THE JM SMUCKER COMPANY (Dollars and shares in millions, unless otherwise noted, except per share data) This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three and six months endedOctober 31, 2019 and 2018. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted. OnMay 14, 2018 , we acquired the stock of Ainsworth in an all-cash transaction, which was funded by debt and valued at$1.9 billion . Ainsworth was a leading producer, distributor, and marketer of premium pet food and pet snacks, predominantly within theU.S. Annual cost synergies of approximately$55.0 are expected to be fully realized by the end of 2020. We realized total cumulative synergies of$47.4 as ofOctober 31, 2019 . OnAugust 31, 2018 , we sold ourU.S. baking business toBrynwood Partners VII L.P. andBrynwood Partners VIII L.P. , subsidiaries ofBrynwood Partners , an unrelated party. The transaction included products that were primarily sold inU.S. retail channels under the Pillsbury,Martha White , Hungry Jack, White Lily, and Jim Dandy brands, along with all relevant trademarks and licensing agreements, and our manufacturing facility inToledo, Ohio . This business generated net sales of approximately$370.0 in 2018, primarily in theU.S. Retail Consumer Foods segment. The transaction did not include our baking business inCanada . We received proceeds from the divestiture of$369.5 , which were net of cash transaction costs and included a working capital adjustment. We recognized a pre-tax gain of$27.7 related to this transaction, of which$26.6 was recognized during the second quarter of 2019 and was included in other operating expense (income) - net within the Condensed Statement of Consolidated Income. We are the owner of all trademarks referenced herein, except for the following, which are used under license: Dunkin'TM andDunkin' Donuts are trademarks ofDD IP Holder LLC , andRachael Ray is a trademark ofRay Marks II LLC . The Dunkin' and Dunkin' Donuts brands are licensed to us for packaged coffee products, including K-Cup® pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores. Information in this document does not pertain to products for sale in Dunkin' restaurants. K-Cup® is a trademark ofKeurig Green Mountain, Inc. , used with permission. Results of Operations Three Months Ended October 31, Six Months Ended October 31, % Increase % Increase 2019 2018 (Decrease) 2019 2018 (Decrease) Net sales$ 1,957.8 $ 2,021.5 (3 )%$ 3,736.7 $ 3,924.0 (5 )% Gross profit$ 754.0 $ 771.3 (2 )$ 1,453.6 $ 1,449.5 - % of net sales 38.5 % 38.2 % 38.9 % 36.9 % Operating income$ 329.8 $ 330.5 -$ 587.4 $ 557.4 5 % of net sales 16.8 % 16.3 % 15.7 % 14.2 % Net income: Net income$ 211.2 $ 188.5 12$ 365.8 $ 321.5 14 Net income per common share - assuming dilution$ 1.85 $ 1.66 11$ 3.21 $ 2.83 13 Adjusted gross profit (A)$ 753.1 $ 771.4 (2 )$ 1,423.7 $ 1,471.6 (3 ) % of net sales 38.5 % 38.2 % 38.1 % 37.5 % Adjusted operating income (A)$ 391.0 $ 415.7 (6 )$ 681.7 $ 732.8 (7 ) % of net sales 20.0 % 20.6 % 18.2 % 18.7 % Adjusted income: (A) Income$ 257.5 $ 246.5 4$ 437.2 $ 448.9 (3 ) Earnings per share - assuming dilution$ 2.26 $ 2.17 4$ 3.84 $ 3.95 (3 )
(A) We use non-GAAP financial measures to evaluate our performance. Refer to
"Non-GAAP Financial Measures" in this discussion and analysis for a
reconciliation to the comparable GAAP financial measure.
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Net Sales Three Months Ended October 31, Six Months Ended October 31, Increase Increase 2019 2018 (Decrease) % 2019 2018 (Decrease) % Net sales$ 1,957.8 $ 2,021.5 $ (63.7 ) (3 )%
$ 3,736.7 $ 3,924.0 $ (187.3 ) (5 )% Ainsworth acquisition - - - - (25.4 ) - (25.4 ) (1 ) Baking divestiture - (32.8 ) 32.8 2 - (105.9 ) 105.9 3 Foreign currency exchange 1.8 - 1.8 - 3.6 - 3.6 - Net sales excluding acquisition, divestiture, and foreign currency exchange (A)$ 1,959.6 $ 1,988.7 $ (29.1 ) (1 )%
Amounts may not add due to rounding. (A) Net sales excluding acquisition, divestiture, and foreign currency exchange
is a non-GAAP financial measure used to evaluate performance internally. This
measure provides useful information because it enables comparison of results
on a year-over-year basis.
