $ 1,635.9 $ 1,989.4
The table is based on our long-term debt maturities at
Balances have not been reduced by the $22.5 million of unamortized debt
issuance costs at May 30, 2021 .
Amounts represent estimated future interest payments as of
effect at May 30, 2021 .
We enter into leases in the normal course of business. See Note 9, Leases, of
the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial (c) Statements and Supplementary Data" of this Form 10 K. The total amount
includes operating and finance lease obligations and estimated interest costs
of $23.1 million .
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 (d) 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 (e) 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.
Amount primarily consists of long-term compensation and benefits, such as (f) deferred compensation liabilities, pension, and post-retirement benefit
obligations.
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. While we have taken into account certain impacts arising from COVID-19 in connection with the accounting estimates reflected in this Form 10-K, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, we have made appropriate accounting estimates based on the facts and circumstances available as of the 36 Table of Contents
reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be affected.
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 demand for our products, 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 30, 2021 andMay 31, 2020 , we had$39.9 million and$42.5 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.
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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-
judgments of projected cash flow needs, as well as the working capital and
investment requirements of our non-
? in our estimates of cash, working capital, and investment needs in various
jurisdictions could require repatriation of indefinitely reinvested non-
earnings, which could be subject to applicable non-
taxes. While we believe the judgments 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. Significant estimates and assumptions in determining 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.
Non-GAAP Financial Measures
To supplement the financial information included in this report, we have
presented product contribution margin on a consolidated basis, Adjusted EBITDA,
Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted
EPS, each of which is considered a non-GAAP financial measure.
Product contribution margin is one of 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. Our
management also uses Adjusted EBITDA, Adjusted EBITDA including unconsolidated
joint ventures and Adjusted Diluted EPS to evaluate our 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
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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 our 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 gross profit, net income (loss) or diluted earnings per share, and there are limitations to using non-GAAP financial measures. See "Results of Operations - Fiscal Year EndedMay 30, 2021 Compared to Fiscal Year EndedMay 31, 2020 (dollars in millions) -Net Sales and Product Contribution Margin" above for a reconciliation of product contribution margin on a consolidated basis to gross profit.
The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures.
For the Fiscal Years Ended May
2021 (a) 2020 (a)
Net income $ 317.8 $ 365.9
Equity method investment earnings (51.8) (29.3)
Interest expense, net 118.3 108.0
Income tax expense 90.5 112.3
Income from operations 474.8 556.9
Depreciation and amortization 182.7 177.8
Adjusted EBITDA (b) 657.5 734.7
Unconsolidated Joint Ventures
Equity method investment earnings 51.8 29.3
Interest expense, income tax expense, and depreciation and amortization included in equity method investment earnings
39.1 33.2
Items impacting comparability
Loss on withdrawal from multiemployer pension plan - 2.6
Add: Adjusted EBITDA from unconsolidated joint ventures 90.9 65.1
Adjusted EBITDA including unconsolidated joint ventures $ 748.4 $ 799.8
Fiscal 2021 and 2020 include incremental costs resulting from the pandemic's
effect on our manufacturing and supply chain operations, as well as
incremental warehousing and transportation costs, and costs to enhance (a) employee safety measures, including purchases of safety and health screening
equipment, and retaining sales employees. In addition, fiscal 2021 includes
higher costs related to processing raw potatoes out of storage longer than
prior years.
(b) Adjusted EBITDA includes EBITDA from consolidated joint ventures.
The following table reconciles diluted earnings per share to Adjusted Diluted
EPS:
For the Fiscal Years Ended May
2021 (a) 2020 (a)
As reported $ 2.16 $ 2.49
Item impacting comparability:
Loss on withdrawal from multiemployer pension plan -
0.01
Adjusted $ 2.16 $ 2.50
Diluted weighted average common shares were 147.1 million in both fiscal 2021 (a) and 2020.
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