THE JM SMUCKER COMPANY (Dollars and shares in millions, unless otherwise noted, except per share data) Company Background Inspired by more than 120 years of business success and five generations of family leadership,The J. M. Smucker Company makes food that people and pets love. The Company's portfolio of 40+ brands, which are found in 90 percent ofU.S. homes and countless away from home dining locations, include iconic products consumers have always loved such as Folgers, Jif, and Milk-Bone, plus new favorites like Café Bustelo, Smucker's Uncrustables, andRachael Ray Nutrish. Over the past two decades, the Company has grown by thoughtfully acquiring leading and emerging brands, while ensuring the business has a positive impact on its 7,000+ employees, the communities it is a part of, and the planet. 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. TheU.S. retail market segments in total comprised 87 percent of net sales in 2020 and represent a major portion of our strategic focus - the sale of branded food and beverage products with leadership positions to consumers through retail outlets inNorth America . In theU.S. retail market segments, our products are sold primarily to food retailers, club stores, discount and dollar stores, food wholesalers, online retailers, pet specialty stores, natural foods stores and distributors, drug stores, military commissaries, and mass merchandisers. The products included in the International and Away From Home segment are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores). Strategic Overview We remain rooted in our Basic Beliefs of Quality, People, Ethics, Growth, and Independence established by our founder and namesake,Jerome Smucker , more than a century ago. Today, these Basic Beliefs are the core of our unique corporate culture and serve as a foundation for decision-making and actions. We have been led by five generations of family leadership, having had only six chief executive officers in 123 years. This continuity of management and thought extends to the broader leadership team that embodies the values and embraces the business practices that have contributed to our consistent growth. Our strategic vision is to own and market a portfolio of food and beverage brands that combines number one and leading brands with emerging, on-trend brands to drive balanced, long-term growth, primarily inNorth America . Our strategic growth objectives include increasing net sales by 2 to 3 percent and operating income excluding non-GAAP adjustments ("adjusted operating income") by 5 percent on average over the long term. Related to income per diluted share excluding non-GAAP adjustments ("adjusted earnings per share"), our strategic growth objective is to achieve an average increase of 8 percent over the long term. We expect organic growth, including new products, to drive much of our top-line growth, while the contribution from acquisitions will vary from year to year. 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 additional information. Due to the unknown and potentially prolonged impact of COVID-19, we may experience difficulties or be delayed in achieving our long-term strategies; however, we continue to evaluate the effects from COVID-19 on our long-term growth objectives. Net sales has increased at a compound annual growth rate of 7 percent over the past five years, while adjusted operating income and adjusted earnings per share have increased at a rate of 9 percent and 14 percent, respectively, over the same period. These increases were primarily driven by the acquisitions of Big Heart in 2015 and Ainsworth in 2019. Net cash provided by operating activities has increased at a compound annual growth rate of 11 percent. Our cash deployment strategy is to balance reinvesting in our business through acquisitions and capital expenditures with returning cash to our shareholders through the payment of dividends and share repurchases. Our deployment strategy also includes a significant focus on debt repayment. OnMay 14, 2018 , we acquired the equity 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. As anticipated, we fully realized approximately$55.0 of annual cost synergies related to this acquisition by the end of 2020. 20
-------------------------------------------------------------------------------- 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 transactions costs and included a working capital adjustment. During 2019, we recognized a pre-tax gain of$27.7 related to this transaction, which was included in other operating expense (income) - net within the Statement of Consolidated Income. COVID-19 The continued spread of COVID-19 throughoutthe United States and the international community has had, and could continue to have, a negative impact on financial markets, economic conditions, and portions of our business and industry. We are committed to supporting our employees and communities, while ensuring people and pets have access to a steady supply of food through the following initiatives: •Financial assistance provided to employees in the form of a$1,500 hardship award to front-line employees, up to 12 weeks of full pay and benefits continuation for employees unable to perform their roles, 14 days of paid sick leave to individuals with and/or caring for family members with COVID-19, and an assistance fund seeded with$100,000 to support employees significantly impacted; •100 percent payment of COVID-19 testing for employees and all virtual health screenings conducted by our insurance provider; •Reinforcement of mental health resources available to our employees; •Implementation of appropriate physical distancing guidelines and extensive additional sanitation measures and temperature screenings at all of our locations to prevent the spread of COVID-19 and keep employees safe; •Food and monetary donations to organizations including the Red Cross®, Feeding America®, United Way®, Rescue Bank® and theAkron-Canton Regional Foodbank ; and •100 percent match of employee donations to more than 20 local and national charities. We are working closely with our suppliers and customers and have been proactive in taking additional actions to ensure business continuity, maximize product availability, and minimize potential disruptions across our supply chain and operations. We have increased production at all of our facilities and expanded the availability of appointments at distribution centers. All of our production operations remain open and none have experienced significant disruptions or labor reductions related to COVID-19. Furthermore, we have successfully implemented measures to allocate order volumes to ensure a consistent supply across our retail partners during this high period of demand. During the fourth quarter of 2020, we experienced an increase in orders across ourU.S. and international retail businesses, in response to the increased consumer demand for our products related to "stock up" shopping and increased at-home consumption. This benefit was partially offset by the incremental expenses incurred to support the previously mentioned initiatives, which totaled approximately$13.0 . The increase in consumer demand may partially reverse in the coming months as consumer purchasing behavior may change as a result of the length and severity of the pandemic, duration of physical distancing requirements, stay-at-home orders, and macroeconomic implications. In addition, if there is a second surge of the virus, we may experience another temporary increase in orders. However, at the end of 2020, consumer demand and customer orders remain elevated compared to historical seasonal comparisons. We have also experienced a decline in products sold in the away from home channels as a result of COVID-19, which has negatively impacted our net sales in our International and Away From Home reportable segment and we expect to continue to adversely affect our net sales while government restrictions and physical distancing measures are in place. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, consolidated results of operations, financial condition, and liquidity. 21 -------------------------------------------------------------------------------- Results of Operations This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for the years endedApril 30, 2020 and 2019. For the comparisons of the years endedApril 30, 2019 and 2018, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2019 Annual Report on Form 10-K. Year Ended April 30, % Increase 2020 2019 (Decrease) Net sales$ 7,801.0 $ 7,838.0 - % Gross profit$ 3,002.0 $ 2,915.7 3 % of net sales 38.5 % 37.2 % Operating income$ 1,223.1 $ 928.6 32 % of net sales 15.7 % 11.8 % Net income: Net income$ 779.5 $ 514.4 52
Net income per common share - assuming dilution
51
Adjusted gross profit (A) $ 2,982.4 $ 2,969.9 -
% of net sales 38.2 % 37.9 %
Adjusted operating income (A) $ 1,508.7 $ 1,492.3 1
% of net sales 19.3 % 19.0 %
Adjusted income: (A)
Income $ 999.1 $ 942.7 6
Earnings per share - assuming dilution $ 8.76 $ 8.29 6
(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.
Year Ended April 30,
Increase
2020 2019 (Decrease) %
Net sales $ 7,801.0 $ 7,838.0 $ (37.0) - %
Ainsworth acquisition (25.4) - (25.4) -
Baking divestiture - (105.9) 105.9 1
Foreign currency exchange 6.8 - 6.8 -
Net sales excluding acquisition, divestiture, and foreign currency exchange (A)
$ 7,782.4 $ 7,732.1 $ 50.3 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 to investors because it enables comparison of results on a year-over-year basis. Net sales in 2020 decreased$37.0 , 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 increased$50.3 , or 1 percent. Favorable volume/mix contributed 2 percentage points to net sales, primarily driven by gains for the Smucker's, Dunkin', Milk-Bone, and Meow Mix brands, reflecting approximately$185.0 of incremental net sales resulting from increased consumer demand related to the COVID-19 pandemic. These gains were partially offset by declines for private label dog food and the Natural Balance brand. Lower net price realization impacted net sales by 1 percentage point, primarily due to lower net pricing for coffee and peanut butter. 22 -------------------------------------------------------------------------------- Operating Income The following table presents the components of operating income as a percentage of net sales.
Year Ended
2020 2019
Gross profit 38.5 % 37.2 %
Selling, distribution, and administrative expenses:
Marketing 3.9 % 3.9 %
Advertising 2.5 3.0
Selling 3.2 3.2
Distribution 3.6 3.3
General and administrative 5.8 5.9
Total selling, distribution, and administrative expenses 18.9 % 19.2 %
Amortization 3.0 3.1
Goodwill impairment charges - 1.2
Other intangible assets impairment charges 0.7 1.4
Other special project costs 0.2 0.8
Other operating expense (income) - net - (0.4)
Operating income 15.7 % 11.8 %
Amounts may not add due to rounding.
Gross profit increased$86.3 , or 3 percent, in 2020, primarily driven by a favorable net impact of lower prices and lower costs, favorable volume/mix, and the noncomparable benefit of Ainsworth, partially offset by the noncomparable impact related to theU.S. baking business divestiture. 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$294.5 , or 32 percent, primarily due to the$152.7 decrease in intangible asset impairment charges, a$47.6 decrease in special project costs, a$34.3 decrease in selling, distribution, and administrative ("SD&A") expenses, and the increase in gross profit, partially offset by the noncomparable impact of the$27.7 pre-tax gain related to the sale of theU.S. baking business in the prior year. During 2020, we recognized a noncash impairment charge of$52.4 associated with the Natural Balance brand within theU.S. Retail Pet Foods segment. For additional information on this charge, refer to "Critical Accounting Estimates and Policies" in this discussion and analysis. 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 additional information. Gross profit excluding non-GAAP adjustments ("adjusted gross profit") was comparable to the prior year, further reflecting an unfavorable change related to the exclusion of unallocated derivative gains and losses, as compared to GAAP gross profit. Adjusted operating income increased$16.4 , or 1 percent, as compared to the prior year, further reflecting the exclusion of impairment charges and special project costs, as compared to GAAP operating income. Interest Expense Net interest expense decreased$18.7 , or 9 percent, in 2020, primarily as a result of reduced debt, as compared to the prior year. For additional information, see "Capital Resources" in this discussion and analysis. 23
