Lamb Weston Holdings, Inc. 10-Q

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 Information" of this Quarterly Report on Form 10-Q (this “Form 10-Q”) and in “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for the fiscal year ended May 26, 2024 (the “Form 10-K”), which we filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on July 24, 2024. 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,” “anticipate,” “would,” “believe,” “reduce,” “estimate,” “drive,” “increase,” “invest,” “improve,” “generate,” “create,” “target,” “outlook,” 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 business and financial outlook and prospects, our plans and strategies and anticipated benefits therefrom, including with respect to the Restructuring Plan (as defined below), expected completion and impacts of restructuring activities and cost-savings or efficiency initiatives, capital expenditures and investments, pricing actions, operational costs, cash flows, liquidity, dividends, share repurchases, conditions in our operating environment, industry and the global economy. 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 these forward-looking statements and 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: consumer preferences, including restaurant traffic in North America and our international markets, and an uncertain general economic environment, including inflationary pressures and recessionary concerns, any of which could adversely impact our business, financial condition or results of operations, including the demand and prices for our products; the availability and prices of raw materials and other commodities; operational challenges; our ability to successfully implement the Restructuring Plan, including achieving the benefits of restructuring activities and cost-saving or efficiency initiatives and possible changes in the size and timing of related charges; difficulties, disruptions or delays in implementing new technology, such as our new enterprise resource planning (“ERP”) system; levels of labor and people-related expenses; 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 or facilities; the competitive environment and related conditions in the markets in which we operate; political and economic conditions of the countries in which we conduct business and other factors related to our international operations; disruptions in the global economy caused by conflicts such as the war in Ukraine and conflicts in the Middle East and the possible related heightening of our other known risks; the ultimate outcome of litigation or any product recalls or withdrawals; changes in our relationships with our growers or significant customers; impacts on our business due to health pandemics or other contagious outbreaks, such as the COVID-19 pandemic, including impacts on demand for our products, increased costs, disruption of supply, other constraints in the availability of key commodities and other necessary services or restrictions imposed by public health authorities or governments; disruption of our access to export mechanisms; risks associated with integrating acquired businesses, including our former European joint venture, Lamb-Weston/Meijer v.o.f. (“LW EMEA”); risks associated with other possible acquisitions; our debt levels; actions of governments and regulatory factors affecting our businesses; 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 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”) 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 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 the majority of our value-added frozen potato product portfolio. 19 Table of Contents 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 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 Restructuring Expense, and Adjusted Equity Method Investment Earnings, 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, and Adjusted Equity Method Investment Earnings, and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, net income, gross profit, SG&A, or equity method investment earnings, as applicable. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below. Restructuring Plan On October 1, 2024, we announced a restructuring plan (the “Restructuring Plan”) that is designed to drive operational and cost efficiencies and improve cash flows. The Restructuring Plan includes the permanent closure of a manufacturing facility, the temporary curtailment of certain production lines and schedules across our manufacturing network in North America, and reductions in employee headcount, other operating expenses, and capital expenditures. In connection with the Restructuring Plan, we expect to recognize total pre-tax charges of $190 million to $210 million. Any changes to estimates or timing will be reflected in our results of operations in future periods. We expect actions in connection with the Restructuring Plan will be substantially complete by the end of the fourth quarter of fiscal 2025. We estimate that the Restructuring Plan will generate approximately $55 million in pre-tax cost savings and reduce working capital in fiscal 2025. Net income (loss) for the thirteen and twenty-six