What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-01-06 compared with 2021-10-07 · 212 added, 110 removed, 125 unchanged (72% of the section changed)

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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,” “estimate,” “grow,” “drive,” “support,” “remain,” “increase,” “maintain,” “manage,” “improve,” “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 plans, execution, capital investments, operational costs, cash flows, liquidity, dividends, share repurchases, enterprise resource planning (“ERP”) system implementation and business outlook and prospects, as well as the impact of the COVID-19 pandemic on our industry and the global economy.

Words such as “will,” “continue,” “may,” “expect,” “anticipate,” “believe,” “estimate,” “grow,” “take,” “mitigate,” “support,” “remain,” “increase,” “manage,” “improve,” “create,” “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 plans, execution, capital investments, operational costs, pricing actions, cash flows, liquidity, dividends, share repurchases, enterprise resource planning (“ERP”) system implementation and business outlook and prospects, as well as the impact of the COVID-19 pandemic on our 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.

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These risks and uncertainties include, among other things:

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 or other constraints in the availability of key commodities and other necessary services;

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;

the availability and prices of raw materials;

labor shortages and other operational challenges;

levels of pension, labor and people-related expenses;

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our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends;

and other risks described in our reports filed from time to time with the U.S.

Securities and Exchange Commission (“SEC”).

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.

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Our MD&A is based on financial data derived from the financial statements prepared in accordance with U.S.

generally accepted accounting principles (“GAAP”) and certain other financial data (including Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures) that is prepared using non-GAAP financial measures.

Refer to “Non-GAAP Financial Measures” below for the definitions of Adjusted EBITDA and

Adjusted EBITDA including unconsolidated joint ventures, and a reconciliation of these non-GAAP financial measures to net income.

generally accepted accounting principles (“GAAP”) and certain other financial data (including product contribution margin, on a consolidated basis, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures) that is prepared using non-GAAP financial measures.

Refer to “Non-GAAP

Financial Measures” below for the definitions of product contribution margin, Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS, and a reconciliation of these non-GAAP financial measures to gross profit, net income or diluted earnings per share, as applicable.

Executive Summary

Our strong sales growth in the first quarter of fiscal 2022 reflects the ongoing broad recovery of the frozen potato category following the pandemic’s negative impact on demand in our food-away-from-home channels.

However, our earnings in the quarter declined versus the prior year, reflecting the effect of significant inflation and other industrywide challenges on our manufacturing and supply chain operations, as well as higher selling, general and administrative (“SG&A”) expenses.

We made good financial and operating progress in the quarter as we continue to navigate through a difficult and volatile macro environment defined by cost inflation, supply chain disruptions and production challenges due to a tight labor market.

We generated strong sales as solid demand across our food-away-from-home channels drove volume growth, and as we continued to implement recent pricing actions.

While earnings declined versus the prior year, the pricing actions and other strategic actions we have taken to offset cost increases and improve throughput in our factories led to sequential gross margin gains.

Specifically, in the quarter:

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● Diluted earnings per share declined 67% to $0.22

● Adjusted Diluted EPS declined 24% to $0.50

● Adjusted EBITDA including unconsolidated joint ventures declined 15% to $180.9 million

Compared with the first quarter of fiscal 2021, the increase in net sales was primarily driven by higher sales volumes in North America as demand in our restaurant and foodservice channels continued to improve as the economy further reopened and as consumer traffic recovered.

The increase in sales was most pronounced in our Foodservice segment, which has a higher proportion of its sales to on-premise dining establishments, including independent restaurants and non-commercial operations, such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments.

Sales volumes also continued to increase at the large chain restaurant customers served by our Global segment, but to a lesser extent as sales volumes in this channel had largely recovered to pre-pandemic levels in the prior year quarter.

In contrast, sales volumes in our Retail segment declined largely due to lower shipments of private label products resulting from incremental losses of certain low-margin business, and as food-at-home purchases began to normalize to pre-pandemic levels.

Our net sales increase was also aided by higher price/mix in each of our core business segments, reflecting pricing actions, including the benefit of higher prices charged to customers for product delivery, as well as favorable mix.

Overall international sales volumes, which are included in our Global segment, varied by market, but improved versus the prior year period as restaurant traffic continued to gradually recover.

However, our exports were hindered by pandemic-related congestion at U.S.

West Coast ports as well as the availability of shipping containers.

In Europe, which is served by our Lamb-Weston/Meijer joint venture, sales volumes also increased as restaurant traffic continued to improve, although earnings were also negatively affected by inflation, production, and transportation challenges affecting its supply chain.

Despite an increase in sales, income from operations declined largely due to higher manufacturing and distribution costs on a per pound basis.

The increase in costs predominantly reflected double-digit cost inflation from key inputs and transportation.

We also incurred higher costs and inefficiencies related to labor availability across our manufacturing network.

In addition, the decline in earnings was also driven by higher SG&A expenses, largely due to investments to improve our operations over the long term, higher compensation and benefit expenses, and higher advertising and promotional (“A&P”) expenses.

We remain committed to prioritizing the health and well-being of our employees and contractors, to supporting our customers, and to maintaining our financial strength as the pandemic continues to impact our business and the global economy.

We expect our net sales in fiscal 2022 to increase versus the prior year as global demand for frozen potato products continues to recover.

In the U.S., during the first quarter of fiscal 2022, we saw shipments to large chain restaurants as well as in our Foodservice segment, in aggregate, approach pre-pandemic levels, although the rate of recovery in our Foodservice segment slowed during the final month of the quarter due to a resurgence of COVID-19 infections.

However, we expect the recovery in restaurant traffic will gradually resume as vaccination rates improve and the rate of COVID-19 infections eases.

We continue to expect that overall frozen potato demand may approach pre-pandemic levels, on a run-rate basis, by the end of the calendar year.

We expect our earnings in fiscal 2022 to be pressured largely as a result of inflation and industrywide operational challenges.

We anticipate that the rate of inflation for many of our manufacturing, commodity, and transportation costs, including, but not limited to edible oils, rail, trucking, ocean freight, and packaging, will increase compared to what we experienced in fiscal 2021.

We also expect our potato costs on a per pound basis will likely rise as the year progresses due to the extreme summer heat that negatively affected the quality of potato crops in the Pacific Northwest.

We anticipate the ongoing effects of the pandemic and the rapid resurgence of the broader economy will continue to pressure and disrupt our global supply chain operations, including the availability of manufacturing labor, through the remainder of fiscal 2022, which is expected to lead to volatile operating conditions and incremental manufacturing and distribution costs.

Our experienced team is taking specific actions to mitigate these challenges, most notably executing pricing actions intended to offset commodity inflation, restructuring freight policies, modifying production and crewing schedules to reduce labor volatility, adopting new policies and practices to attract and retain manufacturing employees, and rationalizing our product portfolio.

In addition, we expect overall SG&A in fiscal 2022 will be higher than the prior year largely due to increased compensation and benefit expenses, as well as continued investments to improve our information technology, commercial and supply chain operations over the long term.

This includes resuming our efforts to implement the next phase of a new ERP system, which we deferred due to the disruptive impact of the pandemic on our operations, as well as the significant number of employees working remotely.

While the near-term impact of the pandemic on sales volumes and costs is volatile, we believe we have sufficient liquidity to manage through the uncertainty.

● We returned $84.3 million of cash to stockholders, including $34.3 million in dividends and $50.0 million of share repurchases

Compared with the second quarter of fiscal 2021, the increase in net sales was driven by a balance of higher sales volumes and price/mix.

The increase in our sales volumes was driven by the ongoing recovery in demand for frozen potato products across our restaurant and foodservice channels in the U.S.

The increase in sales volumes was most pronounced in our Foodservice segment, which has a higher proportion of its sales to on-premise dining establishments, including independent restaurants and non-commercial operations, such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments.

Sales volumes in our Retail segment declined primarily due to lower shipments of private label products resulting from incremental losses of certain low-margin business, and was partially offset by an increase in branded product sales volumes.

Our net sales increase was also driven by higher price/mix in each of our core business segments, primarily reflecting the initial benefit of product pricing actions taken earlier in the year, as well the benefit of higher prices charged to customers for product delivery.

Outside of North America, demand was solid in most of our key international markets.

However, our international sales volumes, which are included in our Global segment, declined as a result of limited shipping container availability along the U.S.

West Coast and disruptions to ocean freight networks across the Pacific Ocean.

Sales volumes in Europe, which is served by our Lamb-Weston/Meijer joint venture, increased as restaurant traffic continued to improve, although earnings were negatively affected by inflation, production, and transportation challenges.

Despite a strong increase in sales, our income from operations declined largely due to higher manufacturing and distribution costs on a per pound basis.

The increase in costs per pound primarily reflected double-digit cost inflation from key inputs and transportation, as well as higher costs and inefficiencies related to labor shortages across our manufacturing network.

While we expect the increasing benefits from product and freight pricing actions that we implemented earlier this year, along with additional recently-announced pricing actions and supply chain productivity initiatives, will improve future earnings, the benefits that we realized to date were insufficient to fully offset the cost pressures during the second quarter.

The decline in income from operations was also due to higher selling, general and administrative expenses (“SG&A”) expenses that were largely driven by an increase in advertising and promotion (“A&P”) expenses and higher employee-related costs.

Approximately one-third of the decline in net income and diluted earnings per share was due to lower income from operations and equity method investment earnings.

Approximately two-thirds of the decline was due to an approximately $53 million (approximately $41 million, or $0.28 per share, after-tax) non-recurring loss associated with the extinguishment of debt.

We have identified these costs as “items impacting comparability” in our non-GAAP results.

For more information see “Liquidity and Capital Resources” in this MD&A.

We expect our net sales in fiscal 2022 to increase versus the prior year driven by a combination of higher price/mix and higher sales volumes.

We expect price/mix to increase largely due to pricing actions that we began to implement earlier in fiscal 2022 in an effort to mitigate higher manufacturing and distribution costs.

We expect solid sales volume growth as global demand for frozen potato products continues to rise.

In the U.S., during the first half of fiscal 2022, aggregate demand, as well as our shipments, returned to pre-pandemic levels.

The rate of recovery in demand in our key international markets remained mixed, while the recovery in our shipments was also tempered by limited shipping container availability and disruptions to ocean freight networks.

We expect overall frozen potato demand in the U.S.

and in our key international markets will continue to be solid through the remainder of this fiscal year, although sales volumes may be tempered by disruptions in our production and logistics networks, as well as the effect of the COVID-19 variants on restaurant traffic and consumer demand.

We expect our earnings in fiscal 2022 to be pressured largely as a result of input cost inflation, including higher raw potato costs, and industrywide supply chain challenges.

We anticipate that the rate of inflation for many of our manufacturing, commodity, and transportation costs, including, but not limited to edible oils, grains and starches used for product coatings, rail, trucking, ocean freight, and packaging, will remain higher than we experienced in fiscal 2021.

We also expect our potato costs on a per pound basis will rise as the year progresses due to the impact of the extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest.

We anticipate the ongoing effects of the pandemic and disruptions to the broader global supply chain will continue to pressure our operations, including the shortage of manufacturing labor, through the remainder of fiscal 2022, which is expected to lead to volatile operating conditions and incremental manufacturing and distribution costs.

Our experienced team is continuing to take specific actions to mitigate these challenges, most notably executing pricing actions intended to offset commodity inflation, restructuring freight policies, modifying production and crewing schedules, adopting new policies and practices to attract and retain manufacturing employees, and optimizing our product portfolio.

This includes resuming our efforts in the second half of fiscal 2022 to implement the next phase of a new ERP system.

While the near-term impact of the pandemic on sales volumes and costs continues to be volatile, we believe we have sufficient liquidity to manage through the uncertainty.

We remain focused on our strategic objectives, and believe that our investments in productivity, technology, and capacity to support customer growth will create value for our stakeholders over the long term.

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Financial Statements” of this report.

Thirteen Weeks Ended August 29, 2021 compared to Thirteen Weeks Ended August 30, 2020 (dollars in millions)

Net Sales and Product Contribution Margin

Thirteen Weeks Ended November 28, 2021 compared to Thirteen Weeks Ended November 29, 2020

Net Sales, Gross Profit, and Product Contribution Margin

Thirteen Weeks Ended

Segment sales

(in millions)

Segment net sales

Segment product contribution margin

Advertising and promotion expenses

Compared to the prior-year quarter, Lamb Weston’s net sales for the first quarter of fiscal 2022 increased $112.7 million, or 13%, to $984.2 million.

Compared to the prior year quarter, Lamb Weston’s net sales for the second quarter of fiscal 2022 increased $110.5 million, or 12%, to $1,006.6 million.

Volume and price/mix each increased 6%.

The ongoing recovery in demand for frozen potato products in our restaurant and foodservice channels in the U.S.

drove the increase in sales volumes, while the initial benefits of product pricing actions, as well as higher prices charged to customers for product delivery, primarily drove the increase in price/mix.

Global segment net sales increased $40.8 million, or 9%, to $516.7 million.

Price/mix increased 5% while volume increased 4%.

The increase in price/mix largely reflected the benefit of pricing actions, including higher prices charged for freight.

Strong growth in shipments to restaurant chain customers in the U.S.

drove the increase in sales volumes.

While demand in most of our key international markets was solid, export sales volumes declined as a result of limited shipping container availability and disruptions to ocean freight networks.

Foodservice segment net sales increased $72.8 million, or 30%, to $313.9 million.

Volume increased 22% while price/mix increased 8%.

Strong demand at small and regional chain restaurants, as well as independently-owned restaurants, drove the increase in sales volumes.

Shipments to non-commercial customers, such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments, also increased versus the prior year quarter, but remained below pre-pandemic levels.

The segment’s overall volume growth was tempered by our inability

to serve full customer demand due to widespread industry supply chain constraints, including labor shortages, that resulted in lower production run-rates and throughput in our factories.

The increase in price/mix largely reflected the initial benefits of pricing actions taken earlier in the year, higher prices charged for freight, and favorable mix.

Retail segment net sales increased $1.9 million, or 1%, to $142.6 million.

Price/mix increased 5% while volume decreased 4%.

The increase in price/mix was largely driven by favorable price in our branded portfolio, including higher prices charged for freight.

The sales volume decline largely reflects lower shipments of private label products resulting from incremental losses of certain low-margin business, partially offset by an increase in branded product sales volumes.

Product shipments were tempered by the inability to serve full customer demand due to lower production run-rates and throughput in our factories.

Net sales in our Other segment declined $5.0 million, or 13%, to $33.4 million, with volume down 24% and price/mix up 11%.

The decline was driven by lower volume in our vegetable business, reflecting the negative effect of the extreme summer heat on the yield and quality of the vegetable crops.

Gross Profit and Product Contribution Margin

Gross profit declined $18.0 million, or 8%, to $205.5 million, as the benefits from increased sales volumes and higher price/mix were more than offset by higher manufacturing and distribution costs on a per-pound basis.

The higher costs per pound predominantly reflected double-digit cost inflation from key inputs, particularly edible oils;

ingredients, such as grains and starches used in product coatings;

transportation;

and packaging.

The increase in costs per pound also reflected the effect of labor shortages on production run-rates, as well as lower raw potato utilization rates due to the poor crop harvested in fall 2021.

The increase in per pound costs was partially offset by supply chain productivity savings.

The decline in gross profit also included a $6.1 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $1.0 million loss in the current quarter, compared with a $5.1 million gain related to these items in the prior year quarter.

Lamb Weston’s overall product contribution margin, defined as gross profit less A&P expenses, declined $20.5 million, or 9%, to $200.5 million.

The decline was largely due to lower gross profit (as described above) and a $2.5 million increase in A&P expenses.

Global segment product contribution margin declined $11.8 million, or 13%, to $80.9 million.

Higher manufacturing and distribution costs per pound more than offset the benefit of favorable price/mix and higher sales volumes.

Global segment cost of sales was $434.8 million, up 14% compared to the second quarter of fiscal 2021, primarily due to higher sales volumes and higher manufacturing and distribution costs.

Foodservice segment product contribution margin increased $16.7 million, or 19%, to $104.4 million.

Favorable price/mix and higher sales volumes drove the increase, and was partially offset by higher manufacturing and distribution costs per pound.

Foodservice segment cost of sales was $208.3 million, up 37% compared to the second quarter of fiscal 2021, primarily due to higher sales volumes and higher manufacturing and distribution costs.

Retail segment product contribution margin declined $8.7 million, or 29%, to $21.4 million.

Higher manufacturing and distribution costs per pound, a $1.9 million increase in A&P expenses, and lower sales volumes drove the decline.

Retail segment cost of sales was $118.5 million, up 8% compared to the second quarter of fiscal 2021, primarily due to higher manufacturing and distribution costs, partially offset by lower sales volumes.

Other segment product contribution margin declined $16.7 million to a loss of $6.2 million in the second quarter fiscal 2022, as compared to $10.5 million of income in fiscal 2021.

These amounts include an $8.6 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, and a $4.3 million gain related to the contracts in fiscal 2021.

Excluding these mark-to-market adjustments and realized settlements, Other segment product contribution margin declined $3.8 million, largely due to higher manufacturing costs and lower sales volumes in our vegetable business.

Selling, General and Administrative Expenses

SG&A increased $7.2 million compared to the prior year quarter, primarily due to a $2.5 million increase in A&P expenses, higher sales commissions associated with increased sales volumes, and higher expenses largely related to employee recruiting and retention.

The increase in SG&A was partially offset by lower consulting expenses associated with improving our commercial and supply chain operations, as well as fewer expenses for our new ERP system.

Approximately $2 million of the ERP-related costs in the quarter consisted primarily of consulting expenses that will not continue after we implement the new system, compared to approximately $5 million in the prior year quarter.

Interest Expense, Net

Compared with the prior year quarter, interest expense, net increased $52.4 million to $82.4 million.

The increase reflects a $53.3 million ($40.5 million after-tax) loss on extinguishment of debt associated with the redemption in full of our outstanding 4.625% senior notes due 2024 (the “2024 Notes”) and 4.875% senior notes due 2026 (the “2026 Notes”).

For more information see “Liquidity and Capital Resources” in this MD&A.

Income Tax Expense

Income tax expense for the second quarter of fiscal 2022 and 2021 was $9.6 million and $31.9 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 22.8% and 24.8% for the second quarter of fiscal 2022 and 2021, respectively.

The effective tax rate varies from the U.S.

statutory tax rate of 21%, principally due to the impact of U.S.

state taxes, foreign taxes, permanent differences, and discrete items.

Equity Method Investment Earnings

We conduct business through unconsolidated joint ventures in Europe, the U.S., and South America and include our share of the earnings based on our economic ownership interest in them.

Our share of earnings from our equity method investments was $10.1 million and $19.2 million for the second quarter of fiscal 2022 and 2021, respectively.

Equity method investment earnings included a $3.6 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the current quarter, compared to a $0.1 million unrealized loss related to these items in the prior year quarter.

Excluding the mark-to-market adjustments, earnings from equity method investments declined $12.8 million compared to the prior year period.

The earnings decline largely reflects input cost inflation and higher manufacturing costs in Europe and the U.S.

Twenty-Six Weeks Ended November 28, 2021 compared to Twenty-Six Weeks Ended November 29, 2020

Net Sales, Gross Profit, and Product Contribution Margin

Twenty-Six Weeks Ended

(in millions)

Segment net sales

Segment product contribution margin

Advertising and promotion expenses

Compared to the first half of fiscal 2021, Lamb Weston’s net sales increased $223.2 million, or 13%, to $1,990.8 million.

Volume increased 9% and price/mix increased 4%.

The increase in sales volumes predominantly reflected the recovery in demand for frozen potato products outside the home, which more than offset the decline in retail volume.

Pricing actions, including the benefit of higher prices charged to customers for product delivery, as well as favorable mix drove the increase in price/mix in each of our core business segments.

The ongoing recovery in demand for frozen potato products in our restaurant and foodservice channels drove the increase in sales volumes.

In the prior year period, demand was affected by reduced shipments related to government-imposed social restrictions on restaurant traffic.

The initial benefits of product pricing actions, as well as higher prices charged to customers for product delivery, primarily drove the increase in price/mix.

Global segment net sales increased $94.5 million, or 10%, to $1,017.9 million.

Volume increased 6% while price/mix increased 4%.

The sales volume increase reflects the recovery in demand in the U.S.

and in most of our key international markets, as well as the benefit of limited time product offerings.

The increase in price/mix largely reflected favorable price, including higher prices charged for freight.

Strong growth in shipments to restaurant chain customers in the U.S., including the benefit of limited time product offerings, drove the increase in sales volumes.

Demand in most of our key international markets was solid, although limited shipping container availability and disruptions to ocean freight networks tempered growth of our export sales volumes.

The increase in price/mix largely reflected the benefit of pricing actions, including higher prices charged for freight.

Foodservice segment net sales increased $157.5 million, or 33%, to $635.3 million.

Volume increased 28% while price/mix increased 5%.

The continued recovery in demand at small and regional chain restaurants, as well as independently-owned restaurants, especially at full-service establishments, drove the increase in sales volumes.

Volume growth was tempered by the inability to service full customer demand due to lower production run-rates and throughput.

The increase in price/mix largely reflected favorable price, including higher prices charged for freight.

Solid demand at small and regional chain restaurants, as well as independently-owned restaurants, drove the increase in sales volumes.

Shipments to non-commercial customers also increased versus the prior year period, but remained below pre-pandemic levels.

The segment’s overall volume growth was tempered by our inability to serve full customer demand due to widespread industry supply chain constraints, including labor shortages, that resulted in lower production run-rates and throughput in our factories.

The increase in price/mix largely reflected the initial benefits of pricing actions taken earlier in the year, as well as higher prices charged for freight.

Retail segment net sales declined $19.5 million, or 7%, to $275.1 million.

Volume declined 11% while price/mix increased 4%.

The sales volume decline largely reflects lower shipments of private label products resulting from incremental losses of certain low-margin business, and to a lesser extent, a slight decline in branded product sales volumes as food-at-home purchases began to normalize to pre-pandemic levels.

However, total shipments of branded products in the current quarter were well above pre-pandemic levels.

The sales volume decline primarily reflects lower shipments of private label products resulting from incremental losses of certain low-margin business.

Branded product sales volumes were well above pre-pandemic levels, but were essentially flat versus the prior year period because of our inability to serve full customer demand due to lower production run-rates and throughput in our factories.

The increase in price/mix was largely driven by favorable price, including higher prices charged for freight.

Net sales in our Other segment declined $4.3 million, or 13%, to $29.1 million.

The decline primarily reflects lower volume in our vegetable business, partially offset by favorable price/mix.

Net sales in our Other segment declined $9.3 million, or 13%, to $62.5 million, with volume down 23% and price/mix up 10%.

The decline primarily reflects lower volume in our vegetable business, reflecting the negative effect of the extreme summer heat on the yield and quality of the vegetable crops.

Gross Profit and Product Contribution Margin

Gross profit declined $62.5 million, as the benefit of increased sales volumes was more than offset by higher manufacturing and distribution costs on a per pound basis.

The higher costs per pound predominantly reflected double-digit cost inflation from key inputs, especially edible oils, and transportation, especially trucking and ocean freight.

In addition, we incurred higher manufacturing costs per pound due to volatile labor availability, which was in part a result of COVID-related absenteeism, that affected production run-rates and throughput.

The decline in gross profit also included a $5.6 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $1.2 million gain in the current quarter, compared with a $6.8 million gain related to these items in the prior year quarter.

Lamb Weston’s overall product contribution margin, defined as gross profit less A&P expenses, declined $65.4 million, or 31%, to $147.2 million.

The decline was largely due to lower gross profit (as described above) and a $2.9 million increase in A&P expenses to support new product launches in our Retail segment.

Global segment product contribution margin declined $35.2 million to $42.6 million, down 45% versus the prior year quarter.

Input and transportation cost inflation, as well as higher manufacturing costs per pound, more than offset the benefit of higher sales volumes and favorable price/mix.

Global segment cost of sales was $457.7 million, up 24% compared to the first quarter of fiscal 2021, primarily due to higher sales volumes and higher manufacturing and distribution costs.

Foodservice segment product contribution margin increased $10.6 million to $96.4 million, up 12% compared to the prior year quarter.

Higher sales volume and favorable price/mix drove the increase, and was partially offset by input and transportation cost inflation, as well as higher manufacturing costs per pound.

Foodservice segment cost of sales was $224.0 million, up 49% compared to the first quarter of fiscal 2021, primarily due to higher sales volumes and higher manufacturing and distribution costs.

Retail segment product contribution margin declined $21.0 million to $14.8 million, down 59% versus the prior year quarter.

Input and transportation cost inflation, higher manufacturing costs per pound, lower sales volumes and a $2.1 million increase in A&P expenses to support new product launches, drove the decline.

Retail segment cost of sales was $115.6 million, down 2% compared to the first quarter of fiscal 2021, primarily due to lower sales volumes and higher manufacturing and distribution costs.

Other product contribution margin declined $19.8 million to a loss of $6.6 million in the first quarter fiscal 2022, as compared to $13.2 million of income in fiscal 2021.

These amounts include an $8.2 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, and a $7.7 million gain related to the contracts in fiscal 2021.

Excluding these mark-to-market adjustments, Other segment product contribution margin declined $3.9 million, largely due to higher manufacturing costs and lower sales volumes in our vegetable business.

Gross profit declined $80.5 million, or 18%, to $356.8 million, as the benefits from increased sales volumes and higher price/mix were more than offset by higher manufacturing and distribution costs on a per-pound basis.

The higher costs per pound predominantly reflected double-digit cost inflation from key inputs, particularly edible oils;

transportation;

ingredients, such as grains and starches used in product coatings;

and packaging.

The increase in costs per pound also reflected the effect of labor shortages on production run-rates, as well as lower raw potato utilization rates due to the poor crop harvested in fall 2021.

The increase in per pound costs was partially offset by supply chain productivity savings.

The decline in gross profit also included an $11.8 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $0.2 million gain in the first half of fiscal 2022, compared with a $12.0 million gain related to these items in the first half of fiscal 2021.

Lamb Weston’s overall product contribution margin declined $85.9 million, or 20%, to $347.7 million.

The decline was largely due to lower gross profit (as described above) and a $5.4 million increase in A&P expenses.

Global segment product contribution margin declined $47.0 million, or 28%, to $123.5 million.

Higher manufacturing and distribution costs per pound resulting from input and transportation cost inflation, reduced production run-rates and lower raw potato utilization rates more than offset the benefit of favorable price/mix and higher sales volumes.

Global segment cost of sales was $892.5 million, up 19% compared to the first half of fiscal 2021, primarily due to higher sales volumes and higher manufacturing and distribution costs.

Foodservice segment product contribution margin increased $27.3 million, or 16%, to $200.8 million.

Higher sales volumes and favorable price/mix drove the increase, and was partially offset by higher manufacturing and distribution costs per pound.

Foodservice segment cost of sales was $432.3 million, up 43% compared to the first half of fiscal 2021, primarily due to higher sales volumes and higher manufacturing and distribution costs.

Retail segment product contribution margin declined $29.7 million, or 45%, to $36.2 million.

Higher manufacturing and distribution costs per pound, lower sales volumes and a $3.9 million increase in A&P expenses, drove the decline.

Retail segment cost of sales was $234.1 million, up 3% compared to the first half of fiscal 2021, primarily due to lower sales volumes and higher manufacturing and distribution costs.

Other segment product contribution margin declined $36.5 million to a loss of $12.8 million in the first half of fiscal 2022, as compared to $23.7 million of income in the first half of fiscal 2021.

These amounts include a $16.9 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, and a $12.1 million gain related to the contracts in fiscal 2021.

Excluding these mark-to-market adjustments and realized settlements, Other segment product contribution margin declined $7.5 million, largely due to higher manufacturing costs and lower sales volumes in our vegetable business.

Selling, General and Administrative Expenses

SG&A increased $13.0 million compared to the prior year quarter, primarily due to investments to improve our information technology, commercial and supply chain operations over the long term, as well as increased compensation and benefit expenses.

These investments included more than $4 million of non-recurring expenses (primarily consulting expenses) associated with a new ERP system, compared to approximately $1 million in the prior year quarter.

In addition, A&P expenses increased $2.9 million, largely in support of the launch of new products in the Retail segment.

SG&A increased $20.2 million compared to the first half of fiscal 2021, primarily due to a $5.4 million increase in A&P expenses to support new product launches;

higher compensation and benefits expense;

investments to improve our information technology, commercial and supply chain operations over the long term;

expenses largely related to employee recruiting and retention and temporary labor;

and higher sales commissions associated with increased sales volumes.

SG&A included approximately $6 million of ERP-related costs in the first half of fiscal 2022 and 2021.

In both periods, these costs consisted primarily of consulting expenses that will not continue after we implement the new ERP system.

Interest Expense, Net

Compared with the prior-year quarter, interest expense, net declined $2.4 million to $27.9 million.

The decrease reflected lower average total debt versus the prior year.

Compared with the first half of fiscal 2021, interest expense, net increased $50.0 million to $110.3 million.

The increase reflects a $53.3 million ($40.5 million after-tax) loss on extinguishment of debt associated with the redemption in full of our 2024 Notes and 2026 Notes.

For more information see “Liquidity and Capital Resources” in this MD&A.

Income Tax Expense

Income tax expense for the first quarter of fiscal 2022 and 2021 was $8.7 million and $28.0 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 22.6% and 23.9% for the first quarter of fiscal 2022 and 2021, respectively.

Income tax expense for the first half of fiscal 2022 and 2021 was $18.3 million and $59.9 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 22.7% and 24.3% for the first half of fiscal 2022 and 2021, respectively.

The effective tax rate varies from the U.S.

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We conduct business through unconsolidated joint ventures in Europe, the U.S., and South America and include our share of the earnings based on our economic ownership interest in them.

Our share of earnings from our equity method investments was $6.2 million and $11.9 million for the first quarter of fiscal 2022 and 2021, respectively.

Equity method investment earnings included a $4.3 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the current quarter, compared to a $4.7 million unrealized gain related to these items in the prior year quarter.

Excluding the mark-to-market adjustments, earnings from equity method investments declined $5.3 million compared to the prior year period.

Our share of earnings from our equity method investments was $16.3 million and $31.1 million for the first half of fiscal 2022 and 2021, respectively.

Equity method investment earnings included a $7.9 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the first half of fiscal 2022, compared to a $4.6 million unrealized gain related to these items in fiscal 2021.

Excluding the mark-to-market adjustments, earnings from equity method investments declined $18.1 million compared to the first half of fiscal 2021.

The earnings decline largely reflects input cost inflation and higher manufacturing costs in Europe and the U.S.

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Sources and Uses of Cash

We ended the first quarter of fiscal 2022 in a strong financial position with resources available for reinvesting in our business, including our strategic growth initiatives, pursuing acquisition opportunities that we may identify, and managing our capital structure on a short- and long-term basis.

During the first quarter of fiscal 2022, we amended our revolving credit facility to increase its capacity to $1.0 billion and to extend the maturity date to August 11, 2026.

At the end of the fiscal first quarter, no borrowings were outstanding under the amended revolving credit facility.

At August 29, 2021, we had $789.7 million of cash and cash equivalents and $994.6 million of availability under our revolving credit facility.

While we expect the near-term impact of the pandemic on sales volumes and costs to remain volatile, we believe we have sufficient liquidity to meet projected capital expenditures, service existing debt and meet working capital requirements for the next 12 months with current cash balances and cash from operations, supplemented as necessary by available borrowings under our existing revolving credit facility.

Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities (dollars in millions):

Thirteen Weeks Ended

We ended the first half of fiscal 2022 in a strong financial position with $621.9 million of cash and cash equivalents and $994.6 million of availability under our revolving credit facility, net of letters of credit.

During the first half of fiscal 2022, we lowered the interest rates and extended the maturities on $1,670.0 million of our outstanding debt (see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1.

Financial Statements” of this report) and amended our revolving credit facility to increase its capacity to $1.0 billion and extend its maturity date to August 11, 2026.

At the end of the first half of fiscal 2022, no borrowings were outstanding under the amended revolving credit facility.

While we expect the near-term impact of the pandemic on costs to remain volatile, we believe we have sufficient liquidity to meet projected capital expenditures, service existing debt and meet working capital requirements for at least the next 12 months with current cash balances and cash from operations, supplemented as necessary by available borrowings under our currently undrawn revolving credit facility.

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)

Net cash flows provided by (used for):

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Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities

In the first quarter of fiscal 2022, cash provided by operating activities decreased $88.8 million to $161.8 million, compared with $250.6 million in the same period a year ago.

The decrease related to a $56.7 million decrease in income from operations, adjusted for non-cash income and expenses, and $32.1 million of cash used by unfavorable changes in working capital.

Lower income from operations was driven by higher manufacturing and transportation costs on a per pound basis, reflecting cost inflation for key inputs and transportation.

In the first half of fiscal 2022, cash provided by operating activities decreased $111.3 million to $207.5 million, compared with $318.8 million in the same period a year ago.

The decrease related to a $65.1 million decrease in income from operations, adjusted for non-cash income and expenses, and $46.2 million of cash used for unfavorable changes in working capital.

Lower income from operations was driven by higher manufacturing and distribution costs on a per pound basis, reflecting cost inflation for key inputs and transportation.

See “Results of Operations” in this MD&A for more information.

Unfavorable changes in working capital primarily related to an increase in receivables attributable to higher sales at the end of first quarter fiscal 2022, compared with the end of first quarter of fiscal 2021, a decrease in income taxes payable due to lower taxable income in first quarter of fiscal 2022, compared with the prior year quarter, and a decrease in accounts payable and grower payments, due to timing.

The unfavorability was partially offset by lower finished goods inventories compared with the prior year quarter, and an increase in trade promotion accruals due to higher sales, and an increase in accrued interest due to the timing of interest payments.

Unfavorable changes in working capital primarily related to an increase in receivables attributable to higher sales at the end of the first half of fiscal 2022, compared with the end of the first half of fiscal 2021, a decrease in accounts payable changes due to timing, and a decrease in income taxes payable due to lower taxable income in the first half of fiscal 2022, compared with the prior year period.

The unfavorability was partially offset by lower finished goods inventories compared with the prior year period, an increase in trade promotion accruals due to higher sales, and an increase in other accrued liabilities due to timing.

Investing Activities

Investing activities used $78.8 million of cash in the first quarter of fiscal 2022, compared with $33.1 million in the same period in the prior year.

Investing activities used $147.6 million of cash in the first half of fiscal 2022, compared with $53.3 million in the same period in the prior year.

The increase primarily relates to our investment in our chopped and formed capacity expansion in American Falls, Idaho and our greenfield french fry processing facility in Ulanqab, Inner Mongolia, China.

We reduced our estimate of cash used for capital expenditures, excluding acquisitions, for fiscal 2022 to approximately $450 million from our previous estimate of $650 million to $700 million, due to the projected timing of expenditures related to some of our capacity expansion projects.

We expect to use approximately $450 million for capital expenditures, excluding acquisitions, in fiscal 2022.

Financing Activities

We took actions to further strengthen our liquidity by amending our revolving credit facility on August 11, 2021, to increase its capacity to $1.0 billion, extend the maturity date to August 11, 2026, and lower pricing with more favorable terms and conditions.

At the end of the fiscal first quarter, no borrowings were outstanding under the amended revolving credit facility.

During the first quarter of fiscal 2022, cash used for financing activities decreased $474.4 million to $75.8 million, compared with $550.2 million during the same period a year ago.

During the first quarter of fiscal 2022, financing activities primarily related to the payment of $34.4 million of cash dividends to common stockholders, and $7.9 million of debt and financing obligations repayments.

We also repurchased 395,361 shares of our common stock at an average price of $65.86 and withheld 111,488 shares from employees to cover income and payroll taxes on equity awards that vested during the period.

During the first quarter of fiscal 2021, financing activities primarily related to the repayment of $498.1 million of short-term borrowings, the payment of $33.6 million of cash dividends to common stockholders, and $9.2 million of debt and financing obligations repayments.

We also withheld 151,151 s hares from employees to cover income and payroll taxes on equity awards that vested during the period.

During the first half of fiscal 2022, cash used for financing activities decreased $647.9 million to $219.3 million, compared with $867.2 million during the same period a year ago.

During the first half of fiscal 2022, financing activities primarily related to issuing senior notes with net proceeds of $1,655.4 million, debt and financing obligation repayments of $1,682.1 million, including the redemption of the 2024 Notes and 2026 Notes, the payment of $68.7 million of cash dividends to common stockholders, and the payment of an aggregate call premium of $39.6 million relating to the notes redemption.

In addition, $83.5 million relates to the repurchase of 1,264,114 shares of our common stock at an average price of $60.15 and withholding 114,530 shares from employees to cover income and payroll taxes on equity awards that vested during the period.

During the first half of fiscal 2021, financing activities primarily related to the repayment of $498.8 million of short-term borrowings, $289.6 million of debt and financing obligations repayments, which includes the repayment of the $271.9 million term loan facility due in November 2021, and the payment of $67.2 million of cash dividends to common stockholders.

In addition, $9.8 million relates to withholding 156,506 s hares from employees to cover income and payroll taxes on equity awards that vested during the period.

We assess our financing alternatives periodically and expect to access credit or debt capital markets opportunistically, within targeted levels, as part of our plans to fund our capital programs, including capital expenditures and cash returns to stockholders through dividends and share repurchases.

These transactions may include refinancing of existing debt or the incurrence of new debt, subject to financing options that may be available to us from time to time, as well as conditions in the credit and debt capital markets generally.

These transactions may include the incurrence of new debt, subject to financing options that may be available to us from time to time, as well as conditions in the credit and debt capital markets generally.

In particular, one of our subsidiaries is pursuing a new credit facility of up to $180 million related to funding our previously announced capital expansion project in China.

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Financial Statements and Supplementary Data” of the Form 10-K.

At August 29, 2021, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.

At November 28, 2021, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.

Obligations and Commitments

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Non-GAAP Financial Measures

To supplement the financial information included in this report, we have presented product contribution margin on a consolidated basis, Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures, each of which is considered a non-GAAP financial measure.

To supplement the financial information included in this report, we have presented product contribution margin on a consolidated basis, Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS, each of which is considered a non-GAAP financial measure.

Product contribution margin is one of the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance.

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Product contribution margin includes A&P expenses because those expenses are directly associated with the performance of our segments.

Our management also uses Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures to evaluate our performance excluding the impact of certain non-cash charges and other special items in order to have comparable financial results to analyze changes in our underlying business between reporting periods.

Our management also uses Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures, and Adjusted Diluted EPS to evaluate our performance excluding the impact of certain non-cash charges and other special items in order to have comparable financial results to analyze changes in our underlying business between reporting periods.

We include these non-GAAP financial measures because management believes they provide useful information to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision making.

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These non-GAAP financial measures may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures the same way.

See “Results of Operations – Thirteen Weeks Ended August 29, 2021 compared to Thirteen Weeks Ended August 30, 2020 (dollars in millions) – Net Sales and Product Contribution Margin” above for a reconciliation of product contribution margin on a consolidated basis to gross profit.

The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures (dollars in millions):

See “Results of Operations – Thirteen Weeks Ended November 28, 2021 compared to Thirteen Weeks Ended November 29, 2020 – Net Sales, Gross Profit, and Product Contribution Margin” and “Results of Operations – Twenty-Six Weeks Ended November 28, 2021 compared to Twenty-Six Weeks Ended November 29, 2020 – Net Sales, Gross Profit, and Product Contribution Margin” above for a reconciliation of product contribution margin on a consolidated basis to gross profit.

The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

(in millions)

Equity method investment earnings

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Adjusted EBITDA including unconsolidated joint ventures

The following table reconciles diluted earnings per share to Adjusted Diluted EPS:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Item impacting comparability:

Loss on extinguishment of debt (b)

(a) Diluted weighted average common shares were 146.3 million and 147.1 million for the thirteen weeks ended November 28, 2021 and November 29, 2020, respectively, and 146.6 million and 147.1 million for the twenty-six weeks ended November 28, 2021 and November 29, 2020, respectively.

(b) The thirteen and twenty-six weeks ended November 28, 2021, include a loss on the extinguishment of debt of $53.3 million ($40.5 million after-tax), which consists of an aggregate call premium of $39.6 million related to the redemption of the 2024 Notes and 2026 Notes and the write-off of $13.7 million of debt issuance costs associated with those notes.

Off-Balance Sheet Arrangements

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included in the Form 10-K.

There were no material changes to these critical accounting estimates during the first quarter of fiscal 2022.

There were no material changes to these critical accounting policies and estimates during the first half of fiscal 2022.

New and Recently Adopted Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis