Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations, which we refer to as “MD&A,” should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Statements and Supplementary Data" of this Quarterly Report on Form 10-Q (this "Form 10-Q") and the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2020 (the “Form 10-K”), which we filed with the U.S. Securities and Exchange Commission (“SEC”) on July 28, 2020.
Forward-Looking Statements
This report, including the MD&A, contains forward-looking statements within the meaning of the federal securities laws. Words such as “will,” “continue,” “may,” “expect,” ‘plan,” “anticipate,” “believe,” “estimate,” “support,” “impact,” “improve,” “enhance,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding our plans, execution, liquidity, dividends, share repurchases, capital expenditures, operational costs, ERP implementation and business outlook and prospects, as well as the impact of the COVID-19 pandemic on the industry and consumer demand. These forward-looking statements are based on management’s current expectations and are subject to uncertainties and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These risks and uncertainties include, among other things: impacts on our business due to health pandemics or other contagious outbreaks, such as the current COVID-19 pandemic, including impacts on demand for our products, increased costs, disruption of supply or other constraints in the availability of key commodities and other necessary services; our ability to successfully execute our long-term value creation strategies; our ability to execute on large capital projects, including construction of new production lines; the competitive environment and related conditions in the markets in which we and our joint ventures operate; political and economic conditions of the countries in which we and our joint ventures conduct business and other factors related to our international operations; disruption of our access to export mechanisms; risks associated with possible acquisitions, including our ability to complete acquisitions or integrate acquired businesses; our debt levels; the availability and prices of raw materials; changes in our relationships with our growers or significant customers; the success of our joint ventures; actions of governments and regulatory factors affecting our businesses or joint ventures; the ultimate outcome of litigation or any product recalls; levels of pension, labor and people-related expenses; our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and other risks described in our reports filed from time to time with the U.S. Securities and Exchange Commission (“SEC”). We caution readers not to place undue reliance on any forward-looking statements included in this report, which speak only as of the date of this report. We undertake no responsibility for updating these statements, except as required by law.
Overview
Lamb Weston Holdings, Inc. (“we,” “us,” “our,” “the Company,” or “Lamb Weston”), along with our joint ventures, is a leading global producer, distributor, and marketer of value-added frozen potato products. We, along with our joint ventures, are the number one supplier of value-added frozen potato products in North America and a leading supplier of value-added frozen potato products internationally, with a strong and growing presence in high-growth emerging markets. We, along with our joint ventures, offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our value-added frozen potato product portfolio.
This MD&A is provided as a supplement to the consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. Our MD&A is based on financial data derived from the financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and certain other financial data (EBITDA and EBITDA including unconsolidated joint ventures) that is prepared using non-GAAP measures. Refer to “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” below for the definitions of EBITDA and EBITDA including unconsolidated joint ventures, and a reconciliation of these non-GAAP financial measures to net income.
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Executive Summary
Lamb Weston’s financial performance in the second quarter of fiscal 2021 reflects the COVID-19 pandemic’s negative impact on frozen potato demand in our food-away-from-home sales channels. While demand trends have improved in both our food-away-from-home and food-at-home sales channels since the end of fiscal 2020, it remains below pre-pandemic levels. As a result, our sales and earnings in the fiscal second quarter declined as compared to the second quarter of fiscal 2020. Specifically:
● Net sales declined 12% to $896.1 million
● Income from operations declined 28% to $139.6 million
● Net income declined 31% to $96.9 million
● Diluted earnings per share declined 31% to $0.66
● EBITDA including unconsolidated joint ventures declined 18% to $213.2 million
Compared with the second quarter of fiscal 2020, price/mix increased, largely due to higher prices in our Foodservice and Retail segments and improved mix in our Retail segment. Our sales volume declined as demand for frozen potato products outside the home declined after government-imposed social restrictions to slow the spread of COVID-19 reduced restaurant traffic and included restrictions for on-premise dining. In addition, the onset of colder weather during the quarter tempered demand by limiting outdoor dining traffic across many U.S. markets. Income from operations declined due to lower sales and higher production costs, which were largely due to incremental costs resulting from the pandemic’s effect on our manufacturing and supply chain operations, costs related to processing raw potatoes out of storage longer than in prior years, and input cost inflation. The earnings decline was partially offset by lower selling, general and administrative costs (“SG&A”).
