ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended May 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 ended May 31, 2020, which we filed with the Securities and Exchange Commission on July 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.
Overview
Lamb 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 in North 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.
On November 9, 2016, we separated from Conagra and became an independent publicly traded company through the pro rata distribution by Conagra of 100% of our outstanding common stock to Conagra stockholders. In connection with the Separation, Conagra transferred substantially all of the assets and liabilities and operations of the Lamb 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 with U.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 $3,670.9 million
● Income from operations declined 15% to $474.8 million
● Net income declined 13% to $317.8 million
● Net cash provided by operating activities declined 4% to $553.2 million
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 the U.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.
In Europe, which is served by our Lamb-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 the U.S., most consumption in Europe 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 in Europe was similar to what we observed for full-service restaurants operations in the U.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 the U.S. In addition, our exports were hindered by pandemic-related congestion at U.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 the U.S. and China, and with our joint venture in Europe, announced expansions in Russia and the 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
Table of Contents
revolving credit facility. In addition, we returned $161.0 million to our stockholders, through a combination of dividends and share repurchases.
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 the U.S. and our key international markets and as governments continue to ease social restrictions in their respective jurisdictions. We believe this will likelyhave 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 the U.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.
30
Table of Contents
Fiscal Year Ended May 30, 2021 Compared to Fiscal Year Ended May 31, 2020 (dollars in millions)
Net Sales and Product Contribution Margin
Year Ended
Segment sales
Segment product contribution margin
Add: Advertising and promotion expenses 17.8 23.0 (23%)
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 the U.S. Sales volumes for the segment increased in the fiscal fourth quarter due to a recovery in demand in the U.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 of Lamb 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 $15.5 million, or 10%, to $138.7 million, compared with $154.2 million in fiscal 2020. The decline primarily reflects lower volume in our vegetable business, partially offset by favorable price/mix.
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 $357.2 million, up $18.9 million, or 6%, in fiscal 2021 compared with fiscal 2020. The increase was largely driven by investments to improve our manufacturing, supply chain, commercial and information
32
Table of Contents
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 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.
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, in December 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 by Lamb-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 in Europe 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. At May 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
Net cash flows provided by (used for):
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 in Australia 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 in American Falls, Idaho; initial construction of a new french fry processing line and plant modernization investments in American 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. At May 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 of Social Security taxes accrued between March 27, 2020, and December 31, 2020.
34
Table of Contents
Under the CARES Act, 50% of the deferred payroll taxes will be paid by December 31, 2021 and the remainder will be paid by December 31, 2022. In addition, in June 2019, we entered into a new $300.0 million term loan facility due in June 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 in November 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 of May 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. At May 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 of May 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.
35
Table of Contents
A summary of our contractual obligations as of May 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
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 the Audit 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. At May 30, 2021 and May 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:
37
Table of Contents
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
38
Table of Contents
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 Ended May 30, 2021 Compared to Fiscal Year Ended May 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
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
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
(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
As reported $ 2.16 $ 2.49
Item impacting comparability:
Loss on withdrawal from multiemployer pension plan — 0.01
39
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, we may periodically enter into derivatives to minimize these risks, but not for trading purposes. The effects of the COVID-19 pandemic have resulted in volatility and uncertainty in the markets in which we operate. At the time of this filing, we are unable to predict or determine the impacts that the COVID-19 pandemic may continue to have on our exposure to market risk from commodity prices, foreign currency exchange rates and interest rates, among other factors. For additional discussion, refer to “Forward-Looking Statements,” “Liquidity and Capital Resources” within “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as “Item 1A. Risk Factors” of this Form 10-K.
Based on our open commodity contract hedge positions as of May 30, 2021 and May 31, 2020, a hypothetical 10 percent decline in market prices applied to the fair value of the instruments would result in a charge to “Cost of sales” of approximately $7.7 million ($5.9 million net of income tax benefit) and $9.6 million ($7.4 million net of income tax benefit), respectively. It should be noted that any change in the fair value of the contracts, real or hypothetical, would be substantially offset by an inverse change in the value of the underlying hedged item.
Including our joint ventures, we transact business in multiple currencies and are subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. At May 30, 2021 and May 31, 2020, we had no financial instruments to hedge foreign currency risk.
