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 —
Net cash (used for) provided by financing activities $ (48.0) $ 340.8 $ (363.4)
Effect of exchange rate changes on cash and cash equivalents 0.5 18.2 (3.2)
Net decrease in cash and cash equivalents (233.4) (220.2) (258.5)
Cash and cash equivalents, beginning of period 304.8 525.0 783.5
Cash and cash equivalents, end of period $ 71.4 $ 304.8 $ 525.0
See Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lamb Weston Holdings, Inc. (“we,” “us,” “our,” the “Company,” or “Lamb Weston”) is a leading global producer, distributor, and marketer of value-added frozen potato products and is headquartered in Eagle, Idaho. We have two reportable segments: North America and International.
Basis of Presentation
These Consolidated Financial Statements present the financial results of Lamb Weston for the fiscal years ended May 26, 2024, May 28, 2023, and May 29, 2022 (“fiscal 2024, 2023, and 2022”), and have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”). The fiscal year of Lamb Weston ends the last Sunday in May. The fiscal years for the Consolidated Financial Statements presented consist of 52- week periods.
The financial statements include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such financial statements. Our Consolidated Financial Statements include the accounts of Lamb Weston and all of our majority-owned subsidiaries. Intercompany investments, accounts, and transactions have been eliminated.
Certain amounts in the prior year period consolidated financial statements have been reclassified to conform with the current period presentation.
The equity method of accounting is applied for investments when the Company has significant influence over the investee’s operations, or when the investee is structured with separate capital accounts and our investment is considered more than minor. Our equity method investments are described in Note 12, Joint Venture Investments.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including but not limited to those related to the measurement of assets acquired and the liabilities assumed based on the fair value at the acquisition date, provisions for income taxes, estimates of sales incentives and trade promotion allowances. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the Consolidated Financial Statements in future periods.
Revenue from Contracts with Customers
Generally, we recognize revenue on a point-in-time basis when the customer takes title to the product and assumes the risks and rewards for the product. However, for customized products, which are products manufactured to customers’ unique specifications, we recognize revenue over time, utilizing an output method, which is generally as the products are produced. This is because once a customized product is manufactured pursuant to a purchase order, we have an enforceable right to payment for that product. Conversely, for non-customized products, revenue is generally recognized upon shipment. As a result, the timing of the receipt of a purchase order may create quarterly fluctuations.
The nature of our contracts varies based on the business, customer type, and region; however, in all instances it is our customary business practice to receive a valid order from the customer, in which each party’s rights and related payment terms are clearly identifiable. Our payment terms are consistent with industry standards and generally include early pay discounts. Amounts billed and due from customers are short-term in nature and are classified as receivables, since payments are unconditional and only the passage of time is required before payments are due. As of May 26, 2024, and May 28, 2023, we had $104.3 million and $146.9 million, respectively, of unbilled receivables for customized products for which we have accelerated the recognition of revenue and recorded the amounts in “Receivables” on our Consolidated Balance Sheets. We generally do not offer financing to our customers. We also do not provide a general right of return. However, customers may seek to return defective or non-conforming products. Following a customer return, we may offer
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remedies, including cash refunds, credit towards future purchases, or product replacement. As a result, customers’ right of return and related refund or product liabilities are estimated and recorded as reductions in revenue.
We have contract terms that give rise to variable consideration including, but not limited to, discounts, coupons, rebates, and volume-based incentives. We estimate volume rebates based on the most likely amount method outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. We estimate early payment discounts and other customer trade incentives based principally on historical sales and coupon utilization and redemption rates, influenced by judgments about current market conditions such as competitive activity in specific product categories, which is consistent with the expected value method outlined in ASC 606. We have concluded that these methods result in the best estimate of the consideration we are entitled to from our customers. Because of the complexity of some of these trade promotions, however, the ultimate resolution may result in payments that are materially different from our estimates. As additional information becomes known, we may change our estimates. At May 26, 2024 and May 28, 2023, we had $90.0 million and $86.1 million, respectively, of sales incentives and trade promotions payable recorded in “Accrued liabilities” on our Consolidated Balance Sheets.
We have elected to present all sales taxes on a net basis, account for shipping and handling activities as fulfillment activities, recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period of the asset we would recognize is one year or less, and not record interest income or interest expense when the difference in timing of control or transfer and customer payment is one year or less.
Advertising and Promotion
Advertising and promotion expenses totaled $49.7 million, $34.4 million, and $18.9 million in fiscal 2024, 2023, and 2022, respectively, and are included in “Selling, general and administrative expenses” in the Consolidated Statements of Earnings as the expenses are incurred.
Research and Development
Research and development costs are expensed as incurred and totaled $26.4 million, $17.2 million, and $16.2 million in fiscal 2024, 2023, and 2022, respectively, and are included in “Selling, general and administrative expenses” in the Consolidated Statements of Earnings.
