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MarketScreener Homepage  >  Equities  >  Nyse  >  The JM Smucker Company    SJM

THE JM SMUCKER COMPANY

(SJM)
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JM Smucker : J M SMUCKER CO Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/25/2020 | 04:29pm EST
(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 ended
July 31, 2020 and 2019. All comparisons presented are to the corresponding
period of the prior year, unless otherwise noted.
We are the owner of all trademarks referenced herein, except for the following,
which are used under license: Dunkin'TM and Dunkin' Donuts are trademarks of DD
IP Holder LLC, and Rachael Ray is a trademark of Ray Marks II LLC. The Dunkin'
and Dunkin' Donuts brands are licensed to us for packaged coffee products,
including K-Cup® pods, sold in retail channels such as grocery stores, mass
merchandisers, club stores, e-commerce, and drug stores. All references to
Dunkin' in this Quarterly Report on Form 10-Q are deemed to include the Dunkin'
and Dunkin' Donuts trademarks. Information in this document does not pertain to
products for sale in Dunkin' restaurants. K-Cup® is a trademark of Keurig Green
Mountain, Inc., used with permission.
COVID-19
The continued spread of COVID-19 throughout the 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 the first quarter of 2021, many state governments began a phased
reopening of their economies. These phased approaches include limited
foodservice offerings, outdoor dining, travel, and the reopening of certain
retail establishments, among others, while adhering to new guidelines and
enhanced safety measures, such as physical distancing and face mask protocols.
However, certain states have delayed or reversed plans to reopen their economies
as new cases of COVID-19 and related illnesses continue to rise. In general,
consumers continue to stay at home as a precaution due to the sustained increase
in new cases, and as a result, at-home food consumption and consumer demand
remains high.

In June, we commenced a phased approach to reopen our corporate headquarters in
Orrville, 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 in
place at all of our facilities, which are monitoring the continually 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. 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 allocate order
volumes to ensure a consistent supply across our retail partners during this
period of high demand.

We continued to experience an increase in orders during the first quarter of
2021, primarily across our U.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. The continued increase in consumer demand
may slow in the coming months as consumer purchasing behavior may change as a
result of the length and severity of the pandemic, duration of physical
distancing requirements, stay-at-home orders, and macroeconomic implications.
However, during the first quarter of 2021, consumer demand and customer orders
for the U.S. Retail Coffee and U.S Retail Consumer Foods segments remain
elevated compared to historical comparison periods. We have also experienced a
decline in products sold in the away from home channels as a result of COVID-19,
which has negatively impacted our net sales in our Away From Home operating
segment, and we expect COVID-19 to continue to adversely affect our net sales
while government restrictions and physical distancing measures are in place.
However, as certain states have begun to reopen their economies, our net sales
for the away from home channels has improved compared to the initial months of
the pandemic and relative to our initial expectations. The impact of COVID-19
remains uncertain and ultimately will be dictated by the length and severity of
the pandemic; the federal, state, and local government actions taken in
response; and the macroeconomic environment. We will continue to evaluate the
nature and extent to which COVID-19 will impact our business, consolidated
results of operations, financial condition, and liquidity.
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Results of Operations
                                                                                 Three Months Ended July 31,
                                                                                                                  % Increase
                                                                    2020                       2019               (Decrease)
Net sales                                                     $     1,971.8$ 1,778.9                       11  %
Gross profit                                                  $       775.4$   699.6                       11
% of net sales                                                         39.3   %                 39.3  %
Operating income                                              $       361.1$   257.6                       40
% of net sales                                                         18.3   %                 14.5  %
Net income:
Net income                                                    $       237.0$   154.6                       53
Net income per common share - assuming dilution               $        2.08$    1.36                       53
Adjusted gross profit (A)                                     $       759.2$   670.6                       13
% of net sales                                                         38.5   %                 37.7  %
Adjusted operating income (A)                                 $       404.5$   290.7                       39
% of net sales                                                         20.5   %                 16.3  %
Adjusted income: (A)
Income                                                        $       270.0$   179.7                       50
Earnings per share - assuming dilution                        $        2.37$    1.58                       50


(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
Net sales in the first three months of 2021 increased $192.9, or 11 percent,
driven by favorable volume/mix across all of our retail businesses, supported by
increased at-home consumption for the U.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.
Operating Income
The following table presents the components of operating income as a percentage
of net sales.
                                                                            

Three Months Ended July 31,

                                                                                 2020                  2019
Gross profit                                                                        39.3  %               39.3  %
Selling, distribution, and administrative expenses:
Marketing                                                                            6.2  %                7.5  %
Selling                                                                              3.3                   3.9
Distribution                                                                         3.5                   3.6
General and administrative                                                           5.1                   6.5
Total selling, distribution, and administrative expenses                            18.1  %               21.4  %
Amortization                                                                         3.0                   3.3

Other special project costs                                                            -                   0.2
Other operating expense (income) - net                                              (0.1)                    -
Operating income                                                                    18.3  %               14.5  %


Amounts may not add due to rounding.
Gross profit increased $75.8, or 11 percent, in the first quarter of 2021,
primarily driven by favorable volume/mix and lower costs, partially offset by an
unfavorable change in derivative gains and losses as compared to the prior year.
Operating income increased $103.5, or 40 percent, primarily reflecting the
increase in gross profit and a $23.0 decrease in selling, distribution, and
administrative ("SD&A") expenses.
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Our non-GAAP adjustments include amortization expense and impairment charges
related to intangible assets, integration and restructuring costs, and
unallocated gains and losses on commodity and foreign currency exchange
derivatives. Refer to "Non-GAAP Financial Measures" in this discussion and
analysis for additional information. Gross profit excluding non-GAAP adjustments
("adjusted gross profit") increased $88.6, or 13 percent, in the first quarter
of 2021, reflecting the exclusion of unallocated derivative gains and losses, as
compared to GAAP gross profit. Operating income excluding non-GAAP adjustments
("adjusted operating income") increased $113.8, or 39 percent, as compared to
the prior year.
Interest Expense

Net interest expense decreased $3.3, or 7 percent, in the first quarter of 2021,
primarily as a result of a decrease in interest rates and reduced debt
outstanding, as compared to the prior year, partially offset by interest expense
related to interest rate contracts terminated in the fourth quarter of 2020.
Income Taxes
Income taxes increased $24.5, or 47 percent, in the first quarter of 2021, due
to the increase in income before income taxes and partially offset by a lower
effective tax rate of 24.4 percent, compared to 25.2 percent for the first
quarter of 2020. During both the current and prior years, the effective tax
rates varied from the U.S. statutory tax rate of 21.0 percent, primarily due to
the impact of state income taxes. We anticipate a full-year effective tax rate
for 2021 of approximately 24.0 percent. For further information, refer to Note
11: Income Taxes.
Segment Results
We have three reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee,
and U.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
recent leadership changes, these operating segments are now being managed and
reported separately, and no longer represent a reportable segment for segment
reporting purposes. Prior year segment results 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 the domestic sales of
Rachael Ray Nutrish, Meow Mix, Milk-Bone, 9Lives, Kibbles 'n Bits, Natural
Balance, 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, Jif, and Crisco 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).
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                                                 Three Months Ended July 31,
                                                                                % Increase
                                         2020                       2019        (Decrease)
Net sales:
U.S. Retail Pet Foods              $      692.6$ 669.9               3  %
U.S. Retail Coffee                        570.9                    465.7              23
U.S. Retail Consumer Foods                489.2                    402.2              22
International and Away From Home          219.1                    241.1              (9)
Segment profit:
U.S. Retail Pet Foods              $      125.3$ 120.1               4  %
U.S. Retail Coffee                        182.6                    128.9              42
U.S. Retail Consumer Foods                131.5                     81.0              62
International and Away From Home           30.9                     32.3              (4)
Segment profit margin:
U.S. Retail Pet Foods                      18.1   %                 17.9  %
U.S. Retail Coffee                         32.0                     27.7
U.S. Retail Consumer Foods                 26.9                     20.1
International and Away From Home           14.1                     13.4


