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 30, 2021 (the "Form 10-K"),
which we filed with the United States ("U.S.") Securities and Exchange
Commission ("SEC") on July 27, 2021.
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," "anticipate," "believe," "estimate," "grow," "take," "mitigate,"
"support," "remain," "increase," "manage," "improve," "create," "outlook," and
variations of such words and similar expressions are intended to identify
forward-looking statements. Examples of forward-looking statements include, but
are not limited to, statements regarding our plans, execution, capital
investments, operational costs, pricing actions, cash flows, liquidity,
dividends, share repurchases, enterprise resource planning ("ERP") system
implementation and business outlook and prospects, as well as the impact of the
COVID-19 pandemic on our industry and the global economy. These forward-looking
statements are based on management's current expectations and are subject to
uncertainties and changes in circumstances. Readers of this report should
understand that these statements are not guarantees of performance or results.
Many factors could affect 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: impacts on our business due to health pandemics or other
contagious outbreaks, such as the COVID-19 pandemic, including impacts on demand
for our products, increased costs, disruption of supply, other constraints in
the availability of key commodities and other necessary services or restrictions
imposed by public health authorities or governments; the availability and prices
of raw materials; labor shortages and other operational challenges; levels of
pension, labor and people-related expenses; 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 possible acquisitions, including our ability to complete
acquisitions or integrate acquired businesses; 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.
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 Diluted EPS,
Adjusted EBITDA and Adjusted EBITDA including unconsolidated joint ventures)
that is prepared using non-GAAP financial measures. Refer to "Non-GAAP
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Financial Measures" below for the definitions of product contribution margin,
Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures and
Adjusted Diluted EPS, and a reconciliation of these non-GAAP financial measures
to gross profit, net income or diluted earnings per share, as applicable.
Executive Summary
We made good financial and operating progress in the quarter as we continue to
navigate through a difficult and volatile macro environment defined by cost
inflation, supply chain disruptions and production challenges due to a tight
labor market. We generated strong sales as solid demand across our
food-away-from-home channels drove volume growth, and as we continued to
implement recent pricing actions. While earnings declined versus the prior year,
the pricing actions and other strategic actions we have taken to offset cost
increases and improve throughput in our factories led to sequential gross margin
gains. Specifically, in the quarter:
? Net sales increased 12% to $1,006.6 million
? Income from operations declined 18% to $114.4 million
? Net income declined 66% to $32.5 million
? Diluted earnings per share declined 67% to $0.22
? Adjusted Diluted EPS declined 24% to $0.50
? Adjusted EBITDA including unconsolidated joint ventures declined 15% to $180.9
million
? We returned $84.3 million of cash to stockholders, including $34.3 million in
dividends and $50.0 million of share repurchases
Compared with the second quarter of fiscal 2021, the increase in net sales was
driven by a balance of higher sales volumes and price/mix. The increase in our
sales volumes was driven by the ongoing recovery in demand for frozen potato
products across our restaurant and foodservice channels in the U.S. The increase
in sales volumes was most pronounced in our Foodservice segment, which has a
higher proportion of its sales to on-premise dining establishments, including
independent restaurants and non-commercial operations, such as lodging and
hospitality, healthcare, schools and universities, sports and entertainment, and
workplace environments. Sales volumes also continued to increase at the large
chain restaurant customers served by our Global segment, but to a lesser extent
as sales volumes in this channel had largely recovered to pre-pandemic levels by
the first quarter of fiscal 2021. Sales volumes in our Retail segment declined
primarily due to lower shipments of private label products resulting from
incremental losses of certain low-margin business, and was partially offset by
an increase in branded product sales volumes. Our net sales increase was also
driven by higher price/mix in each of our core business segments, primarily
reflecting the initial benefit of product pricing actions taken earlier in the
year, as well the benefit of higher prices charged to customers for product
delivery.
Outside of North America, demand was solid in most of our key international
markets. However, our international sales volumes, which are included in our
Global segment, declined as a result of limited shipping container availability
along the U.S. West Coast and disruptions to ocean freight networks across the
Pacific Ocean.
Sales volumes in Europe, which is served by our Lamb-Weston/Meijer joint
venture, increased as restaurant traffic continued to improve, although earnings
were negatively affected by inflation, production, and transportation
challenges.
