THE JM SMUCKER COMPANY (Dollars and shares in millions, unless otherwise noted, except per share data)
This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three and nine months endedJanuary 31, 2023 and 2022. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted. OnJanuary 31, 2022 , we sold the natural beverage and grains businesses to Nexus. The transaction included products sold under the R.W. Knudsen and TruRoots brands, inclusive of certain trademarks, a licensing agreement for Santa Cruz Organic beverages, dedicated manufacturing and distribution facilities inChico, California , andHavre de Grace, Maryland , and approximately 150 employees who supported the natural beverage and grains businesses. The transaction did not include Santa Cruz Organic nut butters, fruit spreads, syrups, or applesauce. Under our ownership, the businesses generated net sales of$106.7 in 2022, primarily included in theU.S. Retail Consumer Foods segment. Final net proceeds from the divestiture were$98.7 , which were inclusive of a working capital adjustment and net of cash transaction costs. We recognized a pre-tax gain of$28.3 related to the natural beverage and grains businesses within other operating expense (income) - net in the Condensed Statements of Consolidated Income, of which$26.7 was recognized during the second half of 2022, and the remaining$1.6 was recognized upon finalization of the working capital adjustment during the first quarter of 2023. OnDecember 1, 2021 , we sold the private label dry pet food business toDiamond Pet Foods . The transaction included dry pet food products sold under private label brands, a dedicated manufacturing facility located in Frontenac,Kansas , and approximately 220 employees who supported the private label dry pet food business. The transaction did not include any branded products or our private label wet pet food business. Under our ownership, the business generated net sales of$62.3 in 2022, included in theU.S. Retail Pet Foods segment. Final net proceeds from the divestiture were$32.9 , which were net of cash transaction costs. Upon completion of this transaction during the third quarter of 2022, we recognized a pre-tax loss of$17.1 , within other operating expense (income) - net in the Condensed Statement of Consolidated Income. We are the owner of all trademarks referenced herein, except for the following, which are used under license: Dunkin' is a trademark ofDD IP Holder LLC , andRachael Ray is a trademark ofRay Marks II LLC . The Dunkin' brand is licensed to us for packaged coffee products, including K-Cup® pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, e-commerce, and drug stores. Information in this document does not pertain to products for sale in Dunkin' restaurants. K-Cup® is a trademark ofKeurig Green Mountain, Inc. , used with permission. Trends Affecting our Business The spread of the novel coronavirus ("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 2022, we experienced significant input cost inflation and a dynamic macroeconomic environment, which we anticipate will persist through the remainder of 2023. In addition, the higher costs required us to implement material price increases across all of our businesses in 2022, and we anticipate the price elasticity of demand will remain elevated during the remainder of 2023 as consumers continue to respond to broader inflation pressures. During 2023, we continued to experience disruption in our supply chain network, including labor shortages and the supply of certain ingredients, packaging, and other sourced materials, which has resulted in the continued elevation of transportation and other supply chain costs. It is possible that more significant disruptions could occur if the COVID-19 pandemic and certain geopolitical events continue 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, as well as labor shortages. 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 maintained production at all our facilities and availability of appointments at distribution centers. Furthermore, we have implemented measures to manage order volumes to ensure a consistent supply across our retail partners during this period of high demand. However, to the extent that high demand levels or the current supply chain environment continues to disrupt order fulfillment, we may experience volume loss and elevated penalties. Although we do not have any operations inRussia orUkraine , we continue to monitor the environment for any significant escalation or expansion of economic or supply chain disruptions, including broader inflationary costs, as well as regional or global economic recessions. During 2023, the conflict betweenRussia andUkraine primarily impacted the price of grains, oils, and fat-based products, which may continue to have an adverse impact on our results of operations during the remainder of 2023. 21
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Overall, the impact of COVID-19 and the conflict betweenRussia andUkraine , including broad-based supply chain disruptions and rising levels of inflation, remain uncertain and ultimately depend on the length and severity of the conflict and the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response to the pandemic; vaccination rates and effectiveness; and the macroeconomic environment. We will continue to evaluate the nature and extent to which COVID-19 and the conflict betweenRussia andUkraine will impact our business; supply chain, including labor availability and attrition; consolidated results of operations; financial condition; and liquidity. Results of Operations Three Months Ended January 31, Nine Months Ended January 31, % Increase % Increase 2023 2022 (Decrease) 2023 2022 (Decrease) Net sales$ 2,216.3 $ 2,057.1 8 %$ 6,294.4 $ 5,965.1 6 % Gross profit$ 755.8 $ 683.1 11$ 2,009.4 $ 2,034.0 (1) % of net sales 34.1 % 33.2 % 31.9 % 34.1 % Operating income$ 317.9 $ 150.6 111$ 791.0 $ 721.8 10 % of net sales 14.3 % 7.3 % 12.6 % 12.1 % Net income: Net income$ 208.5 $ 69.7 n/m$ 509.4 $ 429.6 19 Net income per common share - assuming $ 1.95$ 0.64 n/m $ 4.77$ 3.96 20
dilution
Adjusted gross profit (A)$ 739.3 $ 712.3 4$ 2,057.7 $ 2,089.4 (2) % of net sales 33.4 % 34.6 % 32.7 % 35.0 % Adjusted operating income (A)$ 357.6 $ 377.9 (5)$ 1,007.2 $ 1,089.2 (8) % of net sales 16.1 % 18.4 % 16.0 % 18.3 % Adjusted income: (A) Income$ 236.8 $ 252.5 (6)$ 671.1 $ 722.1 (7) Earnings per share - assuming dilution $ 2.21$ 2.33 (5) $ 6.28$ 6.66 (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.
Net Sales Three Months Ended January 31, Nine Months Ended January 31, Increase Increase 2023 2022 (Decrease) % 2023 2022 (Decrease) % Net sales$ 2,216.3 $ 2,057.1 $ 159.2 8 %$ 6,294.4 $ 5,965.1 $ 329.3 6 % Private label dry pet food divestiture - (9.4) 9.4 - - (62.3) 62.3 1 Natural beverage and grains divestiture - (36.1) 36.1 2 - (106.7) 106.7 2 Foreign currency exchange 7.2 - 7.2 - 18.6 - 18.6 - Net sales excluding divestitures and foreign currency exchange (A)$ 2,223.5 $ 2,011.6 $ 211.9 11 %$ 6,313.0 $ 5,796.1 $ 516.9 9 %
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 the third quarter of 2023 increased$159.2 , or 8 percent, which includes$45.5 of noncomparable net sales in the prior year related to divestitures. Net sales excluding divestitures and foreign currency exchange increased$211.9 , or 11 percent. Higher net price realization contributed a 15 percentage point increase to net sales, primarily reflecting list price increases for each of ourU.S. Retail segments and for International and Away From Home. The favorable net price realization was partially offset by a 4 percentage point decrease from volume/mix, primarily driven by theU.S. Retail Coffee segment. Net sales in the first nine months of 2023 increased$329.3 , or 6 percent, which includes$169.0 of noncomparable net sales in the prior year related to divestitures. Net sales excluding divestitures and foreign currency exchange increased$516.9 , or 9 percent. Higher net price realization contributed a 15 percentage point increase to net sales, primarily reflecting list price 22
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increases for each of ourU.S. Retail segments and for International and Away From Home, partially offset by the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall. The favorable net price realization was partially offset by a 6 percentage point decrease from volume/mix, primarily driven by theU.S. Retail Coffee segment and manufacturing downtime related to the recall.
Operating Income
The following table presents the components of operating income as a percentage
of net sales.
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
Gross profit 34.1 % 33.2 % 31.9 % 34.1 %
Selling, distribution, and administrative expenses:
Marketing 5.5 % 5.4 % 5.3 % 5.5 %
Selling 2.5 2.7 2.9 2.9
Distribution 3.5 3.5 3.6 3.5
General and administrative 5.7 4.8 5.4 4.9
Total selling, distribution, and administrative 17.2 % 16.3 % 17.1 % 16.9 %
expenses
Amortization 2.5 2.7 2.6 2.8 Other intangible assets impairment charge - 7.3 - 2.5 Other special project costs - 0.1 - 0.1 Other operating expense (income) - net - (0.5) (0.5) (0.3) Operating income 14.3 % 7.3 % 12.6 % 12.1 %
Amounts may not add due to rounding.
Gross profit increased$72.7 , or 11 percent, in the third quarter of 2023, primarily reflecting a favorable net impact of higher net price realization and increased commodity and ingredient, manufacturing, and packaging costs, inclusive of the unfavorable impact related to the Jif peanut butter product recall, partially offset by a lower contribution from volume/mix and the noncomparable impact of the divested natural beverage and grains businesses.
Operating income increased
Our non-GAAP adjustments include amortization expense and impairment charges
related to intangible assets, special project costs, gains and losses on
divestitures, the change in net cumulative 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"), primarily reflecting the exclusion of the change in
net cumulative unallocated derivative gains and losses as compared to GAAP gross
profit, increased $27.0 , or 4 percent, in the third quarter of 2023. Operating
income excluding non-GAAP adjustments ("adjusted operating income") decreased
$20.3 , or 5 percent, as compared to the prior year, further reflecting the
exclusion of the prior year impairment charge.
Gross profit decreased $24.6 , or 1 percent, in the first nine months of 2023,
primarily reflecting a lower contribution from volume/mix and the noncomparable
impact of the divested natural beverage and grains businesses, partially offset
by a favorable net impact of higher net price realization and increased
commodity and ingredient, manufacturing, and packaging costs, inclusive of the
unfavorable impact related to the Jif peanut butter product recall.
Operating income increased $69.2 , or 10 percent, primarily driven by the lapping
of the prior year $150.4 intangible asset impairment charge, partially offset by
a $71.3 increase in SD&A expenses and the decrease in gross profit.
Adjusted gross profit, primarily reflecting the exclusion of special project
costs and the change in net cumulative unallocated derivative gains and losses
as compared to GAAP gross profit, decreased $31.7 , or 2 percent, in the first
nine months of 2023. Adjusted operating income decreased $82.0 , or 8 percent, as
compared to the prior year, further reflecting the exclusion of the impairment
charge.
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Interest Expense
Net interest expense decreased$1.6 and$6.2 in the third quarter and first nine months of 2023, respectively, primarily due to a net favorable impact of the repayment of Senior Notes and the issuance of debt in the prior year. For additional information, refer to Note 8: Debt and Financing Arrangements.
Income Taxes
Income taxes increased$27.0 , or 68 percent, in the third quarter of 2023, and increased$6.0 , or 4 percent, in the first nine months of 2023, primarily due to the increase in income before income taxes, partially offset by a lower effective income tax rate of 24.3 and 23.9 percent for the third quarter and first nine months of 2023, respectively. The 2022 effective income tax rates were 36.4 percent for the third quarter and 26.4 percent for the first nine months. During both the current and prior years, the effective income tax rates varied from theU.S. statutory income tax rate of 21.0 percent, primarily due to the impact of state income taxes. The effective income tax rates for the three and nine months endedJanuary 31, 2022 , were also impacted by an unfavorable one-time deferred tax impact of an internal legal entity simplification. We anticipate a full-year effective income tax rate for 2023 of approximately 24.0 percent. The full-year effective income tax rate does not include the unfavorable impact related to the goodwill to be disposed with the anticipated sale of certain pet food brands, which is expected to close during the fourth quarter of 2023, subject to certain closing conditions, including the receipt of regulatory approval. For further information, refer to Note 4: Divestitures and Note 13: Income Taxes. Restructuring Activities A restructuring program was approved by the Board during 2021, associated with opportunities identified to reduce our overall cost structure, optimize our organizational design, and support our portfolio reshape. This is inclusive of certain restructuring costs associated with the divestitures of the Crisco, Natural Balance, private label dry pet food, and natural beverage and grains businesses. For additional information related to the divestitures, see Note 4: Divestitures. During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close ourSuffolk, Virginia , facility as a result of a new strategic partnership for the production of our liquid coffee products. During 2022, we completed the transition of production toJDE Peet's N.V. Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the closure of ourRipon, Wisconsin , production facility to further optimize operations for ourU.S. Retail Consumer Foods business. We completed the closure of theRipon facility during the third quarter of 2023, as planned, and anticipate the remaining restructuring activities will be completed by the end of 2023. We expect to incur total costs of approximately$65.0 associated with the restructuring activities, of which more than half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation. The remaining costs represent employee-related costs. We have incurred total cumulative restructuring costs of$60.2 , of which$1.6 and$7.6 were incurred during the third quarter and first nine months of 2023, respectively. For further information, refer to Note 3: Restructuring Costs.
Segment Results
We have three reportable segments:U.S. Retail Pet Foods ,U.S. Retail Coffee, andU.S. Retail Consumer Foods . The presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable.The U.S. Retail Pet Foods segment primarily includes the 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 the 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). 24
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Three Months Ended January 31, Nine Months Ended January 31,
% Increase % Increase
2023 2022 (Decrease) 2023 2022 (Decrease)
Net sales:
U.S. Retail Pet Foods $ 758.6 $ 696.6 9 % $ 2,252.8 $ 2,046.2 10 %
U.S. Retail Coffee 735.1 661.8 11 2,042.8 1,850.1 10
U.S. Retail Consumer Foods 434.2 433.1 - 1,177.5 1,309.9 (10)
International and Away From Home 288.4 265.6 9 821.3 758.9 8
Segment profit:
U.S. Retail Pet Foods $ 109.0 $ 95.7 14 % $ 349.4 $ 275.2 27 %
U.S. Retail Coffee 204.0 213.4 (4) 537.6 572.5 (6)
U.S. Retail Consumer Foods 94.1 99.5 (5) 249.2 329.2 (24)
International and Away From Home 37.6 34.2 10 95.7 107.5 (11)
Segment profit margin:
U.S. Retail Pet Foods 14.4 % 13.7 % 15.5 % 13.4 %
U.S. Retail Coffee 27.8 32.2 26.3 30.9
U.S. Retail Consumer Foods 21.7 23.0 21.2 25.1
International and Away From Home 13.0 12.9 11.7 14.2
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales increased $62.0 in the third quarter
of 2023, inclusive of the impact of $9.4 of noncomparable net sales in the prior
year related to the divested private label dry pet food business. Excluding the
noncomparable impact of the divested business, net sales increased $71.4 , or 10
percent. Higher net price realization increased net sales by 16 percentage
points, primarily reflecting list price increases across the portfolio,
partially offset by a decreased contribution from volume/mix of 5 percentage
points, primarily driven by decreases for cat food and dog snacks. Segment
profit increased $13.3 , primarily reflecting a favorable net impact of higher
net price realization and increased commodity and ingredient, manufacturing, and
packaging costs, partially offset by higher marketing spend and the unfavorable
volume/mix.
The U.S. Retail Pet Foods segment net sales increased $206.6 in the first nine
months of 2023, inclusive of the impact of $62.3 of noncomparable net sales in
the prior year related to the divested private label dry pet food business.
Excluding the noncomparable impact of the divested business, net sales increased
$268.9 , or 14 percent. Higher net price realization increased net sales by 17
percentage points, primarily reflecting list price increases across the
portfolio, which was partially offset by a lower contribution from volume/mix of
4 percentage points, primarily reflecting decreases for cat food and dog food.
Segment profit increased $74.2 , primarily reflecting a favorable net impact of
higher net price realization and increased commodity and ingredient, packaging,
manufacturing, and transportation costs, partially offset by the unfavorable
volume/mix.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased $73.3 in the third quarter of
2023. Net price realization contributed a 19 percentage point increase to net
sales, primarily reflecting list price increases across the portfolio.
Unfavorable volume/mix decreased net sales by 8 percentage points driven by the
Folgers and Dunkin' brands. Segment profit decreased $9.4 , primarily reflecting
the unfavorable volume/mix, partially offset by a favorable net impact of higher
net price realization and increased commodity and manufacturing costs.
The U.S. Retail Coffee segment net sales increased $192.7 in the first nine
months of 2023. Net price realization contributed a 22 percentage point increase
to net sales, primarily reflecting list price increases across the portfolio.
Unfavorable volume/mix decreased net sales by 11 percentage points driven by the
Folgers and Dunkin' brands. Segment profit decreased $34.9 , primarily reflecting
the unfavorable volume/mix and higher marketing spend, partially offset by a
favorable net impact of higher net price realization and increased commodity and
manufacturing costs.
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The U.S. Retail Consumer Foods segment net sales increased$1.1 in the third quarter of 2023, inclusive of the impact of$34.7 of noncomparable net sales in the prior year related to the divested natural beverage and grains businesses. Excluding the noncomparable impact of the divested businesses, net sales increased$35.8 , or 9 percent. Net price realization contributed a 6 percentage point increase to net sales, primarily reflecting list price increases across the portfolio. Volume/mix increased net sales by 3 percentage points, primarily driven by an increase for Smucker's Uncrustables® frozen sandwiches. Segment profit decreased$5.4 , primarily reflecting higher manufacturing and packaging costs, inclusive of costs related to the Jif peanut butter product recall, increased marketing spend, and the noncomparable segment profit in the prior year related to the divested natural beverage and grains businesses, partially offset by higher net price realization and the favorable volume/mix.The U.S. Retail Consumer Foods segment net sales decreased$132.4 in the first nine months of 2023, inclusive of the impact of$101.8 of noncomparable net sales in the prior year related to the divested natural beverage and grains businesses. Excluding the noncomparable impact of the divested businesses, net sales decreased$30.6 , or 3 percent. Volume/mix decreased net sales by 6 percentage points, primarily driven by downtime related to the Jif peanut butter product recall and decreases for fruit spread products, partially offset by an increase for Smucker's Uncrustables frozen sandwiches. Net price realization contributed a 4 percentage point increase to net sales, primarily driven by list price increases for the Smucker's brand, partially offset by declines for Jif peanut butter, inclusive of the unfavorable impact of customer returns and fees related to the recall. Segment profit decreased$80.0 , primarily reflecting higher commodity and ingredient, manufacturing, and packaging costs, inclusive of costs related to the recall, the impact of the noncomparable segment profit in the prior year related to the divested natural beverage and grains businesses, and the unfavorable volume/mix, partially offset by higher net price realization and lower marketing spend.
International and Away From Home
International and Away From Home net sales increased$22.8 in the third quarter of 2023, including$7.2 of unfavorable foreign currency exchange and the noncomparable impact of$1.4 of net sales in the prior year related to the divested natural beverage and grains businesses. Excluding the noncomparable impact of foreign currency exchange and the divested businesses, net sales increased$31.4 , or 12 percent, reflecting a 17 percent and 6 percent increase for the Away From Home and International operating segments, respectively. Net price realization contributed a 15 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products and baking mixes and ingredients, partially offset by a decreased contribution from volume/mix of 3 percentage points, primarily driven by baking mixes and ingredients and coffee products. Segment profit increased$3.4 , primarily reflecting a favorable net impact of higher net price realization and higher commodity costs. International and Away From Home net sales increased$62.4 in the first nine months of 2023, including$18.6 of unfavorable foreign currency exchange and the noncomparable impact of$4.9 of net sales in the prior year related to the divested natural beverage and grains businesses. Excluding the noncomparable impact of foreign currency exchange and the divested businesses, net sales increased$85.9 , or 11 percent, reflecting a 17 percent and 5 percent increase for the Away From Home and International operating segments, respectively. Net price realization contributed a 13 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products, baking mixes and ingredients, and frozen handheld products, partially offset by the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall and a decreased contribution from volume/mix of 1 percentage point. Segment profit decreased$11.8 , primarily reflecting the impact of the recall and higher commodity costs, partially offset by higher net price realization.
