(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 nearly 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 three reportable segments:U.S. Retail Pet Foods ,U.S. Retail Coffee, andU.S. Retail Consumer Foods . Effective during the first quarter of 2021, the presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable. As a result of leadership changes, these operating segments are being managed and reported separately and no longer represent a reportable segment for segment reporting purposes. Segment results for prior periods have not been modified, as the combination of these operating segments represents the previously reported International and Away From Home reportable segment. TheU.S. retail market segments in total comprised 88 percent of net sales in 2021 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. International and Away From Home includes the sale of 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). 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 124 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 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; divestiture, acquisition, integration, and restructuring costs ("special project costs"); gains and losses related to the sale of a business; unallocated gains and losses on commodity and foreign currency exchange derivative activities ("unallocated derivative gains and losses"); and other one-time items that do not directly reflect ongoing operating results. 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 1 percent over the past five years, while adjusted operating income and adjusted earnings per share have increased at a rate of 1 percent and 4 percent, respectively, over the same period. These increases were driven by increased at-home consumption for theU.S. Retail Coffee and U.S. Retail Consumer Foods segments and the Ainsworth acquisition in 2019, partially offset by the reduction in net sales from the divestitures of the Crisco and Natural Balance businesses in 2021 and theU.S. baking business in 2019. Net cash provided by operating activities has increased at a compound annual growth rate of 1 percent over the past five years. Our cash deployment strategy is to balance reinvesting in our business through acquisitions and capital expenditures with returning cash to our shareholders 21 --------------------------------------------------------------------------------
through the payment of dividends and share repurchases. Our deployment strategy also includes a significant focus on debt repayment.
OnDecember 1, 2020 , we sold the Crisco oils and shortening business to B&G Foods. The transaction included oils and shortening products sold under the Crisco brand, primarily in theU.S. andCanada , certain trademarks and licensing agreements, dedicated manufacturing and warehouse facilities located inCincinnati, Ohio , and approximately 160 employees who supported the Crisco business. Under our ownership, the business generated net sales of$198.9 and$269.2 in 2021 and 2020, respectively, primarily included in theU.S. Retail Consumer Foods segment. We received net proceeds from the divestiture of$530.2 , which were net of cash transaction costs and included a working capital adjustment. Upon completion of the transaction, we recognized a pre-tax gain of$114.8 during 2021, which is included in other operating expense (income) - net within the Statement of Consolidated Income. OnJanuary 29, 2021 , we sold the Natural Balance premium pet food business to Nexus. The transaction included pet food products sold under the Natural Balance brand, certain trademarks and licensing agreements, and select employees who supported the Natural Balance business. Under our ownership, the business generated net sales of$156.7 and$222.8 in 2021 and 2020, respectively, included in theU.S. Retail Pet Foods segment. We received net proceeds from the divestiture of$33.8 , which were net of cash transaction costs and included a working capital adjustment. Upon completion of the transaction, we recognized a pre-tax loss of$89.5 during 2021, which is included in other operating expense (income) - net within the Statement of Consolidated Income. COVID-19 The spread of COVID-19 throughoutthe United States and the international community has had, and will continue to have, an impact on financial markets, economic conditions, and portions of our business and industry. During 2021, state governments reopened their economies, while adhering to new guidelines and enhanced safety measures, such as social distancing and face mask protocols. While there has been a general downward trend inU.S. cases in calendar year 2021, consumers continue to stay at home more frequently as a precaution, and as a result, at-home food consumption and demand remains elevated. We anticipate these changes in consumer behavior to continue into 2022, dependent upon continued vaccine availability and effectiveness, as well as the impact of additional strains of the virus. We commenced a phased approach to reopen our corporate headquarters inOrrville, Ohio , with increased safety protocols. However, occupancy levels remain low as the majority of our office-based employees continue to work remotely where possible, and we continue to monitor the latest public health and government guidance related to COVID-19. We have crisis management teams at all of our facilities, which are monitoring the evolving situation and implementing risk mitigation actions as necessary. To date, there has been minimal disruption in our supply chain network, including the supply of our ingredients, packaging, or other sourced materials, although it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world, including the impact of e-commerce pressures on freight charges and potential shipping delays due to supply and demand imbalances. We also continue to work closely with our customers and external business partners, taking additional actions to ensure safety and business continuity and maximize product availability. 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 implemented measures to manage order volumes to ensure a consistent supply across our retail partners during this period of high demand. During 2021, we continued to experience an increase in orders, primarily across ourU.S. Retail Coffee and U.S. Retail Consumer Foods segments, in response to the increased consumer demand for our products related to the elevated at-home consumption. It is anticipated that the increase in consumer demand will continue, to a lesser extent, through the beginning of 2022. A decline in products sold in away from home channels has also been experienced as a result of COVID-19, which has negatively impacted our net sales in our Away From Home operating segment, and we expect COVID-19 will continue to adversely affect our net sales while government-mandated safety measures are in place and consumers continue to stay at home as a precaution. However, as states have reopened their economies during 2021, our net sales for the away from home channels improved compared to the initial months of the pandemic. This trend could reverse during 2022 if cases rise and governments impose additional safety measures that further impact away from home consumption, which is partially dependent upon continued vaccine availability and effectiveness. Overall, the impact of COVID-19 remains uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response; continued vaccine availability and effectiveness; and the macroeconomic environment. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, supply chain, consolidated results of operations, financial condition, and liquidity. 22 -------------------------------------------------------------------------------- Results of Operations This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for the years endedApril 30, 2021 and 2020. For the comparisons of the years endedApril 30, 2020 and 2019, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2020 Annual Report on Form 10-K. Year Ended April 30, % Increase 2021 2020 (Decrease) Net sales$ 8,002.7 $ 7,801.0 3 % Gross profit$ 3,138.7 $ 3,002.0 5 % of net sales 39.2 % 38.5 % Operating income$ 1,386.8 $ 1,223.1 13 % of net sales 17.3 % 15.7 % Net income: Net income$ 876.3 $ 779.5 12
Net income per common share - assuming dilution
14 Adjusted gross profit (A)$ 3,048.5 $ 2,982.4 2 % of net sales 38.1 % 38.2
%
Adjusted operating income (A)$ 1,528.8 $ 1,508.7 1 % of net sales 19.1 % 19.3 % Adjusted income: (A) Income$ 1,025.0 $ 999.1 3 Earnings per share - assuming dilution$ 9.12 $ 8.76 4
(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 2021 2020 (Decrease) % Net sales$ 8,002.7 $ 7,801.0 $ 201.7 3 % Crisco divestiture - (112.4) 112.4 1 Natural Balance divestiture - (53.6) 53.6 1 Foreign currency exchange (7.7) - (7.7) -
Net sales excluding divestitures and foreign currency exchange (A)
$ 7,995.0 $ 7,635.0 $ 360.0 5 % Amounts may not add due to rounding. (A)Net sales excluding divestitures 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 2021 increased$201.7 , or 3 percent, which includes$166.0 of noncomparable net sales in the prior year related to the Crisco and Natural Balance divestitures. Net sales excluding divestitures and foreign currency exchange increased$360.0 , or 5 percent, driven by favorable volume/mix across all of our retail businesses, supported by increased at-home consumption for theU.S. Retail Coffee and U.S. Retail Consumer Foods segments. The retail business growth was partially offset by unfavorable volume/mix for the Away From Home operating segment. 23 -------------------------------------------------------------------------------- Operating Income The following table presents the components of operating income as a percentage of net sales.
Year Ended
2021 2020 Gross profit 39.2 % 38.5 % Selling, distribution, and administrative expenses: Marketing 3.9 % 3.9 % Advertising 2.8 2.5 Selling 3.0 3.2 Distribution 3.4 3.6 General and administrative 5.9 5.8 Total selling, distribution, and administrative expenses 19.0 % 18.9 % Amortization 2.9 3.0 Other intangible assets impairment charges - 0.7 Other special project costs 0.3 0.2 Other operating expense (income) - net (0.4) - Operating income 17.3 % 15.7 %
Amounts may not add due to rounding.
Gross profit increased$136.7 , or 5 percent, in 2021, driven by increased contribution from volume/mix and a net benefit from price and costs, including a favorable change in derivative gains and losses as compared to the prior year, partially offset by the noncomparable impact related to the Crisco and Natural Balance divestitures.
Operating income increased
Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets; special project costs; gains and losses related to the sale of a business; unallocated derivative gains and losses; and other one-time items that do not directly reflect ongoing operating results. Refer to "Non-GAAP Financial Measures" in this discussion and analysis for additional information. Gross profit excluding non-GAAP adjustments ("adjusted gross profit") increased$66.1 , or 2 percent, in 2021, reflecting the exclusion of unallocated derivative gains, as compared to GAAP gross profit. Adjusted operating income increased$20.1 , or 1 percent, as compared to the prior year, further reflecting the exclusion of impairment charges and the net pre-tax gain on divestitures. Interest Expense Net interest expense decreased$12.1 , or 6 percent, in 2021, primarily as a result of reduced debt outstanding as compared to the prior year. For additional information, see "Capital Resources" in this discussion and analysis. Other Income (Expense) -Net Net other expense increased$30.6 in 2021, primarily reflecting pension settlement charges of$35.5 , which includes the aggregate$29.6 pre-tax settlement charges recognized during 2021 related to the purchase of a group annuity contract to transfer our Canadian defined benefit pension plan obligations to an insurance company. For further information, refer to Note 9: Pensions and Other Postretirement Benefits. Income Taxes Income taxes increased$48.4 , or 20 percent, in 2021, as compared to the prior year. The effective tax rate of 25.2 percent for 2021 varied from theU.S. statutory tax rate of 21.0 percent primarily due to the impact of state income taxes, as well as additional net income tax expense related to the divestitures of the Crisco and Natural Balance businesses during the third quarter of 2021. 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. We anticipate a full-year effective tax rate for 2022 to be approximately 24.0 percent. For additional information, refer to Note 14: Income Taxes. 24 -------------------------------------------------------------------------------- Restructuring Activities A restructuring program was approved by the Board during the third quarter of 2021 associated with opportunities identified to reduce our overall cost structure and optimize our organizational design, inclusive of stranded overhead associated with recent divestitures of the Crisco and Natural Balance businesses. For additional information related to these divestitures, see Note 4: Divestitures. During the fourth quarter of 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close ourSuffolk, Virginia , production facility by the end of 2022, as a result of a new strategic partnership for the production of our Away From Home liquid coffee. While the entire scope of the program cannot be quantified at this time, we expect to incur approximately$85.0 in costs associated with the restructuring activities approved to date. Approximately half of these costs are expected to be accelerated depreciation and other transition and termination costs associated with our cost reduction and margin management initiatives, while the remainder represents employee-related costs. We anticipate the activities associated with this restructuring program will be completed by the end of 2023, with over half of the costs expected to be incurred by the end of 2022. We have incurred total cumulative restructuring costs of$24.1 , which were all incurred during the second half of 2021. For further information, refer to Note 3: Integration and Restructuring Costs. Commodities Overview The raw materials we use in each of our segments are primarily commodities, agricultural-based products, and packaging materials. The most significant of these materials, based on 2021 annual spend, are green coffee, peanuts, protein meals, oils and fats, and plastic containers. Green coffee, corn, certain meals, oils, and grains 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, 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 peanut and soybean. The price of peanuts, 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 protein meals, fats, and green coffee 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 2021 were higher than in 2020, primarily due to higher costs for green coffee and peanuts. 25 -------------------------------------------------------------------------------- Segment Results We have three reportable segments:U.S. Retail Pet Foods ,U.S. Retail Coffee, andU.S. Retail Consumer Foods . Effective during the first quarter of 2021, the presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable. As a result of leadership changes, these operating segments are being managed and reported separately and no longer represent a reportable segment for segment reporting purposes. Segment results for prior periods have not been modified, as the combination of these operating segments represents the previously reported International and Away From Home reportable segment.The U.S. Retail Pet Foods segment primarily includes domestic sales of Rachael Ray Nutrish, Meow Mix, Milk-Bone, 9Lives, Kibbles 'n Bits, Pup-Peroni, and Nature's Recipe 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 and Jif branded products. International and Away From Home includes the sale of 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, 2021 2020 % Increase (Decrease) Net sales: U.S. Retail Pet Foods$ 2,844.5 $ 2,869.5 (1) % U.S. Retail Coffee 2,374.6 2,149.5 10 U.S. Retail Consumer Foods 1,835.7 1,731.7
6
International and Away From Home 947.9 1,050.3 (10) Segment profit: U.S. Retail Pet Foods$ 487.0 $ 552.7 (12) % U.S. Retail Coffee 769.1 691.0 11 U.S. Retail Consumer Foods 472.5 389.7 21 International and Away From Home 124.1 173.4 (28) Segment profit margin: U.S. Retail Pet Foods 17.1 % 19.3 % U.S. Retail Coffee 32.4 32.1 U.S. Retail Consumer Foods 25.7 22.5 International and Away From Home 13.1 16.5
The U.S. Retail Pet Foods segment net sales decreased$25.0 in 2021, inclusive of the impact of$53.6 of noncomparable net sales in the prior year related to the divested Natural Balance business. Excluding the noncomparable impact of the divested business, net sales increased$28.6 , or 1 percent, primarily due to favorable volume/mix, partially offset by lower net price realization. The favorable volume/mix contributed 2 percentage points to net sales, primarily reflecting growth for dog snacks and cat food, driven by Milk-Bone and Pup-Peroni dog snacks, as well as 9Lives and Meow Mix cat food, partially offset by declines for dog food, driven by Nature's Recipe and Kibbles 'n Bits. Lower net price realization reduced net sales by 1 percentage point, primarily reflecting increased trade spend. Segment profit decreased$65.7 , driven by lower net pricing, increased marketing expense, and a recovery in the prior year from a legal settlement related to a supplier issue.
TheU.S. Retail Coffee segment net sales increased$225.1 in 2021, reflecting favorable volume/mix, which contributed 11 percentage points to net sales, related to growth for the Dunkin', Café Bustelo, and Folgers brands. The favorable volume/mix primarily reflects elevated at-home coffee consumption. Net price realization reduced net sales by 1 percentage point. Segment profit increased$78.1 , primarily due to the favorable volume/mix, partially offset by increased marketing expense. 26 --------------------------------------------------------------------------------
The U.S. Retail Consumer Foods segment net sales increased$104.0 in 2021, inclusive of the impact of$101.2 of noncomparable net sales in the prior year related to the divested Crisco business. Excluding the noncomparable impact of the divested business, net sales increased$205.2 , or 13 percent, primarily due to favorable volume/mix, which contributed 8 percentage points to net sales, reflecting growth for the Smucker's brand, inclusive of Uncrustables frozen sandwiches and fruit spreads, and Jif peanut butter. The favorable volume/mix primarily reflects elevated at-home consumption and continued growth of our Uncrustables brand. Higher net pricing increased net sales by 4 percentage points, primarily driven by the impact of a peanut butter list price increase taken on the Jif brand during the second quarter of 2021. Segment profit increased$82.8 , reflecting the favorable impact of higher net pricing, the increased contribution from volume/mix, and the lapping of a write-off of equipment related to the discontinuation of Jif Power Ups® during the prior year, partially offset by the noncomparable segment profit in the prior year related to the divested Crisco business and increased marketing expense. International and Away From Home International and Away From Home net sales decreased$102.4 in 2021, including the noncomparable impact of$11.2 of net sales in the prior year related to the divested Crisco business. Excluding the noncomparable impact of the divested business, net sales decreased$91.2 , primarily reflecting a 21 percent decline for the Away From Home operating segment, partially offset by net sales growth of 4 percent for the International operating segment. Unfavorable volume/mix for the combined businesses reduced net sales by 10 percentage points, primarily driven by coffee, portion control, and sweetener products in away from home channels. These declines were partially offset by gains for Uncrustables frozen sandwiches in away from home channels and dog snacks and cat food in the International operating segment. Foreign currency exchange had a$7.7 favorable impact on net sales. Segment profit decreased$49.3 , primarily reflecting the unfavorable volume/mix and higher input costs, partially offset by lower SD&A expenses.
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 decreased to$334.3 atApril 30, 2021 , compared to$391.1 atApril 30, 2020 .
The following table presents selected cash flow information.
