What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-06 compared with 2023-01-05 · 158 added, 176 removed, 173 unchanged (66% of the section changed)

4 unchanged sentences

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,” “would,” “believe,” “acquire,” “increase,” “implement,” “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, pricing actions, cash flows, liquidity, dividends, enterprise resource planning (“ERP”) system implementation, pending acquisition of the remaining equity interest in our European joint venture, Lamb-Weston/Meijer v.o.f.

(“LWM”), including the anticipated benefits of the transaction, the expected timing of the completion of the transaction, related financing and the ability of the parties to complete the transaction, and business and financial outlook and prospects, as well as supply chain constraints, inflation, our industry, and global economic conditions.

Words such as “will,” “continue,” “may,” “expect,” “would,” “believe,” “increase,” “improve,” “leverage,” “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, enterprise resource planning (“ERP”) system implementation, acquisition of the remaining equity interest in Lamb-Weston/Meijer v.o.f.

(“LW EMEA”), including the anticipated benefits of the transaction, and business and financial outlook and prospects, as well as supply chain constraints, inflation, our industry, and global economic conditions.

These forward-looking statements are based on management’s current expectations and are subject to uncertainties and changes in circumstances.

5 unchanged sentences

an uncertain general economic environment, including inflationary pressures and recessionary concerns, any of which could adversely impact our business, financial condition or results of operations, including the demand and prices for our products;

the occurrence of any event, change or other circumstances that could give rise to the termination of our agreement to acquire the remaining equity interest in LWM;

the risk that the necessary regulatory approvals for the LWM acquisition may not be obtained or may be obtained subject to conditions that are not anticipated;

the risk that the LWM acquisition will not be consummated in a timely manner or at all;

risks that any of the closing conditions to the LWM acquisition may not be satisfied or may not be satisfied in a timely manner;

risks related to disruption of management time from ongoing business operations due to the LWM acquisition;

failure to realize the benefits expected from the LWM acquisition;

and the effect of the announcement of the LWM acquisition on our ability to retain customers and retain and hire key personnel, maintain relationships with suppliers and on our operating results and businesses generally;

risks associated with integrating acquired businesses, including LWM;

disruptions in the global economy caused by the war in Ukraine and the possible related heightening of our other known risks;

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;

risks related to disruption of management time from ongoing business operations due to integration efforts related to the LW EMEA acquisition;

failure to realize the benefits expected from the LW EMEA acquisition;

the effect of the LW EMEA acquisition on our ability to retain customers and retain and hire key personnel, maintain relationships with suppliers and on our operating results and businesses generally;

risks associated with integrating acquired businesses, including LW EMEA;

levels of pension, labor and people-related expenses;

3 unchanged sentences

political and economic conditions of the countries in which we and our joint ventures conduct business and other factors related to our international operations;

disruptions in the global economy caused by the war in Ukraine and the possible related heightening of our other known risks;

disruption of our access to export mechanisms;

17 unchanged sentences

generally accepted accounting principles (“GAAP”) and certain other financial data (including product contribution margin, on a consolidated basis, Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures, Adjusted Income from Operations, Adjusted Net Income, and Adjusted Diluted EPS) 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, Adjusted Income from Operations, Adjusted Net Income, and Adjusted Diluted EPS, and a reconciliation of these non-GAAP financial measures to gross profit, income from operations, net income, or diluted earnings per share, as applicable.

Refer to “Non-GAAP Financial Measures” below for the definitions of product contribution margin, Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures, Adjusted Income from Operations, Adjusted Net Income, and Adjusted Diluted EPS, and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, gross profit, income from operations, net income, or diluted earnings per share, as applicable.

Executive Summary

The following highlights our financial results in the second quarter of fiscal 2023, compared with the prior year quarter.

For more information, refer to the “Results of Operations” section below.

The following highlights our financial results in the third quarter of fiscal 2023, compared with the prior year quarter.

For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below.

● Net sales increased 31% to $1,253.6 million

● Income from operations increased 99% to $266.3 million

● Net income increased 217% to $103.1 million, and diluted earnings per share increased 223% to $0.71, including items impacting comparability, as discussed below, of $110.3 million ($82.3 million after-tax, or $0.57 per share)

● Net income increased 64% to $175.1 million, and diluted earnings per share increased 66% to $1.21, including items impacting comparability, as discussed below, of a net loss of $43.0 million ($32.3 million after-tax, or $0.22 per share)

● Adjusted Income from Operations increased 96% to $262.0 million

1 unchanged sentence

● Adjusted EBITDA including unconsolidated joint ventures increased 72% to $345.5 million

● We returned $35.2 million of cash to stockholders through dividends

● We returned $35.2 million of cash to stockholders through dividends, and $12.2 million through share repurchases

We drove strong sales growth, earnings growth, and gross margin expansion in the quarter by continuing to execute pricing actions across each of our business segments to counter significant input, manufacturing, and supply chain cost inflation.

The increase in net sales was partially offset by a decline in sales volume, primarily reflecting an inability to fully serve customer demand in our foodservice and retail channels due to the impact of supply chain disruptions on run-rates and throughput in our production facilities, and to a lesser extent, softer restaurant traffic and demand trends in the U.S., especially at casual dining and full-service restaurants, as consumers adjusted to the severe inflationary environment.

Overall traffic at large quick service restaurants (“QSR”) in the U.S.

remained solid.

The increase in net income was driven by higher sales and gross profit and lower interest expense, and was partially offset by sharply lower equity method investment earnings and higher selling, general and administrative expenses (“SG&A”).

The following items impacted comparability of our second quarter results and were excluded when providing Adjusted Income from Operations, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, and Adjusted EBITDA including unconsolidated joint ventures:

● Interest expense in the prior year quarter included a loss of $53.3 million ($40.5 million after-tax, or $0.28 per share) associated with the extinguishment of debt (see “Liquidity and Capital Resources”).

● The decrease in equity method investment earnings included a $136.8 million unrealized loss ($101.5 million after-tax, or $0.70 per share) in the second quarter of fiscal 2023 related to mark-to-market adjustments associated

with natural gas and electricity hedging contracts in Europe, reflecting the volatility of those energy markets in that region, and a $6.3 million unrealized gain ($4.7 million after-tax, or $0.03 per share) in the prior year quarter.

● SG&A included a net $26.5 million gain ($19.2 million after-tax, or $0.13 per share), related to actions taken to mitigate the effect of changes in currency rates on the pending purchase of the remaining ownership interest in LWM, net of other acquisition-related costs.

In October 2022, we entered into an agreement to acquire the remaining interest in LWM for consideration consisting of €525.0 million in cash and €175.0 million in shares of our common stock.

Upon completion of the transaction, we will own 100% of LWM.

We expect to close this transaction in the fourth quarter of fiscal 2023, subject to customary regulatory approvals.

After closing, we will include LWM’s operating results within our Global segment.

During the second half of fiscal 2023, we expect increases in price/mix in each of our core business segments to be the primary driver of net sales growth versus the prior year period.

We expect supply chain disruptions, including the effects of commodities shortages and onboarding new production workers, and changes in product mix will continue to impact run-rates and throughput in our production facilities, and affect our customer fulfillment rates.

We also expect sales volume trends and demand will continue to be volatile as consumers in the U.S.

Overall volume was flat as growth in shipments to large chain restaurant and retail channel customers in North America offset the impact of exiting certain lower-priced and lower-margin business as we continue to strategically manage our customer and product mix due to capacity constraints.

To a lesser extent, softer traffic at casual dining and full-service restaurants in North America also tempered volume.

As compared to the prior year period, demand for frozen potato products in the U.S.

and most key international markets was solid, although the widespread emergence of COVID-19 variants tempered demand and restaurant traffic in the prior year period.

The increase in net income was driven by higher sales and gross profit, and was partially offset by significantly lower equity method investment earnings and higher selling, general and administrative expenses (“SG&A”).

The following items impacted comparability of our third quarter results and were excluded when providing Adjusted Income from Operations, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, and Adjusted EBITDA including unconsolidated joint ventures:

● The decrease in equity method investment earnings included a $47.3 million unrealized loss ($35.1 million after-tax, or $0.24 per share) in the third quarter of fiscal 2023 related to mark-to-market adjustments associated with natural gas and electricity hedging contracts in Europe, reflecting the volatility of those energy markets in that region, and a $19.3 million unrealized gain ($14.3 million after-tax, or $0.10 per share) in the prior year quarter.

● SG&A included a net $4.3 million gain ($2.8 million after-tax, or $0.02 per share), related to actions taken to mitigate the effect of changes in currency rates on our purchase of the remaining equity interest in LW EMEA, net of other acquisition-related costs.

On February 28, 2023, we acquired the remaining equity interest in LW EMEA for consideration consisting of €531.6 million ($564.0 million) in cash, subject to certain post-closing adjustments pursuant to the purchase agreement, and 1,952,421 shares of our common stock.

With the completion of the transaction, we own 100% of LW EMEA.

Starting in the fourth fiscal quarter, we will consolidate LW EMEA’s financial results in our consolidated financial statements and include LW EMEA’s operating results within our Global segment.

During the remainder of fiscal 2023, we expect the macroeconomic environment to remain challenging.

Excluding the impact of consolidating the financial results of LW EMEA, for our fiscal fourth quarter, we expect net sales growth versus the prior year period to be primarily driven by increases in price/mix in each of our core business segments.

We expect volume will be pressured as we exit certain lower-priced and lower-margin business to manage customer and product mix.

We also expect sales volume trends and demand will remain volatile as consumers in the U.S.

and our key international markets continue to respond to the current inflationary environment.

We expect our gross margins will be largely consistent with the levels that we delivered in the first half of the year due to the carryover benefits of pricing actions taken in fiscal 2022, as well as actions being taken in fiscal 2023 to offset input cost inflation, including an increase in raw potato costs as a result of higher contract rates and the impact of below-average crop yields as a result of significant heat waves late in the season in our growing regions in the Pacific Northwest.

We expect LWM’s earnings may improve as compared to the prior year period as a result of the continued implementation of pricing actions to counter cost inflation.

While the near-term global demand trends may be volatile as consumers navigate the current challenging macroenvironment, our investments to expand capacity in Idaho, China, and Argentina, along with our intent to acquire the remaining equity interest in our LWM joint venture, reflect our belief in the long-term health and growth outlook of the frozen potato category.

We expect our gross margins will expand as compared to the prior year period due to the carryover benefits of pricing actions taken in fiscal 2022, as well as actions being taken in fiscal 2023, to offset higher costs for raw potatoes and other key inputs, and that the resulting increase in gross profit will be partially offset by higher SG&A.

As previously noted, beginning in the fourth fiscal quarter, we will consolidate LW EMEA’s financial results in our financial statements.

We believe in the long-term health and growth outlook for the frozen potato category, and believe that Lamb Weston is well-positioned to drive sustainable, profitable growth, and to better serve customers around the world as we seek to leverage the commercial and operational benefits of our former joint venture in Europe, as well as our capacity expansion investments in the U.S., China, Argentina, and the Netherlands.

Results of Operations

8 unchanged sentences

Financial Statements” of this report.

Thirteen Weeks Ended November 27, 2022 compared to Thirteen Weeks Ended November 28, 2021

Thirteen Weeks Ended February 26, 2023 compared to Thirteen Weeks Ended February 27, 2022

Net Sales, Gross Profit, and Product Contribution Margin

1 unchanged sentence

(in millions, except percentages)

Increase (Decrease)

Segment net sales

1 unchanged sentence

Advertising and promotion expenses

Compared to the prior year quarter, net sales for the second quarter of fiscal 2023 increased $269.9 million, or 27%, to $1,276.5 million.

Price/mix increased 30%, reflecting the benefit of pricing actions across each of our core business segments to counter input, manufacturing, and transportation cost inflation.

Volume declined 3%, primarily reflecting an inability to fully serve customer demand in our foodservice and retail channels.

The impact of supply chain disruptions during the quarter, including the effects of commodities shortages and onboarding new production workers, continued to affect production run-rates and throughput in our production facilities as well as customer order fulfillment rates.

To a lesser extent, softer casual dining and full-service restaurant traffic in the U.S.

also contributed to the decline as consumers face a challenging macroeconomic environment.

Compared to the prior year quarter, net sales for the third quarter of fiscal 2023 increased $298.6 million, or 31%, to $1,253.6 million.

Price/mix increased 31%, reflecting the benefit of pricing actions across each of our core business segments to counter input and manufacturing cost inflation.

Overall volume was flat as growth in shipments to large chain restaurant customers in North America and into retail channels offset the impact of exiting certain lower-priced and lower-margin business as we continue to strategically manage our customer and product mix due to capacity constraints, and to a lesser extent, softer traffic at casual dining and full-service restaurants in North America.

Global segment net sales increased $160.6 million, or 33%, to $648.5 million.

Price/mix increased 31% and volume increased 3%.

The benefit of domestic and international product and freight pricing actions to offset inflation, as well as favorable mix, drove the increase in price/mix.

The impact of acquiring a controlling interest in Lamb Weston Alimentos Modernos S.A.

(“LWAMSA”) in early fiscal 2023, growth in international shipments, and strength in domestic QSR limited time product offerings largely drove the increase in volume.

Price/mix increased 33%, driven by domestic and international pricing actions to counter inflationary pressures.

Volume was flat as solid growth from key customers in North America offset the impact of exiting certain lower-priced and lower-margin business in international and domestic markets.

Foodservice segment net sales increased $65.5 million, or 22%, to $360.0 million.

Price/mix increased 25%, while volume decreased 3%.

The carryover benefits of product and freight pricing actions taken in the prior year, as well as actions taken in fiscal 2023 to counter inflation, drove the increase in price/mix.

Volume fell, reflecting a combination of:

the supply chain disruptions on run-rates and throughput in our production facilities;

incremental losses of certain low-margin business;

and, to a lesser extent, a slowdown in restaurant traffic and consumer demand in casual dining and other full-service restaurants.

The carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, to counter inflationary pressures drove the increase in price/mix.

Incremental losses of certain lower-priced and lower-margin business, and to a lesser extent, softer traffic at casual dining and full-service restaurants, drove the volume decline.

Retail segment net sales increased $72.4 million, or 50%, to $216.0 million.

Price/mix increased 43%, while volume decreased 9%.

The carryover benefits of product and freight pricing actions across the branded and private label portfolios taken in the prior year, as well as actions taken in fiscal 2023 to counter inflation, drove the increase in price/mix.

While consumer demand for frozen potato products remained strong, volume fell largely due to the impact of supply chain disruptions on run-rates and throughput in our production facilities, as well as incremental losses of certain low-margin, private label business.

Other segment net sales increased $0.9 million, or 3%, to $34.3 million.

Price/mix increased 5% and was driven by higher prices in our vegetable business.

Volume decreased 2%, reflecting the negative effect of the extreme summer heat on the yield and quality of the vegetable crops.

Price/mix increased 44%, driven by the carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, across the branded and private label portfolios to counter inflationary pressures.

Volume rose 6%, driven by strong growth in branded products as customer service rates improved, as well as more modest growth in private label products.

Other segment net sales increased $0.1 million to $29.1 million.

Price/mix and sales volumes in our vegetable business were essentially flat.

Gross Profit and Product Contribution Margin

Gross profit increased $176.1 million, or 86%, to $381.6 million, as benefits from pricing actions more than offset the impact of higher manufacturing and distribution costs on a per-pound basis, as well as lower sales volumes.

Gross profit increased $176.8 million, or 80%, to $397.8 million, as benefits from pricing actions more than offset the impact of higher manufacturing costs on a per-pound basis.

The higher costs per pound primarily reflected double-digit cost inflation from key inputs, including:

edible oils, ingredients such as grains and starches used in product coatings, labor, and transportation and warehousing.

The increase in costs per pound also reflected higher costs associated with the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in fall 2021, as well as the effects of supply chain disruptions on run-rates and throughput in our production facilities.

The increase in gross profit also included a $6.5 million increase in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $0.4 million gain in the second quarter, compared with a $6.1 million loss related to these items in the prior year quarter.

Our overall product contribution margin, defined as gross profit less A&P expenses, increased $174.5 million, or 87%, to $375.0 million.

raw potatoes, edible oils, ingredients such as grains and starches used in product coatings, labor, and energy.

The increase in gross profit included an $8.7 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $5.1 million loss in the third quarter, compared with a $3.6 million gain related to these items in the prior year quarter.

Our overall product contribution margin, defined as gross profit less A&P, increased $171.3 million, or 79%, to $388.8 million.

The increase was largely driven by higher sales and gross profit (as described above).

Global segment product contribution margin increased $94.5 million, or 129%, to $167.5 million.

Pricing actions and favorable mix drove the increase, more than offsetting higher manufacturing and distribution costs per pound.

As a result of the cumulative benefit of pricing actions and mix improvement efforts during the past two years to counter input cost inflation, the Global segment’s product contribution margin percentage in the second quarter approached pre-pandemic levels.

Global segment cost of sales was $520.5 million, up 20% compared to the second quarter of fiscal 2022, primarily due to higher manufacturing and distribution costs, as well as higher sales volumes.

Pricing actions drove the increase, more than offsetting higher manufacturing costs per pound.

Global segment cost of sales was $478.8 million, up 16% compared to the third quarter of fiscal 2022, primarily due to higher input and manufacturing costs.

Foodservice segment product contribution margin increased $36.2 million, or 34%, to $142.9 million.

Pricing actions drove the increase, and was partially offset by higher manufacturing and distribution costs per pound, unfavorable mix, and the impact of lower sales volumes.

Foodservice segment cost of sales was $225.4 million, up 8% compared to the second quarter of fiscal 2022, primarily due to higher manufacturing and distribution costs, partially offset by lower sales volumes.

Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound and the impact of lower sales volumes.

Foodservice segment cost of sales was $215.1 million, up 15% compared to the third quarter of fiscal 2022, primarily due to higher input and manufacturing costs, partially offset by lower sales volumes.

Retail segment product contribution margin increased $51.0 million, or 161%, to $82.6 million.

Pricing actions drove the increase, partially offset by higher manufacturing and distribution costs per pound.

Retail segment cost of sales was $122.2 million, a 3% increase compared to the second quarter of fiscal 2022, primarily due to higher manufacturing and distribution costs, partially offset by lower sales volumes.

Other segment product contribution margin increased $13.7 million to $7.5 million in the second quarter of fiscal 2023, as compared to a loss of $6.2 million in the second quarter of fiscal 2022.

These amounts include a $2.0 million gain and an $8.6 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts reported in the Other segment in fiscal 2023 and 2022, respectively.

Excluding these mark-to-market adjustments and realized settlements, Other segment product contribution margin increased $3.1 million, largely due to pricing actions in our vegetable business.

Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound and a $3.3 million increase in A&P.

Retail segment cost of sales was $128.6 million, a 16% increase compared to the third quarter of fiscal 2022, primarily due to higher input and manufacturing costs and higher sales volumes.

Other segment product contribution margin decreased $10.4 million to a loss of $4.2 million in the third quarter of fiscal 2023, as compared to earnings of $6.2 million in the third quarter of fiscal 2022.

These amounts include a $7.5 million loss and a $2.8 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts reported in this segment in fiscal 2023 and 2022, respectively.

Excluding these mark-to-market adjustments and realized settlements, Other segment product contribution margin declined $0.1 million.

Selling, General and Administrative Expenses

SG&A increased $18.7 million to $109.8 million in the second quarter of fiscal 2023, and includes a net $26.5 million gain ($19.2 million after-tax, or $0.13 per share) related to actions taken to mitigate the effect of changes in currency rates on the pending purchase of the remaining ownership interest in LWM, net of other acquisition-related costs.

Excluding items impacting comparability, SG&A increased $45.2 million to $136.3 million, primarily due to higher compensation and benefits expense, and to a lesser extent, higher expenses related to improving our information systems and ERP infrastructure.

SG&A increased $44.3 million to $131.5 million in the third quarter of fiscal 2023, and includes a net $4.3 million gain ($2.8 million after-tax, or $0.02 per share) related to actions taken to mitigate the effect of changes in currency rates on our purchase of the remaining equity interest in LW EMEA, net of other acquisition-related costs.

Excluding items impacting comparability, SG&A increased $48.6 million to $135.8 million, primarily due to higher compensation and benefits expense, and to a lesser extent, higher expenses related to improving our information systems and ERP infrastructure, as well as a $5.5 million increase in A&P.

Interest Expense, Net

Compared with the prior year quarter, interest expense, net decreased $57.8 million to $24.6 million, primarily reflecting a loss on extinguishment of debt in the prior year quarter of $53.3 million ($40.5 million after-tax, or $0.28 per share) 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”).

In addition, capitalized interest and interest income were each higher versus the prior year quarter.

Compared with the prior year quarter, interest expense, net was flat, as the impact of higher interest rates on our floating rate debt offset higher capitalized interest and interest income.

Income Tax Expense

Income tax expense for the second quarter of fiscal 2023 and 2022 was $36.8 million and $9.6 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 26.3% and 22.8% for the second quarter of fiscal 2023 and 2022, respectively.

Excluding items impacting comparability, our effective tax rate for the second quarter of fiscal 2023 and 2022 was 25.9% and 23.4%, respectively.

Income tax expense for the third quarter of fiscal 2023 and 2022 was $42.1 million and $31.1 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 19.4% and 22.6% for the third quarter of fiscal 2023 and 2022, respectively.

Excluding items impacting comparability, our effective tax rate for the third quarter of fiscal 2023 and 2022 was 20.3% and 22.0%, 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.

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

Equity Method Investment Earnings (Loss)

We conduct business through unconsolidated joint ventures in Europe and the U.S.

and include our share of the earnings (loss) based on our economic ownership interest in them.

Our share of earnings and loss from our equity method investments was a loss of $107.3 million and earnings of $10.1 million for the second quarter of fiscal 2023 and 2022, respectively.

Equity method investment earnings (loss) included a $130.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in the second quarter of fiscal 2023, of which $136.8 million ($101.5 million after-tax, or $0.70 per share) related to losses in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

and include our share of the earnings (loss) based on our equity interest in them.

Our share of earnings and loss from our equity method investments was a loss of $23.3 million and earnings of $29.7 million for the third quarter of fiscal 2023 and 2022, respectively.

Equity method investment earnings (loss) included a $45.6 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in the third quarter of fiscal 2023, of which $47.3 million ($35.1 million after-tax, or $0.24 per share) related to losses in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

Equity method investment earnings in the prior year quarter included a $19.6 million unrealized gain for mark-to-market adjustments, of which $19.3 million ($14.3 million after-tax, or $0.10 per share) related to gains in natural gas and electricity derivatives.

Excluding the items impacting comparability noted above (mark-to-market adjustments related to natural gas and electricity derivatives) and the other mark-to-market adjustments, earnings from equity method investments increased $16.3 million compared to the prior year quarter, reflecting favorable price/mix, partially offset by higher manufacturing and distribution costs, in both Europe and the U.S.

Twenty-Six Weeks Ended November 27, 2022 compared to Twenty-Six Weeks Ended November 28, 2021

Excluding the items impacting comparability noted above (mark-to-market adjustments related to natural gas and electricity derivatives) and the other mark-to-market adjustments, earnings from equity method investments increased $12.2 million compared to the prior year quarter, reflecting favorable price/mix, partially offset by higher manufacturing costs, in both Europe and the U.S.

Thirty-Nine Weeks Ended February 26, 2023 compared to Thirty-Nine Weeks Ended February 27, 2022

Net Sales, Gross Profit, and Product Contribution Margin

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(in millions, except percentages)

2 unchanged sentences

Advertising and promotion expenses

Compared to the first half of fiscal 2022, net sales increased $411.3 million, or 21%, to $2,402.1 million.

Compared to the prior year period, net sales increased $709.9 million, or 24%, to $3,655.7 million.

Price/mix increased 27%, reflecting the benefit of product and freight pricing actions across each of our core business segments to counter input, manufacturing, and transportation cost inflation.

Volume declined 5%, primarily reflecting an inability to fully serve customer demand in our foodservice and retail channels.

The impact of supply chain disruptions during the first half of fiscal 2023, including the effects of commodities shortages and onboarding new production workers, continued to affect production run-rates and throughput in our production facilities as well as customer order fulfillment rates.

To a lesser extent, softer casual dining and full-service restaurant traffic in the U.S.

as consumers face a challenging macroeconomic environment.

Volume declined 3%, primarily reflecting an inability to fully serve customer demand in our foodservice and retail channels as well as the exiting of certain lower-priced and lower-margin business to strategically manage customer and product mix.

The impact of supply chain disruptions during the first three quarters of fiscal 2023, including the effects of commodities shortages and onboarding new production workers, and changes in product mix affected production run-rates and throughput in our production facilities as well as customer order fulfillment rates.

To a lesser extent, softer casual dining and full-service restaurant traffic in North America as consumers face a challenging macroeconomic environment also affected shipments.

Global segment net sales increased $395.2 million, or 26%, to $1,901.0 million.

Price/mix increased 23%, while volume was flat.

The benefit of domestic and international product and freight pricing actions to offset inflation drove the increase in price/mix.

The impact of acquiring a controlling interest in LWAMSA in early fiscal 2023 and growth in international shipments offset a decline in domestic volumes.

Price/mix increased 26%, driven by domestic and international product and freight pricing actions to counter inflationary pressures.

Volume was flat as solid growth from key customers in North America and the benefit of acquiring a controlling interest in LWAMSA in early fiscal 2023 offset the impact of exiting certain lower-priced and lower-margin business in international and domestic markets.

Foodservice segment net sales increased $154.4 million, or 17%, to $1,084.2 million.

Price/mix increased 25%, while volume decreased 11%.

The carryover benefits of product and freight pricing actions taken in the prior year, as well as actions taken in fiscal 2023 to counter inflation, drove the increase in price/mix.

Price/mix increased 26%, driven by the carryover benefits of product and freight pricing actions taken in the prior year, as well as actions taken in fiscal 2023 to counter inflationary pressures.

Volume fell 9%, reflecting a combination of:

the impact of supply chain disruptions on run-rates and throughput in our production facilities;

incremental losses of certain low-margin business;

and a slowdown in restaurant traffic and consumer demand in casual dining and other full-service restaurants.

the impact on customer service rates from supply chain disruptions;

incremental losses of certain lower-priced and lower-margin business;

and a slowdown in traffic and consumer demand in casual dining and other full-service restaurants.

Retail segment net sales increased $158.3 million, or 38%, to $577.0 million.

Price/mix increased 41%, while volume decreased 3%.

While consumer demand for frozen potato products remained strong, the decline in the segment’s overall volume was due largely to the impact of supply chain disruptions on run-rates and throughput in our production facilities for branded products, as well as incremental losses of certain low-margin, private label business.

The carryover benefits of product and freight pricing actions taken in the prior year, as well as actions taken in fiscal 2023, across the branded and private label portfolios to counter inflationary pressures, largely drove the increase in price/mix.

The decline in the segment’s overall volume was due to the impact on customer service rates from supply chain disruptions, as well as incremental losses of certain lower-priced and lower-margin private label business.

Branded product volumes increased as compared to the prior year period.

Other segment net sales increased $2.0 million, or 2%, to $93.5 million.

Price/mix increased 4% and was driven by higher prices in our vegetable business.

Volume decreased 5%, reflecting the negative effect of the extreme summer heat on the yield and quality of the vegetable crops.

Volume declined 2%, reflecting the negative effect of the extreme summer heat on the yield and quality of the vegetable crops.

Gross Profit and Product Contribution Margin

1 unchanged sentence

The higher costs per pound predominantly reflected double-digit cost inflation from key inputs, including:

raw potatoes;

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

transportation;

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

and transportation.

The increase in potato costs per pound were driven by higher contract prices, reflecting increased costs for growers, as well as the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in fall 2021.

The increase in manufacturing costs per pound also reflect the effects of supply chain disruptions.

Our overall product contribution margin increased $467.4 million, or 83%, to $1,032.6 million.

1 unchanged sentence

Global segment product contribution margin increased $225.7 million, or 115%, to $422.2 million.

Pricing actions drove the increase, more than offsetting higher manufacturing and distribution costs per pound, as well as unfavorable mix.

Global segment cost of sales was $995.6 million, up 12% compared to the first half of fiscal 2022, primarily due to higher manufacturing and distribution costs.

Pricing actions drove the increase, which was partially offset by higher manufacturing and distribution costs per pound.

Global segment cost of sales was $1,474.4 million, up 13% compared to the first three quarters of fiscal 2022, primarily due to higher input and manufacturing and distribution costs.

Foodservice segment product contribution margin increased $104.4 million, or 34%, to $411.9 million.

Pricing actions drove the increase, and was partially offset by higher manufacturing and distribution costs per pound, unfavorable mix, and the impact of lower sales volumes.

Foodservice segment cost of sales was $452.3 million, up 5% compared to the first half of fiscal 2022, due to higher manufacturing and distribution costs, partially offset by lower sales volumes.

Pricing actions drove the increase, which was partially offset by higher manufacturing and distribution costs per pound, unfavorable mix, and the impact of lower sales volumes.

Foodservice segment cost of sales was $667.4 million, up 8% compared to the first three quarters of fiscal 2022, due to higher input and manufacturing and distribution costs, partially offset by lower sales volumes.

Retail segment product contribution margin increased $129.2 million, or 191%, to $197.0 million.

Pricing actions drove the increase, partially offset by higher manufacturing and distribution costs per pound.

Retail segment cost of sales was $240.9 million, up 3% compared to the first half of fiscal 2022, primarily due to higher manufacturing and distribution costs, partially offset by lower sales volumes.

Other segment product contribution margin increased $18.4 million to $5.6 million in the first half of fiscal 2023, as compared to a loss of $12.8 million in the first half of fiscal 2022.

These amounts include a $6.9 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, and a $16.9 million loss related to the contracts in fiscal 2022.

Pricing actions largely drove the increase, which was partially offset by higher manufacturing and distribution costs per pound and a $4.3 million increase in A&P.

Retail segment cost of sales was $369.5 million, up 7% compared to the first three quarters of fiscal 2022, primarily due to higher input and manufacturing and distribution costs, partially offset by lower sales volumes.

Other segment product contribution margin increased $8.1 million to $1.5 million in the first three quarters of fiscal 2023, as compared to a loss of $6.6 million in the first three quarters of fiscal 2022.

These amounts include losses of $14.3 million and $14.1 million related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts reported in this segment in fiscal 2023 and 2022, respectively.

Excluding these mark-to-market adjustments and realized settlements, Other segment product contribution margin increased $8.3 million, largely due to pricing actions in our vegetable business.

Selling, General and Administrative Expenses

SG&A increased $43.9 million to $226.1 million in the first half of fiscal 2023, and includes a net $26.5 million gain ($19.2 million after-tax, or $0.13 per share) related to actions taken to mitigate the effect of changes in currency rates on the pending purchase of the remaining ownership interest in LWM, net of other acquisition-related costs.

Excluding items impacting comparability, SG&A increased $70.4 million to $252.6 million, primarily due to higher compensation and benefits expense, and higher expenses related to improving our information systems and ERP infrastructure.

SG&A increased $88.2 million to $357.6 million in the first three quarters of fiscal 2023, and includes a net $30.8 million gain ($22.0 million after-tax, or $0.15 per share) related to actions taken to mitigate the effect of changes in currency rates on our purchase of the remaining equity interest in LW EMEA, net of other acquisition-related costs.

Excluding items impacting comparability, SG&A increased $119.0 million to $388.4 million, primarily due to higher compensation and benefits expense, and to a lesser extent higher expenses related to improving our information systems and ERP infrastructure, as well as a $7.5 million increase in A&P.

Interest Expense, Net

Compared with the first half of fiscal 2022, interest expense, net decreased $59.7 million to $50.6 million.

The first half of fiscal year 2022 includes a $53.3 million ($40.5 million after-tax or $0.28 per share) loss on extinguishment of debt associated with the redemption in full of our 2024 Notes and 2026 Notes.

Compared with the first three quarters of fiscal 2022, interest expense, net decreased $59.7 million to $76.4 million.

The first three quarters of fiscal year 2022 includes a $53.3 million ($40.5 million after-tax or $0.28 per share) 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”).

Excluding items impacting comparability, interest expense declined $6.4 million as higher capitalized interest and interest income more than offset the impact of higher interest rates on our floating rate debt.

Income Tax Expense

Income tax expense for the first half of fiscal 2023 and 2022 was $110.5 million and $18.3 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 24.8% and 22.7% for the first half of fiscal 2023 and 2022, respectively.

Excluding items impacting comparability, our effective tax rates for the first half of fiscal 2023 and 2022 were 25.5% and 23.0%.

Income tax expense for the first three quarters of fiscal 2023 and 2022 was $152.6 million and $49.4 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.0% and 22.6% for the first three quarters of fiscal 2023 and 2022, respectively.

Excluding items impacting comparability, our effective tax rates for the first three quarters of fiscal 2023 and 2022 were 23.4% and 22.5%, 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.

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

Equity Method Investment Earnings

Equity method investments earnings were $67.3 million and $16.3 million for the first half of fiscal 2023 and 2022, respectively.

Equity method investment earnings included a $14.4 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the first half of fiscal 2023, of which $9.5 million ($7.0 million after-tax, or $0.05 per share) related to gains in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

Equity method investment earnings in the first half of fiscal 2022 included a $7.9 million unrealized gain for mark-to-market adjustments, of which $11.3 million ($8.4 million after-tax, or $0.06 per share) related to gains in natural gas and electricity derivatives.

Equity method investment earnings in the first half of fiscal 2023 also included a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with remeasuring our previously held 50% ownership interest in LWAMSA to fair value.

Excluding the items impacting comparability noted above (mark-to-market adjustments related to natural gas and electricity derivatives and the remeasurement of our previously held ownership interest in LWAMSA) and the other mark-to-market adjustments, earnings from equity method investments increased $29.4 million compared to the prior year, reflecting favorable price/mix, partially offset by higher manufacturing and distribution costs, in both Europe and the U.S.

Equity method investments earnings were $44.0 million and $46.0 million for the first three quarters of fiscal 2023 and 2022, respectively.

Equity method investment earnings included a $31.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in the first three quarters of fiscal 2023, of which $37.8 million ($28.1 million after-tax, or $0.18 per share) related to losses in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

Equity method investment earnings in the first three quarters of fiscal 2022 included a $27.5 million unrealized gain for mark-to-market adjustments, of which $30.6 million ($22.7 million after-tax, or $0.16 per share) related to gains in natural gas and electricity derivatives.

Equity method investment earnings in the first three quarters of fiscal 2023 also included a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with remeasuring our previously held 50% equity interest in LWAMSA to fair value.

Excluding the items impacting comparability noted above (mark-to-market adjustments related to natural gas and electricity derivatives and the remeasurement of our previously held 50% equity interest in LWAMSA) and the other mark-to-market adjustments, earnings from equity method investments increased $41.5 million compared to the prior year, reflecting favorable price/mix, partially offset by higher manufacturing and distribution costs, in both Europe and the U.S.

Liquidity and Capital Resources

Sources and Uses of Cash

We ended the first half of fiscal 2023 with $419.4 million of cash and cash equivalents and $994.6 million of availability under our revolving credit facility, net of letters of credit.

As of November 27, 2022, no borrowings were outstanding under the revolving credit facility.

In October 2022, we entered into an agreement to acquire the remaining interest in LWM for consideration consisting of €525.0 million in cash and €175.0 million in shares of our common stock.

We expect to close the transaction in the fourth quarter of fiscal 2023, subject to customary regulatory approvals.

We expect to fund the cash portion of this acquisition with new borrowings and cash on hand.

We ended the first three quarters of fiscal 2023 with $675.0 million of cash and cash equivalents and $994.6 million of availability under our revolving credit facility, net of letters of credit.

As of February 26, 2023, no borrowings were outstanding under the revolving credit facility.

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, and in the longer term, 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

Thirty-Nine Weeks Ended

(in millions)

4 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating Activities

In the first half of fiscal 2023, cash provided by operating activities increased $80.5 million to $288.0 million, compared with $207.5 million in the same period a year ago.

The increase related to a $128.5 million increase in income from operations, adjusted for non-cash income and expenses, offset by $48.0 million of cash used for unfavorable changes in working capital.

In the first three quarters of fiscal 2023, cash provided by operating activities increased $161.1 million to $335.1 million, compared with $174.0 million in the same period a year ago.

The increase related to a $213.9 million increase in income from operations, adjusted for non-cash income and expenses, partially offset by $52.8 million of cash used for unfavorable changes in working capital.

See “Results of Operations” in this MD&A for more information related to the increase in income from operations.

Unfavorable changes in working capital primarily related to higher-cost finished goods inventories, due primarily to increased potato and input cost inflation.

These unfavorable changes were partially offset by an increase in accounts payable due to timing, an increase in accrued liabilities due to higher compensation and benefits accrued in fiscal 2023, compared with the prior year period, and an increase in income taxes payable due to higher taxable income in fiscal 2023, compared with the prior year period.

These unfavorable changes were partially offset by an increase in accrued liabilities due to higher compensation and benefits accrued in fiscal 2023, compared with the prior year period, a decrease in prepaid expenses and other current assets due to differences between contracted volumes and actual usage for grower storage as well as timing of advances to growers, an increase in accounts payable due to timing, and a decrease in receivables attributable to timing of collection of accounts receivable.

Investing Activities

Investing activities used $311.0 million of cash in the first half of fiscal 2023, compared with $147.6 million in the same period in the prior year.

Investing activities used $535.7 million of cash in the first three quarters of fiscal 2023, compared with $226.2 million in the same period in the prior year.

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

We expect to use approximately $475 million to $525 million for capital expenditures, excluding our pending acquisition of LWM and other acquisitions, if any, in fiscal 2023.

We also used $42.3 million to acquire an additional ownership interest in our joint venture in Argentina and used $37.4 million to acquire assets associated with the improvement of our information and technology services infrastructure.

We expect to use approximately $700 million to $725 million in fiscal 2023, including capital expenditures at LW EMEA, but excluding the purchase price to acquire equity interests in our joint ventures in Europe and Argentina.

During the first three quarters of fiscal 2023, we also used $42.3 million to acquire an additional equity interest in our joint venture in Argentina and used $67.6 million to largely acquire assets associated with the improvement of our information and technology services infrastructure.

On February 28, 2023, we acquired the remaining equity interest in LW EMEA for €531.6 million ($564.0 million) in cash, subject to certain post-closing adjustments pursuant to the purchase agreement, and 1,952,421 shares of our common stock.

With the completion of the transaction, we own 100% of LW EMEA.

We funded the cash portion of the acquisition with the proceeds from a $450.0 million term loan and $114.0 million of cash on hand.

Financing Activities

In the first half of fiscal 2023, cash used for financing activities decreased $122.7 million to $96.6 million, compared with $219.3 million used during the same period a year ago.

During the first half of fiscal 2023, financing activities primarily related to $23.3 million of additional borrowings under our RMB-denominated loan facility, offset by $16.7 million of debt and financing obligation repayments, and the payment of $70.6 million of cash dividends to our common stockholders.

During the first three quarters of fiscal 2023, financing activities primarily related to issuing a new term loan facility for net proceeds of $450.0 million and borrowing $59.1 million and $1.7 million under our RMB-denominated loan facility and other credit facilities, respectively, offset by $24.6 million of debt and financing obligation repayments, and the payment of $105.8 million of cash dividends to our common stockholders.

In addition, we used $47.2 million of cash to repurchase 529,167 shares of our common stock at an average price of $76.66 per share and withheld 83,973 shares from employees to cover income and payroll taxes on equity awards that vested during the period.

In the first half of fiscal 2022, financing activities primarily related to issuing senior notes, which generated 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 our common stockholders, and the payment of an aggregate redemption premium of $39.6 million relating to the notes redemption.

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

In the first three quarters of fiscal 2022, cash used for financing activities primarily related to issuing U.S.

dollar-denominated senior notes and a RMB-denominated loan facility for combined net proceeds of $1,669.2 million, offset by $1,690.1 million of debt and financing obligation repayments, including cash used to redeem our previously outstanding 2024 Notes and 2026 Notes, the payment of $103.0 million of cash dividends to common stockholders, and the payment of an aggregate call premium of $39.6 million relating to redeeming the 2024 Notes and 2026 Notes.

In addition, we used $133.7 million of cash to repurchase 2,027,891 shares of our common stock at an average price of $62.15 per share and withheld 116,780 shares from employees to cover income and payroll taxes on equity awards that vested during the period.

For more information about our debt, interest rates, maturity dates, and covenants, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1.

1 unchanged sentence

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

At November 27, 2022, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.

At February 26, 2023, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.

Obligations and Commitments

Except for our pending acquisition of the remaining ownership interest in LWM as discussed in this MD&A, there have been no material changes to the contractual obligations disclosed in “Management's Discussion and Analysis of Financial Condition and Results of Operations"

Except for our acquisition of the remaining equity interest in LW EMEA, as discussed in this MD&A, and the related liabilities assumed from the acquisition, there have been no material changes to the contractual obligations disclosed in “Management's Discussion and Analysis of Financial Condition and Results of Operations"

in the Form 10-K.

5 unchanged sentences

Our management also uses Adjusted Income from Operations, Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures.

These non-GAAP financial measures reflect management’s exclusion of items impacting comparability between periods as management believes these items are not necessarily reflective of the underlying operating trends of our business.

We use these non-GAAP financial measures as a means to evaluate the underlying performance of our business on an ongoing basis, and we believe these measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide useful supplemental information regarding the factors and trends affecting Lamb Weston’s business than could be obtained absent these disclosures.

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.

We believe that the presentation of these non-GAAP financial measures, when used in conjunction with GAAP financial measures, is a useful financial analysis tool that can assist investors in assessing our operating performance and underlying prospects.

These non-GAAP financial measures should be viewed in addition to, and not as alternatives for, financial measures prepared in accordance with GAAP.

These measures are not a substitute for their comparable GAAP financial measures, such as gross profit, income from operations, net income, or diluted earnings per share, and there are limitations to using non-GAAP financial measures.

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 November 27, 2022 compared to Thirteen Weeks Ended November 28, 2021 – Net Sales, Gross Profit, and Product Contribution Margin” and “Results of Operations – Twenty-Six Weeks Ended November 27, 2022 compared to Twenty-Six Weeks Ended November 28, 2021 – Net Sales, Gross Profit, and Product Contribution Margin” above for a reconciliation of product contribution margin on a consolidated basis to gross profit.

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 certain 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 historical performance, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating our results.

In addition, we believe that the presentation of these non-GAAP financial measures, when considered together with the most directly comparable GAAP financial measures and the reconciliations to those GAAP financial measures, provides investors with additional tools to understand the factors and trends affecting our underlying business than could be obtained absent these disclosures.

The non-GAAP financial measures provided in this report should be viewed in addition to, and not as an alternative for, financial measures prepared in accordance with GAAP that are presented in this report.

These measures are not substitutes for their comparable GAAP financial measures, such as gross profit, income from operations, net income, diluted earnings per share, 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.

See “Results of Operations – Thirteen Weeks Ended February 26, 2023 compared to Thirteen Weeks Ended February 27, 2022 – Net Sales, Gross Profit, and Product Contribution Margin” and “Results of Operations – Thirty-Nine Weeks Ended February 26, 2023 compared to Thirty-Nine Weeks Ended February 27, 2022 – 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

Thirty-Nine Weeks Ended

(in millions)

4 unchanged sentences

Depreciation and amortization

Items impacting comparability

Acquisition-related items, net (a)

Adjusted EBITDA

Unconsolidated Joint Ventures

Equity method investment earnings (loss)

Equity method investment (loss) earnings

Interest expense, income tax expense, and depreciation and

1 unchanged sentence

Items impacting comparability

Impact of LWM natural gas and electricity derivatives (a)

LWM acquisition-related items, net (b)

Impact of LW EMEA natural gas and electricity derivatives (b)

Gain on acquisition of interest in joint venture (c)

1 unchanged sentence

Adjusted EBITDA including unconsolidated joint ventures

(a) Equity method investment earnings (loss) for the thirteen weeks ended November 27, 2022 and November 28, 2021 included a $136.8 million unrealized loss ($101.5 million after-tax, or $0.70 per share) and a $6.3 million unrealized gain ($4.7 million after-tax, or $0.03 per share), respectively;

and for the twenty-six weeks ended November 27, 2022 and November 28, 2021, included unrealized gains of $9.5 million ($7.0 million after-tax, or $0.05 per share) and $11.3 million ($8.4 million after-tax, or $0.06 per share), respectively, related to mark-to-market adjustments associated with changes in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

(b) Income from operations for the thirteen and twenty-six weeks ended November 27, 2022 included a net $26.5 million gain ($19.2 million after-tax, or $0.13 per share) related to actions taken to mitigate the effect of changes in currency rates on the pending purchase of the remaining ownership interest in LWM, net of other acquisition-related costs.

(c) Equity method investment earnings for the twenty-six weeks ended November 27, 2022 included a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with our acquisition of an additional 40% interest in our Argentina joint venture, increasing our ownership from 50% to 90%.

The gain related to the remeasuring of our previously held 50% ownership interest to fair value.

(a) Income from operations for the thirteen weeks and thirty-nine weeks ended February 26, 2023 included a net $4.3 million gain ($2.8 million after-tax, or $0.02 per share) and a net $30.8 million gain ($22.0 million after-tax, or $0.15 per share), respectively, related to actions taken to mitigate the effect of changes in currency rates on our fourth quarter purchase of the remaining equity interest in LW EMEA, net of other acquisition-related costs.

(b) Equity method investment earnings (loss) for the thirteen weeks ended February 26, 2023 and February 27, 2022 included a $47.3 million unrealized loss ($35.1 million after-tax, or $0.24 per share) and a $19.3 million unrealized gain ($14.3 million after-tax, or $0.10 per share), respectively;

and for the thirty-nine weeks ended February 26, 2023 and February 27, 2022, included unrealized losses of $37.8 million ($28.1 million after-tax, or $0.18 per share) and unrealized gains of $30.6 million ($22.7 million after-tax, or $0.16 per share), respectively, related to mark-to-market adjustments associated with changes in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

(c) Equity method investment earnings for the thirty-nine weeks ended February 26, 2023 included a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with our acquisition of an additional 40% equity interest in our Argentina joint venture, increasing our equity ownership from 50% to 90%.

The gain related to remeasuring our previously held 50% equity interest to fair value.

The following tables reconcile income from operations to Adjusted Income from Operations, net income to Adjusted Net Income, and diluted EPS to Adjusted Diluted EPS:

3 unchanged sentences

Items impacting comparability:

Impact of LWM natural gas and electricity derivatives (b)

LWM acquisition-related items, net (c)

Loss on extinguishment of debt (e)

Impact of LW EMEA natural gas and electricity derivatives (b)

Acquisition-related items, net (c)

Total items impacting comparability

For the Twenty-six Weeks Ended

For Thirty-Nine Weeks Ended

(in millions, except per share amounts)

1 unchanged sentence

Items impacting comparability:

Impact of LWM natural gas and electricity derivatives (b)

LWM acquisition-related items, net (c)

Impact of LW EMEA natural gas and electricity derivatives (b)

Acquisition-related items, net (c)

Gain on acquisition of interest in joint venture (d)

1 unchanged sentence

Total items impacting comparability

(a) Diluted weighted average common shares were 144.6 million and 146.3 million for the thirteen weeks ended November 27, 2022 and November 28, 2021, respectively, and 144.6 million and 146.6 million for the twenty-six weeks ended November 27, 2022 and November 28, 2021, respectively .

(b) See footnote (a) to the reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures above for a discussion of the item impacting comparability.

(c) See footnote (b) to the reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures above for a discussion of the item impacting comparability.

(a) Diluted weighted average common shares were 144.8 million and 145.5 million for the thirteen weeks ended February 26, 2023 and February 27, 2022, respectively, and 144.7 million and 146.2 million for the thirty-nine weeks ended February 26, 2023 and February 27, 2022, respectively .

(b) See footnote (b) to the reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures above for a discussion of the item impacting comparability.

(c) See footnote (a) to the reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures above for a discussion of the item impacting comparability.

(d) See footnote (c) to the reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures above for a discussion of the item impacting comparability.

There was no tax on the gain associated with purchasing an additional 40% interest in our Argentina joint venture.

(e) 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 redemption 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.

There was no tax on the gain associated with the acquisition of an additional 40% equity interest in our Argentina joint venture.

(e) The thirty-nine weeks ended February 27, 2022, include a loss on the extinguishment of debt of $53.3 million ($40.5 million after-tax), which consists of an aggregate redemption 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

3 unchanged sentences

included in the Form 10-K.

There were no material changes to these critical accounting policies and estimates during the first half of fiscal 2023.

There were no material changes to these critical accounting policies and estimates during the first three quarters of fiscal 2023.

New and Recently Adopted Accounting Pronouncements

3 unchanged sentences

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