Despite a strong increase in sales, our income from operations declined largely
due to higher manufacturing and distribution costs on a per pound basis. The
increase in costs per pound primarily reflected double-digit cost inflation from
key inputs and transportation, as well as higher costs and inefficiencies
related to labor shortages across our manufacturing network. While we expect the
increasing benefits from product and freight pricing actions that we implemented
earlier this year, along with additional recently-announced pricing actions and
supply chain productivity initiatives, will improve future earnings, the
benefits that we realized to date were insufficient to fully offset the cost
pressures during the second quarter.
The decline in income from operations was also due to higher selling, general
and administrative expenses ("SG&A") expenses that were largely driven by an
increase in advertising and promotion ("A&P") expenses and higher
employee-related costs.
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Approximately one-third of the decline in net income and diluted earnings per
share was due to lower income from operations and equity method investment
earnings. Approximately two-thirds of the decline was due to an approximately
$53 million (approximately $41 million, or $0.28 per share, after-tax)
non-recurring loss associated with the extinguishment of debt. We have
identified these costs as "items impacting comparability" in our non-GAAP
results. For more information see "Liquidity and Capital Resources" in this
MD&A.
Outlook
We expect our net sales in fiscal 2022 to increase versus the prior year driven
by a combination of higher price/mix and higher sales volumes. We expect
price/mix to increase largely due to pricing actions that we began to implement
earlier in fiscal 2022 in an effort to mitigate higher manufacturing and
distribution costs. We expect solid sales volume growth as global demand for
frozen potato products continues to rise. In the U.S., during the first half of
fiscal 2022, aggregate demand, as well as our shipments, returned to
pre-pandemic levels. The rate of recovery in demand in our key international
markets remained mixed, while the recovery in our shipments was also tempered by
limited shipping container availability and disruptions to ocean freight
networks. We expect overall frozen potato demand in the U.S. and in our key
international markets will continue to be solid through the remainder of this
fiscal year, although sales volumes may be tempered by disruptions in our
production and logistics networks, as well as the effect of the COVID-19
variants on restaurant traffic and consumer demand.
We expect our earnings in fiscal 2022 to be pressured largely as a result of
input cost inflation, including higher raw potato costs, and industrywide supply
chain challenges. We anticipate that the rate of inflation for many of our
manufacturing, commodity, and transportation costs, including, but not limited
to edible oils, grains and starches used for product coatings, rail, trucking,
ocean freight, and packaging, will remain higher than we experienced in fiscal
2021. We also expect our potato costs on a per pound basis will rise as the year
progresses due to the impact of the extreme summer heat that negatively affected
the yield and quality of potato crops in the Pacific Northwest. We anticipate
the ongoing effects of the pandemic and disruptions to the broader global supply
chain will continue to pressure our operations, including the shortage of
manufacturing labor, through the remainder of fiscal 2022, which is expected to
lead to volatile operating conditions and incremental manufacturing and
distribution costs. Our experienced team is continuing to take specific actions
to mitigate these challenges, most notably executing pricing actions intended to
offset commodity inflation, restructuring freight policies, modifying production
and crewing schedules, adopting new policies and practices to attract and retain
manufacturing employees, and optimizing our product portfolio.
In addition, we expect overall SG&A in fiscal 2022 will be higher than the prior
year largely due to increased compensation and benefit expenses, as well as
continued investments to improve our information technology infrastructure over
the long term. This includes resuming our efforts in the second half of fiscal
2022 to implement the next phase of a new ERP system.
While the near-term impact of the pandemic on sales volumes and costs continues
to be volatile, we believe we have sufficient liquidity to manage through the
uncertainty.
We remain focused on our strategic objectives, and believe that our investments
in productivity, technology, and capacity to support customer growth will create
value for our stakeholders over the long term.
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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. 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 A&P expenses. Product contribution margin includes A&P
expenses because those expenses are directly associated with the performance of
the Company's segments. 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.
Thirteen Weeks Ended November 28, 2021 compared to Thirteen Weeks Ended November
29, 2020
Net Sales, Gross Profit, and Product Contribution Margin
Thirteen Weeks Ended
November 28, November 29, %
(in millions) 2021 2020 Inc/(Dec)
Segment net sales
Global $ 516.7 $ 475.9 9%
Foodservice 313.9 241.1 30%
Retail 142.6 140.7 1%
Other 33.4 38.4 (13%)
$ 1,006.6 $ 896.1 12%
Segment product contribution margin
Global $ 80.9 $ 92.7 (13%)
Foodservice 104.4 87.7 19%
Retail 21.4 30.1 (29%)
Other (6.2) 10.5 (159%)
200.5 221.0 (9%)
Add: Advertising and promotion expenses 5.0 2.5 100%
Gross profit $ 205.5 $ 223.5 (8%)
Net Sales
Compared to the prior year quarter, Lamb Weston's net sales for the second
quarter of fiscal 2022 increased $110.5 million, or 12%, to $1,006.6 million.
Volume and price/mix each increased 6%. The ongoing recovery in demand for
frozen potato products in our restaurant and foodservice channels in the U.S.
drove the increase in sales volumes, while the initial benefits of product
pricing actions, as well as higher prices charged to customers for product
delivery, primarily drove the increase in price/mix.
Global segment net sales increased $40.8 million, or 9%, to $516.7 million.
Price/mix increased 5% while volume increased 4%. The increase in price/mix
largely reflected the benefit of pricing actions, including higher prices
charged for freight. Strong growth in shipments to restaurant chain customers in
the U.S. drove the increase in sales volumes. While demand in most of our key
international markets was solid, export sales volumes declined as a result of
limited shipping container availability and disruptions to ocean freight
networks.
Foodservice segment net sales increased $72.8 million, or 30%, to $313.9
million. Volume increased 22% while price/mix increased 8%. Strong demand at
small and regional chain restaurants, as well as independently-owned
restaurants, drove the increase in sales volumes. Shipments to non-commercial
customers, such as lodging and hospitality, healthcare, schools and
universities, sports and entertainment, and workplace environments, also
increased versus the prior year quarter, but remained below pre-pandemic levels.
The segment's overall volume growth was tempered by our inability
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to serve full customer demand due to widespread industry supply chain
constraints, including labor shortages, that resulted in lower production
run-rates and throughput in our factories. The increase in price/mix largely
reflected the initial benefits of pricing actions taken earlier in the year,
higher prices charged for freight, and favorable mix.
Retail segment net sales increased $1.9 million, or 1%, to $142.6 million.
Price/mix increased 5% while volume decreased 4%. The increase in price/mix was
largely driven by favorable price in our branded portfolio, including higher
prices charged for freight. The sales volume decline largely reflects lower
shipments of private label products resulting from incremental losses of certain
low-margin business, partially offset by an increase in branded product sales
volumes. Product shipments were tempered by the inability to serve full customer
demand due to lower production run-rates and throughput in our factories.
Net sales in our Other segment declined $5.0 million, or 13%, to $33.4 million,
with volume down 24% and price/mix up 11%. The decline was driven by lower
volume in our vegetable business, reflecting the negative effect of the extreme
summer heat on the yield and quality of the vegetable crops.
Gross Profit and Product Contribution Margin
Gross profit declined $18.0 million, or 8%, to $205.5 million, as the benefits
from increased sales volumes and higher price/mix were more than offset by
higher manufacturing and distribution costs on a per-pound basis. The higher
costs per pound predominantly reflected double-digit cost inflation from key
inputs, particularly edible oils; ingredients, such as grains and starches used
in product coatings; transportation; and packaging. The increase in costs per
pound also reflected the effect of labor shortages on production run-rates, as
well as lower raw potato utilization rates due to the poor crop harvested in
fall 2021. The increase in per pound costs was partially offset by supply chain
productivity savings. The decline in gross profit also included a $6.1 million
decrease in unrealized mark-to-market adjustments associated with commodity
hedging contracts, which includes a $1.0 million loss in the current quarter,
compared with a $5.1 million gain related to these items in the prior year
quarter.
Lamb Weston's overall product contribution margin, defined as gross profit less
A&P expenses, declined $20.5 million, or 9%, to $200.5 million. The decline was
largely due to lower gross profit (as described above) and a $2.5 million
increase in A&P expenses.
Global segment product contribution margin declined $11.8 million, or 13%, to
$80.9 million. Higher manufacturing and distribution costs per pound more than
offset the benefit of favorable price/mix and higher sales volumes. Global
segment cost of sales was $434.8 million, up 14% compared to the second quarter
of fiscal 2021, primarily due to higher sales volumes and higher manufacturing
and distribution costs.
Foodservice segment product contribution margin increased $16.7 million, or 19%,
to $104.4 million. Favorable price/mix and higher sales volumes drove the
increase, and was partially offset by higher manufacturing and distribution
costs per pound. Foodservice segment cost of sales was $208.3 million, up 37%
compared to the second quarter of fiscal 2021, primarily due to higher sales
volumes and higher manufacturing and distribution costs.
Retail segment product contribution margin declined $8.7 million, or 29%, to
$21.4 million. Higher manufacturing and distribution costs per pound, a $1.9
million increase in A&P expenses, and lower sales volumes drove the decline.
Retail segment cost of sales was $118.5 million, up 8% compared to the second
quarter of fiscal 2021, primarily due to higher manufacturing and distribution
costs, partially offset by lower sales volumes.
Other segment product contribution margin declined $16.7 million to a loss of
$6.2 million in the second quarter fiscal 2022, as compared to $10.5 million of
income in fiscal 2021. These amounts include an $8.6 million loss related to
unrealized mark-to-market adjustments and realized settlements associated with
commodity hedging contracts, and a $4.3 million gain related to the contracts in
fiscal 2021. Excluding these mark-to-market adjustments and realized
settlements, Other segment product contribution margin declined $3.8 million,
largely due to higher manufacturing costs and lower sales volumes in our
vegetable business.
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Selling, General and Administrative Expenses
SG&A increased $7.2 million compared to the prior year quarter, primarily due to
a $2.5 million increase in A&P expenses, higher sales commissions associated
with increased sales volumes, and higher expenses largely related to employee
recruiting and retention. The increase in SG&A was partially offset by lower
consulting expenses associated with improving our commercial and supply chain
operations, as well as fewer expenses for our new ERP system. Approximately $2
million of the ERP-related costs in the quarter consisted primarily of
consulting expenses that will not continue after we implement the new system,
compared to approximately $5 million in the prior year quarter.
Interest Expense, Net
Compared with the prior year quarter, interest expense, net increased $52.4
million to $82.4 million. The increase reflects a $53.3 million ($40.5 million
after-tax) loss on extinguishment of debt associated with the redemption in full
of our outstanding 4.625% senior notes due 2024 (the "2024 Notes") and 4.875%
senior notes due 2026 (the "2026 Notes"). For more information see "Liquidity
and Capital Resources" in this MD&A.
Income Tax Expense
Income tax expense for the second quarter of fiscal 2022 and 2021 was $9.6
million and $31.9 million, respectively. The effective income tax rate
(calculated as the ratio of income tax expense to pre-tax income, inclusive of
equity method investment earnings) was 22.8% and 24.8% for the second quarter of
fiscal 2022 and 2021, respectively. The effective tax rate varies from the U.S.
statutory tax rate of 21%, principally due to the impact of U.S. state taxes,
foreign taxes, permanent differences, and discrete items.
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in Europe, the U.S.,
and South America and include our share of the earnings based on our economic
ownership interest in them. Our share of earnings from our equity method
investments was $10.1 million and $19.2 million for the second quarter of fiscal
2022 and 2021, respectively. Equity method investment earnings included a $3.6
million unrealized gain related to mark-to-market adjustments associated with
currency and commodity hedging contracts in the current quarter, compared to a
$0.1 million unrealized loss related to these items in the prior year quarter.
Excluding the mark-to-market adjustments, earnings from equity method
investments declined $12.8 million compared to the prior year period. The
earnings decline largely reflects input cost inflation and higher manufacturing
costs in Europe and the U.S.