Year Ended April
30,
2021
2020
Net cash provided by (used for) operating activities$ 1,565.0 $ 1,254.8 Net cash provided by (used for) investing activities 311.1 (271.5) Net cash provided by (used for) financing activities (1,943.9) (688.7)
Net cash provided by (used for) operating activities
(306.7) (269.3) Free cash flow (A)$ 1,258.3 $ 985.5 (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$310.2 increase in cash provided by operating activities in 2021 was primarily driven by a favorable benefit from lapping the settlement of interest rate contracts for$239.8 during 2020. In addition, net income adjusted for noncash items was higher in the current year. The cash required to fund working capital decreased compared to the prior year, primarily related to lower payments for accounts payable driven by working capital initiatives, inclusive of a supplier financing program entered into during the second half of 2020, and an increase in cash from trade receivables due to the timing of sales and payments, which was mostly offset by increased inventory levels reflecting the lapping of increased consumer demand in the fourth quarter of 2020. 27 -------------------------------------------------------------------------------- Cash provided by investing activities in 2021 primarily consisted of net proceeds from the divestitures of the Crisco and Natural Balance businesses of$564.0 and a decrease of$54.0 in our derivative cash margin account balances, partially offset by$306.7 in capital expenditures. Cash used for investing activities in 2020 primarily consisted of$269.3 in capital expenditures. Cash used for financing activities in 2021 consisted primarily of long-term debt repayments of$700.0 , purchase of treasury shares of$678.4 , dividend payments of$403.2 , and a net decrease in short-term borrowings of$166.4 . 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 decrease in short-term borrowings, partially offset by$798.2 in long-term debt proceeds. 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 the second half of 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, 2021 and 2020,$304.2 and$157.5 of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers. During 2021 and 2020, we paid$663.5 and$31.8 , respectively, 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 2019 and 2020. While we cannot predict with certainty the ultimate results of the remaining 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, 2021 . Based on the information known to date, with the exception of the matters 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 inCouncil for Education and Research on Toxics ("CERT") v.Brad Barry LLC , et al., which alleges that we, in addition to nearly eighty other defendants (collectively the "Defendants") who manufacture, package, distribute, or sell packaged coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. CERT sought equitable relief, including warnings to consumers, as well as civil penalties in the amount of the statutory maximum of$2,500 per day per violation of Proposition 65. In addition, CERT asserted that every consumed cup of coffee, absent a compliant warning, was equivalent to a violation under Proposition 65. InJune 2019 , the state agency responsible for administering the Proposition 65 program, theCalifornia Office of Environmental Health Hazard Assessment ("OEHHA"), approved a regulation clarifying that cancer warnings are not required for coffee under Proposition 65, and inAugust 2020 , the trial court granted the Defendants' motion for summary judgment based on the regulation. CERT appealed the ruling inNovember 2020 to theCalifornia Court of Appeals for the Second Appellate District , which is currently pending. We are also defendants in nine pending putative class action lawsuits filed in federal courts inCalifornia ,Florida ,Illinois ,Missouri ,Texas ,Washington , andWashington D.C. The plaintiffs in those actions assert claims arising under various state laws for false advertising, consumer protection, deceptive and unfair trade practices, and similar statutes. Their claims are premised on allegations that we have misrepresented the number of servings that can be made from various canisters of Folgers coffee on the packaging for those products. Five of the lawsuits have been transferred to theUnited States District Court for the Western District of Missouri for coordinated pre-trial proceedings. Similar claims have been asserted against certain retailers of our Folgers coffee products, and indemnity claims have been asserted by such retailers against us. Various other potential plaintiffs have threatened to assert similar claims against us. The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as ofApril 30, 2021 , and the likelihood of loss is not considered probable or 28 -------------------------------------------------------------------------------- estimable. However, if we are required to pay significant damages, our business and financial results could be adversely impacted, and sales of those products could suffer not only in these locations but elsewhere. For additional information, see Note 16: Contingencies. Capital Resources The following table presents our capital structure.April 30, 2021 2020
Current portion of long-term debt
82.0 248.0 Long-term debt, less current portion 3,516.8 5,373.3 Total debt$ 4,751.7 $ 5,621.3 Shareholders' equity 8,124.8 8,190.9 Total capital$ 12,876.5 $ 13,812.2 During the third quarter of 2021, we prepaid, in full, the remaining outstanding balance of the$1.5 billion Term Loan Credit Agreement ("Term Loan") that was entered into inApril 2018 to partially finance the Ainsworth acquisition, as discussed in Note 2: Acquisition. During 2021 and 2020, we prepaid$700.0 and$100.0 on the Term Loan, respectively. We have available a$1.8 billion unsecured revolving credit facility with a group of 11 banks that matures inSeptember 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 ofApril 30, 2021 , we had$82.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 0.17 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. OnOctober 22, 2020 , the Board authorized the repurchase of up to 5.0 million common shares, in addition to the 3.6 million common shares that remained available for repurchase pursuant to prior authorizations of the Board, for a total of 8.6 million common shares available for repurchase. Under the repurchase program, a total of 5.8 million common shares were repurchased for$671.9 during 2021. Included in the total repurchases during the third quarter of 2021 were 2.0 million common shares repurchased under a 10b5-1 plan entered into onDecember 30, 2020 . AtApril 30, 2021 , approximately 2.8 million common shares remain available for repurchase pursuant to the Board's authorizations. We did not repurchase any common shares under a repurchase plan authorized by the Board during 2020. The following table presents certain cash requirements related to 2022 investing and financing activities based on our current expectations. Projection Year Ending April 30, 2022 Principal payments - excludes the impact of potential debt refinancing$ 1,150.0 Dividend payments - based on current rates and common shares outstanding 390.0 Capital expenditures 380.0 Interest payments 153.4 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, principal and interest payments on debt outstanding, and capital expenditures. 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. 29 -------------------------------------------------------------------------------- During 2021, we returned$100.0 of foreign cash to theU.S. fromCanada . The repatriation was subject to$5.0 of foreign withholding taxes, whileU.S. federal and state income taxes were not significant. As ofApril 30, 2021 , we have re-evaluated our global cash needs and determined that a portion of our undistributed earnings, primarily inCanada , are no longer permanently reinvested, resulting in the recognition of an immaterial deferred tax liability. NON-GAAP FINANCIAL MEASURES We use non-GAAP financial measures including: net sales excluding divestitures 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 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; special project costs; gains and losses related to the sale of a business; unallocated derivative gains and losses; and other one-time items that do not directly reflect ongoing operating results. Additionally, income taxes, as adjusted is calculated using an adjusted effective income tax rate that is applied to adjusted income before income taxes and reflects the exclusion of the previously discussed items, as well as any adjustments for one-time tax related activities, when they occur. While this adjusted effective income tax rate does not generally differ materially from our GAAP effective tax rate, certain exclusions from non-GAAP results, such as the permanent tax impacts associated with the Crisco and Natural Balance divestitures, 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 withU.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. 30 -------------------------------------------------------------------------------- The following table reconciles certain non-GAAP financial measures to the comparable GAAP financial measure. See page 23 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure. Year Ended April
30,
2021
2020
Gross profit reconciliation: Gross profit$ 3,138.7 $
3,002.0
Unallocated derivative losses (gains) (93.6)
(19.6)
Cost of products sold - special project costs 3.4
-
Adjusted gross profit$ 3,048.5 $
2,982.4
Operating income reconciliation: Operating income$ 1,386.8 $ 1,223.1 Amortization 233.0 236.3 Other intangible assets impairment charges 3.8
52.4
Gain on divestitures - net (25.3)
-
Unallocated derivative losses (gains) (93.6)
(19.6)
Cost of products sold - special project costs 3.4 - Other special project costs 20.7 16.5 Adjusted operating income$ 1,528.8 $ 1,508.7 Net income reconciliation: Net income$ 876.3 $ 779.5 Income tax expense (benefit) 295.6 247.2 Amortization 233.0 236.3 Other intangible assets impairment charges 3.8
52.4
Gain on divestitures - net (25.3)
-
Unallocated derivative losses (gains) (93.6)
(19.6)
Cost of products sold - special project costs 3.4
-
Other special project costs 20.7
16.5
Other one-time items: Pension plan termination settlement charges (A) 29.6
-
Adjusted income before income taxes$ 1,343.5 $ 1,312.3 Income taxes, as adjusted 318.5 313.2 Adjusted income$ 1,025.0 $ 999.1 Weighted-average shares - assuming dilution 112.4
114.0
Adjusted earnings per share - assuming dilution
8.76
EBITDA (as adjusted) reconciliation: Net income$ 876.3 $ 779.5 Income tax expense (benefit) 295.6 247.2 Interest expense - net 177.1 189.2 Depreciation 219.5 210.2 Amortization 233.0 236.3 Other intangible assets impairment charges 3.8
52.4
EBITDA (as adjusted)$ 1,805.3 $
1,714.8
Free cash flow reconciliation: Net cash provided by (used for) operating activities$ 1,565.0 $ 1,254.8 Additions to property, plant, and equipment (306.7) (269.3) Free cash flow$ 1,258.3 $ 985.5
(A) Represents the nonrecurring pre-tax settlement charges of
31 -------------------------------------------------------------------------------- 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, 2021 . 2027 and Total 2022 2023-2024 2025-2026 beyond Long-term debt obligations, including current portion (A)$ 4,700.0 $ 1,150.0
$ -