-------------------------------------------------------------------------------- Income Taxes Income taxes increased$60.0 , or 32 percent, in 2020, as compared to the prior year. The effective tax rate of 24.1 percent for 2020 varied from theU.S. statutory tax rate of 21.0 percent primarily due to the impact of state income taxes. The effective tax rate of 26.7 percent for 2019 was also unfavorably impacted by the income tax expense associated with the sale of theU.S. baking business and a goodwill impairment charge within theU.S. Retail Consumer Foods segment, partially offset by a noncash deferred tax benefit related to the integration of Ainsworth. We anticipate a full-year effective tax rate for 2021 to be approximately 24.0 percent. For additional information, refer to Note 14: Income Taxes. Integration Activities As ofApril 30, 2020 , all integration activities related to the acquisition of Ainsworth were considered complete. We have incurred total cumulative integration costs of$48.6 , of which$16.5 was incurred in 2020. The majority of these costs were cash charges. For additional information, refer to Note 3: Integration and Restructuring Costs. Commodities Overview The raw materials we use are primarily commodities, agricultural-based products, and packaging materials. The most significant of these materials, based on 2020 annual spend, are green coffee, peanuts, animal protein meals, oils and fats, and plastic containers. Green coffee and certain oils are traded on active regulated exchanges, and the price of these commodities fluctuates based on market conditions. Derivative instruments, including futures and options, are used to minimize the impact of price volatility for these commodities. We source green coffee from more than 20 coffee-producing countries. Its price is subject to high volatility due to factors such as weather, global supply and demand, plant disease, investor speculation, and political and economic conditions in the source countries. We source peanuts, animal protein meals, and oils and fats mainly fromNorth America . We are one of the largest procurers of peanuts in theU.S. and frequently enter into long-term purchase contracts for various periods of time to mitigate the risk of a shortage of this commodity. The oils we purchase are mainly soybean and canola. The price of peanuts, animal protein meals, and oils are driven primarily by weather, which impacts crop sizes and yield, as well as global demand, especially from large importing countries such asChina andIndia . In particular, the supply chain for animal protein meals and fats has been significantly disrupted by the COVID-19 pandemic, and therefore, the price for these commodities has increased and may continue to increase due to such disruptions. Furthermore, the price of peanuts has been impacted by the recent decrease in crop supply. We frequently enter into long-term contracts to purchase plastic containers, which are sourced mainly from within theU.S. Plastic resin is made from petrochemical feedstock and natural gas feedstock, and the price can be influenced by feedstock, energy, and crude oil prices as well as global economic conditions. Excluding the impact of derivative gains and losses, our overall commodity costs in 2020 were lower than in 2019, primarily due to lower costs for green coffee and peanuts. 24
-------------------------------------------------------------------------------- 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 domestic sales ofRachael Ray Nutrish, Meow Mix, Milk-Bone, Kibbles 'n Bits, 9Lives, Natural Balance, Nature's Recipe, and Pup-Peroni branded products; theU.S. Retail Coffee segment primarily includes the domestic sales of Folgers, Dunkin', and Café Bustelo branded coffee; and theU.S. Retail Consumer Foods segment primarily includes 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., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores). Year Ended April 30, 2020 2019 % Increase (Decrease) Net sales: U.S. Retail Pet Foods$ 2,869.5 $ 2,879.5 - % U.S. Retail Coffee 2,149.5 2,122.3 1 U.S. Retail Consumer Foods 1,731.7 1,761.5 (2) International and Away From Home 1,050.3 1,074.7 (2) Segment profit: U.S. Retail Pet Foods$ 552.7 $ 503.4 10 % U.S. Retail Coffee 691.0 676.3 2 U.S. Retail Consumer Foods 389.7 406.1 (4) International and Away From Home 173.4 198.5 (13) Segment profit margin: U.S. Retail Pet Foods 19.3 % 17.5 % U.S. Retail Coffee 32.1 31.9 U.S. Retail Consumer Foods 22.5 23.1 International and Away From Home 16.5 18.5U.S. Retail Pet Foods The U.S. Retail Pet Foods segment net sales decreased$10.0 in 2020, including the impact of two weeks of incremental Ainsworth sales in the current year. Excluding the incremental Ainsworth business, net sales decreased$35.4 , reflecting a$59.8 decline related to private label products. Volume/mix decreased net sales by 2 percentage points, primarily driven by declines for private label dog food and the Natural Balance brand, partially offset by gains for the Milk-Bone and Meow Mix brands, which is reflective of the incremental net sales from stock-up purchasing related to the COVID-19 pandemic. Net price realization contributed 1 percentage point, primarily related to the Meow Mix and Kibbles 'n Bits brands, partially offset by declines for the Nutrish brand. The higher net pricing is reflective of list price increases across most brands implemented during the second half of the prior year, partially offset by increased trade spend. Segment profit increased$49.3 , 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 synergy realization, reduced marketing expense, higher net pricing, and a recovery from a legal settlement related to a prior year supplier issue, partially offset by an increase in SD&A expenses and higher input costs.U.S. Retail Coffee TheU.S. Retail Coffee segment net sales increased$27.2 in 2020, reflecting favorable volume/mix, partially offset by lower net price realization. The favorable volume/mix, which increased net sales by 5 percentage points, was driven by the Dunkin', Folgers, and Café Bustelo brands, reflecting the benefit of incremental net sales resulting from increased at-home coffee consumption related to the COVID-19 pandemic. Lower net pricing, which reduced net sales by 4 percentage points, reflected promotional activity across all brands, mostly supported by lower green coffee costs. Segment profit increased$14.7 , primarily due to favorable volume/mix and decreased marketing expense, partially offset by the net unfavorable impact of lower net pricing and lower green coffee costs and an increase in SD&A expenses.U.S. Retail Consumer Foods The U.S. Retail Consumer Foods segment net sales decreased$29.8 in 2020, driven by a$102.2 noncomparable impact of theU.S. baking business. Excluding the noncomparable impact of the divested business, net sales increased 4 percent. Favorable 25 -------------------------------------------------------------------------------- volume/mix contributed 7 percentage points to net sales, primarily related to growth for the Smucker's and Jif brands, reflecting the benefit of incremental net sales resulting from increased consumer demand related to the COVID-19 pandemic and the associated stay-at-home orders. Lower net price realization reduced net sales by 2 percentage points, primarily driven by the list price decrease on the Jif brand, partially offset by decreased trade spend. Segment profit decreased$16.4 , primarily reflecting$44.3 of segment profit in the prior year related to the divested business, of which$27.7 represented the pre-tax gain related to the sale. Excluding the impact of the divestiture, segment profit increased 8 percent, driven primarily by the favorable volume/mix and decreased marketing expense, partially offset by the unfavorable net impact of lower pricing and lower input costs, as well as a write-off of equipment related to the discontinuation ofJif Power Ups . International and Away From Home The International and Away From Home segment net sales decreased$24.4 in 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 1 percentage point, primarily driven by declines for the Folgers brand and increased shipments in the prior year related to the closing of facilities inMexico and transition to a distributor export model. These declines were partially offset by gains for the Smucker's brand. Lower net price realization reduced net sales by 1 percentage point, primarily related to the Folgers brand. Foreign currency exchange had a$6.8 unfavorable impact on net sales. Segment profit decreased$25.1 , primarily reflecting the unfavorable volume/mix, lower pricing, and higher cost.
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. Total cash and cash equivalents increased to$391.1 atApril 30, 2020 , compared to$101.3 atApril 30, 2019 .
The following table presents selected cash flow information.
Year Ended April 30,
2020 2019
Net cash provided by (used for) operating activities$ 1,254.8 $ 1,141.2 Net cash provided by (used for) investing activities (271.5) (1,924.2) Net cash provided by (used for) financing activities (688.7) 699.0
Net cash provided by (used for) operating activities
(269.3) (359.8)
Free cash flow (A) $ 985.5 $ 781.4
(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.
The $113.6 increase in cash provided by operating activities in 2020 was
primarily driven by higher net income adjusted for noncash items in the current
year. The cash required to fund working capital decreased compared to the prior
year, excluding the impact of the realization of a $30.0 income tax refund in
2019. The decrease in working capital requirements was primarily driven by lower
payments for accounts payable items driven by working capital initiatives,
inclusive of a supplier financing program entered into during 2020. Offsetting
these decreases is a $239.8 settlement of interest rate contracts during 2020.
For additional information, refer to Note 10: Derivative Financial Instruments.
Cash used for investing activities in 2020 primarily consisted of
Cash used for financing activities in 2020 consisted primarily of long-term debt repayments of$900.0 , dividend payments of$396.8 , and a$185.8 net reduction in short-term borrowings, partially offset by$798.2 in long-term debt proceeds. Cash provided by financing activities in 2019 consisted primarily of$1.5 billion in long-term debt proceeds and a$282.0 net increase in short-term borrowings, partially offset by long-term debt repayments of$700.0 and dividend payments of$377.9 . 26 -------------------------------------------------------------------------------- Supplier Financing Program As part of ongoing efforts to maximize working capital, we work with our suppliers to optimize our terms and conditions, which includes the extension of payment terms. Payment terms with our suppliers, which we deem to be commercially reasonable, generally range from 0 to 120 days. During 2020, we entered into an agreement with a third-party administrator to provide an accounts payable tracking system and facilitate a supplier financing program which allows participating suppliers the ability to monitor and voluntarily elect to sell our payment obligations to a designated third-party financial institution. Participating suppliers can sell one or more of our payment obligations at their sole discretion, and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier's decision to enter into these agreements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers' decisions to sell amounts under these arrangements. As ofApril 30, 2020 ,$157.5 of our outstanding payment obligations were elected and sold to a financial institution by participating suppliers. During 2020, we paid$31.8 to a financial institution for payment obligations that were settled through the supplier financing program.
Contingencies
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, 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 atApril 30, 2020 . 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 will 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 ofApril 30, 2020 , 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 16: Contingencies. Capital Resources The following table presents our capital structure.April 30, 2020 2019
Current portion of long-term debt $ -
248.0 426.0
Long-term debt, less current portion 5,373.3 4,686.3
Total debt $ 5,621.3 $ 5,910.8
Shareholders' equity 8,190.9 7,970.5
Total capital $ 13,812.2 $ 13,881.3
In March 2020 , we completed an offering of $500.0 and $300.0 in Senior Notes due
March 15, 2030 , and March 15, 2050 , respectively. A portion of the net proceeds
from the offering was used to repay the $500.0 Senior Notes due March 15, 2020 ,
with the balance being held as a cash equivalent to be used for general
corporate purposes.
In April 2018 , we entered into a senior unsecured delayed-draw Term Loan Credit
Agreement ("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 is 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 April 30, 2020 , we have prepaid $800.0 on the Term
Loan to
27
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date, including $100.0 in 2020. The interest rate on the Term Loan at April 30,
2020 , was 1.21 percent. In November 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
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 April 30, 2020 , we had $248.0 of
short-term borrowings outstanding, all of which were issued under our commercial
paper program, at a weighted-average interest rate of 0.40 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 2020, we did not repurchase any common shares under a repurchase plan
authorized by the Board. At April 30, 2020 , 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.
The following table presents certain cash requirements related to 2021 investing
and financing activities based on our current expectations. Although no
principal payments are required on our debt obligations in 2021, we may utilize
a portion of our cash for debt repayment. Additionally, in 2022, a portion of
our Senior Notes will mature, and $1.9 billion in principal payments will be
required that year.
Projection
Year Ending
April 30, 2021
Dividend payments - based on current rates and common shares outstanding $ 400.0
Capital expenditures 300.0
Interest payments 190.0
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 the payment of quarterly dividends, capital
expenditures, and interest payments on debt outstanding. However, as a result of
COVID-19, we may experience an increase in the cost or the difficulty to obtain
debt or equity financing, or to refinance our debt in the future, which could
affect our financial condition or our ability to fund operations or future
investment opportunities.
During 2020, we returned $39.7 of international cash to the U.S. , primarily
driven by a reduction in our capital investment in certain foreign subsidiaries
in conjunction with a restructuring of our international holding and operating
entities. No foreign withholding taxes were applicable, and the state income
taxes were not significant. As of April 30, 2020 , total cash and cash
equivalents of $83.9 was held by our foreign subsidiaries, primarily in Canada .
The undistributed earnings of our foreign subsidiaries remain permanently
reinvested.
28
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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; earnings before
interest, taxes, depreciation, amortization, and impairment charges related to
intangible assets ("EBITDA (as adjusted)"); 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 of Directors also utilizes certain non-GAAP
financial measures as components for measuring performance for incentive
compensation purposes.
Non-GAAP financial 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 impacts 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 tax
rate, certain exclusions from non-GAAP results 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.
29
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The following table reconciles certain non-GAAP financial measures to the
comparable GAAP financial measure. See
page 22 for a reconciliation of net sales adjusted for certain noncomparable
items to the comparable GAAP financial measure.
Year Ended
2020 2019 2018 2017 2016
Gross profit reconciliation:
Gross profit $ 3,002.0 $
2,915.7
(19.6) 54.2 (37.3) 27.2 (12.0)
Cost of products sold - special project costs - - 3.9 5.7 12.2
Adjusted gross profit $ 2,982.4 $ 2,969.9 $ 2,802.7 $ 2,868.2 $ 2,968.0
Operating income reconciliation:
Operating income $ 1,223.1 $ 928.6 $ 1,044.0 $ 1,042.6 $ 1,146.3
Amortization 236.3 240.3 206.8 207.3 208.4
Goodwill impairment charges - 97.9 145.0 - -
Other intangible assets impairment charges 52.4 107.2 31.9 133.2 -
Unallocated derivative losses (gains) (19.6) 54.2 (37.3) 27.2 (12.0)
Cost of products sold - special project costs - - 3.9 5.7 12.2
Other special project costs 16.5 64.1 45.4 76.9 135.9
Adjusted operating income $ 1,508.7 $ 1,492.3 $ 1,439.7 $ 1,492.9 $ 1,490.8
Net income reconciliation:
Net income $ 779.5 $ 514.4 $ 1,338.6 $ 592.3 $ 688.7
Income tax expense (benefit) 247.2 187.2 (477.6) 286.1 289.2
Amortization 236.3 240.3 206.8 207.3 208.4
Goodwill impairment charges - 97.9 145.0 - -
Other intangible assets impairment charges 52.4 107.2 31.9 133.2 -
Unallocated derivative losses (gains) (19.6) 54.2 (37.3) 27.2 (12.0)
Cost of products sold - special project costs - - 3.9 5.7 12.2
Other special project costs 16.5 64.1 45.4 76.9 135.9
Adjusted income before income taxes $ 1,312.3 $ 1,265.3 $ 1,256.7 $ 1,328.7 $ 1,322.4
Income taxes, as adjusted 313.2 322.6 352.1 432.8 391.1
Adjusted income $ 999.1 $
942.7
114.0 113.7 113.6 116.1 119.5
Adjusted earnings per share - assuming dilution $ 8.76 $ 8.29 $ 7.96 $ 7.72 $ 7.79
EBITDA (as adjusted) reconciliation:
Net income $ 779.5 $ 514.4 $ 1,338.6 $ 592.3 $ 688.7
Income tax expense (benefit) 247.2 187.2 (477.6) 286.1 289.2
Interest expense - net 189.2 207.9 174.1 163.1 171.1
Depreciation 210.2 206.0 206.3 211.7 221.7
Amortization 236.3 240.3 206.8 207.3 208.4
Goodwill impairment charges - 97.9 145.0 - -
Other intangible assets impairment charges 52.4 107.2 31.9 133.2 -
EBITDA (as adjusted) $ 1,714.8 $ 1,560.9 $ 1,625.1 $ 1,593.7 $ 1,579.1
Free cash flow reconciliation:
Net cash provided by (used for) operating
activities $ 1,254.8 $
1,141.2
(269.3) (359.8) (321.9) (192.4) (201.4)
Free cash flow $ 985.5 $ 781.4 $ 896.1 $ 866.6 $ 1,259.6
30
-------------------------------------------------------------------------------- OFF-BALANCE SHEET ARRANGEMENTS 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 are not material to our results of operations, financial condition, or cash flows. CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations by fiscal year atApril 30, 2020 . 2026 and Total 2021 2022-2023 2024-2025 beyond Long-term debt obligations, including current portion (A)$ 5,400.0 $ -
1,873.9 174.8 282.0 256.6 1,160.5
Operating lease obligations (C) 168.5 40.3 71.0 37.4 19.8
Purchase obligations (D) 1,914.4 1,517.2 283.1 80.9 33.2
Other liabilities (E) 392.0 42.7 51.9 24.5 272.9
Total $ 9,748.8 $ 1,775.0 $ 2,538.0 $ 1,399.4 $ 4,036.4
(A)Long-term debt obligations, including current portion, excludes the impact of
offering discounts, make-whole payments, and debt issuance costs.
