ITEM 1A. RISK FACTORS
Our business is subject to various risks and uncertainties. Any of the risks and uncertainties described below could materially and adversely affect our business, financial condition, and results of operations and should be considered in evaluating us. Although the risks are organized by heading, and each risk is described separately, many of the risks are interrelated. While we believe we have identified and discussed below the material risks affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition, or results of operations in the future.
Business and Operating Risks
We may not be able to offset cost increases due to inflationary pressures on inputs necessary for the production and distribution of our products, such as labor, raw materials, energy, fuel, and packaging materials.
A significant portion of our cost of goods comes from commodities such as raw potatoes, edible oil, grains, starches, and energy. These commodities are subject to price volatility and fluctuations in availability caused by many factors, including: changes in global supply and demand, weather conditions (including any potential effects of climate change), fire, natural disasters (such as a hurricane, tornado, earthquake, wildfire or flooding), disease or pests, agricultural uncertainty, water stress, health epidemics or pandemics or other contagious outbreaks, such as the COVID-19 pandemic, governmental incentives and controls (including import/export restrictions, such as new or increased tariffs, sanctions, quotas or trade barriers including the financial and economic sanctions imposed by the U.S. and certain foreign governments in response to the war in Ukraine), limited or sole sources of supply, inflation, political uncertainties, acts of terrorism, governmental instability, war or other conflicts (such as the war in Ukraine and conflicts in the Middle East), or currency exchange rates.
During fiscal 2024, we continued to experience significantly elevated commodity and supply chain costs, including the costs of labor, raw materials (such as edible oil, grain and starch), energy, fuel, packaging materials, and other inputs necessary for the production and distribution of our products. As fiscal 2024 progressed, we experienced some moderation in input cost inflation, however, we expect modestly elevated levels of inflation to continue into fiscal 2025. Commodity price increases, or a sustained interruption or other constraints in the supply or availability of key commodities, including necessary services such as transportation and warehousing, could adversely affect our business, financial condition, and results of operations. Our attempts to offset these cost pressures, such as through increases in the selling prices of some of our products, may not continue to be successful. Higher product prices may result in reductions in sales volume. To the extent that price increases are not sufficient to offset these increased costs adequately or in a timely manner, and/or if they result in significant decreases in sales volume, our business, financial condition, or results of operations may be adversely affected.
We also may not be successful in mitigating the effects of these cost increases through productivity initiatives or through our commodity hedging activity. Our future success and earnings growth depend in part on our ability to maintain the appropriate cost structure and operate efficiently in the highly competitive value-added frozen potato product category. We continue to implement profit-enhancing initiatives that improve the efficiency of our supply chain and general and administrative functions. These initiatives are focused on cost-saving opportunities in procurement, manufacturing, logistics, and customer service, as well as general and administrative functions. However, gaining additional efficiencies may become more difficult over time. In addition, there is currently no active derivatives market for potatoes in the U.S. Although we have experience in hedging against commodity price increases, these practices and experience reduce, but do not eliminate, the risk of negative profit impacts from commodity price increases. As a result, the risk management procedures that we use may not always work as we intend. To the extent we are unable to offset present and future cost increases, our business, financial condition, and results of operations could be materially and adversely affected.
Disruption to our supply chain could adversely affect our business.
Our ability to manufacture or sell our products may be impaired by damage or disruption to our manufacturing, warehousing or distribution capabilities, or to the capabilities of our suppliers, logistics service providers, or independent distributors. This damage or disruption could result from execution issues, as well as factors that are difficult to predict or beyond our control such as increased temperatures due to climate change, water stress, extreme weather events, natural disasters, product or raw material scarcity, fire, terrorism, pandemics (such as the COVID-19 pandemic), armed hostilities (including the ongoing war in Ukraine and conflicts in the Middle East), strikes, labor shortages, cybersecurity breaches, governmental restrictions or mandates, disruptions in logistics, supplier capacity constraints, or other events. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, may adversely affect our business, financial condition, and results of operations. Further, the inability of any supplier, including, but not limited to, those that supply our packaging, ingredients, equipment and other necessary operating materials, co-manufacturer, independent contractor, logistics service provider, or independent distributor to
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deliver or perform for us in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease. We have experienced, and may continue to experience, disruptions in our supply chain, including as a result of temporary systems disruptions, labor shortages, increased transportation and warehousing costs, longer shipping times, and other factors related to the effects of pandemics or other public health crisis, such as the COVID-19 pandemic, the ongoing war in Ukraine and the conflicts in the Middle East. For example, in fiscal 2024 after our transition to a new ERP system in North America, we experienced temporary reduced visibility into finished goods inventories at our distribution centers, which affected our ability to fill customer orders and reduced our sales and increased costs. In addition, the occurrence of a significant supply chain disruption or the inability to access or deliver products that meet requisite quality and safety standards in a timely and efficient manner, could lead to increased warehouse and other storage costs or otherwise adversely affect our profitability and weaken our competitive position or harm our business.
Labor shortages or stoppages, an inability to attract and retain key personnel, increased turnover or increases in labor costs could adversely affect our business, financial condition, and results of operations.
Labor is a primary component of operating our business. A number of factors may adversely affect the labor force available to us or increase labor costs, including the shift towards hybrid or remote work arrangements, higher unemployment subsidies, other government regulations, and general macroeconomic factors. The labor market has been increasingly tight and competitive, and we may face sudden and unforeseen challenges in the availability of labor, such as we experienced in fiscal 2022 and 2023 at some of our production facilities, which reduced our production run-rates and increased our manufacturing costs. As we experienced with the COVID-19 pandemic, sustained labor shortages or increased turnover rates within our workforce, could lead to production or shipping delays, increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, and could negatively affect our ability to efficiently operate our production and distribution facilities and overall business. Further, our success depends on our ability to attract, retain, and develop effective leaders and personnel with professional and technical expertise, such as agricultural and food manufacturing experience, as well as finance, marketing, and other senior management professionals. The loss of the services of these persons could deplete our institutional knowledge and could have a material adverse effect on our business, financial condition, and results of operations. The market for these employees is competitive, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. Our ability to recruit and retain a highly skilled workforce could also be materially impacted if we fail to adequately respond to rapidly changing employee expectations regarding fair compensation, an inclusive and diverse workplace, flexible working, or other matters. If we are unable to hire and retain employees capable of performing at a high-level, develop adequate training and succession plans for leadership positions, or if mitigation measures we may take to respond to a decrease in labor availability, such as overtime and third-party outsourcing, have unintended negative effects, our business could be adversely affected. Similarly, we have been negatively impacted and may in the future continue to be negatively impacted by labor shortages or increased labor costs experienced by our third-party business partners, including our logistics providers, suppliers, and customers. For example, reduced availability of trucking capacity due to shortages of drivers, primarily as a result of the COVID-19 pandemic, caused an increase in the cost of transportation for us and our suppliers in fiscal 2022. An overall labor shortage, lack of skilled labor, increased turnover, or labor inflation could have a material adverse impact on our business, financial condition, and results of operations.
In addition, health care and workers’ compensation costs have been increasing. Inflationary pressures and any shortages in the labor market could continue to increase labor costs, which could have a material adverse effect on our business, financial condition, or results of operations. Our labor costs include the cost of providing employee benefits in the U.S. and foreign jurisdictions, including pension, health and welfare, and severance benefits. Changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns, and the market value of plan assets can affect the funded status of our defined benefit plans and cause volatility in the future funding requirements of the plans. A significant increase in our obligations or future funding requirements could have a negative impact on our results of operations and cash flows from operations. Additionally, the annual costs of benefits vary with increased costs of health care and the outcome of collectively bargained wage and benefit agreements. Furthermore, we may be subject to increased costs or experience adverse effects on our operating results if we are unable to renew collectively bargained agreements on satisfactory terms as they expire. Our financial condition and ability to meet the needs of our customers could be materially and adversely affected if strikes or work stoppages or interruptions occur as a result of delayed negotiations with union-represented employees within or outside the U.S.
Changes in our relationships with our growers could adversely affect us.
We expend considerable resources to develop and maintain relationships with many potato growers. In some instances, we have entered into long-term agreements with growers; however, a portion of our potato needs are sourced on an annual contracted basis. To the extent we are unable to maintain positive relationships with our long-term growers, contracted growers deliver less supply than we expect, or we are unable to secure sufficient potatoes from uncontracted growers in a given year, we may not have sufficient potato supply to satisfy our business opportunities. To obtain sufficient
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potato supply, we may be required to purchase potatoes at prices substantially higher than expected, or forgo sales to some market segments, which would reduce our profitability. If we forgo sales to such market segments, we may lose customers and may not be able to regain or replace them later.
Our business, financial condition, and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations, including foreign currency risks and trade barriers.
We conduct a substantial and growing amount of business with customers located outside the U.S. During each of fiscal 2024, 2023, and 2022, net sales outside the U.S., primarily in Australia, Canada, China, Europe, Japan, Korea, Mexico, and Taiwan, accounted for approximately 34%, 23%, and 17% of our net sales, respectively. The amount for fiscal 2022 does not include any impact of unconsolidated net sales associated with LWAMSA and LW EMEA, which are also subject to risks associated with international operations. In fiscal 2023, we acquired additional equity interests in LWAMSA and LW EMEA, thereby increasing our ownership in LWAMSA and LW EMEA to 90% and 100%, respectively. We began consolidating the financial results of LWAMSA and LW EMEA in our Consolidated Financial Statements in the first quarter and fourth quarter of fiscal 2023, respectively.
Factors relating to our domestic and international sales and operations, many of which are outside of our control, have had, and could continue to have, a material adverse impact on our business, financial condition, and results of operations, including:
•foreign exchange rates, foreign currency exchange and transfer restrictions, which may unpredictably and adversely impact our combined operating results, asset and liability balances, and cash flow in our Consolidated Financial Statements, even if their value has not changed in their original currency;
•our consolidated financial statements are presented in U.S. dollars, and we must translate the assets, liabilities, revenue and expenses into U.S. dollars for external reporting purposes;
•changes in trade, monetary and fiscal policies of the U.S. and foreign governments, including modification or termination of existing trade agreements or treaties, creation of new trade agreements or treaties, trade regulations, and increased or new tariffs, sanctions, quotas, import or export licensing requirements, and other trade barriers imposed by governments. In particular, changes in U.S. trade programs and trade relations with other countries, including the imposition of trade protection measures by foreign countries in favor of their local producers of competing products, such as governmental subsidies, tax benefits, and other measures giving local producers a competitive advantage over Lamb Weston, may adversely affect our business and results of operations in those countries;
•changes in capital controls, including currency exchange controls, government currency policies or other limits on our ability to import raw materials or finished products into various countries or repatriate cash from outside the United States;
•negative economic developments in economies around the world and the instability of governments, including the actual or threat of wars, terrorist attacks, epidemics or civil unrest, including the war in Ukraine and conflicts in the Middle East;
•currency devaluations or fluctuations in currency values, including in developed and emerging markets, such as the highly inflationary environment in Argentina;
•earthquakes, tsunamis, droughts, floods or other major disasters that may limit the supply of raw materials that are purchased abroad for use in our international operations or domestically;
•volatile commodity prices and increased costs of raw and packaging materials, labor, energy and transportation, disruptions in shipping or reduced availability of freight transportation and warehousing, such as the reduced availability of shipping containers that we encountered in fiscal 2022;
•pandemics and other public health crises, which may lead, and in the case of the COVID-19 pandemic, have led, to measures that decrease revenues, disrupt our supply chain or otherwise increase our storage, production or distribution costs and adversely affect our workforce, local suppliers, customers and consumers of our products;
•differing employment practices and labor standards in the international markets in which we operate;
•differing levels of protection of intellectual property across the international markets in which we operate;
•difficulties and costs associated with complying with U.S. laws and regulations applicable to entities with overseas operations, including the Foreign Corrupt Practices Act;
•the threat that our operations or property could be subject to nationalization and expropriation;
•varying regulatory, tax, judicial and administrative practices in the international markets in which we operate;
•difficulties associated with operating under a wide variety of complex foreign laws, treaties and regulations; and
•potentially burdensome taxation.