U.S. Retail Pet FoodsThe U.S. Retail Pet Foods segment net sales increased $22.7 in the first quarter
of 2021, primarily reflecting favorable volume/mix, which contributed 5
percentage points to net sales. The favorable volume/mix was driven by growth
for 9Lives and Meow Mix cat food and Milk-Bone dog snacks, partially offset by
declines for Natural Balance, Nature's Recipe, and private label dog food. Lower
net price realization reduced net sales by 2 percentage points, primarily
reflecting increased trade spend for dog food and cat food. Segment profit
increased $5.2, driven by lower manufacturing costs, the favorable volume/mix,
and lower SD&A expenses, partially offset by lower pricing.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased $105.2 in the first quarter
of 2021, reflecting favorable volume/mix, which contributed 23 percentage points
to net sales, primarily related to growth for the Dunkin' Donuts, Folgers, and
Café Bustelo brands. The favorable volume/mix is reflective of elevated at-home
consumption and re-stocking of retailer inventory following the surge in
consumer demand during the fourth quarter of 2020. Segment profit increased
$53.7, primarily due to the favorable volume/mix.
U.S. Retail Consumer FoodsThe U.S. Retail Consumer Foods segment net sales increased $87.0 in the first
quarter of 2021, as favorable volume/mix contributed 19 percentage points to net
sales, reflecting growth for the Smucker's brand, inclusive of Uncrustables®
frozen sandwiches and fruit spreads, Crisco oils and shortening, and Jif peanut
butter. The favorable volume/mix is reflective of elevated at-home consumption
and retailer inventory re-stocking following the surge in consumer demand during
the fourth quarter of 2020. Higher net pricing increased net sales by 3
percentage points, primarily attributable to reduced promotional activity for
Jif peanut butter and Smucker's fruit spreads. Segment profit increased $50.5,
primarily reflecting the favorable volume/mix, higher net pricing, and lower
SD&A expenses.
International and Away From Home
International and Away From Home net sales decreased $22.0 in the first quarter
of 2021, primarily reflecting a 33 percent decline for the Away From Home
operating segment, partially offset by net sales growth of 21 percent for the
International operating segment, most notably for flour and baking ingredients.
Unfavorable volume/mix for the combined businesses reduced net sales by 8
percentage points and foreign currency decreased net sales by 1 percentage
point. Segment profit decreased $1.4, primarily reflecting higher input costs
and the unfavorable volume/mix, partially offset by lower SD&A expenses.
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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, 2020, total cash and cash equivalents was $396.6, compared
to $391.1 at April 30, 2020.
The following table presents selected cash flow information.
                                                                            

Three Months Ended July 31,

                                                                              2020                 2019
Net cash provided by (used for) operating activities                    $        409.0$  221.5
Net cash provided by (used for) investing activities                             (49.2)            (52.1)
Net cash provided by (used for) financing activities                            (357.3)           (222.6)

Net cash provided by (used for) operating activities                    $        409.0$  221.5
Additions to property, plant, and equipment                                      (76.6)            (73.0)
Free cash flow (A)                                                      $        332.4$  148.5


(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 $187.5 increase in cash provided by operating activities in the first
quarter of 2021 was primarily driven by lower working capital requirements in
2021, as well as higher net income adjusted for noncash items in the current
year. The decrease in cash required to fund working capital, as compared to the
prior year, was primarily attributable 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, as well as a reduction in trade
receivables this quarter, due to the timing of sales and payments.
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 investing activities in
the first three months of 2020 consisted of $73.0 in capital expenditures,
partially offset by a $20.9 decrease in our derivative cash margin account
balances.
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.
Cash used for financing activities in the first three months of 2020 consisted
primarily of a $130.0 net decrease in short-term borrowings and dividend
payments of $96.5.
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 180 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 of July 31,
2020, $192.3 of our outstanding payment obligations were elected and sold to a
financial institution by participating suppliers. During the first quarter of
2021, we paid $122.1 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
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during the second half of 2019. While we cannot predict with certainty the
ultimate results of these proceedings or potential settlements associated with
these or other matters, we have accrued losses for certain contingent
liabilities that we have determined are probable and reasonably estimable at
July 31, 2020. Based on the information known to date, with the exception of the
matter discussed below, we do not believe the final outcome of these proceedings
will have a material adverse effect on our financial position, results of
operations, or cash flows.

In addition to the legal proceedings discussed above, we are currently a
defendant in CERT v. Brad Barry LLC, et al., which alleges that we, in addition
to nearly eighty other defendants who manufacture, package, distribute, or sell
coffee, failed to provide warnings for our coffee products of exposure to the
chemical acrylamide as required under Proposition 65. As part of a joint defense
group organized to defend against the lawsuit, we dispute these claims.
Acrylamide is not added to coffee, but is inherently present in all coffee in
small amounts (measured in parts per billion) as a byproduct of the coffee bean
roasting process. The outcome and the financial impact of the case, if any,
cannot be predicted at this time. Accordingly, no loss contingency has been
recorded for this matter as of July 31, 2020, as the likelihood of loss is not
considered probable or estimable. However, if we are required to pay significant
statutory penalties or to add warning labels to any of our products or place
warnings in certain locations where our products are sold as a result of
Proposition 65, our business and financial results could be adversely impacted,
and sales of those products could suffer not only in those locations but
elsewhere. For additional information, see Note 13: Contingencies.

Capital Resources
The following table presents our capital structure.
                                        July 31, 2020       April 30, 2020
Current portion of long-term debt      $        399.8      $             -
Short-term borrowings                           296.0                248.0
Long-term debt, less current portion          4,672.8              5,373.3
Total debt                             $      5,368.6$       5,621.3
Shareholders' equity                          8,345.2              8,190.9
Total capital                          $     13,713.8$      13,812.2


In April 2018, we entered into a Term Loan with a syndicate of banks and an
available commitment amount of $1.5 billion. The full amount of the Term Loan
was drawn on May 14, 2018, to partially finance the Ainsworth acquisition.
Borrowings under the Term Loan bear interest on the prevailing U.S. Prime Rate
or LIBOR, based on our election, and is payable either on a quarterly basis or
at the end of the borrowing term. The Term Loan matures on May 14, 2021, and
does not require scheduled amortization payments. Voluntary prepayments are
permitted without premium or penalty. As of July 31, 2020, we have prepaid $1.1
billion on the Term Loan to date, including $300.0 in the first quarter of 2021.
The interest rate on the Term Loan at July 31, 2020, was 0.97 percent.
We have available a $1.8 billion unsecured revolving credit facility with a
group of 11 banks that matures in September 2022. Additionally, we participate
in a commercial paper program under which we can issue short-term, unsecured
commercial paper not to exceed $1.8 billion at any time. The commercial paper
program is backed by our revolving credit facility and reduces what we can
borrow under the revolving credit facility by the amount of commercial paper
outstanding. Commercial paper will be used as a continuing source of short-term
financing for general corporate purposes. As of July 31, 2020, we had $296.0 of
short-term borrowings outstanding, all of which were issued under our commercial
paper program, at a weighted-average interest rate of 0.25 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 6:
Debt and Financing Arrangements.
During the first quarter of 2021, we did not repurchase any common shares under
a repurchase plan authorized by the Board. At July 31, 2020, approximately 3.6
million common shares remain available for repurchase pursuant to the Board's
authorizations. There is no guarantee as to the exact number of shares that may
be repurchased or when such purchases may occur.
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
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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.
As of July 31, 2020, total cash and cash equivalents of $85.1 was held by our
foreign subsidiaries, primarily in Canada. The undistributed earnings of our
foreign subsidiaries remain permanently reinvested.
Non-GAAP Financial Measures
We use non-GAAP financial measures, including: 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, integration and restructuring costs ("special project costs"), and
unallocated gains and losses on commodity and foreign currency exchange
derivatives ("unallocated derivative gains and losses"), as well as the related
tax impacts of these exclusions. The special project costs in the following
table relate to specific integration and restructuring projects, and the
unallocated derivative gains and losses reflect the changes in fair value of our
commodity and foreign currency exchange contracts. Additionally, income taxes,
as adjusted is calculated using an adjusted effective income tax rate that is
applied to adjusted income before income taxes. While this adjusted effective
income tax rate does not generally differ materially from our GAAP effective
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.
                                                                            

Three Months Ended July 31,

                                                                                  2020                  2019
Gross profit reconciliation:
Gross profit                                                                $        775.4$   699.6
Unallocated derivative losses (gains)                                                (16.2)             (29.0)

Adjusted gross profit                                                       $        759.2$   670.6
Operating income reconciliation:
Operating income                                                            $        361.1$   257.6
Amortization                                                                          59.6               58.8

Unallocated derivative losses (gains)                                                (16.2)             (29.0)

Other special project costs                                                              -                3.3
Adjusted operating income                                                   $        404.5$   290.7
Net income reconciliation:
Net income                                                                  $        237.0$   154.6
Income tax expense                                                                    76.6               52.1
Amortization                                                                          59.6               58.8

Unallocated derivative losses (gains)                                                (16.2)             (29.0)

Other special project costs                                                              -                3.3
Adjusted income before income taxes                                         $        357.0$   239.8
Income taxes, as adjusted                                                             87.0               60.1
Adjusted income                                                             $        270.0$   179.7
Weighted-average shares - assuming dilution                                          114.1              113.9
Adjusted earnings per share - assuming dilution                             $         2.37          $    1.58



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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 of July 31, 2020, there were no material changes to our future contractual
obligations as previously reported in our
Annual Report on Form 10-K for the year ended April 30, 2020.
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 ended April 30, 2020. 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, foreign currency exchange rates, and commodity prices.
Interest Rate Risk: The fair value of our cash and cash equivalents at July 31,
2020, approximates carrying value. We are exposed to interest rate risk with
regard to existing debt consisting of fixed- and variable-rate maturities. Our
interest rate exposure primarily includes U.S.Treasury rates, LIBOR, and
commercial paper rates in the U.S.The Financial Conduct Authority in the United
Kingdom has stated that it will not require banks to submit LIBOR beyond 2021.
We do not anticipate a significant impact to our financial position as a result
of this action given our current mix of variable- and fixed-rate debt.
We utilize derivative instruments to manage interest 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 due March 15, 2030, and March 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 due October
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. At July 31, 2020, the
remaining benefit of $10.2 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 at July 31, 2020, would increase the fair value of our long-term debt by
$448.9.
Foreign Currency Exchange Risk: We have operations outside the U.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 of
July 31, 2020, are not expected to result in a significant impact on future
earnings or cash flows.
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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 of July 31,
2020, a hypothetical 10 percent change in exchange rates would not materially
impact the fair value.
Revenues from customers outside the U.S., subject to foreign currency exchange,
represented 5 percent of net sales during the three months ended July 31, 2020.
Thus, certain revenues and expenses have been, and are expected to be, subject
to the effect of foreign currency fluctuations, and these fluctuations may have
an impact on operating results.
Commodity Price Risk: We use certain raw materials and other commodities that
are subject to price volatility caused by supply and demand conditions,
political and economic variables, weather, investor speculation, and other
unpredictable factors. To manage the volatility related to anticipated commodity
purchases, we use derivatives with maturities of generally less than one year.
We do not qualify commodity derivatives for hedge accounting treatment. As a
result, the gains and losses on all commodity derivatives are immediately
recognized in cost of products sold.
The following sensitivity analysis presents our potential loss of fair value
resulting from a hypothetical 10 percent change in market prices related to
commodities.
            July 31, 2020       April 30, 2020
High       $         37.6      $          37.8
Low                  13.6                 14.5
Average              25.7                 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 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.
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;
•our ability to achieve cost savings related to our cost management programs in
the amounts and within the time frames currently anticipated;
•our ability to generate sufficient cash flow to continue operating under our
capital deployment model, including capital expenditures, debt repayment,
dividend payments, and share repurchases;
•volatility of commodity, energy, and other input costs;
•risks associated with derivative and purchasing strategies we employ to manage
commodity pricing and interest rate risks;
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•the availability of reliable transportation on acceptable terms;
•our ability to implement and realize the full benefit of price changes, and the
impact of the timing of the price changes to profits and cash flow in a
particular period;
•the success and cost of marketing and sales programs and strategies intended to
promote growth in our businesses, including product innovation;
•general competitive activity in the market, including competitors' pricing
practices and promotional spending levels;
•the impact of food security concerns involving either our products or our
competitors' products;
•the impact of accidents, extreme weather, natural disasters, and pandemics
(such as COVID-19);
•the concentration of certain of our businesses with key customers and
suppliers, including single-source suppliers of certain key raw materials and
finished goods, and our ability to manage and maintain key relationships;
•impairments in the carrying value of goodwill, other intangible assets, or
other long-lived assets or changes in useful lives of other intangible assets or
other long-lived assets;
•the impact of new or changes to existing governmental laws and regulations and
their application, including tariffs;
•the outcome of tax examinations, changes in tax laws, and other tax matters;
•foreign currency exchange rate and interest rate fluctuations; and
•risks related to other factors described under "Risk Factors" in other reports
and statements we have filed with the Securities and Exchange Commission (the
"SEC").
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 of July 31, 2020 (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 in SEC
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 ended July 31, 2020, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.


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