Financial Condition - Liquidity and Capital Resources
Liquidity
Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility. AtJanuary 31, 2023 , total cash and cash equivalents was$104.2 , compared to$169.9 atApril 30, 2022 . 26
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The following table presents selected cash flow information.
Nine Months Ended
2023 2022
Net cash provided by (used for) operating activities $ 750.6 $ 742.6
Net cash provided by (used for) investing activities (306.8) (131.9)
Net cash provided by (used for) financing activities (509.4) (660.4)
Net cash provided by (used for) operating activities $ 750.6 $ 742.6
Additions to property, plant, and equipment (332.3) (244.5)
Free cash flow (A) $ 418.3 $ 498.1 (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$8.0 increase in cash provided by operating activities in the first nine months of 2023 was primarily driven by lower working capital requirements in 2023, partially offset by the$70.0 contribution to ourU.S. qualified defined benefit pension plans during the first quarter of 2023 and lower net income adjusted for noncash items in the current year. The cash required to fund working capital decreased compared to the prior year, primarily related to a favorable net impact of increased accounts payable and inventory levels, primarily driven by timing and input cost inflation. A decrease in incentive compensation also contributed to the lower cash requirements in 2023. Cash used for investing activities in the first nine months of 2023 consisted primarily of$332.3 in capital expenditures, primarily driven by investments in the new manufacturing and distribution facilities inMcCalla, Alabama , and capacity expansions inLongmont, Colorado , to support growth for the Smucker's Uncrustables brand, as well as plant maintenance across our facilities. The use of cash in 2023 was partially offset by a decrease in collateral pledged of$21.2 in our derivative cash margin account. Cash used for investing activities in the first nine months of 2022 consisted primarily of$244.5 in capital expenditures, which reflected capacity expansion at ourLongmont facility, as well as plant maintenance across our facilities. An increase in collateral pledged of$15.4 in our derivative cash margin account also contributed to the use of cash in 2022, which was partially offset by net proceeds from the divested private label dry pet food and the natural beverage and grains businesses of$130.2 . Cash used for financing activities in the first nine months of 2023 consisted primarily of dividend payments of$321.8 and a net decrease in short-term borrowings of$185.2 . Cash used for financing activities in the first nine months of 2022 consisted primarily of long-term debt repayments of$1,157.0 and dividend payments of$311.1 , partially offset by$797.6 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, range from 0 to 180 days. We have 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 ofJanuary 31, 2023 , andApril 30, 2022 ,$416.1 and$314.3 of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers. During the first nine months of 2023 and 2022, we paid$1,069.9 and$774.8 , 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 Pet Brands , the significant majority of which were settled and paid during 2019 and 2020. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements 27
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associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable atJanuary 31, 2023 . 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, inMay 2011 , we were named a defendant in CERT v.Brad Barry LLC , et al., which alleged that we, in addition to 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. InAugust 2020 , the trial court granted the Defendants' motion for summary judgment based on a 2019 regulation clarifying that cancer warnings are not required for coffee under Proposition 65. CERT appealed the ruling inNovember 2020 to theCalifornia Court of Appeals for the Second Appellate District , which affirmed the trial court's decision. CERT then petitioned for further appeal to theCalifornia Supreme Court , which was denied onFebruary 15, 2023 .The California Supreme Court will send the case back to the trial court to affirm judgement in favor of the Defendants thereby effectively concluding this litigation. We are also defendants in a series of putative class action lawsuits that were originally filed in federal courts inCalifornia ,Florida ,Illinois ,Missouri ,New York, Texas , andWashington D.C. , but have been transferred to theUnited States District Court for the Western District of Missouri for coordinated pre-trial proceedings. The plaintiffs 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. 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 ofJanuary 31, 2023 , and the likelihood of loss is not considered probable or 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.
Product Recall
InMay 2022 , we initiated a voluntary recall of select Jif peanut butter products produced at ourLexington, Kentucky , facility and sold primarily in theU.S. , due to potential salmonella contamination. At that time, we also suspended the manufacturing of these products at ourLexington facility and temporarily paused shipments from ourMemphis, Tennessee , facility. No other products produced at our other facilities were affected by this recall. InJune 2022 , we resumed manufacturing and shipping at ourLexington facility, as well as shipping from ourMemphis facility. We partnered with retailers to restock Jif peanut butter products during the first quarter of 2023 and anticipate a return to normal levels by the end of 2023. During the three and nine months endedJanuary 31, 2023 , approximately$20.0 and$110.0 of direct costs were recognized, respectively, net of insurance recoveries, related to customer returns, fees, unsaleable inventory, and other product recall-related costs, primarily within ourU.S. Retail Consumer Foods segment. The majority of the direct costs were incurred through the third quarter of 2023, and additional direct costs are expected to be minimal during the remainder of 2023. Further, we are a defendant in five putative class action lawsuits as a result of our voluntary recall of select Jif peanut butter products. The plaintiffs assert causes of action for negligence, breach of warranties, fraudulent concealment, unjust enrichment, and, in some of the lawsuits, violations of state consumer protection and deceptive trade practices laws. Their claims are premised on allegations that we engaged in business practices designed to mislead the public regarding the safety of Jif peanut butter for human consumption due to the alleged presence of salmonella. The cases are pending and consolidated in theUnited States District Court for the Northern District of Ohio . Additionally, the FDA issued a warning letter onJanuary 24, 2023 , following an inspection of ourLexington facility completed inJune 2022 , identifying concerns regarding certain practices and controls at the facility. We have responded to the warning letter with a detailed explanation of our food safety plan and extensive verification activities to prevent contamination in Jif peanut butter products but the FDA or other agencies may nonetheless conclude that certain practices or controls were not in compliance with the Federal Food, Drug, and Cosmetic Act or other laws. Any potential regulatory action could result in the imposition of injunctive terms and monetary payments that could have a material adverse effect on our business, reputation, brand, results of operations, and financial performance, as well as affect pending consumer litigation associated with the voluntary recall of Jif peanut butter products. The outcome and financial impact, if any, of the ongoing consumer litigation or potential regulatory action associated with the Jif voluntary recall cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as ofJanuary 31, 2023 , and the likelihood of loss is not considered probable or estimable. 28
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Capital Resources
The following table presents our capital structure.
January 31, 2023 April 30, 2022
Short-term borrowings $ - $ 180.0
Long-term debt 4,313.3 4,310.6
Total debt $ 4,313.3 $ 4,490.6
Shareholders' equity 8,335.0 8,140.1
Total capital $ 12,648.3 $ 12,630.7
We have available a $2.0 billion unsecured revolving credit facility with a
group of 11 banks that matures in August 2026 . Additionally, we participate in a
commercial paper program under which we can issue short-term, unsecured
commercial paper not to exceed $2.0 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 is used as a continuing source of short-term
financing for general corporate purposes. As of January 31, 2023 , we did not
have a balance outstanding under the commercial paper program.
We are in compliance with all our debt covenants as of January 31, 2023 , and
expect to be for the next 12 months. For additional information on our long-term
debt, sources of liquidity, and debt covenants, see Note 8: Debt and Financing
Arrangements.
During the first nine months of 2023 and 2022, we did not repurchase any common
shares under a repurchase plan authorized by the Board. At January 31, 2023 ,
approximately 5.8 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.
In November 2021 , we announced plans to invest $1.1 billion to build a new
manufacturing facility and distribution center in McCalla, Alabama , dedicated to
production of Smucker's Uncrustables frozen sandwiches. Construction of this
facility began in the third quarter of 2022, with production expected to begin
in calendar year 2025. The project demonstrates our commitment to meet
increasing demand for this highly successful product and deliver on our strategy
to focus on brands with the most significant growth opportunities. Construction
of the facility and production will occur in three phases over multiple years
and will result in the creation of up to 750 jobs. Financial investments and job
creation will align with each of the three phases.
Absent any material acquisitions or other significant investments, we believe
that cash on hand, combined with cash provided by operations, borrowings
available under our revolving credit facility and commercial paper program, 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 the current macroeconomic environment, including the ongoing impacts
of COVID-19 and the conflict between Russia and Ukraine , 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. We continue to evaluate these risks, which
could affect our financial condition or our ability to fund operations or future
investment opportunities.
As of January 31, 2023 , total cash and cash equivalents of $17.1 was held by our
foreign subsidiaries, primarily in Canada . We have not repatriated foreign cash
to the U.S. during the first nine months of 2023.
Material Cash Requirements
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.
As of
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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, 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 on divestitures, the change in net cumulative unallocated derivative gains and losses, and other one-time items that do not directly reflect ongoing operating results. 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 income tax rate, certain exclusions from non-GAAP financial measures, such as the one-time deferred state tax impact of the internal legal entity simplification during the third quarter of 2022, 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
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The following table reconciles certain non-GAAP 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.
Three Months Ended January
31, Nine Months Ended January 31,
2023 2022 2023 2022
Gross profit reconciliation:
Gross profit $ 755.8 $ 683.1 $ 2,009.4 $ 2,034.0 Change in net cumulative unallocated derivative gains and (17.5)
22.4 43.4 37.9
losses
Cost of products sold - special project costs 1.0 6.8 4.9 17.5 Adjusted gross profit$ 739.3 $ 712.3 $ 2,057.7 $ 2,089.4 Operating income reconciliation: Operating income$ 317.9 $ 150.6 $ 791.0$ 721.8 Amortization 55.6 55.3 166.8 166.1 Other intangible assets impairment charge - 150.4 - 150.4 Gain on divestitures - net - (9.6) (1.6) (9.6)
Change in net cumulative unallocated derivative gains and (17.5)
22.4 43.4 37.9
losses
Cost of products sold - special project costs 1.0 6.8 4.9 17.5 Other special project costs 0.6 2.0 2.7 5.1 Adjusted operating income$ 357.6 $ 377.9 $ 1,007.2 $ 1,089.2 Net income reconciliation: Net income$ 208.5 $ 69.7 $ 509.4$ 429.6 Income tax expense 66.9 39.9 160.0 154.0 Amortization 55.6 55.3 166.8 166.1 Other intangible assets impairment charge - 150.4 - 150.4 Gain on divestitures - net - (9.6) (1.6) (9.6)
Change in net cumulative unallocated derivative gains and (17.5)
22.4 43.4 37.9
losses
Cost of products sold - special project costs 1.0 6.8 4.9 17.5 Other special project costs 0.6 2.0 2.7 5.1 Adjusted income before income taxes$ 315.1 $ 336.9 $ 885.6$ 951.0 Income taxes, as adjusted 78.3 84.4 214.5 228.9 Adjusted income$ 236.8 $ 252.5 $ 671.1$ 722.1 Weighted-average shares - assuming dilution 107.0 108.5 106.9 108.4 Adjusted earnings per share - assuming dilution$ 2.21 $ 2.33 $ 6.28$ 6.66
Critical Accounting Estimates and Policies
A discussion of our critical accounting estimates and policies can be found in the "Management's Discussion and Analysis" section of our Annual Report on Form 10-K for the year endedApril 30, 2022 . There were no material changes to the information previously disclosed. 31
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