We expect that we will continue to incur additional costs as a result of the pandemic’s impact on our manufacturing, supply chain, commercial and functional support operations (“COVID-related costs”) at least through the remainder of fiscal 2021. These costs may include, but are not limited to, costs to shut down, sanitize, and restart production facilities after a production employee has been infected by the virus; production inefficiencies and labor retention costs arising from modifying production schedules, reducing run-times, and lower overall factory utilization; costs to adopt and maintain enhanced employee safety and sanitation protocols, such as purchasing personal protection and health screening equipment and services; costs related to processing raw potatoes out of storage longer than prior years; and incremental warehousing and transportation costs.
We also expect that the pandemic will continue to have an impact on the U.S. and global economies, global consumer demand for frozen potato products, and on our business and financial results for at least the remainder of fiscal 2021. While the impact is uncertain, we continue to closely monitor the global french fry industry, including consumer reaction and demand. During the second quarter, we observed the following:
● In the U.S., overall restaurant traffic and demand for frozen potato products largely stabilized at approximately 90% of pre-pandemic levels. Traffic at large, quick service chain restaurants (“QSRs”) were essentially at prior-year levels by continuing to leverage drive-thru and delivery formats. Traffic at full-service restaurants weakened from 70% to 80% of prior-year levels during most of the first two months of the quarter to 60% to 70% of prior-year levels during the latter weeks of the quarter, related to governments reimposing social and on-premise dining restrictions, as well as reduced outdoor dining due to the onset of colder weather across many markets. Demand by our non-commercial customers (i.e., lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) remained approximately 50% below prior-year levels. In contrast, demand for retail frozen potato products remained strong along with overall food-at-home consumption with the adoption of government-imposed social restrictions. We continue to expect traffic and demand at full-service restaurants and non-commercial operations to be more vulnerable than at QSRs, especially as governments continue to impose social restrictions, and as options for outdoor dining become more limited during colder weather months in our third quarter.
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● In Europe, which is served by our Lamb-Weston/Meijer joint venture, demand for frozen potato products approached prior-year levels during the first half of the quarter, but softened to 75% to 85% of prior-year levels during much of the second half of the quarter, related to governments reimposing social and on-premise dining restrictions, as well as reduced outdoor dining due to the onset of colder weather across many markets. Since most consumption in Europe is dine-in or carry-out as QSR drive-thru options are more limited, we anticipate that demand will continue to be tempered as governments continue to impose social restrictions, and as options for outdoor dining become more limited during colder weather months in our third quarter.
● Demand improvement in our other key international markets was mixed. In China and Australia, demand for frozen potatoes stabilized at near prior-year levels. In our other key markets, which are primarily in Asia and Latin America, demand improved sequentially, but remained well below prior-year levels.
While the near-term impact of the pandemic on demand and sales volume is likely to be material, we believe we have sufficient liquidity to manage through the uncertainty. In the first half of fiscal 2021, we generated $318.8 million of cash from operations, down 8% as compared to the first half of fiscal 2020, and we paid $67.2 million of cash dividends to shareholders. In December 2020, we announced a two-cent annual increase to our quarterly dividend. In addition, we plan to resume our share repurchase program, which we suspended at the onset of the COVID-19 pandemic to preserve liquidity. The timing and amount of share repurchases will be subject to our evaluation of market conditions, applicable legal requirements, and other factors.
As discussed above, the government-imposed severe social and business restrictions, including closing or partially closing restaurants and other foodservice operations, have led to a decrease in consumer and customer demand for our products. In response, we have taken actions, and will continue to evaluate various options, to lower our cost structure and maximize the efficiency of our manufacturing and commercial operations, including temporarily closing facilities and/or modifying production schedules to rebalance utilization rates across our manufacturing network. During these uncertain times, our top priorities are to ensure the health and welfare of our employees, maintain product safety, and continue to support our customers as they manage their supply chains and inventories.
We believe that the possibility of wide availability of government-approved COVID-19 vaccines by mid-calendar 2021 may allow governments to gradually ease broad social restrictions in their respective jurisdictions, which would likely have a favorable impact on restaurant traffic. In the coming months, we anticipate facing challenging and volatile operating conditions until the virus is broadly contained, and that demand may soften, especially at full-service restaurants, as governments continue to impose broad social restrictions and as colder weather limits outdoor dining. However, we believe that global restaurant traffic will improve through calendar year 2021, which will lead to overall frozen potato demand approaching pre-pandemic levels, on a run-rate basis, by the end of the calendar year.