Stock-Based Compensation
Compensation expense resulting from all stock-based compensation transactions is measured and recorded in the Consolidated Financial Statements based on the grant date fair value of the equity instruments issued. Compensation expense is recognized over the period the employee or non-employee director provides service in exchange for the award. See Note 8, Stock-Based Compensation, for additional information.
Pension and Post-Retirement Benefits
Certain U.S. employees are covered by a defined benefit pension plan which is now frozen for all participants. We make pension plan contributions that are sufficient to fund our actuarial determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act of 1974, as amended. From time to time, we may make discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. In fiscal 2024 and 2023, we made $6.1 million and $2.0 million of contributions to our qualified plan. We expect to make minimum required contributions in fiscal 2025 of $2.3 million to our qualified pension plan.
We also have a nonqualified defined benefit pension plan that provides unfunded supplemental retirement benefits to certain U.S. executives. This plan is closed to new participants and pension benefit accruals are frozen for active participants.
Our pension benefit obligations and post-retirement benefit obligations, and the related costs, are calculated using actuarial concepts. The measurement of such obligations and expenses requires that certain assumptions be made regarding several factors, most notably including the discount rate and the expected rate of return on plan assets. We evaluate these assumptions on an annual basis. The funded status of our plans are based on company contributions, benefit payments, the plan asset investment return, the discount rate used to measure the liability, and expected participant longevity. The benefit obligations of the plans exceeded the assets by $10.0 million and $9.3 million for the pension plan and $3.8 million and
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$4.3 million for the other post-retirement benefit plan for the years ended May 26, 2024 and May 28, 2023, respectively. We recognize the unfunded status of these plans in “Other noncurrent liabilities” on the Consolidated Balance Sheets, and we recognize changes in funded status in the year changes occur through the Consolidated Statements of Comprehensive Income. Net periodic benefit costs were $0.8 million, $2.5 million, and $2.7 million in fiscal 2024, 2023, and 2022, respectively.
Participants that do not actively participate in a pension plan are eligible to participate in defined contribution savings plans with employer matching provisions. Eligible U.S. employees participate in a contributory defined contribution plan (“the 401(k) Plan”), which permits participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. Regardless of employee participation level, we generally provide a 3% contribution to the 401(k) Plan. In addition to this, we will generally match 100% of the first 6% of the participating employee’s contribution election to the 401(k) Plan. The Plan’s matching contributions have a five-year graded vesting with 20% vesting each year. We made employer contributions of $48.1 million, $38.7 million, and $30.5 million in fiscal 2024, 2023, and 2022, respectively.
We sponsor a non-qualified deferred compensation savings plan that permits eligible U.S. employees to continue to make deferrals and receive company matching contributions when their contributions to the 401(k) Plan are stopped due to limitations under U.S. tax law. In addition, we sponsor a non-qualified deferred compensation plan for non-employee directors that allow directors to defer their cash compensation and stock awards. Both deferred compensation plans are unfunded nonqualified defined contribution plans. Participant deferrals and company matching contributions (for the employee deferred compensation plan only) are not invested in separate trusts, but are paid directly from our general assets at the time benefits become due and payable. At May 26, 2024 and May 28, 2023, we had $27.6 million and $22.6 million, respectively, of liabilities attributable to participation in our deferred compensation plans recorded on our Consolidated Balance Sheets.
