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,” “believe,” “reduce,” “estimate,” “deliver,” “remain,” “drive,” “increase,” “improve,” “generate,” “evaluate,” “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) and other cost-savings or efficiency initiatives, capital expenditures and investments, pricing actions, operational costs, cash flows, liquidity, dividends, conditions in our operating environment and industry, and prevailing economic conditions in our markets. 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 tariffs, 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 or other cost-saving or efficiency initiatives, including achieving the benefits of those activities and possible changes in the size and timing of related charges; shareholder activism; including costs and expenses incurred to address activism matters and distraction of management from business operations; difficulties, disruptions or delays in implementing new technology; 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 in 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, Adjusted Restructuring Expense, 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, restructuring expense, or equity method investment earnings, as applicable. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below. Executive Summary As a result of the actions we took in early fiscal 2025 to drive operational and cost efficiencies, volume trends sequentially improved in the third quarter and we are delivering the cost savings and reduced capital spending outlined in our October 1, 2024 announced restructuring plan (the “Restructuring Plan”). We continue to be affected by soft restaurant traffic trends as consumer buying power is stretched due to rising prices and economic uncertainty. According to industry publications, global quick service restaurant (QSR) traffic worsened in our fiscal third quarter. QSR hamburger trends declined further with traffic worsening sequentially each month during the quarter. QSR restaurant traffic was down with declines in our larger markets, the U.S. and the United Kingdom, as well as declines in France, Germany and Italy. During our second fiscal quarter, we took steps to rationalize capacity, permanently closing a manufacturing facility and temporarily curtailing additional lines. Since our second fiscal quarter, industry participants have announced additional capacity, primarily outside of the U.S. Against a backdrop of lower restaurant traffic and increasing manufacturing capacity, we have undertaken a thorough end-to-end review, including an engagement with AlixPartners, a leading global business advisory firm, to assist us in evaluating opportunities for near- and long-term value creation and cost savings, further building on our Restructuring Plan. Outlook Looking forward to the fourth quarter of fiscal 2025, we expect sales volumes to be slightly higher than in the third quarter, primarily due to growth in our International segment. We expect costs per pound to increase in the fourth quarter. This reflects seasonal trends, particularly the third quarter benefit from seasonally lower costs as we transport and process direct from the field. We expect input and transportation and warehousing costs to remain high. In addition, we expect an increase in planned maintenance and curtailment-related downtime associated with our previously revised demand outlook will more than offset benefits from continued improvement in our global manufacturing operations. On April 2, 2025, the U.S. announced a new universal baseline tariff of 10%, plus an additional country-specific tariff for select trading partners, on all U.S. imports. We are a global business that allows us to provide most of our customers with local/regional supply. The recently announced tariffs exempt imports that are compliant with the United States-Mexico-Canada trading agreement (“USMCA”), which includes french fries imported from Canada. As such, the products we manufacture at our one production facility in Canada and import to the U.S. are exempt from these tariffs. We source approximately 5 percent of our inputs from Canada, primarily edible oils and natural gas, which are also USMCA compliant and therefore, exempt from the recently announced tariffs. We are evaluating our other expenditures to assess the impact of the recent tariff announcements, but do not currently expect them to have a significant impact on our fiscal 2025 financial results. In addition, our U.S. manufacturing operations export in the mid- to high-teens as a percent of total volume and net sales, which could be subject to future retaliatory tariffs, if any. Given the timing and uncertainty of tariffs, including potential retaliatory tariffs, we have not included any impact from potential tariffs in our outlook above. Restructuring Plan Our Restructuring Plan 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 20 Table of Contents 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 or early fiscal 2026. 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 for the thirteen weeks ended February 23, 2025 included: • $10.3 million ($7.7 million after-tax, or $0.05 per share) of pre-tax charges; ◦ $0.7 million ($0.5 million after-tax, or zero per share) was included in Cost of sales; and ◦ $9.6 million ($7.2 million after-tax, or $0.05 per share) was included in Restructuring expense Net income for the thirty-nine weeks ended February 23, 2025 included: • $169.4 million ($131.3 million after-tax, or $0.91 per share) of pre-tax charges, of which $120.2 million are cash expenses and $49.2 million of non-cash expenses; ◦ $76.2 million ($57.9 million after-tax, or $0.40 per share) was included in Cost of sales; ◦ $84.2 million ($66.5 million after-tax, or $0.46 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, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” in this report. Results of Operations Thirteen Weeks Ended February 23, 2025 compared to Thirteen Weeks Ended February 25, 2024 Net Sales and Segment Adjusted EBITDA Thirteen Weeks Ended (in millions, except percentages) February 23, 2025 February 25, 2024 % Increase (Decrease) Segment net sales North America $ 986.3 $ 947.5 4% International 534.2 510.8 5% $ 1,520.5 $ 1,458.3 4% Segment Adjusted EBITDA North America $ 300.7 $ 285.9 5% International 93.2 101.7 (8)% Net Sales Compared to the prior year quarter, net sales for the third quarter of fiscal 2025 increased $62.2 million, or 4%, to $1,520.5 million. Volume increased 9% compared to the prior year quarter as we fully replaced the combined regional, small, and retail customer volume lost in the prior year, during our transition to a new ERP system, in addition to recent customer contract wins across each of our channels and geographic regions, net of volume losses. These benefits were partially offset by soft global restaurant traffic trends. Price/mix declined 5%, reflecting the impact of planned investments in price to compete in the increasingly competitive environment in both the North America and International segments. 21 Table of Contents North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, increased $38.8 million, or 4%, to $986.3 million. Volume increased 8% compared to the prior year quarter as we fully replaced the combined regional, small, and retail customer volume lost in the prior year during our transition to a new ERP system. We also had recent customer contract wins across each of our channels, net of volume losses primarily in our quick service channel, which were partially offset by soft restaurant traffic trends. Price/mix declined 4%, due to planned investments in price and trade, which was only partially offset by favorable channel and product mix. The favorable mix was attributable to fully replacing the combined volume of regional, small and retail customers that was harder to fill in the prior year quarter due to the ERP transition. International segment net sales, which includes all sales to customers outside of North America, increased $23.4 million, or 5%, to $534.2 million. Despite soft restaurant traffic, volume increased 12%, led primarily by chain customer contract wins in key international markets and to a lesser extent, lapping unfilled orders due to the prior year ERP transition. These volume increases were partially offset by 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 7% related to pricing actions in key international markets in response to the competitive environment along with unfavorable changes in foreign currencies. Gross Profit Gross profit increased $18.8 million versus the prior year quarter to $422.5 million, and included $2.8 million ($2.2 million after-tax, or $0.02 per share) of unrealized gains related to mark-to-market adjustments associated with commodity hedging contracts and $0.7 million of charges ($0.5 million after-tax, or zero per share) related to the Restructuring Plan. The prior year quarter included $23.3 million ($17.3 million after-tax, or $0.12 per share) of unrealized losses related to mark-to-market adjustments associated with commodity hedging contracts. Adjusted Gross Profit declined $6.6 million versus the prior year quarter to $420.4 million due primarily to unfavorable price/mix, higher transportation and warehousing costs primarily driven by higher warehouse inventories, and $16.2 million of higher depreciation expense largely associated with our recent capacity expansions in the Netherlands and the U.S. This decline was partially offset by higher sales volumes and lower manufacturing costs per pound, which included lapping $53.5 million of pre-tax charges in the prior year (including an estimated $33 million of incremental costs associated with the ERP transition and a $20.5 million charge for the write-off of excess raw potatoes), and a current year reduction in North America raw potato prices. Selling, General and Administrative Expenses SG&A declined $15.6 million versus the prior year quarter to $164.2 million including $3.1 million ($2.4 million after-tax, or $0.02 per share) of unrealized gains related to mark-to-market adjustments associated with currency hedging contracts, $7.0 million ($5.0 million after-tax, or $0.04 per share) of foreign currency exchange losses, a gain of $0.6 million ($0.4 million after-tax, or zero per share) related to blue chip swap transactions in Argentina, and $3.7 million ($2.9 million after-tax, $0.02 per share) of expenses related to ongoing shareholder activism matters. The prior year quarter included $4.0 million ($3.0 million after-tax, or $0.02 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts, $16.4 million ($12.4 million after-tax, or $0.08 per share) of foreign currency exchange losses, a gain of $7.4 million ($5.6 million after-tax, or $0.04 per share) related to blue chip swap transactions in Argentina, and $2.4 million ($1.8 million after-tax, or $0.01 per share) of integration and acquisition-related expenses associated with the completion of our acquisition of the remaining interest in LW EMEA. Adjusted SG&A declined $7.2 million versus the prior year quarter to $157.2 million, primarily related to lapping higher expenses associated with the ERP implementation in the third quarter of fiscal 2024 and cost savings associated with the Restructuring Plan and other management initiatives to reduce costs, partially offset by the timing of compensation and benefit accruals. Net Income, Adjusted EBITDA and Segment Adjusted EBITDA Net income declined $0.1 million from the prior year quarter to $146.0 million. Net income in the current quarter included a total net loss of $10.6 million ($14.5 million before tax, or $0.07 per share) resulting from unrealized mark-to-market derivative gains, foreign currency exchange losses, gains on blue chip swap transactions in Argentina, and other items impacting comparability. Net income in the prior year quarter included an estimated $72 million negative impact associated with the ERP transition. In addition, the prior year quarter included a total net loss of $28.9 million ($38.7 million before tax, or $0.19 per share) resulting from unrealized mark-to-market derivative gains, foreign currency exchange losses, gains on blue chip swap transactions in Argentina, and other items impacting comparability. 22 Table of Contents Adjusted EBITDA increased $20.2 million versus the prior year quarter to $363.8 million, primarily due to higher net sales and lower Adjusted SG&A, which were partially offset by lower Adjusted Gross Profit. Adjusted EBITDA in the prior year quarter included an approximately $95 million negative impact from the ERP transition and a $25.0 million charge for the write-off of excess raw potatoes, of which $4.5 million was recorded in equity method investment earnings. North America Segment Adjusted EBITDA increased $14.8 million versus the prior year quarter to $300.7 million. The increase was driven by higher sales volume and lower manufacturing costs per pound, which included lapping the impact of the ERP transition, a pre-tax charge of $22.7 million for the write-off of excess raw potatoes, and lower raw potato prices in the current year. The benefits of these items were partially offset by planned investments in price and trade. North America Segment Adjusted EBITDA in the prior year quarter included an approximately $83 million negative impact of the ERP transition related to lower order fulfillment rates and incremental costs and expenses. International Segment Adjusted EBITDA declined $8.5 million versus the prior year quarter to $93.2 million, including approximately $5 million of losses in the prior year related to lower order fulfillment rates associated with the ERP transition and a $2.3 million allocated charge for the write-off of excess raw potatoes. Unfavorable price/mix was partially offset by increased sales volume and lower manufacturing costs per pound. Interest Expense, Net Interest expense, net increased $11.6 million, versus the prior year quarter, to $47.3 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 third quarter of fiscal 2025 and 2024 was $57.5 million and $43.1 million, respectively. Our effective tax rate in the third quarter of 2025 was 28.3%, versus 22.8% in the third quarter of fiscal 2024. The increase is largely due to foreign losses without tax benefits and a higher proportion of overall earnings in our International segment. Equity Method Investment Earnings Equity method investment earnings from unconsolidated joint ventures were $2.1 million and $1.0 million for the third quarter of fiscal 2025 and 2024, respectively. Equity method investment earnings in the prior year quarter included a $4.5 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”). Thirty-Nine Weeks Ended February 23, 2025 compared to Thirty-Nine Weeks Ended February 25, 2024 Net Sales and Segment Adjusted EBITDA Thirty-Nine Weeks Ended (in millions, except percentages) February 23, 2025 February 25, 2024 % Increase (Decrease) Segment net sales North America $ 3,162.1 $ 3,250.0 (3)% International 1,613.4 1,605.7 —% $ 4,775.5 $ 4,855.7 (2)% Segment Adjusted EBITDA North America $ 843.5 $ 986.6 (15)% International 191.1 291.5 (34)% Net Sales Compared to the first three quarters of fiscal 2024, net sales declined $80.2 million, or 2%, to $4,775.5 million. 23 Table of Contents Despite soft global restaurant traffic trends, volume was flat compared to the prior year period as we fully replaced the combined regional, small, and retail customer volume lost in the prior year during our transition to a new ERP system and gained incremental volume from recent customer contract wins across each of our channels and geographic regions, net of volume losses. These factors were offset by the impact of soft global restaurant traffic trends, 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 declined 2% compared to the prior year period, reflecting planned investments in price to compete in the increasingly competitive environment in both the North America and International segments and unfavorable channel and product mix. North America segment net sales declined $87.9 million, or 3%, to $3,162.1 million. Volume declined 1%, largely reflecting the impact of customer volume losses, net of gains and softening restaurant traffic in the U.S., largely offset by lapping unfilled customer orders during the ERP transition in the third quarter of fiscal 2024. Price/mix declined 2%, reflecting planned investments in price and trade support across all sales channels, more than offsetting the carryover benefit of inflation-driven pricing actions taken in fiscal 2024 for contracts with large and regional chain restaurant customers. International segment net sales increased $7.7 million to $1,613.4 million. Volume was slightly up, reflecting volume growth in key international markets outside of Europe, mostly offset by customer volume 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 reflecting the benefit of inflation-driven pricing actions in Europe in fiscal 2024, offset by pricing actions in key international markets in response to a more competitive environment in fiscal 2025. Gross Profit Compared to the first three quarters of fiscal 2024, gross profit declined $322.5 million to $1,056.3 million, and included $15.5 million ($11.6 million after-tax, or $0.08 per share) of unrealized gains related to mark-to-market adjustments associated with commodity hedging contracts and a $76.2 million pre-tax charge ($57.9 million after-tax, or $0.40 per share) related to the Restructuring Plan. The prior year period included $3.8 million ($2.9 million after-tax, or $0.02 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 $278.7 million versus the first three quarters of fiscal 2024 to $1,117.0 million. • The current year period included $78.5 million of pre-tax charges including $47.5 million of higher depreciation expense largely associated with our recent capacity expansions in the Netherlands, China, and the U.S. and an approximately $31 million charge associated with the voluntary product withdrawal initiated in the fourth quarter of the prior year. • The prior year period included $118.1 million of pre-tax charges, including an $85.1 million pre-tax charge for the write-off of excess raw potatoes, largely reflecting a reduction in our initial sales estimate that was developed in January 2023 for the following year, as well as a higher-than-expected impact on customer shipments associated with the transition to a new ERP system, and an estimated $33 million of pre-tax costs associated with the ERP transition. • After the pre-tax charges described above, Adjusted Gross Profit declined primarily related to higher manufacturing and transportation and warehousing costs per pound and unfavorable price/mix. The higher manufacturing costs per pound largely reflected input cost inflation, primarily driven by higher raw potato costs in the first half of the year, utilization-related production costs and inefficiencies, and higher transportation and warehouse costs due primarily to higher finished goods inventory levels during the current year. Selling, General and Administrative Expenses Compared to the first three quarters of fiscal 2024, SG&A declined $33.2 million to $492.8 million, including $3.7 million ($2.7 million after-tax, or $0.02 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts, $17.2 million ($12.6 million after-tax, or $0.09 per share) of foreign currency exchange losses, a gain of $20.5 million ($19.7 million after-tax, or $0.14 per share) related to blue chip swap transactions in Argentina, and $4.1 million ($3.2 million after-tax, or $0.02 per share) of expenses related to ongoing shareholder activism matters. The prior year period included $5.4 million ($4.0 million after-tax, or $0.03 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts, $21.8 million ($16.4 million 24 Table of Contents after-tax, or $0.11 per share) of foreign currency exchange losses, a gain of $14.5 million ($10.9 million after-tax, or $0.08 per share) related to blue chip swap transactions in Argentina, and $11.2 million ($8.4 million after-tax, or $0.05 per share) of LW EMEA integration and acquisition-related expenses. Adjusted SG&A declined $13.8 million to $488.3 million, primarily related to lapping higher external costs associated with the ERP transition in the prior year, net of increased non cash amortization and expenses related to the ERP transition, cost savings associated with the Restructuring Plan, and other management initiatives to reduce costs. Net Income, Adjusted EBITDA and Segment Adjusted EBITDA Compared to the first three quarters of 2024, net income declined $358.5 million to $237.3 million. Net income in the current period included a total net loss of $118.5 million ($158.4 million before tax, or $0.82 per share) including unrealized mark-to-market derivative gains and losses, foreign currency exchange losses, gains resulting from blue chip swap transactions in Argentina, and other items impacting comparability. Net income in the prior period included a total net loss of $30.4 million ($40.8 million before tax, or $0.20 per share) including unrealized mark-to-market derivative gains and losses, foreign currency exchange losses, gains resulting from blue chip swap transactions in Argentina, and other items impacting comparability. Compared to the first three quarters of fiscal 2024, Adjusted EBITDA declined $197.8 million to $935.6 million, primarily due to higher costs per pound (as discussed above under Adjusted Gross Profit), unfavorable price/mix, and an approximately $31 million charge for the voluntary product withdrawal initiated in the fourth quarter of fiscal 2024. Adjusted EBITDA in the prior year period included 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, and an estimated $95 million negative impact from the ERP transition in the third quarter of fiscal 2024. North America Segment Adjusted EBITDA declined $143.1 million to $843.5 million, primarily due to higher manufacturing costs per pound, mostly driven by higher transportation and warehousing costs and higher raw potato prices during the first half of the year, lower net sales driven by unfavorable price/mix and lower sales volume, and an approximately $19 million charge for the voluntary product withdrawal, initiated in the fourth quarter of fiscal 2024, for products manufactured in North America. North America Adjusted EBITDA in the prior year period included a $86.0 million charge for the write-off of excess raw potatoes and an estimated $83 million negative impact from the ERP transition in the third quarter of fiscal 2024. International Segment Adjusted EBITDA declined $100.4 million to $191.1 million. International Segment Adjusted EBITDA in the current year period included an approximately $12 million allocated charge for the impact of the voluntary product withdrawal initiated in the fourth quarter of fiscal 2024. The prior year period included $14.9 million of pre-tax losses including a $9.9 million allocated charge for the write-off of excess raw potatoes and an estimated $5 million negative impact from the ERP transition in the third quarter of fiscal 2024. After these pre-tax charges, the decline in International Segment Adjusted EBITDA primarily related to higher manufacturing costs per pound, primarily due to higher raw potato costs and higher transportation and warehousing costs driven mostly by an increase in freight expense related to U.S. imports. Interest Expense, Net Compared with the first three quarters of fiscal 2024, interest expense, net increased $40.3 million to $135.8 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 three quarters of fiscal 2025 and 2024 was $121.7 million and $179.3 million, respectively. During the first three quarters of fiscal 2025, we recorded a $39.9 million tax benefit, which primarily reflects a $38.1 million tax benefit related to charges associated with the Restructuring Plan. The remaining portion of the income tax benefit for the fiscal 2025 period is attributable 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. Additionally, we recorded an $18.2 million discrete tax expense in fiscal 2025, primarily related to the establishment of a non-cash full valuation allowance against certain international deferred tax assets. Our effective tax rate for the first three quarters of fiscal 2025 was 33.9%, versus 23.1% for the same period of fiscal 2024. Excluding the impact of the items above, our effective tax rate in the first three quarters of fiscal 2025 was 27.7% versus 23.3% in the first three 25 Table of Contents quarters of fiscal 2024, with the increase largely due to foreign losses without tax benefits and a higher proportion of overall earnings in our International segment. Equity Method Investment Earnings Equity method investment earnings from unconsolidated joint ventures were $15.5 million and $17.8 million for the first three quarters 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 $6.7 million to $24.5 million. Equity method investment earnings in the prior year period included a pre-tax charge of $10.8 million for the write-off of excess raw potatoes. The results for the first three quarters 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 February 23, 2025, we had $67.5 million of cash and cash equivalents, with $1,052.5 million available for borrowing 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. 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: Thirty-Nine Weeks Ended (in millions) February 23, 2025 February 25, 2024 Net cash flows provided by (used for): Operating activities $ 485.3 $ 481.5 Investing activities (559.0) (824.8) Financing activities 69.4 100.1 (4.3) (243.2) Effect of exchange rate changes on cash and cash equivalents 0.4 0.7 Net decrease in cash and cash equivalents (3.9) (242.5) Cash and cash equivalents, beginning of period 71.4 304.8 Cash and cash equivalents, end of period $ 67.5 $ 62.3 Operating Activities In the first three quarters of fiscal 2025, cash provided by operating activities increased $3.8 million to $485.3 million. The increase largely relates to $274.0 million of favorable changes in working capital, mostly attributable to a greater build of inventory in the third quarter of the prior year related to the ERP transition. This was mostly offset by $270.2 million of lower income after adjustments for non-cash operating activities. See “Results of Operations” in this MD&A for more information related to the decrease in income from operations. Investing Activities Investing activities used $559.0 million of cash in the first three quarters of fiscal 2025, compared with $824.8 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 year 2025. In connection with the Restructuring Plan, we decreased our estimate of capital 26 Table of Contents expenditures in fiscal 2025 by $100 million to $750 million excluding acquisitions, which included pausing the next phase of our ERP build and implementation. Depending on the timing of cash paid for the Argentina expansion, our cash investments may result in 2025 spending below $750 million and push into fiscal 2026. Financing Activities During the first three quarters of fiscal 2025, we borrowed $162.2 million under our revolving credit facility and $525.3 million under new long-term debt facilities, which primarily included our new $500 million Term A-5 loan facility. The funds from the new term loan facility were used primarily to repay the Term A-1 loan facility and outstanding borrowings under our revolving credit facility. In the aggregate, we used $193.8 million of cash to repurchase 2,972,221 shares of our common stock at an average price of $61.23 per share and withheld 202,190 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $154.7 million in cash dividends to common stockholders during the first three quarters of fiscal 2025. During the first three quarters of fiscal 2024 , proceeds from short-term borrowings and debt issuances were $429.2 million , of which $379.1 million were short-term. The increase in short-term borrowings related to continued investments to expand french fry capacity and unfavorable third quarter cash receipts for products shipped due to lower customer order fulfillment rates as we transitioned to our new ERP system. W e used $165.1 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 144,260 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $122.0 million in cash dividends to our common stockholders and repaid $42.0 million of other debt and financing obligations. 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 February 23, 2025, 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. 27 Table of Contents 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, restructuring expense, 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. The following table reconciles net income to Adjusted EBITDA: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in millions) February 23, 2025 February 25, 2024 February 23, 2025 February 25, 2024 Net income (a) $ 146.0 $ 146.1 $ 237.3 $ 595.8 Interest expense, net 47.3 35.7 135.8 95.5 Income tax expense 57.5 43.1 121.7 179.3 Income from operations including equity method investment earnings 250.8 224.9 494.8 870.6 Depreciation and amortization (b) 98.5 80.0 282.4 222.0 Unrealized derivative (gains) losses (5.9) 27.3 (11.8) 1.6 Foreign currency exchange losses 7.0 16.4 17.2 21.8 Blue chip swap transaction gains (c) (0.6) (7.4) (20.5) (14.5) Items impacting comparability: Restructuring Plan expenses (d) 10.3 — 169.4 — Shareholder activism expense (e) 3.7 — 4.1 — Inventory step-up from acquisition — — — 20.7 Integration and acquisition-related items, net — 2.4 — 11.2 Adjusted EBITDA $ 363.8 $ 343.6 $ 935.6 $ 1,133.4 ___________________________________________ (a) Net income reflects the following: i. During the thirteen and thirty-nine weeks ended February 23, 2025, we recorded an approximately $9 million ($7 million after-tax, or $0.05 per share) benefit and $31 million ($24 million after-tax, or $0.17 per share) charge related to the voluntary product withdrawal that was initiated in the fourth quarter of fiscal 2024. ii. We recorded a $25.0 million charge ($19.0 million after-tax, or $0.13 per share) and $95.9 million charge ($72.9 million after-tax, or $0.50 per share) for the write-off of excess raw potatoes in North America for the thirteen and thirty-nine weeks ended February 25, 2024, respectively, largely reflecting a reduction in our initial sales estimate that was developed in January 2023 for the following year, as well as a higher-than-expected impact on customer shipments associated with the transition to a new ERP system. • For the thirteen weeks ended February 25, 2024, we recorded a $20.5 million charge ($15.6 million after-tax, or $0.11 per share) in cost of sales, and a $4.5 million charge ($3.4 million after-tax, or $0.02 per share) in equity method investment earnings. The total charge to the reporting segments was as follows: $22.7 million to the North America segment; and $2.3 million to the International segment. • For the thirty-nine weeks ended February 25, 2024, we recorded a $85.1 million charge ($64.7 million after-tax, or $0.44 per share) in cost of sales, and a $10.8 million charge ($8.2 million after-tax, or $0.06 per share) in equity method investment earnings. 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. For both the thirteen and thirty-nine weeks ended February 25, 2024, our results were negatively impacted by the ERP transition, which we estimate impacted net sales by approximately $135 million, with $123 million and $12 million in our North America and International segments, respectively. We estimate net income was impacted by approximately $95 million ($72 million after taxes), including approximately $55 million ($42 million after taxes) related to lower order fulfillment rates and approximately $40 million ($30 million after taxes) of incremental costs and expenses, of which approximately $7 million ($5 million after taxes) was a reduction in gross sales, and included accrued fees and charges for delayed or unfilled customer orders; approximately $26 million ($20 million after taxes) was recorded in cost of sales, and included reduced fixed cost coverage and inefficiencies resulting from planned downtime at our processing facilities, as well as additional freight charges; and approximately $7 million ($5 million after taxes) was recorded in SG&A, and 28 Table of Contents largely included consulting expenses to restore order fulfillment rates. We estimate that approximately $83 million impacted the North America segment, approximately $5 million impacted the International segment, and approximately $7 million impacted unallocated corporate costs. (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 February 23, 2025 and February 25, 2024, respectively; and $6.1 million and $6.4 million for the thirty-nine weeks ended February 23, 2025 and February 25, 2024, respectively. Depreciation expense does not include $4.5 million and $33.4 million of accelerated depreciation related to the closure of our manufacturing facility in Connell, Washington for the thirteen and thirty-nine weeks ended February 23, 2025, respectively. (c) We enter into blue chip swap transactions to transfer U.S. dollars into Argentina primarily related to funding our previously announced capacity expansion project in Argentina. The blue chip swap rate can diverge significantly from Argentina's official exchange rate. (d) Restructuring plan expenses relate to the Restructuring Plan. Refer to Footnote 4 in the Condensed Notes to Consolidated Financial Statements (unaudited), within “ Part I, Item I. Financial Statements of this Form 10-Q. ” (e) 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 February 23, 2025 February 25, 2024 February 23, 2025 February 25, 2024 February 23, 2025 February 25, 2024 February 23, 2025 February 25, 2024 (in millions) Gross Profit Selling, General and Administrative Restructuring Expense Equity Method Investment Earnings As reported $ 422.5 $ 403.7 $ 164.2 $ 179.8 $ 9.6 $ — $ 2.1 $ 1.0 Unrealized derivative gains and losses (2.8) 23.3 3.1 (4.0) — — — — Foreign currency exchange gains and losses — — (7.0) (16.4) — — — — Blue chip swap transaction gains — — 0.6 7.4 — — — — Items impacting comparability: Restructuring Plan expenses 0.7 — — — (9.6) — — — Shareholder activism expense — — (3.7) — — — — — Integration and acquisition-related items, net — — — (2.4) — — — — Total adjustments (2.1) 23.3 (7.0) (15.4) (9.6) — — — Adjusted $ 420.4 $ 427.0 $ 157.2 $ 164.4 $ — $ — $ 2.1 $ 1.0 For the Thirty-Nine Weeks Ended February 23, 2025 February 25, 2024 February 23, 2025 February 25, 2024 February 23, 2025 February 25, 2024 February 23, 2025 February 25, 2024 (in millions) Gross Profit Selling, General and Administrative Restructuring Expense Equity Method Investment Earnings As reported $ 1,056.3 $ 1,378.8 $ 492.8 $ 526.0 $ 84.2 $ — $ 15.5 $ 17.8 Unrealized derivative gains and losses (15.5) (3.8) (3.7) (5.4) — — — — Foreign currency exchange losses — — (17.2) (21.8) — — — — Blue chip swap transaction gains — — 20.5 14.5 — — — — Items impacting comparability: Restructuring Plan expenses 76.2 — — — (84.2) — 9.0 — Shareholder activism expense — — (4.1) — — — — — Inventory step-up from acquisition — 20.7 — — — — — — Integration and acquisition-related items, net — — — (11.2) — — — Total adjustments 60.7 16.9 (4.5) (23.9) (84.2) — 9.0 — Adjusted $ 1,117.0 $ 1,395.7 $ 488.3 $ 502.1 $ — $ — $ 24.5 $ 17.8 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. 29 Table of Contents 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 third 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.