(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 months endedJuly 31, 2021 and 2020. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted. 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 in 2021, 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 a working capital adjustment. Upon completion of this transaction, we recognized a pre-tax gain of$114.8 during the second half of 2021. 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 in 2021, 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 a working capital adjustment. Upon completion of this transaction, we recognized a pre-tax loss of$89.5 during the second half of 2021. 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. COVID-19 The spread of 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 calendar year 2021, state governments reopened their economies, while adhering to new guidelines and enhanced safety measures, such as social distancing, face mask protocols, and vaccination recommendations. However, in recent months, there has been a general uptick inU.S. cases, and as a result, consumers continue to stay at home more frequently as a precaution, leading to the demand of at-home food consumption remaining elevated, though the impact is of a lesser extent as compared to the prior year. As a result of elevated consumption, the supply chain network continues to be challenged due to rising COVID-19 cases and increasing labor shortages, negatively impacting our business and the overall industry. We anticipate this consumer behavior and at-home food consumption will continue through 2022, with the extent to which it remains elevated dependent on vaccination rates and effectiveness, as well as the impact of additional COVID-19 variants. We are continuing the 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. All of our production operations remain open, and none have experienced significant disruptions or labor reductions related to COVID-19. During the first quarter of 2022, we have experienced increased disruption in our supply chain network, including the supply of certain ingredients, packaging, and other sourced materials, which has resulted in higher than expected inflation, including escalating transportation and other supply chain costs, as well as unfavorable volume/mix, as we transition from the unprecedented demand for our products in the prior year period. 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, 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 of our facilities and availability of 19 -------------------------------------------------------------------------------- Table of Contents 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. During the first three months of 2022, order levels continued to be elevated, primarily across ourU.S. Retail Consumer Foods andU.S. Retail Coffee 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 compared to the prior year, through the remainder 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 calendar year 2021, our net sales for the away from home channels have continued to improve compared to the initial months of the pandemic, as experienced during the first quarter of 2022. This trend could moderate during 2022 if cases continue to rise and governments impose additional safety measures that further impact away from home consumption, which is partially dependent upon vaccination rates and effectiveness, as well as the impact of additional COVID-19 variants. 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; vaccination rates 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, including labor availability, consolidated results of operations, financial condition, and liquidity. Results of Operations Three Months Ended July 31, % Increase 2021 2020 (Decrease) Net sales$ 1,858.0 $ 1,971.8 (6) % Gross profit$ 639.4 $ 775.4 (18) % of net sales 34.4 % 39.3 % Operating income$ 259.4 $ 361.1 (28) % of net sales 14.0 % 18.3 % Net income: Net income$ 153.9 $ 237.0 (35) Net income per common share - assuming dilution$ 1.42 $ 2.08 (32) Adjusted gross profit (A)$ 646.2 $ 759.2 (15) % of net sales 34.8 % 38.5 % Adjusted operating income (A)$ 323.4 $ 404.5 (20) % of net sales 17.4 % 20.5 % Adjusted income: (A) Income$ 205.8 $ 270.0 (24) Earnings per share - assuming dilution$ 1.90 $ 2.37 (20) (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 July 31, Increase 2021 2020 (Decrease) % Net sales$ 1,858.0 $ 1,971.8 $ (113.8) (6) % Crisco divestiture - (79.5) 79.5 4 Natural Balance divestiture - (56.0) 56.0 3 Foreign currency exchange (10.4) - (10.4) (1)
Net sales excluding divestitures and foreign currency exchange (A)
$ 1,847.6 $ 1,836.3 $ 11.3 1 % 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. 20 -------------------------------------------------------------------------------- Table of Contents Net sales in the first three months of 2022 decreased$113.8 , or 6 percent, which includes$135.5 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$11.3 , or 1 percent. Favorable volume/mix for the Away From Home operating segment andU.S. Retail Pet Foods segment was partially offset by unfavorable volume/mix for the International operating segment andU.S. Retail Coffee segment. A slight benefit from net price realization primarily reflected higher net pricing in theU.S. Retail Consumer Foods segment, mostly offset by lower net pricing in theU.S. Retail Coffee segment. Operating Income The following table presents the components of operating income as a percentage of net sales.
Three Months Ended
2021 2020
Gross profit 34.4 % 39.3 %
Selling, distribution, and administrative expenses:
Marketing 5.3 % 6.2 %
Selling 3.3 3.3
Distribution 3.7 3.5
General and administrative 5.1 5.1
Total selling, distribution, and administrative expenses 17.4 % 18.1 %
Amortization 3.0 3.0
Other special project costs 0.1 -
Other operating expense (income) - net (0.1) (0.1)
Operating income 14.0 % 18.3 %
Amounts may not add due to rounding.
Gross profit decreased $136.0 , or 18 percent, in the first quarter of 2022,
reflecting higher costs, primarily driven by increased commodity and
transportation costs, the noncomparable impact related to the Crisco and Natural
Balance divestitures, and unfavorable volume/mix.
Operating income decreased $101.7 , or 28 percent, primarily reflecting the
decrease in gross profit, partially offset by a $33.5 decrease in selling,
distribution, and administrative ("SD&A") expenses, primarily attributable to
decreased marketing expense.
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; 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") decreased $113.0 , or 15 percent, in the first quarter
of 2022, primarily reflecting the exclusion of the change in net cumulative
unallocated derivative gains and losses, as compared to GAAP gross profit.
Operating income excluding non-GAAP adjustments ("adjusted operating income")
decreased $81.1 , or 20 percent, as compared to the prior year.
Interest Expense
Net interest expense decreased $3.0 , or 7 percent, in the first quarter of 2022,
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.
Income Taxes
Income taxes decreased $25.3 , or 33 percent, in the first quarter of 2022,
primarily due to the decrease in income before income taxes, partially offset by
a higher effective income tax rate of 25.0 percent, as compared to 24.4 percent
for the first quarter of 2021. During both the current and prior years, the
effective income tax rates varied from the U.S. statutory tax rate of 21.0
percent, primarily due to the impact of state income taxes. We anticipate a
full-year effective income tax rate for 2022 of approximately 24.5 percent. For
further information, refer to Note 12: Income Taxes.
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Restructuring Activities
A restructuring program was approved by the Board during 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
2021, we substantially completed an organizational redesign related to our
corporate headquarters and announced plans to close our Suffolk, 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 products. We
expect to incur costs of approximately $85.0 associated with the restructuring
activities approved to date. Approximately 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, 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 the majority of the costs expected to be incurred by the end of 2022. We
have incurred total cumulative restructuring costs of $30.5 , of which $6.4 were
incurred during the first quarter of 2022. For further information, refer to
Note 3: Integration and Restructuring Costs.
Segment Results
We have three reportable segments: U.S. Retail Pet Foods , U.S. Retail Coffee,
and U.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; the U.S. Retail Coffee segment primarily
includes the domestic sales of Folgers, Dunkin', and Café Bustelo branded
coffee; and the U.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).
Three Months Ended July 31,
% Increase
2021 2020 (Decrease)
Net sales:
U.S. Retail Pet Foods $ 648.0 $ 692.6 (6) %
U.S. Retail Coffee 543.2 570.9 (5)
U.S. Retail Consumer Foods 435.6 489.2 (11)
International and Away From Home 231.2 219.1 6
Segment profit:
U.S. Retail Pet Foods $ 79.9 $ 125.3 (36) %
U.S. Retail Coffee 151.3 182.6 (17)
U.S. Retail Consumer Foods 118.7 131.5 (10)
International and Away From Home 32.9 30.9 6
Segment profit margin:
U.S. Retail Pet Foods 12.3 % 18.1 %
U.S. Retail Coffee 27.9 32.0
U.S. Retail Consumer Foods 27.2 26.9
International and Away From Home 14.2 14.1
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales decreased $44.6 in the first quarter
of 2022, inclusive of the impact of $56.0 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 $11.4 , or 2
percent, primarily due to favorable volume/mix, which contributed 2 percentage
points to net sales, primarily driven by growth for the Meow Mix, Milk-Bone, and
Pup-Peroni brands, as well as private label pet food, partially offset by
declines for the Rachael Ray Nutrish and Kibbles 'n Bits brands. Net price
realization was neutral. Segment profit decreased $45.4 , primarily reflecting
higher commodity and transportation costs.
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U.S. Retail Coffee
The U.S. Retail Coffee segment net sales decreased $27.7 in the first quarter of
2022, driven by lower net price realization and unfavorable volume/mix. Net
price realization reduced net sales by 3 percentage points, reflecting increased
trade spend related to the lapping of suspended promotions in the prior year.
Volume/mix reduced net sales by 2 percentage points, reflecting the lapping of
retailer inventory re-stocking in the prior year, driven by declines for the
Folgers brand, partially offset by growth for the Dunkin' and Café Bustelo
brands. Segment profit decreased $31.3 , reflecting lower net pricing, higher
commodity costs, and unfavorable volume/mix, partially offset by lower marketing
expense.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales decreased $53.6 in the first
quarter of 2022, inclusive of the impact of $71.7 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 $18.1 , or 4
percent. Higher net price realization contributed 4 percentage points to net
sales, primarily driven by peanut butter and Smucker's Uncrustables® frozen
sandwiches. Volume/mix was neutral, as growth for Smucker's Uncrustables frozen
sandwiches and Jif peanut butter was mostly offset by a decline for Smucker's
fruit spreads. Segment profit decreased $12.8 , reflecting the noncomparable
segment profit in the prior year related to the divested Crisco business and
higher transportation, commodity, and packaging costs, partially offset by the
higher net pricing and lower marketing expense.
International and Away From Home
International and Away From Home net sales increased $12.1 in the first quarter
of 2022, including the noncomparable impact of $7.8 of net sales in the prior
year related to the divested Crisco business and $10.4 of favorable foreign
currency exchange. Excluding the noncomparable impact of the divested business
and foreign currency exchange, net sales increased $9.5 , or 4 percent, primarily
reflecting a 27 percent increase for the Away From Home operating segment,
partially offset by a net sales decline of 12 percent for the International
operating segment. Favorable volume/mix for the combined businesses contributed
3 percentage points to net sales, primarily driven by growth for portion
control, coffee, and frozen handheld products in the away from home channels,
partially offset by declines for baking mixes and ingredients in the
International operating segment. Net price realization contributed a 1
percentage point increase to net sales. Segment profit increased $2.0 , primarily
reflecting the favorable foreign currency exchange impact, lower marketing
expense, and a favorable impact of net pricing and costs, partially offset by
the noncomparable segment profit in the prior year related to the divested
Crisco business and unfavorable volume/mix.
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.
At July 31, 2021 , total cash and cash equivalents was $168.8 , compared
to $334.3 at April 30, 2021 .
The following table presents selected cash flow information.
Three Months Ended
2021 2020
Net cash provided by (used for) operating activities $ 137.8 $ 409.0
Net cash provided by (used for) investing activities (80.0) (49.2)
Net cash provided by (used for) financing activities (223.3) (357.3)
Net cash provided by (used for) operating activities $ 137.8 $ 409.0
Additions to property, plant, and equipment (68.0) (76.6)
Free cash flow (A) $ 69.8 $ 332.4
(A)Free cash flow is a non-GAAP financial measure used by management to evaluate
the amount of cash available for debt repayment, dividend distribution,
acquisition opportunities, share repurchases, and other corporate purposes.
The $271.2 decrease in cash provided by operating activities in the first three
months of 2022 was primarily driven by greater working capital requirements in
2022, as well as lower net income adjusted for noncash items in the current
year. The increase
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in cash required to fund working capital, as compared to the prior year, was
primarily attributable to an increase in trade receivables due to the timing of
payments and an increase in inventory levels.
Cash used for investing activities in the first three months of 2022 consisted
primarily of $68.0 in capital expenditures and an increase of $11.4 in our
derivative cash margin account balances. Cash used for investing activities in
the first three months of 2021 consisted of $76.6 in capital expenditures,
partially offset by a $27.6 decrease in our derivative cash margin account
balances.
Cash used for financing activities in the first three months of 2022 consisted
primarily of long-term debt repayments of $407.0 and dividend payments of $97.2 ,
partially offset by a net increase in short-term borrowings of $284.0 . Cash used
for financing activities in the first three months of 2021 consisted primarily
of long-term debt repayments of $300.0 and dividend payments of $100.1 ,
partially offset by a net increase in short-term borrowings of $47.8 .
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. During 2020, we entered into
an agreement with a third-party administrator to provide an accounts payable
tracking system and facilitate a supplier financing program which allows
participating suppliers the ability to monitor and voluntarily elect to sell our
payment obligations to a designated third-party financial institution.
Participating suppliers can sell one or more of our payment obligations at their
sole discretion, and our rights and obligations to our suppliers are not
impacted. We have no economic interest in a supplier's decision to enter into
these agreements. Our obligations to our suppliers, including amounts due and
scheduled payment terms, are not impacted by our suppliers' decisions to sell
amounts under these arrangements. As of July 31, 2021 and April 30, 2021 , $278.2
and $304.2 of our outstanding payment obligations, respectively, were elected
and sold to a financial institution by participating suppliers. During the first
three months of 2022 and 2021, we paid $267.7 and $122.1 , 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 associated with these or other matters, we have accrued losses for
certain contingent liabilities that we have determined are probable and
reasonably estimable at July 31, 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 in CERT v. Brad Barry LLC , et al., which alleges that we, in addition
to 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. In June 2019 , the
state agency responsible for administering the Proposition 65 program, OEHHA,
approved a regulation clarifying that cancer warnings are not required for
coffee under Proposition 65, and in August 2020 , the trial court granted the
Defendants' motion for summary judgment based on the regulation. CERT appealed
the ruling in November 2020 to the California 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 in California , Florida , Illinois , Missouri , Texas , Washington ,
and Washington 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 the United 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.
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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 of July 31, 2021 , 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.
Capital Resources
The following table presents our capital structure.
July 31, 2021 April 30, 2021
Current portion of long-term debt
366.0 82.0
Long-term debt, less current portion 3,517.5 3,516.8
Total debt $ 4,635.1 $ 4,751.7
Shareholders' equity 8,170.3 8,124.8
Total capital $ 12,805.4 $ 12,876.5
During the first quarter of 2022, we prepaid $400.0 in principal of the Senior
Notes due March 15, 2022 , and as a result, we recognized a net loss on
extinguishment of $6.9 , which primarily consisted of a make-whole payment and
was included in other income (expense) - net in the Condensed Statement of
Consolidated Income.
As of July 31, 2021 , we had available a $1.8 billion unsecured revolving credit
facility with a group of 11 banks that was scheduled to mature in September
2022 . Additionally, we participate in a commercial paper program under which we
can issue short-term, unsecured commercial paper not to exceed $1.8 billion at
any time. The commercial paper program is backed by our revolving credit
facility and reduces what we can borrow under the revolving credit facility by
the amount of commercial paper outstanding. Commercial paper is used as a
continuing source of short-term financing for general corporate purposes. As of
July 31, 2021 , we had $366.0 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.
Subsequent to the first quarter of 2022, we entered into an unsecured revolving
credit facility with a group of 11 banks, which provides for a revolving credit
line of $2.0 billion and matures in August 2026 . As a result of entering into
the new facility in August 2021 , we terminated the $1.8 billion revolving credit
facility. Furthermore, in conjunction with entering into the new unsecured
revolving credit facility, we also increased our commercial paper program to
$2.0 billion .
We are in compliance with all of our debt covenants as of July 31, 2021 . For
additional information on our long-term debt, sources of liquidity, and debt
covenants, see Note 7: Debt and Financing Arrangements.
During the first quarter of 2022, we did not repurchase any common shares under
a repurchase plan authorized by the Board. At July 31, 2021 , approximately 2.8
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.
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 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. We
continue to evaluate these risks, which could affect our financial condition or
our ability to fund operations or future investment opportunities.
As of July 31, 2021 , total cash and cash equivalents of $17.3 was held by our
foreign subsidiaries, primarily in Canada .
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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 related to the sale of a
business; 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 results can significantly
impact our adjusted effective income tax rate.
These non-GAAP financial measures are not intended to replace the presentation
of financial results in accordance with U.S. GAAP. Rather, the presentation of
these non-GAAP financial measures supplements other metrics we use to internally
evaluate our businesses and facilitate the comparison of past and present
operations and liquidity. These non-GAAP financial measures may not be
comparable to similar measures used by other companies and may exclude certain
nondiscretionary expenses and cash payments.
The following table reconciles certain non-GAAP measures to the comparable GAAP
financial measure. See page 20 for a reconciliation of net sales adjusted for
certain noncomparable items to the comparable GAAP financial measure.
Three Months Ended
2021 2020
Gross profit reconciliation:
Gross profit $ 639.4 $ 775.4
Change in net cumulative unallocated derivative gains and losses 2.2 (16.2)
Cost of products sold - special project costs 4.6 -
Adjusted gross profit $ 646.2 $ 759.2
Operating income reconciliation:
Operating income $ 259.4 $ 361.1
Amortization 55.4 59.6
Change in net cumulative unallocated derivative gains and losses 2.2 (16.2)
Cost of products sold - special project costs 4.6 -
Other special project costs 1.8 -
Adjusted operating income $ 323.4 $ 404.5
Net income reconciliation:
Net income $ 153.9 $ 237.0
Income tax expense 51.3 76.6
Amortization 55.4 59.6
Change in net cumulative unallocated derivative gains and losses 2.2 (16.2)
Cost of products sold - special project costs 4.6 -
Other special project costs 1.8 -
Adjusted income before income taxes $ 269.2 $ 357.0
Income taxes, as adjusted 63.4 87.0
Adjusted income $ 205.8 $ 270.0
Weighted-average shares - assuming dilution 108.4 114.1
Adjusted earnings per share - assuming dilution $ 1.90 $ 2.37
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-------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements and Contractual Obligations We do not have material off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities. Transactions with related parties are in the ordinary course of business and are not material to our results of operations, financial condition, or cash flows. As ofJuly 31, 2021 , there were no material changes to our future contractual obligations as previously reported in our Annual Report on Form 10-K for the year endedApril 30, 2021 . 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, 2021 . There were no material changes to the information previously disclosed. Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in millions, unless otherwise noted) 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 atJuly 31, 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 and commercial paper rates in theU.S. 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 is deferred as a component of the carrying value of the long-term debt and is being recognized ratably as a reduction to interest expense over the remaining life of the related debt. AtJuly 31, 2021 , the remaining benefit of$1.9 was recorded as an increase in the long-term debt balance. In measuring interest rate risk by the amount of net change in the fair value of our financial liabilities, a hypothetical 100 basis-point decrease in interest rates atJuly 31, 2021 , would increase the fair value of our long-term debt by$400.6 . 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. 27 -------------------------------------------------------------------------------- Table of Contents The following sensitivity analysis presents our potential loss of fair value resulting from a hypothetical 10 percent change in market prices related to commodities. July 31, 2021 April 30, 2021 High $ 46.5 $ 47.5 Low 11.3 11.7 Average 28.6 29.0 The estimated fair value was determined using quoted market prices and was based on our net derivative position by commodity for the previous four quarters. The calculations are not intended to represent actual losses in fair value that we expect to incur. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. The commodities hedged have a high inverse correlation to price changes of the derivative instrument. Thus, we would expect that over time any gain or loss in the estimated fair value of its 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 ofJuly 31, 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 ofJuly 31, 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 the three months endedJuly 31, 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. Certain Forward-Looking Statements Certain statements included in this Quarterly Report on Form 10-Q 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, 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 and labor shortages; •volatility of commodity, energy, and other input costs; •risks associated with derivative and purchasing strategies we employ to manage commodity pricing and interest rate risks; •the availability of reliable transportation on acceptable terms, 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; 28 -------------------------------------------------------------------------------- Table of Contents •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; •our ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period; •the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses, including product innovation; •general competitive activity in the market, including competitors' pricing practices and promotional spending levels; •the impact of food security concerns involving either our products or our competitors' products; •the impact of accidents, extreme weather, natural disasters, and pandemics (such as COVID-19); •the concentration of certain of our businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and our ability to manage and maintain key relationships; •impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in useful lives of other intangible assets or other long-lived assets; •the impact of new or changes to existing governmental laws and regulations and their application, including tariffs; •the outcome of tax examinations, changes in tax laws, and other tax matters; •foreign currency exchange rate and interest rate fluctuations; and •risks related to other factors described under "Risk Factors" in other reports and statements we have filed with 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures. Management, including the principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as ofJuly 31, 2021 (the "Evaluation Date"). Based on that evaluation, the principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified inSEC rules and forms, and (2) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting during the three months endedJuly 31, 2021 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 29
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