At May 30, 2021, we had $2,166.0 million of fixed-rate and $586.6 million of variable-rate debt outstanding. At May 31, 2020, we had $2,166.0 million of fixed-rate and $1,389.0 million of variable-rate debt outstanding. We have interest rate risk associated with our variable-rate debt. A one percent increase in interest rates related to variable-rate debt would have resulted in an increase in interest expense and a corresponding decrease in income before taxes of approximately $5.9million annually ($4.6 million net of income tax benefit) and $14.1million annually ($10.8 million net of income tax benefit) at May 30, 2021 and May 31, 2020, respectively.
For more information about our market risks, see Note 8, Debt and Financing Obligations, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
40
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Registered Public Accounting Firm 42
Notes to Consolidated Financial Statements 50
41
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lamb Weston Holdings, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lamb Weston Holdings, Inc. and subsidiaries (the Company) as of May 30, 2021 and May 31, 2020, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended May 30, 2021, and the related notes and consolidated financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 30, 2021 and May 31, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended May 30, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of May 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated July 27, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases for the fiscal year ended May 31, 2020 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), effective May 27, 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
42
Table of Contents
Evaluation of certain sales incentives and trade promotion allowances
As discussed in Note 1 to the consolidated financial statements, the Company offers sales incentives and trade promotion allowances through various programs. The Company records accruals based on sales incentive agreements and expectations regarding customer participation and performance levels. Customer participation and performance levels are primarily based on historical sales and redemption rates, current customer sales, and industry trends.
We identified the evaluation of certain accruals for sales incentive and trade promotion allowances as a critical audit matter. Subjective and complex auditor judgment was required in evaluating these accruals as a result of the timing difference between when the product is delivered and when the incentive will be claimed by the end consumer, coupled with customer participation expectations. This specifically related to the impact of historical sales, payments, and redemption rates on the Company’s accrual.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s sales incentive and trade promotion allowance process, including the accrual methodology, and evaluation of the use of historic data. To evaluate the Company’s accrual for certain sales incentives and trade promotions allowances we (1) assessed the Company’s ability to accurately estimate its sales incentive accrual by comparing previously established accruals to actual settlements, (2) evaluated conditions in the current operating environment which may affect the use of historical sales, payments, and redemption rates as inputs to the projected accrual, (3) evaluated a sample of customer and end consumer incentive payments, which are the basis for certain portions of the Company’s accrual for sales incentives and trade promotions, based on volumes sold and the terms of the sales incentives to validate the accuracy of the payment made and the lag time between product invoice and incentive redemption, and (4) evaluated certain customer and end consumer incentive accruals based on volumes sold, historic payments, and the terms of the sales incentives to test the basis of the specific customer’s projected accrual.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
Seattle, Washington
July 27, 2021
43
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lamb Weston Holdings, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Lamb Weston Holdings, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of May 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of May 30, 2021 and May 31, 2020, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended May 30, 2021, and the related notes and consolidated financial statement schedule (collectively, the consolidated financial statements), and our report dated July 27, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Seattle, Washington
July 27, 2021
44
Table of Contents
Lamb Weston Holdings, Inc.
Consolidated Statements of Earnings
(dollars in millions, except per-share amounts)
For the Fiscal Years Ended May
Selling, general and administrative expenses 357.2 338.3 335.1
Income before income taxes and equity method earnings 356.5 448.9 561.3
Equity method investment earnings 51.8 29.3 59.5
Less: Income attributable to noncontrolling interests — — 8.6
Earnings per share
See Notes to Consolidated Financial Statements.
45
Table of Contents
Lamb Weston Holdings, Inc.
Consolidated Statements of Comprehensive Income
(dollars in millions)
For the Fiscal Years Ended May
Tax Tax Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
Other comprehensive income (loss):
See Notes to Consolidated Financial Statements.
46
Table of Contents
Lamb Weston Holdings, Inc.
Consolidated Balance Sheets
(dollars in millions, except share data)
May 30, May 31,
ASSETS
Current assets:
Prepaid expenses and other current assets 117.8 109.8
Property, plant and equipment, net 1,524.0 1,535.0
Operating lease assets 141.7 167.0
Equity method investments 310.2 250.2
Intangible assets, net 36.9 38.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ — $ 498.7
Current portion of long-term debt and financing obligations 32.0 48.8
Long-term liabilities:
Deferred income taxes 159.7 152.5
Other noncurrent liabilities 245.5 252.3
Total long-term liabilities 3,110.6 3,397.4
Commitments and contingencies
Stockholders' equity:
Additional distributed capital (836.8) (862.9)
Accumulated other comprehensive income (loss) 29.5 (40.5)
Total stockholders' equity 480.6 240.0
Total liabilities and stockholders’ equity $ 4,209.4 $ 4,662.3
See Notes to Consolidated Financial Statements.
47
Table of Contents
Lamb Weston Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(dollars in millions, except share data)
Additional Accumulated
Common Stock, Common Treasury Paid-in Other
Shares Amount Amount Capital Earnings Income (Loss) Equity
Common stock issued 258,961 0.3 — 1.7 — — 2.0
Other — — — 0.4 (0.5) — (0.1)
Comprehensive income — — — — 478.6 (21.0) 457.6
Adoption of ASC 842 leases — — — — 20.5 — 20.5
Common stock issued 338,924 0.3 — 4.0 — — 4.3
Other — — — 0.6 0.2 — 0.8
Comprehensive income — — — — 365.9 (15.2) 350.7
Common stock issued 646,881 0.6 — 3.5 — — 4.1
Other — — — 2.0 (1.6) — 0.4
Comprehensive income — — — — 317.8 70.0 387.8
See Notes to Consolidated Financial Statements.
48
Table of Contents
Lamb Weston Holdings, Inc.
Consolidated Statements of Cash Flows
(dollars in millions)
For the Fiscal Years Ended May
Cash flows from operating activities
Stock-settled, stock-based compensation expense 20.6 22.8 18.8
Deferred income taxes 3.8 20.0 37.5
Receivables (21.0) 1.1 (25.1)
Income taxes payable/receivable, net (3.3) 2.7 (16.4)
Prepaid expenses and other current assets (4.9) (2.0) (1.9)
Accrued liabilities (9.0) (16.1) 1.9
Net cash provided by operating activities $ 553.2 $ 574.0 $ 680.9
Cash flows from investing activities
Additions to property, plant and equipment (147.2) (167.7) (334.2)
Additions to other long-term assets (16.1) (40.7) (2.7)
Acquisition of business, net of cash acquired — (116.7) (88.6)
Investment in equity method joint venture — (22.6) —
Net cash used for investing activities $ (162.5) $ (346.0) $ (423.0)
Cash flows from financing activities
Proceeds (payments) of short-term borrowings, net (498.8) 490.5 (1.0)
Repayments of debt and financing obligations (305.5) (336.3) (66.7)
Proceeds from issuance of debt — 1,122.9 —
Acquisition of noncontrolling interest — — (78.2)
Cash distributions paid to noncontrolling interest — — (6.1)
Other 1.7 (1.9) 2.1
Cash and cash equivalents, beginning of the period 1,364.0 12.2 55.6
Cash and cash equivalents, end of period $ 783.5 $ 1,364.0 $ 12.2
See Notes to Consolidated Financial Statements.
49
Table of Contents
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lamb Weston Holdings, Inc. (“we,” “us,” “our,” the “Company,” or “Lamb Weston”), along with our joint venture partners, is a leading global producer, distributor, and marketer of value-added frozen potato products and is headquartered in Eagle, Idaho. We have four reportable segments: Global, Foodservice, Retail, and Other. See Note 14, Segments, for additional information on our reportable segments.
On November 9, 2016, Lamb Weston separated from Conagra Brands, Inc. (formerly, ConAgra Foods, Inc., “Conagra”) and became an independent publicly traded company through the pro rata distribution by Conagra of 100% of the outstanding common stock of Lamb Weston to Conagra stockholders (“Separation”).
Basis of Presentation
These Consolidated Financial Statements present the financial results of Lamb Weston for the fiscal years ended May 30, 2021, May 31, 2020, and May 26, 2019 (“fiscal 2021, 2020, and 2019”), and have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America. The fiscal year of Lamb Weston ends the last Sunday in May. The fiscal years for the Consolidated Financial Statements presented consist of 52-week periods for fiscal 2021 and 2019, and a 53-week period for fiscal 2020.
The financial statements include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such financial statements. The preparation of financial statements involves the use of estimates and accruals. Actual results may vary from those estimates.
Our consolidated financial statements include the accounts of Lamb Weston and all of our majority-owned subsidiaries. In addition, the accounts of all variable interest entities for which we are the primary beneficiary are included in our consolidated financial statements from the date such determination was made. Intercompany investments, accounts, and transactions have been eliminated.
The equity method of accounting is applied for investments when the Company has significant influence over the investee’s operations, or when the investee is structured with separate capital accounts and our investment is considered more than minor. Our equity method investments are described in Note 4, Investments in Joint Ventures.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including but not limited to those related to provisions for income taxes, estimates of sales incentives and trade promotion allowances, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The inputs into our judgments and estimates consider the economic implications of the effects of the COVID-19 pandemic on our critical accounting estimates and significant accounting policies. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods.