weeks ended November 24, 2024 included: • $159.1 million ($123.6 after-tax, or $0.86 per share) of pre-tax charges, of which $114.5 million were cash expenses and $44.6 million of non-cash expenses; ◦ $75.5 million ($57.4 million after-tax, or $0.40 per share) was included in Cost of sales; ◦ $74.6 million ($59.3 million after-tax, or $0.41 per share) was included in Restructuring expense; and ◦ $9.0 million ($6.9 million after-tax, or $0.05 per share) was included in Equity method investment earnings. For more information related to the Restructuring Plan, see Note 4, Restructuring Plan, in this report. Executive Summary In a challenging operating environment, we delivered second quarter financial results that were below our expectations, largely due to higher-than-expected manufacturing costs and softer-than-expected volumes, while our results for price/mix and operating expenses were broadly in line with our expectations. We expect challenging conditions to persist through the remainder of fiscal 2025, as weak restaurant traffic trends and incremental french fry capacity expansions have added to an imbalance in global industry supply and demand, especially outside of North America. We expect our earnings in the second half of fiscal 2025 will decline as compared to the prior year period as a result of investments in price, costs associated with the Restructuring Plan, and higher manufacturing costs per pound will more than offset volume growth and cost-savings initiatives. We anticipate that input costs, in the aggregate, will continue to rise, but at a more moderate rate compared to the first half of fiscal 2025. We expect that an increase in SG&A and Restructuring expense will primarily reflect charges associated with the Restructuring Plan, incremental non-cash amortization of prior investments in our ERP infrastructure, and inflation, though we expect this increase will be partially offset by cost savings from the Restructuring Plan and other cost-savings initiatives. We continue to take prudent steps to adapt to the dynamic operating environment. In addition to the cost benefits we expect to realize from our Restructuring Plan, we are evaluating other cost-saving and productivity initiatives to improve our operating efficiency, profitability, and cash flows, while also positioning us to continue to support our customers and create value for our stakeholders over the long-term. 20 Table of Contents Results of Operations Thirteen Weeks Ended November 24, 2024 compared to Thirteen Weeks Ended November 26, 2023 Net Sales and Segment Adjusted EBITDA Thirteen Weeks Ended (in millions, except percentages) November 24, 2024 November 26, 2023 % Increase (Decrease) Segment net sales North America $ 1,072.1 $ 1,167.1 (8)% International 528.8 565.0 (6)% $ 1,600.9 $ 1,732.1 (8)% Segment Adjusted EBITDA North America $ 266.7 $ 321.3 (17)% International 47.4 100.2 (53)% Net Sales Compared to the prior year quarter, net sales for the second quarter of fiscal 2025 declined $131.2 million, or 8%, to $1,600.9 million. Volume declined 6%, largely reflecting the impact of soft global restaurant traffic trends; customer share losses, net of gains; and the carryover effect of our decision in the prior year to exit certain lower-priced and lower-margin business in Europe to strategically manage customer and product mix. Price/mix declined 2%, reflecting planned investments in price and trade support to attract and retain volume in North America, pricing actions in key international markets in response to a more competitive environment, and unfavorable channel and product mix. The decline in price/mix was partially offset by the benefit of inflation-driven pricing actions in EMEA. North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, declined $95.0 million, or 8%, to $1,072.1 million. Volume declined 5%, largely reflecting the impact of declining restaurant traffic in the U.S. and customer share losses in away-from-home channels. Price/mix declined 3%, due to planned investments in price and trade support across all sales channels to attract and retain volume, as well as unfavorable channel and product mix. International segment net sales, which includes all sales to customers outside of North America, declined $36.2 million, or 6%, to $528.8 million. Volume declined 6%, largely reflecting declining or softening restaurant traffic in key international markets; the impact of customer share losses, net of gains; and the carryover effect of our decision in the prior year to exit certain lower-priced and lower-margin business in Europe. Price/mix was flat with the prior year quarter as pricing actions in key international markets, in response to a more competitive environment, were offset by the benefit of inflation-driven pricing actions in EMEA. Gross Profit Gross profit declined $197.8 million versus the prior year quarter to $277.8 million, and included $75.5 million of pre-tax charges ($57.4 million after-tax, or $0.40 per share) related to the Restructuring Plan, and $9.8 million ($7.3 million after-tax, or $0.05 per share) of unrealized gains related to mark-to-market adjustments associated with commodity hedging contracts. The prior year quarter included $4.6 million ($3.5 million after-tax, or $0.02 per share) of unrealized losses related to mark-to-market adjustments associated with commodity hedging contracts, and $1.8 million of benefit ($1.3 million after-tax, or $0.01 per share) associated with the sale of inventory stepped-up to fair value following our acquisition of the remaining interest in Lamb-Weston/Meijer v.o.f. (“LW EMEA”), our former joint venture in Europe. 21 Table of Contents Adjusted Gross Profit declined $134.9 million versus the prior year quarter to $343.5 million due to unfavorable price/mix, higher manufacturing costs per pound, and lower sales volumes. The higher manufacturing costs per pound largely reflected input cost inflation, which was primarily driven by higher raw potato costs; utilization-related production costs and inefficiencies; higher transportation and warehousing costs; and $15.8 million of higher depreciation expense largely associated with our recent capacity expansions in China and the U.S. Manufacturing costs in the prior year quarter included a $64.6 million pre-tax charge for the write-off of excess raw potatoes. Selling, General and Administrative Expenses SG&A increased $14.7 million versus the prior year quarter to $184.7 million including a gain of $3.3 million (before and after-tax, or $0.02 per share) related to blue chip swap transactions in Argentina; $9.6 million ($7.2 million after-tax, or $0.05 per share) of foreign currency exchange losses; $12.8 million ($9.5 million after-tax, or $0.07 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts; and $0.4 million ($0.3 million after-tax, no per share impact) of expenses related to ongoing shareholder activism matters. The prior year quarter included a gain of $7.1 million ($5.3 million after-tax, or $0.04 per share) related to blue chip swap transactions in Argentina; $2.1 million ($1.6 million after-tax, or $0.01 per share) of foreign currency exchange gains; $3.0 million ($2.2 million after-tax, or $0.01 per share) of unrealized gains related to mark-to-market adjustments associated with currency hedging contracts; and $4.8 million of LW EMEA integration and acquisition-related expenses ($3.6 million after-tax, or $0.02 per share). Adjusted SG&A declined $12.2 million versus the prior year quarter to $165.2 million, despite including an incremental $6.5 million of non-cash amortization and expense related to our new ERP system. Savings from expense reduction initiatives, including savings associated with the Restructuring Plan, lower performance-based compensation and benefits accruals, and lower investments in information technology more than offset inflation. Net Income, Adjusted EBITDA and Segment Adjusted EBITDA Net income declined $251.1 million from the prior year quarter to a loss of $36.1 million. Net loss in the current quarter included $130.6 million ($168.8 million before tax, or $0.91 per share) of gains resulting from blue chip swap transactions in Argentina, foreign currency exchange losses, and unrealized mark-to-market derivative gains and losses, and other items impacting comparability. Net income in the prior year quarter included total net gains of $3.3 million ($4.6 million before tax, or $0.03 per share) for blue chip swap transactions in Argentina, foreign currency exchange losses, unrealized mark-to-market derivative gains and losses, and a benefit associated with the sale of inventory stepped-up to fair value following the completion of our acquisition of the remaining interest in LW EMEA. Adjusted EBITDA declined $95.0 million versus the prior year quarter to $281.9 million, primarily due to lower net sales and Adjusted Gross Profit. Adjusted EBITDA in the prior year quarter included a $70.9 million pre-tax charge for the write-off of excess raw potatoes, of which $6.3 million was recorded in Equity Method Investment Earnings. North America Segment Adjusted EBITDA declined $54.6 million versus the prior year quarter to $266.7 million. Unfavorable price/mix, lower sales volumes, and higher manufacturing costs per pound largely drove the decline. North America Segment Adjusted EBITDA in the prior year quarter included a $63.3 million charge for the write-off of excess raw potatoes. International Segment Adjusted EBITDA declined $52.8 million versus the prior year quarter to $47.4 million. Higher manufacturing costs per pound and lower volume largely drove the decline. International Segment Adjusted EBITDA in the prior year quarter included a $7.6 million allocated charge for the write-off of excess raw potatoes. Interest Expense, Net Interest expense, net increased $14.2 million, versus the prior year quarter, to $43.3 million, reflecting the impact of higher total debt outstanding and lower capitalized interest related to our manufacturing expansion projects. 22 Table of Contents Income Tax Expense Income tax expense for the second quarter of fiscal 2025 and 2024 was $13.4 million and $66.2 million, respectively. During the current quarter we recorded a $38.2 million tax benefit related to gains resulting from blue chip swap transactions in Argentina, foreign currency exchange losses, unrealized mark-to-market derivative gains and losses, and other items impacting comparability, which included a $35.5 million tax benefit related to Restructuring Plan charges, and a $14.4 million discrete tax expense, primarily related to the establishment of a non-cash full valuation allowance against certain international deferred tax assets. Our effective tax rate in the second quarter of 2025 was (59.0)%, versus 23.5% in the second quarter of fiscal 2024. Excluding the impact of the items above, our effective tax rate in the second quarter of fiscal 2025 was 25.5% versus 23.5% in the second quarter of fiscal 2024, with the increase largely due to a higher proportion of earnings in our International segment. Equity Method Investment Earnings Equity method investment earnings from unconsolidated joint ventures were $2.1 million and $4.7 million for the second quarter of fiscal 2025 and 2024, respectively. The results in the current quarter include $9.0 million ($6.9 million after-tax, or $0.05 per share) of costs related to the Restructuring Plan. Excluding this item, Adjusted Equity Method Investment Earnings increased $6.4 million compared to the prior year quarter. Equity method investment earnings in the prior year quarter included a $6.3 million charge for the write-off of excess raw potatoes. The results for the current and prior year quarters reflect earnings associated with our 50% interest in Lamb Weston/RDO Frozen, an unconsolidated potato processing joint venture in Minnesota (“Lamb Weston RDO”). Twenty-Six Weeks Ended November 24, 2024 compared to Twenty-Six Weeks Ended November 26, 2023 Net Sales and Segment Adjusted EBITDA Twenty-Six Weeks Ended (in millions, except percentages) November 24, 2024 November 26, 2023 % Increase (Decrease) Segment net sales North America $ 2,175.8 $ 2,302.5 (6)% International 1,079.2 1,094.9 (1)% $ 3,255.0 $ 3,397.4 (4)% Segment Adjusted EBITDA North America $ 542.8 $ 700.7 (23)% International 97.9 189.8 (48)% Net Sales Compared to the first half of fiscal 2024, net sales for the first half of fiscal 2025 declined $142.4 million, or 4%, to $3,255.0 million. Volume declined 4%, largely reflecting the impact of soft global restaurant traffic trends; customer share losses, net of gains; the carryover effect of our decision in the prior year to exit certain lower-priced and lower-margin business in Europe; and the impact of a previously announced voluntary product withdrawal initiated in late fiscal 2024. Price/mix was flat as compared to the prior year period, reflecting planned investments in price and trade support in North America to attract and retain volume, pricing actions in key international markets in response to a more competitive environment, and unfavorable channel and product mix, offsetting the benefit of inflation-driven pricing actions in Europe. North America segment net sales declined $126.7 million, or 6%, to $2,175.8 million. Volume declined 5%, largely reflecting the impact of customer share losses, net of gains, and declining restaurant traffic in the U.S. Price/mix declined 1%, reflecting planned investments in price and trade support across all sales channels, as well as unfavorable channel and product mix, more than offsetting the carryover benefit of inflation-driven pricing actions taken in fiscal 2024 for contracts with large and regional chain restaurant customers. 23 Table of Contents International segment net sales declined $15.7 million, or 1%, to $1,079.2 million. Volume declined 2%, reflecting the impact of soft global restaurant traffic trends; customer share losses, net of gains; and the carryover effect of our decision in the prior year to exit certain lower-priced and lower-margin business in Europe. The decline was partially offset by volume growth in key international markets outside of Europe. Price/mix increased 1% reflecting the benefit of inflation-driven pricing actions in Europe, partially offset by pricing actions in key international markets in response to a more competitive environment. Gross Profit Gross profit declined $341.3 million versus the first half of fiscal 2024 to $633.8 million, and included a $75.5 million pre-tax charge ($57.4 million after-tax, or $0.40 per share) related to the Restructuring Plan, and $12.7 million ($9.4 million after-tax, or $0.06 per share) of unrealized gains related to mark-to-market adjustments associated with commodity hedging contracts. The prior year period included $27.1 million ($20.2 million after-tax, or $0.14 per share) of unrealized gains related to mark-to-market adjustments associated with commodity hedging contracts, and $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 the completion of our acquisition of the remaining interest in LW EMEA. Adjusted Gross Profit declined $272.1 million versus the first half of fiscal 2024 to $696.6 million due to lower sales volume, higher manufacturing costs per pound, and an approximately $39 million loss associated with the voluntary product withdrawal. The higher manufacturing costs per pound largely reflected input cost inflation, which was primarily driven by higher raw potato costs; utilization-related production costs and inefficiencies; higher transportation and warehouse costs; and $31.3 million of higher depreciation expense largely associated with our recent capacity expansions in China and the U.S. Manufacturing costs in the prior year period included a $64.6 million pre-tax charge for the write-off of excess raw potatoes. Selling, General and Administrative Expenses SG&A declined $17.6 million versus the first half of fiscal 2024 to $328.6 million, including a gain of $19.9 million ($19.3 million after-tax, or $0.13 per share) related to blue chip swap transactions in Argentina; $10.2 million ($7.6 million after-tax, or $0.05 per share) of foreign currency exchange losses; $6.8 million ($5.1 million after-tax, or $0.04 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts; and $0.4 million ($0.3 million after-tax, no per share impact) of expenses related to ongoing shareholder activism matters. The first half of fiscal 2024 included a gain of $7.1 million ($5.3 million after-tax, or $0.04 per share) related to blue chip swap transactions in Argentina; $5.3 million ($3.9 million after-tax, or $0.03 per share) of foreign currency exchange losses; $1.4 million ($1.0 million after-tax, or $0.01 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts; and $8.8 million of LW EMEA integration and acquisition-related expenses ($6.6 million after-tax, or $0.04 per share). Adjusted SG&A declined $6.7 million versus the first half of fiscal 2024 to $331.1 million, despite including an incremental $12.6 million of non-cash amortization and expense related to our new ERP system. Savings from expense reduction initiatives, including savings associated with the Restructuring Plan, as well as lower performance-based compensation and benefits accruals, more than offset inflation. Net Income, Adjusted EBITDA and Segment Adjusted EBITDA Net income declined $358.5 million from the first half of fiscal 2024 to $91.3 million. Net income in the first half of fiscal 2025 included $107.9 million ($143.9 million before tax, or $0.76 per share) of gains resulting from blue chip swap transactions in Argentina, foreign currency exchange losses, and unrealized mark-to-market derivative gains and losses, and other items impacting comparability. Net income in the first half of fiscal 2024 included a total net loss of $1.4 million ($2.0 million before tax, or $0.01 per share) for blue chip swap transactions, foreign currency exchange losses, unrealized mark-to-market derivative gains and losses, and a benefit associated with the sale of inventory stepped-up to fair value following the completion of our acquisition of the remaining interest in LW EMEA. Adjusted EBITDA declined $217.9 million versus the first half of fiscal 2024 to $571.8 million, primarily due to lower net sales and Adjusted Gross Profit. Adjusted EBITDA in the prior year period included a $70.9 million pre-tax charge for the write-off of excess raw potatoes, of which $6.3 million was recorded in Equity Method Investment Earnings. 24 Table of Contents North America Segment Adjusted EBITDA declined $157.9 million versus the first half of fiscal 2024 to $542.8 million. Higher manufacturing costs per pound, lower sales volumes, unfavorable price/mix, and an approximately $21 million charge for the voluntary product withdrawal related to products manufactured in North America drove the decline. North America Adjusted EBITDA in the prior year period included a $63.3 million charge for the write-off of excess raw potatoes. International Segment Adjusted EBITDA declined $91.9 million versus the first half of fiscal 2024 to $97.9 million. Higher manufacturing costs per pound, an approximately $18 million impact associated with the voluntary product withdrawal, and lower sales volumes largely drove the decline. International Segment Adjusted EBITDA in the prior year period included a $7.6 million allocated charge for the write-off of excess raw potatoes. Interest Expense, Net Interest expense, net increased $28.7 million versus the first half of 2024 to $88.5 million, reflecting the impact of higher total debt outstanding and lower capitalized interest related to our manufacturing expansion projects. Income Tax Expense Income tax expense for the first half of fiscal 2025 and 2024 was $64.2 million and $136.1 million, respectively. During the first half of fiscal 2025 we recorded a $36.0 million tax benefit related to gains resulting from blue chip swap transactions in Argentina, foreign currency exchange losses, unrealized mark-to-market derivative gains and losses, and other items impacting comparability, which included a $35.5 million tax benefit related to Restructuring Plan charges, and a $19.2 million discrete tax expense, primarily related to the establishment of a non-cash full valuation allowance against certain international deferred tax assets. Our effective tax rate in the first half of 2025 was 41.3%, versus 23.2% in the first half of fiscal 2024. Excluding the impact of the items above, our effective tax rate in the first half of fiscal 2025 was 27.1% versus 23.4% in the first half of fiscal 2024, with the increase largely due to a higher proportion of earnings in our International segment. Equity Method Investment Earnings Equity method investment earnings from unconsolidated joint ventures were $13.4 million and $16.8 million for the first half of fiscal 2025 and 2024, respectively. The results in the current period include $9.0 million ($6.9 million after-tax, or $0.05 per share) of costs related to the Restructuring Plan. Excluding this item, Adjusted Equity Method Investment Earnings increased $5.6 million to $22.4 million. Equity method investment earnings in the prior year period included a pre-tax charge of $6.3 million for the write-off of excess raw potatoes. The results for the first half of fiscal 2025 and 2024 reflect earnings associated with our 50% interest in Lamb Weston RDO. Liquidity and Capital Resources Sources and Uses of Cash As of November 24, 2024, we had $79.0 million of cash and cash equivalents, with $1,211.9 million of available liquidity under our 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 cash and cash equivalents and availability under our revolving credit facility , are our primary sources of liquidity for funding our business requirements. Our funding requirements include capital expenditures for our manufacturing capacity expansion in Argentina and our recently completed manufacturing capacity expansion in the Netherlands, working capital requirements, and shareholder returns, including cash dividends and repurchases under our share repurchase program. 25 Table of Contents Cash Flows Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities: Twenty-Six Weeks Ended (in millions) November 24, 2024 November 26, 2023 Net cash flows provided by (used for): Operating activities $ 429.3 $ 455.2 Investing activities (484.9) (570.8) Financing activities 63.3 (112.0) 7.7 (227.6) Effect of exchange rate changes on cash and cash equivalents (0.1) 1.1 Net increase (decrease) in cash and cash equivalents 7.6 (226.5) Cash and cash equivalents, beginning of period 71.4 304.8 Cash and cash equivalents, end of period $ 79.0 $ 78.3 Operating Activities Cash provided by operating activities declined $25.9 million in the first half of fiscal 2025 versus the prior year to $429.3 million. The decline largely relates to $273.0 million decrease in income from operations, adjusted for non-cash income and expenses, largely offset by a favorable increase of $247.1 million in working capital, primarily related to timing of accounts payable related to capital expenditures and expenses related to the Restructuring Plan, accrued liabilities, and receipts of accounts receivable. See “Results of Operations” in this MD&A for more information related to the decrease in income from operations. Investing Activities Investing activities used $484.9 million of cash in the first half of fiscal 2025, compared with $570.8 million in the same period in the prior year. Expenditures in both periods primarily related to our investments to expand our french fry capacity and other facility modernization efforts in China, the Netherlands, the U.S., and Argentina. The projects in China and the U.S. were completed during the second and fourth quarters of fiscal 2024, respectively. The project in the Netherlands was completed during the second quarter of fiscal 2025, while the project in Argentina is on track to be completed by mid-calendar 2025. In connection with the Restructuring Plan, we decreased our estimate of capital expenditures in fiscal 2025 by $100 million to $750 million excluding acquisitions, which included pausing the next phase of our ERP build and implementation. Financing Activities During the first half of fiscal 2025, we borrowed $520.2 million under new long-term debt facilities, which included our new $500 million Term A-5 loan facility. These funds were used primarily to repay the Term A-1 loan facility and outstanding borrowings under our revolving credit facility. In the aggregate, we used $92.8 million of cash to repurchase 1,412,852 shares of our common stock at an average price of $58.04 per share, and we withheld 187,735 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $103.3 million in cash dividends to common stockholders. In the first half of fiscal 2024 , we used an aggregate of $164.3 million of cash to repurchase 1,564,351 shares of our common stock at an average price of $95.89 per share, and we withheld 134,340 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $81.6 million of cash dividends to our common stockholders and repaid $27.7 million of other debt and financing obligations. These financing uses were partially offset by $162.1 million of borrowings during the period primarily under our revolving credit facility. 26 Table of Contents For more information about our debt, interest rates, maturity dates, and covenants, see Note 10, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and Note 6, 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 24, 2024, we were in compliance with the financial covenant ratios and other covenants contained in our debt agreements. Obligations and Commitments On September 27, 2024, we entered into a new $500 million term loan facility, the proceeds of which were used to repay the remaining $225 million balance of our Term A-1 loan facility and $275 million of outstanding borrowings under our revolving credit facility. Except for these transactions, there have been no other 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. See Note 10, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this report for more information. 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 Restructuring Expense, and Adjusted Equity Method Investment Earnings, 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 provides 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, equity method investment earnings, 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. 27 Table of Contents The following table reconciles net income to Adjusted EBITDA: Thirteen Weeks Ended Twenty-Six Weeks Ended (in millions) November 24, 2024 November 26, 2023 November 24, 2024 November 26, 2023 Net income (loss) (a) $ (36.1) $ 215.0 $ 91.3 $ 449.8 Interest expense, net 43.3 29.1 88.5 59.8 Income tax expense 13.4 66.2 64.2 136.1 Income from operations including equity method investment earnings 20.6 310.3 244.0 645.7 Depreciation and amortization (b) 92.5 71.2 183.9 142.0 Unrealized derivative losses (gains) 3.0 1.6 (5.9) (25.7) Foreign currency exchange losses (gains) 9.6 (2.1) 10.2 5.3 Blue chip swap transaction gains (c) (3.3) (7.1) (19.9) (7.1) Items impacting comparability: Restructuring Plan expenses 159.1 — 159.1 — Shareholder activism expense (d) 0.4 — 0.4 — Inventory step-up from acquisition — (1.8) — 20.7 Integration and acquisition-related items, net — 4.8 — 8.8 Adjusted EBITDA $ 281.9 $ 376.9 $ 571.8 $ 789.7 ___________________________________________ (a) Net loss during the thirteen weeks ended November 24, 2024 included minimal clean-up activity related to the voluntary product withdrawal that occurred in the fourth quarter of fiscal 2024. During the twenty-six weeks ended November 24, 2024, we recorded approximately $39 million related to the voluntary product withdrawal. (b) Depreciation and amortization includes interest expense, income tax expense, and depreciation and amortization from equity method investments of $2.0 million and $2.1 million for the thirteen weeks ended November 24, 2024 and November 26, 2023, respectively; and $4.1 million and $4.3 million for the twenty-six weeks ended November 24, 2024 and November 26, 2023, respectively. Depreciation expense does not include $28.9 million of accelerated depreciation related to the closure of our manufacturing facility in Connell, Washington. (c) We enter into blue chip swap transactions to transfer U.S. dollars into and out of Argentina primarily related to funding our announced capacity expansion in Argentina. The blue chip swap rate can diverge significantly from Argentina's official exchange rate. (d) Represents advisory fees related to shareholder activism matters. The following tables reconcile gross profit to Adjusted Gross Profit, SG&A to Adjusted SG&A, restructuring expense to Adjusted Restructuring Expense and equity method investment earnings to Adjusted Equity Method Investment Earnings. For the Thirteen Weeks Ended November 24, 2024 November 26, 2023 November 24, 2024 November 26, 2023 November 24, 2024 November 26, 2023 November 24, 2024 November 26, 2023 (in millions) Gross Profit Selling, General and Administrative Restructuring Expense Equity Method Investment Earnings As reported $ 277.8 $ 475.6 $ 184.7 $ 170.0 $ 74.6 $ — $ 2.1 $ 4.7 Unrealized derivative gains and losses (9.8) 4.6 (12.8) 3.0 — — — — Foreign currency exchange gains and losses — — (9.6) 2.1 — — — — Blue chip swap transaction gains — — 3.3 7.1 — — — — Items impacting comparability: Restructuring Plan expenses 75.5 — — — (74.6) — 9.0 — Shareholder activism expense — — (0.4) — — — — — Inventory step-up from acquisition — (1.8) — — — — — — Integration and acquisition-related items, net — — — (4.8) — — — — Total adjustments 65.7 2.8 (19.5) 7.4 (74.6) — 9.0 — Adjusted $ 343.5 $ 478.4 $ 165.2 $ 177.4 $ — $ — $ 11.1 $ 4.7 28 Table of Contents For the Twenty-Six Weeks Ended November 24, 2024 November 26, 2023 November 24, 2024 November 26, 2023 November 24, 2024 November 26, 2023 November 24, 2024 November 26, 2023 (in millions) Gross Profit Selling, General and Administrative Restructuring Expense Equity Method Investment Earnings As reported $ 633.8 $ 975.1 $ 328.6 $ 346.2 $ 74.6 $ — $ 13.4 $ 16.8 Unrealized derivative gains and losses (12.7) (27.1) (6.8) (1.4) — — — — Foreign currency exchange losses — — (10.2) (5.3) — — — — Blue chip swap transaction gains — — 19.9 7.1 — — — — Items impacting comparability: Restructuring Plan expenses 75.5 — — — (74.6) — 9.0 — Shareholder activism expense — — (0.4) — — — — — Inventory step-up from acquisition — 20.7 — — — — — — Integration and acquisition-related items, net — — — (8.8) — — — Total adjustments 62.8 (6.4) 2.5 (8.4) (74.6) — 9.0 — Adjusted $ 696.6 $ 968.7 $ 331.1 $ 337.8 $ — $ — $ 22.4 $ 16.8 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 policies and estimates during the second quarter of fiscal 2025. 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 I. Financial Statements” of this report.