Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations, which we refer to as “MD&A,” should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Information" of this Quarterly Report on Form 10-Q (this “Form 10-Q”) and in “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2023 (the “Form 10-K”), which we filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on July 25, 2023.
Forward-Looking Statements
This report, including the MD&A, contains forward-looking statements within the meaning of the federal securities laws. Words such as “will,” “continue,” “may,” “expect,” “would,” “believe,” “deliver,” “manage,” “anticipate,” “drive,” “leverage,” “benefit,” “increase,” “outlook,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding our business and financial outlook and prospects, our plans, execution, capital expenditures and investments, pricing actions, cash flows, liquidity, dividends, enterprise resource planning (“ERP”) system implementation, integration of our former European joint venture, Lamb-Weston/Meijer v.o.f. (“LW EMEA”), and inflation, conditions in our industry, and the global economy. These forward-looking statements are based on management’s current expectations and are subject to uncertainties and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect these forward-looking statements and our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These risks and uncertainties include, among other things: the availability and prices of raw materials and other commodities; labor shortages and other operational challenges; 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; risks associated with integrating acquired businesses, including LW EMEA; levels of labor and people-related expenses; our ability to successfully execute our long-term value creation strategies; our ability to execute on large capital projects, including construction of new production lines or facilities; difficulties, disruptions or delays in implementing new technology, including our new ERP system; the competitive environment and related conditions in the markets in which we operate; political and economic conditions of the countries in which we conduct business and other factors related to our international operations; disruptions in the global economy caused by conflicts such as the war in Ukraine and conflicts in the Middle East and the possible related heightening of our other known risks; impacts on our business due to health pandemics or other contagious outbreaks, such as the COVID-19 pandemic, including impacts on demand for our products, increased costs, disruption of supply, other constraints in the availability of key commodities and other necessary services or restrictions imposed by public health authorities or governments; disruption of our access to export mechanisms; risks associated with other possible acquisitions; our debt levels; changes in our relationships with our growers or significant customers; actions of governments and regulatory factors affecting our businesses; the ultimate outcome of litigation or any product recalls; our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and other risks described in our reports filed from time to time with the SEC. We caution readers not to place undue reliance on any forward-looking statements included in this report, which speak only as of the date of this report. We undertake no responsibility for updating these statements, except as required by law.
Overview
Lamb Weston Holdings, Inc. (“we,” “us,” “our,” the “Company,” or “Lamb Weston”) is a leading global producer, distributor, and marketer of value-added frozen potato products. We are the number one supplier of value-added frozen potato products in North America and a leading supplier of value-added frozen potato products internationally, with a strong and growing presence in high-growth emerging markets. We offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our value-added frozen potato product portfolio.
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This MD&A is provided as a supplement to the consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. Our MD&A is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). We have also presented Adjusted EBITDA, which is considered a non-GAAP financial measure, to supplement the financial information included in this report. Refer to “Non-GAAP Financial Measures” below for the definition of Adjusted EBITDA, and a reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, net income. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below.
Executive Summary
In the second quarter of fiscal 2024, we drove solid sales and earnings growth, reflecting: the carryover benefit of inflation-driven pricing actions taken in the prior year; incremental sales and earnings from the acquisition of the remaining equity interest in LW EMEA (the “LW EMEA Acquisition”), our former joint venture in Europe; favorable mix; and supply chain productivity savings. While sales volumes, excluding the benefit of acquisitions, declined compared with the second quarter of fiscal 2023, our volume performance improved sequentially versus our fiscal fourth and first quarters, reflecting resilient global demand and the gradual addition of new business to replace the lower-margin volume that we chose to exit in the prior fiscal year. Volume elasticities in response to inflation-based pricing actions across our portfolio have continued to remain low during the quarter.
Net income and Adjusted EBITDA in the second quarter increased as favorable price/mix and incremental earnings from the consolidation of the financial results of LW EMEA more than offset a $70.9 million charge to write-off excess raw potatoes in North America, higher input and manufacturing costs on a per pound basis, the impact of lower sales volumes and higher selling, general and administrative (“SG&A”) expenses. The charge for excess raw potatoes largely reflected a reduction to our sales volume estimate, compared with the January 2023 estimate used to determine the number of acres to contract, as well as a solid potato crop, after two years of below average crop, in our growing regions in North America.
In the first half of fiscal 2024, we generated net cash from operating activities of $455.2 million, up $167.2 million compared to the first half of fiscal 2023, primarily due to higher earnings. We ended the second quarter with $78.3 million of cash and cash equivalents and $175.0 million of borrowings outstanding under our $1.0 billion U.S. revolving credit facility. In addition, we returned an aggregate of $90.8 million to our common stockholders during the quarter, including $50.0 million of share repurchases and $40.8 million in cash dividends. In October 2023, we increased our share repurchase authorization to $500.0 million, and in December 2023, we increased our quarterly cash dividend to common stockholders by 29% to $0.36 per share.
In November 2023, our greenfield french fry processing facility in Ulanqab, Inner Mongolia, China became operational as scheduled. Our capacity expansion and modernization efforts in Idaho, Argentina, and the Netherlands remain on track. In addition, at the beginning of our third quarter of fiscal 2024, we began transitioning certain central systems and functions in North America to a new ERP system, as part of our multi-year effort to upgrade our information systems and ERP infrastructure across the company.
Outlook
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, as compared to the first three quarters of fiscal 2023, from the consolidation of the financial results of LW EMEA. In addition to the incremental sales related to the consolidation of LW EMEA, we expect pricing actions to drive net sales growth for fiscal 2024, as we expect sales volumes will continue to be pressured by our decisions 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 softer restaurant traffic trends, as compared to the prior year period, in North America and other key markets as our customers and consumers generally both respond to challenging macroeconomic environments.
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We expect earnings growth for fiscal 2024 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. We anticipate that the increase in gross profit will be partially offset by the $64.6 million pre-tax charge incurred in the second quarter of fiscal 2024 to write-off excess raw potatoes, and 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 ERP infrastructure; non-cash amortization of intangible assets associated with the LW EMEA Acquisition; and higher compensation and benefits expenses due to increased employee headcount.
We continue to 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 seek to leverage the commercial and operational benefits from the LW EMEA Acquisition, as well as the benefits we expect from our previously announced capacity expansion investments in China, the U.S., Argentina, and the Netherlands.
Results of Operations
Effective May 29, 2023, to align with our expanded global footprint following the completion of the LW EMEA Acquisition, management, including our chief executive officer (who is our chief operating decision maker), began managing operations in two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources. As a result of this change, we now have two operating segments, each of which is a reportable segment: North America and International. We report net sales and Adjusted EBITDA by segment and on a consolidated basis, which are the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Adjusted EBITDA is a non-GAAP financial measure. For additional information on our reportable segments, Segment Adjusted EBITDA, and Adjusted EBITDA, see Note 12, Segments, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and “Non-GAAP Financial Measures” below. Prior period segment data has been retrospectively adjusted to conform with current period classification.
Thirteen Weeks Ended November 26, 2023 compared to Thirteen Weeks Ended November 27, 2022
Net Sales and Segment Adjusted EBITDA
Thirteen Weeks Ended
November 26,
November 27,
%
(in millions, except percentages)
2023
2022
Increase (Decrease)
Segment net sales
North America
$
1,167.1
$
1,062.5
10%
International
565.0
214.0
164%
$
1,732.1
$
1,276.5
36%
Segment Adjusted EBITDA
North America
$
321.3
$
299.6
7%
International
100.2
60.2
66%
Net Sales
Compared to the prior year quarter, net sales for the second quarter of fiscal 2024 increased $455.6 million, or 36%, to $1,732.1 million, and included $375.8 million of incremental sales attributable to the consolidation of the financial results of LW EMEA following the completion of the LW EMEA Acquisition in February 2023.
Net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, grew 6% versus the prior year quarter. Price/mix increased 12%, reflecting the benefit of inflation-driven pricing actions across each of our business segments, and favorable mix, partially offset by lower customer transportation charges. Volume declined 6%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix. Volume elasticities in response to inflation-based pricing actions across our portfolio continued to remain low.
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North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, increased $104.6 million, or 10%, to $1,167.1 million. Price/mix increased 14%, reflecting the carryover benefits of inflation-driven pricing actions taken in fiscal 2023, and favorable mix, partially offset by lower customer transportation charges. Volume declined 4%, primarily reflecting the carryover impact of our decisions to exit certain lower-priced and lower-margin business in the prior fiscal year.
International segment net sales, which includes all sales to customers outside of North America, increased $351.0 million, or 164%, to $565.0 million, and included $375.8 million of incremental sales attributable to the consolidation of the financial results of LW EMEA. International segment net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, declined 12% compared to the prior year quarter. Price/mix increased 10%, driven by the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as favorable mix, partially offset by lower customer transportation charges. Volume, excluding the benefit from the LW EMEA acquisition, declined 22%, primarily reflecting our decisions to exit certain lower-priced and lower-margin business as well as lapping a strong prior year comparison.
Gross Profit
Gross profit increased $94.0 million, or 25%, to $475.6 million, and included $1.8 million ($1.3 million after-tax, or $0.01 per share) of benefits associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition, and a $4.6 million ($3.5 million after-tax, or $0.02 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. The prior year quarter included a $0.4 million ($0.3 million after-tax, with no per share impact) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts.
Excluding unrealized mark-to-market commodity gains and losses and items impacting comparability, gross profit increased $97.2 million, driven primarily by benefits from pricing actions and incremental earnings attributable to the consolidation of the financial results of LW EMEA. Gross profit also included a $64.6 million pre-tax charge for the write-off of excess raw potatoes, largely reflecting a reduction to our initial sales estimate that was developed in January 2023 for the following year, as well as a solid potato crop in our growing regions in North America.
The increase in gross profit was also partially offset by higher costs per pound, which largely reflected mid-single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, ingredients such as grains and starches used in product coatings, and labor. The increase in per pound costs was partially offset by supply chain productivity savings as well as lower costs for edible oils.
Selling, General and Administrative Expenses
SG&A increased $60.2 million to $170.0 million in the second quarter of fiscal 2024, and included: $4.8 million ($3.6 million after-tax, or $0.02 per share) of LW EMEA integration and acquisition-related expenses; $3.0 million ($2.2 million after-tax, or $0.01 per share) of unrealized gains related to mark-to-market adjustments associated with currency hedging contracts; and $9.2 million ($6.9 million after-tax, or $0.05 per share) of foreign currency exchange gains. The prior year quarter included $26.5 million ($19.2 million after-tax, or $0.13 per share) of LW EMEA integration and acquisition-related net gains and $1.4 million ($1.0 million after-tax, or $0.01 per share) of foreign currency exchange losses.
Excluding these items, SG&A increased $42.5 million to $177.4 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA; higher expenses related to improving our information systems and ERP infrastructure; and higher compensation and benefits expenses.
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Segment Adjusted EBITDA
North America Segment Adjusted EBITDA increased $21.7 million to $321.3 million. The carryover benefit of inflation-driven pricing actions and favorable mix drove the increases, which were partially offset by a $63.3 million charge for the write-off of excess raw potatoes, higher costs per pound, and the impact of lower volumes.
International Segment Adjusted EBITDA increased $40.0 million to $100.2 million, and excluded a net benefit from comparability items of $1.8 million ($1.3 million after-tax, or $0.01 per share) associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, higher costs per pound, including a $7.6 million allocated charge for the write-off of excess raw potatoes, and the impact of lower volumes, more than offset favorable price/mix.
Adjusted EBITDA increased $48.0 million to $376.9 million, up 15% compared to the prior year quarter, and included a $70.9 million pre-tax charge for the write-off of excess raw potatoes, of which $6.3 million was recorded in “Equity method investment earnings” in the Consolidated Statement of Earnings. Higher income from operations, which includes the benefit of incremental earnings from LW EMEA, drove the increases.
Interest Expense, Net
Compared with the prior year quarter, interest expense, net increased $4.5 million to $29.1 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects and interest income.
Income Tax Expense
Income tax expense for the second quarter of fiscal 2024 and 2023 was $66.2 million and $36.8 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 23.5% and 26.3% for the second quarter of fiscal 2024 and 2023, 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 and currency, permanent differences, and discrete items.
Equity Method Investment Earnings (Loss)
Equity method investment earnings (loss) from unconsolidated joint ventures were earnings of $4.7 million and a loss of $107.3 million for the second quarter of fiscal 2024 and 2023, respectively. The results in the current quarter include earnings associated with our 50% interest in Lamb Weston/RDO Frozen, an unconsolidated potato processing joint venture in Minnesota (“Lamb Weston RDO”), while results in the prior year quarter also included earnings associated with our previously held 50% interest in LW EMEA that were classified as equity method investment earnings (losses) prior to the completion of the LW EMEA Acquisition. The results in the prior year quarter include a $130.1 million ($96.5 million after-tax, or $0.67 per share) unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in LW EMEA.
Excluding these items, equity method investment earnings declined $18.1 million compared to the prior year quarter, largely due to our share of LW EMEA earnings being included in the prior year quarter. The results in the second quarter also include a $6.3 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO.
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Twenty-Six Weeks Ended November 26, 2023 compared to Twenty-Six Weeks Ended November 27, 2022
Net Sales and Segment Adjusted EBITDA
Twenty-Six Weeks Ended
November 26,
November 27,
%
(in millions, except percentages)
2023
2022
Increase (Decrease)
Segment net sales
North America
$
2,302.5
$
2,018.1
14%
International
1,094.9
384.0
185%
$
3,397.4
$
2,402.1
41%
Segment Adjusted EBITDA
North America
$
700.7
$
531.4
32%
International
189.8
93.3
103%
Net Sales
Compared to the first half of fiscal 2023, net sales increased $995.3 million, or 41%, to $3,397.4 million, and included $750.7 million of incremental sales attributable to the consolidation of the financial results of (1) LW EMEA, following the completion of the LW EMEA Acquisition in February 2023, and (2) Lamb Weston Alimentos Modernos S.A., our joint venture in Argentina (“LWAMSA”), following our acquisition in July 2022 of an additional 40% equity interest in LWAMSA (the “LWAMSA Acquisition” and, together with the LW EMEA Acquisition, the “Acquisitions”).
Net sales, excluding the incremental sales attributable to the Acquisitions, grew 10%. Price/mix increased 17%, reflecting the benefit of inflation-driven pricing actions across each of our business segments, lower trade spending in North America, and favorable mix, partially offset by lower customer transportation charges. Volume declined 7%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year as we continue to strategically manage customer and product mix. To a lesser extent, inventory destocking by certain customers in international markets and in select U.S. retail channels also pressured volumes. Volume elasticities in response to inflation-based pricing actions across our portfolio continued to remain low.
North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, increased $284.4 million, or 14%, to $2,302.5 million. Price/mix increased 18%, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, lower trade spending, and favorable mix, partially offset by lower customer transportation charges. Volume declined 4%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. To a lesser extent, lower shipments in response to inventory destocking by certain customers in select U.S. retail channels also pressured volumes.
International segment net sales, which includes all sales to customers outside of North America, increased $710.9 million, or 185%, to $1,094.9 million, and included $750.7 million of incremental sales attributable to the Acquisitions. International segment net sales, excluding the incremental sales attributable to the Acquisitions, declined 11% compared to the prior year period. Price/mix increased 14%, driven by the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as favorable mix, partially offset by lower customer transportation charges. Volume declined 25%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. To a lesser extent, lower shipments in response to inventory destocking by certain customers in several markets in the Asia-Pacific region also pressured volume.
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Gross Profit
Gross profit increased $320.2 million, or 49%, to $975.1 million, and included $20.7 million of costs ($15.4 million after-tax, or $0.11 per share) associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition, and a $27.1 million ($20.2 million after-tax, or $0.14 per share) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts. The prior year period included a $3.6 million ($2.7 million after-tax, or $0.02 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts.
Excluding unrealized mark-to-market commodity gains and losses and items impacting comparability, gross profit increased $310.2 million, driven primarily by: benefits from pricing actions, incremental earnings attributable to the consolidation of the financial results of LW EMEA, and lower trade spending in North America. Gross profit also included a $64.6 million pre-tax charge for the write-off of excess raw potatoes, largely reflecting a reduction in our initial sales estimate that was developed in January 2023 for the following year, as well as a solid potato crop in our growing regions in North America.
The increase in gross profit was also partially offset by higher costs per pound, which largely reflected mid-to-high single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, ingredients such as grains and starches used in product coatings, and labor. The increase in per pound costs was partially offset by supply chain productivity savings as well as lower costs for edible oils.
Selling, General and Administrative Expenses
SG&A increased $120.1 million to $346.2 million in the first half of fiscal 2024, and included: $8.8 million of LW EMEA integration and acquisition-related expenses ($6.6 million after-tax, or $0.04 per share); $1.4 million ($1.0 million after-tax, or $0.01 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts; and $1.8 million ($1.4 million after-tax, or $0.01 per share) of foreign currency exchange gains. The prior year period included: $26.5 million ($19.2 million after-tax, or $0.13 per share) of LW EMEA integration and acquisition-related net gains; and $2.4 million ($1.8 million after-tax, or $0.01 per share) of foreign currency exchange losses.
Excluding these items, SG&A increased $87.6 million to $337.8 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, higher expenses related to improving our information systems and ERP infrastructure, and higher compensation and benefits expenses.
Segment Adjusted EBITDA
North America Segment Adjusted EBITDA increased $169.3 million to $700.7 million. The carryover benefit of inflation-driven pricing actions, lower trade spending, and favorable mix drove the increases, which were partially offset by a $63.3 million charge for the write-off of excess raw potatoes, higher costs per pound, and the impact of lower volumes.
International Segment Adjusted EBITDA increased $96.5 million to $189.8 million, and excluded $20.7 million ($15.4 million after-tax, or $0.11 per share) of costs associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, higher costs per pound, including a $7.6 million allocated charge for the write-off of excess raw potatoes, and the impact of lower volumes, more than offset favorable price/mix.
Interest Expense, Net
Compared with the first half of fiscal 2024, interest expense, net increased $9.2 million to $59.8 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects and interest income.
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Income Tax Expense
Income tax expense for the first half of fiscal 2024 and 2023 was $136.1 million and $110.5 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 23.2% and 24.8% for the first half of fiscal 2024 and 2023, 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 and currency, permanent differences, and discrete items.
Equity Method Investment Earnings
Equity method investment earnings from unconsolidated joint ventures were earnings of $16.8 million and $67.3 million for the first half of fiscal 2024 and 2023, respectively. The results in the current year period include earnings associated with our 50% interest in Lamb Weston RDO, while results in the prior year also included earnings associated with our previously held 50% interest in LW EMEA. The results in the prior year include a $14.4 million unrealized gain ($10.7 million after-tax, or $0.07 per share) related to mark-to-market adjustments associated with currency and commodity hedging contracts and a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with the LWAMSA Acquisition, which related to remeasuring our previously held 50% ownership interest to fair value.
Excluding these items, equity method investment earnings declined $21.0 million compared to the prior year period, largely due to our share of LW EMEA earnings being included in the prior year. The results in the current period also include a $6.3 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO.
Liquidity and Capital Resources
Sources and Uses of Cash
As of November 26, 2023, we had $78.3 million of cash and cash equivalents, with $175.0 million in borrowings outstanding under our $1.0 billion 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 cash and cash equivalents and availability under our credit facilities, are our primary sources of liquidity for funding our business requirements. Our funding requirements include capital expenditures for announced manufacturing expansions in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade information systems and ERP infrastructure, working capital requirements, and shareholder returns, including cash dividends and repurchases under our share repurchase program.
Cash Flows
Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities:
Twenty-Six Weeks Ended
November 26,
November 27,
(in millions)
2023
2022
Net cash flows provided by (used for):
Operating activities
$
455.2
$
288.0
Investing activities
(570.8)
(311.0)
Financing activities
(112.0)
(96.6)
(227.6)
(119.6)
Effect of exchange rate changes on cash and cash equivalents
1.1
14.0
Net decrease in cash and cash equivalents
(226.5)
(105.6)
Cash and cash equivalents, beginning of period
304.8
525.0
Cash and cash equivalents, end of period
$
78.3
$
419.4
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Operating Activities
In the first half of fiscal 2024, cash provided by operating activities increased $167.2 million to $455.2 million, compared with $288.0 million in the same period of fiscal 2023. The increase related to a $255.6 million increase in income from operations, adjusted for non-cash income and expenses, partially offset by $88.4 million of cash used for unfavorable changes in working capital, primarily related to construction-related purchases included in accounts payable and changes in compensation and benefit accruals. See “Results of Operations” in this MD&A for more information related to the increase in income from operations.
Investing Activities
Investing activities used $570.8 million of cash in the first half of fiscal 2024, compared with $311.0 million in the same period in the prior year. The increase primarily relates to our investments to expand our french fry and chopped and formed capacity and other facility modernization efforts in American Falls, Idaho; the construction of a greenfield french fry processing facility in Ulanqab, Inner Mongolia, China, which became operational in November 2023; and the construction of french fry processing facilities in Mar-del-Plata, Argentina and Kruiningen, the Netherlands. We also used $58.9 million to upgrade our information systems and ERP infrastructure. We expect to use approximately $900 million to $950 million in fiscal 2024 as we continue construction of our capacity expansion efforts in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade our information systems and ERP infrastructure.
Financing Activities
During the first half of fiscal 2024, we used $164.3 million of cash to repurchase 1,564,351 shares of our common stock at an average price of $95.89 per share, and we withheld 134,340 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $81.6 million in cash dividends to common stockholders and $27.7 million of debt and financing obligations. These financing uses were offset by $162.1 million of borrowings during the period primarily under our U.S. revolving credit facility.
In the first half of fiscal 2023, cash used for 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. In addition, we used $34.9 million of cash to repurchase 404,476 shares of our common stock at an average price of $70.11 per share, and we withheld 82,042 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. Financial Statements” of this report and Note 8, Debt and Financing Obligations of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of the Form 10-K. At November 26, 2023, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.
Obligations and Commitments
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.
Non-GAAP Financial Measures
To supplement the financial information included in this report, we have presented Adjusted EBITDA, which is considered a non-GAAP financial measure. Management uses this non-GAAP financial measure to assist in analyzing what management views as our core operating performance for purposes of business decision making. Management believes that presenting this non-GAAP financial measure provides investors with useful supplemental information because it (i) provides meaningful supplemental information regarding financial performance by excluding foreign currency exchange and unrealized mark-to-market derivative gains and losses and items affecting comparability between periods, (ii) permits investors to view performance using the same tools that management uses to budget, make operating
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and strategic decisions, and evaluate our core operating performance across periods, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating our financial results. In addition, we believe that the presentation of this non-GAAP financial measure, when considered together with the most directly comparable GAAP financial measure and the reconciliation to this GAAP financial measure, 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 measure presented in this report should be viewed in addition to, and not as an alternative for, financial measures prepared in accordance with GAAP that are also presented in this report. This measure is not a substitute for its comparable GAAP financial measure, net income, and there are limitations to using non-GAAP financial measures. For example, the non-GAAP financial measure presented in this report may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define this non-GAAP financial measure the same way we do.
The following table reconciles net income to Adjusted EBITDA:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
November 26,
November 27,
November 26,
November 27,
(in millions)
2023
2022
2023
2022
Net income (a)
$
215.0
$
103.1
$
449.8
$
335.0
Interest expense, net
29.1
24.6
59.8
50.6
Income tax expense
66.2
36.8
136.1
110.5
Income from operations including equity method investment earnings
310.3
164.5
645.7
496.1
Depreciation and amortization (b)
71.2
59.8
142.0
117.4
Unrealized derivative (gains) losses
1.6
(0.4)
(25.7)
3.6
Unconsolidated joint venture unrealized derivative (gains) losses
—
130.1
—
(14.4)
Foreign currency exchange (gains) losses
(9.2)
1.4
(1.8)
2.4
Items impacting comparability:
Inventory step-up from acquisition
(1.8)
—
20.7
—
Integration and acquisition-related items, net
4.8
(26.5)
8.8
(26.5)
Gain on acquisition of interest in joint venture
—
—
—
(15.1)
Adjusted EBITDA
$
376.9
$
328.9
$
789.7
$
563.5
(a) Net income included a $70.9 million charge ($53.9 million after-tax, or $0.37 per share) for the write-off of excess raw potatoes in North America for both the thirteen and twenty-six weeks ended November 26, 2023. We recorded a $64.6 million charge ($49.1 million after-tax, or $0.34 per share) in cost of sales, and a $6.3 million charge ($4.8 million after-tax, or $0.03 per share) in equity method investment earnings. The total charge to the reporting segments was as follows: $63.3 million to the North America segment; and $7.6 million to the International segment.
(b) Depreciation and amortization included interest expense, income tax expense, and depreciation and amortization included in equity method investment earnings of $2.1 million and $8.6 million for the thirteen weeks ended November 26, 2023 and November 27, 2022, respectively; and $4.3 million and $17.6 million for the twenty-six weeks ended November 26, 2023 and November 27, 2022.
Off-Balance Sheet Arrangements
There have been no material changes to the off-balance sheet arrangements disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Form 10-K.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K. There were no material changes to these critical accounting policies and estimates during the first half of fiscal 2024 .
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New and Recently Adopted Accounting Pronouncements
For a list of our new and recently adopted accounting pronouncements, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item I. Financial Statements” of this report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.