(B)Interest payments consists of the interest payments on our long-term debt,
which reflect estimated payments for our variable-rate debt based on the current
interest rate outlook.
(C)Operating lease obligations consists of the minimum rental commitments under
non-cancelable operating leases.
(D)Purchase obligations includes agreements that are enforceable and legally
bind us to purchase goods or services, which primarily consist of obligations
related to normal, ongoing purchase obligations in which we have guaranteed
payment to ensure availability of raw materials. We expect to receive
consideration for these purchase obligations in the form of materials and
services. These purchase obligations do not represent all future purchases
expected, but represent only those items for which we are contractually
obligated. Amounts included in the table above represent our current best
estimate of payments due. Actual cash payments may vary due to the variable
pricing components of certain purchase obligations.
(E)Other liabilities consists primarily of projected commitments associated with
our defined benefit pension and other postretirement benefit plans, as well as
$6.0 related to financing lease obligations. The liability for unrecognized tax
benefits and tax-related net interest of $15.0 under the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income
Taxes, is excluded, since we are unable to reasonably estimate the timing of
cash settlements with the respective taxing authorities.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity withU.S. GAAP requires that we make estimates and assumptions that in certain circumstances affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Trade Marketing and Merchandising Programs: In order to support our products, various promotional activities are conducted through retail, distributors, or directly with consumers, including in-store display and product placement programs, price discounts, coupons, and other similar activities. The costs of these programs are classified as a reduction of sales. We regularly review and revise, when we deem necessary, estimates of costs for these promotional programs based on estimates of what will be redeemed by retail, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expenditures and actual performance are recognized as a change in estimate in a subsequent period. During 2020, 2019, and 2018, subsequent period adjustments were less than 2 percent of both consolidated pre-tax income and cash provided by operating activities. These promotional expenditures, including amounts classified as a reduction of sales, represented 39 percent of net sales in 2020. The possibility exists that reported results could be different if factors such as the level and success of the promotional programs or other conditions differ from expectations. 31 -------------------------------------------------------------------------------- Income Taxes: We account for income taxes using the liability method. In the ordinary course of business, we are exposed to uncertainties related to tax filing positions and periodically assess the technical merits of these tax positions for all tax years that remain subject to examination, based upon the latest information available. For material uncertain tax positions, we have recognized a liability for unrecognized tax benefits, including any applicable interest and penalty charges. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that it is more likely than not that all or some portion of such assets will not be realized. Valuation allowances related to deferred tax assets can be affected by changes in tax laws, statutory tax rates, and projected future taxable income levels. Changes in estimated realization of deferred tax assets would result in an adjustment to income in the period in which that determination is made, unless such changes are determined to be an adjustment to goodwill within the allowable measurement period under the acquisition method of accounting. The future tax benefit arising from the net deductible temporary differences and tax carryforwards was$244.8 and$163.6 atApril 30, 2020 and 2019, respectively. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of operations. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance would have been provided. As ofApril 30, 2020 , the undistributed earnings of our foreign subsidiaries, primarily inCanada , remain permanently reinvested.Goodwill and Other Indefinite-Lived Intangible Assets: A significant portion of our assets is goodwill and other intangible assets, the majority of which are not amortized but are reviewed at least annually for impairment onFebruary 1 , and more often if indicators of impairment exist. AtApril 30, 2020 , the carrying value of goodwill and other intangible assets totaled$12.7 billion , compared to total assets of$17.0 billion and total shareholders' equity of$8.2 billion . If the carrying value of these assets exceeds the current estimated fair value, the asset is considered impaired, and this would result in a noncash charge to earnings. Any such impairment charge would reduce earnings and could be material. Events and conditions that could result in impairment include a sustained drop in the market price of our common shares, increased competition or loss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial performance in comparison to projected results. To test for goodwill impairment, we estimate the fair value of each of our reporting units using both a discounted cash flow valuation technique and a market-based approach. The impairment test incorporates estimates of future cash flows; allocations of certain assets, liabilities, and cash flows among reporting units; future growth rates; terminal value amounts; and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimates and projections used in the calculation of fair value are consistent with our current and long-range plans, including anticipated changes in market conditions, industry trends, growth rates, and planned capital expenditures. Changes in forecasted operations and other estimates and assumptions could impact the assessment of impairment in the future. AtApril 30, 2020 , goodwill totaled$6.3 billion .Goodwill is substantially concentrated within theU.S. Retail Pet Foods ,U.S. Retail Coffee, andU.S. Retail Consumer Foods segments. During 2020, no goodwill impairment was recognized as a result of the evaluations performed throughout the year. The estimated fair value of each of our reporting units for which there is a goodwill balance was substantially in excess of its carrying value as of the annual test date, with the exception of thePet Foods reporting unit, for which its fair value exceeded its carrying value by approximately 3 percent. A sensitivity analysis was performed for thePet Foods reporting unit, assuming a hypothetical 50-basis-point decrease in the expected long-term growth rate or a hypothetical 50-basis-point increase in the weighted-average cost of capital, and both scenarios independently yielded an estimated fair value for thePet Foods reporting unit below carrying value. Other indefinite-lived intangible assets, consisting entirely of trademarks, are also tested for impairment at least annually and more often if events or changes in circumstances indicate their carrying value may not be recoverable. To test these assets for impairment, we estimate the fair value of each asset based on a discounted cash flow model using various inputs, including projected revenues, an assumed royalty rate, and a discount rate. Changes in these estimates and assumptions could impact the assessment of impairment in the future. AtApril 30, 2020 , other indefinite-lived intangible assets totaled$2.9 billion . Trademarks that represent our leading brands comprise approximately 90 percent of the total carrying value of other indefinite-lived intangible assets. As ofApril 30, 2020 , 32 -------------------------------------------------------------------------------- the estimated fair value was substantially in excess of the carrying value for the majority of these leading brand trademarks, and in all instances, the estimated fair value exceeded the carrying value by greater than 10 percent, with the exception of the Rachael Ray Nutrish brand within theU.S. Retail Pet Foods segment. During 2020, we recognized an impairment charge of$52.4 related to the Natural Balance brand within theU.S. Retail Pet Foods segment, representing the extent to which the carrying value exceeded the estimated fair value. We reassessed the long-term strategic expectations for the Natural Balance brand and reclassified this brand as a finite-lived intangible asset as ofFebruary 1, 2020 . The carrying values of the goodwill and indefinite-lived intangible assets within theU.S. Retail Pet Foods segment were$2.4 billion and$1.4 billion , respectively, as ofApril 30, 2020 . These intangible assets remain susceptible to future impairment charges due to narrow differences between fair value and carrying value, which is primarily attributable to recent impairment charges and the acquisition of Ainsworth inMay 2018 . Any significant adverse change in our near- or long-term projections or macroeconomic conditions could result in future impairment charges which could be material. Furthermore, we continue to evaluate the potential impact of COVID-19 on the fair value of our goodwill and indefinite-lived intangible assets. While we concluded there were no indicators of impairment as ofApril 30, 2020 , any significant sustained adverse change in consumer purchasing behaviors, government restrictions, financial results, or macroeconomic conditions could result in future impairment, specifically as it relates to the Away From Home reporting unit, which has experienced a significant decline in demand as a result of COVID-19. As ofApril 30, 2020 , the goodwill related to the Away From Home reporting unit represented approximately 65 percent of the goodwill within the International and Away From Home segment. For additional information, see Note 7:Goodwill and Other Intangible Assets. Pension and Other Postretirement Benefit Plans: To determine the ultimate obligation under our defined benefit pension and other postretirement benefit plans, we must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. Various actuarial assumptions must be made in order to predict and measure costs and obligations many years prior to the settlement date, the most significant being the interest rates used to discount the obligations of the plans, the long-term rates of return on the plans' assets, mortality assumptions, assumed pay increases, and the health care cost trend rates. We, along with third-party actuaries and investment managers, review all of these assumptions on an ongoing basis to ensure that the most reasonable information available is being considered. We utilize a spot rate methodology for the estimation of service and interest cost for our plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of service and interest costs. For 2021 expense recognition, we will use weighted-average discount rates for theU.S. defined benefit pension plans of 3.05 percent to determine benefit obligation, 3.34 percent to determine service cost, and 2.54 percent to determine interest cost, and a rate of compensation increase of 3.58 percent. For the Canadian defined benefit pension plans, we will use weighted-average discount rates of 2.95 percent to determine benefit obligation, 3.06 percent to determine service cost, and 2.47 percent to determine interest cost, and a rate of compensation increase of 3.00 percent. In addition, we anticipate using an expected rate of return on plan assets of 4.96 percent and 3.00 percent for theU.S. and Canadian defined benefit pension plans, respectively. FORWARD-LOOKING STATEMENTS Certain statements included in this Annual Report on Form 10-K contain forward-looking statements within the meaning of federal securities laws. The forward-looking statements may include statements concerning our current expectations, estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as "expect," "anticipate," "believe," "intend," "will," "plan," and similar phrases. Federal securities laws provide a safe harbor for forward-looking statements to encourage companies to provide prospective information. We are providing this cautionary statement in connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on any forward-looking statements, as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of our control and could cause actual results to differ materially from such statements and from our historical results and experience. These risks and uncertainties include, but are not limited to, those set forth under the caption "Risk Factors" of this Annual Report on Form 10-K, as well as the following: •the impact of the COVID-19 outbreak on our business, industry, suppliers, customers, consumers, employees, and communities, particularly with respect to our Away From Home business; •disruptions or inefficiencies in our operations or supply chain, including any impact of the COVID-19 outbreak; 33 -------------------------------------------------------------------------------- •our ability to achieve cost savings related to our cost management programs in the amounts and within the time frames currently anticipated; •our ability to generate sufficient cash flow to continue operating under our capital deployment model, including capital expenditures, debt repayment, dividend payments, and share repurchases; •volatility of commodity, energy, and other input costs; •risks associated with derivative and purchasing strategies we employ to manage commodity pricing and interest rate risks; •the availability of reliable transportation on acceptable terms; •our ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period; •the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses, including product innovation; •general competitive activity in the market, including competitors' pricing practices and promotional spending levels; •the impact of food security concerns involving either our products or our competitors' products; •the impact of accidents, extreme weather, natural disasters, and pandemics (such as COVID-19); •the concentration of certain of our businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and our ability to manage and maintain key relationships; •impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in useful lives of other intangible assets or other long-lived assets; •the impact of new or changes to existing governmental laws and regulations and their application, including tariffs; •the outcome of tax examinations, changes in tax laws, and other tax matters; •foreign currency exchange rate and interest rate fluctuations; and •risks related to other factors described under "Risk Factors" in other reports and statements we have filed with theSecurities and Exchange Commission . Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Annual Report on Form 10-K. We do not undertake any obligation to update or revise these forward-looking statements to reflect new events or circumstances subsequent to the filing of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK The following discussions about our market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and commodity prices. Interest Rate Risk: The fair value of our cash and cash equivalents atApril 30, 2020 , approximates carrying value. We are exposed to interest rate risk with regard to existing debt consisting of fixed- and variable-rate maturities. Our interest rate exposure primarily includesU.S. Treasury rates, LIBOR, and commercial paper rates in theU.S. The Financial Conduct Authority in theUnited Kingdom has stated that it will not require banks to submit LIBOR beyond 2021. We do not anticipate a significant impact to our financial position as a result of this action given our current mix of variable- and fixed-rate debt. We utilize derivative instruments to manage interest risk associated with anticipated debt transactions, as well as to manage changes in the fair value of our long-term debt. At the inception of an interest rate contract, the instrument is evaluated and documented for qualifying hedge accounting treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the contract are deferred and included as a component of accumulated other comprehensive income (loss), and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the contract is recognized at fair value on the balance sheet, and changes in the fair value are recognized in interest expense. Generally, changes in the fair value of the contract are equal to changes in the fair value of the underlying debt and have no net impact on earnings. 34 -------------------------------------------------------------------------------- We entered into interest rate contracts inNovember 2018 andJune 2018 , with notional values of$300.0 and$500.0 , respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These interest rate contracts were designated as cash flow hedges. InMarch 2020 , we terminated the interest rate contracts concurrent with the pricing of the Senior Notes dueMarch 15, 2030 , andMarch 15, 2050 , which resulted in a pre-tax loss of$239.8 . The loss was deferred and included as a component of accumulated other comprehensive income (loss) and is being amortized as interest expense over the life of the debt. In 2015, we terminated the interest rate swap on the Senior Notes dueOctober 15, 2021 , which was designated as a fair value hedge and used to hedge against the changes in the fair value of the debt. As a result of the early termination, we received$58.1 in cash, which included$4.6 of accrued and prepaid interest and a$53.5 benefit that is deferred as a component of the carrying value of the long-term debt and is being recognized ratably as a reduction to interest expense over the remaining life of the related debt. AtApril 30, 2020 , the remaining benefit of$12.4 was recorded as an increase in the long-term debt balance. In measuring interest rate risk by the amount of net change in the fair value of our financial liabilities, a hypothetical 100-basis-point decrease in interest rates atApril 30, 2020 , would increase the fair value of our long-term debt by$416.6 . Foreign Currency Exchange Risk: We have operations outside theU.S. with foreign currency denominated assets and liabilities, primarily denominated in Canadian currency. Because we have foreign currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. The foreign currency balance sheet exposures as ofApril 30, 2020 , are not expected to result in a significant impact on future earnings or cash flows. We utilize foreign currency derivatives to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials and finished goods. The contracts generally have maturities of less than one year. We do not qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment. Therefore, the change in value of these instruments is immediately recognized in cost of products sold. Based on our hedged foreign currency positions as ofApril 30, 2020 , a hypothetical 10 percent change in exchange rates would not materially impact the fair value. Revenues from customers outside theU.S. , subject to foreign currency exchange, represented 6 percent of net sales during 2020. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an impact on operating results. Commodity Price Risk: We use certain raw materials and other commodities that are subject to price volatility caused by supply and demand conditions, political and economic variables, weather, investor speculation, and other unpredictable factors. To manage the volatility related to anticipated commodity purchases, we use derivatives with maturities of generally less than one year. We do not qualify commodity derivatives for hedge accounting treatment. As a result, the gains and losses on all commodity derivatives are immediately recognized in cost of products sold. The following sensitivity analysis presents our potential loss of fair value resulting from a hypothetical 10 percent change in market prices related to commodities. Year Ended April 30, 2020 2019 High$ 37.8 $ 51.6 Low 14.5 25.3 Average 26.9 37.0 The estimated fair value was determined using quoted market prices and was based on our net derivative position by commodity for the previous four quarters. The calculations are not intended to represent actual losses in fair value that we expect to incur. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. The commodities hedged have a high inverse correlation to price changes of the derivative instrument; thus, we would expect that any gain or loss in the estimated fair value of these derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures. 35
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