1,715.7 153.4 256.6 221.6 1,084.1 Operating lease obligations (C) 162.2 44.2 70.1 40.0 7.9 Purchase obligations (D) 2,179.5 1,752.2 282.6 96.1 48.6 Other liabilities (E) 347.9 31.3 49.9 28.9 237.8 Total$ 9,105.3 $ 3,131.1 $ 659.2 $ 1,386.6 $ 3,928.4 (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 for our fixed-rate Senior Notes. (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$4.5 related to financing lease obligations. The liability for unrecognized tax benefits and tax-related net interest of$11.9 under theFinancial 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 2021, 2020, and 2019, 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 2021. 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. 32 -------------------------------------------------------------------------------- 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$229.6 and$244.8 atApril 30, 2021 and 2020, 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, 2021 , the Company has re-evaluated its global cash needs and determined that a portion of the undistributed foreign earnings, primarily inCanada , are no longer permanently reinvested.Goodwill and Other Indefinite-Lived Intangible Assets: A significant portion of our assets is composed of goodwill and other intangible assets, the majority of which are not amortized but are reviewed for impairment at least annually onFebruary 1 , and more often if indicators of impairment exist. AtApril 30, 2021 , the carrying value of goodwill and other intangible assets totaled$12.1 billion , compared to total assets of$16.3 billion and total shareholders' equity of$8.1 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, 2021 , goodwill totaled$6.0 billion .Goodwill is substantially concentrated within theU.S. Retail Pet Foods ,U.S. Retail Coffee, andU.S. Retail Consumer Foods segments. During 2021, 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 6 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 values may be below their fair values. 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, 2021 , 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, 2021 , 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. 33 -------------------------------------------------------------------------------- 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, 2021 . These intangible assets remain susceptible to future impairment charges due to narrow differences between fair value and carrying value, which is primarily attributable to the recognition of these assets at fair value resulting from recent impairment charges and the acquisition of Ainsworth in 2019. 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, 2021 , 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, 2021 , the goodwill related to the Away From Home reporting unit represented approximately 60 percent of the goodwill within International and Away From Home. 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 2022 expense recognition, we will use weighted-average discount rates for theU.S. defined benefit pension plans of 3.13 percent to determine benefit obligation, 3.53 percent to determine service cost, and 2.40 percent to determine interest cost, and a rate of compensation increase of 3.55 percent. For the Canadian defined benefit pension plans, we will use weighted-average discount rates of 2.15 percent to determine benefit obligation and 1.95 percent to determine interest cost. In addition, we anticipate using an expected rate of return on plan assets of 4.59 percent and 1.70 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 pandemic 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 pandemic; •our ability to achieve cost savings related to our restructuring and 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; 34 -------------------------------------------------------------------------------- •the availability of reliable transportation on acceptable terms, including any impact of the COVID-19 pandemic; •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 the 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 theSEC . 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, commodity prices, and foreign currency exchange rates. Interest Rate Risk: The fair value of our cash and cash equivalents atApril 30, 2021 , 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 calendar year 2021. We do not anticipate a significant impact to our financial position as a result of this action given our current mix of fixed- and variable-rate debt. We utilize derivative instruments to manage interest rate 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. In 2020, we terminated interest rate contracts concurrent with the pricing of the Senior Notes dueMarch 15, 2030 , andMarch 15, 2050 . They were designated as cash flow hedges and were used to manage our exposure to interest rate volatility associated with the anticipated debt financing. The termination resulted in a pre-tax loss of$239.8 , which 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 was 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 life of the debt. AtApril 30, 2021 , the remaining benefit of$4.0 was recorded as an increase in the long-term debt balance. 35 -------------------------------------------------------------------------------- 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, 2021 , would increase the fair value of our long-term debt by$386.0 . Commodity Price Risk: We use certain raw materials and other commodities that are subject to price volatility caused by supply and demand conditions, political and economic variables, weather, investor speculation, and other unpredictable factors. To manage the volatility related to anticipated commodity purchases, we use derivatives with maturities of generally less than one year. We do not qualify commodity derivatives for hedge accounting treatment. As a result, the gains and losses on all commodity derivatives are immediately recognized in cost of products sold. The following sensitivity analysis presents our potential loss of fair value resulting from a hypothetical 10 percent change in market prices related to commodities. Year Ended April 30, 2021 2020 High$ 47.5 $ 37.8 Low 11.7 14.5 Average 29.0 26.9 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. 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, 2021 , 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, 2021 , 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 5 percent of net sales during 2021. 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. 36
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