Net sales in the second quarter of 2020 decreased$63.7 , or 3 percent, reflecting$32.8 of noncomparable net sales in the prior year related to theU.S. baking business, which was divested during the second quarter of 2019. Net sales excluding divestiture and foreign currency exchange decreased$29.1 , or 1 percent, as lower net price realization impacted net sales by 1 percentage point, primarily due to lower net pricing for coffee and peanut butter, partially offset by higher pricing for pet food and pet snacks. Volume/mix had a neutral impact on net sales, as decreases for dog food and shortening and oils were mostly offset by increases for coffee and Smucker's Uncrustables®. Net sales in the first six months of 2020 decreased$187.3 , or 5 percent, reflecting$105.9 of noncomparable net sales in the prior year related to theU.S. baking business, partially offset by incremental net sales in the current year of$25.4 related to the Ainsworth acquisition. Net sales excluding acquisition, divestiture, and foreign currency exchange decreased$103.2 , or 3 percent. This reflected a 1 percentage point impact from unfavorable volume/mix, primarily driven by declines for private label pet food offerings, as well as the Natural Balance and Folgers brands, partially offset by gains for the Smucker's brand. Lower net price realization also impacted net sales by 1 percentage point, primarily due to lower net pricing for coffee and peanut butter, partially offset by higher pricing for pet food and pet snacks. Operating Income The following table presents the components of operating income as a percentage of net sales. Three Months EndedOctober 31 ,
Six Months Ended
2019 2018 2019 2018
Gross profit 38.5 % 38.2 % 38.9 % 36.9 %
Selling, distribution, and administrative
expenses:
Marketing 6.3 % 6.8 % 6.9 % 7.1 %
Selling 3.2 3.3 3.5 3.4
Distribution 3.6 3.3 3.6 3.4
General and administrative 5.4 5.6 5.9 5.7
Total selling, distribution, and
administrative expenses 18.5 % 18.9 % 19.9 % 19.5 %
Amortization 3.0 3.0 3.1 3.1
Other special project costs 0.2 1.3 0.2 0.8
Other operating expense (income) - net - (1.3 ) - (0.7 )
Operating income 16.8 % 16.3 % 15.7 % 14.2 %
Amounts may not add due to rounding.
Gross profit decreased$17.3 , or 2 percent, in the second quarter of 2020, primarily driven by the noncomparable impact related to theU.S. baking business divestiture and an unfavorable net impact of lower prices and lower costs, partially offset by favorable volume/mix. Operating income was comparable to the prior year, as the impact of the$26.6 pre-tax gain related to the sale of theU.S. baking business in the prior year and the decrease in gross profit were mostly offset by a$22.1 decrease in special project costs and a$20.9 decrease in selling, distribution, and administrative ("SD&A") expenses. 21
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Our non-GAAP adjustments include amortization expense and impairment charges
related to intangible assets, integration and restructuring costs, and
unallocated gains and losses on commodity and foreign currency exchange
derivatives. Refer to "Non-GAAP Financial Measures" in this discussion and
analysis for further information. Gross profit excluding non-GAAP adjustments
("adjusted gross profit") decreased $18.3 , or 2 percent, in the second quarter
of 2020. Operating income excluding non-GAAP adjustments ("adjusted operating
income") decreased $24.7 , or 6 percent, reflecting the exclusion of the impact
of reduced special project costs, as compared to the prior year.
Gross profit increased $4.1 in the first six months of 2020, primarily driven by
a favorable net impact of lower prices and lower costs and the noncomparable
benefit of Ainsworth, mostly offset by the noncomparable impact related to the
U.S. baking business divestiture and unfavorable volume/mix. The favorable net
impact of price and cost was mostly driven by a favorable change in the impact
of derivative gains and losses. Operating income increased $30.0 , or 5 percent,
primarily due to a $26.5 decrease in special project costs, a $23.7 decrease in
SD&A expenses, and higher gross profit, partially offset by the impact of the
$26.6 pre-tax gain related to the sale of the U.S. baking business in the prior
year.
Adjusted gross profit decreased $47.9 , or 3 percent, in the first six months of
2020, reflecting a $52.0 unfavorable impact of the exclusion of unallocated
derivative gains and losses, as compared to the prior year. Adjusted operating
income decreased $51.1 , or 7 percent, further reflecting the exclusion of the
impact of reduced special project costs, as compared to the prior year.
Interest Expense
Net interest expense decreased $4.5 , or 8 percent, in the second quarter of
2020, and decreased $8.7 , or 8 percent, in the first six months of 2020,
primarily as a result of reduced debt, as compared to the prior year, driven by
repayments made during the last twelve months.
Income Taxes
Income taxes decreased $13.0 , or 16 percent, in the second quarter of 2020, and
decreased $1.0 , or 1 percent, in the first six months of 2020, due to lower
effective tax rates in 2020 of 24.3 percent for the second quarter and 24.7
percent for the first six months. The 2019 effective tax rates were 30.0 percent
for the second quarter and 27.3 percent for the first six months.
During the current year and the prior year, the effective tax rates varied from
the U.S. statutory tax rate of 21.0 percent, primarily due to the impact of
state income taxes. The effective tax rates for the prior year were also
unfavorably impacted by the income tax expense associated with the sale of the
U.S. baking business. We anticipate a full-year effective tax rate for 2020 to
be approximately 24.5 percent. For further information, refer to Note 13: Income
Taxes.
Integration Activities
We expect to incur approximately $50.0 in total integration costs related to the
Ainsworth acquisition, the majority of which are expected to be cash charges. Of
the total anticipated integration costs, we expect approximately one-third to be
employee-related costs. We have incurred total cumulative integration costs of
$38.7 , of which $3.3 and $6.6 were incurred in the second quarter and first six
months of 2020, respectively. All remaining integration costs are expected to be
incurred by the end of 2020. For further information, refer to Note 4:
Integration and Restructuring Costs.
Segment Results
We have four reportable segments: U.S. Retail Pet Foods , U.S. Retail Coffee,
U.S. Retail Consumer Foods , and International and Away From Home. The U.S.
Retail Pet Foods segment primarily includes the domestic sales of Rachael Ray
Nutrish, Meow Mix, Milk-Bone, Natural Balance, Kibbles 'n Bits, 9Lives, Nature's
Recipe, and Pup-Peroni branded products; the U.S. Retail Coffee segment
primarily includes the domestic sales of Folgers, Dunkin' Donuts , and Café
Bustelo branded coffee; and the U.S. Retail Consumer Foods segment primarily
includes the domestic sales of Smucker's, Jif, and Crisco branded products. The
International and Away From Home segment comprises products distributed
domestically and in foreign countries through retail channels and foodservice
distributors and operators (e.g., restaurants, lodging, schools and
universities, health care operators).
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Three Months Ended October 31, Six Months Ended October 31,
% Increase % Increase
2019 2018 (Decrease) 2019 2018 (Decrease)
Net sales:
U.S. Retail Pet Foods $ 709.9 $ 728.1 (2 )% $ 1,379.8 $ 1,399.3 (1 )%
U.S. Retail Coffee 543.4 544.9 - 1,009.1 1,034.4 (2 )
U.S. Retail Consumer Foods 426.1 461.9 (8 ) 828.3 945.2 (12 )
International and Away From Home 278.4 286.6 (3 ) 519.5 545.1 (5 )
Segment profit:
U.S. Retail Pet Foods $ 137.0 $ 123.9 11 % $ 257.1 $ 224.3 15 %
U.S. Retail Coffee 182.5 174.3 5 311.4 322.1 (3 )
U.S. Retail Consumer Foods 91.4 134.3 (32 ) 172.4 231.6 (26 )
International and Away From Home 50.4 56.7 (11 ) 82.7 100.1 (17 )
Segment profit margin:
U.S. Retail Pet Foods 19.3 % 17.0 % 18.6 % 16.0 %
U.S. Retail Coffee 33.6 32.0 30.9 31.1
U.S. Retail Consumer Foods 21.5 29.1 20.8 24.5
International and Away From Home 18.1 19.8 15.9 18.4
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales in the second quarter of 2020
decreased $18.2 , reflecting a $19.5 decline related to private label products,
which was due to both planned exits and softness at certain retailers.
Volume/mix reduced net sales by 4 percentage points, primarily driven by private
label and the Natural Balance brand, partially offset by gains for the Milk-Bone
and Rachael Ray Nutrish brands. Net price realization contributed 1 percentage
point, primarily related to the Meow Mix, 9Lives, and Nature's Recipe brands,
reflecting list price increases taken during the second half of the prior year
across most brands, partially offset by increased trade spend. Segment profit
increased $13.1 , primarily driven by higher net pricing, synergy realization,
and reduced marketing expense, partially offset by higher input costs and
unfavorable volume/mix.
The U.S. Retail Pet Foods segment net sales in the first six months of 2020
decreased $19.5 , including the impact of two weeks of incremental Ainsworth
sales in the current year. Excluding the incremental Ainsworth business, net
sales decreased $44.9 , reflecting a $45.8 decline related to private label
products. Volume/mix reduced net sales by 5 percentage points, primarily driven
by private label and the Natural Balance brand. Net price realization
contributed 2 percentage points, primarily related to the Meow Mix, Kibbles 'n
Bits, and Milk-Bone brands, reflecting the list price increases taken during the
second half of the prior year, partially offset by increased trade spend.
Segment profit increased $32.8 , reflecting a $10.9 unfavorable fair value
purchase accounting adjustment in the prior year and the benefit from the
incremental Ainsworth sales. Profit improvement was also driven by higher net
pricing, synergy realization, and reduced marketing expense, partially offset by
higher input costs and unfavorable volume/mix.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales decreased $1.5 in the second quarter of
2020, reflecting lower net price realization, mostly offset by favorable
volume/mix. Lower net pricing on the Folgers and Dunkin' Donuts brands reduced
net sales by 4 percentage points, which reflected promotional activity across
both brands resulting from lower green coffee costs. The favorable volume/mix
increased net sales by 4 percentage points, primarily due to growth of the
Dunkin' Donuts and Café Bustelo brands. Segment profit increased $8.2 , primarily
due to favorable volume/mix, as lower input costs offset the impact of lower net
pricing.
The U.S. Retail Coffee segment net sales decreased $25.3 in the first six months
of 2020, reflecting lower net price realization, partially offset by favorable
volume/mix. Lower net pricing, which reduced net sales by 4 percentage points,
reflected promotional activity across all brands resulting from lower green
coffee costs. The favorable volume/mix, which increased net sales by 1
percentage point, was driven by the Dunkin' Donuts and Café Bustelo brands,
partially offset by declines for the Folgers brand. Segment profit decreased
$10.7 , primarily due to unfavorable volume/mix and the net unfavorable impact of
lower net pricing and lower green coffee costs.
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U.S. Retail Consumer Foods The U.S. Retail Consumer Foods segment net sales decreased$35.8 in the second quarter of 2020, primarily reflecting$32.0 of net sales in the prior year related to the divestedU.S. baking business. Excluding the noncomparable impact of the divested business, net sales decreased 1 percent, reflecting lower net price realization, partially offset by favorable volume/mix. Lower net pricing reduced net sales by 3 percentage points, primarily driven by a list price decrease on the Jif brand in the fourth quarter of the prior year. Favorable volume/mix contributed 2 percentage points, primarily related to Smucker's Uncrustables and the Jif brand, partially offset by declines for the Crisco brand. Segment profit decreased$42.9 , primarily reflecting$35.4 of segment profit in the prior year related to the divested business, of which$26.6 represented the pre-tax gain related to the sale. Excluding the impact of the divestiture, segment profit decreased 8 percent, driven primarily by the impact of lower pricing, partially offset by favorable volume/mix and reduced SD&A expenses.The U.S. Retail Consumer Foods segment net sales decreased$116.9 in the first six months of 2020, driven by a$102.2 noncomparable impact of theU.S. baking business. Excluding the noncomparable impact of the divested business, net sales decreased 2 percent, primarily due to lower net price realization, which reduced net sales by 3 percentage points, primarily driven by the list price decrease on the Jif brand. Favorable volume/mix contributed 2 percentage points, primarily related to Smucker's Uncrustables, partially offset by declines for the Crisco brand. Segment profit decreased$59.2 , primarily reflecting$44.3 of segment profit in the prior year related to the divested business, of which$26.6 represented the pre-tax gain related to the sale. Excluding the impact of the divestiture, segment profit decreased 8 percent, driven primarily by the unfavorable net impact of lower pricing and lower input costs for peanut butter, partially offset by decreased marketing expense. International and Away From Home The International and Away From Home segment net sales decreased$8.2 in the second quarter of 2020, primarily reflecting unfavorable volume/mix, which reduced net sales by 2 percentage points driven primarily by increased shipments in the prior year related to the closing of facilities inMexico and transition to a distributor export model. Foreign currency had a$1.8 unfavorable impact on net sales. Segment profit decreased$6.3 , primarily reflecting the unfavorable volume/mix and higher input costs. The International and Away From Home segment net sales decreased$25.6 in the first six months of 2020, including a noncomparable impact of$3.7 of net sales in the prior year related to the divestedU.S. baking business. Unfavorable volume/mix reduced net sales by 2 percentage points, primarily driven by the Folgers brand and the increased shipments in the prior year related to the closing of facilities inMexico and transition to a distributor export model, partially offset by gains for the Smucker's brand. Lower net price realization across most brands reduced net sales by 1 percentage point. Foreign currency exchange had a$3.6 unfavorable impact on net sales. Segment profit decreased$17.4 , primarily reflecting the unfavorable volume/mix and lower net pricing. Financial Condition - Liquidity and Capital Resources Liquidity Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility. AtOctober 31, 2019 , total cash and cash equivalents was$48.8 , compared to$101.3 atApril 30, 2019 . 24
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The following table presents selected cash flow information.
Six Months
Ended
2019 2018
Net cash provided by (used for) operating activities
$ 445.9 Net cash provided by (used for) investing activities (104.2 ) (1,718.9 ) Net cash provided by (used for) financing activities (395.2 ) 1,256.2
Net cash provided by (used for) operating activities
$ 445.9 Additions to property, plant, and equipment (136.4 ) (179.1 ) Free cash flow (A)$ 309.1 $ 266.8
(A) Free cash flow is a non-GAAP financial measure used by management to evaluate
the amount of cash available for debt repayment, dividend distribution,
acquisition opportunities, share repurchases, and other corporate purposes.
Cash provided by operating activities for the first six months of 2020 was comparable to the prior year, as the higher net income adjusted for noncash items in the current year was mostly offset by the increase in cash required to fund working capital in 2020. The increase in working capital requirements, as compared to the prior year, was mainly driven by higher payments for accounts payable items and an increase in inventory levels. These increases were partially offset by a reduction in trade receivables compared to the prior year, due to lower sales. Cash used for investing activities in the first six months of 2020 consisted of$136.4 in capital expenditures, partially offset by a$32.1 decrease in our derivative cash margin account balances. Cash used for investing activities in the first six months of 2019 consisted of$1.9 billion related to the Ainsworth acquisition and$179.1 in capital expenditures, partially offset by net proceeds from the divestiture of theU.S. baking business of$372.1 . Cash used for financing activities in the first six months of 2020 consisted primarily of dividend payments of$196.6 , a net decrease in short-term borrowings of$102.9 , and a long-term debt repayment of$100.0 . Cash provided by financing activities in the first six months of 2019 consisted primarily of$1.5 billion in long-term debt proceeds and a$246.0 net increase in short-term borrowings, partially offset by a long-term debt repayment of$300.0 and dividend payments of$184.9 . We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of,Big Heart Pet Brands , the significant majority of which were settled and paid during the second half of 2019. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable atOctober 31, 2019 . Based on the information known to date, with the exception of the matter discussed below, we do not believe the final outcome of these proceedings would have a material adverse effect on our financial position, results of operations, or cash flows. In addition to the legal proceedings discussed above, we are currently a defendant in CERT v.Brad Barry LLC , et al., which alleges that we, in addition to nearly eighty other defendants who manufacture, package, distribute, or sell coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. As part of a joint defense group organized to defend against the lawsuit, we dispute these claims. Acrylamide is not added to coffee, but is inherently present in all coffee in small amounts (measured in parts per billion) as a byproduct of the coffee bean roasting process. The outcome and the financial impact of the case, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for this matter as ofOctober 31, 2019 , as the likelihood of loss is not considered probable or estimable. However, if we are required to pay significant statutory penalties or to add warning labels to any of our products or place warnings in certain locations where our products are sold as a result of Proposition 65, our business and financial results could be adversely impacted, and sales of those products could suffer not only in those locations but elsewhere. For additional information, see Note 15: Contingencies. 25
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Capital Resources
The following table presents our capital structure.
October 31, 2019 April 30, 2019
Current portion of long-term debt $ 799.5 $ 798.5
Short-term borrowings 327.9 426.0
Long-term debt, less current portion 4,584.5 4,686.3
Total debt $ 5,711.9 $ 5,910.8
Shareholders' equity 8,095.3 7,970.5
Total capital $ 13,807.2 $ 13,881.3
In April 2018 , we entered into a Term Loan with a syndicate of banks and an
available commitment amount of $1.5 billion . The full amount of the Term Loan
was drawn on May 14, 2018 , to partially finance the Ainsworth acquisition.
Borrowings under the Term Loan bear interest on the prevailing U.S. Prime Rate
or LIBOR, based on our election, and are payable either on a quarterly basis or
at the end of the borrowing term. The Term Loan matures on May 14, 2021 , and
does not require scheduled amortization payments. Voluntary prepayments are
permitted without premium or penalty. As of October 31, 2019 , we have prepaid
$800.0 on the Term Loan to date, including $100.0 in the second quarter of 2020.
The interest rate on the Term Loan at October 31, 2019 , was 2.94 percent.
Subsequent to the second quarter, on November 14, 2019 , we entered into an
amendment to the Term Loan that decreased the applicable margins on LIBOR, based
on our long-term unsecured debt rating. This amendment did not have a material
impact on our condensed consolidated financial statements.
We have available a $1.8 billion unsecured revolving credit facility with a
group of 11 banks that matures in September 2022 . Additionally, we participate
in a commercial paper program under which we can issue short-term, unsecured
commercial paper not to exceed $1.8 billion at any time. The commercial paper
program is backed by our revolving credit facility and reduces what we can
borrow under the revolving credit facility by the amount of commercial paper
outstanding. Commercial paper will be used as a continuing source of short-term
financing for general corporate purposes. As of October 31, 2019 , we had $327.9
of short-term borrowings outstanding, all of which were issued under our
commercial paper program, at a weighted-average interest rate of 2.07 percent.
We are in compliance with all of our debt covenants. For additional information
on our long-term debt, sources of liquidity, and debt covenants, see Note 8:
Debt and Financing Arrangements.
During the second quarter of 2020, we did not repurchase any common shares under
a repurchase plan authorized by the Board. At October 31, 2019 , approximately
3.6 million common shares remain available for repurchase pursuant to the
Board's authorizations. There is no guarantee as to the exact number of shares
that may be repurchased or when such purchases may occur.
Absent any material acquisitions or other significant investments, we believe
that cash on hand, combined with cash provided by operations, borrowings
available under our commercial paper program and revolving credit facility, and
access to capital markets, will be sufficient to meet our cash requirements for
the next 12 months, including capital expenditures, the payment of quarterly
dividends, principal and interest payments on debt outstanding, and share
repurchases.
During the first six months of 2020, we reduced our capital investment in
certain foreign subsidiaries in conjunction with a restructuring of our
international holding and operating entities, returning $39.1 of international
cash to the U.S. No foreign withholding taxes were applicable, and state income
taxes were not significant. As of October 31, 2019 , total cash and cash
equivalents of $41.8 was held by our foreign subsidiaries, primarily in Canada .
The undistributed earnings of our foreign subsidiaries remain permanently
reinvested.
Non-GAAP Financial Measures
We use non-GAAP financial measures, including: net sales excluding acquisition,
divestiture, and foreign currency exchange; adjusted gross profit; adjusted
operating income; adjusted income; adjusted earnings per share; and free cash
flow, as key measures for purposes of evaluating performance internally. We
believe that investors' understanding of our performance is enhanced by
disclosing these performance measures. Furthermore, these non-GAAP financial
measures are used by management in preparation of the annual budget and for the
monthly analyses of our operating results. The Board also utilizes certain
non-GAAP financial measures as components for measuring performance for
incentive compensation purposes.
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Non-GAAP measures exclude certain items affecting comparability that can
significantly affect the year-over-year assessment of operating results, which
include amortization expense and impairment charges related to intangible
assets, integration and restructuring costs ("special project costs"), and
unallocated gains and losses on commodity and foreign currency exchange
derivatives ("unallocated derivative gains and losses"), as well as the related
tax impact of these exclusions. The special project costs in the following table
relate to specific integration and restructuring projects, and the unallocated
derivative gains and losses reflect the changes in fair value of our commodity
and foreign currency exchange contracts. Additionally, income taxes, as adjusted
is calculated using an adjusted effective income tax rate that is applied to
adjusted income before income taxes. While this adjusted effective income tax
rate does not generally differ materially from our GAAP effective income tax
rate, certain items can significantly impact our adjusted effective income tax
rate.
These non-GAAP financial measures are not intended to replace the presentation
of financial results in accordance with U.S. GAAP. Rather, the presentation of
these non-GAAP financial measures supplements other metrics we use to internally
evaluate our businesses and facilitate the comparison of past and present
operations and liquidity. These non-GAAP financial measures may not be
comparable to similar measures used by other companies and may exclude certain
nondiscretionary expenses and cash payments. The following table reconciles
certain non-GAAP measures to the comparable GAAP financial measure. See page 21
for a reconciliation of net sales adjusted for certain noncomparable items to
the comparable GAAP financial measure.
Three Months Ended October 31, Six Months Ended October 31,
2019 2018 2019 2018
Gross profit reconciliation:
Gross profit $ 754.0 $ 771.3 $ 1,453.6 $ 1,449.5
Unallocated derivative losses (gains) (0.9 ) 0.1 (29.9 ) 22.1
Adjusted gross profit $ 753.1 $ 771.4 $ 1,423.7 $ 1,471.6
Operating income reconciliation:
Operating income $ 329.8 $ 330.5 $ 587.4 $ 557.4
Amortization 58.8 59.7 117.6 120.2
Unallocated derivative losses (gains) (0.9 ) 0.1 (29.9 ) 22.1
Other special project costs 3.3 25.4 6.6 33.1
Adjusted operating income $ 391.0 $ 415.7 $ 681.7 $ 732.8
Net income reconciliation:
Net income $ 211.2 $ 188.5 $ 365.8 $ 321.5
Income tax expense 67.9 80.9 120.0 121.0
Amortization 58.8 59.7 117.6 120.2
Unallocated derivative losses (gains) (0.9 ) 0.1 (29.9 ) 22.1
Other special project costs 3.3 25.4 6.6 33.1
Adjusted income before income taxes $ 340.3 $ 354.6 $ 580.1 $ 617.9
Income taxes, as adjusted 82.8 108.1 142.9 169.0
Adjusted income $ 257.5 $ 246.5 $ 437.2 $ 448.9
Weighted-average shares - assuming
dilution 114.1 113.7 114.0 113.7
Adjusted earnings per share - assuming
dilution $ 2.26 $ 2.17 $ 3.84 $ 3.95
Off-Balance Sheet Arrangements and Contractual Obligations We do not have material off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities. Transactions with related parties are in the ordinary course of business and not material to our results of operations, financial condition, or cash flows.
As ofOctober 31, 2019 , there were no material changes to our future contractual obligations as previously reported in our Annual Report on Form 10-K for the year endedApril 30, 2019 . Critical Accounting Estimates and Policies A discussion of our critical accounting estimates and policies can be found in the "Management's Discussion and Analysis" section of our Annual Report on Form 10-K for the year endedApril 30, 2019 . There were no material changes to the information previously disclosed. 27
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