Revenue from Contracts with Customers
Generally, we recognize revenue on a point-in-time basis when the customer takes title to the product and assumes the risks and rewards for the product. However, for customized products, which are products manufactured to customers’ unique specifications, we recognize revenue over time, utilizing an output method, which is generally as the products are produced. This is because once a customized product is manufactured pursuant to a purchase order, we have an enforceable right to payment for that product. Our Global segment sells the majority of our customized products, for which revenue is
50
Table of Contents
recognized when a purchase order is received to the extent the product has been manufactured, as opposed to sales of non-customized products, for which revenue is generally recognized upon shipment. As a result, the timing of the receipt of a purchase order may create quarterly fluctuations in this segment.
The nature of our contracts vary based on the business, customer type, and region; however, in all instances it is our customary business practice to receive a valid order from the customer, in which each party’s rights and related payment terms are clearly identifiable. Our payment terms are consistent with industry standards and generally include early pay discounts. Amounts billed and due from customers are short-term in nature and are classified as receivables, since payments are unconditional and only the passage of time is required before payments are due. As of May 30, 2021 and May 31, 2020, we had $111.0 million and $72.7 million, respectively, of unbilled receivables for customized products for which we have accelerated the recognition of revenue and recorded the amounts in “Receivables” on our Consolidated Balance Sheets. We generally do not offer financing to our customers. We also do not provide a general right of return. However, customers may seek to return defective or non-conforming products. Following a customer return, we may offer remedies, including cash refunds, credit towards future purchases, or product replacement. As a result, customers’ right of return and related refund or product liabilities are estimated and recorded as reductions in revenue.
We have contract terms that give rise to variable consideration including, but not limited to, discounts, coupons, rebates, and volume-based incentives. We estimate volume rebates based on the most likely amount method outlined in ASC 606, Revenue from Contracts with Customers. We estimate early payment discounts and other customer trade incentives based principally on historical sales and coupon utilization and redemption rates, influenced by judgments about current market conditions such as competitive activity in specific product categories, which is consistent with the expected value method outlined in ASC 606. We have concluded that these methods result in the best estimate of the consideration we are entitled to from our customers. Because of the complexity of some of these trade promotions, however, the ultimate resolution may result in payments that are materially different from our estimates. As additional information becomes known, we may change our estimates. At May 30, 2021 and May 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.
We have elected to present all sales taxes on a net basis, account for shipping and handling activities as fulfillment activities, recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period of the asset we would recognize is one year or less, and not record interest income or interest expense when the difference in timing of control or transfer and customer payment is one year or less.
Advertising and Promotion
Advertising and promotion expenses totaled $17.8 million, $23.0 million, and $32.4 million in fiscal 2021, 2020, and 2019, respectively, and are included in “Selling, general and administrative expenses” in the Consolidated Statements of Earnings.
Research and Development
Research and development costs are expensed as incurred and totaled $12.9 million in fiscal 2021 and $15.4 million in both fiscal 2020 and 2019, and are included in “Selling, general and administrative expenses” in the Consolidated Statements of Earnings.
Stock-Based Compensation
Compensation expense resulting from all stock-based compensation transactions is measured and recorded in the consolidated financial statements based on the grant date fair value of the equity instruments issued. Compensation expense is recognized over the period the employee provides service in exchange for the award. See Note 11, Stock-Based Compensation, for additional information.
51
Table of Contents
Cash and Cash Equivalents
Cash and all highly liquid investments with an original maturity of three months or less at the date of acquisition are classified as cash and cash equivalents and stated at cost, which approximates market value. We maintain various banking relationships with high quality financial institutions and believe we are not exposed to any significant credit risk for our cash and cash equivalents. Cash and cash equivalents totaled $783.5 million and $1,364.0 million at May 30, 2021 and May 31, 2020, respectively. We invest available cash in money market funds that are backed by U.S. Treasury securities and can be redeemed without notice.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount we expect to collect based on our past experience, as well as reliance on the Perishable Agricultural Commodities Act, which was enacted to help promote fair trade in the fruit and vegetable industry by establishing a code of fair business practices. The collectability of our accounts receivable is based upon a combination of factors. In circumstances where a specific customer is unable to meet its financial obligations (e.g., bankruptcy filings, substantial downgrading of credit sources), a specific reserve for bad debts is recorded against amounts due to the Company to reduce the net recorded receivable to the amount that we reasonably believe will be collected. For all other customers, reserves for bad debts are recognized based on forward-looking information to assess expected credit losses. If collection experience deteriorates, the estimate of the recoverability of amounts due could be reduced. We periodically review our allowance for doubtful accounts and adjustments to the valuation allowance are recorded as income or expense. Trade accounts receivable balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At May 30, 2021 and May 31, 2020, the allowance for doubtful accounts was $0.9 million and $1.3 million, respectively.