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Twenty-Six Weeks Ended November 28, 2021 compared to Twenty-Six Weeks Ended
November 29, 2020
Net Sales, Gross Profit, and Product Contribution Margin
Twenty-Six Weeks Ended
November 28, November 29, %
(in millions) 2021 2020 Inc/(Dec)
Segment net sales
Global $ 1,017.9 $ 923.4 10%
Foodservice 635.3 477.8 33%
Retail 275.1 294.6 (7%)
Other 62.5 71.8 (13%)
$ 1,990.8 $ 1,767.6 13%
Segment product contribution margin
Global $ 123.5 $ 170.5 (28%)
Foodservice 200.8 173.5 16%
Retail 36.2 65.9 (45%)
Other (12.8) 23.7 (154%)
347.7 433.6 (20%)
Add: Advertising and promotion expenses 9.1 3.7 146%
Gross profit $ 356.8 $ 437.3 (18%)
Net Sales
Compared to the first half of fiscal 2021, Lamb Weston's net sales increased
$223.2 million, or 13%, to $1,990.8 million. Volume increased 9% and price/mix
increased 4%. The ongoing recovery in demand for frozen potato products in our
restaurant and foodservice channels drove the increase in sales volumes. In the
prior year period, demand was affected by reduced shipments related to
government-imposed social restrictions on restaurant traffic. The initial
benefits of product pricing actions, as well as higher prices charged to
customers for product delivery, primarily drove the increase in price/mix.
Global segment net sales increased $94.5 million, or 10%, to $1,017.9 million.
Volume increased 6% while price/mix increased 4%. Strong growth in shipments to
restaurant chain customers in the U.S., including the benefit of limited time
product offerings, drove the increase in sales volumes. Demand in most of our
key international markets was solid, although limited shipping container
availability and disruptions to ocean freight networks tempered growth of our
export sales volumes. The increase in price/mix largely reflected the benefit of
pricing actions, including higher prices charged for freight.
Foodservice segment net sales increased $157.5 million, or 33%, to $635.3
million. Volume increased 28% while price/mix increased 5%. Solid demand at
small and regional chain restaurants, as well as independently-owned
restaurants, drove the increase in sales volumes. Shipments to non-commercial
customers also increased versus the prior year period, but remained below
pre-pandemic levels. The segment's overall volume growth was tempered by our
inability to serve full customer demand due to widespread industry supply chain
constraints, including labor shortages, that resulted in lower production
run-rates and throughput in our factories. The increase in price/mix largely
reflected the initial benefits of pricing actions taken earlier in the year, as
well as higher prices charged for freight.
Retail segment net sales declined $19.5 million, or 7%, to $275.1 million.
Volume declined 11% while price/mix increased 4%. The sales volume decline
primarily reflects lower shipments of private label products resulting from
incremental losses of certain low-margin business. Branded product sales volumes
were well above pre-pandemic levels, but were essentially flat versus the prior
year period because of our inability to serve full customer demand due to lower
production run-rates and throughput in our factories. The increase in price/mix
was largely driven by favorable price, including higher prices charged for
freight.
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Net sales in our Other segment declined $9.3 million, or 13%, to $62.5 million,
with volume down 23% and price/mix up 10%. The decline primarily reflects lower
volume in our vegetable business, reflecting the negative effect of the extreme
summer heat on the yield and quality of the vegetable crops.
Gross Profit and Product Contribution Margin
Gross profit declined $80.5 million, or 18%, to $356.8 million, as the benefits
from increased sales volumes and higher price/mix were more than offset by
higher manufacturing and distribution costs on a per-pound basis. The higher
costs per pound predominantly reflected double-digit cost inflation from key
inputs, particularly edible oils; transportation; ingredients, such as grains
and starches used in product coatings; and packaging. The increase in costs per
pound also reflected the effect of labor shortages on production run-rates, as
well as lower raw potato utilization rates due to the poor crop harvested in
fall 2021. The increase in per pound costs was partially offset by supply chain
productivity savings. The decline in gross profit also included an $11.8 million
decrease in unrealized mark-to-market adjustments associated with commodity
hedging contracts, which includes a $0.2 million gain in the first half of
fiscal 2022, compared with a $12.0 million gain related to these items in the
first half of fiscal 2021.
Lamb Weston's overall product contribution margin declined $85.9 million, or
20%, to $347.7 million. The decline was largely due to lower gross profit (as
described above) and a $5.4 million increase in A&P expenses.
Global segment product contribution margin declined $47.0 million, or 28%, to
$123.5 million. Higher manufacturing and distribution costs per pound resulting
from input and transportation cost inflation, reduced production run-rates and
lower raw potato utilization rates more than offset the benefit of favorable
price/mix and higher sales volumes. Global segment cost of sales was $892.5
million, up 19% compared to the first half of fiscal 2021, primarily due to
higher sales volumes and higher manufacturing and distribution costs.