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The nature and degree of the various risks we face can differ significantly among our regions and businesses. All these factors could result in increased costs or decreased revenues and could have an adverse effect on our business, financial condition, and results of operations.
Changes in our relationships with significant customers could adversely affect us.
We maintain a diverse customer base across our reporting segments. Customers include global, national and regional quick service and fast casual restaurants as well as small, independently operated restaurants, multinational, broadline foodservice distributors, regional foodservice distributors, and major food retailers. Some of these customers independently represent a meaningful portion of our sales. In addition, we depend on foodservice distributors to help us create end-customer demand, provide technical support and other value-added services to customers, fill customer orders, and stock our products. A material change in our relationship with one or more of these distributors or their failure to perform as expected could reduce our revenue. The foodservice distributors also sell products that compete with our products, and we sometimes need to reduce prices or provide rebates and other incentives to focus them on the sale of our products.
There can be no assurance that our customers will continue to purchase our products in the same quantities or on the same terms as in the past. The loss of a significant customer or a material reduction in sales to a significant customer could materially and adversely affect our business, financial condition, and results of operations. In addition, the financial condition of our significant customers, including restaurants, distributors and retailers, are affected by events that are largely beyond our control, such as the impacts of the COVID-19 pandemic and possible future pandemics or other contagious outbreaks, and political or military conflicts, such as the war in Ukraine or conflicts in the Middle East. Specifically, in 2022, some customers, including McDonald’s Corporation, exited from Russia. Deterioration in the financial condition of significant customers could materially and adversely affect our business, financial condition, and results of operations.
Disruption of our access to export mechanisms could have an adverse impact on our business, financial condition, and results of operations.
To serve our customers globally, we rely in part on our international operations, but also on exports from the U.S. During fiscal 2024, 2023, and 2022, export sales from the U.S. accounted for approximately 6%, 11% and 12%, respectively, of our total net sales. Circumstances beyond our control, such as a labor dispute at a port, or workforce disruptions (such as disruptions that occurred due to the COVID-19 pandemic), could prevent us from exporting our products in sufficient quantities to meet customer opportunities. For example, during the latter half of fiscal 2022, limited shipping container availability along the U.S. West Coast and disruptions to ocean freight networks across the Pacific Ocean resulted in lower export volumes in our International segment. We have access to production outside of the U.S. through our facilities in Argentina, Australia, Austria, Canada, China, the Netherlands, and the United Kingdom, but we may be unsuccessful in mitigating any future disruption to export mechanisms. If this occurs, we may be unable to adequately supply all our existing customers’ needs and new customer opportunities, which could adversely affect our business, financial condition, and results of operations.
Our operations are dependent on a wide array of third parties.
The success of our end-to-end supply chain relies on the continued performance of a wide array of third parties. Suppliers, co-packers, third-party outsourcers, warehousing partners, and transportation providers are among our critical partners. Although we take steps to qualify and audit third parties with whom we do business, we cannot guarantee that all third parties will perform dependably or at all. It is possible that events beyond our control, such as operational failures, labor issues, heightened inflation, recession, financial and credit market disruptions, or other economic conditions, cybersecurity events, global geopolitical conflict, such as the war in Ukraine and conflicts in the Middle East, pandemics or other health issues, such as was the case with the COVID-19 pandemic, or other issues could impact our third parties. If our third parties fail to deliver on their commitments, introduce unplanned risk to our operations (e.g., through cyber activity), or are unable to fulfill their obligations, we could experience manufacturing challenges, shipment delays, increased costs, or lost revenue, which could also impact our relationships with customers and our brand image.
In addition to our own production facilities, we source a portion of our products under co-packing agreements. The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform. We believe that there are a limited number of competent, high-quality co-packers in the industry, and if we were required to obtain additional or alternative co-packing agreements or arrangements in the future, we can provide no assurance that we would be able to do so on satisfactory terms or in a timely manner. Our inability to enter into satisfactory co-packing agreements could limit our ability to implement our business plan or meet customer demand.
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Damage to our reputation as a trusted partner to customers and good corporate citizen could have a material adverse effect on our business, financial condition, and results of operations.
Our customers rely on us and our co-manufacturers to manufacture safe, high quality food products. Product contamination or tampering, the failure to maintain high standards for product quality, safety, and integrity, or allegations of product quality issues, mislabeling or contamination, even if untrue, may damage the reputation of our customers, and ultimately our reputation as a trusted industry partner. Damage to either could reduce demand for our products or cause production and delivery disruptions.
Our reputation could also be adversely impacted by any of the following, or by adverse publicity (whether or not valid) relating thereto: the failure to maintain high ethical, social, and environmental standards for our operations and activities, including the health, safety, and security of our employees and our supply chain; our research and development efforts; our environmental impact, including use of agricultural materials, packaging, energy and water use, and waste management, and the failure to set certain goals, or to achieve any stated goals, with respect to such matters; our failure to comply with local laws and regulations; our failure to maintain an effective system of internal controls; or our failure to provide accurate and timely financial information. Moreover, the growing use of social and digital media by consumers and other stakeholders has greatly increased the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about us, our brands, or our products on social or digital media could damage our reputation and our brands. Damage to our reputation or loss of customer confidence in our products for any of these or other reasons could result in decreased demand for our products and could have a material adverse effect on our business, financial condition, and results of operations, as well as require additional resources to rebuild our reputation.
If we are unable to execute on large capital projects, our business, financial condition, and results of operations could be materially and adversely affected.
We believe global demand for frozen potato products will continue to grow over the long-term. To support our customers’ growth, we believe we must invest in our production capabilities either through capital expansion or acquisitions. In fiscal 2024, we completed the construction of a new french fry processing line in American Falls, Idaho and a new processing facility in Ulanqab, Inner Mongolia, China. We are also currently investing in new french fry processing facilities in Argentina and the Netherlands. If we are unable to complete these or other large capital projects, or encounter unexpected delays, higher costs or other challenges, including those related to supply chain disruptions and availability of necessary labor, materials, and equipment, our business, financial condition, and results of operations could be materially and adversely affected.
Our results may be adversely affected by our inability to complete or realize the projected benefits of acquisitions, divestitures and other strategic transactions.
Our ability to meet our objectives with respect to acquisitions and other strategic transactions may depend in part on our ability to identify suitable counterparties, negotiate favorable financial and other contractual terms, obtain all necessary regulatory approvals on the terms expected and complete those transactions. Potential risks also include:
•the inability to integrate acquired businesses into our existing operations in a timely and cost-efficient manner;
•diversion of management's attention from other business concerns;
•potential loss of key employees, suppliers and/or customers of acquired businesses;
•assumption of unknown risks and liabilities;
•the inability to achieve anticipated benefits, including revenues or other operating results;
•operating costs of acquired businesses may be greater than expected;
•difficulties integrating personnel and financial and other systems;
•inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets, which would reduce future reported earnings;
•indemnities and potential disputes with the sellers; and
•the inability to promptly implement an effective control environment.
If we are unable to complete or realize the projected benefits of recent or future acquisitions, divestitures or other strategic transactions, our business or financial results may be adversely impacted.
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Industry Risks
Our business is affected by potato crop performance.
Our primary input is potatoes and every year, we must procure potatoes that meet the quality standards for processing into value-added products. Environmental and climate conditions, such as soil quality, moisture, and temperature, affect the yield and quality of the potato crop on a year-to-year basis. As a result, we source potatoes from specific regions of the U.S. and specific countries abroad, including Argentina, Australia, Austria, Belgium, Canada, China, France, Germany, the Netherlands, and the United Kingdom, where we believe the optimal potato growing conditions exist. However, severe weather conditions, including protracted periods of extreme heat or cold, during the planting and growing season in these regions can significantly affect potato crop performance, such as the extreme heat in the Pacific Northwest in the summer of 2021 and the drought in Europe during fiscal 2019, both of which resulted in poor crop and significantly limited supply. Further, because of the poor quality of the crop in the Pacific Northwest that was harvested in fall 2021, we encountered lower raw potato utilization rates in our production facilities during the second half of fiscal 2022 and early fiscal 2023, which increased our production costs. On the other hand, too much water, such as in times of prolonged heavy rainfalls or flooding, can promote harmful crop conditions like mildew growth and increase risks of diseases, as well as delay planting or affect our ability to harvest the potatoes. For example, wet conditions in Europe delayed planting in 2024. Potatoes are also susceptible to pest diseases and insects that can cause crop failure, decreased yields, and negatively affect the physical appearance of the potatoes. We have deep experience in agronomy and actively work to monitor the potato crop. However, if a weather or pest-related event occurs in a particular crop year, and our agronomic programs are insufficient to mitigate the impacts thereof, we may have insufficient potatoes to meet our existing customers’ needs and new customer opportunities, or we may experience manufacturing inefficiencies and higher costs, and our competitiveness and profitability could decrease. Alternatively, overly favorable growing conditions can lead to high per acre yields and over-supply. An increased supply of potatoes could lead to overproduction of finished goods and associated increased storage costs or destruction of unused potatoes at a loss. For example, in fiscal 2024, we had an oversupply of potatoes, largely attributable to soft restaurant traffic trends in North America and other key international markets and a higher-than-expected impact on customer order fulfillment rates related to the ERP transition, as well as a solid potato crop in the Company’s growing regions in North America, which resulted in the write-off of excess raw potatoes that adversely affected our financial results.
Our business relies on a potato crop that has a concentrated growing region.
Ideal growing conditions for the potatoes necessary for our value-added products (e.g., french fries) are concentrated in a few geographic regions globally. In the U.S., most of the potato crop used in value-added products is grown in Washington, Idaho, and Oregon. European growing regions for the necessary potatoes are concentrated in Austria, Belgium, Germany, France, the Netherlands, and the United Kingdom. Recent agronomic developments have opened new growing regions, but the capital-intensive nature of our industry’s production processes has kept production highly concentrated in the historical growing regions noted above. Unfavorable crop conditions in any one region could lead to significant demand on the other regions for production, which occurred in connection with the drought in Europe during fiscal 2019. Our inability to mitigate any such conditions by leveraging our production capabilities in other regions could negatively impact our ability to meet existing customers’ needs and new customer opportunities and could decrease our profitability. See also “- Legal and Regulatory Risks - Climate change, or legal, regulatory, or market measures to address climate change, may negatively affect our business and operations,” in this Item 1A. Risk Factors below.
The sophistication and buying power of some of our customers could have a negative impact on profits.
Some of our customers are large and sophisticated, with buying power and negotiating strength. These customers may be more capable of resisting price increases and more likely to demand lower pricing, increased promotional programs, or specialty tailored products. In addition, some of these customers (e.g., larger distributors and supermarkets) have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own brands. Shelf space at food retailers is not guaranteed, and large retail customers may choose to stock their own retailer and other economy brands that compete with some of our products. This could be exacerbated with a shift in consumer spending as a result of an economic downturn and consumers moving to private label or lower priced products. If the initiatives we undertake to counteract these pressures, including efficiency programs and investments in innovation and quality, are unsuccessful and we are unable to counteract the negotiating strength of these customers, our profitability could decline.
Increased competition may result in reduced sales or profits.
Our business, value-added frozen potato products, is highly competitive. Competitors include large North American and European frozen potato product companies that compete globally, local and regional companies, and retailers and foodservice distributors with their own branded and private label products. Some of our competitors are larger
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and have substantial financial, sales and marketing, and other resources. We compete based on, among other things, customer service, value, product innovation, product quality, brand recognition and loyalty, price, and the ability to identify and satisfy customer preferences. A strong competitive response from one or more of our competitors to our marketplace efforts could result in us reducing pricing, increasing spend on promotional activity, or losing market share. Competitive pressures may restrict our ability to increase prices, including in response to commodity and other input cost increases or additional improvements in product quality. Our profits could decrease if a reduction in prices or increased costs are not counterbalanced with increased sales volume.
Increased industry capacity may result in reduced sales or profits.
In recent years, market demand for value-added frozen potato products has exceeded industry capacity to produce these products. However, in fiscal 2024, we experienced declines in sales volume as a result of a slowdown in restaurant traffic in North America and other key international markets as our customers and consumers respond to the cumulative effect of inflation on the cost of food consumed away from home. As additional industry capacity comes online, restaurant traffic declines, or market demand otherwise decreases, including as a result of inflation or pandemics such as the COVID-19 pandemic or other contagious outbreaks, we may face competitive pressures that would restrict our ability to increase or maintain prices, or we may lose market share. For example, during fiscal 2024, we have faced increased pricing pressure as additional industry capacity becomes operational, which capacity is also impacted by softening demand. Our profits would decrease as a result of a reduction in prices or sales volume.
We must identify changing consumer preferences and consumption trends and develop and offer food products to our customers that help meet those preferences and trends.
Consumer preferences evolve over time and our success depends on our ability to identify the priorities, tastes and dietary habits of consumers and offer products that appeal to those preferences. We need to continue to respond to these changing consumer preferences and support our customers in their efforts to evolve to meet those preferences. For example, as consumers continue to focus on freshly prepared foods, some restaurants may choose to limit the frying capabilities of their kitchens. As a result, we must evolve our product offering to provide alternatives that work in such a preparation environment. In addition, our products contain carbohydrates, sodium, genetically modified ingredients, added sugars, saturated fats, and preservatives, the diet and health effects of which remain the subject of public scrutiny. For example, the increased use and/or prevalence of certain weight loss drugs, which may suppress a person’s appetite and/or impact a person’s preferences, may impact the demand or consumption patterns for certain of our products.We must continue to reformulate our products, introduce new products and create product extensions without a loss of the taste, texture, and appearance that consumers demand in value-added potato products. All these efforts require significant research and development and marketing investments. If our products fail to meet consumer preferences or customer requirements, or we fail to introduce new and improved products on a timely basis, then the return on those investments will be less than anticipated, which could materially and adversely affect our business, financial condition, and results of operations.
In addition, we compete against branded products as well as private label products. Our products must provide higher value and/or quality to our customers and consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and private label products change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer private label products, which are typically sold at lower prices, then we could lose market share or sales volumes or shift our product mix to lower margin offerings. During an economic downturn, some of the effects of which are present in our current environment, factors such as increased unemployment, decreases in disposable income, inflation, and declines in consumer confidence could cause a decrease in demand for our overall product offerings, particularly higher priced products, which could materially and adversely affect our business, financial condition, and results of operations. Distributors, restaurants, and retailers may also become more conservative in response to these conditions and seek to reduce their inventories. A change in consumer preferences could also cause us to increase capital, marketing, and other expenditures, which could materially and adversely affect our business, financial condition, and results of operations.
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Financial and Economic Risks
Our substantial debt may limit cash flow available to invest in the ongoing needs of our business and could prevent us from fulfilling our debt obligations.
We have incurred substantial indebtedness. As of May 26, 2024, we had approximately $3.8 billion of debt, including current portion, and short-term borrowings, recorded on our Consolidated Balance Sheet. Our level of debt could have important consequences. For example, it could:
•make it more difficult for us to make payments on our debt;
•require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, and other general corporate purposes;
•increase our vulnerability to adverse economic or industry conditions;
•limit our ability to obtain additional financing in the future to enable us to react to changes in our business; or
•place us at a competitive disadvantage compared to businesses in our industry that have less debt.
The agreements governing our debt contain various covenants that impose restrictions on us that may affect our ability to operate our business.
The credit agreements governing our term loans and revolving credit facilities and the indentures governing our senior notes contain covenants that, among other things, limit our ability to:
•borrow money or guarantee debt;
•create liens;
•pay dividends on or redeem or repurchase stock;
•make specified types of investments and acquisitions;
•enter into agreements that limit the ability of our subsidiaries to pay dividends or other payments to us;
•enter into transactions with affiliates; and
•sell assets or merge with other companies.
These restrictions on our ability to operate our business could harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition, or other corporate opportunities. Various risks, uncertainties, and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all our obligations. Also, the limitations imposed by these financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.
In addition, the restrictive covenants in our credit agreements require us to maintain specified financial ratios and satisfy other financial condition tests. We cannot provide assurance that we will continue to be in compliance with these ratios and tests. Our ability to continue to meet those financial ratios and tests will depend on our ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, market, and competitive factors, many of which are beyond our control. A breach of any of these covenants could result in a default under one or more of our debt instruments, including as a result of cross default provisions and, in the case of our revolving credit facility, permit the lenders thereunder to cease making loans to us. Upon the occurrence of an event of default under our credit facilities, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. Such action by the lenders could cause cross-defaults under our senior notes indentures.
Any failure to meet required payments on our debt, or failure to comply with any covenants in the instruments governing our debt, could result in a downgrade to our credit ratings. A downgrade in our credit ratings could limit our access to capital and increase our borrowing costs.
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We face risks related to heightened inflation, recession, financial and credit market disruptions,and other economic conditions.
Customer and consumer demand for our products may be impacted by weak economic conditions, recession, equity market volatility, or other negative economic factors in the U.S. or other countries. For example, the U.S. has experienced significantly heightened inflationary pressures since 2022. In fiscal 2024, we experienced declines in sales volume as a result of a slowdown in restaurant traffic in North America and other key international markets as our customers and consumers respond to the cumulative effect of inflation on the cost of food consumed away from home. In addition, if the restaurant traffic trends continue to soften, we may experience sales declines and may have to decrease prices, all of which could have a material adverse impact on our business, financial condition, and results of operations.
Similarly, disruptions in financial and/or credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers, and creditors and might cause us to not be able to continue to have access to preferred sources of liquidity when needed or on terms we find acceptable, and our borrowing costs could increase. An economic or credit crisis could occur and impair credit availability and our ability to raise capital when needed. In addition, disruptions in financial and/or credit markets could result in some of our customers experiencing a significant decline in profits and/or reduced liquidity. A significant adverse change in the financial and/or credit position of a customer could require us to assume greater credit risk relating to that customer and could limit our ability to collect receivables. A significant adverse change in the financial and/or credit position of a supplier or co-packer could result in an interruption of supply. This could have a material adverse effect on our business, financial condition, results of operations, and liquidity. A disruption in the financial markets may also have a negative effect on our derivative counterparties and could impair our banking or other business partners, on whom we rely for access to capital and as counterparties to our derivative contracts. In addition, changes in tax or interest rates in the U.S. or other countries, whether due to recession, economic disruptions, or other reasons, may adversely impact us.
Technology Risks
Problems with the transition, design, or implementation of our new ERP system have and could further interfere with our business and operations and adversely affect our financial condition.
At the beginning of our third quarter of fiscal 2024, we began transitioning certain central systems and functions in North America to a new ERP system, as part of our multi-year effort to upgrade our information systems and ERP infrastructure across the company. We are designing the next phase of our ERP implementation for our manufacturing facilities in North America. The ERP system is designed to accurately maintain our financial records, enhance operational functionality, and provide timely information to our management team related to the operation of the business. The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We have experienced, and may continue to experience, difficulties as we transition to new upgraded systems and business processes. For example, after the ERP transition in our fiscal third quarter 2024, we experienced temporary reduced visibility into finished goods inventories at our distribution centers, which affected our ability to fill customer orders. Although we partnered closely with our customers to minimize the impact of the disruptions and resolved the reduced visibility, within the quarter, our sales volume and margins nevertheless declined. In addition, some customers affected by these disruptions may have secured supply from alternative sources, and we must regain their trust and business. Other difficulties may include loss of data; difficulty in completing financial reporting and filing reports with the SEC in a timely manner; or challenges in otherwise running our business. We may also experience decreases in productivity as our personnel implement and become familiar with new systems and processes. Any disruptions, delays, or deficiencies in the transition, design, and implementation of a new ERP system, particularly any disruptions, delays, or deficiencies that impact our operations, could have a material adverse effect on our business, financial condition, and results of operations. Even if we do not encounter further adverse effects, the transition, design, and implementation of a new ERP system, may be much more costly than we anticipated.
We are significantly dependent on information technology, and we may be unable to protect our information systems against service interruption, misappropriation of data, or breaches of security.
We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage and support a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. We also depend upon our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers, third-party manufacturers and suppliers. The importance of such networks and systems has increased due to our adoption of flexible work-from-home policies for some of our functional support areas, which in turn has heightened our vulnerability to cyberattacks or other disruptions as a result of team members accessing our networks and systems from off-site. Despite careful security and controls design, implementation and updating, monitoring and routine testing, independent third-party verification, and annual training of employees on information security and data protection, our information technology
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systems, some of which are dependent on services provided by third parties, may be vulnerable to, among other things, damage, invasions, disruptions, or shutdowns due to any number of causes such as catastrophic events, natural disasters, infectious disease outbreaks and other public health crises, fires, power outages, systems failures, telecommunications failures, security breaches, computer viruses, ransomware and malware, hackers, employee error or malfeasance, potential failures in the incorporation of artificial intelligence, and other causes. While we have experienced threats to our data and systems, to date, we are not aware that we have experienced a breach that had a material impact on our operations or business. However, third parties, including our partners and vendors, could also be a source of security risk to us, or cause disruptions to our normal operations, in the event of a breach of their own products, components, networks, security systems, and infrastructure. For example, in December 2021, our third-party service provider for our workforce management software, the Ultimate Kronos Group (“Kronos”), experienced a ransomware attack that resulted in Kronos temporarily decommissioning the functionality of certain of its cloud software, requiring us to find and implement other procedures to continue our payroll processes, which was time consuming and burdensome but did not have a material adverse impact on our business. In addition, in April 2023, Americold Realty Trust, Inc. (“Americold”), a third-party finished goods storage provider, suffered a cyber incident that impacted its operations and resulted in considerable delays in the delivery of our products to our customers and interrupted other key business processes. While the incident impacted our business and we were unable to ship to certain customers for a short period of time, it did not have a material adverse impact on our business.
As evidenced by the attacks on Kronos and Americold, cyber threats are constantly evolving, are becoming more frequent and more sophisticated and are being made by groups of individuals with a wide range of expertise and motives, which increases the difficulty of detecting and successfully defending against them. Further, continued geopolitical turmoil, including the ongoing war in Ukraine and conflicts in the Middle East, and geopolitical tensions, such as between the U.S. and China, have heightened the risk of cyberattacks. Sophisticated cybersecurity threats, including potential cyberattacks from China or Russia targeted against the U.S., pose a potential risk to the security and viability of our information technology systems, as well as the confidentiality, integrity, and availability of the data stored on those systems, including cloud-based platforms. In addition, new technology, such as artificial intelligence, that could result in greater operational efficiency may further expose our computer systems to the risk of cyberattacks. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure and associated automated and manual control processes, we could be subject to billing and collection errors, business disruptions, or damage resulting from security breaches. If any of our significant information technology systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition, and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results. Any interruption of our information technology systems could have operational, reputational, legal, and financial impacts that may have a material adverse effect on our business, financial condition, and results of operations. Further, in the event our suppliers or customers experience a breach or system failure, their businesses could be disrupted or otherwise negatively affected, which may result in a disruption in our supply chain or reduced customer orders, which would adversely affect our business and financial results.
In addition, if we are unable to prevent security breaches or unauthorized disclosure of non-public information, we may suffer financial and reputational damage, litigation or remediation costs, fines, or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, or suppliers. Misuse, leakage, or falsification of information could result in violations of data privacy laws and regulations (including federal, state and international), potentially significant fines and penalties, damage to our reputation and credibility, loss of strategic opportunities, and loss of ability to commercialize products developed through research and development efforts and, therefore, could have a negative impact on net sales. In addition, we may face business interruptions, litigation, and financial and reputational damage because of lost or misappropriated confidential information belonging to us, our current or former employees, or to our suppliers or customers, and may become subject to legal action and increased regulatory oversight. We could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems. While we maintain a cyber insurance policy that provides coverage for security incidents, we cannot be certain that our coverage will be adequate for liabilities actually incurred, that insurance will continue to be available to us on financially reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. There is no assurance that the measures we have taken to protect our information systems will prevent or limit the impact of a future cyber incident.
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Legal and Regulatory Risks
We may be subject to product liability claims and product recalls or withdrawals, which could negatively impact our relationships with customers and harm our business.
We sell food products for human consumption, which involves risks such as product contamination or spoilage, product tampering, other adulteration of food products, mislabeling, and misbranding. We may voluntarily recall or withdraw products from the market in certain circumstances, which would cause us to incur associated costs; those costs could be meaningful. For example, in June 2024, we had a voluntary product withdrawal, which negatively impacted our financial results in fiscal 2024 and is expected to continue to impact our results in fiscal 2025. We may also be subject to litigation, requests for indemnification from our customers, or liability if the consumption or inadequate preparation of any of our products causes injury, illness, or death. A significant product liability judgment or a widespread product recall or withdrawal may negatively impact our sales and profitability for a period of time depending on the costs of the recall or withdrawal, the destruction of product inventory, product availability, competitive reaction, customer reaction, and consumer attitudes. Even if a product liability or labeling claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.
In addition, we could be the target of claims of false or deceptive advertising under U.S. federal and state laws as well as foreign laws, including consumer protection statutes of some states. The marketing of food products has come under increased regulatory scrutiny in recent years, and the food industry has been subject to an increasing number of proceedings and claims relating to alleged false or deceptive labeling and marketing under federal, state and foreign laws or regulations. Changes in legal or regulatory requirements (such as new food safety requirements and revised nutrition facts labeling, including front of pack labeling, and serving size regulations), or evolving interpretations of existing legal or regulatory requirements, may result in increased compliance costs, capital expenditures and other financial obligations that could adversely affect our business or financial results. If we are found to be out of compliance with applicable laws and regulations in these areas, we could be subject to civil remedies, including fines, injunctions, termination of necessary licenses or permits, or recalls or withdrawals, as well as potential criminal sanctions, any of which could have a material adverse effect on our business.
Additionally, as a manufacturer and marketer of food products, we are subject to extensive regulation by the FDA and other national, state and local government agencies. The Food, Drug & Cosmetic Act, the Food Safety Modernization Act, other laws and their respective regulations govern, among other things, the manufacturing, composition and ingredients, packaging, and safety of food products. Some aspects of these laws use a strict liability standard for imposing sanctions on corporate behavior, meaning that no intent is required to be established. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls, withdrawals, or seizures, as well as criminal sanctions, any of which could have a material adverse effect on our business, financial condition, and results of operations.
New regulations imposed by the FDA or EFSA around acrylamide formation in potato products could adversely affect us.
The regulation of food products, both within the U.S. and internationally, continues to be a focus for governmental scrutiny. The presence and/or formation of acrylamide in potato products cooked at high temperatures has become a global regulatory issue as both the FDA and the European Food Safety Authority (‘‘EFSA’’) have issued guidance to the food processing industry to work to reduce conditions that favor the formation of this naturally occurring compound. Acrylamide formation is the result of heat processing reactions that give ‘‘browned foods’’ their desirable flavor. Acrylamide formation occurs in many food types in the human diet, including but not limited to breads, toast, cookies, coffee, crackers, potatoes, and olives. The regulatory approach to acrylamide has generally been to encourage the industry to achieve as low as reasonably achievable content levels through process control (e.g., temperature) and material testing (e.g., low sugar and low asparagine). However, limits for acrylamide exposure have been established in the State of California, and point of sale consumer warnings are required if products exceed those limits. In addition, the EFSA has promulgated regulations establishing specific mitigation measures, sampling, and analysis procedures and benchmark levels for acrylamide in certain food products. If the global regulatory approach to acrylamide becomes more stringent and additional legal limits are established, our manufacturing costs could increase. In addition, if consumer perception regarding the safety of our products is negatively impacted due to regulation, sales of our products could decrease.
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If we fail to comply with the many laws and regulations applicable to our business, we may face lawsuits or incur significant fines and penalties.
Our facilities and products are subject to many laws and regulations administered by the U.S. Department of Agriculture, the FDA, the Occupational Safety and Health Administration, and other federal, state, local, and foreign governmental agencies relating to the processing, packaging, storage, distribution, advertising, labeling, quality, and safety of food products, and the health and safety of our employees. Our failure to comply with applicable laws and regulations could subject us to additional costs, product detentions, substantial delays or a temporary shutdown in manufacturing, lawsuits, administrative penalties, and civil remedies, including fines, injunctions, and recalls or withdrawals of our products.
Our operations are also subject to extensive and increasingly stringent regulations administered by foreign government agencies, the U.S. Environmental Protection Agency, and comparable state agencies, which pertain to the protection of human health and the environment, including, but not limited to, the discharge of materials into the environment, such as the land application of our processed water, and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences, including civil and administrative penalties and negative publicity, while compliance could require seasonal shutdowns in manufacturing and increase costs. Changes in applicable laws or regulations or evolving interpretations thereof, including increased government regulations to limit the emissions of toxic air pollutants and carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, may result in increased compliance costs, capital expenditures, and other financial obligations for us, which could affect our profitability or impede the production or distribution of our products, which could adversely affect our business, financial condition, and results of operations.
Climate change, or legal, regulatory, or market measures to address climate change, may negatively affect our business and operations.
There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as potatoes and edible oils. Adverse weather conditions and natural disasters can reduce crop size and crop quality, which in turn could reduce our supplies of raw potatoes, lower recoveries of usable raw potatoes, increase the prices of our raw potatoes, increase our cost of transporting and storing raw potatoes, or disrupt our production schedules or efficiencies. Natural disasters and extreme weather conditions may disrupt the productivity of our facilities or the operation of our supply chain. In addition, water is an important part of potato processing. In times of water stress, we may be subject to decreased availability or less favorable pricing for water, which could impact our manufacturing and distribution operations. Further, a decrease in the availability of water in certain regions caused by droughts or other factors could increase competition for land and resources in areas that have more favorable growing conditions, and thereby increase costs for such land and resources.
The increasing concern over climate change also may result in more regional, federal, and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases, as well as more stringent regulation of water rights. In the event that such regulation is enacted and is more aggressive than the sustainability measures that we are currently undertaking to monitor our emissions, improve our energy efficiency, and reduce and reuse water, we may be subject to curtailment or reduced access to resources or experience significant increases in our costs of operation and delivery. In addition, increasing regulation of utility providers, fuel emissions, or fuel suppliers could substantially increase the distribution and supply chain costs of our products. Further, we may experience significant increases in our compliance costs, capital expenditures, and other financial obligations to adapt our business and operations to meet new regulations and standards.
Even if we make changes to align ourselves with such legal or regulatory requirements, we may still be subject to significant penalties or potential litigation if such laws and regulations are interpreted and applied in a manner inconsistent with our practices. Also, consumers and customers may place an increased priority on purchasing products that are sustainably grown and made, requiring us to incur increased costs for additional transparency, due diligence, and reporting. In addition, we might fail to effectively address increased attention from the media, stockholders, activists, and other stakeholders on climate change and related environmental sustainability matters. From time to time, we establish and publicly announce goals and commitments, including those related to reducing our impact on the environment. Our ability to achieve any stated goal, target or objective is subject to numerous factors and conditions, many of which are outside of our control, including evolving regulatory requirements, the pace of scientific and technological developments, and the availability of suppliers that can meet our standards. We may be required to expend significant resources to meet these goals and commitments, which could significantly increase our operational costs. Furthermore, standards for tracking and reporting such matters continue to evolve. Our selection of voluntary disclosure frameworks and standards, and the
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interpretation or application of those frameworks and standards, may change from time to time or differ from those of others. Methodologies for reporting this data may be updated and previously reported data may be adjusted to reflect improvement in availability and quality of third-party data, changing assumptions, changes in the nature and scope of our operations (including from acquisitions and divestitures), and other changes in circumstances, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future. There can be no assurance of the extent to which any of our goals or commitments will be achieved, or that any future investments we make in furtherance of achieving these goals will meet customer or investor expectations. Any delay or failure (perceived or actual) to achieve our goals with respect to reducing our impact on the environment or perception of a delay or failure to act responsibly with respect to the environment or to effectively respond to regulatory requirements concerning climate change can lead to adverse publicity, which could damage our reputation, as well as expose us to enforcement actions and litigation. See also “Industry Risks – Our business is affected by potato crop performance,” in this Item 1A. Risk Factors above.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
We consider our intellectual property rights to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of trademark, patent, copyright and trade secret protection, contractual agreements and policing of third-party misuses of our intellectual property. Our failure to timely obtain or adequately protect our intellectual property or any change in law that lessens or removes the current legal protections of our intellectual property may diminish our competitiveness and adversely affect our business and financial results. We also license certain intellectual property, most notably Grown in Idaho and Alexia, from third parties. To the extent that we are not able to contract with these third parties on favorable terms or maintain our relationships with these third parties, our rights to use certain intellectual property could be impacted.
Competing intellectual property claims that impact our brands or products may arise unexpectedly. Any litigation or disputes regarding intellectual property may be costly and time-consuming and may divert the attention of our management and key personnel from our business operations. We also may be subject to significant damages or injunctions against development, launch, and sale of certain products. Any of these occurrences may harm our business and financial results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk Management and Strategy
We assess, identify, and manage material risks from cybersecurity threats through our cybersecurity risk management program. This program includes cybersecurity policies, standards, and procedures, a cybersecurity incident response plan, regular risk assessments, including as part of our annual enterprise risk management (“ERM”) assessment, testing of the Company’s internal infrastructure to identify vulnerabilities, cybersecurity insurance, procedures for recovering from disruptions to our operations, workforce cybersecurity trainings, and third-party assessments and programs. We maintain a cybersecurity incident response plan to help enable timely, consistent responses to actual or attempted cybersecurity incidents impacting the Company. This plan provides guidance to address the overall coordination of our response to a cybersecurity crisis and plan for resources, actions, and decisions we may need to be prepared for; a communication plan for timely and accurate dissemination of evolving information to stakeholders during the crisis; and business continuity plans that document strategies and measures to enable core business activities to continue during a cybersecurity event. To support our cybersecurity incident response plan, we conduct tabletop exercises to educate and train our management on response capabilities and inform adjustments to our controls and response. We have engaged third-party cybersecurity firms to advise on these exercises. The status and ongoing enhancement of our cybersecurity risk management program is reported to senior management, as well as the Audit Committee of our Board, on a quarterly basis, or more frequently as warranted.
As part of our broader risk management and control framework, we have implemented cybersecurity controls over the information technology and process control systems of the Companyand of our third-party service providers, to support the oversight and identification of risks from cybersecurity threats. We engage third-party organizations to assess the controls around sensitive data, including but not limited to financial, employee, customer, and vendor data as well as data affecting our process controls and data used to operate our manufacturing facilities. As part of our cybersecurity risk management program, we conduct information security and data protection training for employees, including training on
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matters such as phishing, social engineering, cybersecurity awareness, and email security best practices. In addition, we work with third-party providers to undertake penetration testing and maturity assessments of the Company’s information security program based on the National Institute of Standards and Technology cybersecurity framework. With respect to third-party service providers, we perform information security assessments and due diligence reviews prior to entering into a contractual agreement. Further, after engagement, we periodically perform information security assessments of certain third-party service providers that we consider critical to our operations. In addition, recently, we have been including provisions in our supplier contracts that require the suppliers to maintain an effective information security management program and to notify us in the event of a known or suspected cyber incident. We have added these requirements in new or amended contracts going forward. We also consult with external advisors and specialists, as necessary, regarding opportunities and enhancements to strengthen our cybersecurity practices and policies and implement enhancements to our cybersecurity capabilities based on evolving threats.
While we have experienced threats to our data and systems, to date, we are not aware that we have experienced a cybersecurity incident that had, or is reasonably likely to have, a material impact on our business or operations; however, because of the frequently changing attack techniques, along with the increased volume and sophistication of the attacks, there is the potential for the Company to be adversely impacted. This impact could result in reputational, competitive, operational, or other business harm as well as financial costs and regulatory action. See “Item 1A. Risk Factors–Technology Risks” of this Form 10-K for additional discussion of cybersecurity risks and potential related impacts on the Company.
Corporate Governance
Our Board has ultimate oversight of cybersecurity risk, which it manages as part of our ERM program. This program is utilized in making decisions with respect to company priorities, resource allocations, and oversight structures. The Board is assisted by the Audit Committee, which regularly reviews our cybersecurity program with management and reports to the Board on its activities on a quarterly basis or more frequently as warranted.
Our cybersecurity program is managed by our Chief Information Security Officer (“CISO”), who reports to our Chief Information and Digital Officer (“CIDO”). Our CISO is informed about and monitors prevention, detection, mitigation, and remediation efforts through regular communication and reporting from professionals in the Company’s information security team, many of whom hold cybersecurity certifications such as a Certified Information Systems Security Professional or Certified Information Security Manager, and through the use of technological tools and software and results from third-party audits. Our CISO has extensive experience assessing and managing cybersecurity programs and cybersecurity risk. Our CISO has served in this position since June 2022 and has over 20 years of experience in information security. His background includes technical experience, strategy and architecture focused roles, cyber and threat experience, and various leadership roles in all areas of information technology. Our CIDO joined the Company in July 2023 with over 25 years of experience leading digital and information technology teams, including leading all aspects of her prior company’s global enterprise digital roadmap, including finance, supply chain, and commercial solutions as well as data and analytics, including automation and artificial intelligence.
Our CISO and CIDO regularly update the Audit Committee on the Company's cybersecurity programs, policies, and practices as warranted, including review of the state of the Company's cybersecurity programs and risks, emerging cybersecurity developments, threats and vulnerability, and the Company's strategy and key cybersecurity initiatives designed to improve the Company’s risk posture. In addition, we have an escalation process in place to inform senior management and the Board of material cyber-related issues. The Audit Committee also reviews with our CIDO, on an annual basis, our global information technology structure and strategic efforts to protect, optimize, and support the growth of the Company. The Chair of the Audit Committee reports to the full Board on its activities.
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ITEM 2. PROPERTIES
We are headquartered in Eagle, Idaho. The following table sets forth our principal production and processing facilities as of May 26, 2024:
Location Type of Facility and Number Owned/ Leased (Number of Facilities)
Domestic:
American Falls, ID Production Facility and Cold Storage Owned (1)
Connell, WA Production Facility, Cold Storage Owned (1), Leased (1)
Delhi, LA Production Facility, Cold Storage, Farm Owned (1), Leased (2)
Hermiston, OR Production Facility Owned (1)
Park Rapids, MN (a) Production Facility and Cold Storage Owned (1)
Pasco, WA Production Facility (2) Owned (2)
Paterson, WA Production Facility, Farm (4) Owned (2), Leased (3)
Quincy, WA Production Facility Owned (1)
Richland, WA Production Facility, Innovation Center Owned (2)
Twin Falls, ID Production Facility Owned (1)
Warden, WA Production Facility Owned (1)
International:
Bergen-op-Zoom, The Netherlands Production Facility Owned (1)
Broekhuizenvorst, The Netherlands Production Facility Owned (1)
Buenos Aires, Argentina Production Facility Owned (1)
Hallam, Australia Production Facility and Cold Storage (2) Leased (2)
Hollabrunn, Austria (b) Production Facility Owned (1)
Kruiningen, The Netherlands Production Facility Owned (1)
Oosterbierum, The Netherlands Production Facility Owned (1)
Shangdu, China Production Facility Owned (1)
Taber, Canada Production Facility and Cold Storage Owned (1)
Ulanqab, China Production Facility and Cold Storage Owned (1)
Wisbech, The United Kingdom Production Facility Owned (1)
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(a)We own a 50% interest in this facility through our Lamb Weston RDO joint venture.
(b)LW EMEA owns a 75% interest in a joint venture in Austria that owns this facility. This joint venture’s financial results are consolidated in our financial statements.
We use our farms as a source of raw materials, to better understand the costs of growing potatoes, and to deploy agronomic research. Overall, our facilities vary in age and condition, and each of them has an active maintenance program to ensure a safe operating environment and to keep the facilities in good condition. We believe all our buildings are in satisfactory operating condition to conduct our business as intended. We also own and lease general office/support facilities in the regions in which we operate, including North America, Latin America, Europe, the Middle East, and Asia.
Our manufacturing assets are shared across all reportable segments. Therefore, we do not identify or allocate assets by reportable segment. For more information, see Note 13, Segments, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
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ITEM 3. LEGAL PROCEEDINGS
For information regarding our legal proceedings, see Note 14, Commitments, Contingencies, Guarantees, and Legal Proceedings, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the ticker symbol “LW.” At July 17, 2024, there were 9,930 holders of record of our common stock. The majority of holders of Lamb Weston common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
Dividends
Our Board intends to continue to consider declaring and paying dividends on Lamb Weston common stock based on our financial condition and results of operations, as well as applicable covenants under our debt agreements. However, our Board has no obligation under Delaware law or our amended and restated certificate of incorporation to declare or pay dividends, and dividends on Lamb Weston common stock are limited to legally available funds.
Purchases of Equity Securities by the Issuer
The following table presents information related to total shares purchased during the periods presented below:
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(a)Represents repurchased shares of our common stock under our publicly announced share repurchase program, which were repurchased at a weighted average price of $82.15 per share, and shares withheld from employees to cover income and payroll taxes on equity awards that vested during the period.
(b)On December 20, 2018, we announced that our Board had authorized a $250.0 million share repurchase program with no expiration date. On December 17, 2021, we announced that our Board had authorized the repurchase of an additional $250.0 million of our common stock under this program, bringing the total amount authorized under the program to $500.0 million of our common stock. On October 11, 2023, we announced that our Board had increased our share repurchase authorization under the program to an aggregate of $500.0 million of our common stock, including $123.9 million of previously authorized but unused capacity under the program. As of May 26, 2024, $390.0 million remained authorized and available for repurchase under this program. Repurchases under our share repurchase program may be made at our discretion from time to time on the open market, subject to applicable laws, including pursuant to a repurchase plan administered in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, or through privately negotiated transactions.
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Performance Graph
The following graph and table compare the cumulative total return on our common stock with the cumulative total return of the Standard & Poor’s (“S&P”) 500 Index, the S&P 400 Packaged Foods Index, which we consider to be our peer group, and the S&P 500 Packaged Foods Index for the five years ended May 24, 2024 (the last trading day of our fiscal year). The graph and table assume that $100 was invested in our common stock, the S&P 500 Index, the S&P 400 Packaged Foods Index, and the S&P 500 Packaged Foods Index on May 24, 2019, and that all dividends were reinvested. The cumulative total return shown below are based on the last trading day in Lamb Weston’s fiscal year.
The above performance graph and other information furnished under this Part II, Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the provisions of Section 18, of the Securities Exchange Act of 1934, as amended.
ITEM 6. RESERVED
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of our results of operations and financial condition, which we refer to in this filing as “MD&A,” should be read in conjunction with the audited financial statements and the notes thereto. Discussions of fiscal 2022 items and fiscal year comparisons between fiscal 2023 and 2022 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 28, 2023, which we filed with the SEC on July 25, 2023. Results for the fiscal year ended May 26, 2024 are not necessarily indicative of results that may be attained in the future.
Our MD&A is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). We have also presented Adjusted EBITDA, Adjusted Gross Profit, Adjusted Selling, General and Administrative expenses (“SG&A”), Adjusted Income from Operations, Adjusted Equity Method Investment Earnings, Adjusted Net Income, and Adjusted Diluted EPS, each of which is considered a non-GAAP financial measure, to supplement the financial information included in this report. Refer to “Non-GAAP Financial Measures” below for the definitions of Adjusted EBITDA, Adjusted Gross Profit, Adjusted SG&A, Adjusted Income from Operations, Adjusted Equity Method Investment Earnings, Adjusted Net Income, and Adjusted Diluted EPS, and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, net income, gross profit, SG&A, income from operations, equity method investment earnings, and diluted EPS, as applicable. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below.
Acquisitions of Joint Venture Interests
In February 2023, we completed the acquisition of the remaining 50% equity interest in LW EMEA (the “LW EMEA Acquisition”). In addition, in July 2022, we acquired an additional 40% interest in LWAMSA (together with the LW EMEA Acquisition, the “Acquisitions”). With the completion of the Acquisitions, we own 100% and 90% of the equity interests in LW EMEA and LWAMSA, respectively. We acquired the remaining interest in LW EMEA for consideration consisting of €531.6 million ($564.0 million) in cash, which excludes settlement of pre-existing relationships and cash held by LW EMEA, and 1,952,421 shares of our common stock (valued at $197.3 million as of the acquisition closing date). We used $42.3 million of cash to acquire the additional equity interest in LWAMSA. We began consolidating LW EMEA’s and LWAMSA’s results in our Consolidated Financial Statements following the respective acquisitions. The results are included in our International segment. We discuss the Acquisitions in more detail in Note 11, Acquisitions, in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Changes in our fiscal 2024 financial results compared to fiscal 2023 were primarily driven by the consolidation of the financial results of LW EMEA for the full year as compared to only the fourth quarter of fiscal 2023.
Overview
Lamb Weston is a leading global producer, distributor, and marketer of value-added frozen potato products. We are the number one supplier of value-added frozen potato products in North America and are a leading supplier of value-added frozen potato products internationally, with a strong and growing presence in high-growth emerging markets. We offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent most of our value-added frozen potato product portfolio.
During fiscal 2024, we operated our business in two reportable segments: North America and International. We report net sales and adjusted EBITDA by segment and on a consolidated basis. Net sales and Segment Adjusted EBITDA are the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. For additional information on our reportable segments, see “Non-GAAP Financial Measures” below and Note 13, 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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Executive Summary
The following highlights our financial results for fiscal 2024. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below.
In fiscal 2024, our net sales increased 21% as compared to the prior year, primarily driven by incremental sales related to the LW EMEA Acquisition, and to a significantly lesser extent, an incremental 40% interest in LWAMSA. Excluding the incremental sales from the Acquisitions, our net sales increased modestly as inflation-driven pricing actions in each of our business segments were essentially offset by a decline in sales volume. The sales volume decline primarily reflected the carryover impact of our decisions to strategically manage customer and product mix by exiting certain lower-priced and lower-margin business, customer share losses, and soft restaurant traffic and frozen potato demand trends across our key markets as consumers continued to adjust to higher menu prices. In addition, sales volumes were negatively affected by lower order fulfillment rates related to the transition to a new ERP system in North America during our fiscal third quarter, as well as a voluntary product withdrawal during our fiscal fourth quarter.
Our net income in fiscal 2024 declined 28% as compared to the prior year, largely reflecting a non-cash gain in the prior year related to the LW EMEA Acquisition. Our Adjusted EBITDA increased 13% as compared to the prior year, reflecting the benefit of pricing actions in each of our business segments, and incremental earnings from the consolidation of the financial results of LW EMEA, which more than offset input cost inflation, charges to write-off excess raw potatoes, the impact of lower sales and incremental costs associated with our ERP transition during the fiscal third quarter, lower sales volumes, and losses associated with the voluntary product withdrawal.
In fiscal 2024, we generated net cash from operating activities of $798.2 million, up $36.5 million versus the prior year, due to higher net income, adjusted for non-cash income and expenses, partially offset by increased working capital needs. We ended fiscal 2024 with 71.4 million of cash and cash equivalents and $1.2 billion of availability under our global revolving credit facility. In addition, we returned $384.0 million to our stockholders during fiscal 2024, including $174.0 million in cash dividends on our common stock and $210.0 million of share repurchases.
During fiscal 2024, our greenfield french fry processing facility in Ulanqab, Inner Mongolia, China and our capacity expansion and modernization in American Falls, Idaho, became operational. Our capacity expansions in the Netherlands and Argentina are on schedule to be completed in fall 2024 and mid-calendar year 2025, respectively.
Outlook
We expect fiscal 2025 to be another challenging year. The operating environment has changed rapidly over the past 12 months as global restaurant traffic and frozen potato demand softened. This has resulted in an increase in available capacity in North America and Europe. We believe this supply-demand imbalance will persist through much, if not all, of fiscal 2025. Accordingly, we are making some operating adjustments in the near term to manage through the current environment including focusing on driving volume growth, implementing targeted investments in price and trade support, pursuing additional cost and supply chain productivity savings, and rephasing investments to modernize production capabilities to better match the demand environment.
In fiscal 2025, we expect to deliver net sales and earnings growth, on a constant currency basis, as compared to fiscal 2024. We expect sales growth will be primarily driven by higher sales volumes and improved mix. Volume will likely decline during the first half of fiscal 2025 due to the impact of market share losses and menu price inflation, which we expect will continue to affect global restaurant traffic and demand for frozen potato products. We anticipate that volume will increase in the second half of fiscal 2025 as we lap the prior-year impact of our ERP transition, and benefit from recent customer contract wins.
We expect our earnings growth will largely be driven by sales and gross profit growth, although we expect gross profit as a percentage of sales to decline. We expect the benefits of volume growth, improved mix, and supply chain productivity savings will more than offset higher costs per pound driven by input cost inflation and higher depreciation expense associated with our recent capacity expansion efforts. We anticipate that input cost inflation, in aggregate, will moderate as compared to fiscal 2024 inflation rates. We expect that the increase in gross profit will be partially offset by higher SG&A, largely reflecting higher compensation and benefits expense, and to a lesser extent, incremental non-cash amortization of prior investments in our ERP infrastructure.
Despite a challenging near-term operating environment, we believe the actions we are taking to continue to strengthen our portfolio and capabilities, including investments to modernize our asset base, position us to continue to support our customers and create value for our stakeholders over the long term.
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Results of Operations
Fiscal Year Ended May 26, 2024 Compared to Fiscal Year Ended May 28, 2023
Year Ended
(in millions, except percentages) May 26, 2024 May 28, 2023 %Increase (Decrease)
Segment net sales
Segment Adjusted EBITDA
Net Sales
Lamb Weston’s net sales for fiscal 2024 increased $1,117.0 million, or 21%, to $6,467.6 million, and included $1,107.4 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA beginning in our fiscal fourth and first quarters of fiscal 2023, respectively. Net sales, excluding the incremental sales attributable to the Acquisitions, increased $9.6 million or less than 1% versus the prior year, with sales growth reduced by an estimated $135 million due to impacts associated with the ERP transition. Price/mix increased 10%, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as pricing actions taken in fiscal 2024, across each of our business segments, partially offset by lower customer transportation charges that were driven by lower volume and the pass-through of lower freight rates. Volume excluding the incremental sales attributable to the Acquisitionsdeclined 10%. Approximately 3.5 percentage points of the volume decline reflects the carryover effect of our decision to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix. Another approximately 3.5 percentage points of the volume decline was largely driven by soft restaurant traffic trends in North America and other key international markets, and to a much smaller extent, lost sales related to the voluntary product withdrawal. The remaining approximately 3 percentage points of the decline reflects share losses and the impact of unfilled customer orders related to the ERP transition in the fiscal third quarter.
North America segment net sales increased $113.8 million, or 3%, to $4,363.2 million, with sales growth reduced by an estimated $123 million due to impacts associated with the ERP transition, in the fiscal third quarter. Price/mix increased 11%, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as pricing actions for contracts with large and regional chain restaurant customers in fiscal 2024. The increase in price/mix was partially offset by lower customer transportation charges that were driven by lower volume and the pass-through of lower freight rates, and unfavorable mix. Volume declined 8%, with approximately 3 percentage points of the volume decline reflecting the carryover effect our decision to exit certain lower-price and lower-margin business in the prior year. Approximately 2.5 percentage points of the decline reflect market share losses, and approximately 2.5 percentage points was largely driven by soft restaurant traffic trends in the U.S.
International segment net sales increased $1,003.2 million, or 91%, to $2,104.4 million, and included $1,107.4 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA. International segment net sales, excluding the incremental sales attributable to the Acquisitions, declined $104.2 million, or 9% compared to the prior year, with sales growth reduced by an estimated $12 million due to impacts associated with the ERP transition. Volume, excluding the benefit from the Acquisitions, declined 15%. Approximately 10 percentage points of the volume decline reflects share losses, which are due in part to our decision to exit certain lower-priced and lower-margin business in LW EMEA earlier in the year, the carryover effect of our decision to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix, and an estimated $12 million impact of unfilled customer orders related to the ERP transition in the fiscal third quarter. The remaining approximately 5 percentage points of the volume decline was largely driven by soft restaurant traffic trends in our key international markets, and to a smaller extent, the voluntary product withdrawal. Price/mix increased 6% as the carryover benefit of inflation-driven pricing actions taken in fiscal 2023 and pricing actions taken in fiscal 2024 was partially offset by lower customer transportation charges and investments in trade support.
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Gross Profit
Gross profit in fiscal 2024 increased $334.6 million, or 23%, to $1,766.7 million, and included $20.7 million of costs ($15.4 million after-tax, or $0.11 per share) associated with the sale of inventory stepped-up to fair value following completion of the LW EMEA Acquisition, and a $28.7 million ($21.4 million after-tax, or $0.15 per share) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts. The prior fiscal year included $27.0 million of costs ($20.0 million after-tax, or $0.14 per share) associated with the sale of inventory stepped-up to fair value following completion of the LW EMEA Acquisitionand a $37.5 million ($28.0 million after-tax, or $0.19 per share impact) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts.
Adjusted Gross Profit increased $262.1 million, or 17.5%, to $1,758.7 million, driven primarily by incremental earnings from the consolidation of the financial results of LW EMEA, and benefits from inflation-driven pricing actions. Gross profit and Adjusted Gross Profit in the current fiscal year was impacted by:
•An estimated $88 million of pre-tax losses related to lower customer order fulfillment rates and other pre-tax costs associated with the ERP transition in the fiscal third quarter;
•An $85.1 million pre-tax charge for the write-off of excess raw potatoes ($64.6 million in the fiscal second quarter and $20.5 million in the fiscal third quarter), largely attributable to soft restaurant traffic trends in North America and other key international markets; and
•An estimated $40 million of pre-tax losses related to the voluntary product withdrawal, of which approximately $21 million was allocated to the International segment and approximately $19 million was allocated to the North America segment in the fiscal fourth quarter. We expect to incur an additional $20 million to $30 million of pre-tax losses associated with the voluntary product withdrawal in the first quarter of fiscal 2025.
The higher manufacturing costs per pound largely reflected mid-single-digit cost inflation, in aggregate, for key inputs, including: raw potatoes, ingredients such as grains and starches used in product coatings, and labor. The increase in per pound costs was partially offset by lower cost of edible oils.
Selling, General and Administrative Expenses
SG&A in fiscal 2024 increased $151.4 million, or 28%, to $701.4 million, and included: $12.8 million ($9.6 million, or $0.07 per share) of LW EMEA integration and acquisition-related expenses; $3.8 million ($2.8 million after-tax, or $0.02 per share) of unrealized loss related to mark-to-market adjustments associated with currency hedging contracts; and $10.6 million ($8.0 million after-tax, or $0.05 per share) of foreign currency exchange losses. The prior fiscal year included a net $21.8 million ($12.2 million after-tax, or $0.08 per share) of gain related to actions taken to mitigate the effect of changes in currency rates on the purchase price of LW EMEA, net of other acquisition-related costs; $4.2 million ($3.1 million after-tax, or $0.02 per share) of unrealized loss related to mark-to-market adjustments associated with currency hedging contracts; and $5.5 million ($4.1 million after-tax, or $0.03 per share) of foreign currency exchange losses.
Adjusted SG&A increased $112.1 million, or 20%, to $674.2 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, and higher expenses associated with information technology investments, including an incremental $11.5 million of non-cash amortization related to the new ERP system. The increase in Adjusted SG&A was partially offset by a reduction in performance-based compensation and benefit accruals.
Net Income, Adjusted EBITDA and Segment Adjusted EBITDA
Net income in fiscal 2024 declined $283.4 million, or 28%, to $725.5 million. Net income in the current fiscal year included a total net loss of $14.4 million ($19.2 million before tax, or $0.10 per share) for foreign currency exchange and unrealized mark-to-market derivative gains and losses, and items impacting comparability. Net income in the prior fiscal year included a total net gain of $312.2 million ($340.7 million before tax, or $2.15 per share) most of which is a non-cash net benefit related to the LW EMEA Acquisition with the remaining from foreign currency exchange and unrealized mark-to-market derivative gains and losses, and items impacting comparability.
Adjusted EBITDA in fiscal 2024 increased $167.3 million, or 13%, to $1,416.7 million, reflecting the benefit of inflation-driven pricing actions and incremental earnings from the consolidation of the financial results of LW EMEA more than offsetting higher manufacturing costs per pound, a $95.9 million pre-tax charge for the write-off of excess raw potatoes (of which $10.8 million was recorded in Equity Method Investment Earnings), an approximately $95 million
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negative impact related to the ERP transition, lower sales volumes, and an estimated $40 million pre-tax loss related to the voluntary product withdrawal.
North America Segment Adjusted EBITDA increased $100.8 million, or 9%, to $1,263.1 million, reflecting the benefit of inflation-driven pricing actions more than offsetting higher manufacturing costs per pound, an $86.0 million charge for the write-off of excess raw potatoes, an approximately $83 million negative impact of the ERP transition, lower sales volumes, unfavorable mix, and an approximately $19 million loss related to the voluntary product withdrawal related to products manufactured in North America.
International Segment Adjusted EBITDA increased $100.9 million, or 44%, to $331.9 million. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the Acquisitions, the impact of higher costs per pound, lower sales volumes, and approximately $21 million of allocated losses related to the voluntary product withdrawal, $9.9 million charge for the write-off of excess raw potatoes, and an approximately $5 million negative impact related to the ERP transition, more than offset the benefit of inflation-driven pricing actions.
Interest Expense, Net
Interest expense, net in fiscal 2024 increased $26.6 million, or 24%, to $135.8 million. The increase in interest expense was driven by higher total debt and higher borrowing rates associated with our variable-rate credit facilities, partially reduced by $49.5 million of capitalized interest in fiscal 2024, an increase of $32.0 million over the prior year. The increase in our total debt reflected increased borrowing under our credit facilities, predominantly to finance working capital requirements and capital projects. For more information, see Note 6, 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 24.1% for fiscal 2024, compared to 18.2% in fiscal 2023. Excluding a $4.8 million tax benefit and a $28.5 million of net tax expense from items impacting comparability in fiscal 2024 and 2023, respectively, our effective tax rate was 24.1% for fiscal 2024 and 22.0% in fiscal 2023. Our effective tax rate varies from the U.S. statutory tax rate of 21% primarily 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 conducted business through unconsolidated joint ventures during fiscal 2024 and 2023. The results in the current year include earnings associated with our 50% interest in Lamb Weston RDO, while results in the prior year also included earnings associated with our then 50% interest in LW EMEA and LWAMSA. The results in the prior year include non-cash gains on the acquisitions of interests in our LW EMEA and LWAMSA joint ventures of $425.8 million ($379.5 million after-tax or $2.62 per share), as well as a $32.7 million ($24.3 million after-tax, or $0.17 per share) unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts at LW EMEA.
Adjusted Equity Method Investment Earnings declined $41.5 million compared to the prior year, largely due to LW EMEA earnings being reflected as equity method investment earnings in the first three quarters of fiscal 2023. The results in the current year also include a $10.8 million charge for the write-off of excess raw potatoes at Lamb Weston RDO.
Fiscal 2024 Compared to Fiscal 2023 Balance Sheet Changes
The changes in our Consolidated Balance Sheet, compared with May 28, 2023, related primarily to the investment in production facilities in American Falls, Idaho and Ulanqab, Inner Mongolia, China and ongoing projects across our facilities. Our short-term borrowings also increased as a result of additional borrowings under our new global revolving credit facility to support our expansion projects.
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Liquidity and Capital Resources
We ended fiscal 2024 with $71.4 million of cash and cash equivalents and $1.2 billion of undrawn availability under our global revolving credit facility. We believe we have sufficient liquidity to meet our business requirements for at least the next 12 months. Cash generated by operations, supplemented by our total cash and availability under our credit facilities, is our primary source of liquidity for funding business requirements. Our funding requirements include capital expenditures for announced manufacturing expansions in the Netherlands and Argentina, as well as capital investments to upgrade information systems and ERP infrastructure, working capital requirements, and dividends. These expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, supply chain constraints for equipment, and our regulatory compliance requirements. At May 26, 2024, we had commitments for capital expenditures of $402.7 million.
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:
For the Fiscal Years Ended May
Net cash flows provided by (used for):
Effect of exchange rate changes on cash and cash equivalents 0.5 18.2
Net decrease in cash and cash equivalents (233.4) (220.2)
Cash and cash equivalents, beginning of period 304.8 525.0
Cash and cash equivalents, end of period $ 71.4 $ 304.8
Operating Activities
During fiscal 2024, cash provided by operating activities increased $36.5 million to $798.2 million, compared to $761.7 million for fiscal 2023. The increase included a $257.9 million increase in net income, adjusted for non-cash income and expenses, partially offset by unfavorable changes in working capital of $221.4 million primarily related to changes in performance-based compensation and benefit accruals and increased inventory balances due to cost inflation, as well as lower than expected sales volumes in the second half of the year related to the ERP transition and soft restaurant traffic trends in North America and other key international markets.See “Results of Operations” in this MD&A for more information related to the increase in income from operations.
Investing Activities
Investing activities used $984.1 million of cash in fiscal 2024, compared with $1,340.9 million in fiscal 2023. The decrease primarily relates to $610.4 million of cash used to purchase the remaining equity interest in LW EMEA and an additional 40% equity interest in LWAMSA during fiscal 2023. Fiscal 2024 included expenditures to expand our french fry and chopped and formed capacity and other facility modernization efforts in American Falls, Idaho, which became operational in May 2024; the construction of a greenfield french fry processing facility in Ulanqab, Inner Mongolia, China, which became operational in November 2023; and expenditures for the construction of french fry processing facilities in Kruiningen, the Netherlands and Mar del Plata, Argentina which are scheduled to be completed in fall 2024 and mid-calendar year 2025, respectively.
We expect to use approximately $850 million, excluding acquisitions, if any, for investing activities, in fiscal 2025 as we continue construction of our capacity expansion efforts in the Netherlands and Argentina, as well as capital investments to upgrade our information systems and ERP infrastructure.
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Financing Activities
During fiscal 2024, proceeds from short-term borrowings and debt issuances were $756.9 million, of which $164.9 million were short-term and $592.0 million related to upsizing our term loan borrowing capacity in connection with entering into a new term loan credit agreement in May 2024. We repaid $401.1 million of debt and financial obligations, which primarily included repayments towards the Term A-2 loan facility and Euro loan facility in connection with entering into new term loan and revolving credit agreements. We used $225.3 million of cash to repurchase 2,294,654 shares of our common stock at an average price of $91.51 per share, and we withheld 146,259 shares from employees to cover income and payroll taxes on equity awards that vested during the year. In addition, we paid $174.0 million in cash dividends to common stockholders.
During fiscal 2023, financing activities included $529.5 million of proceeds from debt issuances including a new $450.0 million term loan facility to fund a portion of the LW EMEA Acquisition and $79.5 million of borrowings on other credit facilities. We also had proceeds of $41.4 million from short-term borrowings on other facilities. These activities were partially offset by the payment of $146.1 million of cash dividends to common stockholders and $32.6 million of debt and financing obligation repayments. In addition, we used $51.6 million of cash to repurchase 569,698 shares of our common stock at an average price of $78.99 per share and withheld 83,974 shares from employees to cover income and payroll taxes on equity awards that vested during the year.
For more information about our debt, including among other items, our new global revolving credit agreement and term loan facilities, interest rates, maturity dates, and covenants, see Note 6, 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 26, 2024, we were in compliance with all covenants contained in our credit agreements.
Obligations and Commitments
As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements, potato supply agreements, and unconditional purchase obligations. The unconditional purchase obligations are enforceable and legally binding arrangements entered into in the normal course of business to ensure adequate levels of sourced product are available.
A summary of our material cash requirements for our known contractual obligations as of May 26, 2024 are as follows:
(in millions) Total Payable within 12 Months
Interest on long-term debt (b) 935.7 180.8
Purchase obligations and capital commitments (a) 1,148.4 591.0
_____________________________________________________
(a)See the below Notes to the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information.
•Short-term borrowings and long-term debt, including current portion. See Note 6, Debt and Financing Obligations, for more information on debt payments and the timing of expected future payments.
•Leases. See Note 7, Leases, for more information on our operating and finance lease obligations and timing of expected future payments.
•Purchase obligations and capital commitments. See Note 14, Commitments, Contingencies, Guarantees, and Legal Proceedings, for more information on our purchase obligations and the timing of future payments and capital commitments in connection with the expansion and replacement of existing facilities and equipment.
(b)Amounts represent estimated future interest payments assuming our long-term debt is held to maturity and using interest rates in effect as of May 26, 2024. This does not reflect a reduction for future estimated capitalized interest amounts.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of May 26, 2024 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.
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 U.S. 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 impairment, 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 Committee of our Board.
We have made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our Consolidated Financial Statements may be affected.
Acquisitions
From time to time, we may enter into business combinations. In July 2022 and February 2023, we acquired an additional 40% interest in LWAMSA and the remaining 50% equity interest in LW EMEA, respectively. With the completion of the Acquisitions, we own 90% and 100% of the equity interests in LWAMSA and LW EMEA, respectively. We recorded the assets acquired and the liabilities assumed at their estimated acquisition date fair values 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. Additionally, for acquisitions of previously held equity interests, we remeasure the previously held equity interest to fair value based on consideration at the acquisition date utilizing a market approach based on comparable control premiums within our industry. 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.
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.
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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 26, 2024 and May 28, 2023, we had $90.0 million and $86.1 million, respectively, of accrued 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 and liabilities 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 May 26, 2024, reflect the estimated outcome of known tax contingencies as of such date in accordance with accounting for uncertainty in income taxes under ASC 740.
•We recognize the tax impact of including certain foreign earnings in U.S. 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-U.S. earnings or for outside basis differences in our subsidiaries, because we plan to indefinitely reinvest such earnings and basis differences. Remittances of non-U.S. earnings are based on estimates and judgments of projected cash flow needs, as well as the working capital and investment requirements of our non-U.S. and U.S. operations. Material changes in our estimates of cash, working capital, and investment needs in various jurisdictions could require repatriation of indefinitely reinvested non-U.S. earnings, which could be subject to applicable non-U.S. income and withholding 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.
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New and Recently Issued Accounting Standards
For a listing of new and recently issued 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 Adjusted EBITDA, Adjusted Gross Profit, Adjusted SG&A, Adjusted Income from Operations, Adjusted Equity Method Investment Earnings, Adjusted Net Income, and Adjusted Diluted EPS, each of which is considered a non-GAAP financial measure. Management uses these non-GAAP financial measures to assist in analyzing what management views as our core operating performance for purposes of business decision-making. Management believes that presenting these non-GAAP financial measures provide investors with useful supplemental information because they (i) provide meaningful supplemental information regarding financial performance by excluding impacts of foreign currency exchange rates and unrealized mark-to-market derivative gains and losses and other items affecting comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our core operating performance across periods, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating our financial results. In addition, we believe that the presentation of these non-GAAP financial measures, when considered together with their most directly comparable GAAP financial measure and the reconciliations to those GAAP financial measures, provides investors with additional tools to understand the factors and trends affecting our underlying business than could be obtained absent these disclosures.
The non-GAAP financial measures presented in this report should be viewed in addition to, and not as alternatives for, financial measures prepared in accordance with GAAP that are also presented in this report. These measures are not substitutes for their comparable GAAP financial measures, such as net income, gross profit, SG&A, income from operations, equity method investment earnings, diluted EPS, or other measures prescribed by GAAP, and there are limitations to using non-GAAP financial measures. For example, the non-GAAP financial measures presented in this report 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 we do.
The following table reconciles net income to Adjusted EBITDA.
For the Fiscal Years Ended May
Depreciation and amortization 306.2 247.4
Unrealized derivative (gains) and losses (24.9) 41.7
Unconsolidated joint venture unrealized derivative losses — 32.7
Foreign currency exchange losses 10.6 5.5
Items impacting comparability:
Inventory step-up from acquisition 20.7 27.0
Integration and acquisition-related items, net 12.8 (21.8)
Gain on acquisition of interest in joint venture (d) — (425.8)
_____________________________________________________
(a)Fiscal 2024 included the consolidated financial statements of LW EMEA whereas in the first three quarters of fiscal 2023, LW EMEA’s financial results were recorded in “Equity method investment earnings.” For more information about the LW EMEA Acquisition, see Note 11, Acquisitions, of the Notes to Consolidated Financial Statements.
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(b)Net income for fiscal 2024 included the following:
i.Approximately $95 million of losses ($72 million after-tax) related to the ERP transition in the fiscal third quarter, including approximately $83 million in the North America segment, approximately $5 million in the International segment, and $7 million of unallocated corporate costs.
ii.A $95.9 million charge ($72.9 million after-tax, or $0.50 per share) related to a write-off of excess raw potatoes. The total charge to the reporting segments was as follows: $86.0 million to the North America segment and $9.9 million to the International segment.
iii.An estimated $40 million loss ($30 million after-tax, or $0.20 per share) related to the voluntary product withdrawal. The total charge to the reporting segments was approximately $19 million to the North America segment and approximately $21 million to the International segment.
(c)Income from operations included:
i.Net integration and acquisition-related items were a loss of $12.8 million ($9.6 million after-tax, or $0.07 per share) and a gain of $21.8 million ($12.2 million after-tax, or $0.08 per share) related to actions taken to mitigate the effect of changes in currency rates on the purchase of the remaining equity interest in LW EMEA, net of other acquisition-related costs, for fiscal 2024 and 2023, respectively;
ii.A $20.7 million ($15.4 million after-tax, or $0.11 per share) and $27.0 million ($20.0 million after-tax, or $0.14 per share) charge related to the step-up and sale of inventory following completion of the LW EMEA Acquisition for fiscal 2024 and 2023, respectively;
iii.A $24.9 million unrealized gain ($18.6 million after-tax, or $0.13 per share) and a $74.4 million unrealized loss ($55.4 million after-tax, or $0.38 per share) related to mark-to-market adjustments associated with commodity and currency hedging contracts for fiscal 2024 and 2023, respectively; and
iv.Foreign currency exchange losses of $10.6 million ($8.0 million after-tax, or $0.05 per share) and $5.5 million ($4.1 million after-tax, or $0.03 per share) for fiscal 2024 and 2023, respectively.
(d)Included in Adjusted EBITDA is a gain on acquisition interest in joint ventures of $425.8 million ($379.5 million, or $2.62 per share) of non-cash gains related to the remeasurement of our initial equity interests to fair value, including a $410.7 million non-cash gain ($364.4 million after-tax, or $2.52 per share) for LW EMEA and a $15.1 million non-cash gain (before and after-tax, or $0.10 per share) for LWAMSA.
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The following tables reconcile gross profit to Adjusted Gross Profit, SG&A to Adjusted SG&A, income from operations to Adjusted Income from Operations, equity method investment earnings to Adjusted Equity Method Investment Earnings, net income to Adjusted Net Income, and diluted EPS to Adjusted Diluted EPS:
Unrealized derivative gains and losses (28.7) (3.8) (24.9) — (18.6) (0.13)
Foreign currency exchange losses — (10.6) 10.6 — 8.0 0.05
Items impacting comparability:
Integration and acquisition-related items, net — (12.8) 12.8 — 9.6 0.07
Foreign currency exchange losses — (5.5) 5.5 — 4.1 0.03
Items impacting comparability:
Gain on acquisition of interest in joint ventures — — — (425.8) (379.5) (2.62)
Integration and acquisition-related items, net — 21.8 (21.8) — (12.2) (0.08)
_____________________________________________________
(a)Diluted weighted average common shares were 145.6 million and 145.2 million at the end of fiscal 2024 and 2023, respectively.
(b)See footnotes in the reconciliation of net income to Adjusted EBITDA above for a discussion of the items impacting comparability.
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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, changes in currency 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. All of the following potential changes are based on sensitivity analyses performed on our financial positions as of May 26, 2024 and May 28, 2023. Actual results may differ materially.
Commodity Price Risk
The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. We may use commodity swap or forward purchase contracts, in addition to sourcing from multiple providers, to manage risks associated with market fluctuations in oil and energy prices. Based on our open commodity contract hedge positions as of May 26, 2024, a hypothetical 10% decline in market prices applied to the fair value of the instruments would result in a charge to “Cost of sales” of $9.2 million ($6.9 million after-tax). Based on our open commodity hedge positions as of May 28, 2023, a hypothetical 10% decline in market prices applied to the fair value of the instruments would have resulted in a charge to “Cost of sales” of $9.0 million ($6.8 million after-tax). It should be noted that any change in the fair value of the contracts, real or hypothetical, likely would be substantially offset by an inverse change in the value of the underlying hedged item.
Foreign Currency Exchange Rate Risk
We are subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our operations in foreign countries export to, and compete with imports from other regions. As such, currency movements can have a number of direct and indirect impacts on our financial statements. Direct impacts include the translation of international operations’ local currency financial statements into U.S. dollars and the remeasurement impact associated with non-functional currency financial assets and liabilities. Indirect impacts include the change in competitiveness of exports out of the United States (and the impact on local currency pricing of products that are traded internationally). The currency that has the most impact is the Euro. From time to time, we may economically hedge currency risk with foreign currency contracts, such as forward contracts. Based on monetary assets and liabilities denominated in foreign currencies, we estimate that a hypothetical 10% adverse change in exchange rates versus the U.S. dollar would result in losses of $63.3 million ($48.1 million after-tax) and $48.8 million ($37.1 million after-tax) as of May 26, 2024 and May 28, 2023, respectively.
Interest Rate Risk
We issue fixed and floating rate debt in a proportion that management deems appropriate based on current and projected market conditions. At May 26, 2024, we had $2,495.0 million of fixed-rate and $1,341.7 million of variable-rate debt outstanding. At May 28, 2023, we had $2,170.0 million of fixed-rate and $1,309.8 million of variable-rate debt outstanding. A one percent increase in interest rates related to variable-rate debt would result in an annual increase in interest expense and a corresponding decrease in income before taxes of $13.6 million annually ($10.6 million after-tax) and $13.3 million annually ($10.3 million after-tax) at May 26, 2024 and May 28, 2023, respectively.
For more information about our debt, see Note 6, 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Notes to Consolidated Financial Statements 51
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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 26, 2024 and May 28, 2023, 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 26, 2024, 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 26, 2024 and May 28, 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended May 26, 2024, 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 26, 2024, 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 24, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
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 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.
Sufficiency of audit evidence over the finished goods inventory held at third-party warehouse locations
As discussed in Note 1 to the consolidated financial statements, the Company has recognized finished goods inventory of $867.9 million as of May 26, 2024, the majority of which is held at third-party warehouse locations. The tracking of the existence and completeness of finished goods inventory quantities held at third-party warehouse locations is reliant upon manual processes and automated processes within the Company’s enterprise resource planning system.
We identified the evaluation of the sufficiency of audit evidence obtained related to the quantities of finished goods inventory held at third-party warehouse locations as a critical audit matter. Challenging auditor judgment was required to determine the nature and extent of procedures to be performed over the quantity of finished goods inventory held at third-party warehouse locations, including the determination of third-party warehouse locations at which to observe
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physical inventory counts and the need to involve information technology (IT) professionals with specialized skills and knowledge to assess the IT system involved.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the quantities of finished goods inventory held at third-party warehouse locations by evaluating:
•homogeneity of the locations
•historical results of physical counts of inventory
•inventory quantities by location.
We evaluated the design and tested the operating effectiveness of certain internal controls within the Company’s inventory process, including controls over finished goods inventory quantities held at third-party warehouse locations. We involved IT professionals with specialized skills and knowledge, who assisted in testing certain general IT and application controls related to the Company’s process of recording finished goods inventory quantities held at third-party warehouse locations. We tested the existence and completeness of finished goods inventory by observing a sample of physical inventory counts during the year. We also obtained external confirmation of inventory quantities held at certain third-party warehouse locations for a sample of locations. In addition, we evaluated the overall sufficiency of audit evidence obtained over finished goods inventory quantities held at third-party warehouse locations by assessing the results of procedures performed including the appropriateness of such evidence.
We have served as the Company’s auditor since 2016.
/s/ KPMG LLP
Seattle, Washington
July 24, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the 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 26, 2024, 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 26, 2024, 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 26, 2024 and May 28, 2023, 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 26, 2024, and the related notes and consolidated financial statement schedule (collectively, the consolidated financial statements), and our report dated July 24, 2024 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 24, 2024
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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 701.4 550.0 387.6
Income before income taxes and equity method earnings 929.5 772.9 283.4
Equity method investment earnings (loss) 26.0 460.6 (10.7)
Earnings per share:
Weighted average common shares outstanding:
See Notes to Consolidated Financial Statements.
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Lamb Weston Holdings, Inc.
Consolidated Statements of Comprehensive Income
(dollars in millions)
For the Fiscal Years Ended May
Other comprehensive income (loss):
See Notes to Consolidated Financial Statements.
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Lamb Weston Holdings, Inc.
Consolidated Balance Sheets
(dollars in millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 71.4 $ 304.8
Receivables, less allowance for doubtful accounts of $0.9 and $2.6 743.6 724.2
Prepaid expenses and other current assets 136.4 166.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and financing obligations 56.4 55.3
Long-term liabilities:
Commitments and contingencies
Stockholders’ equity:
Additional distributed capital (508.9) (558.6)
Accumulated other comprehensive loss (12.9) (26.8)
Total liabilities and stockholders’ equity $ 7,367.0 $ 6,519.8
See Notes to Consolidated Financial Statements.
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Lamb Weston Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(dollars in millions, except share and per share data)
Dividends declared, $0.96 per share — — — — (139.3) — (139.3)
Stock-settled, stock-based compensation expense — — — 21.3 — — 21.3
Other — — — 0.7 (0.7) — —
Dividends declared, $1.05 per share — — — — (151.6) — (151.6)
Stock-settled, stock-based compensation expense — — — 38.5 — — 38.5
Dividends declared, $1.28 per share — — — — (184.9) — (184.9)
Stock-settled, stock-based compensation expense — — — 46.8 — — 46.8
See Notes to Consolidated Financial Statements.
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Lamb Weston Holdings, Inc.
Consolidated Statements of Cash Flows
(dollars in millions)
For the Fiscal Years Ended May
Cash flows from operating activities
Loss on extinguishment of debt — — 53.3
Stock-settled, stock-based compensation expense 46.8 38.5 21.3
Gain on acquisition of interests in joint ventures — (425.8) —
Equity method investment earnings in excess of distributions (15.5) (35.7) 29.9
Deferred income taxes (1.3) 0.4 13.5
Foreign currency remeasurement (gain) loss (0.1) (21.7) 0.5
Changes in operating assets and liabilities, net of acquisitions:
Income taxes payable/receivable, net 20.1 (12.3) 11.6
Prepaid expenses and other current assets 9.7 1.8 (6.8)
Net cash provided by operating activities $ 798.2 $ 761.7 $ 418.6
Cash flows from investing activities
Additions to property, plant and equipment (929.5) (654.0) (290.1)
Additions to other long-term assets (62.3) (82.0) (16.3)
Acquisition of interests in joint ventures, net — (610.4) —
Acquisition of business, net of cash acquired (10.5) — —
Net cash used for investing activities $ (984.1) $ (1,340.9) $ (310.5)
Cash flows from financing activities
Repayments of debt and financing obligations (401.1) (32.6) (1,698.1)
Payments of senior notes call premium — — (39.6)
Proceeds of short-term borrowings, net 164.9 41.4 —