Inventories
Inventories are valued at the lower of cost (determined using the first-in, first-out method) or net realizable value and include all costs directly associated with manufacturing products: materials, labor, and manufacturing overhead. The components of inventories were as follows (dollars in millions):
Raw materials and packaging $ 89.8 $ 106.2
Leased Assets
Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from these leases. Effective May 27, 2019, the beginning of our fiscal 2020, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of the lease payments over the lease term. Our leases may include options to extend or terminate these leases. These options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in lease assets and liabilities. Variable payments for leases of land and buildings primarily relate to common area maintenance, insurance, taxes, and utilities. Variable payments for equipment, vehicles, and leases within supply agreements primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of our leases, we use an incremental borrowing rate to determine the initial present value of lease payments over the lease terms on a collateralized basis over a similar term, which is based on market and company specific information. This is updated quarterly for measurement of new lease liabilities. Leases having a lease term of twelve months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. In addition, we applied the practical expedient to account for
52
Table of Contents
the lease and non-lease components as a single lease component for all of our leases. See Note 9, Leases, for more information.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements and the amount of interest cost associated with significant capital additions. The amount of interest capitalized from construction in progress was $1.9 million, $2.6 million, and $7.6 million in fiscal 2021, 2020, and 2019, respectively. Repairs and maintenance costs are expensed as incurred. The components of property, plant and equipment were as follows (dollars in millions):
Land and land improvements $ 108.2 $ 107.2
Buildings, machinery, and equipment 2,763.3 2,670.1
Furniture, fixtures, office equipment, and other 97.1 107.1
Construction in progress 122.5 58.3
Property, plant and equipment, at cost 3,091.1 2,942.7
Less accumulated depreciation (1,567.1) (1,407.7)
Property, plant and equipment, net $ 1,524.0 $ 1,535.0
Depreciation is computed on the straight-line method over the estimated useful lives of the respective classes of assets as follows:
Land improvements 2-30 years
Buildings 10-40 years
Machinery and equipment 5-20 years
Furniture, fixtures, office equipment, and other 3-15 years
We recorded $177.7 million, $175.3 million, and $155.5 million of depreciation expense in fiscal 2021, 2020, and 2019, respectively. At May 30, 2021 and May 31, 2020, purchases of property, plant and equipment included in accounts payable were $23.1 million and $9.9 million, respectively.
Long-Lived Asset Impairment
We review long-lived assets for impairment upon the occurrence of events or changes in circumstances which indicate that the carrying amount of the assets may not be fully recoverable, measured by comparing their net book value to the undiscounted projected future cash flows generated by their use. Impaired assets are recorded at their estimated fair value.
Goodwill and Other Identifiable Intangible Assets
We perform an annual impairment assessment of goodwill at the reporting unit level in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. We have an option to evaluate goodwill for impairment by first performing a qualitative assessment of events and circumstances to determine whether it is more likely than not that the fair value of a reporting until is less than its carrying amount. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amounts, then a quantitative goodwill impairment test is not required to be performed. The quantitative assessment requires us to estimate the fair value of our reporting units using a weighted approach based on discounted future cash flows, market multiples and transaction multiples. If the carrying amount of the reporting units is in excess of their estimated fair value, the reporting unit will record an impairment charge by the amount that the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
53
Table of Contents
We amortize acquisition-related intangible assets with finite lives over their estimated useful life. We perform a review of significant finite-lived identified intangible assets to determine whether facts and circumstances indicate that the carrying amount may not be recoverable. These reviews can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for our products lines.
See Note 6, Goodwill and Other Identifiable Intangible Assets, for additional information.
Fair Values of Financial Instruments
When determining fair value, we consider the principal or most advantageous market in which we would transact, as well as assumptions that market participants would use when pricing the asset or liability. Unless otherwise specified, we believe the carrying value of financial instruments approximates their fair value.
The three levels of inputs that may be used to measure fair value are: