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Item 7. Management’s Discussion and Analysis

2023-07-25 compared with 2022-07-27 · 196 added, 187 removed, 130 unchanged (75% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide a summary of significant factors relevant to our financial performance and condition.

The discussion and analysis should be read together with our consolidated financial statements and related notes in “Part II, Item 8.

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

Results for the fiscal year ended May 29, 2022 are not necessarily indicative of results that may be attained in the future.

The following generally discusses fiscal 2022 and 2021 items and fiscal year comparisons between fiscal 2022 and 2021.

The following management’s discussion and analysis of our results of operations and financial condition, which we refer to in this filing as “MD&A,” should be read in conjunction with the audited financial statements and the notes thereto.

Discussions of fiscal 2021 items and fiscal year comparisons between fiscal 2022 and 2021 that are not included in this Form 10-K can be found in “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended May 29, 2022, which we filed with the SEC on July 27, 2022.

Lamb Weston, along with our joint ventures, is a leading global producer, distributor, and marketer of value-added frozen potato products.

We, along with our joint ventures, are the number one supplier of value-added frozen potato products in North America.

We, along with our joint ventures, are also a leading supplier of value-added frozen potato products internationally, with a strong and growing presence in high-growth emerging markets.

We, along with our joint ventures, offer a broad product portfolio to a diverse channel and customer base in over 100 countries.

French fries represent the majority of our value-added frozen potato product portfolio.

Management’s discussion and analysis of our results of operations and financial condition, which we refer to in this filing as “MD&A,” is provided as a supplement to the consolidated financial statements and related notes included elsewhere in this Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

Results for the fiscal year ended May 28, 2023 are not necessarily indicative of results that may be attained in the future.

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 product contribution margin on a consolidated basis, Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), Adjusted EBITDA including unconsolidated joint ventures, Adjusted Diluted earnings per share (“EPS”), and Adjusted Net Income) 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 Diluted EPS, and Adjusted Net Income, and a reconciliation of these non-GAAP financial measures to gross profit, net income or diluted EPS, as applicable.

Executive Summary

In fiscal 2022, we delivered a solid financial and operating performance in a highly challenging environment that was characterized by severe input and transportation cost inflation, a historically poor potato crop in the Pacific Northwest, and constraints in labor availability and logistics networks.

We drove strong net sales growth by executing pricing actions and improving product and customer mix.

These actions, along with our supply chain productivity initiatives, served to offset some, but not all, of the cost and operating headwinds that we faced throughout the year.

Specifically, compared with the prior year:

● Net sales increased 12% to $4,098.9 million

● Income from operations decreased 6% to $444.4 million

● Net income decreased 37% to $200.9 million and Adjusted Net Income decreased 4% to $304.1 million

● Diluted EPS decreased 36% to $1.38 and Adjusted Diluted EPS decreased 4% to $2.08

● Adjusted EBITDA including unconsolidated joint ventures decreased 3% to $725.7 million

● Net cash provided by operating activities declined 24% to $418.1 million

Compared with fiscal 2021, the increase in net sales was primarily driven by higher price/mix and sales volumes.

The increase in price/mix reflected the benefit of multiple product pricing actions across each of our business segments to offset input cost inflation, as well as higher prices charged for product delivery.

The increase in sales volumes reflected

higher shipments to restaurant and foodservice channels in North America as demand continued to rebound towards pre-pandemic levels.

The increase was most pronounced in our Foodservice segment, which has a higher proportion of its sales to on-premise dining establishments, while shipments to our large chain quick service restaurant (“QSR”) and casual dining restaurant customers in the U.S., which are included in our Global segment, also increased.

The sales volume increase was partially offset by lower export volumes, which are included in our Global segment, and lower shipments in our Retail segment.

Our sales growth was also tempered by widespread industry supply chain constraints that resulted in lower production run-rates and throughput in our production facilities.

Outside of North America, the recovery in frozen potato demand varied and generally lagged U.S.

Shipments to customers in China fell as restaurant traffic and consumer demand was negatively affected by government-imposed restrictions geared towards reducing the spread of COVID-19-related variants, while shipments to other key markets in Asia and Oceania were negatively affected by global logistics constraints.

In Europe, which is served by our LWM joint venture, sales volumes increased as restaurant traffic continued to improve, although earnings were negatively affected by inflation, production, and transportation challenges.

Gross profit in fiscal 2022 was flat compared to fiscal 2021, as favorable price/mix offset higher manufacturing and distribution costs on a per pound basis, while income from operations declined $30.4 million to $444.4 million as a result of higher selling, general and administrative (“SG&A”) expenses.

Compared to fiscal 2021, net income declined $116.9 million to $200.9 million, while Diluted EPS declined $0.78 to $1.38.

Most of the declines were due to a $62.7 million (before and after-tax, or $0.43 per share) non-cash impairment charge associated with LWM’s announced intent, in the fourth quarter of fiscal 2022, to withdraw from its joint venture in Russia in response to the war in Ukraine, as well as a loss of $53.3 million ($40.5 million after-tax or $0.27 per share) associated with a transaction to lower the interest rates and extend the maturities on some outstanding debt (see Liquidity and Capital Resources below).

We generated full-year cash from operations of $418.1 million and cash flow after investing activities of $107.6 million.

We ended the year with $525.0 million of cash and cash equivalents and no borrowings on our revolving credit facility.

In addition, we returned $289.1 million to our stockholders, including $138.4 million in cash dividends and $150.7 million of share repurchases.

In July 2022, we used approximately $42 million to acquire an additional forty percent interest in our joint venture in Argentina, LWAMSA, increasing our total ownership from fifty percent to ninety percent.

Following the acquisition, we will consolidate LWAMSA’s results in our consolidated financial statements.

In fiscal 2023, we expect price/mix to increase largely due to pricing actions that we began to implement in fiscal 2022 in an effort to mitigate manufacturing and distribution cost inflation.

We also expect sales volumes to grow largely due to the expected continuation in the rise of U.S.

demand for frozen potato products, although our volume growth may be tempered by production capacity and logistics constraints.

In addition, we expect that U.S.

restaurant traffic, demand, and volume growth may be increasingly volatile as consumers respond to the current inflationary environment.

We expect the rate of recovery of demand in our key international markets will be mixed, and that our international shipments will continue to be tempered by limited shipping container availability and disruptions to ocean freight networks.

During the first half of fiscal 2023, we expect our gross margins will be pressured as compared to normalized seasonal rates as we continue to manage through significant inflation as well as higher raw potato costs on a per pound basis due to the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in the fall of 2021.

We also expect our gross margins in the first half of fiscal 2023 will be pressured by ongoing industrywide operational challenges, including labor and commodities shortages, resulting from volatility in the broader supply chain.

During the second half of fiscal 2023, we expect our gross margins will improve if the potato crop harvested in fall 2022 is in line with historical averages, we continue to successfully implement our pricing actions to offset input and transportation costs inflation, and we realize a broad easing of labor and logistics pressures that have been constraining our production and shipments.

We expect overall SG&A to be higher as a result of increased compensation and benefits expenses and investments to improve our information technology infrastructure over the long-term, including our efforts to design and implement the next phase of a new ERP system.

Results of Operations

We have four reportable segments:

generally accepted accounting principles (“GAAP”) and certain other financial data (including product contribution margin on a consolidated basis, Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), Adjusted EBITDA including unconsolidated joint ventures, Adjusted Income from Operations, Adjusted Net Income, and Adjusted Diluted earnings per share (“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 their most directly comparable GAAP financial measures, gross profit, income from operations, net income, or diluted EPS, as applicable.

Acquisitions of Joint Venture Interests

In February 2023, we completed the acquisition of the remaining 50 percent equity interest in Lamb-Weston/Meijer v.o.f.

(“LW EMEA”), and in July 2022, we acquired an additional 40 percent interest in Lamb Weston Alimentos Modernos S.A.

With the completion of the transactions, we own 100 percent and 90 percent of the equity interests in LW EMEA and LWAMSA (the “Acquisitions”), respectively.

We acquired the remaining interest in LW EMEA (the “LW EMEA Acquisition”) for consideration consisting of €531.6 million ($564.0 million) in cash, which excludes settlement of pre-existing relationships and cash held by LW EMEA, and 1,952,421 shares of our common stock.

We used $42.3 million of cash to acquire the additional equity interest in LWAMSA.

We began consolidating LW EMEA’s and LWAMSA’s results in our consolidated financial statements following the respective acquisitions.

The results are included in our Global segment.

We discuss the Acquisitions in more detail in Note 3, Acquisitions, in “Part II, Item 8.

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

Changes in our fiscal 2023 financial results compared to fiscal 2022 were primarily driven by the consolidation of the financial results of LW EMEA in fiscal 2023.

Lamb Weston is a leading global producer, distributor, and marketer of value-added frozen potato products.

We are the number one supplier of value-added frozen potato products in North America and are a leading supplier of value-added frozen potato products internationally, with a strong and growing presence in high-growth emerging markets.

We offer a broad product portfolio to a diverse channel and customer base in over 100 countries.

French fries represent most of our value-added frozen potato product portfolio.

During fiscal 2023, we operated our business in four reportable segments:

Global, Foodservice, Retail, and Other.

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Product contribution margin, when presented on a consolidated basis, is a non-GAAP financial measure.

Net sales and product contribution margin are the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance.

Product contribution margin represents net sales less cost of sales and advertising and promotion (“A&P”) expenses.

Product contribution margin includes advertising and promotion expenses because those expenses are directly associated with the performance of our segments.

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

Net sales and product contribution margin are the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance.

For additional information on our reportable segments and product contribution margin, see “Non-GAAP Financial Measures” below and Note 13, Segments, of the Notes to Consolidated Financial Statements in “Part II, Item 8.

Financial Statements and Supplementary Data” in this Form 10-K.

Effective May 29, 2023, in connection with our recent acquisitions and to align with our expanded global footprint, our management, including our chief executive officer, who is our chief operating decision maker, began managing our operations as two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources.

This resulted in a change from four reportable segments to two (North America and International), effective the beginning of fiscal 2024.

All summary financial information on a prospective basis will be presented under the new reportable segments beginning with the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ending August 27, 2023.

Executive Summary

The following highlights our financial results for fiscal 2023.

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

In fiscal 2023, we delivered record net sales and earnings through a combination of improved pricing and supply chain productivity savings, while we continued to operate in a significant input cost inflation environment.

Our net sales growth was driven primarily by pricing actions across each of our core business segments, as well as incremental sales attributable to the acquisitions of additional equity interests in LW EMEA and LWAMSA.

Sales volume declined, largely reflecting our efforts to strategically manage customer and product mix by exiting certain lower-priced and lower-margin business.

To a lesser extent, sales volumes towards the end of fiscal 2023 were also negatively affected by softening traffic in casual dining and full-service restaurant channels (which largely impacted our Foodservice segment), certain international customers reverting to pre-Covid inventory practices (impacted our Global segment), and certain customers in select U.S.

retail channels temporarily lowering prices to reduce private label inventories (impacted our Retail segment).

Outside of North America, frozen potato demand varied, although restaurant traffic trends in our key markets, including Europe, generally softened as customers and consumers both faced similar or more severe macroeconomic environments, including persistent inflation and rising interest rates, than in the U.S.

Gross profit in fiscal 2023 increased as favorable price/mix more than offset higher manufacturing costs on a per pound basis and the impact of lower sales volumes.

Incremental earnings from the consolidation of the financial results of LW EMEA beginning in the fiscal fourth quarter also contributed to the increase.

Increased gross profit was partially offset by higher selling, general and administrative (“SG&A”) expenses, resulting in the increase in income from operations.

Higher income from operations drove the increase in net income and diluted EPS.

In fiscal 2023, we generated net cash from operating activities of $761.7 million, up $343.1 million versus the prior year, due to higher earnings, partially offset by increased working capital.

We ended fiscal 2023 with $304.8 million of cash and cash equivalents and a $1.0 billion undrawn U.S.

revolving credit facility.

In addition, we returned $191.1 million to our stockholders, including $146.1 million in cash dividends and $45.0 million of share repurchases.

In fiscal 2024, we expect to deliver net sales and earnings growth, and to benefit from incremental sales and earnings during the first three quarters of the fiscal year attributable to the consolidation of the financial results of LW EMEA, as compared to the first three quarters of fiscal 2023.

In addition to the incremental sales for the consolidation of LW EMEA, we expect our net sales growth to be largely driven by pricing actions (which may be more modest than fiscal 2023) to counter input cost inflation, and expect sales volumes will be pressured by our continued efforts to strategically manage our customer and product mix by exiting certain lower-priced and lower-margin business.

We also anticipate that demand for our products in the near term may be tempered by ongoing softening restaurant traffic trends in the U.S.

and other key markets as our customers and consumers both respond to challenging macroeconomic environments.

We expect our earnings growth to be largely driven by sales and gross profit growth, and that the rate of input cost inflation, driven largely by higher potato costs, will, in aggregate, moderate as compared to fiscal 2023 inflation rates.

In addition, our expectation of gross profit growth presumes that the yield and quality of the potato crops in our growing regions will be largely consistent with historical averages.

We anticipate that the increase in gross profit will be partially offset by higher SG&A, reflecting incremental expense attributable to the consolidation of the financial results of LW EMEA, increased investments to upgrade our information systems and enterprise resource planning (“ERP”) infrastructure, the non-cash amortization of intangible assets associated with the LW EMEA Acquisition as well as prior investments in our ERP infrastructure, and higher compensation and benefits expense due to increased headcount.

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

Results of Operations

Fiscal Year Ended May 28, 2023 Compared to Fiscal Year Ended May 29, 2022

Net Sales and Product Contribution Margin

Net Sales, Gross Profit, and Product Contribution Margin

(in millions, except percentages)

Increase (Decrease)

Segment net sales

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Advertising and promotion expenses

Lamb Weston’s net sales for fiscal 2022 increased $428.0 million, or 12%, to $4,098.9 million, compared with $3,670.9 million in fiscal 2021.

Price/mix increased 9%, primarily reflecting the benefit of pricing actions across each of our business segments to offset input, manufacturing, and transportation cost inflation, as well as favorable mix.

Volume increased 3%, reflecting higher shipments to restaurant and foodservice channels in North America, partially offset by lower exports due to limited shipping container availability and disruptions to ocean freight networks, as well as lower shipments to retail channels.

Our volume growth was tempered by an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor and commodities shortages, that resulted in lower production run-rates and throughput in our production facilities.

Global net sales increased $152.7 million, or 8%, to $2,064.2 million, compared with $1,911.5 million in fiscal 2021.

Price/mix increased 6% and volume increased 2%.

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.

A strong increase in sales volumes to North American large QSR and casual dining restaurant chain customers was partially offset by lower export shipments due to limited shipping container availability and disruptions to ocean freight networks.

Foodservice net sales increased $300.9 million, or 30%, to $1,318.2 million, compared with $1,017.3 million in fiscal 2021.

Volume and price/mix each increased 15%.

The benefits of product and freight pricing actions taken throughout the year to offset inflation, as well as favorable mix, drove the increase in price/mix.

The segment’s strong volume growth reflects the progressive recovery in demand in its restaurant and non-commercial channels, although growth was tempered by an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor shortages, that resulted in lower production run-rates and throughput in our production facilities.

Retail net sales decreased $8.8 million, or 1%, to $594.6 million, compared with $603.4 million in fiscal 2021.

Volume declined 8% while price/mix increased 7%.

Lower shipments of private label products, resulting from incremental losses of certain low-margin business, as well as lower shipments of branded products, drove the sales volume decline.

The decline in branded product volume reflected an inability to fully serve customer demand due to lower production run-rates and throughput in our production facilities.

Product and freight pricing actions across the branded and private label portfolios to offset inflation, as well as improved mix, drove the increase in price/mix.

Net sales in our Other segment declined $16.8 million, or 12%, to $121.9 million, compared with $138.7 million in fiscal 2021.

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, partially offset by the benefit of pricing actions.

Lamb Weston’s net sales for fiscal 2023 increased $1,251.7 million, or 31%, to $5,350.6 million, and included $421.0 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA beginning in our fiscal fourth and first quarters, respectively.

Net sales, excluding the incremental sales attributable to the Acquisitions, increased 20% versus the prior year.

Price/mix increased 26%, reflecting the benefit of pricing actions across each of our core business segments to counter input and manufacturing cost inflation.

Volume declined 6%, largely reflecting our efforts to exit certain lower-priced and lower-margin business as we continued to strategically manage customer and product mix, as well as softer demand due to a slowdown in casual and full-service restaurant traffic.

To a lesser extent, in late fiscal 2023, inventory destocking by certain customers in international markets as well as in select U.S.

retail channels contributed to the volume decline.

Global net sales increased $870.2 million, or 42%, to $2,934.4 million, and included $421.0 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA.

Net sales, excluding the incremental sales attributable to the Acquisitions, grew 22%.

The benefit of domestic and international

pricing actions to counter multi-year inflationary pressures, as well as favorable mix, drove a 27% increase in price/mix.

Volume declined 5%, largely reflecting our efforts to exit certain lower-priced and lower-margin business in international and domestic markets, and to a lesser extent, lower shipments in response to inventory destocking by certain customers in international markets late in fiscal 2023.

Foodservice net sales increased $170.9 million, or 13%, to $1,489.1 million, with price/mix up 22% and volume down 9%.

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.

The impact of our efforts to exit certain lower-priced and lower-margin business and a slowdown in casual dining and other full-service restaurant traffic drove the volume decline.

Retail net sales increased $203.1 million, or 34%, to $797.7 million.

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 drove a 38% increase in price/mix.

Volume fell 4%, largely driven by our efforts to exit certain low-margin, private label business, and to a lesser extent, the impact of certain customers in select retail channels taking actions to reduce private label inventories late in fiscal 2023.

Other net sales increased $7.5 million, or 6%, to $129.4 million, reflecting the benefit of pricing actions and volume growth in our vegetable business.

Gross Profit and Product Contribution Margin

Gross profit in fiscal 2022 was flat compared to fiscal 2021 at $832.0 million, as the benefits from higher price/mix and volume were offset by the impact of higher manufacturing and distribution costs on a per pound basis.

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

ingredients such as grains and starches used in product coatings;

and higher transportation costs.

The increase in costs per pound also reflected higher raw potato costs due to the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in fall 2021, the effects of labor and commodities shortages on production run-rates, as well as lower raw potato utilization rates.

The increase in per pound costs was partially offset by securing changes to product specifications, portfolio simplification, and driving supply chain savings behind our Win as 1 productivity program.

Gross profit also included a $28.9 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $9.5 million loss in the current year, compared with a $19.4 million gain related to these items in the prior year.

Lamb Weston’s overall product contribution margin in fiscal 2022 declined $1.1 million to $813.1 million, compared with $814.2 million in fiscal 2021.

The decline was largely due to a $1.1 million increase in A&P expenses as gross profit was flat (as described above).

Global product contribution margin declined $54.0 million, or 18%, to $252.2 million in fiscal 2022.

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 $1,806.6 million, up 13% compared to fiscal 2021, primarily due to higher manufacturing and distribution costs and higher sales volumes.

Foodservice product contribution margin increased $109.3 million, or 32%, to $449.3 million in fiscal 2022.

Favorable price, volume and mix drove the increase, and were partially offset by higher manufacturing and distribution costs per pound.

Cost of sales was $863.8 million, up 28% compared to fiscal 2021, primarily due to higher manufacturing and distribution costs and higher sales volumes.

Retail product contribution margin declined $10.8 million, or 9%, to $109.4 million in fiscal 2022.

Higher manufacturing and distribution costs per pound and lower sales volumes drove the decline, partially offset by favorable price/mix and a $0.8 million decrease in A&P expenses.

Cost of sales was $477.1 million, up 1% compared to fiscal 2021, primarily due to higher manufacturing and distribution costs, partially offset by lower sales volumes.

Other product contribution margin declined $45.6 million to $2.2 million in fiscal 2022, as compared to $47.8 million in fiscal 2021.

These amounts include a $10.4 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in fiscal 2022, and a $27.8 million gain related to the

contracts in fiscal 2021.

Excluding these mark-to-market adjustments, Other segment product contribution margin declined $7.4 million, largely due to higher manufacturing costs and lower sales volumes in our vegetable business.

Gross profit in fiscal 2023 increased $600.1 million, or 72%, to $1,432.1 million, and included $45.7 million ($33.9 million after-tax, or $0.23 per share) of costs impacting comparability in the fiscal fourth quarter, which included the sale of inventory stepped-up in the LW EMEA Acquisition and unrealized loss related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA as the market experienced significant volatility.

Excluding these items, gross profit increased $645.8 million, or 78%, to $1,477.8 million driven primarily by the benefits from pricing actions more than offsetting the impacts of higher costs on a per pound basis and lower volumes.

Incremental earnings from the consolidation of the financial results of LW EMEA beginning in the fiscal fourth quarter also contributed to the increase.

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

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

The increase in gross profit was partially offset by a $29.0 million change in unrealized mark-to-market adjustments associated with commodity hedging contracts, reflecting a $38.5 million loss in the current year, compared with a $9.5 million loss related to these items in the prior year.

Lamb Weston’s overall product contribution margin in fiscal 2023 increased $584.6 million, or 72%, to $1,397.7 million.

The increase was driven by higher gross profit (as described above), partially offset by a $15.5 million increase in advertising and promotion (“A&P”) expenses.

Global product contribution margin increased $343.3 million, or 136%, to $595.5 million, and included $27.0 million ($20.0 million after-tax, or $0.14 per share) of costs associated with the sale of inventory stepped-up in the LW EMEA Acquisition.

Excluding this item, product contribution margin increased $370.3 million, or 147%, to $622.5 million.

Pricing actions, incremental earnings from the consolidation of the financial results of LW EMEA, and favorable mix drove the increase, which was partially offset by higher costs per pound.

Global cost of sales was $2,328.1 million, up 29%, primarily due to higher manufacturing costs.

Foodservice product contribution margin increased $101.7 million, or 23%, to $551.0 million.

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

Foodservice cost of sales was $930.8 million, up 8%, primarily due to higher manufacturing costs, partially offset by lower sales volumes.

Retail product contribution margin increased $170.7 million, or 156%, to $280.1 million in fiscal 2023.

Pricing actions drove the increase, which was partially offset by higher costs per pound and a $7.6 million increase in A&P expenses.

Retail cost of sales was $501.9 million, up 5%, primarily due to higher manufacturing costs, partially offset by lower sales volumes.

Other product contribution margin decreased $31.1 million to a loss of $28.9 million in fiscal 2023, as compared to a $2.2 million gain in fiscal 2022.

These amounts include a $48.4 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in fiscal 2023, and a $10.4 million loss related to contracts in fiscal 2022.

Excluding these mark-to-market adjustments, product contribution margin increased $6.9 million, largely due to higher prices in our vegetable business.

Selling, General and Administrative Expenses

SG&A expenses were $387.6 million, up $30.4 million, or 9%, in fiscal 2022 compared with fiscal 2021.

The increase was primarily due to higher compensation and benefits expense;

higher travel, employee relations and in-person meeting expenses;

higher information technology infrastructure costs, including expenses related to the planning and design of our new ERP system, and a $3.5 million contribution to the Lamb Weston charitable foundation.

The increase in SG&A was partially offset by lower consulting expenses associated with improving our commercial and supply chain operations.

SG&A expenses in fiscal 2023 increased $162.4 million, or 42%, to $550.0 million, and included a net $21.8 million gain ($12.2 million after-tax, or $0.08 per share) related to actions taken to mitigate the effect of changes in currency rates on the purchase price of LW EMEA, net of other acquisition-related costs.

Excluding this net gain, SG&A increased $184.2 million to $571.8 million, primarily due to higher compensation and benefits expense, incremental expenses attributable to the consolidation of the financial results of LW EMEA in the fiscal fourth quarter, higher expenses related to improving our information systems and ERP infrastructure, and a $15.5 million increase in A&P expenses.

Interest Expense, Net

Interest expense, net was $161.0 million in fiscal 2022, an increase of $42.7 million compared with fiscal 2021.

The increase reflects a $53.3 million ($40.5 million after-tax) loss on extinguishment of debt associated with the redemption of our previously outstanding senior notes due 2024 and 2026.

Excluding this loss, interest expense, net declined $10.6 million, reflecting a lower weighted average interest rate.

Interest expense, net in fiscal 2023 declined $51.8 million to $109.2 million.

The decrease reflects a $53.3 million ($40.5 million after-tax, or $0.27 per share) loss on extinguishment of debt associated with the redemption of our previously outstanding senior notes due 2024 and 2026, which occurred in fiscal 2022.

Excluding this loss, interest expense, net increased $1.5 million due primarily to additional interest expense associated with debt incurred for the LW EMEA Acquisition.

For more information, see Note 8, Debt and Financing Obligations, of the Notes to Consolidated Financial Statements in “Part II, Item 8.

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Our effective tax rate was 18.2% for fiscal 2023, compared to 26.3% in fiscal 2022.

The difference between our effective tax rates in fiscal 2022 and 2021 is primarily due to the Russia impairment charge treated as a non-deductible permanent difference.

Excluding $34.3 million of net tax expense and a $4.6 million benefit from items impacting comparability in fiscal 2023 and 2022, respectively, our effective tax rate was 21.8% for fiscal 2023 and 21.4% in fiscal 2022.

Our 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, and was elevated in fiscal 2022 relative to our historical rate due to the Russia impairment charge.

Excluding the Russia impairment charge, our effective tax rate for fiscal 2022 was 21.4%.

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

For further information on income taxes, see Note 5, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8.

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Equity Method Investment Earnings (Loss)

We conduct meaningful business through unconsolidated joint ventures and include our share of the earnings (loss) based on our economic ownership interest in them.

Lamb Weston’s share of earnings (loss) from its equity method investments was a loss of $10.7 million and earnings of $51.8 million for fiscal 2022 and 2021, respectively.

Equity method investment earnings in fiscal 2022 included a $62.7 million non-cash impairment charge to write-off our portion of LWM’s net investment in Russia resulting from LWM’s announced intent to withdraw from its joint venture in response to the war in Ukraine.

Equity method investment earnings also included a $26.5 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in fiscal 2022 and an $11.3 million gain related to these items in fiscal 2021.

The increase in mark-to-market adjustments in 2022 primarily relates to changes in the value of natural gas derivatives at LWM as commodity markets in Europe have experienced significant volatility.

Excluding the charge associated with the write-off of our portion of LWM’s net investment in Russia and the mark-to-market adjustments, earnings from equity method investments decreased $15.0 million compared to the prior year.

The decrease reflects input cost inflation and higher manufacturing and distribution costs in both Europe and the U.S., partially offset by the benefit of favorable price/mix and higher sales volumes.

We conducted meaningful business through unconsolidated joint ventures until we acquired the remaining interest of LW EMEA in February 2023.

In fiscal 2023 and 2022, our share of earnings (loss) from our equity method investments was $460.6 million of earnings and a $10.7 million loss, respectively.

The fiscal 2023 results include a $425.8 million ($379.5 million after-tax, or $2.62 per share) non-cash gain related to remeasuring our initial 50 percent equity interests in LW EMEA and LWAMSA to fair value.

Equity method earnings also includes a $31.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which $37.8 million ($28.0 million after-tax, or $0.19 per share) related to losses in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

Equity method investment gains in fiscal 2022 included a $26.5 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which $31.7 million ($23.5 million after-tax, or $0.16 per share) related to gains in natural gas and electricity derivatives .

Equity method investment earnings in fiscal 2022 also included a $62.7 million (before and after-tax, or $0.43 per share) non-cash impairment charge to write-off our then-current portion of LW EMEA’s net investment in its former joint venture in Russia.

Excluding these items (non-cash acquisition gains and impairment charge, and mark-to-market adjustments related to natural gas and electricity derivatives) and the other mark-to-market adjustments, earnings from equity method investments increased $52.3 million compared to the prior year, reflecting the benefit of pricing actions, partially offset by higher costs per pound, in both Europe and the U.S.

Fiscal 2023 Compared to Fiscal 2022 Balance Sheet Changes

The changes in our Consolidated Balance Sheet, compared with May 29, 2022, related primarily to the LW EMEA Acquisition and liabilities incurred to fund the LW EMEA Acquisition.

We increased our assets approximately $1,896.8 million and our liabilities approximately $449.3 million in total based on the fair values of LW EMEA’s assets and liabilities, respectively, on the acquisition date.

In addition, we incurred $450.0 million of new borrowings, which were used to fund a portion of the purchase price for the acquisition and for general corporate purposes, and also issued 1,952,421 million shares of our common stock as additional consideration for the acquisition.

For more information about the LW EMEA Acquisition, see Note 3, Acquisitions, of the Notes to Consolidated Financial Statements in “Part II, Item 8.

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

Liquidity and Capital Resources

We ended fiscal 2022 with $525.0 million of cash and cash equivalents and $994.6 million of availability on our revolving credit facility, which is net of outstanding letters of credit of $5.4 million.

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.

We ended fiscal 2023 with $304.8 million of cash and cash equivalents and a $1.0 billion undrawn U.S.

revolving credit facility.

We believe we have sufficient liquidity to meet our business requirements for at least the next 12 months.

Cash generated by operations, supplemented by our total cash and availability under our revolving credit facilities, is our primary source of liquidity for funding business requirements.

Our funding requirements include capital expenditures for announced manufacturing expansions in China, Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade information systems and ERP infrastructure, working capital requirements, and dividends.

We expect capital investments in fiscal 2024 to be approximately $800 million to $900 million, depending on timing of projects and excluding acquisitions, if any.

These expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, supply chain constraints for equipment, and our regulatory compliance requirements.

At May 28, 2023, we had commitments for capital expenditures of $623.9 million.

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:

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Net decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Operating Activities

During fiscal 2022, cash provided by operating activities decreased $135.1 million to $418.1 million, compared to $553.2 million for fiscal 2021.

The decrease related to $130.4 million of cash used for unfavorable changes in working capital, and a $4.7 million decrease in net income, adjusted for non-cash income and expenses.

Unfavorable changes in working capital primarily related to a decrease in accounts payable due to timing, an increase in receivables attributable to higher sales at the end of fiscal 2022, compared with the end of fiscal 2021, and higher finished goods inventories due to increased input costs and global disruption in freight networks.

These unfavorable changes were partially offset by a favorable change in accrued liabilities, which was primarily due to a shift in the timing of accrued interest payments for our senior notes.

Specifically, our senior notes due 2030 and 2032, which were issued in fiscal 2022, have payments due in the first quarter of fiscal 2023, whereas the now-redeemed senior notes due 2024 and 2026 had interest payments due in the fourth quarter of fiscal 2021.

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

During fiscal 2023, cash provided by operating activities increased $343.1 million to $761.7 million, compared to $418.6 million for fiscal 2022.

The increase related to a $306.8 million increase in net income, adjusted for non-cash income and expenses, in addition to an increase of $36.3 million of cash provided by favorable changes in working capital.

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

Favorable changes in working capital primarily related to an increase in accounts payable due to timing, a decrease in receivables attributable to timing of collection, and an increase in accrued liabilities due to higher compensation and benefits accrued in fiscal 2023, compared with fiscal 2022.

These favorable changes were offset by an unfavorable change in higher-cost finished goods inventories, due primarily to increased potato and input cost inflation.

Investing Activities

Investing activities used $1,340.9 million of cash in fiscal 2023, compared with $310.5 million in fiscal 2022.

The increase primarily relates to our concentrated effort in the prior year to control spending during the early stages of the COVID-19 pandemic to preserve liquidity.

In addition to maintenance capital expenditures, fiscal 2022 also reflected increased investments to support capacity expansion projects in Idaho and China.

We expect capital investments in fiscal 2023 to be approximately $475 million to $525 million, depending on timing of projects, which include among other items:

construction of a previously announced french fry production line and plant modernization investments in Idaho, construction of a greenfield french fry processing facility in China, and capital investments to upgrade information systems and ERP infrastructure.

At May 29, 2022, we had commitments for capital expenditures of $304.7 million.

In July 2022, we acquired an additional forty percent interest in our Argentina joint venture, LWAMSA, for approximately $42 million, increasing our total ownership of LWAMSA from fifty percent to ninety percent.

Following this acquisition, we will consolidate LWAMSA’s results in our consolidated financial statements.

The increase primarily relates to our investments in our chopped and formed capacity expansion and construction of our french fry processing line in Idaho and our greenfield french fry processing facility in China, and investments to upgrade our information systems and ERP infrastructure .

In addition, in fiscal 2023, we used $610.4 million to purchase the remaining equity interest in LW EMEA and an additional 40 percent equity interest in LWAMSA.

Financing Activities

During fiscal 2022, cash used for financing activities decreased $610.6 million to $363.4 million, compared with $974.0 million used during fiscal 2021.

During fiscal 2023, financing activities provided net proceeds of $340.8 million, compared with $363.4 million used in during fiscal 2022.

During fiscal 2023, financing activities included $529.5 million of proceeds from debt issuances including a new $450.0 million term loan facility to fund a portion of the LW EMEA Acquisition and $79.5 million of borrowings on other credit facilities.

We also had proceeds of $41.4 million from short-term borrowings on other facilities.

These activities were partially offset by the payment of $146.1 million of cash dividends to common stockholders and $32.6 million of debt and financing obligation repayments.

In addition, we used $51.6 million of cash to repurchase 569,698 shares of our common stock at an average price of $78.99 per share and withheld 83,974 shares from employees to cover income and payroll taxes on equity awards that vested during the year.

As of May 28, 2023, $223.9 million remained authorized for repurchase under our share repurchase program.

During fiscal 2022, financing activities primarily related to issuing U.S.

dollar-denominated senior notes and a RMB-denominated loan facility for combined net proceeds of $1,676.1 million, offset by $1,698.1 million of debt and financing obligation repayments, including cash used to redeem our previously outstanding senior notes due 2024 and 2026 (including the payment of a call premium of $39.6 million), and the payment of $138.4 million of cash dividends to common stockholders.

In addition, we used $158.4 million of cash to repurchase 2,407,184 shares of our common stock at an average price of $62.59 and withheld 118,204 shares from employees to cover income and payroll taxes on equity awards that vested during the year.

As of May 29, 2022, $268.9 million remained authorized for repurchase under our share repurchase program.

During fiscal 2021, we repaid the $495.0 million we borrowed under our revolving credit facility at the onset of the pandemic, and we repaid $305.5 million of other debt and financing obligations (including the repayment of the $271.9 million term loan facility that was scheduled to mature in November 2021).

We also paid $135.3 million in cash dividends to common stockholders.

During fiscal 2021, we repurchased 328,918 shares of our common stock at an average price of $78.19 and withheld 164,992 shares of common stock from employees to cover income and payroll taxes on equity awards that vested during the period.

In addition, we used $158.4 million of cash to repurchase 2,407,184 shares of our common stock at an average price of $62.59 per share and withheld 118,204 shares from employees to cover income and payroll taxes on equity awards that vested during the year.

For more information about our debt, including among other items, interest rates, maturity dates, and covenants, see Note 8, Debt and Financing Obligations, of the Notes to the Consolidated Financial Statements in “Part II, Item 8.

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At May 28, 2023, we were in compliance with all covenants contained in our credit agreements.

Investments in Joint Ventures

We conduct some of our business through three unconsolidated joint ventures and account for these investments using equity method accounting.

For more information about our investments in joint ventures, see Note 4, Equity Method Investments, of the Notes to the Consolidated Financial Statements in “Part II, Item 8.

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

Obligations and Commitments

As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements, potato supply agreements, and unconditional purchase obligations.

The unconditional purchase obligation arrangements are entered into in the normal course of business in order to ensure adequate levels of sourced product are available.

The unconditional purchase obligation arrangements are entered into in the normal course of business to ensure adequate levels of sourced product are available.

A summary of our material cash requirements for our known contractual obligations as of May 28, 2023 are as follows:

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Payable within 12 Months

Long-term debt, including current portion (a)

Short-term borrowings and long-term debt, including current portion (a)

Interest on long-term debt (b)

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Financial Statements and Supplementary Data” of this Form 10-K for more information.

● Long-term debt, including current portion .

● Short-term borrowings and long-term debt, including current portion .

See Note 8, Debt and Financing Obligations, for more information on debt payments and the timing of expected future payments.

See Note 8, Leases, for more information on our operating and finance lease obligations and timing of expected future

See Note 9, Leases, for more information on our operating and finance lease obligations and timing of expected future payments.

● Purchase obligations and capital commitments .

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To the extent there are differences between these estimates and actual results, our consolidated financial statements may be affected.

From time to time, we may enter into business combinations.

In July 2022 and February 2023, we acquired an additional 40 percent interest in LWAMSA and the remaining equity interest in LW EMEA, respectively.

With the completion of the Acquisitions, we own 90 percent and 100 percent of the equity interests in LWAMSA and LW EMEA, respectively .

We recorded the assets acquired and the liabilities assumed at their estimated acquisition date fair values with the excess purchase price recorded as goodwill.

The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values (fair value is determined using the income approach, cost approach and/or market approach) of inventory, property, plant and equipment, identifiable intangible assets, deferred tax asset valuation allowances, and liabilities related to uncertain tax positions, among others.

Additionally, for acquisitions of previously held equity interests, we remeasure the previously held equity interest to fair value based on consideration at the acquisition date utilizing a market approach based on comparable control premiums within our industry.

This method also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

If we are required to retroactively adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.

Significant estimates and assumptions in determining the fair value of brands and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets.

If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges.

In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense.

If our estimates of the economic lives change, depreciation or amortization expenses could increase or decrease.

Sales Incentives and Trade Promotion Allowances

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The determination of sales incentive and trade promotion costs requires judgment and may change in the future as a result of changes in customer demand for our products, promotion participation, particularly for new programs related to the introduction of new products.

Final determination of the total cost of promotion is dependent upon customers

providing information about proof of performance and other information related to the promotional event.

Final determination of the total cost of promotion is dependent upon customers providing information about proof of performance and other information related to the promotional event.

Because of the complexity of some of these trade promotions, the ultimate resolution may result in payments that are different from our estimates.

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At May 28, 2023 and May 29, 2022, we had $86.1 million and $41.2 million, respectively, of accrued trade promotions payable recorded in “Accrued liabilities” on our Consolidated Balance Sheets.

The increase from May 29, 2022 is primarily due to the LW EMEA Acquisition.

We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.

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

Impairment of Long-Lived Assets and Equity Method Investments

Long lived assets .

Our manufacturing assets are shared across all reporting segments, which are grouped together for long-lived asset impairment assessment.

We review these long-lived assets for impairment upon the occurrence of events or changes in circumstances which indicate that the carrying amount of the assets may not be fully recoverable, measured by comparing their net book value to the undiscounted projected future cash flows generated by their use.

Impaired assets are recorded at their estimated fair value.

In evaluating impairment of long-lived assets, we consider events or changes in circumstances related to market prices, physical condition of assets, legal actions, construction costs, future operating cash flows, remaining depreciable

lives, and potential asset disposal.

At May 29, 2022 and May 30, 2021, we did not identify any triggering events that would indicate that the carrying amounts of our assets groups may not be recoverable.

Equity method investments .

We conduct some of our business through unconsolidated joint ventures and include our share of the earnings based on our economic ownership interest in them.

At May 29, 2022 and May 30, 2021, we held 50% equity interests in three potato processing joint ventures, including LWM, Lamb Weston RDO, and LWAMSA.

These investments are accounted for under the equity method of accounting.

We are required to assess our equity method investments for other-than-temporary impairment when events or circumstances suggest the carrying amount of the investment may be impaired.

We perform our assessment of other-than-temporary impairment for each investment individually.

In evaluating other-than-temporary impairment of equity method investments, we consider events or changes in circumstances related to investee operating losses, investee future cash flows, and the ability to retain our investment in the investee.

In May 2022, in response to the war in Ukraine, LWM announced its intent to withdraw from its investment in Russia and recorded a charge to write-off its net investment in the market.

Our portion of the non-cash impairment charge was $62.7 million.

There were no indications of other-than-temporary impairment in any of our other equity method investments.

New and Recently Issued Accounting Standards

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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, Adjusted EBITDA including unconsolidated joint ventures, Adjusted Diluted EPS, and Adjusted Net Income, 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, Adjusted Income from Operations, Adjusted Net Income, 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.

Product contribution margin represents net sales less cost of sales and advertising and promotion expenses.

Product contribution margin includes advertising and promotion expenses because those expenses are directly associated with the performance of our segments.

Our management also uses Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures, Adjusted Diluted EPS, and Adjusted Net Income, 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 are useful to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision making.

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

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

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

See “Results of Operations – Fiscal Year Ended May 29, 2022 Compared to Fiscal Year Ended May 30, 2021 – Net Sales and Product Contribution Margin” above for a reconciliation of product contribution margin on a consolidated basis to gross profit.

Product contribution margin represents net sales less cost of sales and A&P expenses.

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

Product contribution margin, when presented on a consolidated basis, is a non-GAAP financial measure.

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

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 alternatives 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 – Fiscal Year Ended May 28, 2023 Compared to Fiscal Year Ended May 29, 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.

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Depreciation and amortization

Items impacting comparability

Acquisition expenses, net (a)

LW EMEA derivative losses (gains) (a)

Inventory step-up (a)

Adjusted EBITDA

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Interest expense, income tax expense, and depreciation and

amortization included in equity method investment earnings (loss)

Item impacting comparability

Write-off of net investment in Russia (a)

amortization included in equity method investment earnings

Items impacting comparability

LW EMEA derivative losses (gains) (b)

Gain on acquisitions (b)

Write-off of net investment in Russia (b)

Adjusted EBITDA from unconsolidated joint ventures

Adjusted EBITDA including unconsolidated joint ventures

(a) In May 2022, LWM announced its intent to withdraw from its investment in Russia and wrote-off its net investment.

Our portion of the non-cash impairment charge was $62.7 million.

The following table reconciles net income to Adjusted Net Income, and diluted EPS to Adjusted Diluted EPS:

(a) I ncome from operations for fiscal 2023 included a net $21.8 million gain ($12.2 million after-tax, or $0.08 per share) related to actions taken to mitigate the effect of changes in currency rates on the purchase of the remaining equity interest in LW EMEA, net of other acquisition-related costs.

Fiscal 2023 also includes an $18.7 million unrealized loss ($13.9 million after-tax, or $0.10 per share) related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at our European operations as the market experienced significant volatility, and a $27.0 million ($20.0 million after-tax, or $0.14 per share) charge related to the step-up and sale of inventory acquired in the LW EMEA Acquisition.

(b) Equity method investment earnings for fiscal 2023 included $425.8 million ($379.5 million, or $2.62 per share) of non-cash gains related to the remeasurement of our initial equity interests to fair value, including a $410.7 million non-cash gain ($364.4 million after-tax, or $2.52 per share) for LW EMEA and a $15.1 million non-cash gain (before and after-tax, or $0.10 per share ) for LWAMSA.

These gains were partially offset by a $37.8 million unrealized loss ($28.0 million after-tax, or $0.19 per share), related to mark-to-market adjustments associated with changes in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility.

Equity method investments earnings for fiscal 2022 included $31.7 million ($23.5 million after-tax, or $0.16 per share) of unrealized gains related to mark-to-market adjustments associated with changes in natural gas and electricity derivatives.

Equity method investment earnings for fiscal 2022 included a non-cash impairment charge of $62.7 million (before and after-tax, or $0.43 per share) related to LW EMEA’s withdrawal from its joint venture in Russia.

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

For the Fiscal Years Ended May

(in millions, except per share amounts)

Income from Operations

Items impacting comparability:

Write-off of net investment in Russia (b)

Loss on extinguishment of debt (c)

LW EMEA acquisition-related items:

Gain on acquisitions (b)

Inventory step-up (c)

Acquisition expenses, net (c)

Total LW EMEA acquisition-related items impacting comparability

Gain on acquisition of interest in LWAMSA (b)

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

Loss on extinguishment of debt (d)

Write-off of net investment in Russia (e)

Total items impacting comparability

(a) Diluted weighted average common shares were 145.2 million and 145.9 million in fiscal 2023 and 2022, 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) The fiscal year ended May 29, 2022, includes a loss on the extinguishment of debt of $53.3 million ($40.5 million after-tax), which consists of a call premium of $39.6 million related to the redemption of our senior notes due 2024 and 2026 and the write-off of $13.7 million of debt issuance costs associated with those notes.

(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) The fiscal year ended May 29, 2022, includes a loss on the extinguishment of debt of $53.3 million ($40.5 million after-tax, or $0.27 per share), which consists of a call premium of $39.6 million related to the redemption of our senior notes due 2024 and 2026 and the write-off of $13.7 million of debt issuance costs associated with those notes.

(e) 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.

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-K

Item 7. Management’s Discussion and Analysis