Foodservice segment product contribution margin increased $27.3 million, or 16%,
to $200.8 million. Higher sales volumes and favorable price/mix drove the
increase, and was partially offset by higher manufacturing and distribution
costs per pound. Foodservice segment cost of sales was $432.3 million, up 43%
compared to the first half of fiscal 2021, primarily due to higher sales volumes
and higher manufacturing and distribution costs.
Retail segment product contribution margin declined $29.7 million, or 45%, to
$36.2 million. Higher manufacturing and distribution costs per pound, lower
sales volumes and a $3.9 million increase in A&P expenses, drove the decline.
Retail segment cost of sales was $234.1 million, up 3% compared to the first
half of fiscal 2021, primarily due to lower sales volumes and higher
manufacturing and distribution costs.
Other segment product contribution margin declined $36.5 million to a loss of
$12.8 million in the first half of fiscal 2022, as compared to $23.7 million of
income in the first half of fiscal 2021. These amounts include a $16.9 million
loss related to unrealized mark-to-market adjustments and realized settlements
associated with commodity hedging contracts, and a $12.1 million gain related to
the contracts in fiscal 2021. Excluding these mark-to-market adjustments and
realized settlements, Other segment product contribution margin declined $7.5
million, largely due to higher manufacturing costs and lower sales volumes in
our vegetable business.
Selling, General and Administrative Expenses
SG&A increased $20.2 million compared to the first half of fiscal 2021,
primarily due to a $5.4 million increase in A&P expenses to support new product
launches; higher compensation and benefits expense; investments to improve our
information technology, commercial and supply chain operations over the long
term; expenses largely related to employee recruiting and retention and
temporary labor; and higher sales commissions associated with increased sales
volumes. SG&A included approximately $6 million of ERP-related costs in the
first half of fiscal 2022 and 2021. In both periods, these costs consisted
primarily of consulting expenses that will not continue after we implement the
new ERP system.
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Interest Expense, Net
Compared with the first half of fiscal 2021, interest expense, net increased
$50.0 million to $110.3 million. The increase reflects a $53.3 million ($40.5
million after-tax) loss on extinguishment of debt associated with the redemption
in full of our 2024 Notes and 2026 Notes. For more information see "Liquidity
and Capital Resources" in this MD&A.
Income Tax Expense
Income tax expense for the first half of fiscal 2022 and 2021 was $18.3 million
and $59.9 million, respectively. The effective income tax rate (calculated as
the ratio of income tax expense to pre-tax income, inclusive of equity method
investment earnings) was 22.7% and 24.3% for the first half of fiscal 2022 and
2021, respectively. The effective tax rate varies from the U.S. statutory tax
rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes,
permanent differences, and discrete items.
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in Europe, the U.S.,
and South America and include our share of the earnings based on our economic
ownership interest in them. Our share of earnings from our equity method
investments was $16.3 million and $31.1 million for the first half of fiscal
2022 and 2021, respectively. Equity method investment earnings included a $7.9
million unrealized gain related to mark-to-market adjustments associated with
currency and commodity hedging contracts in the first half of fiscal 2022,
compared to a $4.6 million unrealized gain related to these items in fiscal
2021. Excluding the mark-to-market adjustments, earnings from equity method
investments declined $18.1 million compared to the first half of fiscal 2021.
The earnings decline largely reflects input cost inflation and higher
manufacturing costs in Europe and the U.S.
Liquidity and Capital Resources
Sources and Uses of Cash
We ended the first half of fiscal 2022 in a strong financial position with
$621.9 million of cash and cash equivalents and $994.6 million of availability
under our revolving credit facility, net of letters of credit. During the first
half of fiscal 2022, we lowered the interest rates and extended the maturities
on $1,670.0 million of our outstanding debt (see Note 9, Debt and Financing
Obligations, of the Condensed Notes to Consolidated Financial Statements in
"Part I, Item 1. Financial Statements" of this report) and amended our revolving
credit facility to increase its capacity to $1.0 billion and extend its maturity
date to August 11, 2026. At the end of the first half of fiscal 2022, no
borrowings were outstanding under the amended revolving credit facility.
While we expect the near-term impact of the pandemic on costs to remain
volatile, we believe we have sufficient liquidity to meet projected capital
expenditures, service existing debt and meet working capital requirements for at
least the next 12 months with current cash balances and cash from operations,
supplemented as necessary by available borrowings under our currently undrawn
revolving credit facility.
27
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