Operating Results
We have four reportable segments: Global, Foodservice, Retail, and Other. We report product contribution margin by segment. Product contribution margin is the primary measure reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Product contribution margin represents net sales less cost of sales and advertising and promotion expenses. Product contribution margin includes advertising and promotion expenses because the amounts are directly associated with segment performance; it excludes general corporate expenses and interest expense because management believes these amounts are not directly associated with segment performance. For additional information on our reportable segments and product contribution margin, see Note 13, Segments, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report.
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Thirteen Weeks Ended November 29, 2020 compared to Thirteen Weeks Ended November 24, 2019 (dollars in millions)
Net Sales and Product Contribution Margin
Thirteen Weeks Ended
November 29,
November 24,
%
2020
2019
Inc/(Dec)
Segment sales
Global
$
475.9
$
539.6
(12%)
Foodservice
241.1
304.9
(21%)
Retail
140.7
132.1
7%
Other
38.4
42.6
(10%)
$
896.1
$
1,019.2
(12%)
Segment product contribution margin
Global
$
92.7
$
128.9
(28%)
Foodservice
87.7
111.3
(21%)
Retail
30.1
28.5
6%
Other
10.5
10.4
1%
221.0
279.1
(21%)
Advertising and promotion expenses
2.5
6.0
(58%)
Gross profit
$
223.5
$
285.1
(22%)
Net Sales
Compared to the prior-year quarter, Lamb Weston’s net sales for the second quarter of fiscal 2021 declined $123.1 million, or 12%, to $896.1 million. Volume declined 14%, predominantly due to the decline in demand for frozen potato products outside the home following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19, as well as the effect of colder weather, which limited outdoor dining traffic across many U.S. markets. In addition, the volume decline reflected the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter. Price/mix increased 2%, largely due to higher prices in our Foodservice and Retail segments and improved mix in our Retail segment.
Global segment net sales declined $63.7 million, or 12%, to $475.9 million. Volume declined 11%, primarily due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and other foodservice-related traffic in the U.S. and in most of our key international markets. The volume decline also reflected the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter. Price/mix declined 1% as a result of negative mix.
Foodservice segment net sales declined $63.8 million, or 21%, to $241.1 million. Volume declined 25% due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and non-commercial customers, such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments, as well as the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter. Volume trends weakened during the latter weeks of the quarter, reflecting the effect on restaurant traffic, especially at full-service restaurants, of government-imposed social restrictions and colder weather on outdoor dining. Price/mix increased 4%, reflecting the carryover benefit of pricing actions implemented during fiscal 2020, partially offset by unfavorable mix as sales of Lamb Weston branded and premium products softened.
Retail segment net sales increased $8.6 million, or 7%, to $140.7 million. Price/mix increased 7%, largely driven by favorable mix from increased sales of branded products. Volume increased nominally as strong growth in shipments of premium and mainstream branded offerings, which have historically comprised approximately 40% of the segment’s shipments, were offset by a decline in shipments of private label products, which reflects incremental losses of certain low-
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margin private label business, as well as the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter.
Net sales in our Other segment declined $4.2 million, or 10%, to $38.4 million, compared with $42.6 million in the second quarter of fiscal 2020, as lower volumes in our vegetable business more than offset favorable price/mix.
Product Contribution Margin
Lamb Weston’s product contribution margin declined $58.1 million, or 21%, to $221.0 million in the second quarter of fiscal 2021. The decline was driven by lower sales due to the pandemic, as well as higher manufacturing costs, which were largely due to COVID-related costs (as described above), and input cost inflation.
Global segment product contribution margin declined $36.2 million, or 28%, to $92.7 million in the second quarter of fiscal 2021. Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline. Global segment cost of sales was $382.4 million, down 7% compared to the second quarter of fiscal 2020, primarily due to lower sales volumes, partially offset by the higher manufacturing costs described above.
Foodservice segment product contribution margin declined $23.6 million, or 21%, to $87.7 million in the second quarter of fiscal 2021. Lower sales volumes, higher manufacturing costs, and unfavorable mix drove the decline, partially offset by favorable price. Cost of sales was $152.5 million, down 21% compared to the second quarter of fiscal 2020, due to lower sales volumes, partially offset by the higher manufacturing costs described above.
Retail segment product contribution margin increased $1.6 million, or 6%, to $30.1 million in the second quarter of fiscal 2021. Favorable mix and $2.4 million of lower advertising and promotional expenses drove the increase. Cost of sales was $109.8 million, up 9% compared to the second quarter of fiscal 2020, primarily due to higher sales volume and the higher manufacturing costs described above.
Other segment product contribution margin increased $0.1 million, or 1%, to $10.5 million in the second quarter of fiscal 2021. These amounts include a $4.3 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the second quarter of fiscal 2021, and a $4.2 million gain related to the contracts in the prior year period. Excluding these adjustments, Other segment product contribution margin was flat, as the impact of lower sales volumes in our vegetable business was offset by the benefit of favorable price/mix.
Selling, General and Administrative Expenses
Compared with the prior-year period, selling, general and administrative expenses declined $7.7 million, or 8%, to $83.9 million, largely due to lower incentive compensation expense accruals and a $3.5 million decline in advertising and promotional expenses. The decline in SG&A was partially offset by investments to improve our operations and information technology infrastructure, which included approximately $5 million of non-recurring expenses (primarily consulting and employee training expenses) associated with implementing the first phase of a new enterprise resource planning (“ERP”) system.
Interest Expense, Net
Compared with the prior-year quarter, interest expense, net in the second quarter of fiscal 2021 increased $4.6 million to $30.0 million. The increase reflected higher average total debt versus the prior year resulting from our actions to enhance our liquidity position, as well as the write-off of $1.0 million of debt issuance costs related to paying off a term loan facility that was due in November 2021. For more information see “Liquidity and Capital Resources” in this MD&A.
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Income Tax Expense
Income tax expense for the second quarter of fiscal 2021 and 2020 was $31.9 million and $42.7 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 24.8% and 23.3% for the second quarter of fiscal 2021 and 2020, respectively, in our Consolidated Statements of Earnings. The effective tax rate varies from the U.S. statutory tax rate of 21% principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items.
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in Europe, the U.S., and South America and include our share of the earnings based on our economic ownership interest in them. Our share of earnings from our equity method investments was $19.2 million and $15.0 million for the second quarter of fiscal 2021 and 2020, respectively. Equity method investment earnings included a $0.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in the second quarter of fiscal 2021, compared to a $2.7 million unrealized loss related to the contracts in the second quarter of fiscal 2020. Excluding the mark-to-market adjustments, earnings from equity method investments increased $1.6 million compared to the prior year period, largely due to improved performance in Europe, although demand in Europe softened during the latter half of the quarter, reflecting the negative impact on restaurant traffic at full-service restaurants related to governments reimposing social and on-premise dining restrictions, as well as reduced outdoor dining due to the onset of colder weather across many markets.
Twenty-Six Weeks Ended November 29, 2020 compared to Twenty-Six Weeks Ended November 24, 2019 (dollars in millions)
Net Sales and Product Contribution Margin
Twenty-Six Weeks Ended
November 29,
November 24,
%
2020
2019
Inc/(Dec)
Segment sales
Global
$
923.4
$
1,057.2
(13%)
Foodservice
477.8
610.3
(22%)
Retail
294.6
261.4
13%
Other
71.8
79.3
(9%)
$
1,767.6
$
2,008.2
(12%)
Segment product contribution margin
Global
$
170.5
$
231.6
(26%)
Foodservice
173.5
213.8
(19%)
Retail
65.9
57.4
15%
Other
23.7
20.1
18%
433.6
522.9
(17%)
Advertising and promotion expenses
3.7
10.8
(66%)
Gross profit
$
437.3
$
533.7
(18%)
Net Sales
Compared with the prior-year period, Lamb Weston’s net sales for the first half of fiscal 2021 declined $240.6 million, or 12%, to $1,767.6 million. Volume declined 14%, reflecting the decline in demand for frozen potato products outside the home following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19, as well as the effect of colder weather, which limited outdoor dining traffic across many U.S. markets during the latter months of the first half of fiscal 2021. The decline was partially offset by increased sales volume in our Retail segment. Price/mix increased 2% due to improved price/mix in the Foodservice and Retail segments.
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Global segment net sales declined $133.8 million, or 13%, to $923.4 million. Volume declined 12%, primarily due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and other foodservice-related traffic in the U.S. and in most of our key international markets. Price/mix declined 1% as a result of negative mix.
Foodservice segment net sales declined $132.5 million, or 22%, to $477.8 million. Volume decreased 27% due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and non-commercial customers, such as lodging and hospitality, schools and universities, sports and entertainment, and workplace environments. Volume trends weakened during the latter weeks of the quarter, reflecting the negative impact on restaurant traffic, especially at full-service restaurants, related to government-imposed social restrictions and reduced outdoor dining due to the onset of colder weather. Price/mix increased 5%, reflecting the carryover benefit of pricing actions implemented during fiscal 2020, partially offset by unfavorable mix as sales of Lamb Weston branded and premium products softened.
Retail segment net sales increased $33.2 million, or 13%, to $294.6 million. Price/mix increased 7%, largely driven by favorable mix from increased sales of branded products. Volume increased 6% due to increased sales of frozen potato products for in-home consumption following government-imposed social restrictions. Sales volumes of premium and mainstream branded offerings more than offset the decline in sales volumes of private label products, which reflects incremental losses of certain low-margin private label business.
Net sales in our Other segment declined $7.5 million, or 9%, to $71.8 million, compared with $79.3 million in the first half of fiscal 2020, largely due to lower volumes in our vegetable business, partially offset by favorable price/mix.
Product Contribution Margin
Compared with the prior-year period, Lamb Weston’s product contribution margin for the first half of fiscal 2021 declined $89.3 million, or 17%, to $433.6 million. The decline was driven by lower sales due to the pandemic, as well as higher manufacturing costs, which were largely due to COVID-related costs, and input cost inflation.
Global segment product contribution margin declined $61.1 million, or 26%, to $170.5 million in the first half of fiscal 2021. Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline. Global segment cost of sales was $751.8 million, down 9% compared to the first half of fiscal 2020, primarily due to lower sales, partially offset by the higher manufacturing costs described above.
Foodservice segment product contribution margin declined $40.3 million, or 19%, to $173.5 million in the first half of fiscal 2021. Lower sales volumes, higher manufacturing costs, and unfavorable mix drove the decline, partially offset by favorable price. Cost of sales was $302.9 million, down 23% compared to the first half of fiscal 2020, due to lower sales volumes, partially offset by the higher manufacturing costs described above.
Retail segment product contribution margin increased $8.5 million, or 15%, to $65.9 million in the first half of fiscal 2021. Higher sales volumes, favorable mix and a $4.3 million decline in advertising and promotional expenses drove the increase, which was partially offset by higher manufacturing costs. Cost of sales was $227.8 million, up 15% compared to the first half of fiscal 2020, primarily due to higher sales volume and the higher manufacturing costs described above.
Other segment product contribution margin increased $3.6 million to $23.7 million, as compared with $20.1 million in the first half of fiscal 2020. These amounts include a $12.1 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the first half of fiscal 2021, and a $7.3 million gain related to the contracts in the first half of fiscal 2020. Excluding these adjustments, Other segment product contribution margin declined $1.2 million, largely due to higher costs in our vegetable business.
Selling, General and Administrative Expenses
Compared with the prior-year period, selling, general and administrative expenses declined $8.2 million, or 5%, to $162.0 million. The decline was largely driven by lower incentive compensation expense, cost management efforts, and
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a $7.1 million decline in advertising and promotional expenses, which more than offset investments to improve our operations and information technology infrastructure, which included approximately $6 million of non-recurring expenses (primarily consulting and employee training expenses) associated with implementing the first phase of a new ERP system.
Interest Expense, Net
Compared with the prior-year period, interest expense, net increased $6.7 million to $60.3 million. The increase reflected higher average total debt versus the prior year resulting from our actions to enhance our liquidity position, as well as the write-off of $1.0 million of debt issuance costs related to paying off a term loan facility that was due in November 2021. For more information see “Liquidity and Capital Resources” in this MD&A.
Income Tax Expense
Income tax expense for the first half of fiscal 2021 and 2020 was $59.9 million and $79.4 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 24.3% and 23.7% for the first half of fiscal 2021 and 2020, respectively, in our Consolidated Statements of Earnings. The effective tax rate varies from the U.S. statutory tax rate of 21% principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items.
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in Europe, the U.S., and South America and include our share of the earnings based on our economic ownership interest in them. Our share of earnings from our equity method investments was $31.1 million and $25.6 million for the first half of fiscal 2021 and 2020, respectively. Equity method investment earnings included a $4.6 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the first half of fiscal 2021, compared to a $1.6 million unrealized loss related to the contracts in the first half of fiscal 2020. Excluding the mark-to-market adjustments, earnings from equity method investments declined $0.7 million compared to the prior year period, largely reflecting the impact of lower sales following government-imposed restrictions on restaurant and other foodservice operations as well as COVID-related costs in Europe.
Liquidity and Capital Resources
Sources and Uses of Cash
The current COVID-19 pandemic has disrupted our business and operating results. As a result of the uncertainties caused by the pandemic, we have taken, and are continuing to take, actions to enhance liquidity. We limited discretionary expenses across the Company and implemented a hiring and salary freeze for our U.S. salaried positions. In September 2020, we amended our credit agreement to increase available borrowings under our revolving credit facility from $500.0 million to $750.0 million and extended the maturity date to September 2023. In connection with the amendment, we used cash on hand to repay the $271.9 million term loan facility due in November 2021. Considering the current environment, with a significant number of employees working remotely, we have also deferred the second phase of our new ERP system implementation. As a result of our actions, our cash and cash equivalents balance was $763.9 million at November 29, 2020.
We believe our cash on hand, cash flows from operations and our current credit facilities will be sufficient to satisfy our future working capital requirements, interest payments, capital expenditures, dividends on our common stock, and other financing requirements for the foreseeable future. While we expect increased availability of COVID-19 vaccines to enable a gradual return of consumer french fry demand as our fiscal year progresses, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. If we are unable to generate sufficient cash flows from operations, or are otherwise unable to comply with the terms of our credit facilities, we may be required to seek additional financing alternatives, which may require waivers under our credit agreements governing our senior secured debt and indentures governing our senior notes, in order to generate additional cash. There can be no assurance that we would be able to obtain additional financing or any such
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waivers on terms acceptable to us or at all. For additional information on our debt, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and Note 9, Debt and Financing Obligations, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K.
Cash Flows
Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities (dollars in millions):
Twenty-Six Weeks Ended
November 29,
November 24,
Provided by
2020
2019
(Used for)
Net cash flows provided by (used for):
Operating activities
$
318.8
$
345.3
$
(26.5)
Investing activities
(53.3)
(240.2)
186.9
Financing activities
(867.2)
(93.6)
(773.6)
(601.7)
11.5
(613.2)
Effect of exchange rate changes on cash and cash equivalents
1.6
0.1
1.5
Net increase (decrease) in cash and cash equivalents
$
(600.1)
$
11.6
$
(611.7)
Operating Activities
In the first half of fiscal 2021, cash provided by operating activities decreased $26.5 million to $318.8 million, compared with $345.3 million in the same period a year ago. The decrease related to an $85.2 million decrease in income from operations, adjusted for non-cash income and expenses, partially offset by $58.7 million of cash provided by favorable changes in working capital. Lower income from operations in the first half of fiscal 2021 related to government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19. See “Operating Results” in this MD&A for more information. Favorable changes in working capital primarily related to lower sales and therefore, lower receivables in the first half of fiscal 2021, compared with the same period in fiscal 2020, and the timing of the collection of accounts receivable. Also contributing to favorable working capital changes was an increase in income taxes and accounts payable, due to timing. This favorability was partially offset by a decrease in rebate accruals due primarily to lower sales in fiscal 2021, relative to fiscal 2020 and a larger finished goods inventory build in the first half of fiscal 2021, compared with fiscal 2020, due to the abnormally low finished goods inventories at the end of fiscal 2020, as we balanced production with declining demand resulting from the impact of the COVID-19 pandemic, and decreases in other accrued liabilities.
Investing Activities
Investing activities used $53.3 million of cash in the first half of fiscal 2021, compared with $240.2 million in the same period in the prior year. Excluding the $116.7 million of cash used for the acquisition of a frozen potato processor in Australia in the prior year, cash used for investing activities decreased $70.2 million, compared with the first half of fiscal 2020. The decrease related to our efforts to preserve liquidity during the COVID-19 pandemic. Cash used for capital investing activities in fiscal 2021, including information technology expenditures, is expected to be $180 million, reflecting investments in productivity, optimization and growth capacity projects. These expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, including the impact of COVID-19, and our regulatory compliance requirements.
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Financing Activities
During the first half of fiscal 2021, cash used for financing activities increased $773.6 million to $867.2 million, compared with $93.6 million during the same period a year ago. During the first half of fiscal 2021, financing activities primarily related to the repayment of $498.8 million of short-term borrowings, $289.6 million of debt and financing obligations repayments, which includes the repayment of the $271.9 million term loan facility due in November 2021, the payment of $67.2 million in cash dividends to common stockholders, and $2.8 million of debt issuance costs primarily related to amending our credit agreement in September 2020 to increase available borrowings under our revolving credit facility from $500.0 million to $750.0 million and extending the maturity to September 2023. Financing activities also included $9.8 million for the repurchase of 156,506 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In December 2020, we announced a two-cent annual increase to our quarterly dividend. In addition, we plan to resume our share repurchase program, which we suspended at the onset of the COVID-19 pandemic to preserve liquidity. These actions reflect our belief in the long-term strength of our business.
During the first half of fiscal 2020, financing activities primarily related to $318.1 million of debt and financing obligation repayments, $299.3 million of net proceeds from the issuance of debt related to refinancing $300.0 million of the $599.1 million term loan facility outstanding at May 26, 2019, the payment of $58.5 million in cash dividends to common stockholders, $1.4 million of short-term borrowings and $17.8 million in cash used to repurchase 185,200 shares of our common stock, including tax withholdings in connection with vesting of restricted stock.
For more information about our debt, interest rates, maturity dates, and covenants, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and Note 9, Debt and Financing Obligations of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of the Form 10-K. At November 29, 2020, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.
Obligations and Commitments
Except for the $271.9 million repayment in September 2020 of the term loan facility due in 2021, there have been no material changes to the contractual obligations disclosed in “Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
To supplement the financial information included in this report, we have presented EBITDA and EBITDA including unconsolidated joint ventures, each of which is a non-GAAP financial measure.
Lamb Weston’s management uses EBITDA and EBITDA including unconsolidated joint ventures to evaluate the Company’s performance. The Company includes these non-GAAP financial measures because management believes they are useful to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision making. We believe that the presentation of these non-GAAP financial measures, when used in conjunction with GAAP financial measures, is a useful financial analysis tool that can assist investors in assessing the Company’s operating performance and underlying prospects. These non-GAAP financial measures should be viewed in addition to, and not as alternatives for, financial measures prepared in accordance with GAAP. These non-GAAP financial measures may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures the same way. These measures are not a substitute for their comparable GAAP financial measures, such as net income, and there are limitations to using non-GAAP financial measures.
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The following table reconciles net income to EBITDA and EBITDA including unconsolidated joint ventures (dollars in millions):
Thirteen Weeks Ended
Twenty-Six Weeks Ended
November 29,
November 24,
November 29,
November 24,
2020
2019
2020
2019
Net income
$
96.9
$
140.4
$
186.2
$
256.1
Equity method investment earnings
(19.2)
(15.0)
(31.1)
(25.6)
Interest expense, net
30.0
25.4
60.3
53.6
Income tax expense
31.9
42.7
59.9
79.4
Income from operations
139.6
193.5
275.3
363.5
Depreciation and amortization
46.6
44.7
92.2
87.8
EBITDA
186.2
238.2
367.5
451.3
Unconsolidated Joint Ventures
Equity method investment earnings
19.2
15.0
31.1
25.6
Interest expense, income tax expense, and depreciation and
amortization included in equity method investment earnings
7.8
7.7
16.4
16.9
Add: EBITDA from unconsolidated joint ventures
27.0
22.7
47.5
42.5
EBITDA including unconsolidated joint ventures
$
213.2
$
260.9
$
415.0
$
493.8
Off-Balance Sheet Arrangements
There have been no material changes to the off-balance sheet arrangements disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Form 10-K.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K. There were no material changes to these critical accounting estimates during the first half of fiscal 2021.
New and Recently Adopted Accounting Pronouncements
For a list of our new and recently adopted accounting pronouncements, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.