Cash and Cash Equivalents
Cash and all highly liquid investments with an original maturity of three months or less at the date of acquisition are classified as cash and cash equivalents and stated at cost, which approximates market value. We maintain various banking relationships with high quality financial institutions, and we invest available cash in money market funds that are backed by U.S. Treasury securities and can be redeemed without notice.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount we expect to collect based on our past experience, as well as reliance on the Perishable Agricultural Commodities Act, which was enacted to help promote fair trade in the fruit and vegetable industry by establishing a code of fair business practices. The collectability of our accounts receivable is based upon a combination of factors. In circumstances where a specific customer is unable to meet its financial obligations (e.g., bankruptcy filings, substantial downgrading of credit sources), a specific reserve for bad debts is recorded against amounts due to the Company to reduce the net recorded receivable to the amount that we reasonably believe will be collected. For all other customers, reserves for bad debts are recognized based on forward-looking information to assess expected credit losses. If collection experience deteriorates, the estimate of the recoverability of amounts due could be reduced. We periodically review our allowance for doubtful accounts and adjustments to the valuation allowance are recorded as income or expense in “Selling, general and administrative expenses” in our Consolidated Statements of Earnings. Trade accounts receivable balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
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Inventories
Inventories are valued at the lower of cost (determined using the first-in, first-out method) or net realizable value and include all costs directly associated with manufacturing products: materials, labor, and manufacturing overhead. Inventories are reduced to net realizable value after consideration of excess, obsolete, and unsaleable inventories based on quantities on hand and estimated future usage and sales. The majority of our finished goods inventories are held at third-party warehouses not owned or leased by the Company.The components of inventories were as follows:
Raw materials and packaging $ 178.7 $ 145.7
Leased Assets
Leases consist of real property and machinery and equipment. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of the lease payments over the lease term. Our leases may include options to extend or terminate. Options to extend are included in the lease term when it is reasonably certain that we will exercise the option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in lease assets and liabilities. Variable payments for leases of land and buildings primarily relate to common area maintenance, insurance, taxes, and utilities. Variable payments for equipment, vehicles, and leases within supply agreements primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of our leases, we use an incremental borrowing rate to determine the initial present value of lease payments over the lease terms on a collateralized basis over a similar term, which is based on market and company specific information. Assets and liabilities related to leases having a lease term of twelve months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. In addition, we account for lease and non-lease components as a single lease component for all of our leases. See Note 7, Leases, for more information.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements and the amount of interest cost associated with significant capital additions. The amount of interest capitalized from construction in progress was $49.5 million, $17.5 million, and $6.0 million in fiscal 2024, 2023, and 2022, respectively. Construction in progress does not include deposits made on equipment, materials, and services yet to be received. As of May 26, 2024 and May 28, 2023, deposits for construction in progress were $52.6 million and $30.5 million, respectively, and were recorded in “Other assets” on our Consolidated Balance Sheets. Repairs and maintenance costs are expensed as incurred.The components of property, plant and equipment were as follows:
Land and land improvements $ 186.2 $ 163.2
Furniture, fixtures, office equipment and other 127.7 112.0
Property, plant and equipment, at cost 5,710.9 4,683.8
Property, plant and equipment, net $ 3,582.8 $ 2,808.0
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Depreciation is computed on a straight-line basis over the estimated useful lives of the respective classes of assets as follows:
Land improvements 1-30 years
Buildings 10-40 years
Machinery and equipment 5-20 years
Furniture, fixtures, office equipment, and other 3-15 years
We recorded $278.2 million, $211.3 million, and $181.5 million of depreciation expense in fiscal 2024, 2023, and 2022, respectively. Below is a breakout between Cost of sales (“COS”) and Selling, general and administrative expenses (“SG&A”) for depreciation and amortization:
Amortization - COS $ 1.0 $ 1.0 $ 1.0
At May 26, 2024 and May 28, 2023, purchases of property, plant and equipment included in accounts payable were $292.0 million and $138.3 million, respectively.
Long-Lived Asset Impairment
We review long-lived assets for impairment upon the occurrence of events or changes in circumstances which indicate that the carrying amount of the assets may not be fully recoverable, measured by comparing their net book value to the undiscounted projected future cash flows generated by their use. Impaired assets are recorded at their estimated fair value.
Goodwill and Other Identifiable Intangible Assets
We perform an annual impairment assessment of goodwill at the reporting unit level in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. We have an option to evaluate goodwill for impairment by first performing a qualitative assessment of events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amounts, then a quantitative goodwill impairment test is not required to be performed. The quantitative assessment requires us to estimate the fair value of our reporting units using a weighted approach based on discounted future cash flows, market multiples and transaction multiples. If the carrying amount of the reporting units is in excess of their estimated fair value, the reporting unit will record an impairment charge by the amount that the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
We amortize intangible assets with finite lives over their estimated useful life. We perform a review of significant finite-lived identified intangible assets to determine whether facts and circumstances indicate that the carrying amount may not be recoverable. These reviews can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for our products lines.
See Note 4, Goodwill and Other Identifiable Intangible Assets, for additional information.
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Fair Values of Financial Instruments
When determining fair value, we consider the principal or most advantageous market in which we would transact, as well as assumptions that market participants would use when pricing the asset or liability.
The three levels of inputs that may be used to measure fair value are:
Level 1—Quoted market prices in active markets for identical assets or liabilities. We evaluate security-specific market data when determining whether a market is active.
Level 2—Observable market-based inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3—Unobservable inputs for the asset or liability reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
See Note 9, Fair Value Measurements, for additional information.
Foreign Currency
Most of our foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities are translated at exchange rates prevailing at the balance sheet dates. Revenues and expenses are translated into U.S. dollars using daily and monthly average exchange rates. Gains and losses resulting from the translation of Consolidated Balance Sheets are recorded as a component of “Accumulated other comprehensive income (loss).”
Foreign currency transactions resulted in a loss of $10.6 million, a gain of $19.7 million, and a loss of $3.3 million in fiscal 2024, 2023, and 2022, respectively. Fiscal 2023 includes a $25.2 million foreign currency transaction gain related to actions taken to mitigate the effect of changes in currency rates on the purchase price of our former European joint venture, Lamb-Weston/Meijer v.o.f. (“LW EMEA”). These amounts were recorded in “Selling, general and administrative expenses” in the Consolidated Statements of Earnings.
Derivative Financial Instruments
We use derivatives and other financial instruments to hedge a portion of our commodity and interest rate risks. We do not hold or issue derivatives and other financial instruments for trading purposes. Derivative instruments are reported in our Consolidated Balance Sheets at their fair values, unless the derivative instruments qualify for the normal purchase normal sale exception (“NPNS”) under GAAP and such exception has been elected. If the NPNS exception is elected, the fair values of such contracts are not recognized. Changes in derivative instrument values are recognized in “Cost of sales” in our Consolidated Statements of Earnings. We do not designate commodity derivatives to achieve hedge accounting treatment.
Income Taxes
We recognize current tax liabilities and assets based on an estimate of taxes payable or refundable in the current year for each of the jurisdictions in which we transact business. As part of the determination of our current tax liability, management exercises judgment in evaluating positions taken in the tax returns. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than a 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
We also recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences (e.g., the difference in book basis versus tax basis of fixed assets resulting from differing depreciation methods). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are remeasured to reflect new tax rates in the periods rate changes are enacted. If appropriate, we recognize valuation allowances to reduce deferred tax assets to amounts that are more likely than not to be ultimately realized, based on our assessment of estimated future taxable income.
See Note 3, Income Taxes, for more information.
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New and Recently Issued Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. ASU 2023-07 is effective for our Annual Report on Form 10-K for the fiscal year ending May 25, 2025, and subsequent interim periods, with early adoption permitted. We are evaluating the impact of adopting this ASU on our Consolidated Financial Statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to enhance transparency and decision usefulness of income tax disclosures, particularly around rate reconciliations and income taxes paid information. ASU 2023-09 is effective for our Annual Report on Form 10-K for the fiscal year ending May 24, 2026, on a prospective basis, with early adoption permitted. We are evaluating the impact of adopting this ASU on our Consolidated Financial Statements and related disclosures.
There were no other accounting pronouncements recently issued that had or are expected to have a material impact on our Consolidated Financial Statements.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per common share for the periods presented:
For the Fiscal Years Ended May
Numerator:
Denominator:
Basic weighted average common shares outstanding 144.9 144.5 145.5
Add: Dilutive effect of employee incentive plans (a) 0.8 0.7 0.4
Diluted weighted average common shares outstanding 145.6 145.2 145.9
Earnings per share:
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(a)Potential dilutive shares of common stock from employee incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of outstanding restricted stock units and performance share awards. As of May 26, 2024 and May 28, 2023, an insignificant number of stock-based awards were excluded from the computation of diluted earnings per share because they would be antidilutive. As of May 29, 2022, we did not have any stock-based awards that were antidilutive.
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3. INCOME TAXES
Pre-tax income, inclusive of equity method investment earnings, consisted of the following:
For the Fiscal Years Ended May
The provision for income taxes included the following:
For the Fiscal Years Ended May
Current
Deferred
Total deferred provision for taxes $ (1.4) $ 0.4 $ 13.5
A reconciliation of income tax expense using the 21% U.S. statutory tax rate on income from operations, including equity method earnings and before income taxes, compared with the actual provision for income taxes follows:
For the Fiscal Years Ended May
Provision computed at U.S. statutory rate $ 200.7 $ 259.0 $ 57.3
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit 20.1 21.2 6.4
Non-U.S. operations (a) 9.0 (12.4) (0.7)
Consolidation of previously held equity interests (b) — (43.1) —
Write-off of net investment in Russia (c) — — 13.2
Effective income tax rate (d) 24.1 % 18.2 % 26.3 %
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(a)We derive the effective tax rate detriment or (benefit) attributed to non-U.S. income taxed at different rates, including the impact of permanent items. The statutory tax rates range from 0% to 35%.
(b)In connection with the joint venture acquisitions discussed in Note 11, Acquisitions, we recorded a $43.1 million rate benefit based on a $425.8 million non-cash gain ($379.5 million after-tax) related to the remeasurement of our initial equity interests to fair value.
(c)In connection with LW EMEA’s withdrawal from Russia, we reflected a $13.2 million tax detriment as any loss realized upon the sale of shares of the Russian joint venture is a non-deductible permanent difference.
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(d)The effective income tax rate is calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings. The effective tax rate in fiscal 2023 included the tax impact of the remeasurement of our initial 50% equity interests in LW EMEA and our joint venture in Argentina, Lamb Weston Alimentos Modernos S.A (“LWAMSA”), and other acquisition-related items. The fiscal 2023 and 2022 tax rates were both affected by mark-to-market adjustments associated with changes in natural gas and electricity derivatives as commodity markets in Europe experienced significant volatility. Fiscal 2022 also included taxes related to the write-off of our portion of LW EMEA’s net investment in its former joint venture in Russia. Excluding these items, our effective tax rate was 21.8% and 21.4% in fiscal 2023 and 2022, respectively.
Income Taxes Paid
Income taxes paid, net of refunds, were $188.8 million, $226.5 million, and $44.3 million in fiscal 2024, 2023, and 2022, respectively.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred income tax assets and liabilities were as follows:
(in millions) Assets Liabilities Assets Liabilities
Property, plant and equipment $ — $ 322.6 $ — $ 285.1
Goodwill and other intangible assets 17.4 — 12.0 —
Compensation and benefit related liabilities 27.8 — 24.4 —
Net operating loss and credit carryforwards (a) 22.9 — 4.4 —
Accrued expenses and other liabilities 20.1 — 13.5 —
Inventory and inventory reserves 17.7 — 5.4 —
Lease obligations 31.4 — 34.4 —
Operating lease assets — 28.9 — 32.2
R&D expenditures capitalization 21.4 — 22.0 —
Equity method investments — 7.1 — 8.3
Derivatives 3.1 — 8.8 —
Less: Valuation allowance (b) (53.1) — (49.5) —
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(a)At May 26, 2024, Lamb Weston had approximately $38.2 million of gross ($10.2 million after-tax) non-U.S. net operating loss carryforwards, of which $3.2 million (after-tax) will expire by fiscal 2030. The remaining $7.0 million (after-tax) non-U.S. net operating loss carryforwards will not expire. Lamb Weston also had a state business credit carryforward of $14.6 million ($11.5 million net of federal benefit), which will expire by fiscal 2038, and a non-U.S. tax credit carryforward of $1.2 million, which will expire by fiscal 2033.
(b)The valuation allowance is predominantly related to non-amortizable intangibles. There was no impact on income tax expense related to changes in the valuation allowance, including net operating loss carryforwards, in fiscal 2024, 2023, and 2022.
(c)Deferred tax assets of $8.2 million and $3.3 million, as of May 26, 2024 and May 28, 2023, respectively, were presented in “Other assets.” Deferred tax liabilities of $256.2 million and $252.1 million as of May 26, 2024 and May 28, 2023, respectively, were presented in “Deferred income taxes” as "Long-term liabilities" on the Consolidated Balance Sheets. The deferred tax asset and liability net position is determined by tax jurisdiction.
The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for global intangible low-taxed income (“GILTI”) or treat them as a tax cost in the year incurred. We have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. Under this policy, we have not provided deferred taxes on temporary differences that upon their reversal would affect the amount of income subject to GILTI in the period.
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We have not established deferred income taxes on accumulated undistributed earnings and other basis differences for operations outside the U.S., as such earnings and basis differences are indefinitely reinvested. Determining the unrecognized deferred tax liability for these earnings is not practicable. Generally, no U.S. federal income taxes will be imposed on future distributions of non-U.S. earnings under the current law. However, distributions to the U.S. or other jurisdictions could be subject to withholding and other local taxes, and these taxes would not be material.
Uncertain Tax Positions
The aggregate changes in the gross amount of unrecognized tax benefits, excluding interest and penalties consisted of the following:
For the Fiscal Years Ended May
Decreases from positions established during prior fiscal years (3.6) — —
Decreases relating to settlements with taxing authorities (0.5) (4.9) (1.0)
Expiration of statute of limitations (5.3) (2.2) (5.2)
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(a)In connection with the acquisition of LW EMEA during the year ended May 28, 2023, we recognized $8.9 million of gross unrecognized tax benefits with a corresponding increase to goodwill.
(b)If we were to prevail on the unrecognized tax benefits recorded as of May 26, 2024 and May 28, 2023, it would result in a tax benefit of $69.0 million and $52.2 million, respectively, and a reduction in the effective tax rate. The ending balances exclude $15.3 million and $9.2 million of gross interest and penalties in fiscal 2024 and 2023, respectively. We accrue interest and penalties associated with uncertain tax positions as part of income tax expense.
Lamb Weston conducts business and files tax returns in numerous countries, states, and local jurisdictions. We do not have any significant open tax audits. Major jurisdictions where we conduct business generally have statutes of limitations ranging from three to five years. Statute of limitation expirations could reduce the uncertain tax positions by approximately $14 million during the next 12 months.
Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that certain U.S. federal, state, and non-U.S. tax audits may be concluded within the next 12 months. This process could increase or decrease the balance of our gross unrecognized tax benefits. The estimated impact on income tax expense and net income is not expected to be significant.
4. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The following table presents changes in goodwill balances, by segment, for fiscal years 2024 and 2023:
(in millions) North America International Total
Acquisitions — 8.5 8.5
Foreign currency translation adjustment 6.4 4.3 10.7
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(a)As a result of our change in segments, effective May 29, 2023, goodwill was reassigned to the North America and International segments based on relative fair value using a market-based approach. Before and after the reassignment of our goodwill, we completed impairment assessments and concluded there were no indications of impairment in our segments. Please refer to Note 13, Segments, and our Current Report on Form 8-K, which we filed with the Securities and Exchange Commission on August 24, 2023 for further information regarding our segment structure.
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Other identifiable intangible assets were as follows:
Non-amortizing intangible assets (a) n/a $ 18.0 $ — $ 18.0 n/a $ 18.0 $ — $ 18.0
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(a)Non-amortizing intangible assets represent brands and trademarks.
(b)Amortizing intangible assets are primarily comprised of licensing agreements, brands, and customer relationships. In addition, $227.9 million and $175.4 million of net developed technology at May 26, 2024 and May 28, 2023, respectively, is recorded as “Other assets” on our Consolidated Balance Sheets and will generally be amortized over seven years once implemented. Foreign intangible assets are affected by foreign currency translation.
Based on current intangibles subject to amortization, we expect intangible asset amortization expense, excluding developed technology, will be approximately $7.2 million in fiscal 2025, $7.3 million in fiscal 2026, $7.2 million in fiscal 2027, $7.2 million in fiscal 2028, and $7.0 million in fiscal 2029, and approximately $51.0 million thereafter.
Impairment Testing
During the annual goodwill impairment test we performed in the fourth quarter of fiscal 2024, we assessed qualitative factors to determine whether it was more likely than not that the fair value of each reporting unit was less than its carrying value. Based on the results of the qualitative impairment test, we determined that it was not more likely than not that the fair value was less than the carrying value of our North America and International reporting units. Additionally, we completed our tests of our non-amortizing intangibles in the fourth quarter of fiscal 2024 and there was no indication of intangible asset impairment.
5. ACCRUED LIABILITIES
The components of accrued liabilities were as follows:
Accrued trade promotions $ 90.0 $ 86.1
Compensation and benefits 72.8 187.5
Dividends payable to shareholders 51.7 40.8
Current portion of operating lease obligations 29.3 28.5
Derivative liabilities and payables 24.6 53.9
Plant utilities and accruals 23.9 27.2
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6. DEBT AND FINANCING OBLIGATIONS
The components of our debt, including financing obligations, were as follows:
Amount Interest Rate Amount Interest Rate
Short-term borrowings:
Global revolving credit facility $ 291.3 6.580 % $ — — %
U.S. revolving credit facility — 6.680 — 7.710
Other credit facilities (a) 35.0 11.4
Long-term debt:
Euro term loan facility, due December 2024 (d) — — 80.4 2.010
Financing obligations:
Lease financing obligations due on various dates through 2040 (e) 5.7 7.7
Total debt and financing obligations 3,842.4 3,487.5
Debt issuance costs and debt discounts (f) (19.0) (25.3)
Short-term borrowings, net of debt discounts (326.3) (158.5)
Current portion of long-term debt and financing obligations (56.4) (55.3)
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(a)The Other credit facilities consist of various short-term facilities at one of our subsidiaries used for working capital needs and have various interest rates.
(b)The interest rates on the Term A-1, A-2, A-3, and A-4 loans do not include anticipated patronage dividends. We have received and expect to continue receiving patronage dividends under all Term loan facilities.
(c)The Term A-2 loan facility was repaid in full in connection with our entry into the New Term Loan Credit Agreement discussed below.
(d)The Euro term loan facility, due December 2024 was repaid in full in connection with our entry into the Global Revolving Credit Agreement discussed below.
(e)The interest rates on our lease financing obligations ranged from 2.08% to 6.19% at May 26, 2024 and May 28, 2023. For more information on our lease financing obligations, see Note 7, Leases.
(f)Excludes debt issuance costs of $4.9 million and $2.5 million as of May 26, 2024 and May 28, 2023, respectively, related to our Global Revolving Credit Facility, which are recorded in “Other assets” on our Consolidated Balance Sheets. In fiscal 2024, 2023, and 2022, we recorded $4.5 million, $4.1 million, and $4.8 million, respectively, of amortization expense in “Interest expense” in our Consolidated Statements of Earnings.
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Global Revolving Credit Facility
On May 3, 2024, we entered into an amended and restated credit agreement (the “Global Revolving Credit Agreement”), which replaced our then-existing credit agreement, dated as of November 9, 2016 (as amended, the “U.S. Revolving Credit Agreement”). The U.S. Revolving Credit Agreement provided for, among other things, a $1.0 billion revolving credit facility (the “U.S. Revolving Credit Facility”), including borrowings and letters of credit available in U.S. dollars and various foreign currencies. The Global Revolving Credit Agreement modified the U.S. Revolving Credit Agreement for the purpose of, among other things, (i) increasing the commitments under the Global Revolving Credit Facility to $1.5 billion, (ii) extending the maturity date of the Global Revolving Credit Facility from August 2026 to May 2029, and (iii) establishing a new €200.0 million term loan facility maturing May 2029 (the “New Euro Term Loan Facility”).
Borrowings under the Global Revolving Credit Facility bear interest at a per annum rate equal to (i) an applicable rate described in the table below plus (ii)(a) for U.S. dollar denominated loans, Term SOFR, Adjusted Daily Simple SOFR or the Base Rate (each as defined in the Global Revolving Credit Agreement), and (b) for Alternative Currency denominated loans, the Alternative Currency Term Rate or the Alternative Currency Daily Rate (each as defined in the Global Revolving Credit Agreement). Borrowings under the New Euro Term Loan Facility bear interest at a per annum rate equal to (i) an applicable rate described in the table below plus (ii) the Alternative Currency Term Rate applicable to Euro denominated loans. The Global Revolving Credit Agreement contains certain covenant restrictions, a consolidated net leverage ratio and an interest coverage ratio and customary events of default.
At May 26, 2024, we had $1,203.3 million of availability under the Global Revolving Credit Facility, which is net of outstanding letters of credit of $5.4 million.
Term Loan Facilities
On May 3, 2024, we entered into an amended and restated credit agreement (the “New Term Loan Credit Agreement”), which replaced our then-existing credit agreement, dated as of June 28, 2019 (as amended, the “Prior Term Loan Credit Agreement”). The Prior Term Loan Credit Agreement provided for, among other things, (i) a $300.0 million term loan facility due June 2026 (the “Term A-1 Loan Facility”), (ii) a $325.0 million term loan facility due April 2025 (the “Term A-2 Loan Facility”) and (iii) a $450.0 million term loan facility due January 2030 (the “Term A-3 Loan Facility”). The New Term Loan Credit Agreement modified the Prior Term Loan Credit Agreement for the purpose of, among other things, establishing an additional $325.0 million term loan facility due May 2029 (the “Term A-4 Loan Facility”). Borrowings under the Term A-4 Loan Facility were used in part to repay the Term A-2 Loan Facility in full. The Term A-1 Loan Facility and the Term A-3 Loan Facility both remain outstanding under the New Term Loan Credit Agreement.
Borrowings under the New Term Loan Credit Agreement bear interest, before anticipated patronage dividends, at a per annum rate equal to (i) an applicable rate described in the table below plus (ii) Adjusted Term SOFR, the Base Rate or, in the case of Term A-4 Loan Facility, the Fixed Rate (each as defined in the New Term Loan Credit Agreement). The New Term Loan Credit Agreement contains certain covenant restrictions, a consolidated net leverage ratio and an interest coverage ratio and customary events of default.
RMB Loan Facility
On February 18, 2022, our wholly owned subsidiary, Ulanqab Lamb Weston Food Co., Ltd., entered into a facility agreement providing for a RMB 1,079.0 million (approximately $149.0 million based on prevailing exchange rates on May 26, 2024) term loan facility (the “RMB Loan Facility”). The RMB Loan Facility matures on February 25, 2027. The RMB Loan Facility contains covenants that are standard for credit facilities originated in the People’s Republic of China. Payment obligations under the RMB Loan Facility are unconditionally guaranteed by Lamb Weston.
4.875% Senior Notes due 2028
In May 2020, we issued $500.0 million aggregate principal amount of 4.875% senior notes due May 15, 2028 (“2028 Notes”). Our obligations under the 2028 Notes are unconditionally guaranteed on a senior unsecured basis by the same subsidiaries as the Global Revolving Credit Facility. The 2028 Notes are senior unsecured obligations and rank equally with all of our current and future senior indebtedness (including the 2030 and 2032 Notes), rank senior to all our current and future subordinated indebtedness and are subordinated to all of our current and future secured indebtedness (including all borrowings with respect to the Global Revolving Credit Facility and Term A-1, A-3, and A-4 Loan Facilities
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to the extent of the value of the assets securing such indebtedness). Upon a change of control (as defined in the indenture governing the 2028 Notes), we must offer to repurchase the 2028 Notes at 101% of the principal amount of the notes, plus accrued and unpaid interest.
4.125% Senior Notes due 2030 and 4.375% Senior Notes due 2032
On November 8, 2021, we issued (i) $970.0 million aggregate principal amount of 4.125% senior notes due January 31, 2030 (“2030 Notes”) and (ii) $700.0 million aggregate principal amount of 4.375% senior notes due January 31, 2032 (“2032 Notes”) pursuant to indentures, each dated as of November 8, 2021 (together, the “Indentures”). Our obligations under the 2030 Notes and 2032 Notes are unconditionally guaranteed on a senior unsecured basis by the same subsidiaries as the Global Revolving Credit Facility.
The 2030 Notes and 2032 Notes are effectively subordinated to all of our existing and future secured debt, rank equally with all of our existing and future senior debt and rank senior to all of our existing and future subordinated debt. The guarantees of the 2030 Notes and 2032 Notes are effectively subordinated to all of the guarantors’ existing and future secured debt, rank equally with all of their existing and future senior debt and rank senior to all of their existing and future subordinated debt. The 2030 Notes and 2032 Notes are structurally subordinated to all of the liabilities of our non-guarantor subsidiaries.
Former Euro Revolving Credit Facility and Term Loan Facility
On May 3, 2024, in connection with our entry into the Global Revolving Credit Agreement, we terminated LW EMEA’s then-existing €400.0 million revolving credit facility (the “Euro Revolving Credit Facility”) and repaid LW EMEA’s then-existing €75.0 million term loan facility, due December 2024, in full.
Other Credit Facilities
At May 26, 2024 and May 28, 2023, two of our subsidiaries had $58.3 million and $51.0 million, respectively, of availability under their overdraft line of credit facilities with financial institutions, with borrowings outstanding of $35.0 million and $11.4 million, respectively. We guarantee the full amount of one of our subsidiaries’ obligations to the financial institutions up to the maximum amount of borrowings under the credit facility.
Variable Rate Interest
Additional information regarding our variable rate debt modifiers is shown below:
Reference Rate-Based Loans Base Rate-Based Loans
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(a)Borrowings under the Global Revolving Credit Facility have the same margin whether loans are denominated in U.S. dollars or non-U.S. currencies.
(b)The Term A-2 Loan Facility was repaid in full in connection with our entry into the New Term Loan Credit Agreement.
(c)The Term A-4 Loan Facility is considered fixed-rate debt, however, the last year of its term under the New Term Loan Credit Agreement will be variable-rate based, as noted above.
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Reference Rate-Based Loans PRC Prime Rate-Based Loans
RMB loan facility, due February 2027 N/A Prime + 0.300%
Euro term loan facility, due December 2024 (a) 0.400 - 1.100% N/A
Euro revolving credit facility (British Pound Loans) (b) 1.250 - 2.100% N/A
Euro revolving credit facility (Other Loans) (b) 1.050 - 1.900% N/A
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(a)The Euro term loan facility, due December 2024 was repaid in full in connection with our entry into the Global Revolving Credit Agreement.
(b)The Euro Revolving Credit Facility was terminated in connection with our entry into the Global Revolving Credit Agreement.
Debt Maturities
The aggregate minimum principal maturities of our long-term debt, including current portion, for the next five fiscal years and thereafter, are as follows:
(in millions) Debt (a)
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(a)See Note 7, Leases, for maturities of our lease financing obligations.
Other
During fiscal 2024, 2023, and 2022, we paid $191.3 million, $151.8 million, and $80.6 million, respectively, of interest on debt.
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7. LEASES
We lease various real estate, including certain operating facilities, warehouses, office space, and land. We also lease material handling equipment, vehicles, and certain other equipment. Our leases have remaining lease terms of one to 16 years.
The components of total lease costs, net, consisted of the following:
For the Fiscal Year Ended May (a)
Short-term and variable lease costs 15.6 10.4 7.8
Sublease income (4.7) (5.0) (4.9)
Finance lease costs:
Amortization of lease assets 1.4 1.0 1.1
Interest on lease obligations 0.3 0.2 0.2
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(a)Supply-chain-related lease costs are included in “Cost of sales,” and the remainder is recorded in “Selling, general and administrative expenses,” in our Consolidated Statements of Earnings. Interest on finance lease obligations is included in “Interest expense, net,” in our Consolidated Statements of Earnings.
Operating and finance leases, with initial terms greater than one year, were as follows:
Assets:
Operating lease assets Operating lease assets $ 133.0 $ 146.1
Finance lease assets Property, plant and equipment, net (a) 3.9 3.8
Liabilities:
Lease obligations due within one year:
Operating lease obligations Accrued liabilities $ 29.3 $ 28.5
Long-term lease obligations:
Operating lease obligations Other noncurrent liabilities 115.4 127.5
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(a)Finance leases are net of accumulated amortization of $8.2 million and $6.8 million at May 26, 2024 and May 28, 2023, respectively.
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The maturities of our lease obligations for operating and finance leases at May 26, 2024 for the next five fiscal years and thereafter are as follows: