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 29, 2022 (the "Form 10-K"),
which we filed with the United States ("U.S.") Securities and Exchange
Commission ("SEC") on July 27, 2022.
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," "acquire," "increase," "implement," "improve,"
"outlook," and variations of such words and similar expressions are intended to
identify forward-looking statements. Examples of forward-looking statements
include, but are not limited to, statements regarding our plans, execution,
capital investments, operational costs, pricing actions, cash flows, liquidity,
dividends, enterprise resource planning ("ERP") system implementation, pending
acquisition of the remaining equity interest in our European joint venture,
Lamb-Weston/Meijer v.o.f. ("LWM"), including the anticipated benefits of the
transaction, the expected timing of the completion of the transaction, related
financing and the ability of the parties to complete the transaction, and
business and financial outlook and prospects, as well as supply chain
constraints, inflation, our industry, and global economic conditions. 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; the occurrence of any event,
change or other circumstances that could give rise to the termination of our
agreement to acquire the remaining equity interest in LWM; the risk that the
necessary regulatory approvals for the LWM acquisition may not be obtained or
may be obtained subject to conditions that are not anticipated; the risk that
the LWM acquisition will not be consummated in a timely manner or at all; risks
that any of the closing conditions to the LWM acquisition may not be satisfied
or may not be satisfied in a timely manner; risks related to disruption of
management time from ongoing business operations due to the LWM acquisition;
failure to realize the benefits expected from the LWM acquisition; and the
effect of the announcement of the LWM acquisition on our ability to retain
customers and retain and hire key personnel, maintain relationships with
suppliers and on our operating results and businesses generally; risks
associated with integrating acquired businesses, including LWM; disruptions in
the global economy caused by the war in Ukraine and the possible related
heightening of our other known risks; impacts on our business due to health
pandemics or other contagious outbreaks, such as the COVID-19 pandemic,
including impacts on demand for our products, increased costs, disruption of
supply, other constraints in the availability of key commodities and other
necessary services or restrictions imposed by public health authorities or
governments; levels of pension, labor and people-related expenses; our ability
to successfully execute our long-term value creation strategies; our ability to
execute on large capital projects, including construction of new production
lines or facilities; the competitive environment and related conditions in the
markets in which we and our joint ventures operate; political and economic
conditions of the countries in which we and our joint ventures conduct business
and other factors related to our international operations; 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; the success of our joint ventures; actions of governments and
regulatory factors affecting our businesses or joint ventures; 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.
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Overview
Lamb Weston Holdings, Inc. ("we," "us," "our," "the Company," or "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 and 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.
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") and certain other financial data (including
product contribution margin, on a consolidated basis, Adjusted EBITDA, Adjusted
EBITDA including unconsolidated joint ventures, Adjusted Income from Operations,
Adjusted Net Income, and Adjusted Diluted EPS) that is prepared using non-GAAP
financial measures. Refer to "Non-GAAP Financial Measures" below for the
definitions of product contribution margin, Adjusted EBITDA, Adjusted EBITDA
including unconsolidated joint ventures, Adjusted Income from Operations,
Adjusted Net Income, and Adjusted Diluted EPS, and a reconciliation of these
non-GAAP financial measures to gross profit, income from operations, net income,
or diluted earnings per share, as applicable.
Executive Summary
The following highlights our financial results in the second quarter of fiscal
2023, compared with the prior year quarter. For more information, refer to the
"Results of Operations" section below.
? Net sales increased 27% to $1,276.5 million
? Income from operations increased 138% to $271.8 million
Net income increased 217% to $103.1 million, and diluted earnings per share
? increased 223% to $0.71, including items impacting comparability, as discussed
below, of $110.3 million ($82.3 million after-tax, or $0.57 per share)
? Adjusted Income from Operations increased 114% to $245.3 million
? Adjusted Net Income increased 171% to $185.4 million, and Adjusted Diluted EPS
increased 172% to $1.28
? Adjusted EBITDA including unconsolidated joint ventures increased 92% to $334.6
million
? We returned $35.2 million of cash to stockholders through dividends
We drove strong sales growth, earnings growth, and gross margin expansion in the
quarter by continuing to execute pricing actions across each of our business
segments to counter significant input, manufacturing, and supply chain cost
inflation. The increase in net sales was partially offset by a decline in sales
volume, primarily reflecting an inability to fully serve customer demand in our
foodservice and retail channels due to the impact of supply chain disruptions on
run-rates and throughput in our production facilities, and to a lesser extent,
softer restaurant traffic and demand trends in the U.S., especially at casual
dining and full-service restaurants, as consumers adjusted to the severe
inflationary environment. Overall traffic at large quick service restaurants
("QSR") in the U.S. remained solid.
The increase in net income was driven by higher sales and gross profit and lower
interest expense, and was partially offset by sharply lower equity method
investment earnings and higher selling, general and administrative expenses
("SG&A"). The following items impacted comparability of our second quarter
results and were excluded when providing Adjusted Income from Operations,
Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, and Adjusted EBITDA
including unconsolidated joint ventures:
Interest expense in the prior year quarter included a loss of $53.3 million
? ($40.5 million after-tax, or $0.28 per share) associated with the
extinguishment of debt (see "Liquidity and Capital Resources").
The decrease in equity method investment earnings included a $136.8 million
? unrealized loss ($101.5 million after-tax, or $0.70 per share) in the second
quarter of fiscal 2023 related to mark-to-market adjustments associated
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with natural gas and electricity hedging contracts in Europe, reflecting the
volatility of those energy markets in that region, and a $6.3 million unrealized
gain ($4.7 million after-tax, or $0.03 per share) in the prior year quarter.
SG&A included a net $26.5 million gain ($19.2 million after-tax, or $0.13 per
? share), related to actions taken to mitigate the effect of changes in currency
rates on the pending purchase of the remaining ownership interest in LWM, net
of other acquisition-related costs.
In October 2022, we entered into an agreement to acquire the remaining interest
in LWM for consideration consisting of €525.0 million in cash and €175.0 million
in shares of our common stock. Upon completion of the transaction, we will own
100% of LWM. We expect to close this transaction in the fourth quarter of fiscal
2023, subject to customary regulatory approvals. After closing, we will include
LWM's operating results within our Global segment.
Outlook
During the second half of fiscal 2023, we expect increases in price/mix in each
of our core business segments to be the primary driver of net sales growth
versus the prior year period. We expect supply chain disruptions, including the
effects of commodities shortages and onboarding new production workers, and
changes in product mix will continue to impact run-rates and throughput in our
production facilities, and affect our customer fulfillment rates. We also expect
sales volume trends and demand will continue to be volatile as consumers in the
U.S. and our key international markets continue to respond to the current
inflationary environment. We expect our gross margins will be largely consistent
with the levels that we delivered in the first half of the year due to the
carryover benefits of pricing actions taken in fiscal 2022, as well as actions
being taken in fiscal 2023 to offset input cost inflation, including an increase
in raw potato costs as a result of higher contract rates and the impact of
below-average crop yields as a result of significant heat waves late in the
season in our growing regions in the Pacific Northwest. We expect LWM's earnings
may improve as compared to the prior year period as a result of the continued
implementation of pricing actions to counter cost inflation.
While the near-term global demand trends may be volatile as consumers navigate
the current challenging macroenvironment, our investments to expand capacity in
Idaho, China, and Argentina, along with our intent to acquire the remaining
equity interest in our LWM joint venture, reflect our belief in the long-term
health and growth outlook of the frozen potato category.
Results of Operations
We have four reportable segments: Global, Foodservice, Retail, and Other. We
report net sales and product contribution margin by segment and on a
consolidated basis. Product contribution margin, when presented on a
consolidated basis, is a non-GAAP financial measure. Product contribution margin
represents net sales less cost of sales and advertising and promotion ("A&P")
expenses. Product contribution margin includes A&P expenses because those
expenses are directly associated with the performance of the Company's 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 Condensed Notes to Consolidated
Financial Statements in "Part I, Item 1. Financial Statements" of this report.
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Thirteen Weeks Ended November 27, 2022 compared to Thirteen Weeks Ended November
28, 2021
Net Sales, Gross Profit, and Product Contribution Margin
Thirteen Weeks Ended
November 27, November 28, %
(in millions, except percentages) 2022 2021 Increase
Segment net sales
Global $ 692.8 $ 516.7 34%
Foodservice 357.9 313.9 14%
Retail 191.5 142.6 34%
Other 34.3 33.4 3%
$ 1,276.5 $ 1,006.6 27%
Segment product contribution margin
Global $ 171.0 $ 80.9 111%
Foodservice 130.8 104.4 25%
Retail 65.7 21.4 207%
Other 7.5 (6.2) 221%
375.0 200.5 87%
Add: Advertising and promotion expenses 6.6 5.0 32%
Gross profit $ 381.6 $ 205.5 86%
Net Sales
Compared to the prior year quarter, net sales for the second quarter of fiscal
2023 increased $269.9 million, or 27%, to $1,276.5 million. Price/mix increased
30%, reflecting the benefit of pricing actions across each of our core business
segments to counter input, manufacturing, and transportation cost inflation.
Volume declined 3%, primarily reflecting an inability to fully serve customer
demand in our foodservice and retail channels. The impact of supply chain
disruptions during the quarter, including the effects of commodities shortages
and onboarding new production workers, continued to affect production run-rates
and throughput in our production facilities as well as customer order
fulfillment rates. To a lesser extent, softer casual dining and full-service
restaurant traffic in the U.S. also contributed to the decline as consumers face
a challenging macroeconomic environment.
Global segment net sales increased $176.1 million, or 34%, to $692.8 million.
Price/mix increased 31% and volume increased 3%. The benefit of domestic and
international product and freight pricing actions to offset inflation, as well
as favorable mix, drove the increase in price/mix. The impact of acquiring a
controlling interest in Lamb Weston Alimentos Modernos S.A. ("LWAMSA") in early
fiscal 2023, growth in international shipments, and strength in domestic QSR
limited time product offerings largely drove the increase in volume.
Foodservice segment net sales increased $44.0 million, or 14%, to $357.9
million. Price/mix increased 25%, while volume decreased 11%. The carryover
benefits of product and freight pricing actions taken in the prior year, as well
as actions taken in fiscal 2023 to counter inflation, drove the increase in
price/mix. Volume fell, reflecting a combination of: the supply chain
disruptions on run-rates and throughput in our production facilities;
incremental losses of certain low-margin business; and, to a lesser extent, a
slowdown in restaurant traffic and consumer demand in casual dining and other
full-service restaurants.
Retail segment net sales increased $48.9 million, or 34%, to $191.5 million.
Price/mix increased 43%, while volume decreased 9%. The carryover benefits of
product and freight pricing actions across the branded and private label
portfolios taken in the prior year, as well as actions taken in fiscal 2023 to
counter inflation, drove the increase in price/mix. While consumer demand for
frozen potato products remained strong, volume fell largely due to the impact of
supply chain disruptions on run-rates and throughput in our production
facilities, as well as incremental losses of certain low-margin, private label
business.
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Other segment net sales increased $0.9 million, or 3%, to $34.3 million.
Price/mix increased 5% and was driven by higher prices in our vegetable
business. Volume decreased 2%, reflecting the negative effect of the extreme
summer heat on the yield and quality of the vegetable crops.
Gross Profit and Product Contribution Margin
Gross profit increased $176.1 million, or 86%, to $381.6 million, as benefits
from pricing actions more than offset the impact of higher manufacturing and
distribution costs on a per-pound basis, as well as lower sales volumes. The
higher costs per pound primarily reflected double-digit cost inflation from key
inputs, including: edible oils, ingredients such as grains and starches used in
product coatings, labor, and transportation and warehousing. The increase in
costs per pound also reflected higher costs associated with the impact of
extreme summer heat that negatively affected the yield and quality of potato
crops in the Pacific Northwest in fall 2021, as well as the effects of supply
chain disruptions on run-rates and throughput in our production facilities. The
increase in gross profit also included a $6.5 million increase in unrealized
mark-to-market adjustments associated with commodity hedging contracts, which
includes a $0.4 million gain in the second quarter, compared with a $6.1 million
loss related to these items in the prior year quarter.
Our overall product contribution margin, defined as gross profit less A&P
expenses, increased $174.5 million, or 87%, to $375.0 million. The increase was
largely driven by higher sales and gross profit (as described above).
Global segment product contribution margin increased $90.1 million, or 111%, to
$171.0 million. Pricing actions and favorable mix drove the increase, more than
offsetting higher manufacturing and distribution costs per pound. As a result of
the cumulative benefit of pricing actions and mix improvement efforts during the
past two years to counter input cost inflation, the Global segment's product
contribution margin percentage in the second quarter approached pre-pandemic
levels. Global segment cost of sales was $520.5 million, up 20% compared to the
second quarter of fiscal 2022, primarily due to higher manufacturing and
distribution costs, as well as higher sales volumes.
Foodservice segment product contribution margin increased $26.4 million, or 25%,
to $130.8 million. Pricing actions drove the increase, and was partially offset
by higher manufacturing and distribution costs per pound, unfavorable mix, and
the impact of lower sales volumes. Foodservice segment cost of sales was $225.4
million, up 8% compared to the second quarter of fiscal 2022, primarily due to
higher manufacturing and distribution costs, partially offset by lower sales
volumes.
Retail segment product contribution margin increased $44.3 million, or 207%, to
$65.7 million. Pricing actions drove the increase, partially offset by higher
manufacturing and distribution costs per pound. Retail segment cost of sales was
$122.2 million, a 3% increase compared to the second quarter of fiscal 2022,
primarily due to higher manufacturing and distribution costs, partially offset
by lower sales volumes.
Other segment product contribution margin increased $13.7 million to $7.5
million in the second quarter of fiscal 2023, as compared to a loss of $6.2
million in the second quarter of fiscal 2022. These amounts include a $2.0
million gain and an $8.6 million loss related to unrealized mark-to-market
adjustments and realized settlements associated with commodity hedging contracts
reported in the Other segment in fiscal 2023 and 2022, respectively. Excluding
these mark-to-market adjustments and realized settlements, Other segment product
contribution margin increased $3.1 million, largely due to pricing actions in
our vegetable business.
Selling, General and Administrative Expenses
SG&A increased $18.7 million to $109.8 million in the second quarter of fiscal
2023, and includes a net $26.5 million gain ($19.2 million after-tax, or $0.13
per share) related to actions taken to mitigate the effect of changes in
currency rates on the pending purchase of the remaining ownership interest in
LWM, net of other acquisition-related costs. Excluding items impacting
comparability, SG&A increased $45.2 million to $136.3 million, primarily due to
higher compensation and benefits expense, and to a lesser extent, higher
expenses related to improving our information systems and ERP infrastructure.
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Interest Expense, Net
Compared with the prior year quarter, interest expense, net decreased $57.8
million to $24.6 million, primarily reflecting a loss on extinguishment of debt
in the prior year quarter of $53.3 million ($40.5 million after-tax, or $0.28
per share) associated with the redemption in full of our outstanding 4.625%
senior notes due 2024 (the "2024 Notes") and 4.875% senior notes due 2026 (the
"2026 Notes"). In addition, capitalized interest and interest income were each
higher versus the prior year quarter.
Income Tax Expense
Income tax expense for the second quarter of fiscal 2023 and 2022 was $36.8
million and $9.6 million, respectively. The effective income tax rate
(calculated as the ratio of income tax expense to pre-tax income, inclusive of
equity method investment earnings) was 26.3% and 22.8% for the second quarter of
fiscal 2023 and 2022, respectively. Excluding items impacting comparability, our
effective tax rate for the second quarter of fiscal 2023 and 2022 was 25.9% and
23.4%, respectively. The effective tax rate varies from the U.S. statutory tax
rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes,
permanent differences, and discrete items.
Equity Method Investment Earnings (Loss)
We conduct business through unconsolidated joint ventures in Europe and the U.S.
and include our share of the earnings (loss) based on our economic ownership
interest in them. Our share of earnings and loss from our equity method
investments was a loss of $107.3 million and earnings of $10.1 million for the
second quarter of fiscal 2023 and 2022, respectively. Equity method investment
earnings (loss) included a $130.1 million unrealized loss related to
mark-to-market adjustments associated with currency and commodity hedging
contracts in the second quarter of fiscal 2023, of which $136.8 million ($101.5
million after-tax, or $0.70 per share) related to losses in natural gas and
electricity derivatives as commodity markets in Europe have experienced
significant volatility. Equity method investment earnings in the prior year
quarter included a $3.6 million unrealized gain for mark-to-market adjustments,
of which $6.3 million ($4.7 million after-tax, or $0.03 per share) related to
gains in natural gas and electricity derivatives.
Excluding the items impacting comparability noted above (mark-to-market
adjustments related to natural gas and electricity derivatives) and the other
mark-to-market adjustments, earnings from equity method investments increased
$16.3 million compared to the prior year quarter, reflecting favorable
price/mix, partially offset by higher manufacturing and distribution costs, in
both Europe and the U.S.
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Twenty-Six Weeks Ended November 27, 2022 compared to Twenty-Six Weeks Ended
November 28, 2021
Net Sales, Gross Profit, and Product Contribution Margin
Twenty-Six Weeks Ended
November 27, November 28, %
(in millions, except percentages) 2022 2021 Increase
Segment net sales
Global $ 1,252.5 $ 1,017.9 23%
Foodservice 724.3 635.3 14%
Retail 361.0 275.1 31%
Other 64.3 62.5 3%
$ 2,402.1 $ 1,990.8 21%
Segment product contribution margin
Global $ 254.7 $ 123.5 106%
Foodservice 269.1 200.8 34%
Retail 114.4 36.2 216%
Other 5.6 (12.8) 144%
643.8 347.7 85%
Add: Advertising and promotion expenses 11.1 9.1 22%
Gross profit $ 654.9 $ 356.8 84%
Net Sales
Compared to the first half of fiscal 2022, net sales increased $411.3 million,
or 21%, to $2,402.1 million. Price/mix increased 26%, reflecting the benefit of
product and freight pricing actions across each of our core business segments to
counter input, manufacturing, and transportation cost inflation. Volume declined
5%, primarily reflecting an inability to fully serve customer demand in our
foodservice and retail channels. The impact of supply chain disruptions during
the first half of fiscal 2023, including the effects of commodities shortages
and onboarding new production workers, continued to affect production run-rates
and throughput in our production facilities as well as customer order
fulfillment rates. To a lesser extent, softer casual dining and full-service
restaurant traffic in the U.S. as consumers face a challenging macroeconomic
environment.
Global segment net sales increased $234.6 million, or 23%, to $1,252.5 million.
Price/mix increased 23%, while volume was flat. The benefit of domestic and
international product and freight pricing actions to offset inflation drove the
increase in price/mix. The impact of acquiring a controlling interest in LWAMSA
in early fiscal 2023 and growth in international shipments offset a decline in
domestic volumes.
Foodservice segment net sales increased $89.0 million, or 14%, to $724.3
million. Price/mix increased 25%, while volume decreased 11%. The carryover
benefits of product and freight pricing actions taken in the prior year, as well
as actions taken in fiscal 2023 to counter inflation, drove the increase in
price/mix. Volume fell, reflecting a combination of: the impact of supply chain
disruptions on run-rates and throughput in our production facilities;
incremental losses of certain low-margin business; and a slowdown in restaurant
traffic and consumer demand in casual dining and other full-service restaurants.
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Retail segment net sales increased $85.9 million, or 31%, to $361.0 million.
Price/mix increased 38%, while volume decreased 7%. The carryover benefits of
product and freight pricing actions across the branded and private label
portfolios taken in the prior year, as well as actions taken in fiscal 2023 to
counter inflation, largely drove the increase in price/mix. While consumer
demand for frozen potato products remained strong, the decline in the segment's
overall volume was due largely to the impact of supply chain disruptions on
run-rates and throughput in our production facilities for branded products, as
well as incremental losses of certain low-margin, private label business.
Other segment net sales increased $1.8 million, or 3%, to $64.3 million.
Price/mix increased 8% and was driven by higher prices in our vegetable
business. Volume decreased 5%, reflecting the negative effect of the extreme
summer heat on the yield and quality of the vegetable crops.
Gross Profit and Product Contribution Margin
Gross profit increased $298.1 million, or 84%, to $654.9 million, as benefits
from pricing actions more than offset the impact of higher manufacturing and
distribution costs on a per-pound basis, as well as lower sales volumes. The
higher costs per pound predominantly reflected double-digit cost inflation from
key inputs, including: edible oils; ingredients, such as grains and starches
used in product coatings; transportation; and labor. The increase in costs per
pound also reflected higher costs associated with the impact of extreme summer
heat that negatively affected the yield and quality of potato crops in the
Pacific Northwest in fall 2021, as well as the effects of supply chain
disruptions on run-rates and throughput in our production facilities. The
increase in per pound costs was partially offset by supply chain productivity
savings.
Our overall product contribution margin increased $296.1 million, or 85%, to
$643.8 million. The increase was largely due to higher sales and gross profit
(as described above).
Global segment product contribution margin increased $131.2 million, or 106%, to
$254.7 million. Pricing actions drove the increase, more than offsetting higher
manufacturing and distribution costs per pound, as well as unfavorable mix.
Global segment cost of sales was $995.6 million, up 12% compared to the first
half of fiscal 2022, primarily due to higher manufacturing and distribution
costs.
Foodservice segment product contribution margin increased $68.3 million, or 34%,
to $269.1 million. Pricing actions drove the increase, and was partially offset
by higher manufacturing and distribution costs per pound, unfavorable mix, and
the impact of lower sales volumes. Foodservice segment cost of sales was $452.3
million, up 5% compared to the first half of fiscal 2022, due to higher
manufacturing and distribution costs, partially offset by lower sales volumes.
Retail segment product contribution margin increased $78.2 million, or 216%, to
$114.4 million. Pricing actions drove the increase, partially offset by higher
manufacturing and distribution costs per pound. Retail segment cost of sales was
$240.9 million, up 3% compared to the first half of fiscal 2022, primarily due
to higher manufacturing and distribution costs, partially offset by lower sales
volumes.
Other segment product contribution margin increased $18.4 million to $5.6
million in the first half of fiscal 2023, as compared to a loss of $12.8 million
in the first half of fiscal 2022. These amounts include a $6.9 million loss
related to unrealized mark-to-market adjustments and realized settlements
associated with commodity hedging contracts, and a $16.9 million loss related to
the contracts in fiscal 2022. Excluding these mark-to-market adjustments and
realized settlements, Other segment product contribution margin increased $8.4
million, largely due to pricing actions in our vegetable business.
Selling, General and Administrative Expenses
SG&A increased $43.9 million to $226.1 million in the first half of fiscal 2023,
and includes a net $26.5 million gain ($19.2 million after-tax, or $0.13 per
share) related to actions taken to mitigate the effect of changes in currency
rates on the pending purchase of the remaining ownership interest in LWM, net of
other acquisition-related costs. Excluding items impacting comparability, SG&A
increased $70.4 million to $252.6 million, primarily due to higher compensation
and benefits expense, and higher expenses related to improving our information
systems and ERP infrastructure.
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Interest Expense, Net
Compared with the first half of fiscal 2022, interest expense, net decreased
$59.7 million to $50.6 million. The first half of fiscal year 2022 includes a
$53.3 million ($40.5 million after-tax or $0.28 per share) loss on
extinguishment of debt associated with the redemption in full of our 2024 Notes
and 2026 Notes.
Income Tax Expense
Income tax expense for the first half of fiscal 2023 and 2022 was $110.5 million
and $18.3 million, respectively. The effective income tax rate (calculated as
the ratio of income tax expense to pre-tax income, inclusive of equity method
investment earnings) was 24.8% and 22.7% for the first half of fiscal 2023 and
2022, respectively. Excluding items impacting comparability, our effective tax
rates for the first half of fiscal 2023 and 2022 were 25.5% and 23.0%. The
effective tax rate varies from the U.S. statutory tax rate of 21%, principally
due to the impact of U.S. state taxes, foreign taxes, permanent differences, and
discrete items.
Equity Method Investment Earnings
Equity method investments earnings were $67.3 million and $16.3 million for the
first half of fiscal 2023 and 2022, respectively. Equity method investment
earnings included a $14.4 million unrealized gain related to mark-to-market
adjustments associated with currency and commodity hedging contracts in the
first half of fiscal 2023, of which $9.5 million ($7.0 million after-tax, or
$0.05 per share) related to gains in natural gas and electricity derivatives as
commodity markets in Europe have experienced significant volatility. Equity
method investment earnings in the first half of fiscal 2022 included a $7.9
million unrealized gain for mark-to-market adjustments, of which $11.3 million
($8.4 million after-tax, or $0.06 per share) related to gains in natural gas and
electricity derivatives. Equity method investment earnings in the first half of
fiscal 2023 also included a $15.1 million gain (before and after-tax, or $0.10
per share) recognized in connection with remeasuring our previously held 50%
ownership interest in LWAMSA to fair value.
Excluding the items impacting comparability noted above (mark-to-market
adjustments related to natural gas and electricity derivatives and the
remeasurement of our previously held ownership interest in LWAMSA) and the other
mark-to-market adjustments, earnings from equity method investments increased
$29.4 million compared to the prior year, reflecting favorable price/mix,
partially offset by higher manufacturing and distribution costs, in both Europe
and the U.S.
Liquidity and Capital Resources
Sources and Uses of Cash
We ended the first half of fiscal 2023 with $419.4 million of cash and cash
equivalents and $994.6 million of availability under our revolving credit
facility, net of letters of credit. As of November 27, 2022, no borrowings were
outstanding under the revolving credit facility.
In October 2022, we entered into an agreement to acquire the remaining interest
in LWM for consideration consisting of €525.0 million in cash and €175.0 million
in shares of our common stock. We expect to close the transaction in the fourth
quarter of fiscal 2023, subject to customary regulatory approvals. We expect to
fund the cash portion of this acquisition with new borrowings and cash on hand.
We believe we have sufficient liquidity to meet projected capital expenditures,
service existing debt and meet working capital requirements for at least the
next 12 months with current cash balances and cash from operations, and in the
longer term, supplemented as necessary by available borrowings under our
currently undrawn revolving credit facility.
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LAMB WESTON HOLDINGS, INC. 
