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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-K
_________________________________________________________________________________________________________________________
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended April 30, 2020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 001-5111
_______________________________________________
THE J. M. SMUCKER COMPANY
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common shares held by nonaffiliates of the registrant at October 31, 2019, was $11,446,124,922.
As of June 12, 2020, 114,043,184 common shares of The J. M. Smucker Company were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant’s definitive Proxy Statement to be filed in connection with its Annual Meeting of Shareholders to be held on August 19, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
| PART I. | Page No. | ||||||||||
| Item 1. | Business | ||||||||||
| Item 1A. | Risk Factors | ||||||||||
| Item 1B. | Unresolved Staff Comments | ||||||||||
| Item 2. | Properties | ||||||||||
| Item 3. | Legal Proceedings | ||||||||||
| Item 4. | Mine Safety Disclosures | ||||||||||
| PART II. | |||||||||||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | ||||||||||
| Item 6. | Selected Financial Data | ||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | ||||||||||
| Item 8. | Financial Statements and Supplementary Data | ||||||||||
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosures | ||||||||||
| Item 9A. | Controls and Procedures | ||||||||||
| Item 9B. | Other Information | ||||||||||
| PART III. | |||||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance | ||||||||||
| Item 11. | Executive Compensation | ||||||||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||||||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | ||||||||||
| Item 14. | Principal Accounting Fees and Services | ||||||||||
| PART IV. | |||||||||||
| Item 15. | Exhibits and Financial Statement Schedules | ||||||||||
| Signatures | |||||||||||
PART I
Item 1. Business.
The Company: The J. M. Smucker Company (“Company,” “registrant,” “we,” “us,” or “our”), often referred to as Smucker’s (a registered trademark), was established in 1897 and incorporated in Ohio in 1921. We operate principally in one industry, the manufacturing and marketing of branded food and beverage products on a worldwide basis, although the majority of our sales are in the U.S. Our operations outside the U.S. are principally in Canada, although products are exported to other countries as well. Net sales outside the U.S., subject to foreign currency translation, represented approximately
6 percent of consolidated net sales for 2020. Our branded food and beverage products include a strong portfolio of trusted, iconic, market-leading brands that are sold to consumers through retail outlets in North America.
On May 14, 2018, we acquired the equity of Ainsworth Pet Nutrition, LLC (“Ainsworth”) in an all-cash transaction, which was funded by debt and valued at $1.9 billion. Ainsworth was a leading producer, distributor, and marketer of premium pet food and pet snacks, predominantly within the U.S. For additional information, refer to Note 2: Acquisition.
On August 31, 2018, we sold our U.S. baking business to Brynwood Partners VII L.P. and Brynwood Partners VIII L.P., subsidiaries of Brynwood Partners, an unrelated party. The transaction included products that were primarily sold in U.S. retail channels under the Pillsbury®, Martha White®, Hungry Jack®, White Lily®, and Jim Dandy® brands, along with all relevant trademarks and licensing agreements, and our manufacturing facility in Toledo, Ohio. This business generated net sales of approximately $370.0 million in 2018. The transaction did not include our baking business in Canada. For additional information, refer to Note 4: Divestiture.
We have four reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home. The U.S. retail market segments in total comprised 87 percent of 2020 consolidated net sales and represent a major portion of our strategic focus – the sale of branded food and beverage products with leadership positions to consumers through retail outlets in North America. The International and Away From Home segment represents sales outside of the U.S. retail market segments.
Principal Products: Our principal products as of April 30, 2020, are coffee, dog food, cat food, pet snacks, peanut butter, fruit spreads, frozen handheld products, shortening and oils, portion control products, juices and beverages, and baking mixes and ingredients. Product sales information for the years 2020, 2019, and 2018 is included within Note 5: Reportable Segments.
In the U.S. retail market segments, our products are primarily sold through a combination of direct sales and brokers to food retailers, club stores, discount and dollar stores, food wholesalers, online retailers, pet specialty stores, natural foods stores and distributors, drug stores, military commissaries, and mass merchandisers. In the International and Away From Home segment, our products are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores).
Sources and Availability of Raw Materials: The raw materials used in each of our segments are primarily commodities and agricultural-based products. Green coffee, peanuts, animal protein meals, oils and fats, sweeteners, grains, fruit, and other ingredients are obtained from various suppliers. The availability, quality, and costs of many of these commodities have fluctuated, and may continue to fluctuate, over time. Basis, futures, options, and fixed price contracts are used to manage price volatility for a significant portion of our commodity costs. Green coffee, along with certain other raw materials, is sourced solely from foreign countries and its supply and price is subject to high volatility due to factors such as weather, global supply and demand, plant disease, investor speculation, and political and economic conditions in the source countries. We source peanuts, animal protein meals, and oils and fats mainly from North America. The principal packaging materials we use are plastic, glass, metal cans, caps, carton board, and corrugate. For additional information on the commodities we purchase, see “Commodities Overview” within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Raw materials are generally available from numerous sources, although we have elected to source certain plastic packaging materials from single sources of supply pursuant to long-term contracts. While availability may vary year-to-year, we believe that we will continue to obtain adequate supplies and that alternatives to single-sourced materials are available. We have not historically encountered significant shortages of key raw materials. We consider our relationships with key raw material suppliers to be in good standing.
2
Trademarks and Patents: Our products are produced under certain patents and marketed under trademarks owned or licensed by us or one of our subsidiaries. Our major trademarks as of April 30, 2020, are listed below.
| Primary Reportable Segment | Major Trademark | |||||||
| U.S. Retail Pet Foods |
Rachael Ray® Nutrish®, Meow Mix®, Milk-Bone®, Kibbles ‘n Bits®, 9Lives®, Natural Balance®, Pup-Peroni®, and Nature’s Recipe®
|
|||||||
| U.S. Retail Coffee |
Folgers®, Dunkin’ Donuts®, and Café Bustelo®
|
|||||||
| U.S. Retail Consumer Foods |
Jif®,, Smucker’s®, Uncrustables®, and Crisco®
|
|||||||
| International and Away From Home |
Folgers and Smucker’s
|
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Dunkin’TM and Dunkin’ Donuts are trademarks of DD IP Holder LLC used under two licenses (the “Dunkin’ Licenses”) for packaged coffee products, including K-Cup® pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores. All references to Dunkin’ in this Annual Report on Form 10-K are deemed to include the Dunkin’ and Dunkin’ Donuts trademarks. The Dunkin’ Licenses do not pertain to Dunkin’ coffee or other products for sale in Dunkin’ restaurants. The terms of the Dunkin’ Licenses include the payment of royalties to an affiliate of DD IP Holder LLC and other financial commitments by the Company. The Dunkin’ Licenses are in effect until January 1, 2039.
We utilize Rachael Ray’s image and likeness and related Rachael Ray trademarks for premium pet food and pet snacks under an exclusive license which expires in 2063. The terms of the license include the payment of royalties to The Rachael Ray Foundation. Rachael Ray is a trademark of Ray Marks II LLC. Keurig® and K-Cup® are trademarks of Keurig Green Mountain, Inc. (“Keurig”), used with permission. In addition, we and our subsidiaries license the use of several other trademarks, none of which are individually material to our business.
Slogans or designs considered to be important trademarks include, without limitation, “With A Name Like Smucker’s, It Has To Be Good®,” “The Best Part of Wakin’ Up Is Folgers In Your Cup®,” “Choosy Moms Choose Jif®,” “Purely The Finest®,” “The Only One Cats Ask For By Name®,” “Say It With Milk-Bone®,” the Smucker’s banner, the Crock Jar shape, the Gingham design, the Jif Color Banner design, the Folgers Mountain Sunrise design, and the Smucker’s Strawberry, Milk-Bone, and 9Lives logos.
We own several hundred patents worldwide in addition to proprietary trade secrets, technology, know-how processes, and other intellectual property rights that are not registered.
We consider all of our owned and licensed intellectual property, taken as a whole, to be essential to our business.
Seasonality: The U.S. Retail Coffee and U.S. Retail Consumer Foods segments have historically been seasonal around the Fall Bake and Holiday period, which generally resulted in higher sales and profits in our second and third quarters. Our success in promoting and merchandising our coffee and baking brands during the Fall Bake and Holiday period has typically had a significant impact on our results for a fiscal year. Additionally, the Back to School period and the Spring Holiday season are important promotional periods. However, as a result of the U.S. baking business divestiture during 2019, the U.S. Retail Consumer Foods segment has experienced less seasonality. Additionally, the U.S. Retail Pet Foods segment, which grew during 2019 as a result of the Ainsworth acquisition, does not experience significant seasonality, further reducing the overall impact of seasonality to the total Company.
Working Capital: Working capital requirements have historically been greatest during the first half of our fiscal year mainly due to the timing of the buildup of coffee, shortening and oils, and baking inventories necessary to support the Fall Bake and Holiday period and the additional buildup of coffee inventory in advance of the Atlantic hurricane season. The impact of seasonality on our overall working capital requirements has been partially reduced by the U.S. Retail Pet Foods segment, which does not experience significant seasonality. The divestiture of the U.S. baking business and the acquisition of Ainsworth during 2019 have further reduced the seasonality of our overall working capital requirements.
Customers: Sales to Walmart Inc. and subsidiaries amounted to 32 percent, 32 percent, and 31 percent of net sales in 2020, 2019, and 2018, respectively. These sales are primarily included in the U.S. retail market segments. No other customer exceeded 10 percent of net sales during 2020, 2019, or 2018.
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During 2020, our top 10 customers, collectively, accounted for approximately 60 percent of consolidated net sales. Supermarkets, warehouse clubs, and food distributors continue to consolidate, and we expect that a significant portion of our revenues will continue to be derived from a limited number of customers. Although the loss of any large customer for an extended length of time could negatively impact our sales and profits, we do not anticipate that this will occur to a significant extent due to strong consumer demand for our brands.
Orders: Generally, orders are filled within a few days of receipt, and the backlog of unfilled orders at any particular time has not been material on a historical basis.
Government Business: No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the government.
Competition: We are the branded market leader in the coffee, dog snacks, peanut butter, fruit spreads, natural shelf stable juices, ice cream toppings, and shortening categories in the U.S. In Canada, we are the branded market leader in the flour, pickles, fruit spreads, canned milk, shortening, and ice cream toppings categories. Our business is highly competitive as all of our brands compete for retail shelf space with other branded products as well as private label products.
In order to remain competitive, companies in the food industry need to consider emerging consumer preferences, technological advances, product and packaging innovations, and the growth of certain retail channels, such as the
e-commerce market. The primary ways in which products and brands are distinguished are brand recognition, product quality, price, packaging, new product introductions, nutritional value, convenience, advertising, promotion, and the ability to identify and satisfy consumer preferences. Positive factors pertaining to our competitive position include well-recognized brands, high-quality products, consumer trust, experienced brand and category management, a single national grocery broker in the U.S., varied product offerings, product innovation, good customer service, and an integrated distribution network.
The packaged foods industry has been challenged by a general decline in sales volume in the center of the store. Certain evolving consumer trends have contributed to the decline, such as a heightened focus on health and wellness, an increased desire for fresh foods, and the growing impact of social media and e-commerce on consumer behavior. To address these dynamics, we continue to focus on innovation with an increased emphasis on products that satisfy evolving consumer trends.
In addition, private label continues to be a competitor in many of the categories in which we compete, partially due to improvements in private label quality and the increased emphasis of store brands by retailers in an effort to cultivate customer loyalty. In our total U.S. retail categories, private label held a 16.4 dollar average market share during the 52 weeks ended April 19, 2020, as compared to a 16.6 dollar average market share during the same period in the prior year. We believe that both private label and leading brands play an important role in the categories in which we compete, appealing to different consumer segments. We closely monitor the price gap, or price premium, between our brands and private label brands, with the view that value is about more than price and the expectation that number one brands will continue to be an integral part of consumers’ shopping baskets.
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Our primary brands and major competitors as of April 30, 2020, are listed below.
(A) Identifies the current market leader within the product category. In certain categories, the market leader is not identified as two or more brands compete for the largest share.
(B) Crisco is the market leader within the shortening category. In the oils category, private label brands, collectively, maintain the largest share.
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Environmental Matters: We consider it to be our responsibility as a good corporate citizen to be compliant with environmental regulations and focus on environmental sustainability. As such, we have public goals related to waste diversion, water usage intensity reduction, greenhouse gas emissions intensity reduction, and packaging recyclability. In addition, we have implemented and manage a variety of programs across our operations, including energy optimization, the utilization of renewable energy, water conservation, the reuse of resources, and the support of farmers who implement sustainable practices, in support of our commitment to environmental sustainability. We continue to evaluate and modify our processes on an ongoing basis to further reduce waste and limit our impact on the environment.
Compliance with the provisions of enacted or pending federal, state, and local environmental regulations regarding either the discharge of materials into the environment or the protection of the environment is not expected to have a material effect upon our capital expenditures, earnings, or competitive position in 2021.
Employees: At April 30, 2020, we had approximately 7,300 full-time employees worldwide, of which 24 percent, located at nine manufacturing locations, are covered by union contracts. These contracts vary in term depending on location, with two contracts expiring in 2021, representing 2 percent of our total employees. We believe our relations with our employees are good.
Information about our Executive Officers: The names, ages as of June 15, 2020, and current positions of our executive officers are listed below. All executive officers serve at the pleasure of the Board of Directors, with no fixed term of office.
| Name | Age |
Years
with Company |
Position |
Served as
an Officer Since |
||||||||||||||||||||||
| Richard K. Smucker | 72 | 47 |
Executive Chairman (A)
|
1974 | ||||||||||||||||||||||
| Mark T. Smucker | 50 | 22 |
President and Chief Executive Officer (B)
|
2001 | ||||||||||||||||||||||
| Mark R. Belgya | 59 | 35 |
Vice Chair (C)
|
1997 | ||||||||||||||||||||||
| John P. Brase | 52 | — |
Chief Operating Officer (D)
|
2020 | ||||||||||||||||||||||
| Amy C. Held | 46 | 7 |
Chief Strategy and International Officer (E)
|
2018 | ||||||||||||||||||||||
| Jeannette L. Knudsen | 50 | 17 |
Chief Legal and Compliance Officer and Secretary (F)
|
2009 | ||||||||||||||||||||||
| Tucker H. Marshall | 44 | 8 |
Chief Financial Officer (G)
|
2020 | ||||||||||||||||||||||
| Jill R. Penrose | 47 | 16 |
Chief People and Administrative Officer (H)
|
2014 | ||||||||||||||||||||||
| Geoff E. Tanner | 46 | 17 |
Chief Marketing and Commercial Officer (I)
|
2019 | ||||||||||||||||||||||
(A)Mr. Richard Smucker was elected to his present position in May 2016, having served as Chief Executive Officer since August 2011.
(B)Mr. Mark Smucker was elected to his present position in May 2016, having served as President and President, Consumer and Natural Foods since April 2015. Prior to that time, he served as President, U.S. Retail Coffee since May 2011.
(C)Mr. Belgya was elected to his present position in May 2020, having served as Vice Chair and Chief Financial Officer since May 2016. Prior to that time, he served as Senior Vice President and Chief Financial Officer since October 2009.
(D)Mr. Brase was elected to his present position in April 2020, having previously served at The Procter & Gamble Company (“P&G”) for 30 years. He was the Vice President and General Manager of P&G’s North American Family Care business from April 2016 through March 2020 and, prior to that time, he served as Vice President and General Manager, Global Family Care, Upstream Innovation since January 2015.
(E)Ms. Held was elected to her present position in November 2019, having served as Senior Vice President, Corporate Strategy, M&A, and International since July 2018. Prior to that time, she served as Senior Vice President, Strategy and M&A since March 2018, Vice President, Corporate Strategy and Development since May 2016, and Director, Corporate Strategy and Development since February 2013.
(F)Ms. Knudsen was elected to her present position in November 2019, having served as Senior Vice President, General Counsel and Secretary since May 2016. Prior to that time, she served as Vice President, General Counsel and Corporate Secretary since August 2010.
(G)Mr. Marshall was elected to his present position in May 2020, having served as Senior Vice President and Deputy Chief Financial Officer since November 2019. Prior to that time, he served as Vice President, Finance since May 2016 and Vice President, Financial Planning and Analysis since June 2014.
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(H)Ms. Penrose was elected to her present position in November 2019, having served as Senior Vice President, Human Resources and Corporate Communications since May 2016. Prior to that time, she served as Vice President, Human Resources since June 2014.
(I)Mr. Tanner was elected to his present position in November 2019, having served as Senior Vice President, Growth and Consumer Engagement since May 2016. Prior to that time, he served as Vice President, Growth and Innovation since January 2016, and Vice President, Pet Food and Snacks Marketing since July 2015.
Available Information: Access to all of our Securities and Exchange Commission (“SEC”) filings, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is provided, free of charge, on our website (investors.jmsmucker.com/sec-filings) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.
Item 1A. Risk Factors.
Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described below should be carefully considered, together with the other information contained or incorporated by reference in this Annual Report on Form 10-K and our other filings with the SEC, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Annual Report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse impact on our business, financial condition, and results of operations.
The outbreak of the novel coronavirus (“COVID-19”) could negatively impact our business and results of operations.
The continued spread of COVID-19 throughout the United States and the international community has had, and could continue to have, a negative impact on financial markets, economic conditions, and portions of our business and industry. COVID-19 could negatively impact our business and results of operations in a number of ways, including, but not limited to, the following:
•a shutdown or slowdown of one or more of our manufacturing facilities due to illness could significantly disrupt our
production capabilities, particularly with respect to our coffee production, substantially all of which takes place in New Orleans, Louisiana;
•a slowdown or stoppage in our supply chain could result from government restrictions or labor shortages due to illness or if our suppliers, vendors, distributors, or third-party manufacturers fail to meet their obligations to us or experience disruptions in their ability to do so;
•a strain on our supply chain could result from increased consumer demand at our retail and e-commerce customers;
•an increase in commodity and other input costs could result from market volatility, particularly with respect to animal protein meals and fats, the supply chain for which has been significantly disrupted by COVID-19;
•a significant portion of our workforce, including our management team, could become unable to work as a result of
illness or government restrictions, or the attention of our management team could be diverted if any key employees
become ill from COVID-19 and are unable to work;
•an impairment in the carrying value of goodwill or intangible assets or a change in the useful life of definite-lived
intangible assets could occur if there are sustained changes in consumer purchasing behaviors, government restrictions, financial results, or a deterioration of macroeconomic conditions;
•a decrease in demand for away from home establishments, resulting from government restrictions and social distancing measures, has adversely affected, and may continue to adversely affect, our away from home operations;
•an increase in working capital needs could occur, caused by an increase in days sales outstanding or an extension of
payment terms by our customers or a reduction of payment terms by our suppliers resulting from increased financial
pressures;
•a change in demand resulting from restrictions on social interactions could affect customers’ and consumers’ plans to purchase or methods of purchasing our products;
•a change in demand for or availability of our products could result from retailers, distributors, or carriers modifying
their restocking, fulfillment, or shipping practices;
•a shift in consumer spending as a result of the economic downturn could result in consumers moving to private label or competitive products or our lower-priced products;
•a change in trade promotions and marketing activities could occur in response to changes in consumer viewing and
shopping habits resulting from the cancellation of major events, travel restrictions, and changes in in-store shopping
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practices;
•a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties;
•an increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future, could
affect our financial condition or our ability to fund operations or future investment opportunities; and
•an increase in regulatory restrictions or continued market volatility could hinder our ability to implement price increases resulting from commodity or other input cost increases or to execute strategic business activities, including
acquisitions and divestitures.
We may be unable to grow market share of our products.
We operate in the competitive food industry whose growth potential is positively correlated to population growth. Our success depends in part on our ability to grow our brands faster than the population in general. We consider our ability to build and sustain the equity of our brands critical to our market share growth. If we do not succeed in these efforts, our market share growth may slow, which could have a material impact on our results of operations.
Our proprietary brands, packaging designs, and manufacturing methods are essential to the value of our business, and the inability to protect these could harm the value of our brands and adversely affect our sales and profitability.
The success of our business depends significantly on our brands, know-how, and other intellectual property. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights, and similar rights to protect our intellectual property. The success of our growth strategy depends on our continued ability to use our existing trademarks and service marks in order to maintain and increase brand awareness and further develop our brands. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates or infringes on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our business. From time to time, we are engaged in litigation to protect our intellectual property, which could result in substantial costs as well as diversion of management attention.
In particular, we consider our proprietary coffee roasting methods essential to the consistent flavor and richness of our coffee products and, therefore, essential to our coffee brands. Because many of the roasting methods we use are not protected by patents, it may be difficult for us to prevent competitors from copying our roasting methods if such methods become known. We also believe that our packaging innovations, such as our AromaSeal™ canisters, are important to the coffee business’ marketing and operational efforts. If our competitors copy our roasting or packaging methods or develop more advanced roasting or packaging methods, the value of our coffee brands may be diminished, and we could lose customers to our competitors.
We use a single national broker to represent a portion of our branded products to the retail grocery trade and any failure by the broker to effectively represent us could adversely affect our business.
We use a single national broker in the U.S. to represent a portion of our branded products to the retail grocery trade. Our business would suffer disruption if this broker were to fail to perform brokerage services or to effectively represent us to the retail grocery trade, which could adversely affect our business.
Loss or interruption of supply from single-source suppliers of raw materials and finished goods could have a disruptive effect on our business and adversely affect our results of operations.
We have elected to source certain raw materials, such as packaging for our Folgers coffee products, as well as our Jif peanut butter and Crisco oil products, and finished goods, such as K-Cup® pods and our Pup-Peroni dog snacks, from single sources of supply. While we believe that, except as set forth below, alternative sources of these raw materials and finished goods could be obtained on commercially reasonable terms, loss or an extended interruption in supplies from a single-source supplier would result in additional costs, could have a disruptive short-term effect on our business, and could adversely affect our results of operations.
Keurig is our single-source supplier for K-Cup® pods, which are used in its proprietary Keurig® K-Cup® brewing system. There are a limited number of manufacturers other than Keurig that are making cups that will work in such proprietary brewing system. If Keurig is unable to supply K-Cup® pods to us for any reason, it could be difficult to find an alternative supplier for such goods on commercially reasonable terms, which could have a material adverse effect on our results of operations.
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Our results may be adversely impacted as a result of increased cost, limited availability, and/or insufficient quality of raw materials, including commodities and agricultural products.
We and our business partners purchase and use large quantities of many different commodities and agricultural products in the manufacturing of our products, including green coffee, peanuts, animal protein meals, oils and fats, sweeteners, grains, and fruit. In addition, we and our business partners utilize significant quantities of plastic, glass, and cardboard to package our products and natural gas and fuel oil to manufacture, package, and distribute our products. The prices of these commodities, agricultural products, and other materials are subject to volatility and can fluctuate due to conditions that are difficult to predict, including global supply and demand, commodity market fluctuations, crop sizes and yield fluctuations, weather, natural disasters, pandemic illness (such as the COVID-19 outbreak), foreign currency fluctuations, investor speculation, trade agreements, political unrest, consumer demand, and changes in governmental agricultural programs. In particular, the supply chain for animal protein meals and fats has been significantly disrupted by the COVID-19 pandemic, and therefore, the price for these commodities has increased and may continue to increase due to such disruptions. We also compete for certain raw materials, notably corn and soy-based agricultural products, with the biofuels industry, which has resulted in increased prices for these raw materials. Additionally, farm acreage currently devoted to other agricultural products we purchase may be utilized for biofuels crops resulting in higher costs for the other agricultural products we utilize. Although we use basis, futures, options, and fixed price contracts to manage commodity price volatility in some instances, commodity price increases ultimately result in corresponding increases in our raw material and energy costs.
Due to the significance of green coffee to our coffee business, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, significant increases or decreases in the cost of green coffee could have an adverse impact on our profitability, as compared to that of our competitors. In addition, if we are not able to purchase sufficient quantities of green coffee due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have a material adverse effect on our business, financial condition, and results of operations.
Our efforts to manage commodity, foreign currency exchange, and other price volatility through derivative instruments could adversely affect our results of operations and financial condition.
We use derivative instruments, including commodity futures and options, to reduce the price volatility associated with anticipated commodity purchases. The extent of our derivative position at any given time depends on our assessment of the markets for these commodities. If we fail to take a derivative position and costs subsequently increase, or if we institute a position and costs subsequently decrease, our costs may be greater than anticipated or higher than our competitors’ costs and our financial results could be adversely affected. In addition, our liquidity may be adversely impacted by the cash margin requirements of the commodities exchanges or the failure of a counterparty to perform in accordance with a contract.
We currently do not qualify any of our commodity or foreign currency exchange derivatives for hedge accounting. We instead mark-to-market our derivatives through the Statement of Consolidated Income, which results in changes in the fair value of all of our derivatives being immediately recognized in consolidated earnings, resulting in potential volatility in both gross profit and net income. These gains and losses are reported in cost of products sold in our Statement of Consolidated Income but are excluded from our segment operating results and non-GAAP earnings until the related inventory is sold, at which time the gains and losses are reclassified to segment profit and non-GAAP earnings. Although this accounting treatment aligns the derivative gains and losses with the underlying exposure being hedged within segment results, it may result in volatility in our consolidated earnings.
We may be limited in our ability to pass cost increases on to our customers in the form of price increases or may realize a decrease in sales volume to the extent price increases are implemented.
We may not be able to pass some or all of any increases in the price of raw materials, energy, and other input costs to our customers by raising prices. To the extent competitors do not also increase their prices, customers and consumers may choose to purchase competing products or may shift purchases to private label or other lower-priced offerings, which may adversely affect our results of operations.
Consumers may be less willing or able to pay a price differential for our branded products and may increasingly purchase lower-priced offerings and may forego some purchases altogether, especially during economic downturns. Retailers may also increase levels of promotional activity for lower-priced offerings as they seek to maintain sales volumes during times of economic uncertainty. Accordingly, sales volumes of our branded products could be reduced or lead to a shift in sales mix
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toward our lower-margin offerings. As a result, decreased demand for our products may adversely affect our results of operations.
Certain of our products are produced at single manufacturing sites.
We have consolidated our production capacity for certain products into single manufacturing sites, including substantially all of our coffee, Milk-Bone dog snacks, fruit spreads, toppings, and syrups. We could experience a production disruption at these or any of our manufacturing sites resulting in a reduction or elimination of the availability of some of our products. If we are not able to obtain alternate production capability in a timely manner, our business, financial condition, and results of operations could be adversely affected.
A significant interruption in the operation of any of our supply chain or distribution capabilities could have an adverse effect on our business, financial condition, and results of operations.
Our ability and the ability of our third-party suppliers and service providers, distributors, and contract manufacturers to manufacture, distribute, and sell products is critical to our success. A significant interruption in the operation of any of our manufacturing or distribution capabilities, or the manufacturing or distribution capabilities of our suppliers, distributors, or contract manufacturers, or a service failure by a third-party service provider, whether as a result of adverse weather conditions or a natural disaster, work stoppage, terrorism, pandemic illness (such as the COVID-19 outbreak), or other causes, could significantly impair our ability to operate our business. In particular, substantially all of our coffee production takes place in New Orleans, Louisiana, and is subject to risks associated with hurricane and other weather-related events, and some of our production facilities are located in places where tornadoes or wildfires can frequently occur, such as Alabama, Kansas, and California. In addition, we are actively monitoring COVID-19 and its impact on our supply chain and consolidated results of operations, which could be negatively impacted in a number of ways, as previously noted. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition, and results of operations.
Our business could be harmed by strikes or work stoppages.
As of April 30, 2020, 24 percent of our full-time employees, located at nine manufacturing locations, are covered by collective bargaining agreements. These contracts vary in term depending on location, with two contracts expiring in 2021, representing 2 percent of our total employees. We cannot assure that we will be able to renew these collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, without production interruptions caused by labor stoppages. If a strike or work stoppage were to occur in connection with negotiations of new collective bargaining agreements or as a result of disputes under collective bargaining agreements with labor unions, our business, financial condition, and results of operations could be materially adversely affected.
Our ability to competitively serve customers depends on the availability of reliable transportation. Increases in logistics and other transportation-related costs could adversely impact our results of operations.
Logistics and other transportation-related costs have a significant impact on our earnings and results of operations. We use multiple forms of transportation, including ships, trucks, and railcars, to bring our products to market. Disruption to the timely supply of these services or increases in the cost of these services for any reason, including availability or cost of fuel, regulations affecting the industry, labor shortages in the transportation industry, service failures by third-party service providers, accidents, natural disasters, or a pandemic illness (such as COVID-19), which may impact the transportation infrastructure or demand for transportation services, could have an adverse effect on our ability to serve our customers, and could have a material adverse effect on our business, financial condition, and results of operations.
Our operations are subject to the general risks of the food industry.
The food industry is subject to risks posed by food spoilage and contamination, product tampering, product recall, and consumer product liability claims. Our operations could be impacted by both genuine and fictitious claims regarding our products as well as our competitors’ products. In the event of product contamination or tampering, we may need to recall some of our products. A widespread product recall could result in significant loss due to the cost of conducting a product recall, including destruction of inventory and the loss of sales resulting from the unavailability of product for a period of time. We could also suffer losses from a significant product liability judgment against us. A significant product recall or a product
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liability judgment, involving either us or our competitors, could also result in a loss of consumer confidence in our food products or the food category, and an actual or perceived loss of value of our brands, materially impacting consumer demand.
Changes in our relationships with significant customers, including the loss of our largest customer, could adversely affect our results of operations.
Sales to Walmart Inc. and subsidiaries amounted to 32 percent of net sales in 2020. These sales are primarily included in the U.S. retail market segments. Trade receivables at April 30, 2020, included amounts due from Walmart Inc. and subsidiaries of $131.9 million, or 24 percent of the total trade receivables balance. During 2020, our top 10 customers, collectively, accounted for approximately 60 percent of consolidated net sales. We expect that a significant portion of our revenues will continue to be derived from a limited number of customers. Our customers are generally not contractually obligated to purchase from us. These customers make purchase decisions based on a combination of price, promotional support, product quality, consumer demand, customer service performance, their desired inventory levels, and other factors. Changes in customers’ strategies, including a reduction in the number of brands they carry or a shift of shelf space to private label products, may adversely affect sales. Customers also may respond to price increases by reducing distribution, resulting in reduced sales of our products. Additionally, our customers may face financial or other difficulties that may impact their operations and their purchases from us, which could adversely affect our results of operations. A reduction in sales to one or more major customers could have a material adverse effect on our business, financial condition, and results of operations.
We operate in the competitive food industry and continued demand for our products may be affected by our failure to effectively compete or by changes in consumer preferences.
We face competition across our product lines from other food companies with the primary methods and factors in competition being product quality, price, packaging, product innovation, nutritional value, convenience, customer service, advertising, and promotion. Continued success is dependent on product innovation, the ability to secure and maintain adequate retail shelf space and to compete in new and growing channels, and effective and sufficient trade merchandising, advertising, and marketing programs. In particular, technology-based systems, which give consumers the ability to shop through e-commerce websites and mobile commerce applications, are also significantly altering the retail landscape in many of our markets. We are committed to expanding our presence in e-commerce, transforming our manufacturing, commercial, and corporate operations through digital technologies, and enhancing our data analytics capabilities to develop new commercial insights. However, if we are unable to effectively compete in the expanding e-commerce market, adequately leverage technology to improve operating efficiencies, or develop the data analytics capabilities needed to generate actionable commercial insights, our business performance may be impacted, which may negatively impact our financial condition and results of operations.
Some of our competitors have substantial financial, marketing, and other resources, and competition with them in our various markets, channels, and product lines could cause us to reduce prices, increase marketing or other expenditures, or lose category share. Category share and growth could also be adversely impacted if we are not successful in introducing new products. Introduction of new products and product extensions requires significant development and marketing investment. If our products fail to meet consumer preferences, or we fail to introduce new and improved products on a timely basis, then the return on that investment will be less than anticipated and our strategy to grow sales and profits through investment in innovation will be less successful. In order to generate future revenues and profits, we must continue to sell products that appeal to our customers and consumers. Specifically, there are a number of trends in consumer preferences that may impact us and the food industry as a whole, including convenience, flavor variety, an emphasis on protein and snacking, and the desire for transparent product labeling and simple and natural ingredients.
The success of our business depends substantially on consumer perceptions of our brands.
We are the branded market leader in several categories both in the U.S. and Canada. We believe that maintaining and continually enhancing the value of our brands is critical to the success of our business. Brand value is based in large part on consumer perceptions. Success in promoting and enhancing brand value depends in large part on our ability to provide high-quality products. Brand value could diminish significantly as a result of a number of factors, such as if we fail to preserve the quality of our products, if we are perceived to act in an irresponsible manner, if the Company or our brands otherwise receive negative publicity, if our brands fail to deliver a consistently positive consumer experience, or if our products become unavailable to consumers. The growing use of social and digital media by consumers increases the speed and extent that information and opinions can be shared. Negative posts or comments about us or our brands or products on social or digital media could damage our brands and reputation. If we are unable to build and sustain brand equity by offering recognizably
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superior products, we may be unable to maintain premium pricing over private label products. If our brand values are diminished, our revenues and operating results could be materially adversely affected. In addition, anything that harms the Dunkin’ or Rachael Ray brands could adversely affect the success of our exclusive licensing agreements with the owners of these brands.
We must leverage our brand value to compete against private label products.
In nearly all of our product categories, we compete against branded products as well as private label products. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and private label products change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer private label products, which are typically sold at lower prices, then we could lose category share or sales volumes or shift our product mix to lower margin offerings, which could have a material effect on our business and consolidated financial position and on the consolidated results of our operations and profitability.
We could be subject to adverse publicity or claims from consumers.
Certain of our products contain ingredients which are the subject of public scrutiny, including the suggestion that consumption may have adverse health effects. Although we strive to respond to consumer preferences and social expectations, we may not be successful in these efforts. An unfavorable report on the effects of ingredients present in our products, product recalls, or negative publicity or litigation could influence consumer preferences, significantly reduce the demand for our products, and adversely affect our profitability.
We may also be subject to complaints from or litigation by consumers who allege food and beverage-related illness, or other quality, health, or operational concerns. Adverse publicity resulting from such allegations could materially adversely affect us, regardless of whether such allegations are true or whether we are ultimately held liable. A lawsuit or claim could result in an adverse decision against us, which could have a material adverse effect on our business, financial condition, and results of operations.
We may not be able to attract, develop, and retain the highly skilled people we need to support our business.
We depend on the skills and continued service of key employees, including our experienced management team. In addition, our ability to achieve our strategic and operating goals depends on our ability to identify, recruit, hire, train, and retain qualified individuals. We compete with other companies both within and outside of our industry for talented people, and we may lose key employees or fail to attract, recruit, train, develop, and retain other talented individuals. Any such loss, failure, or negative perception with respect to these individuals may adversely affect our business or financial results. In addition, activities related to identifying, recruiting, hiring, integrating, and training qualified individuals may require significant time and expense. We may not be able to locate suitable replacements for any key employees who leave or to offer employment to potential replacements on reasonable terms, each of which may adversely affect our business and financial results.
Our operations are subject to the general risks associated with acquisitions and divestitures. Specifically, we may not realize all of the anticipated benefits of the Ainsworth acquisition or those benefits may take longer to realize than expected.
Our stated strategic vision is to own and market a portfolio of food and beverage brands that combines number one and leading brands with emerging, on-trend brands to drive balanced, long-term growth, primarily in North America. We have historically made strategic acquisitions of brands and businesses, including Ainsworth, and intend to do so in the future in support of this strategy. If we are unable to complete acquisitions or to successfully integrate and develop acquired businesses, including the effective management of integration and related restructuring costs, we could fail to achieve the anticipated synergies and cost savings, or the expected increases in revenues and operating results, either of which could have a material adverse effect on our financial results.
In addition, we have made strategic divestitures of brands and businesses, including the sale of our U.S. baking business, and we may do so in the future. If we are unable to complete divestitures or to successfully transition divested businesses, including the effective management of the related separation and stranded overhead costs, our business and financial results could be negatively impacted.
12
We may not realize the benefits we expect from our cost reduction and other cash management initiatives.
We continuously pursue initiatives to reduce costs, increase effectiveness, and optimize cash flow. We may not realize all or part of the anticipated cost savings or other benefits from such initiatives. Other events and circumstances, such as financial or strategic difficulties, delays, or unexpected costs, may also adversely impact our ability to realize all or part of the anticipated cost savings or other benefits, or cause us not to realize such cost savings or other benefits on the expected timetable. If we are unable to realize the anticipated benefits, our ability to fund other initiatives may be adversely affected. Finally, the complexity of the implementation will require a substantial amount of management and operational resources. Our management team must successfully execute the administrative and operational changes necessary to achieve the anticipated benefits of the initiatives. These and related demands on our resources may divert the organization’s attention from other business issues, have adverse effects on existing business relationships with suppliers and customers, and impact employee morale. Any failure to implement these initiatives in accordance with our plans could adversely affect our business and financial results.
Weak financial performance, downgrades in our credit ratings, or disruptions in the financial markets may adversely affect our ability to access capital in the future.
We may need new or additional financing in the future to conduct our operations, expand our business, or refinance existing indebtedness, which would be dependent upon our financial performance. Any downgrade in our credit ratings, particularly our short-term rating, would likely impact the amount of commercial paper we could issue and increase our commercial paper borrowing costs. The liquidity of the overall capital markets and the state of the economy, including the food and beverage industry, may make credit and capital markets more difficult for us to access, even though we have an established revolving credit facility. From time to time, we have relied, and also may rely in the future, on access to financial markets as a source of liquidity for working capital requirements, acquisitions, and general corporate purposes. In particular, our access to funds under our revolving credit facility is dependent on the ability of the financial institutions that are parties to that facility to meet their funding commitments. The obligations of the financial institutions under our revolving credit facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others. In addition, long-term volatility and disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation of financial institutions, reduced alternatives, or the failure of significant financial institutions could adversely affect our access to the liquidity needed for our businesses in the longer term. Such disruptions could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Disruptions in the capital and credit markets could also result in higher interest rates on publicly issued debt securities and increased costs under credit facilities. Continuation of these disruptions would increase our interest expense and capital costs and could adversely affect our results of operations and financial position. Furthermore, as a result of COVID-19, we may experience an increase in the cost of or the difficulty to obtain debt or equity financing, or to refinance our debt in the future, which could also affect our financial condition or our ability to fund operations or future investment opportunities.
Our fixed- and variable-rate debt use the London Interbank Offered Rate (“LIBOR”) as a benchmark for establishing interest rates, and we enter into interest rate swaps from time to time that contain a variable element based on LIBOR. The Financial Conduct Authority in the United Kingdom has stated that it will not require banks to submit LIBOR beyond 2021. Once LIBOR ceases to be available, we may need to amend affected agreements, and we cannot predict what alternative index will be negotiated with our counterparties. Although we do not anticipate a significant impact to our financial position as a result of this transition given our current mix of fixed- and variable-rate debt, our interest expense could increase, and our available cash flow for general corporate requirements may be adversely affected.
Our substantial debt obligations could restrict our operations and financial condition. Additionally, our ability to generate cash to make payments on our indebtedness depends on many factors beyond our control.
As of April 30, 2020, we had approximately $5.6 billion of short-term borrowings and long-term debt, partially as a result of our borrowings in 2019 to finance the Ainsworth acquisition. We may also incur additional indebtedness in the future. Our debt service obligations will require us to use a portion of our operating cash flow to pay interest and principal on indebtedness rather than for other corporate purposes, including funding future expansion of our business and ongoing capital
expenditures, which could impede our growth. Our substantial indebtedness could have other adverse consequences, including:
•making it more difficult for us to satisfy our financial obligations;
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•increasing our vulnerability to adverse economic, regulatory, and industry conditions, and placing us at a disadvantage compared to our competitors that are less leveraged;
•limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•limiting our ability to borrow additional funds for working capital, capital expenditures, acquisitions, and general corporate or other purposes; and
•exposing us to greater interest rate risk, including the risk to variable borrowings of a rate increase and the risk to fixed borrowings of a rate decrease.
Our ability to make payments on our indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us in an amount sufficient to enable us to pay our indebtedness when scheduled payments are due or to fund other liquidity needs. In these circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. Any refinancing of our debt could be at higher interest rates and may require make-whole payments and compliance with more onerous covenants, which could further restrict our business operations. Our ability to refinance our indebtedness or obtain additional financing would depend on, among other things, our financial condition at the time, restriction in the agreements governing our indebtedness, and the condition of the financial markets and the industry in which we operate. As a result, we may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Without this financing, we may have to seek additional equity or debt financing or restructure our debt, which could harm our long-term business prospects. Our failure to comply with the terms of any existing or future indebtedness could result in an event of default which, if not cured or waived, could result in the acceleration of the payment of all of our debt.
A material impairment in the carrying value of acquired goodwill or other intangible assets could negatively affect our consolidated operating results and net worth.
A significant portion of our assets is goodwill and other intangible assets, the majority of which are not amortized but are reviewed for impairment at least annually on February 1, and more often if indicators of impairment exist. At
April 30, 2020, the carrying value of goodwill and other intangible assets totaled $12.7 billion, compared to total assets of
$17.0 billion and total shareholders’ equity of $8.2 billion. If the carrying value of these assets exceeds the current estimated fair value, the asset would be considered impaired, and this would result in a noncash charge to earnings, which could be material. Events and conditions that could result in impairment include a sustained drop in the market price of our common shares, increased competition or loss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial performance in comparison to projected results.
As of April 30, 2020, goodwill and indefinite-lived intangible assets totaled $6.3 billion and 2.9 billion, respectively. The carrying values of the goodwill and indefinite-lived intangible assets were $2.4 billion and $1.4 billion, respectively, within the U.S. Retail Pet Foods segment, and $2.1 billion and $1.2 billion, respectively, within the U.S. Retail Coffee segment, which represent approximately 75 percent of the total goodwill and indefinite-lived intangible assets as of April 30, 2020. Furthermore, the carrying values of the goodwill and indefinite-lived intangible assets within the U.S. Retail Pet Foods segment are susceptible to future impairment charges due to narrow differences between fair value and carrying value as a result of recent impairment charges and the acquisition of Ainsworth in May 2018. To date, we have recognized $465.0 million of impairment charges related to the goodwill and indefinite-lived intangible assets acquired as part of the Big Heart Pet Brands (“Big Heart”) acquisition in 2015, primarily as a result of reductions in our long-term net sales and profitability projections.
We do not believe that our Pet Foods reporting unit or any of the indefinite-lived assets within the U.S. Retail Pet Foods segment are more likely than not impaired as of April 30, 2020. However, further changes to the assumptions regarding the future performance of the U.S. Retail Pet Foods segment or its brands, an adverse change to macroeconomic conditions, or a change to other assumptions could result in additional impairment losses in the future, which could be significant. As of April 30, 2020, the estimated fair value was substantially in excess of the carrying value for the majority of the remaining reporting units and material indefinite-lived intangible assets, and in all such instances, the estimated fair value exceeded the carrying value by greater than 10 percent.
Furthermore, we continue to evaluate the potential impact of COVID-19 on the fair value of our goodwill and indefinite-lived intangible assets. While we concluded there were no indicators of impairment as of April 30, 2020, any significant sustained
14
adverse change in consumer purchasing behaviors, government restrictions, financial results, or macroeconomic conditions could result in future impairment, specifically as it relates to the Away From Home reporting unit, which has experienced a significant decline in demand as a result of COVID-19. For additional information, refer to Note 7: Goodwill and Other Intangible Assets.
Changes in tax, environmental, or other regulations and laws, or their application, or failure to comply with existing licensing, trade, and other regulations and laws could have a material adverse effect on our financial condition.
Our operations are subject to various regulations and laws administered by federal, state, and local government agencies in the U.S. as well as to regulations and laws administered by government agencies in Canada and other countries in which we have operations and our products are sold. In particular, the manufacturing, marketing, packaging, labeling, distribution, and sale of food products are each subject to governmental regulation that is increasingly extensive, encompassing such matters as ingredients (including whether a product contains genetically modified ingredients), packaging, pricing, advertising, relations with distributors and retailers, health, safety, data privacy, and the environment. Additionally, we are routinely subject to new or modified tax and securities regulations, other laws and regulations, and accounting and reporting standards.
In the U.S., we are required to comply with federal laws, such as the Food, Drug and Cosmetic Act, the Food Safety Modernization Act, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Tariff Act, laws governing equal employment opportunity, and various other federal statutes and regulations. We are also subject to various state and local statutes and regulations. For instance, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (better known as “Proposition 65”) requires that a specific warning appear on any product sold in the State of California that contains a substance listed by that state as having been found to cause cancer or birth defects. This law exposes all food and beverage producers to the possibility of having to provide warnings on their products, as well as civil penalties. The detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. Products containing listed substances that occur naturally or that are contributed to such products solely by a municipal water supply are generally exempt from the warning requirement. In particular, we are currently a defendant in Council for Education and Research on Toxics (“Plaintiff” or “CERT”) v. Brad Barry LLC, et al., which alleges that we, in addition to nearly eighty other defendants who manufacture, package, distribute, or sell packaged coffee, failed to warn persons in California that our coffee products expose persons to the chemical acrylamide, which is not added to coffee but is present in all coffee in small amounts (measured in parts per billion) as a byproduct of the coffee bean roasting process, in violation of Proposition 65. 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.
We regularly move data across national and state borders to conduct our operations and, consequently, are subject to a variety of laws and regulations in the U.S. and other jurisdictions regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. There is significant uncertainty with respect to compliance with such privacy and data protection laws and regulations, because they are continuously evolving and developing and may be interpreted and applied differently from country to country and state to state and may create inconsistent or conflicting requirements.
Complying with new regulations and laws, or changes to existing regulations and laws, or their application could increase our costs or adversely affect our sales of certain products. In addition, our failure or inability to comply with applicable regulations and laws could subject us to civil remedies, including fines, injunctions, recalls or seizures, and potential criminal sanctions, which could have a material adverse effect on our business and financial condition.
Our operations in certain developing markets expose us to regulatory risks.
In many countries outside of the U.S., particularly in those with developing economies, it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act or similar local anti-bribery or anti-corruption laws. These laws generally prohibit companies and their employees, contractors, or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could have a material adverse effect on our financial condition and results of operations.
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Changes in climate or legal, regulatory, or market measures to address climate change may negatively affect our business and operations.
There is significant political and scientific concern that emissions of carbon dioxide and other greenhouse gases may alter the composition of the global atmosphere in ways that are affecting and are expected to continue affecting the global climate. The emission of such greenhouse gases may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as green coffee, peanuts, animal protein meals, oils and fats, sweeteners, grains, and fruit. We may also be subjected to decreased availability or less favorable pricing for water as a result of such change, which could impact our manufacturing and distribution operations. In addition, natural disasters and extreme weather conditions may disrupt the productivity of our facilities or the operation of our supply chain.
Increasing concern over climate change also may result in more regulatory requirements to reduce or mitigate the effects of greenhouse gases. In the event that such regulations are enacted and are more rigorous than existing regulations, we may experience significant increases in costs of operation and delivery. In particular, increased regulation of utility providers, fuel emissions, or suppliers could substantially increase our operating, distribution, or supply chain costs. We could also face increased costs related to defending and resolving legal claims and other litigation related to climate change. As a result, climate change could negatively affect our results of operations, cash flows, or financial position.
If our information technology systems fail to perform adequately or we are unable to protect such information technology systems against data corruption, cyber-based attacks, or network security breaches, our operations could be disrupted, and we may suffer financial damage or loss because of lost or misappropriated information.
We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic information, and the importance of such networks and systems has increased due to many of our employees working remotely as a result of the COVID-19 pandemic. In particular, we depend on our information technology infrastructure to effectively manage our business data, supply chain, logistics, finance, and other business processes and for digital marketing activities and electronic communications between Company personnel and our customers and suppliers. If we do not allocate and effectively manage the resources necessary to build, sustain, and protect an appropriate technology infrastructure, or we do not effectively implement system upgrades, our business or financial results could be negatively impacted. We are regularly the target of attempted cyber and other security threats. Therefore, we continuously monitor and update our information technology networks and infrastructure to prevent, detect, address, and mitigate the risk of unauthorized access, misuse, computer viruses, and other events that could have a security impact. We invest in industry standard security technology to protect our data and business processes against the risk of data security breaches and cyber-based attacks. We believe our security technology tools and processes provide adequate measures of protection against security breaches and in reducing cybersecurity risks. Nevertheless, despite continued vigilance in these areas, security breaches or system failures of our infrastructure, whether due to attacks by hackers, employee error, or other causes, can create system disruptions, shutdowns, transaction errors, or unauthorized disclosure of confidential information. If we are unable to prevent such breaches or failures, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information. In addition, the cost to remediate any damages to our information technology systems suffered as a result of a cyber-based attack could be significant.
Further, we have outsourced several information technology support services and administrative functions, including benefit plan administration and other functions, to third-party service providers, and may outsource other functions in the future to achieve cost savings and efficiencies. In addition, certain of our processes rely on third-party cloud computing services. If the service providers to which we outsource these functions do not perform effectively, we may not be able to achieve the expected benefits and may have to incur additional costs to correct errors made by such service providers. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies, inaccurate financial reporting, the loss of or damage to intellectual property through security breach, the loss of sensitive data through security breach, or otherwise.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
The table below lists all of our manufacturing and processing facilities at April 30, 2020. All of our properties are maintained and updated on a regular basis, and we continue to make investments for expansion and safety and technological improvements. We believe that the capacity at our existing facilities will be sufficient to sustain current operations and the anticipated near-term growth of our businesses.
We own all of the properties listed below, except as noted. Additionally, our principal distribution centers in the U.S. include two that we own and seven that we lease. We also lease our principal distribution center in Canada. Our distribution facilities are in good condition, and we believe that they have sufficient capacity to meet our distribution needs in the near future. We lease eight sales and administrative offices in the U.S. and one in Canada. Our corporate headquarters is located in Orrville, Ohio, and our Canadian headquarters is located in Markham, Ontario.
| Locations | Products Produced/Processed/Stored | Primary Reportable Segment | ||||||||||||
| Bloomsburg, Pennsylvania | Wet dog and cat food and dry dog and cat food | U.S. Retail Pet Foods | ||||||||||||
| Buffalo, New York | Dog snacks | U.S. Retail Pet Foods | ||||||||||||
| Chico, California | Fruit and vegetable juices and beverages and grain products | U.S. Retail Consumer Foods | ||||||||||||
| Cincinnati, Ohio | Shortening and oils | U.S. Retail Consumer Foods | ||||||||||||
| Decatur, Alabama | Dry dog and cat food | U.S. Retail Pet Foods | ||||||||||||
| Frontenac, Kansas | Dry dog and cat food | U.S. Retail Pet Foods | ||||||||||||
| Grandview, Washington | Fruit | U.S. Retail Consumer Foods | ||||||||||||
| Havre de Grace, Maryland | Fruit and vegetable juices and beverages | U.S. Retail Consumer Foods | ||||||||||||
| Lawrence, Kansas | Dry dog food | U.S. Retail Pet Foods | ||||||||||||
| Lexington, Kentucky | Peanut butter | U.S. Retail Consumer Foods | ||||||||||||
| Longmont, Colorado | Frozen sandwiches | U.S. Retail Consumer Foods | ||||||||||||
| Meadville, Pennsylvania | Dry dog and cat food | U.S. Retail Pet Foods | ||||||||||||
| Memphis, Tennessee | Peanut butter and fruit spreads | U.S. Retail Consumer Foods | ||||||||||||
| New Bethlehem, Pennsylvania | Peanut butter and combination peanut butter and jelly products | U.S. Retail Consumer Foods | ||||||||||||
|
New Orleans, Louisiana (four facilities) (A)
|
Coffee | U.S. Retail Coffee | ||||||||||||
| Orrville, Ohio | Fruit spreads, toppings, and syrups | U.S. Retail Consumer Foods | ||||||||||||
| Oxnard, California | Fruit | U.S. Retail Consumer Foods | ||||||||||||
| Ripon, Wisconsin | Fruit spreads, toppings, syrups, and condiments | U.S. Retail Consumer Foods | ||||||||||||
| Scottsville, Kentucky | Frozen sandwiches | U.S. Retail Consumer Foods | ||||||||||||
|
Seattle, Washington (A)
|
Nut mix products | U.S. Retail Consumer Foods | ||||||||||||
| Sherbrooke, Quebec | Canned milk | International and Away From Home | ||||||||||||
| Suffolk, Virginia | Liquid coffee | International and Away From Home | ||||||||||||
| Topeka, Kansas | Dry dog and cat food and dog and cat snacks | U.S. Retail Pet Foods | ||||||||||||
(A)We lease our coffee silo facility in New Orleans and our facilities in Seattle.
Item 3. Legal Proceedings.
The information required for this Item is incorporated herein by reference to Note 16: Contingencies.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are listed on the New York Stock Exchange – ticker symbol SJM. There were approximately 304,821 shareholders of record as of June 12, 2020, of which approximately 35,966 were registered holders of common shares.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers: The following table presents the total number of shares of common stock purchased during the fourth quarter of 2020, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase program, if any, and the approximate dollar value of the maximum number of shares that may yet be purchased under the share repurchase program:
| Period | (a) | (b) | (c) | (d) | ||||||||||||||||||||||
|
Total number of shares
purchased |
Average
price paid per share |
Total number of shares
purchased as part of publicly announced plans or programs |
Maximum number (or approximate
dollar value) of shares that may yet be purchased under the plans or programs |
|||||||||||||||||||||||
| February 1, 2020 - February 29, 2020 | 150 | $ | 108.85 | — | 3,586,598 | |||||||||||||||||||||
| March 1, 2020 - March 31, 2020 | 432 | 102.04 | — | 3,586,598 | ||||||||||||||||||||||
| April 1, 2020 - April 30, 2020 | 103 | 116.67 | — | 3,586,598 | ||||||||||||||||||||||
| Total | 685 | $ | 105.73 | — | 3,586,598 | |||||||||||||||||||||
(a) Shares in this column include shares repurchased from stock plan recipients in lieu of cash payments.
(d) As of April 30, 2020, there were 3,586,598 common shares remaining available for future repurchase pursuant to our Board of Directors’ authorizations.
Comparison of Cumulative Total Return: The following graph compares the cumulative total shareholder return for the five years ended April 30, 2020, for our common shares, the Standard & Poor’s (“S&P”) Packaged Foods & Meats Index, and the S&P 500 Index. These figures assume all dividends are reinvested when received and are based on $100.00 invested in our common shares and the referenced index funds on April 30, 2015.
| April 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The J. M. Smucker Company | $ | 100.00 | $ | 112.05 | $ | 114.20 | $ | 105.57 | $ | 116.96 | $ | 113.04 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| S&P Packaged Foods & Meats | 100.00 | 116.53 | 123.26 | 105.60 | 116.68 | 122.62 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| S&P 500 | 100.00 | 101.21 | 119.34 | 135.17 | 153.41 | 154.74 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Copyright © 2020 Standard & Poor's, a division of S&P Global. All rights reserved.
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Item 6. Selected Financial Data.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the five years in the period ended April 30, 2020. The selected financial data should be read in conjunction with the “Results of Operations” and “Liquidity and Capital Resources” sections within Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto.
| Year Ended April 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars and shares in millions, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Statements of Income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 7,801.0 | $ | 7,838.0 | $ | 7,357.1 | $ | 7,392.3 | $ | 7,811.2 | |||||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 3,002.0 | $ | 2,915.7 | $ | 2,836.1 | $ | 2,835.3 | $ | 2,967.8 | |||||||||||||||||||||||||||||||||||||||||||
| % of net sales | 38.5 | % | 37.2 | % | 38.5 | % | 38.4 | % | 38.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 1,223.1 | $ | 928.6 | $ | 1,044.0 | $ | 1,042.6 | $ | 1,146.3 | |||||||||||||||||||||||||||||||||||||||||||
| % of net sales | 15.7 | % | 11.8 | % | 14.2 | % | 14.1 | % | 14.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 779.5 | $ | 514.4 | $ | 1,338.6 | $ | 592.3 | $ | 688.7 | |||||||||||||||||||||||||||||||||||||||||||
| Financial Position: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 391.1 | $ | 101.3 | $ | 192.6 | $ | 166.8 | $ | 109.8 | |||||||||||||||||||||||||||||||||||||||||||
| Total assets | 16,970.4 | 16,711.3 | 15,301.2 | 15,639.7 | 15,984.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total debt | 5,621.3 | 5,910.8 | 4,832.0 | 5,398.5 | 5,430.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total shareholders’ equity | 8,190.9 | 7,970.5 | 7,891.1 | 6,850.2 | 7,008.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Liquidity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 1,254.8 | $ | 1,141.2 | $ | 1,218.0 | $ | 1,059.0 | $ | 1,461.0 | |||||||||||||||||||||||||||||||||||||||||||
| Additions to property, plant, and equipment | 269.3 | 359.8 | 321.9 | 192.4 | 201.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Free cash flow (A)
|
985.5 | 781.4 | 896.1 | 866.6 | 1,259.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Quarterly dividends paid | 396.8 | 377.9 | 350.3 | 339.3 | 316.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | 4.2 | 5.4 | 7.0 | 437.6 | 441.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
EBITDA (as adjusted) (A)
|
1,714.8 | 1,560.9 | 1,625.1 | 1,593.7 | 1,579.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share Data: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted-average shares outstanding | 114.0 | 113.7 | 113.6 | 116.0 | 119.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted-average shares outstanding – assuming dilution | 114.0 | 113.7 | 113.6 | 116.1 | 119.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared per common share | $ | 3.52 | $ | 3.40 | $ | 3.12 | $ | 3.00 | $ | 2.68 | |||||||||||||||||||||||||||||||||||||||||||
| Earnings per Common Share: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 6.84 | $ | 4.52 | $ | 11.79 | $ | 5.11 | $ | 5.77 | |||||||||||||||||||||||||||||||||||||||||||
| Net income – assuming dilution | 6.84 | 4.52 | 11.78 | 5.10 | 5.76 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Other Non-GAAP Measures: (A)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted gross profit | $ | 2,982.4 | $ | 2,969.9 | $ | 2,802.7 | $ | 2,868.2 | $ | 2,968.0 | |||||||||||||||||||||||||||||||||||||||||||
| % of net sales | 38.2 | % | 37.9 | % | 38.1 | % | 38.8 | % | 38.0 | % | |||||||||||||||||||||||||||||||||||||||||||
|
Adjusted operating income
|
$ | 1,508.7 | $ | 1,492.3 | $ | 1,439.7 | $ | 1,492.9 | $ | 1,490.8 | |||||||||||||||||||||||||||||||||||||||||||
| % of net sales | 19.3 | % | 19.0 | % | 19.6 | % | 20.2 | % | 19.1 | % | |||||||||||||||||||||||||||||||||||||||||||
|
Adjusted income and earnings per share:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted income | $ | 999.1 | $ | 942.7 | $ | 904.6 | $ | 895.9 | $ | 931.3 | |||||||||||||||||||||||||||||||||||||||||||
| Adjusted earnings per share – assuming dilution | 8.76 | 8.29 | 7.96 | 7.72 | 7.79 | ||||||||||||||||||||||||||||||||||||||||||||||||
(A)We use non-GAAP financial measures to evaluate our performance. Refer to “Non-GAAP Financial Measures” within Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation to the comparable generally accepted accounting principles (“GAAP”) financial measure.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollars and shares in millions, unless otherwise noted, except per share data)
Company Background
Inspired by more than 120 years of business success and five generations of family leadership, The J. M. Smucker Company makes food that people and pets love. The Company’s portfolio of 40+ brands, which are found in 90 percent of U.S. homes and countless away from home dining locations, include iconic products consumers have always loved such as Folgers, Jif, and Milk-Bone, plus new favorites like Café Bustelo, Smucker’s Uncrustables, and Rachael Ray Nutrish. Over the past two decades, the Company has grown by thoughtfully acquiring leading and emerging brands, while ensuring the business has a positive impact on its 7,000+ employees, the communities it is a part of, and the planet.
We have four reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home. The U.S. retail market segments in total comprised 87 percent of net sales in 2020 and represent a major portion of our strategic focus – the sale of branded food and beverage products with leadership positions to consumers through retail outlets in North America. In the U.S. retail market segments, our products are sold primarily to food retailers, club stores, discount and dollar stores, food wholesalers, online retailers, pet specialty stores, natural foods stores and distributors, drug stores, military commissaries, and mass merchandisers. The products included in the International and Away From Home segment are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores).
Strategic Overview
We remain rooted in our Basic Beliefs of Quality, People, Ethics, Growth, and Independence established by our founder and namesake, Jerome Smucker, more than a century ago. Today, these Basic Beliefs are the core of our unique corporate culture and serve as a foundation for decision-making and actions. We have been led by five generations of family leadership, having had only six chief executive officers in 123 years. This continuity of management and thought extends to the broader leadership team that embodies the values and embraces the business practices that have contributed to our consistent growth. Our strategic vision is to own and market a portfolio of food and beverage brands that combines number one and leading brands with emerging, on-trend brands to drive balanced, long-term growth, primarily in North America.
Our strategic growth objectives include increasing net sales by 2 to 3 percent and operating income excluding non-GAAP adjustments (“adjusted operating income”) by 5 percent on average over the long term. Related to income per diluted share excluding non-GAAP adjustments (“adjusted earnings per share”), our strategic growth objective is to achieve an average increase of 8 percent over the long term. We expect organic growth, including new products, to drive much of our top-line growth, while the contribution from acquisitions will vary from year to year. Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, integration and restructuring costs, and unallocated gains and losses on commodity and foreign currency exchange derivatives. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information. Due to the unknown and potentially prolonged impact of COVID-19, we may experience difficulties or be delayed in achieving our long-term strategies; however, we continue to evaluate the effects from COVID-19 on our long-term growth objectives.
Net sales has increased at a compound annual growth rate of 7 percent over the past five years, while adjusted operating income and adjusted earnings per share have increased at a rate of 9 percent and 14 percent, respectively, over the same period. These increases were primarily driven by the acquisitions of Big Heart in 2015 and Ainsworth in 2019. Net cash provided by operating activities has increased at a compound annual growth rate of 11 percent. Our cash deployment strategy is to balance reinvesting in our business through acquisitions and capital expenditures with returning cash to our shareholders through the payment of dividends and share repurchases. Our deployment strategy also includes a significant focus on debt repayment.
On May 14, 2018, we acquired the equity of Ainsworth in an all-cash transaction, which was funded by debt and valued at $1.9 billion. Ainsworth was a leading producer, distributor, and marketer of premium pet food and pet snacks, predominantly within the U.S. As anticipated, we fully realized approximately $55.0 of annual cost synergies related to this acquisition by the end of 2020.
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On August 31, 2018, we sold our U.S. baking business to Brynwood Partners VII L.P. and Brynwood Partners VIII L.P., subsidiaries of Brynwood Partners, an unrelated party. The transaction included products that were primarily sold in U.S. retail channels under the Pillsbury, Martha White, Hungry Jack, White Lily, and Jim Dandy brands, along with all relevant trademarks and licensing agreements, and our manufacturing facility in Toledo, Ohio. This business generated net sales of approximately $370.0 in 2018, primarily in the U.S. Retail Consumer Foods segment. The transaction did not include our baking business in Canada. We received proceeds from the divestiture of $369.5, which were net of cash transactions costs and included a working capital adjustment. During 2019, we recognized a pre-tax gain of $27.7 related to this transaction, which was included in other operating expense (income) – net within the Statement of Consolidated Income.
COVID-19
The continued spread of COVID-19 throughout the United States and the international community has had, and could continue to have, a negative impact on financial markets, economic conditions, and portions of our business and industry.
We are committed to supporting our employees and communities, while ensuring people and pets have access to a steady supply of food through the following initiatives:
•Financial assistance provided to employees in the form of a $1,500 hardship award to front-line employees, up to
12 weeks of full pay and benefits continuation for employees unable to perform their roles, 14 days of paid sick leave to individuals with and/or caring for family members with COVID-19, and an assistance fund seeded with $100,000 to support employees significantly impacted;
•100 percent payment of COVID-19 testing for employees and all virtual health screenings conducted by our insurance provider;
•Reinforcement of mental health resources available to our employees;
•Implementation of appropriate physical distancing guidelines and extensive additional sanitation measures and temperature screenings at all of our locations to prevent the spread of COVID-19 and keep employees safe;
•Food and monetary donations to organizations including the Red Cross®, Feeding America®, United Way®, Rescue Bank® and the Akron-Canton Regional Foodbank; and
•100 percent match of employee donations to more than 20 local and national charities.
We are working closely with our suppliers and customers and have been proactive in taking additional actions to ensure business continuity, maximize product availability, and minimize potential disruptions across our supply chain and operations. We have increased production at all of our facilities and expanded the availability of appointments at distribution centers. All of our production operations remain open and none have experienced significant disruptions or labor reductions related to COVID-19. Furthermore, we have successfully implemented measures to allocate order volumes to ensure a consistent supply across our retail partners during this high period of demand.
During the fourth quarter of 2020, we experienced an increase in orders across our U.S. and international retail businesses, in response to the increased consumer demand for our products related to “stock up” shopping and increased at-home consumption. This benefit was partially offset by the incremental expenses incurred to support the previously mentioned initiatives, which totaled approximately $13.0. The increase in consumer demand may partially reverse in the coming months as consumer purchasing behavior may change as a result of the length and severity of the pandemic, duration of physical distancing requirements, stay-at-home orders, and macroeconomic implications. In addition, if there is a second surge of the virus, we may experience another temporary increase in orders. However, at the end of 2020, consumer demand and customer orders remain elevated compared to historical seasonal comparisons. We have also experienced a decline in products sold in the away from home channels as a result of COVID-19, which has negatively impacted our net sales in our International and Away From Home reportable segment and we expect to continue to adversely affect our net sales while government restrictions and physical distancing measures are in place. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, consolidated results of operations, financial condition, and liquidity.
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Results of Operations
This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for the years ended April 30, 2020 and 2019. For the comparisons of the years ended April 30, 2019 and 2018, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2019 Annual Report on Form 10-K.
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 |
% Increase
(Decrease) |
|||||||||||||||||||||||||||
| Net sales | $ | 7,801.0 | $ | 7,838.0 | — | % | |||||||||||||||||||||||
| Gross profit | $ | 3,002.0 | $ | 2,915.7 | 3 | ||||||||||||||||||||||||
| % of net sales | 38.5 | % | 37.2 | % | |||||||||||||||||||||||||
| Operating income | $ | 1,223.1 | $ | 928.6 | 32 | ||||||||||||||||||||||||
| % of net sales | 15.7 | % | 11.8 | % | |||||||||||||||||||||||||
| Net income: | |||||||||||||||||||||||||||||
| Net income | $ | 779.5 | $ | 514.4 | 52 | ||||||||||||||||||||||||
| Net income per common share – assuming dilution | $ | 6.84 | $ | 4.52 | 51 | ||||||||||||||||||||||||
|
Adjusted gross profit (A)
|
$ | 2,982.4 | $ | 2,969.9 | — | ||||||||||||||||||||||||
| % of net sales | 38.2 | % | 37.9 | % | |||||||||||||||||||||||||
|
Adjusted operating income (A)
|
$ | 1,508.7 | $ | 1,492.3 | 1 | ||||||||||||||||||||||||
| % of net sales | 19.3 | % | 19.0 | % | |||||||||||||||||||||||||
|
Adjusted income: (A)
|
|||||||||||||||||||||||||||||
| Income | $ | 999.1 | $ | 942.7 | 6 | ||||||||||||||||||||||||
| Earnings per share – assuming dilution | $ | 8.76 | $ | 8.29 | 6 | ||||||||||||||||||||||||
(A)We use non-GAAP financial measures to evaluate our performance. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for a reconciliation to the comparable GAAP financial measure.
Net Sales
| Year Ended April 30, | |||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 |
Increase
(Decrease) |
% | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 7,801.0 | $ | 7,838.0 | $ | (37.0) | — | % | |||||||||||||||||||||||||||||||||
| Ainsworth acquisition | (25.4) | — | (25.4) | — | |||||||||||||||||||||||||||||||||||||
| Baking divestiture | — | (105.9) | 105.9 | 1 | |||||||||||||||||||||||||||||||||||||
|
Foreign currency exchange
|
6.8 | — | 6.8 | — | |||||||||||||||||||||||||||||||||||||
|
Net sales excluding acquisition, divestiture, and foreign currency exchange (A)
|
$ | 7,782.4 | $ | 7,732.1 | $ | 50.3 | 1 | % | |||||||||||||||||||||||||||||||||
Amounts may not add due to rounding.
(A)Net sales excluding acquisition, divestiture, and foreign currency exchange is a non-GAAP financial measure used to evaluate performance internally. This measure provides useful information to investors because it enables comparison of results on a year-over-year basis.
Net sales in 2020 decreased $37.0, reflecting $105.9 of noncomparable net sales in the prior year related to the U.S. baking business, partially offset by incremental net sales in the current year of $25.4 related to the Ainsworth acquisition. Net sales excluding acquisition, divestiture, and foreign currency exchange increased $50.3, or 1 percent. Favorable volume/mix contributed 2 percentage points to net sales, primarily driven by gains for the Smucker’s, Dunkin’, Milk-Bone, and Meow Mix brands, reflecting approximately $185.0 of incremental net sales resulting from increased consumer demand related to the COVID-19 pandemic. These gains were partially offset by declines for private label dog food and the Natural Balance brand. Lower net price realization impacted net sales by 1 percentage point, primarily due to lower net pricing for coffee and peanut butter.
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Operating Income
The following table presents the components of operating income as a percentage of net sales.
| Year Ended April 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Gross profit | 38.5 | % | 37.2 | % | |||||||||||||
|
Selling, distribution, and administrative expenses:
|
|||||||||||||||||
| Marketing | 3.9 | % | 3.9 | % | |||||||||||||
| Advertising | 2.5 | 3.0 | |||||||||||||||
| Selling | 3.2 | 3.2 | |||||||||||||||
| Distribution | 3.6 | 3.3 | |||||||||||||||
| General and administrative | 5.8 | 5.9 | |||||||||||||||
|
Total selling, distribution, and administrative expenses
|
18.9 | % | 19.2 | % | |||||||||||||
| Amortization | 3.0 | 3.1 | |||||||||||||||
| Goodwill impairment charges | — | 1.2 | |||||||||||||||
|
Other intangible assets impairment charges
|
0.7 | 1.4 | |||||||||||||||
| Other special project costs | 0.2 | 0.8 | |||||||||||||||
| Other operating expense (income) – net | — | (0.4) | |||||||||||||||
|
Operating income
|
15.7 | % | 11.8 | % | |||||||||||||
Amounts may not add due to rounding.
Gross profit increased $86.3, or 3 percent, in 2020, primarily driven by a favorable net impact of lower prices and lower costs, favorable volume/mix, and the noncomparable benefit of Ainsworth, partially offset by the noncomparable impact related to the U.S. baking business divestiture. The favorable net impact of price and cost was mostly driven by a favorable change in the impact of derivative gains and losses.
Operating income increased $294.5, or 32 percent, primarily due to the $152.7 decrease in intangible asset impairment charges, a $47.6 decrease in special project costs, a $34.3 decrease in selling, distribution, and administrative (“SD&A”) expenses, and the increase in gross profit, partially offset by the noncomparable impact of the $27.7 pre-tax gain related to the sale of the U.S. baking business in the prior year. During 2020, we recognized a noncash impairment charge of $52.4 associated with the Natural Balance brand within the U.S. Retail Pet Foods segment. For additional information on this charge, refer to “Critical Accounting Estimates and Policies” in this discussion and analysis.
Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, integration and restructuring costs, and unallocated gains and losses on commodity and foreign currency exchange derivatives. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information. Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) was comparable to the prior year, further reflecting an unfavorable change related to the exclusion of unallocated derivative gains and losses, as compared to GAAP gross profit. Adjusted operating income increased $16.4, or 1 percent, as compared to the prior year, further reflecting the exclusion of impairment charges and special project costs, as compared to GAAP operating income.
Interest Expense
Net interest expense decreased $18.7, or 9 percent, in 2020, primarily as a result of reduced debt, as compared to the prior year. For additional information, see “Capital Resources” in this discussion and analysis.
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Income Taxes
Income taxes increased $60.0, or 32 percent, in 2020, as compared to the prior year. The effective tax rate of 24.1 percent for 2020 varied from the U.S. statutory tax rate of 21.0 percent primarily due to the impact of state income taxes. The effective tax rate of 26.7 percent for 2019 was also unfavorably impacted by the income tax expense associated with the sale of the U.S. baking business and a goodwill impairment charge within the U.S. Retail Consumer Foods segment, partially offset by a noncash deferred tax benefit related to the integration of Ainsworth. We anticipate a full-year effective tax rate for 2021 to be approximately 24.0 percent. For additional information, refer to Note 14: Income Taxes.
Integration Activities
As of April 30, 2020, all integration activities related to the acquisition of Ainsworth were considered complete. We have incurred total cumulative integration costs of $48.6, of which $16.5 was incurred in 2020. The majority of these costs were cash charges. For additional information, refer to Note 3: Integration and Restructuring Costs.
Commodities Overview
The raw materials we use are primarily commodities, agricultural-based products, and packaging materials. The most significant of these materials, based on 2020 annual spend, are green coffee, peanuts, animal protein meals, oils and fats, and plastic containers. Green coffee and certain oils are traded on active regulated exchanges, and the price of these commodities fluctuates based on market conditions. Derivative instruments, including futures and options, are used to minimize the impact of price volatility for these commodities.
We source green coffee from more than 20 coffee-producing countries. Its price is subject to high volatility due to factors such as weather, global supply and demand, plant disease, investor speculation, and political and economic conditions in the source countries.
We source peanuts, animal protein meals, and oils and fats mainly from North America. We are one of the largest procurers of peanuts in the U.S. and frequently enter into long-term purchase contracts for various periods of time to mitigate the risk of a shortage of this commodity. The oils we purchase are mainly soybean and canola. The price of peanuts, animal protein meals, and oils are driven primarily by weather, which impacts crop sizes and yield, as well as global demand, especially from large importing countries such as China and India. In particular, the supply chain for animal protein meals and fats has been significantly disrupted by the COVID-19 pandemic, and therefore, the price for these commodities has increased and may continue to increase due to such disruptions. Furthermore, the price of peanuts has been impacted by the recent decrease in crop supply.
We frequently enter into long-term contracts to purchase plastic containers, which are sourced mainly from within the U.S. Plastic resin is made from petrochemical feedstock and natural gas feedstock, and the price can be influenced by feedstock, energy, and crude oil prices as well as global economic conditions.
Excluding the impact of derivative gains and losses, our overall commodity costs in 2020 were lower than in 2019, primarily due to lower costs for green coffee and peanuts.
24
Segment Results
We have four reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home. The U.S. Retail Pet Foods segment primarily includes domestic sales of Rachael Ray Nutrish, Meow Mix, Milk-Bone, Kibbles ’n Bits, 9Lives, Natural Balance, Nature’s Recipe, and Pup-Peroni 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 domestic sales of Smucker’s, Jif, and Crisco branded products. The International and Away From Home segment comprises products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores).
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | % Increase (Decrease) | |||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 2,869.5 | $ | 2,879.5 | — | % | |||||||||||||||||||||||
| U.S. Retail Coffee | 2,149.5 | 2,122.3 | 1 | ||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 1,731.7 | 1,761.5 | (2) | ||||||||||||||||||||||||||
| International and Away From Home | 1,050.3 | 1,074.7 | (2) | ||||||||||||||||||||||||||
| Segment profit: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 552.7 | $ | 503.4 | 10 | % | |||||||||||||||||||||||
| U.S. Retail Coffee | 691.0 | 676.3 | 2 | ||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 389.7 | 406.1 | (4) | ||||||||||||||||||||||||||
| International and Away From Home | 173.4 | 198.5 | (13) | ||||||||||||||||||||||||||
| Segment profit margin: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | 19.3 | % | 17.5 | % | |||||||||||||||||||||||||
| U.S. Retail Coffee | 32.1 | 31.9 | |||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 22.5 | 23.1 | |||||||||||||||||||||||||||
| International and Away From Home | 16.5 | 18.5 | |||||||||||||||||||||||||||
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales decreased $10.0 in 2020, including the impact of two weeks of incremental Ainsworth sales in the current year. Excluding the incremental Ainsworth business, net sales decreased $35.4, reflecting a $59.8 decline related to private label products. Volume/mix decreased net sales by 2 percentage points, primarily driven by declines for private label dog food and the Natural Balance brand, partially offset by gains for the Milk-Bone and Meow Mix brands, which is reflective of the incremental net sales from stock-up purchasing related to the COVID-19 pandemic. Net price realization contributed 1 percentage point, primarily related to the Meow Mix and Kibbles ’n Bits brands, partially offset by declines for the Nutrish brand. The higher net pricing is reflective of list price increases across most brands implemented during the second half of the prior year, partially offset by increased trade spend. Segment profit increased $49.3, reflecting a $10.9 unfavorable fair value purchase accounting adjustment in the prior year and the benefit from the incremental Ainsworth sales. Profit improvement was also driven by synergy realization, reduced marketing expense, higher net pricing, and a recovery from a legal settlement related to a prior year supplier issue, partially offset by an increase in SD&A expenses and higher input costs.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased $27.2 in 2020, reflecting favorable volume/mix, partially offset by lower net price realization. The favorable volume/mix, which increased net sales by 5 percentage points, was driven by the Dunkin’, Folgers, and Café Bustelo brands, reflecting the benefit of incremental net sales resulting from increased at-home coffee consumption related to the COVID-19 pandemic. Lower net pricing, which reduced net sales by 4 percentage points, reflected promotional activity across all brands, mostly supported by lower green coffee costs. Segment profit increased $14.7, primarily due to favorable volume/mix and decreased marketing expense, partially offset by the net unfavorable impact of lower net pricing and lower green coffee costs and an increase in SD&A expenses.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales decreased $29.8 in 2020, driven by a $102.2 noncomparable impact of the U.S. baking business. Excluding the noncomparable impact of the divested business, net sales increased 4 percent. Favorable
25
volume/mix contributed 7 percentage points to net sales, primarily related to growth for the Smucker’s and Jif brands, reflecting the benefit of incremental net sales resulting from increased consumer demand related to the COVID-19 pandemic and the associated stay-at-home orders. Lower net price realization reduced net sales by 2 percentage points, primarily driven by the list price decrease on the Jif brand, partially offset by decreased trade spend. Segment profit decreased $16.4, primarily reflecting $44.3 of segment profit in the prior year related to the divested business, of which $27.7 represented the pre-tax gain related to the sale. Excluding the impact of the divestiture, segment profit increased 8 percent, driven primarily by the favorable volume/mix and decreased marketing expense, partially offset by the unfavorable net impact of lower pricing and lower input costs, as well as a write-off of equipment related to the discontinuation of Jif Power Ups.
International and Away From Home
The International and Away From Home segment net sales decreased $24.4 in 2020, including a noncomparable impact of $3.7 of net sales in the prior year related to the divested U.S. baking business. Unfavorable volume/mix reduced net sales by 1 percentage point, primarily driven by declines for the Folgers brand and increased shipments in the prior year related to the closing of facilities in Mexico and transition to a distributor export model. These declines were partially offset by gains for the Smucker’s brand. Lower net price realization reduced net sales by 1 percentage point, primarily related to the Folgers brand. Foreign currency exchange had a $6.8 unfavorable impact on net sales. Segment profit decreased $25.1, primarily reflecting the unfavorable volume/mix, lower pricing, and higher cost.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility. Total cash and cash equivalents increased to $391.1 at April 30, 2020, compared to $101.3 at April 30, 2019.
The following table presents selected cash flow information.
| Year Ended April 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
|
Net cash provided by (used for) operating activities
|
$ | 1,254.8 | $ | 1,141.2 | |||||||||||||
|
Net cash provided by (used for) investing activities
|
(271.5) | (1,924.2) | |||||||||||||||
|
Net cash provided by (used for) financing activities
|
(688.7) | 699.0 | |||||||||||||||
|
Net cash provided by (used for) operating activities
|
$ | 1,254.8 | $ | 1,141.2 | |||||||||||||
|
Additions to property, plant, and equipment
|
(269.3) | (359.8) | |||||||||||||||
|
Free cash flow (A)
|
$ | 985.5 | $ | 781.4 | |||||||||||||
(A)Free cash flow is a non-GAAP financial measure used by management to evaluate the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share repurchases, and other corporate purposes.
The $113.6 increase in cash provided by operating activities in 2020 was primarily driven by higher net income adjusted for noncash items in the current year. The cash required to fund working capital decreased compared to the prior year, excluding the impact of the realization of a $30.0 income tax refund in 2019. The decrease in working capital requirements was primarily driven by lower payments for accounts payable items driven by working capital initiatives, inclusive of a supplier financing program entered into during 2020. Offsetting these decreases is a $239.8 settlement of interest rate contracts during 2020. For additional information, refer to Note 10: Derivative Financial Instruments.
Cash used for investing activities in 2020 primarily consisted of $269.3 in capital expenditures. Cash used for investing activities in 2019 consisted of $1.9 billion related to the Ainsworth acquisition, $359.8 in capital expenditures, and a $29.8 increase in our derivative cash margin account balances, partially offset by net proceeds from the divestiture of the U.S. baking business of $369.5.
Cash used for financing activities in 2020 consisted primarily of long-term debt repayments of $900.0, dividend payments of $396.8, and a $185.8 net reduction in short-term borrowings, partially offset by $798.2 in long-term debt proceeds. Cash provided by financing activities in 2019 consisted primarily of $1.5 billion in long-term debt proceeds and a $282.0 net increase in short-term borrowings, partially offset by long-term debt repayments of $700.0 and dividend payments of $377.9.
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Supplier Financing Program
As part of ongoing efforts to maximize working capital, we work with our suppliers to optimize our terms and conditions, which includes the extension of payment terms. Payment terms with our suppliers, which we deem to be commercially reasonable, generally range from 0 to 120 days. During 2020, we entered into an agreement with a third-party administrator to provide an accounts payable tracking system and facilitate a supplier financing program which allows participating suppliers the ability to monitor and voluntarily elect to sell our payment obligations to a designated third-party financial institution. Participating suppliers can sell one or more of our payment obligations at their sole discretion, and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers’ decisions to sell amounts under these arrangements. As of April 30, 2020, $157.5 of our outstanding payment obligations were elected and sold to a financial institution by participating suppliers. During 2020, we paid $31.8 to a financial institution for payment obligations that were settled through the supplier financing program.
Contingencies
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart, the significant majority of which were settled and paid during the second half of 2019. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at April 30, 2020. Based on the information known to date, with the exception of the matter discussed below, we do not believe the final outcome of these proceedings will have a material adverse effect on our financial position, results of operations, or cash flows.
In addition to the legal proceedings discussed above, we are currently a defendant in CERT v. Brad Barry LLC, et al., which alleges that we, in addition to nearly eighty other defendants who manufacture, package, distribute, or sell coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. As part of a joint defense group organized to defend against the lawsuit, we dispute these claims. Acrylamide is not added to coffee, but is inherently present in all coffee in small amounts (measured in parts per billion) as a byproduct of the coffee bean roasting process. The outcome and the financial impact of the case, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for this matter as of April 30, 2020, as the likelihood of loss is not considered probable or estimable. However, if we are required to pay significant statutory penalties or to add warning labels to any of our products or place warnings in certain locations where our products are sold as a result of Proposition 65, our business and financial results could be adversely impacted, and sales of those products could suffer not only in those locations but elsewhere. For additional information, see Note 16: Contingencies.
Capital Resources
The following table presents our capital structure.
| April 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
|
Current portion of long-term debt
|
$ | — | $ | 798.5 | |||||||||||||
|
Short-term borrowings
|
248.0 | 426.0 | |||||||||||||||
| Long-term debt, less current portion | 5,373.3 | 4,686.3 | |||||||||||||||
| Total debt | $ | 5,621.3 | $ | 5,910.8 | |||||||||||||
| Shareholders’ equity | 8,190.9 | 7,970.5 | |||||||||||||||
| Total capital | $ | 13,812.2 | $ | 13,881.3 | |||||||||||||
In March 2020, we completed an offering of $500.0 and $300.0 in Senior Notes due March 15, 2030, and March 15, 2050, respectively. A portion of the net proceeds from the offering was used to repay the $500.0 Senior Notes due March 15, 2020, with the balance being held as a cash equivalent to be used for general corporate purposes.
In April 2018, we entered into a senior unsecured delayed-draw Term Loan Credit Agreement (“Term Loan”) with a syndicate of banks and an available commitment amount of $1.5 billion. The full amount of the Term Loan was drawn on May 14, 2018, to partially finance the Ainsworth acquisition. Borrowings under the Term Loan bear interest on the prevailing U.S. Prime Rate or LIBOR, based on our election, and is payable either on a quarterly basis or at the end of the borrowing term. The Term Loan matures on May 14, 2021, and does not require scheduled amortization payments. Voluntary prepayments are permitted without premium or penalty. As of April 30, 2020, we have prepaid $800.0 on the Term Loan to
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date, including $100.0 in 2020. The interest rate on the Term Loan at April 30, 2020, was 1.21 percent. In November 2019, we entered into an amendment to the Term Loan that decreased the applicable margins on LIBOR, based on our long-term unsecured debt rating. This amendment did not have a material impact on our consolidated financial statements.
We have available a $1.8 billion unsecured revolving credit facility with a group of 11 banks that matures in September 2022. Additionally, we participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $1.8 billion at any time. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper will be used as a continuing source of short-term financing for general corporate purposes. As of April 30, 2020, we had $248.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 0.40 percent.
We are in compliance with all of our debt covenants. For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 8: Debt and Financing Arrangements.
During 2020, we did not repurchase any common shares under a repurchase plan authorized by the Board. At April 30, 2020, approximately 3.6 million common shares remain available for repurchase pursuant to the Board’s authorizations. There is no guarantee as to the exact number of shares that may be repurchased or when such purchases may occur.
The following table presents certain cash requirements related to 2021 investing and financing activities based on our current expectations. Although no principal payments are required on our debt obligations in 2021, we may utilize a portion of our cash for debt repayment. Additionally, in 2022, a portion of our Senior Notes will mature, and $1.9 billion in principal payments will be required that year.
|
Projection
Year Ending April 30, 2021 |
|||||
| Dividend payments – based on current rates and common shares outstanding | $ | 400.0 | |||
| Capital expenditures | 300.0 | ||||
| Interest payments | 190.0 | ||||
Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations, borrowings available under our commercial paper program and revolving credit facility, and access to capital markets, will be sufficient to meet our cash requirements for the next 12 months, including the payment of quarterly dividends, capital expenditures, and interest payments on debt outstanding. However, as a result of COVID-19, we may experience an increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future, which could affect our financial condition or our ability to fund operations or future investment opportunities.
During 2020, we returned $39.7 of international cash to the U.S., primarily driven by a reduction in our capital investment in certain foreign subsidiaries in conjunction with a restructuring of our international holding and operating entities. No foreign withholding taxes were applicable, and the state income taxes were not significant. As of April 30, 2020, total cash and cash equivalents of $83.9 was held by our foreign subsidiaries, primarily in Canada. The undistributed earnings of our foreign subsidiaries remain permanently reinvested.
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NON-GAAP FINANCIAL MEASURES
We use non-GAAP financial measures including: net sales excluding acquisition, divestiture, and foreign currency exchange; adjusted gross profit; adjusted operating income; adjusted income; adjusted earnings per share; earnings before interest, taxes, depreciation, amortization, and impairment charges related to intangible assets (“EBITDA (as adjusted)”); and free cash flow, as key measures for purposes of evaluating performance internally. We believe that investors’ understanding of our performance is enhanced by disclosing these performance measures. Furthermore, these non-GAAP financial measures are used by management in preparation of the annual budget and for the monthly analyses of our operating results. The Board of Directors also utilizes certain non-GAAP financial measures as components for measuring performance for incentive compensation purposes.
Non-GAAP financial measures exclude certain items affecting comparability that can significantly affect the year-over-year assessment of operating results, which include amortization expense and impairment charges related to intangible assets, integration and restructuring costs (“special project costs”), and unallocated gains and losses on commodity and foreign currency exchange derivatives (“unallocated derivative gains and losses”), as well as the related tax impacts of these exclusions. The special project costs in the following table relate to specific integration and restructuring projects, and the unallocated derivative gains and losses reflect the changes in fair value of our commodity and foreign currency exchange contracts. Additionally, income taxes, as adjusted is calculated using an adjusted effective income tax rate that is applied to adjusted income before income taxes. While this adjusted effective income tax rate does not generally differ materially from our GAAP effective tax rate, certain exclusions from non-GAAP results can significantly impact our adjusted effective income tax rate.
These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with U.S. GAAP. Rather, the presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our businesses and facilitate the comparison of past and present operations and liquidity. These non-GAAP financial measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments.
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The following table reconciles certain non-GAAP financial measures to the comparable GAAP financial measure. See
page 22 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure.
| Year Ended April 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit reconciliation: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 3,002.0 | $ | 2,915.7 | $ | 2,836.1 | $ | 2,835.3 | $ | 2,967.8 | |||||||||||||||||||||||||||||||||||||||||||
| Unallocated derivative losses (gains) | (19.6) | 54.2 | (37.3) | 27.2 | (12.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of products sold – special project costs | — | — | 3.9 | 5.7 | 12.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted gross profit | $ | 2,982.4 | $ | 2,969.9 | $ | 2,802.7 | $ | 2,868.2 | $ | 2,968.0 | |||||||||||||||||||||||||||||||||||||||||||
| Operating income reconciliation: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 1,223.1 | $ | 928.6 | $ | 1,044.0 | $ | 1,042.6 | $ | 1,146.3 | |||||||||||||||||||||||||||||||||||||||||||
| Amortization | 236.3 | 240.3 | 206.8 | 207.3 | 208.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill impairment charges | — | 97.9 | 145.0 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other intangible assets impairment charges | 52.4 | 107.2 | 31.9 | 133.2 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unallocated derivative losses (gains) | (19.6) | 54.2 | (37.3) | 27.2 | (12.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of products sold – special project costs | — | — | 3.9 | 5.7 | 12.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other special project costs | 16.5 | 64.1 | 45.4 | 76.9 | 135.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Adjusted operating income
|
$ | 1,508.7 | $ | 1,492.3 | $ | 1,439.7 | $ | 1,492.9 | $ | 1,490.8 | |||||||||||||||||||||||||||||||||||||||||||
| Net income reconciliation: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 779.5 | $ | 514.4 | $ | 1,338.6 | $ | 592.3 | $ | 688.7 | |||||||||||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 247.2 | 187.2 | (477.6) | 286.1 | 289.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization | 236.3 | 240.3 | 206.8 | 207.3 | 208.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill impairment charges | — | 97.9 | 145.0 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other intangible assets impairment charges | 52.4 | 107.2 | 31.9 | 133.2 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unallocated derivative losses (gains) | (19.6) | 54.2 | (37.3) | 27.2 | (12.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of products sold – special project costs | — | — | 3.9 | 5.7 | 12.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other special project costs | 16.5 | 64.1 | 45.4 | 76.9 | 135.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Adjusted income before income taxes
|
$ | 1,312.3 | $ | 1,265.3 | $ | 1,256.7 | $ | 1,328.7 | $ | 1,322.4 | |||||||||||||||||||||||||||||||||||||||||||
| Income taxes, as adjusted | 313.2 | 322.6 | 352.1 | 432.8 | 391.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted income | $ | 999.1 | $ | 942.7 | $ | 904.6 | $ | 895.9 | $ | 931.3 | |||||||||||||||||||||||||||||||||||||||||||
| Weighted-average shares – assuming dilution | 114.0 | 113.7 | 113.6 | 116.1 | 119.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Adjusted earnings per share – assuming dilution
|
$ | 8.76 | $ | 8.29 | $ | 7.96 | $ | 7.72 | $ | 7.79 | |||||||||||||||||||||||||||||||||||||||||||
| EBITDA (as adjusted) reconciliation: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 779.5 | $ | 514.4 | $ | 1,338.6 | $ | 592.3 | $ | 688.7 | |||||||||||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 247.2 | 187.2 | (477.6) | 286.1 | 289.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense – net | 189.2 | 207.9 | 174.1 | 163.1 | 171.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation | 210.2 | 206.0 | 206.3 | 211.7 | 221.7 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization | 236.3 | 240.3 | 206.8 | 207.3 | 208.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill impairment charges | — | 97.9 | 145.0 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other intangible assets impairment charges | 52.4 | 107.2 | 31.9 | 133.2 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
|
EBITDA (as adjusted)
|
$ | 1,714.8 | $ | 1,560.9 | $ | 1,625.1 | $ | 1,593.7 | $ | 1,579.1 | |||||||||||||||||||||||||||||||||||||||||||
| Free cash flow reconciliation: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net cash provided by (used for) operating activities | $ | 1,254.8 | $ | 1,141.2 | $ | 1,218.0 | $ | 1,059.0 | $ | 1,461.0 | |||||||||||||||||||||||||||||||||||||||||||
| Additions to property, plant, and equipment | (269.3) | (359.8) | (321.9) | (192.4) | (201.4) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Free cash flow | $ | 985.5 | $ | 781.4 | $ | 896.1 | $ | 866.6 | $ | 1,259.6 | |||||||||||||||||||||||||||||||||||||||||||
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OFF-BALANCE SHEET ARRANGEMENTS
We do not have material off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities. Transactions with related parties are in the ordinary course of business and are not material to our results of operations, financial condition, or cash flows.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations by fiscal year at April 30, 2020.
| Total | 2021 | 2022–2023 | 2024–2025 |
2026 and
beyond |
|||||||||||||||||||||||||
|
Long-term debt obligations, including current portion (A)
|
$ | 5,400.0 | $ | — | $ | 1,850.0 | $ | 1,000.0 | $ | 2,550.0 | |||||||||||||||||||
|
Interest payments (B)
|
1,873.9 | 174.8 | 282.0 | 256.6 | 1,160.5 | ||||||||||||||||||||||||
|
Operating lease obligations (C)
|
168.5 | 40.3 | 71.0 | 37.4 | 19.8 | ||||||||||||||||||||||||
|
Purchase obligations (D)
|
1,914.4 | 1,517.2 | 283.1 | 80.9 | 33.2 | ||||||||||||||||||||||||
|
Other liabilities (E)
|
392.0 | 42.7 | 51.9 | 24.5 | 272.9 | ||||||||||||||||||||||||
| Total | $ | 9,748.8 | $ | 1,775.0 | $ | 2,538.0 | $ | 1,399.4 | $ | 4,036.4 | |||||||||||||||||||
(A)Long-term debt obligations, including current portion, excludes the impact of offering discounts, make-whole payments, and debt issuance costs.
(B)Interest payments consists of the interest payments on our long-term debt, which reflect estimated payments for our variable-rate debt based on the current interest rate outlook.
(C)Operating lease obligations consists of the minimum rental commitments under non-cancelable operating leases.
(D)Purchase obligations includes agreements that are enforceable and legally bind us to purchase goods or services, which primarily consist of obligations related to normal, ongoing purchase obligations in which we have guaranteed payment to ensure availability of raw materials. We expect to receive consideration for these purchase obligations in the form of materials and services. These purchase obligations do not represent all future purchases expected, but represent only those items for which we are contractually obligated. Amounts included in the table above represent our current best estimate of payments due. Actual cash payments may vary due to the variable pricing components of certain purchase obligations.
(E)Other liabilities consists primarily of projected commitments associated with our defined benefit pension and other postretirement benefit plans, as well as $6.0 related to financing lease obligations. The liability for unrecognized tax benefits and tax-related net interest of $15.0 under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes, is excluded, since we are unable to reasonably estimate the timing of cash settlements with the respective taxing authorities.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that in certain circumstances affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Trade Marketing and Merchandising Programs: In order to support our products, various promotional activities are conducted through retail, distributors, or directly with consumers, including in-store display and product placement programs, price discounts, coupons, and other similar activities. The costs of these programs are classified as a reduction of sales. We regularly review and revise, when we deem necessary, estimates of costs for these promotional programs based on estimates of what will be redeemed by retail, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expenditures and actual performance are recognized as a change in estimate in a subsequent period. During 2020, 2019, and 2018, subsequent period adjustments were less than 2 percent of both consolidated pre-tax income and cash provided by operating activities. These promotional expenditures, including amounts classified as a reduction of sales, represented 39 percent of net sales in 2020. The possibility exists that reported results could be different if factors such as the level and success of the promotional programs or other conditions differ from expectations.
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Income Taxes: We account for income taxes using the liability method. In the ordinary course of business, we are exposed to uncertainties related to tax filing positions and periodically assess the technical merits of these tax positions for all tax years that remain subject to examination, based upon the latest information available. For material uncertain tax positions, we have recognized a liability for unrecognized tax benefits, including any applicable interest and penalty charges.
We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that it is more likely than not that all or some portion of such assets will not be realized. Valuation allowances related to deferred tax assets can be affected by changes in tax laws, statutory tax rates, and projected future taxable income levels. Changes in estimated realization of deferred tax assets would result in an adjustment to income in the period in which that determination is made, unless such changes are determined to be an adjustment to goodwill within the allowable measurement period under the acquisition method of accounting.
The future tax benefit arising from the net deductible temporary differences and tax carryforwards was $244.8 and $163.6 at April 30, 2020 and 2019, respectively. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of operations. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance would have been provided.
As of April 30, 2020, the undistributed earnings of our foreign subsidiaries, primarily in Canada, remain permanently reinvested.
Goodwill and Other Indefinite-Lived Intangible Assets: A significant portion of our assets is goodwill and other intangible assets, the majority of which are not amortized but are reviewed at least annually for impairment on February 1, and more often if indicators of impairment exist. At April 30, 2020, the carrying value of goodwill and other intangible assets totaled $12.7 billion, compared to total assets of $17.0 billion and total shareholders’ equity of $8.2 billion. If the carrying value of these assets exceeds the current estimated fair value, the asset is considered impaired, and this would result in a noncash charge to earnings. Any such impairment charge would reduce earnings and could be material. Events and conditions that could result in impairment include a sustained drop in the market price of our common shares, increased competition or loss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial performance in comparison to projected results.
To test for goodwill impairment, we estimate the fair value of each of our reporting units using both a discounted cash flow valuation technique and a market-based approach. The impairment test incorporates estimates of future cash flows; allocations of certain assets, liabilities, and cash flows among reporting units; future growth rates; terminal value amounts; and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimates and projections used in the calculation of fair value are consistent with our current and long-range plans, including anticipated changes in market conditions, industry trends, growth rates, and planned capital expenditures. Changes in forecasted operations and other estimates and assumptions could impact the assessment of impairment in the future.
At April 30, 2020, goodwill totaled $6.3 billion. Goodwill is substantially concentrated within the U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods segments. During 2020, no goodwill impairment was recognized as a result of the evaluations performed throughout the year. The estimated fair value of each of our reporting units for which there is a goodwill balance was substantially in excess of its carrying value as of the annual test date, with the exception of the Pet Foods reporting unit, for which its fair value exceeded its carrying value by approximately 3 percent. A sensitivity analysis was performed for the Pet Foods reporting unit, assuming a hypothetical 50-basis-point decrease in the expected long-term growth rate or a hypothetical 50-basis-point increase in the weighted-average cost of capital, and both scenarios independently yielded an estimated fair value for the Pet Foods reporting unit below carrying value.
Other indefinite-lived intangible assets, consisting entirely of trademarks, are also tested for impairment at least annually and more often if events or changes in circumstances indicate their carrying value may not be recoverable. To test these assets for impairment, we estimate the fair value of each asset based on a discounted cash flow model using various inputs, including projected revenues, an assumed royalty rate, and a discount rate. Changes in these estimates and assumptions could impact the assessment of impairment in the future.
At April 30, 2020, other indefinite-lived intangible assets totaled $2.9 billion. Trademarks that represent our leading brands comprise approximately 90 percent of the total carrying value of other indefinite-lived intangible assets. As of April 30, 2020,
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the estimated fair value was substantially in excess of the carrying value for the majority of these leading brand trademarks, and in all instances, the estimated fair value exceeded the carrying value by greater than 10 percent, with the exception of the Rachael Ray Nutrish brand within the U.S. Retail Pet Foods segment. During 2020, we recognized an impairment charge of $52.4 related to the Natural Balance brand within the U.S. Retail Pet Foods segment, representing the extent to which the carrying value exceeded the estimated fair value. We reassessed the long-term strategic expectations for the Natural Balance brand and reclassified this brand as a finite-lived intangible asset as of February 1, 2020.
The carrying values of the goodwill and indefinite-lived intangible assets within the U.S. Retail Pet Foods segment were
$2.4 billion and $1.4 billion, respectively, as of April 30, 2020. These intangible assets remain susceptible to future impairment charges due to narrow differences between fair value and carrying value, which is primarily attributable to recent impairment charges and the acquisition of Ainsworth in May 2018. Any significant adverse change in our near- or long-term projections or macroeconomic conditions could result in future impairment charges which could be material.
Furthermore, we continue to evaluate the potential impact of COVID-19 on the fair value of our goodwill and indefinite-lived intangible assets. While we concluded there were no indicators of impairment as of April 30, 2020, any significant sustained adverse change in consumer purchasing behaviors, government restrictions, financial results, or macroeconomic conditions could result in future impairment, specifically as it relates to the Away From Home reporting unit, which has experienced a significant decline in demand as a result of COVID-19. As of April 30, 2020, the goodwill related to the Away From Home reporting unit represented approximately 65 percent of the goodwill within the International and Away From Home segment. For additional information, see Note 7: Goodwill and Other Intangible Assets.
Pension and Other Postretirement Benefit Plans: To determine the ultimate obligation under our defined benefit pension and other postretirement benefit plans, we must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. Various actuarial assumptions must be made in order to predict and measure costs and obligations many years prior to the settlement date, the most significant being the interest rates used to discount the obligations of the plans, the long-term rates of return on the plans’ assets, mortality assumptions, assumed pay increases, and the health care cost trend rates. We, along with third-party actuaries and investment managers, review all of these assumptions on an ongoing basis to ensure that the most reasonable information available is being considered.
We utilize a spot rate methodology for the estimation of service and interest cost for our plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of service and interest costs. For 2021 expense recognition, we will use weighted-average discount rates for the U.S. defined benefit pension plans of 3.05 percent to determine benefit obligation, 3.34 percent to determine service cost, and 2.54 percent to determine interest cost, and a rate of compensation increase of 3.58 percent. For the Canadian defined benefit pension plans, we will use weighted-average discount rates of 2.95 percent to determine benefit obligation, 3.06 percent to determine service cost, and 2.47 percent to determine interest cost, and a rate of compensation increase of 3.00 percent. In addition, we anticipate using an expected rate of return on plan assets of 4.96 percent and 3.00 percent for the U.S. and Canadian defined benefit pension plans, respectively.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-K contain forward-looking statements within the meaning of federal securities laws. The forward-looking statements may include statements concerning our current expectations, estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expect,” “anticipate,” “believe,” “intend,” “will,” “plan,” and similar phrases.
Federal securities laws provide a safe harbor for forward-looking statements to encourage companies to provide prospective information. We are providing this cautionary statement in connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on any forward-looking statements, as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of our control and could cause actual results to differ materially from such statements and from our historical results and experience. These risks and uncertainties include, but are not limited to, those set forth under the caption “Risk Factors” of this Annual Report on Form 10-K, as well as the following:
•the impact of the COVID-19 outbreak on our business, industry, suppliers, customers, consumers, employees, and communities, particularly with respect to our Away From Home business;
•disruptions or inefficiencies in our operations or supply chain, including any impact of the COVID-19 outbreak;
33
•our ability to achieve cost savings related to our cost management programs in the amounts and within the time frames currently anticipated;
•our ability to generate sufficient cash flow to continue operating under our capital deployment model, including capital expenditures, debt repayment, dividend payments, and share repurchases;
•volatility of commodity, energy, and other input costs;
•risks associated with derivative and purchasing strategies we employ to manage commodity pricing and interest rate risks;
•the availability of reliable transportation on acceptable terms;
•our ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period;
•the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses, including product innovation;
•general competitive activity in the market, including competitors’ pricing practices and promotional spending levels;
•the impact of food security concerns involving either our products or our competitors’ products;
•the impact of accidents, extreme weather, natural disasters, and pandemics (such as COVID-19);
•the concentration of certain of our businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and our ability to manage and maintain key relationships;
•impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in useful lives of other intangible assets or other long-lived assets;
•the impact of new or changes to existing governmental laws and regulations and their application, including tariffs;
•the outcome of tax examinations, changes in tax laws, and other tax matters;
•foreign currency exchange rate and interest rate fluctuations; and
•risks related to other factors described under “Risk Factors” in other reports and statements we have filed with the Securities and Exchange Commission.
Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Annual Report on Form 10-K. We do not undertake any obligation to update or revise these forward-looking statements to reflect new events or circumstances subsequent to the filing of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK
The following discussions about our market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and commodity prices.
Interest Rate Risk: The fair value of our cash and cash equivalents at April 30, 2020, approximates carrying value. We are exposed to interest rate risk with regard to existing debt consisting of fixed- and variable-rate maturities. Our interest rate exposure primarily 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 risk associated with anticipated debt transactions, as well as to manage changes in the fair value of our long-term debt. At the inception of an interest rate contract, the instrument is evaluated and documented for qualifying hedge accounting treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the contract are deferred and included as a component of accumulated other comprehensive income (loss), and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the contract is recognized at fair value on the balance sheet, and changes in the fair value are recognized in interest expense. Generally, changes in the fair value of the contract are equal to changes in the fair value of the underlying debt and have no net impact on earnings.
34
We entered into interest rate contracts in November 2018 and June 2018, with notional values of $300.0 and $500.0, respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These
interest rate contracts were designated as cash flow hedges. In March 2020, we terminated the interest rate contracts
concurrent with the pricing of the Senior Notes due March 15, 2030, and March 15, 2050, which resulted in a pre-tax loss of $239.8. The loss was deferred and included as a component of accumulated other comprehensive income (loss) and is being amortized as interest expense over the life of the debt.
In 2015, we terminated the interest rate swap on the Senior Notes 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 April 30, 2020, the remaining benefit of $12.4 was recorded as an increase in the long-term debt balance.
In measuring interest rate risk by the amount of net change in the fair value of our financial liabilities, a hypothetical
100-basis-point decrease in interest rates at April 30, 2020, would increase the fair value of our long-term debt by $416.6.
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 April 30, 2020, are not expected to result in a significant impact on future earnings or
cash flows.
We utilize foreign currency derivatives to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials and finished goods. The contracts generally have maturities of less than one year. We do not qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment. Therefore, the change in value of these instruments is immediately recognized in cost of products sold. Based on our hedged foreign currency positions as of April 30, 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 6 percent of net sales during 2020. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an impact on operating results.
Commodity Price Risk: We use certain raw materials and other commodities that are subject to price volatility caused by supply and demand conditions, political and economic variables, weather, investor speculation, and other unpredictable factors. To manage the volatility related to anticipated commodity purchases, we use derivatives with maturities of generally less than one year. We do not qualify commodity derivatives for hedge accounting treatment. As a result, the gains and losses on all commodity derivatives are immediately recognized in cost of products sold.
The following sensitivity analysis presents our potential loss of fair value resulting from a hypothetical 10 percent change in market prices related to commodities.
The estimated fair value was determined using quoted market prices and was based on our net derivative position by commodity for the previous four quarters. The calculations are not intended to represent actual losses in fair value that we expect to incur. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. The commodities hedged have a high inverse correlation to price changes of the derivative instrument; thus, we would expect that any gain or loss in the estimated fair value of these derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
35
Item 8. Financial Statements and Supplementary Data.
THE J. M. SMUCKER COMPANY
INDEX TO FINANCIAL STATEMENTS
| Page No. | |||||
| Report of Management on Internal Control Over Financial Reporting | |||||
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | |||||
| Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements | |||||
| Report of Management on Responsibility for Financial Reporting | |||||
|
Consolidated Balance Sheets at April 30, 2020 and 2019
|
|||||
|
For the years ended April 30, 2020, 2019, and 2018:
|
|||||
| Statements of Consolidated Income | |||||
| Statements of Consolidated Comprehensive Income | |||||
| Statements of Consolidated Cash Flows | |||||
| Statements of Consolidated Shareholders’ Equity | |||||
| Notes to Consolidated Financial Statements | |||||
36
REPORT OF MANAGEMENT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Shareholders
The J. M. Smucker Company
Management is responsible for establishing and maintaining adequate accounting and internal control systems over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended. Our internal control system is designed to provide reasonable assurance that we have the ability to record, process, summarize, and report reliable financial information on a timely basis.
Our management, with the participation of the principal financial officer and principal executive officer, assessed the effectiveness of the internal control over financial reporting as of April 30, 2020. In making this assessment, we used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“the COSO criteria”).
Based on our assessment of internal control over financial reporting under the COSO criteria, we concluded the internal control over financial reporting was effective as of April 30, 2020.
Ernst & Young LLP, an independent registered public accounting firm, audited the effectiveness of our internal control over financial reporting as of April 30, 2020, and their report thereon is included on page 38 of this report.
| Mark T. Smucker | Tucker H. Marshall | |||||||||||||
| President and | Chief Financial Officer | |||||||||||||
| Chief Executive Officer | ||||||||||||||
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Shareholders
The J. M. Smucker Company
Opinion on Internal Control Over Financial Reporting
We have audited The J. M. Smucker Company’s internal control over financial reporting as of April 30, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“the COSO criteria”). In our opinion, The J. M. Smucker Company (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of April 30, 2020 and 2019, the related statements of consolidated income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2020, and the related notes and our report dated June 19, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Akron, Ohio
June 19, 2020
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Shareholders
The J. M. Smucker Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The J. M. Smucker Company (the “Company”) as of April 30, 2020 and 2019, the related statements of consolidated income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of April 30, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June 19, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
39
U.S. Retail Pet Foods Goodwill Impairment Evaluation
| Description of the Matter |
At April 30, 2020, the Company’s total goodwill was $6.3 billion, of that, $2.4 billion relates to the U.S. Retail Pet Foods segment. Goodwill is assigned to the Company’s reporting units as of the acquisition date. As discussed in Note 1 and Note 7 of the consolidated financial statements, goodwill is quantitatively tested at the reporting unit level for impairment at least annually on February 1, or when events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company uses an income and market approach in its quantitative impairment tests. U.S. Retail Pet Foods goodwill is susceptible to impairment due to the narrow difference between fair value and carrying value.
|
||||
| Auditing the Company’s U.S. Retail Pet Foods goodwill impairment evaluation was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting unit. In particular, the fair value estimate using the income approach was sensitive to significant assumptions such as the weighted average cost of capital, discrete revenue growth rates, terminal period revenue growth rate, and profitability assumptions. Elements of these significant assumptions are forward-looking and could be affected by future economic conditions and/or changes in consumer preferences. | |||||
|
How We Addressed the Matter in Our Audit
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s U.S. Retail Pet Foods goodwill impairment review process, including controls over the significant assumptions mentioned above. | ||||
| To test the estimated fair value used in the Company’s U.S. Retail Pet Foods impairment analysis, we performed audit procedures that included, among others, assessing fair value methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. For example, we compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, customer base or product mix and other relevant factors. We assessed the historical accuracy of management’s estimates. We also performed sensitivity analyses of significant assumptions, including the weighted average cost of capital and terminal period revenue growth rate, to evaluate the changes in fair value that would result from changes in the assumptions and the potential impact on the Company’s conclusion of whether or not the goodwill was impaired. In addition, we involved our valuation specialist to assist with our evaluation of the methodology used by the Company and significant assumptions, including, among others, the weighted average cost of capital. | |||||
U.S. Retail Pet Foods and U.S. Retail Coffee Indefinite-Lived Intangible Assets Impairment Evaluation
| Description of the Matter |
At April 30, 2020, the Company’s total indefinite-lived intangible assets were $2.9 billion, of that, $1.4 billion relates to the U.S. Retail Pet Foods segment and $1.2 billion relates to the U.S. Retail Coffee segment (collectively, the “Pet Foods and Coffee indefinite-lived intangible assets”). As discussed in Note 1 and Note 7 of the consolidated financial statements, indefinite-lived intangible assets are quantitatively tested for impairment at least annually on February 1, or when events or circumstances occur that would more likely than not reduce the fair value of the asset below its carrying amount. The Company uses an income approach in its quantitative impairment tests. Certain Pet Foods and Coffee indefinite-lived intangible assets are individually material, have had recently recognized impairment charges, or are susceptible to future charges due to the narrow differences between fair value and carrying value, or a combination of some or all three of these criteria.
|
||||
| Auditing the Company’s Pet Foods and Coffee indefinite-lived intangible assets impairment evaluation was complex and highly judgmental due to the significant estimation required in determining the fair value of the indefinite-lived intangible assets. In particular, the fair value estimate was sensitive to significant assumptions such as the required rate of return, revenue growth rates, terminal period revenue growth rates, and royalty rates. Elements of these significant assumptions are forward-looking and could be affected by future economic conditions and/or changes in consumer preferences. | |||||
40
|
How We Addressed the Matter in Our Audit
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Pet Foods and Coffee indefinite-lived intangible asset impairment review process, including controls over the significant assumptions mentioned above. | ||||
| To test the estimated fair value used in the Company’s Pet Foods and Coffee indefinite-lived intangible assets impairment analyses, we performed audit procedures that included, among others, assessing fair value methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. For example, we compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, customer base or product mix and other relevant factors. We assessed the historical accuracy of management’s estimates. We also performed sensitivity analyses of significant assumptions, including the required rates of return and royalty rates, to evaluate the changes in the fair value of the indefinite-lived intangible assets that would result from changes in the assumptions and the potential impact on the Company’s conclusion of whether or not the indefinite-lived intangible assets were impaired. In addition, we involved our valuation specialist to assist with our evaluation of the methodology used by the Company and significant assumptions, including the required rate of return and royalty rate. | |||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1955.
Akron, Ohio
June 19, 2020
41
REPORT OF MANAGEMENT ON RESPONSIBILITY
FOR FINANCIAL REPORTING
Shareholders
The J. M. Smucker Company
Management of The J. M. Smucker Company is responsible for the preparation, integrity, accuracy, and consistency of the consolidated financial statements and the related financial information in this report. Such information has been prepared in accordance with U.S. generally accepted accounting principles and is based on our best estimates and judgments.
We maintain systems of internal accounting controls supported by formal policies and procedures that are communicated throughout the Company. There is a program of audits performed by our internal audit staff designed to evaluate the adequacy of and adherence to these controls, policies, and procedures.
Ernst & Young LLP, an independent registered public accounting firm, has audited our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Management has made all financial records and related data available to Ernst & Young LLP during its audit.
Our audit committee, comprised of three independent non-employee members of the Board of Directors, meets regularly with the independent registered public accounting firm and management to review the work of the internal audit staff and the work, audit scope, timing arrangements, and fees of the independent registered public accounting firm. The audit committee also regularly satisfies itself as to the adequacy of controls, systems, and financial records. The director of the internal audit department is required to report directly to the audit committee as to internal audit matters.
It is our best judgment that our policies and procedures, our program of internal and independent audits, and the oversight activity of the audit committee work together to provide reasonable assurance that our operations are conducted according to law and in compliance with the high standards of business ethics and conduct to which we subscribe.
| Mark T. Smucker | Tucker H. Marshall | |||||||||||||
| President and | Chief Financial Officer | |||||||||||||
| Chief Executive Officer | ||||||||||||||
42
THE J. M. SMUCKER COMPANY
STATEMENTS OF CONSOLIDATED INCOME
| Year Ended April 30, | |||||||||||||||||||||||||||||
| (Dollars in millions, except per share data) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||
| Net sales | $ | 7,801.0 | $ | 7,838.0 | $ | 7,357.1 | |||||||||||||||||||||||
| Cost of products sold | 4,799.0 | 4,922.3 | 4,521.0 | ||||||||||||||||||||||||||
| Gross Profit | 3,002.0 | 2,915.7 | 2,836.1 | ||||||||||||||||||||||||||
| Selling, distribution, and administrative expenses | 1,474.3 | 1,508.6 | 1,362.9 | ||||||||||||||||||||||||||
| Amortization | 236.3 | 240.3 | 206.8 | ||||||||||||||||||||||||||
| Goodwill impairment charges | — | 97.9 | 145.0 | ||||||||||||||||||||||||||
| Other intangible assets impairment charges | 52.4 | 107.2 | 31.9 | ||||||||||||||||||||||||||
|
Other special project costs (A)
|
16.5 | 64.1 | 45.4 | ||||||||||||||||||||||||||
| Other operating expense (income) – net | (0.6) | (31.0) | 0.1 | ||||||||||||||||||||||||||
| Operating Income | 1,223.1 | 928.6 | 1,044.0 | ||||||||||||||||||||||||||
| Interest expense – net | (189.2) | (207.9) | (174.1) | ||||||||||||||||||||||||||
| Other income (expense) – net | (7.2) | (19.1) | (8.9) | ||||||||||||||||||||||||||
| Income Before Income Taxes | 1,026.7 | 701.6 | 861.0 | ||||||||||||||||||||||||||
| Income tax expense (benefit) | 247.2 | 187.2 | (477.6) | ||||||||||||||||||||||||||
| Net Income | $ | 779.5 | $ | 514.4 | $ | 1,338.6 | |||||||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||||||||
| Net Income | $ | 6.84 | $ | 4.52 | $ | 11.79 | |||||||||||||||||||||||
| Net Income – Assuming Dilution | $ | 6.84 | $ | 4.52 | $ | 11.78 | |||||||||||||||||||||||
(A)Other special project costs includes integration and restructuring costs. For more information, see Note 3: Integration and Restructuring Costs.
See notes to consolidated financial statements.
THE J. M. SMUCKER COMPANY
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
| Year Ended April 30, | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||
| Net income | $ | 779.5 | $ | 514.4 | $ | 1,338.6 | |||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (15.0) | (19.1) | 26.6 | ||||||||||||||||||||||||||
| Cash flow hedging derivative activity, net of tax | (145.2) | (37.5) | 2.0 | ||||||||||||||||||||||||||
| Pension and other postretirement benefit plans activity, net of tax | (36.7) | (9.0) | 14.3 | ||||||||||||||||||||||||||
| Available-for-sale securities activity, net of tax | (0.3) | 0.5 | (1.2) | ||||||||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | (197.2) | (65.1) | 41.7 | ||||||||||||||||||||||||||
| Comprehensive Income | $ | 582.3 | $ | 449.3 | $ | 1,380.3 | |||||||||||||||||||||||
See notes to consolidated financial statements.
43
THE J. M. SMUCKER COMPANY
CONSOLIDATED BALANCE SHEETS
| April 30, | ||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 391.1 | $ | 101.3 | ||||||||||||||||
| Trade receivables, less allowance for doubtful accounts | 551.4 | 503.8 | ||||||||||||||||||
| Inventories: | ||||||||||||||||||||
| Finished products | 563.5 | 590.8 | ||||||||||||||||||
| Raw materials | 331.8 | 319.5 | ||||||||||||||||||
| Total Inventory | 895.3 | 910.3 | ||||||||||||||||||
| Other current assets | 134.9 | 109.8 | ||||||||||||||||||
| Total Current Assets | 1,972.7 | 1,625.2 | ||||||||||||||||||
| Property, Plant, and Equipment | ||||||||||||||||||||
| Land and land improvements | 129.5 | 122.1 | ||||||||||||||||||
| Buildings and fixtures | 977.9 | 903.2 | ||||||||||||||||||
| Machinery and equipment | 2,398.3 | 2,185.0 | ||||||||||||||||||
| Construction in progress | 232.6 | 321.8 | ||||||||||||||||||
| Gross Property, Plant, and Equipment | 3,738.3 | 3,532.1 | ||||||||||||||||||
| Accumulated depreciation | (1,768.9) | (1,619.7) | ||||||||||||||||||
| Total Property, Plant, and Equipment | 1,969.4 | 1,912.4 | ||||||||||||||||||
| Other Noncurrent Assets | ||||||||||||||||||||
| Operating lease right-of-use assets | 148.4 | — | ||||||||||||||||||
| Goodwill | 6,304.5 | 6,310.9 | ||||||||||||||||||
| Other intangible assets – net | 6,429.0 | 6,718.8 | ||||||||||||||||||
| Other noncurrent assets | 146.4 | 144.0 | ||||||||||||||||||
| Total Other Noncurrent Assets | 13,028.3 | 13,173.7 | ||||||||||||||||||
| Total Assets | $ | 16,970.4 | $ | 16,711.3 | ||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||
| Accounts payable | $ | 782.0 | $ | 591.0 | ||||||||||||||||
| Accrued compensation | 99.8 | 85.0 | ||||||||||||||||||
| Accrued trade marketing and merchandising | 167.5 | 142.7 | ||||||||||||||||||
| Dividends payable | 100.3 | 96.7 | ||||||||||||||||||
| Current portion of long-term debt | — | 798.5 | ||||||||||||||||||
| Short-term borrowings | 248.0 | 426.0 | ||||||||||||||||||
| Current operating lease liabilities | 36.5 | — | ||||||||||||||||||
| Other current liabilities | 153.0 | 201.6 | ||||||||||||||||||
| Total Current Liabilities | 1,587.1 | 2,341.5 | ||||||||||||||||||
| Noncurrent Liabilities | ||||||||||||||||||||
| Long-term debt, less current portion | 5,373.3 | 4,686.3 | ||||||||||||||||||
| Defined benefit pensions | 179.3 | 139.1 | ||||||||||||||||||
| Other postretirement benefits | 70.0 | 65.0 | ||||||||||||||||||
| Deferred income taxes | 1,351.6 | 1,398.6 | ||||||||||||||||||
| Noncurrent operating lease liabilities | 120.0 | — | ||||||||||||||||||
| Other noncurrent liabilities | 98.2 | 110.3 | ||||||||||||||||||
| Total Noncurrent Liabilities | 7,192.4 | 6,399.3 | ||||||||||||||||||
| Total Liabilities | 8,779.5 | 8,740.8 | ||||||||||||||||||
| Shareholders’ Equity | ||||||||||||||||||||
|
Serial preferred shares – no par value:
Authorized – 6,000,000 shares; outstanding – none |
— | — | ||||||||||||||||||
|
Common shares – no par value:
Authorized – 300,000,000 shares; outstanding – 114,072,726 at April 30, 2020, and 113,742,296
at April 30, 2019 (net of 32,425,004 and 32,755,434 treasury shares, respectively), at stated value
|
29.0 | 28.9 | ||||||||||||||||||
| Additional capital | 5,794.1 | 5,755.8 | ||||||||||||||||||
| Retained income | 2,746.8 | 2,367.6 | ||||||||||||||||||
| Accumulated other comprehensive income (loss) | (379.0) | (181.8) | ||||||||||||||||||
| Total Shareholders’ Equity | 8,190.9 | 7,970.5 | ||||||||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 16,970.4 | $ | 16,711.3 | ||||||||||||||||
See notes to consolidated financial statements.
44
THE J. M. SMUCKER COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
| Year Ended April 30, | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||
| Operating Activities | |||||||||||||||||||||||||||||
| Net income | $ | 779.5 | $ | 514.4 | $ | 1,338.6 | |||||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by (used for) operations: | |||||||||||||||||||||||||||||
| Depreciation | 210.2 | 206.0 | 206.3 | ||||||||||||||||||||||||||
| Amortization | 236.3 | 240.3 | 206.8 | ||||||||||||||||||||||||||
| Goodwill impairment charges | — | 97.9 | 145.0 | ||||||||||||||||||||||||||
| Other intangible assets impairment charges | 52.4 | 107.2 | 31.9 | ||||||||||||||||||||||||||
| Share-based compensation expense | 26.8 | 20.7 | 15.4 | ||||||||||||||||||||||||||
| Gain on divestiture | — | (27.7) | — | ||||||||||||||||||||||||||
| Deferred income tax expense (benefit) | 7.6 | (93.5) | (803.4) | ||||||||||||||||||||||||||
| Loss on disposal of assets – net | 13.0 | 4.5 | 6.6 | ||||||||||||||||||||||||||
| Other noncash adjustments – net | 8.1 | 1.2 | 3.7 | ||||||||||||||||||||||||||
| Settlement of interest rate contracts | (239.8) | — | — | ||||||||||||||||||||||||||
| Defined benefit pension contributions | (5.1) | (29.3) | (39.6) | ||||||||||||||||||||||||||
| Changes in assets and liabilities, net of effect from acquisition and divestiture: | |||||||||||||||||||||||||||||
| Trade receivables | (49.1) | (53.0) | 54.7 | ||||||||||||||||||||||||||
| Inventories | 12.6 | (5.3) | 54.0 | ||||||||||||||||||||||||||
| Other current assets | (15.7) | 13.3 | (5.3) | ||||||||||||||||||||||||||
| Accounts payable | 181.6 | 43.7 | 19.0 | ||||||||||||||||||||||||||
| Accrued liabilities | 48.0 | 66.7 | 20.5 | ||||||||||||||||||||||||||
| Income and other taxes | 6.5 | 51.8 | (28.7) | ||||||||||||||||||||||||||
| Other – net | (18.1) | (17.7) | (7.5) | ||||||||||||||||||||||||||
| Net Cash Provided by (Used for) Operating Activities | 1,254.8 | 1,141.2 | 1,218.0 | ||||||||||||||||||||||||||
| Investing Activities | |||||||||||||||||||||||||||||
| Business acquired, net of cash acquired | — | (1,903.0) | — | ||||||||||||||||||||||||||
| Additions to property, plant, and equipment | (269.3) | (359.8) | (321.9) | ||||||||||||||||||||||||||
| Proceeds from divestiture | — | 369.5 | — | ||||||||||||||||||||||||||
| Proceeds from disposal of property, plant, and equipment | 2.4 | 1.1 | 13.4 | ||||||||||||||||||||||||||
| Other – net | (4.6) | (32.0) | 30.9 | ||||||||||||||||||||||||||
| Net Cash Provided by (Used for) Investing Activities | (271.5) | (1,924.2) | (277.6) | ||||||||||||||||||||||||||
| Financing Activities | |||||||||||||||||||||||||||||
| Short-term borrowings (repayments) – net | (185.8) | 282.0 | (310.0) | ||||||||||||||||||||||||||
| Proceeds from long-term debt | 798.2 | 1,500.0 | 799.6 | ||||||||||||||||||||||||||
| Repayments of long-term debt | (900.0) | (700.0) | (1,050.3) | ||||||||||||||||||||||||||
| Quarterly dividends paid | (396.8) | (377.9) | (350.3) | ||||||||||||||||||||||||||
| Purchase of treasury shares | (4.2) | (5.4) | (7.0) | ||||||||||||||||||||||||||
| Proceeds from stock option exercises | 7.1 | — | 3.9 | ||||||||||||||||||||||||||
| Other – net | (7.2) | 0.3 | (7.9) | ||||||||||||||||||||||||||
| Net Cash Provided by (Used for) Financing Activities | (688.7) | 699.0 | (922.0) | ||||||||||||||||||||||||||
| Effect of exchange rate changes on cash | (4.8) | (7.3) | 7.4 | ||||||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 289.8 | (91.3) | 25.8 | ||||||||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 101.3 | 192.6 | 166.8 | ||||||||||||||||||||||||||
| Cash and Cash Equivalents at End of Year | $ | 391.1 | $ | 101.3 | $ | 192.6 | |||||||||||||||||||||||
| ( ) | Denotes use of cash | ||||
See notes to consolidated financial statements.
45
THE J. M. SMUCKER COMPANY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
| (Dollars in millions) |
Common
Shares Outstanding |
Common
Shares |
Additional
Capital |
Retained
Income |
Accumulated
Other Comprehensive Income (Loss) |
Total Shareholders’ Equity | |||||||||||||||||||||||||||||
| Balance at May 1, 2017 | 113,439,553 | $ | 28.4 | $ | 5,724.7 | $ | 1,240.5 | $ | (143.4) | $ | 6,850.2 | ||||||||||||||||||||||||
| Net income | 1,338.6 | 1,338.6 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 41.7 | 41.7 | |||||||||||||||||||||||||||||||||
| Comprehensive Income | 1,380.3 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (54,535) | — | (5.8) | (1.2) | (7.0) | ||||||||||||||||||||||||||||||
| Stock plans | 187,822 | — | 21.3 | 21.3 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $3.12 per common share | (353.7) | (353.7) | |||||||||||||||||||||||||||||||||
|
Reclassification of stranded tax effects (A)
|
15.0 | (15.0) | — | ||||||||||||||||||||||||||||||||
| Other | 0.5 | (0.5) | — | ||||||||||||||||||||||||||||||||
| Balance at April 30, 2018 | 113,572,840 | 28.9 | 5,739.7 | 2,239.2 | (116.7) | 7,891.1 | |||||||||||||||||||||||||||||
| Net income | 514.4 | 514.4 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (65.1) | (65.1) | |||||||||||||||||||||||||||||||||
| Comprehensive Income | 449.3 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (50,723) | — | (5.4) | — | (5.4) | ||||||||||||||||||||||||||||||
| Stock plans | 220,179 | — | 21.5 | 21.5 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $3.40 per common share | (386.0) | (386.0) | |||||||||||||||||||||||||||||||||
| Other | — | — | — | ||||||||||||||||||||||||||||||||
| Balance at April 30, 2019 | 113,742,296 | 28.9 | 5,755.8 | 2,367.6 | (181.8) | 7,970.5 | |||||||||||||||||||||||||||||
| Net income | 779.5 | 779.5 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (197.2) | (197.2) | |||||||||||||||||||||||||||||||||
| Comprehensive Income | 582.3 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (35,588) | — | (4.3) | 0.1 | (4.2) | ||||||||||||||||||||||||||||||
| Stock plans | 366,018 | 0.1 | 42.6 | 42.7 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $3.52 per common share | (400.4) | (400.4) | |||||||||||||||||||||||||||||||||
| Other | — | — | |||||||||||||||||||||||||||||||||
| Balance at April 30, 2020 | 114,072,726 | $ | 29.0 | $ | 5,794.1 | $ | 2,746.8 | $ | (379.0) | $ | 8,190.9 | ||||||||||||||||||||||||
(A)During 2018, we elected to early adopt Accounting Standards Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allowed us to reclassify the stranded income tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income (loss) to retained earnings.
See notes to consolidated financial statements.
46
THE J. M. SMUCKER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, unless otherwise noted, except per share data)
Note 1: Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned investments, if any. Intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP requires that we make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates in these consolidated financial statements include, among others: estimates of future cash flows associated with assets, potential asset impairments, useful lives and residual values of long-lived assets used in determining depreciation and amortization, net realizable value of inventories, accruals for trade marketing and merchandising programs, income taxes, and the determination of discount rates and other assumptions for defined benefit pension and other postretirement benefit expenses. Actual results could differ from these estimates.
Cash and Cash Equivalents: We consider all short-term, highly-liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Based on the short-term nature of these assets, carrying value approximates fair value. Cash equivalents within cash and cash equivalents in the Consolidated Balance Sheet was $300.2 at April 30, 2020. There were no cash equivalents included in cash and cash equivalents at April 30, 2019.
Revenue Recognition: Most of our revenue is derived from the sale of food and beverage products to food retailers, online retailers, and foodservice distributors and operators. We recognize revenue when obligations under the terms of a contract with a customer have been satisfied. This occurs when control of our products transfers, which typically takes place upon delivery to or pick up by the customer. Amounts due from our customers are classified as trade receivables in the Consolidated Balance Sheets and require payment on a short-term basis.
Transaction price is based on the list price included in our published price list, which is then reduced by the estimated impact of variable consideration, such as trade marketing and merchandising programs, discounts, unsaleable product allowances, returns, and similar items, in the same period that the revenue is recognized. To estimate the impact of these costs, we consider customer contract provisions, historical data, and our current expectations.
Our trade marketing and merchandising programs consist of various promotional activities conducted through retail, distributors, or directly with consumers, including in-store display and product placement programs, price discounts, coupons, and other similar activities. We regularly review and revise, when we deem necessary, estimates of costs for these promotional programs based on estimates of what will be redeemed by retail, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expenditures and actual performance are recognized as a change in estimate in a subsequent period. During 2020, 2019, and 2018, subsequent period adjustments were less than 2 percent of both consolidated pre-tax income and cash provided by operating activities. Total promotional expenditures, including amounts classified as a reduction of sales, represented 39 percent, 36 percent, and 35 percent of net sales in 2020, 2019, and 2018, respectively. The possibility exists that reported results could be different if factors such as the level and success of the promotional programs or other conditions differ from expectations.
For revenue disaggregated by reportable segment, geographical region, and product category, see Note 5: Reportable Segments.
Shipping and Handling Costs: Transportation costs included in cost of products sold relate to the costs incurred to ship our products. Distribution costs are included in selling, distribution, and administrative (“SD&A”) expenses and primarily relate to the warehousing costs incurred to store our products. Total distribution costs recorded within SD&A were $286.4, $266.6, and $245.4 in 2020, 2019, and 2018, respectively.
Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $198.6, $237.5, and $194.2 in 2020, 2019, and 2018, respectively.
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Research and Development Costs: Research and development (“R&D”) costs are expensed as incurred and are included in SD&A in the Statements of Consolidated Income. R&D costs include expenditures for new and existing product and manufacturing process innovation, which are comprised primarily of internal salaries and wages, consulting, testing, and other supplies attributable to time spent on R&D activities. Other costs include the depreciation and maintenance of research facilities. Total R&D expense was $57.7, $56.0, and $56.0 in 2020, 2019, and 2018, respectively.
Share-Based Payments: Share-based compensation expense, including stock options, is recognized on a straight-line basis over the requisite service period, and generally vest over a period of one to four years.
The following table summarizes amounts related to share-based payments.
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Share-based compensation expense included in SD&A | $ | 26.4 | $ | 20.1 | $ | 13.7 | |||||||||||||||||||||||
| Share-based compensation expense (benefit) included in other special project costs | 0.4 | 0.6 | 1.7 | ||||||||||||||||||||||||||
| Total share-based compensation expense | $ | 26.8 | $ | 20.7 | $ | 15.4 | |||||||||||||||||||||||
| Related income tax benefit | $ | 6.4 | $ | 4.9 | $ | 4.6 | |||||||||||||||||||||||
As of April 30, 2020, total unrecognized share-based compensation cost related to nonvested share-based awards was $45.9. The weighted-average period over which this amount is expected to be recognized is 2.6 years.
Realized excess tax benefits are presented in the Statements of Consolidated Cash Flows as an operating activity and are recognized within income taxes in the Statements of Consolidated Income. For 2020, 2019, and 2018, the excess tax benefits realized upon exercise or vesting of share-based compensation were $0.9, $0.5, and $1.5, respectively. For additional discussion on share-based compensation expense, see Note 13: Share-Based Payments.
Defined Contribution Plans: We offer employee savings plans for domestic and Canadian employees. Our contributions under these plans are based on a specified percentage of employee contributions. Charges to operations for these plans in 2020, 2019, and 2018 were $39.7, $37.1, and $36.3, respectively. For information on our defined benefit plans, see Note 9: Pensions and Other Postretirement Benefits.
Income Taxes: We account for income taxes using the liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the applicable tax rate is recognized in income or expense in the period that the change is enacted. A tax benefit is recognized when it is more likely than not to be sustained. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We account for the financial statement recognition and measurement criteria of a tax position taken or expected to be taken in a tax return under FASB ASC 740, Income Taxes. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. In accordance with the requirements of ASC 740, uncertain tax positions have been classified in the Consolidated Balance Sheets as noncurrent, except to the extent payment is expected within one year. We recognize net interest and penalties related to unrecognized tax benefits in income tax expense.
Trade Receivables: In the normal course of business, we extend credit to customers. Trade receivables, less allowances, reflects the net realizable value of receivables and approximates fair value. We evaluate our trade receivables and establish an allowance for doubtful accounts based on a combination of factors. When aware that a specific customer has been impacted by circumstances such as bankruptcy filings or deterioration in the customer’s operating results or financial position, potentially making it unable to meet its financial obligations, we record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due, historical collection experience, and an evaluation of current and projected economic conditions at the balance sheet date. Trade receivables are charged off against the allowance after we determine that the potential for recovery is remote. At April 30, 2020 and 2019, the allowance for doubtful accounts was $3.0 and $1.8, respectively. We believe there is no concentration of risk with any single customer whose failure or nonperformance would materially affect results other than as discussed in Note 5: Reportable Segments.
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Inventories: Inventories are stated at the lower of cost or market, with market being defined as net realizable value, less costs to sell. Cost for all inventories is determined using the first-in, first-out method applied on a consistent basis.
The cost of finished products and work-in-process inventory includes materials, direct labor, and overhead. Work-in-process is included in finished products in the Consolidated Balance Sheets and was $65.4 and $72.5 at April 30, 2020 and 2019, respectively.
Derivative Financial Instruments: We account for derivative instruments in accordance with FASB ASC 815, Derivatives and Hedging, which requires all derivative instruments to be recognized in the financial statements and measured at fair value, regardless of the purpose or intent for holding them.
We do not qualify commodity derivatives or instruments used to manage foreign currency exchange exposures for hedge accounting treatment, and, as a result, the derivative gains and losses are immediately recognized in earnings. Although we do not perform the assessments required to achieve hedge accounting for derivative positions, we believe all of our derivatives are economic hedges of our risk exposure. The exposures 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 the derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
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.
Property, Plant, and Equipment: Property, plant, and equipment is recognized at cost and is depreciated on a straight-line basis over the estimated useful life of the asset (3 to 20 years for machinery and equipment, 1 to 7 years for capitalized software costs related to software that we have purchased or has been licensed to us, and 5 to 40 years for buildings, fixtures, and improvements).
We lease certain land, buildings, and equipment for varying periods of time, with renewal options. Lease expense in 2020, 2019, and 2018 totaled $112.8, $99.2, and $95.2, respectively.
In accordance with FASB ASC 360, Property, Plant, and Equipment, long-lived assets, other than goodwill and other indefinite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net undiscounted cash flows estimated to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds its estimated fair value of the assets. Assets to be disposed of by sale are recognized as held for sale at the lower of carrying value or fair value less costs to sell. Furthermore, determining fair value is subject to estimates of both cash flows and discount rates, and different estimates could yield different results. There are no events or changes in circumstances of which we are aware of that indicate the carrying value of our long-lived assets may not be recoverable at April 30, 2020.
Goodwill and Other Intangible Assets: Goodwill is the excess of the purchase price paid over the estimated fair value of the net assets of a business acquired. In accordance with FASB ASC 350, Intangibles – Goodwill and Other, goodwill and other indefinite-lived intangible assets are not amortized but are reviewed at least annually for impairment. We conduct our annual test for impairment of goodwill and other indefinite-lived intangible assets as of February 1 of each year. A discounted cash flow valuation technique was utilized to estimate the fair value of our reporting units and indefinite-lived intangible assets. We also used a market-based approach to estimate the fair value of our reporting units. The discount rates utilized in the cash flow analyses were developed using a weighted-average cost of capital methodology. In addition to the annual test, we test for impairment if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit or an indefinite-lived intangible asset below its carrying amount. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which are evaluated on an annual basis. For additional information, see Note 7: Goodwill and Other Intangible Assets.
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Marketable Securities and Other Investments: We maintain funds for the payment of benefits associated with nonqualified retirement plans. These funds include investments considered to be available-for-sale marketable securities. At April 30, 2020 and 2019, the fair value of these investments was $38.6 and $40.9, respectively, and was included in other noncurrent assets in the Consolidated Balance Sheets. Included in accumulated other comprehensive income (loss) at April 30, 2020 and 2019, were unrealized pre-tax gains of $5.0 and $5.4, respectively.
Equity Method Investments: Investments in common stock of entities other than our consolidated subsidiaries are accounted for under the equity method in accordance with FASB ASC 323, Investments – Equity Method and Joint Ventures. Under the equity method, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. The difference between the carrying amount of the investment and the underlying equity in net assets is primarily attributable to goodwill and other intangible assets.
We have a 20 percent equity interest in Mountain Country Foods, LLC, and a 42 percent equity interest in Numi, Inc. The carrying amount of these investments is included in other noncurrent assets in the Consolidated Balance Sheets. The investments did not have a material impact on the consolidated financial statements or the respective reportable segment to which they relate for the years ended April 30, 2020 and 2019.
Supplier Financing Program: 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. However, our right to offset balances due from suppliers against our payment obligations is restricted by the agreement for those payment obligations that have been sold by our suppliers. The payment of these obligations is included in cash provided by operating activities in the Consolidated Statement of Cash Flows. Included in accounts payable in the Consolidated Balance Sheet as of April 30, 2020, were $157.5 of outstanding payment obligations that were elected and sold to a financial institution by participating suppliers.
Foreign Currency Translation: Assets and liabilities of foreign subsidiaries are translated using the exchange rates in effect at the balance sheet dates, while income and expenses are translated using average rates throughout the periods. Translation adjustments are reported as a component of shareholders’ equity in accumulated other comprehensive income (loss). Included in accumulated other comprehensive income (loss) at April 30, 2020 and 2019, were foreign currency losses of $50.5 and $35.5, respectively.
Recently Issued Accounting Standards: In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 will be effective for us on May 1, 2021, with the option to early adopt at any time prior to the effective date. Accounting for franchise taxes will require adoption on a retrospective or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other applicable provisions will require adoption on a retrospective, modified retrospective, or prospective basis, as required by ASU 2019-12. We do not anticipate that the adoption of this ASU will have a material impact on our financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for us on May 1, 2020, but we elected to early adopt on May 1, 2019, as permitted, on a prospective basis. During 2020, we capitalized implementation costs related to third-party cloud computing services of $4.9 which is reflected in other noncurrent assets in the Consolidated Balance Sheet.
In August 2018, the FASB also issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20) Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial and adds new, as well as clarifies certain
50
other, disclosure requirements. ASU 2018-14 will be effective for us on May 1, 2020, and it will require adoption on a retrospective basis. We do not anticipate that the adoption of this ASU will have a material impact on our disclosures.
In February 2016, in an effort to increase transparency and comparability among organizations, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability for all leases with a term of more than 12 months. We adopted the requirements of ASU 2016-02 and all related amendments on May 1, 2019, utilizing an optional transition method that allows for a cumulative-effect adjustment in the period of adoption with no restatement of prior periods. This transition method also does not require new lease disclosures for periods prior to the effective date. We elected certain practical expedients available under the guidance, including a package of practical expedients which allowed us to not reassess prior conclusions related to existing contracts containing leases, lease classification, and initial direct costs.
Adoption of ASU 2016-02 on May 1, 2019, resulted in the recognition of operating lease right-of-use assets and lease liabilities of $159.2 and $166.6, respectively, in our Consolidated Balance Sheet. The difference between the additional lease assets and lease liabilities was primarily due to an existing deferred rent balance that was reclassified to the operating lease liability. The new standard did not materially impact our Statement of Consolidated Income or Statement of Consolidated Cash Flows. The additional disclosures required are presented within Note 12: Leases.
Risks and Uncertainties: The raw materials we use are primarily commodities, agricultural-based products, and packaging materials. The principal packaging materials we use are plastic, glass, metal cans, caps, carton board, and corrugate. Green coffee, peanuts, animal protein meals, oils and fats, sweeteners, grains, fruit, and other ingredients are obtained from various suppliers. The availability, quality, and cost of many of these commodities have fluctuated, and may continue to fluctuate over time. Green coffee is sourced solely from foreign countries, and its supply and price are subject to high volatility due to factors such as weather, global supply and demand, plant disease, investor speculation, and political and economic conditions in the source countries. Raw materials are generally available from numerous sources, although we have elected to source certain plastic packaging materials and finished goods, such as K-Cup® pods and our Pup-Peroni dog snacks, from single sources of supply pursuant to long-term contracts. While availability may vary from year to year, we believe that we will continue to be able to obtain adequate supplies and that alternatives to single-sourced materials are available. We have not historically encountered significant shortages of key raw materials. We consider our relationships with key raw material suppliers to be in good standing.
We have consolidated our production capacity for certain products, including substantially all of our coffee, Milk-Bone dog snacks, fruit spreads, toppings, and syrups, into single manufacturing sites. Although steps are taken at all of our manufacturing sites to reduce the likelihood of a production disruption, an interruption at a single manufacturing site would result in a reduction or elimination of the availability of some of our products for a period of time.
Of our total employees, 24 percent are covered by union contracts at nine manufacturing locations. The contracts vary in term, with two contracts expiring in 2021, representing 2 percent of our total employees.
We insure our business and assets in each country against insurable risks, to the extent that we deem appropriate, based upon an analysis of the relative risks and costs.
Note 2: Acquisition
On May 14, 2018, we acquired the equity of Ainsworth, a leading producer, distributor, and marketer of premium pet food and pet snacks, predominantly within the U.S., in an all-cash transaction valued at $1.9 billion. The transaction was funded with a bank term loan and borrowings under our commercial paper program of approximately $1.5 billion and $400.0, respectively. For additional information on the financing associated with this transaction, refer to Note 8: Debt and Financing Arrangements.
During 2019, the final purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determined the estimated fair values based on independent appraisals, discounted cash flow analyses, quoted market prices, and other estimates made by management. The purchase price allocation included total intangible assets of $1.3 billion. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired and, as a result, the excess was allocated to goodwill. As a result of the acquisition, we recognized total goodwill of $617.8 within the U.S. Retail Pet Foods segment, which represented the value we expected to achieve through the implementation of operational synergies and growth opportunities as a result of
51
integrating Ainsworth into our U.S. Retail Pet Foods segment. Of the total goodwill, $446.0 was deductible for income tax purposes at the acquisition date, of which $385.8 remains deductible at April 30, 2020. The goodwill and indefinite-lived trademarks within the U.S. Retail Pet Foods segment, inclusive of the recently acquired Ainsworth business, remain susceptible to future impairment charges due to the narrow differences between fair value and carrying value. Any significant adverse change in our near or long-term projections or macroeconomic conditions could result in future impairment charges. For more information, see Note 7: Goodwill and Other Intangible Assets.
Note 3: Integration and Restructuring Costs
Integration and restructuring costs primarily consist of employee-related costs and other transition and termination costs related to certain acquisition or restructuring activities. Employee-related costs include severance, retention bonuses, and relocation costs. Severance costs and retention bonuses are recognized over the estimated future service period of the affected employees, and relocation costs are expensed as incurred. Other transition and termination costs include fixed asset-related charges, contract and lease termination costs, professional fees, and other miscellaneous expenditures associated with the integration or restructuring activities, which are expensed as incurred. These integration and restructuring costs are not allocated to segment profit and are reported in other special project costs in the Statements of Consolidated Income. The obligation related to employee separation costs is included in other current liabilities in the Consolidated Balance Sheets.
Integration Costs: As of April 30, 2020, all integration activities related to the acquisition of Ainsworth were considered complete. The following table summarizes our integration costs incurred related to the Ainsworth acquisition.
| 2020 | 2019 |
Total Costs
Incurred to Date at April 30, 2020 |
|||||||||||||||
| Employee-related costs | $ | 2.4 | $ | 15.5 | $ | 17.9 | |||||||||||
| Other transition and termination costs | 14.1 | 16.6 | 30.7 | ||||||||||||||
| Total integration costs | $ | 16.5 | $ | 32.1 | $ | 48.6 | |||||||||||
Noncash charges of $0.6 and $4.1 were included in the integration costs incurred during 2020 and 2019, respectively. Cumulative noncash charges incurred to date were $4.7 and primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was $0.5 and $1.6 at April 30, 2020 and 2019, respectively.
All integration activities related to the acquisition of Big Heart were complete as of April 30, 2018, and as a result, we did not incur any integration costs during 2020 and 2019. During 2018, we incurred total integration costs of $26.6. Noncash charges of $2.6 were included in the total integration costs incurred in 2018 and primarily consisted of share-based compensation and accelerated depreciation. The obligation related to severance costs and retention bonuses was fully satisfied at April 30, 2019.
Restructuring Costs: We completed the restructuring activities associated with our organization optimization program as of April 30, 2019, and as a result, we did not incur any related costs during 2020. We incurred restructuring costs of $32.0 and $22.7 during 2019 and 2018, respectively. Total restructuring costs of $74.6 were incurred related to the program, which included $48.7 and $25.9 of employee-related costs and other transition and termination costs, respectively. Noncash charges included in the total restructuring costs were $15.2, of which $3.3 and $9.8 were incurred during 2019 and 2018, respectively. Noncash charges primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was fully satisfied as of April 30, 2020, and was $0.8 at April 30, 2019.
Note 4: Divestiture
On August 31, 2018, we sold our U.S. baking business to Brynwood Partners VII L.P. and Brynwood Partners VIII L.P., subsidiaries of Brynwood Partners, an unrelated party. The transaction included products that were primarily sold in U.S. retail channels under the Pillsbury, Martha White, Hungry Jack, White Lily, and Jim Dandy brands, along with all relevant trademarks and licensing agreements, and our manufacturing facility in Toledo, Ohio. This business generated net sales of approximately $370.0 in 2018. The transaction did not include our baking business in Canada.
The operating results for this business were primarily included in the U.S. Retail Consumer Foods segment prior to the sale. We received proceeds from the divestiture of $369.5, which were net of cash transaction costs and included a working capital adjustment. Upon completion of the transaction, we recognized a pre-tax gain of $27.7 during 2019, which is included in other operating expense (income) – net within the Statement of Consolidated Income.
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Note 5: Reportable Segments
We operate in one industry: the manufacturing and marketing of food and beverage products. We have four reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home.
The U.S. Retail Pet Foods segment primarily includes domestic sales of Rachael Ray Nutrish, Meow Mix, Milk-Bone,
Kibbles ’n Bits, 9Lives, Natural Balance, Nature’s Recipe, and Pup-Peroni 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 domestic sales of Smucker’s, Jif , and Crisco branded products. The International and Away From Home segment comprises products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores).
Segment profit represents net sales, less direct and allocable operating expenses, and is consistent with the way in which we manage our segments. However, we do not represent that the segments, if operated independently, would report operating profit equal to the segment profit set forth below, as segment profit excludes certain expenses such as corporate administrative expenses, unallocated gains and losses on commodity and foreign currency exchange derivative activities, as well as amortization expense and impairment charges related to intangible assets.
Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility. We would expect that any gain or loss in the estimated fair value of the derivatives would generally be offset by a change in the estimated fair value of the underlying exposures.
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| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 2,869.5 | $ | 2,879.5 | $ | 2,165.3 | |||||||||||||||||||||||
| U.S. Retail Coffee | 2,149.5 | 2,122.3 | 2,086.8 | ||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 1,731.7 | 1,761.5 | 1,985.6 | ||||||||||||||||||||||||||
| International and Away From Home | 1,050.3 | 1,074.7 | 1,119.4 | ||||||||||||||||||||||||||
| Total net sales | $ | 7,801.0 | $ | 7,838.0 | $ | 7,357.1 | |||||||||||||||||||||||
| Segment profit: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 552.7 | $ | 503.4 | $ | 439.4 | |||||||||||||||||||||||
| U.S. Retail Coffee | 691.0 | 676.3 | 612.4 | ||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 389.7 | 406.1 | 475.3 | ||||||||||||||||||||||||||
| International and Away From Home | 173.4 | 198.5 | 200.1 | ||||||||||||||||||||||||||
| Total segment profit | $ | 1,806.8 | $ | 1,784.3 | $ | 1,727.2 | |||||||||||||||||||||||
| Amortization | (236.3) | (240.3) | (206.8) | ||||||||||||||||||||||||||
| Goodwill impairment charges | — | (97.9) | (145.0) | ||||||||||||||||||||||||||
| Other intangible assets impairment charges | (52.4) | (107.2) | (31.9) | ||||||||||||||||||||||||||
| Interest expense – net | (189.2) | (207.9) | (174.1) | ||||||||||||||||||||||||||
| Unallocated derivative gains (losses) | 19.6 | (54.2) | 37.3 | ||||||||||||||||||||||||||
|
Cost of products sold – special project costs (A)
|
— | — | (3.9) | ||||||||||||||||||||||||||
|
Other special project costs (A)
|
(16.5) | (64.1) | (45.4) | ||||||||||||||||||||||||||
| Corporate administrative expenses | (298.1) | (292.0) | (287.5) | ||||||||||||||||||||||||||
| Other income (expense) – net | (7.2) | (19.1) | (8.9) | ||||||||||||||||||||||||||
| Income before income taxes | $ | 1,026.7 | $ | 701.6 | $ | 861.0 | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 7,731.4 | $ | 7,847.0 | $ | 5,932.3 | |||||||||||||||||||||||
| U.S. Retail Coffee | 4,787.4 | 4,771.9 | 4,815.4 | ||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 2,873.1 | 2,850.8 | 3,217.5 | ||||||||||||||||||||||||||
| International and Away From Home | 1,048.0 | 1,019.5 | 1,043.9 | ||||||||||||||||||||||||||
|
Unallocated (B)
|
530.5 | 222.1 | 292.1 | ||||||||||||||||||||||||||
| Total assets | $ | 16,970.4 | $ | 16,711.3 | $ | 15,301.2 | |||||||||||||||||||||||
| Depreciation, amortization, and impairment charges: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 243.0 | $ | 301.4 | $ | 314.8 | |||||||||||||||||||||||
| U.S. Retail Coffee | 96.4 | 98.3 | 96.6 | ||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 72.5 | 162.4 | 80.2 | ||||||||||||||||||||||||||
| International and Away From Home | 51.9 | 52.8 | 57.8 | ||||||||||||||||||||||||||
|
Unallocated (C)
|
35.1 | 36.5 | 40.6 | ||||||||||||||||||||||||||
| Total depreciation, amortization, and impairment charges | $ | 498.9 | $ | 651.4 | $ | 590.0 | |||||||||||||||||||||||
| Additions to property, plant, and equipment: | |||||||||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 60.1 | $ | 136.0 | $ | 34.3 | |||||||||||||||||||||||
| U.S. Retail Coffee | 62.4 | 63.9 | 89.4 | ||||||||||||||||||||||||||
| U.S. Retail Consumer Foods | 107.7 | 138.9 | 168.9 | ||||||||||||||||||||||||||
| International and Away From Home | 39.1 | 21.0 | 29.3 | ||||||||||||||||||||||||||
| Total additions to property, plant, and equipment | $ | 269.3 | $ | 359.8 | $ | 321.9 | |||||||||||||||||||||||
(A)Special project costs include integration and restructuring costs. For more information, see Note 3: Integration and Restructuring Costs.
(B)Primarily represents unallocated cash and cash equivalents and corporate-held investments.
(C)Primarily represents unallocated corporate administrative expense, mainly depreciation and software amortization.
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The following table presents certain geographical information.
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||
| United States | $ | 7,247.9 | $ | 7,298.0 | $ | 6,786.5 | |||||||||||||||||||||||
| International: | |||||||||||||||||||||||||||||
| Canada | $ | 445.3 | $ | 421.9 | $ | 431.8 | |||||||||||||||||||||||
| All other international | 107.8 | 118.1 | 138.8 | ||||||||||||||||||||||||||
| Total international | $ | 553.1 | $ | 540.0 | $ | 570.6 | |||||||||||||||||||||||
| Total net sales | $ | 7,801.0 | $ | 7,838.0 | $ | 7,357.1 | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| United States | $ | 16,547.6 | $ | 16,338.0 | $ | 14,828.2 | |||||||||||||||||||||||
| International: | |||||||||||||||||||||||||||||
| Canada | $ | 421.3 | $ | 362.1 | $ | 428.7 | |||||||||||||||||||||||
| All other international | 1.5 | 11.2 | 44.3 | ||||||||||||||||||||||||||
| Total international | $ | 422.8 | $ | 373.3 | $ | 473.0 | |||||||||||||||||||||||
| Total assets | $ | 16,970.4 | $ | 16,711.3 | $ | 15,301.2 | |||||||||||||||||||||||
| Long-lived assets (excluding goodwill and other intangible assets): | |||||||||||||||||||||||||||||
| United States | $ | 2,209.9 | $ | 2,037.5 | $ | 1,869.8 | |||||||||||||||||||||||
| International: | |||||||||||||||||||||||||||||
| Canada | $ | 54.3 | $ | 18.9 | $ | 17.4 | |||||||||||||||||||||||
| All other international | — | — | 0.3 | ||||||||||||||||||||||||||
| Total international | $ | 54.3 | $ | 18.9 | $ | 17.7 | |||||||||||||||||||||||
| Total long-lived assets (excluding goodwill and other intangible assets) | $ | 2,264.2 | $ | 2,056.4 | $ | 1,887.5 | |||||||||||||||||||||||
The following table presents product category information.
| Year Ended April 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 |
Primary Reportable Segment (A)
|
||||||||||||||||||||||||||||||||
| Coffee | $ | 2,475.4 | $ | 2,479.4 | $ | 2,469.7 | U.S. Retail Coffee | ||||||||||||||||||||||||||||
| Dog food | 1,217.6 | 1,313.1 | 756.8 | U.S. Retail Pet Foods | |||||||||||||||||||||||||||||||
| Cat food | 869.2 | 812.8 | 702.5 | U.S. Retail Pet Foods | |||||||||||||||||||||||||||||||
| Pet snacks | 849.7 | 815.1 | 767.2 | U.S. Retail Pet Foods | |||||||||||||||||||||||||||||||
| Peanut butter | 730.6 | 756.6 | 745.1 | U.S. Retail Consumer Foods | |||||||||||||||||||||||||||||||
| Fruit spreads | 370.3 | 341.6 | 353.8 | U.S. Retail Consumer Foods | |||||||||||||||||||||||||||||||
| Frozen handheld | 365.0 | 289.0 | 254.1 | U.S. Retail Consumer Foods | |||||||||||||||||||||||||||||||
| Shortening and oils | 262.3 | 253.6 | 258.1 | U.S. Retail Consumer Foods | |||||||||||||||||||||||||||||||
| Portion control | 153.3 | 162.7 | 160.3 | International and Away From Home | |||||||||||||||||||||||||||||||
| Juices and beverages | 125.7 | 123.9 | 140.8 | U.S. Retail Consumer Foods | |||||||||||||||||||||||||||||||
| Baking mixes and ingredients | 89.9 | 185.2 | 437.9 |
International and Away From Home (B)
|
|||||||||||||||||||||||||||||||
| Other | 292.0 | 305.0 | 310.8 | International and Away From Home | |||||||||||||||||||||||||||||||
| Total net sales | $ | 7,801.0 | $ | 7,838.0 | $ | 7,357.1 | |||||||||||||||||||||||||||||
(A)The primary reportable segment generally represents at least 75 percent of total net sales for each respective product category.
(B)During 2019 and 2018, the primary reportable segment was U.S. Retail Consumer Foods, as the majority of the net sales within this category were related to the divested U.S. baking business. For more information, see Note 4: Divestiture.
Sales to Walmart Inc. and subsidiaries amounted to 32 percent, 32 percent, and 31 percent of net sales in 2020, 2019, and 2018, respectively. These sales are primarily included in our U.S. retail market segments. No other customer exceeded
10 percent of net sales for any year. Trade receivables at April 30, 2020 and 2019, included amounts due from Walmart Inc. and subsidiaries of $131.9 and $137.7, respectively.
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Note 6: Earnings Per Share
The following table sets forth the computation of net income per common share and net income per common share – assuming dilution under the two-class method.
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Net income | $ | 779.5 | $ | 514.4 | $ | 1,338.6 | |||||||||||||||||||||||
| Less: Net income allocated to participating securities | 4.4 | 2.6 | 6.8 | ||||||||||||||||||||||||||
| Net income allocated to common stockholders | $ | 775.1 | $ | 511.8 | $ | 1,331.8 | |||||||||||||||||||||||
| Weighted-average common shares outstanding | 113.4 | 113.1 | 113.0 | ||||||||||||||||||||||||||
| Add: Dilutive effect of stock options | — | — | — | ||||||||||||||||||||||||||
| Weighted-average common shares outstanding – assuming dilution | 113.4 | 113.1 | 113.0 | ||||||||||||||||||||||||||
| Net income per common share | $ | 6.84 | $ | 4.52 | $ | 11.79 | |||||||||||||||||||||||
| Net income per common share – assuming dilution | $ | 6.84 | $ | 4.52 | $ | 11.78 | |||||||||||||||||||||||
Note 7: Goodwill and Other Intangible Assets
A summary of changes in goodwill by reportable segment is as follows:
|
U.S. Retail
Pet Foods |
U.S. Retail
Coffee |
U.S. Retail
Consumer Foods |
International
and Away From Home |
Total | |||||||||||||||||||||||||
| Balance at May 1, 2018 | $ | 1,824.5 | $ | 2,090.9 | $ | 1,600.4 | $ | 426.4 | $ | 5,942.2 | |||||||||||||||||||
| Acquisition | 617.8 | — | — | — | 617.8 | ||||||||||||||||||||||||
| Divestiture | — | — | (144.3) | — | (144.3) | ||||||||||||||||||||||||
|
Impairment charge (A)
|
— | — | (97.9) | — | (97.9) | ||||||||||||||||||||||||
|
Other (B)
|
— | — | — | (6.9) | (6.9) | ||||||||||||||||||||||||
| Balance at April 30, 2019 | $ | 2,442.3 | $ | 2,090.9 | $ | 1,358.2 | $ | 419.5 | $ | 6,310.9 | |||||||||||||||||||
|
Other (B)
|
— | — | — | (6.4) | (6.4) | ||||||||||||||||||||||||
| Balance at April 30, 2020 | $ | 2,442.3 | $ | 2,090.9 | $ | 1,358.2 | $ | 413.1 | $ | 6,304.5 | |||||||||||||||||||
(A)We have recognized accumulated goodwill impairment charges of $242.9 as of April 30, 2020.
(B)The amounts classified as other represent foreign currency exchange adjustments.
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The following table summarizes our other intangible assets and related accumulated amortization and impairment charges, including foreign currency exchange adjustments.
| April 30, 2020 | April 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Acquisition
Cost |
Accumulated
Amortization/ Impairment Charges/ Foreign Currency Exchange |
Net |
Acquisition
Cost |
Accumulated
Amortization/ Impairment Charges/ Foreign Currency Exchange |
Net | ||||||||||||||||||||||||||||||||||||||||||
|
Finite-lived intangible assets subject to
amortization:
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Customer and contractual relationships | $ | 4,471.1 | $ | 1,353.0 | $ | 3,118.1 | $ | 4,471.1 | $ | 1,156.8 | $ | 3,314.3 | |||||||||||||||||||||||||||||||||||
| Patents and technology | 168.5 | 138.4 | 30.1 | 168.5 | 127.4 | 41.1 | |||||||||||||||||||||||||||||||||||||||||
| Trademarks | 662.0 | 311.0 | 351.0 | 499.9 | 166.9 | 333.0 | |||||||||||||||||||||||||||||||||||||||||
| Total intangible assets subject to amortization | $ | 5,301.6 | $ | 1,802.4 | $ | 3,499.2 | $ | 5,139.5 | $ | 1,451.1 | $ | 3,688.4 | |||||||||||||||||||||||||||||||||||
|
Indefinite-lived intangible assets not subject to amortization:
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Trademarks | $ | 3,158.1 | $ | 228.3 | $ | 2,929.8 | $ | 3,321.1 | $ | 290.7 | $ | 3,030.4 | |||||||||||||||||||||||||||||||||||
| Total other intangible assets | $ | 8,459.7 | $ | 2,030.7 | $ | 6,429.0 | $ | 8,460.6 | $ | 1,741.8 | $ | 6,718.8 | |||||||||||||||||||||||||||||||||||
Amortization expense for finite-lived intangible assets was $235.3, $239.1, and $204.8 in 2020, 2019, and 2018, respectively. The weighted-average useful lives of the customer and contractual relationships, patents and technology, and trademarks are 24 years, 15 years, and 16 years, respectively. The weighted-average useful life of total finite-lived intangible assets is
23 years. Based on the carrying amount of intangible assets subject to amortization at April 30, 2020, the estimated amortization expense is $238.7 for 2021, $232.8 for 2022, $225.5 for 2023, $220.8 for 2024, and $217.3 for 2025.
We review goodwill and other indefinite-lived intangible assets at least annually on February 1 for impairment and more often if indicators of impairment exist.
During the third quarter of 2020, we began our annual planning cycle, which was not complete at the end of the quarter; however, certain brand-level decisions were made that we evaluated to determine whether the carrying value of certain indefinite-lived intangible assets more likely than not exceeded fair value. As a result, we recognized an impairment charge of $52.4 during the third quarter of 2020, related to the Natural Balance brand within the U.S. Retail Pet Foods segment due to a decline in current year and long-term net sales expectations and the royalty rate used in the interim analysis, primarily driven by the market environment and re-positioning of this brand within the Pet Foods brand portfolio. This charge was included as a noncash charge in our Statement of Consolidated Income. Additionally, we reassessed the long-term strategic expectations for the Natural Balance brand and reclassified this brand as a finite-lived intangible asset as of February 1, 2020.
As of February 1, 2020, we completed the annual impairment review, in which goodwill impairment was tested at the reporting unit level for our six reporting units with goodwill. As part of our annual evaluation, we did not recognize any additional impairment charges related to our goodwill and indefinite-lived intangible assets. The estimated fair value was substantially in excess of the carrying value for the majority of the reporting units and material indefinite-lived intangible assets, and in all instances, the estimated fair value exceeded the carrying value by greater than 10 percent, with the exception of the Pet Foods reporting unit and the Rachael Ray Nutrish brand within the U.S. Retail Pet Foods segment. The carrying values of the goodwill and indefinite-lived intangible assets within the U.S. Retail Pet Foods segment were $2.4 billion and $1.4 billion, respectively, as of April 30, 2020. These intangible assets remain susceptible to future impairment charges due to narrow differences between fair value and carrying value, which is primarily attributable to the recent impairment charges and the acquisition of Ainsworth in May 2018. Additional sensitivity analyses were performed for the Pet Foods reporting unit, assuming a hypothetical 50-basis-point decrease in the expected long-term growth rate or a hypothetical 50-basis-point increase in the weighted-average cost of capital. Both scenarios independently yielded an estimated fair value for the Pet Foods reporting unit below carrying value. Therefore, any significant adverse change in our near or long-term projections or macroeconomic conditions could result in future impairment charges, which could be material.
Following the completion of our annual impairment review, we further evaluated the potential impact of COVID-19 on the fair value of our goodwill and indefinite-lived intangible assets. While we concluded there were no indicators of impairment
57
as of April 30, 2020, any significant sustained adverse change in consumer purchasing behaviors, government restrictions, financial results, or macroeconomic conditions could result in future impairment, specifically as it relates to the Away From Home reporting unit, which has experienced a significant decline in demand as a result of COVID-19. We will continue to evaluate the nature and extent to which COVID-19 could impact our business and our goodwill and other intangible assets. As of April 30, 2020, the goodwill related to the Away From Home reporting unit represented approximately 65 percent of the goodwill within the International and Away From Home segment.
During 2019, we recognized impairment charges of $97.9 related to the goodwill of the Natural Foods reporting unit within the U.S. Retail Consumer Foods segment and $107.2 related to certain indefinite-lived intangible assets within the U.S. Retail Pet Foods segment. These charges were primarily the result of reductions in our long-term net sales and profitability projections and were included as noncash charges in our Statement of Consolidated Income.
Note 8: Debt and Financing Arrangements
The following table summarizes the components of our long-term debt.
| April 30, 2020 | April 30, 2019 | ||||||||||||||||||||||||||||||||||
|
Principal
Outstanding |
Carrying Amount (A)
|
Principal
Outstanding |
Carrying
Amount (A)
|
||||||||||||||||||||||||||||||||
| 2.20% Senior Notes due December 6, 2019 | $ | — | $ | — | $ | 300.0 | $ | 299.5 | |||||||||||||||||||||||||||
| 2.50% Senior Notes due March 15, 2020 | — | — | 500.0 | 499.0 | |||||||||||||||||||||||||||||||
| 3.50% Senior Notes due October 15, 2021 | 750.0 | 761.1 | 750.0 | 768.4 | |||||||||||||||||||||||||||||||
| 3.00% Senior Notes due March 15, 2022 | 400.0 | 398.7 | 400.0 | 398.0 | |||||||||||||||||||||||||||||||
| 3.50% Senior Notes due March 15, 2025 | 1,000.0 | 996.0 | 1,000.0 | 995.2 | |||||||||||||||||||||||||||||||
| 3.38% Senior Notes due December 15, 2027 | 500.0 | 496.7 | 500.0 | 496.2 | |||||||||||||||||||||||||||||||
| 2.38% Senior Notes due March 15, 2030 | 500.0 | 495.2 | — | — | |||||||||||||||||||||||||||||||
| 4.25% Senior Notes due March 15, 2035 | 650.0 | 643.9 | 650.0 | 643.5 | |||||||||||||||||||||||||||||||
| 4.38% Senior Notes due March 15, 2045 | 600.0 | 586.5 | 600.0 | 586.0 | |||||||||||||||||||||||||||||||
| 3.55% Senior Notes due March 15, 2050 | 300.0 | 295.7 | — | — | |||||||||||||||||||||||||||||||
| Term Loan Credit Agreement due May 14, 2021 | 700.0 | 699.5 | 800.0 | 799.0 | |||||||||||||||||||||||||||||||
| Total long-term debt | $ | 5,400.0 | $ | 5,373.3 | $ | 5,500.0 | $ | 5,484.8 | |||||||||||||||||||||||||||
| Current portion of long-term debt | — | — | 800.0 | 798.5 | |||||||||||||||||||||||||||||||
| Total long-term debt, less current portion | $ | 5,400.0 | $ | 5,373.3 | $ | 4,700.0 | $ | 4,686.3 | |||||||||||||||||||||||||||
(A) Represents the carrying amount included in the Consolidated Balance Sheets, which includes the impact of capitalized debt issuance costs, offering discounts, and terminated interest rate contracts.
In March 2020, we completed an offering of $800.0 in Senior Notes due March 15, 2030, and March 15, 2050. The Senior Notes included $7.4 of capitalized debt issuance costs and $1.8 of offering discounts to be amortized to interest expense over the life of the debt. A portion of the net proceeds from the offering was used to repay the $500.0 Senior Notes due March 15, 2020, with the balance being held as a cash equivalent to be used for general corporate purposes. Concurrent with the pricing of these Senior Notes, we terminated the interest rate contracts entered into in November 2018 and June 2018, resulting 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. For additional information, see Note 10: Derivative Financial Instruments.
All of our Senior Notes outstanding at April 30, 2020, are unsecured, and interest is paid semiannually, with no required scheduled principal payments until maturity. We may prepay all or part of the Senior Notes at 100 percent of the principal amount thereof, together with the accrued and unpaid interest, and any applicable make-whole amount.
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, as discussed in Note 2: 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 does not require scheduled amortization payments. Voluntary prepayments are permitted without premium or penalty. As of April 30, 2020, we have prepaid $800.0 on the Term Loan to date, including $100.0 in 2020. The interest rate on the Term Loan at April 30, 2020, was 1.21 percent. In November 2019, we entered into an amendment to the Term Loan that decreased the applicable
58
margins on LIBOR, based on our long-term unsecured debt rating. This amendment did not have a material impact on our consolidated financial statements.
We have available a $1.8 billion unsecured revolving credit facility with a group of 11 banks that matures in September 2022. Borrowings under the revolving credit facility bear interest on the prevailing U.S. Prime Rate, LIBOR, or Canadian Dealer Offered Rate, based on our election. Interest is payable either on a quarterly basis or at the end of the borrowing term. We did not have a balance outstanding under the revolving credit facility at both April 30, 2020 and 2019.
We participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $1.8 billion at any time. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper will be used as a continuing source of short-term financing for general corporate purposes. As of April 30, 2020 and 2019, we had $248.0 and $426.0 of short-term borrowings outstanding, respectively, which were issued under our commercial paper program at weighted-average interest rates of 0.40 percent and 2.75 percent, respectively.
Interest paid totaled $193.4, $213.3, and $158.9 in 2020, 2019, and 2018, respectively. This differs from interest expense due to the amortization of debt issuance costs and discounts, effect of interest rate contracts, capitalized interest, payment of other debt fees, and timing of interest payments.
Our debt instruments contain certain financial covenant restrictions, including a leverage ratio and an interest coverage ratio. We are in compliance with all covenants.
Note 9: Pensions and Other Postretirement Benefits
We have defined benefit pension plans covering certain U.S. and Canadian employees. Pension benefits are based on the employee’s years of service and compensation levels. Our plans are funded in conformity with the funding requirements of applicable government regulations.
In addition to providing pension benefits, we sponsor several unfunded postretirement plans that provide health care and life insurance benefits to certain retired U.S. and Canadian employees. These plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features, such as deductibles and coinsurance. Covered employees generally are eligible for these benefits when they reach age 55 and have attained 10 years of credited service.
59
The following table summarizes the components of net periodic benefit cost and the change in accumulated other comprehensive income (loss) related to the defined benefit pension and other postretirement plans.
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended April 30, | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | 1.6 | $ | 2.1 | $ | 5.2 | $ | 1.8 | $ | 1.9 | $ | 2.0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest cost | 20.9 | 23.2 | 21.6 | 2.3 | 2.3 | 2.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | (24.1) | (26.8) | (28.8) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | 0.9 | 0.9 | 0.9 | (1.1) | (1.3) | (1.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of net actuarial loss (gain) | 7.9 | 8.3 | 11.5 | (0.3) | (0.6) | (0.3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Curtailment loss (gain) | — | 0.3 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement loss (gain) | 0.1 | 7.1 | 2.3 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Termination benefit cost | 0.2 | — | — | — | 0.2 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net periodic benefit cost | $ | 7.5 | $ | 15.1 | $ | 12.7 | $ | 2.7 | $ | 2.5 | $ | 2.4 | |||||||||||||||||||||||||||||||||||||||||||||||
We amortize gains and losses for our postretirement plans over the average expected future period of vested service. For plans that consist of less than 5 percent of participants that are active, average life expectancy is used instead of the average expected useful service period.
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We use a measurement date of April 30 to determine defined benefit pension and other postretirement benefit plans’ assets and benefit obligations. The following table sets forth the combined status of the plans as recognized in the Consolidated Balance Sheets.
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||
| April 30, | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Change in benefit obligation: | |||||||||||||||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 615.5 | $ | 639.7 | $ | 70.1 | $ | 65.9 | |||||||||||||||||||||||||||
| Service cost | 1.6 | 2.1 | 1.8 | 1.9 | |||||||||||||||||||||||||||||||
| Interest cost | 20.9 | 23.2 | 2.3 | 2.3 | |||||||||||||||||||||||||||||||
| Amendments | — | — | — | 2.0 | |||||||||||||||||||||||||||||||
| Actuarial loss (gain) | 61.8 | 17.0 | 4.4 | 2.8 | |||||||||||||||||||||||||||||||
| Benefits paid | (39.6) | (33.9) | (3.8) | (4.7) | |||||||||||||||||||||||||||||||
| Curtailment | — | (1.3) | — | — | |||||||||||||||||||||||||||||||
| Settlement | (4.9) | (27.7) | — | — | |||||||||||||||||||||||||||||||
| Termination benefit cost | 0.2 | — | — | 0.2 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (3.2) | (3.6) | (0.3) | (0.3) | |||||||||||||||||||||||||||||||
| Benefit obligation at end of year | $ | 652.3 | $ | 615.5 | $ | 74.5 | $ | 70.1 | |||||||||||||||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 480.3 | $ | 497.0 | $ | — | $ | — | |||||||||||||||||||||||||||
| Actual return on plan assets | 34.3 | 19.6 | — | — | |||||||||||||||||||||||||||||||
| Company contributions | 5.1 | 29.3 | 3.8 | 4.7 | |||||||||||||||||||||||||||||||
| Benefits paid | (39.6) | (33.9) | (3.8) | (4.7) | |||||||||||||||||||||||||||||||
| Settlement | (4.9) | (27.7) | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (3.6) | (4.0) | — | — | |||||||||||||||||||||||||||||||
| Fair value of plan assets at end of year | $ | 471.6 | $ | 480.3 | $ | — | $ | — | |||||||||||||||||||||||||||
| Funded status of the plans | $ | (180.7) | $ | (135.2) | $ | (74.5) | $ | (70.1) | |||||||||||||||||||||||||||
| Defined benefit pensions | $ | (179.3) | $ | (139.1) | $ | — | $ | — | |||||||||||||||||||||||||||
| Other noncurrent assets | 11.6 | 8.0 | — | — | |||||||||||||||||||||||||||||||
| Accrued compensation | (13.0) | (4.1) | (4.5) | (5.1) | |||||||||||||||||||||||||||||||
| Other postretirement benefits | — | — | (70.0) | (65.0) | |||||||||||||||||||||||||||||||
| Net benefit liability | $ | (180.7) | $ | (135.2) | $ | (74.5) | $ | (70.1) | |||||||||||||||||||||||||||
The following table summarizes amounts recognized in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets, before income taxes.
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||
| April 30, | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Net actuarial gain (loss) | $ | (199.7) | $ | (157.2) | $ | 5.5 | $ | 10.2 | |||||||||||||||||||||||||||
| Prior service credit (cost) | (2.6) | (3.5) | 4.7 | 5.8 | |||||||||||||||||||||||||||||||
| Total recognized in accumulated other comprehensive income (loss) | $ | (202.3) | $ | (160.7) | $ | 10.2 | $ | 16.0 | |||||||||||||||||||||||||||
During 2021, we expect to recognize amortization of net actuarial losses and prior service credit of $11.7 and $0.1, respectively, in net periodic benefit cost.
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The following table sets forth the weighted-average assumptions used in determining the benefit obligations.
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||
| April 30, | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| U.S. plans: | |||||||||||||||||||||||||||||||||||
| Discount rate | 3.05 | % | 3.99 | % | 2.98 | % | 3.91 | % | |||||||||||||||||||||||||||
| Rate of compensation increase | 3.58 | 3.56 | — | — | |||||||||||||||||||||||||||||||
| Canadian plans: | |||||||||||||||||||||||||||||||||||
| Discount rate | 2.95 | % | 3.21 | % | 2.93 | % | 3.19 | % | |||||||||||||||||||||||||||
| Rate of compensation increase | 3.00 | 3.00 | — | — | |||||||||||||||||||||||||||||||
For 2021, the assumed health care trend rates are 6.3 percent and 4.5 percent for the U.S. and Canadian plans, respectively. The rate for participants under age 65 is assumed to decrease to 5.0 percent in calendar 2026 for the U.S. plan and remain at 4.5 percent for the Canadian plan. The health care cost trend rate assumption impacts the amount of the other postretirement benefits obligation and periodic other postretirement benefits cost reported. A one percentage point annual change in the assumed health care cost trend rate would have the following effect as of April 30, 2020:
| One Percentage Point | |||||||||||||||||
| Increase | Decrease | ||||||||||||||||
| Effect on total service and interest cost components | $ | — | $ | — | |||||||||||||
| Effect on benefit obligation | 1.1 | 1.1 | |||||||||||||||
The following table sets forth selective information pertaining to our Canadian pension and other postretirement benefit plans, which is included in the consolidated information presented on pages 60 and 61.
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||
| Year Ended April 30, | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Benefit obligation at end of year | $ | 80.1 | $ | 84.8 | $ | 6.8 | $ | 7.1 | |||||||||||||||||||||||||||
| Fair value of plan assets at end of year | 91.0 | 92.1 | — | — | |||||||||||||||||||||||||||||||
| Funded status of the plans | $ | 10.9 | $ | 7.3 | $ | (6.8) | $ | (7.1) | |||||||||||||||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 0.1 | $ | 0.1 | $ | — | $ | — | |||||||||||||||||||||||||||
| Interest cost | 2.3 | 2.7 | 0.2 | 0.2 | |||||||||||||||||||||||||||||||
| Expected return on plan assets | (4.4) | (4.8) | — | — | |||||||||||||||||||||||||||||||
| Amortization of net actuarial loss (gain) | 1.1 | 0.9 | — | — | |||||||||||||||||||||||||||||||
| Termination benefit cost | 0.2 | — | — | — | |||||||||||||||||||||||||||||||
| Net periodic benefit cost (credit) | $ | (0.7) | $ | (1.1) | $ | 0.2 | $ | 0.2 | |||||||||||||||||||||||||||
| Changes in plan assets: | |||||||||||||||||||||||||||||||||||
| Company contributions | $ | 0.1 | $ | 0.1 | $ | 0.3 | $ | 0.5 | |||||||||||||||||||||||||||
| Benefits paid | (6.8) | (6.5) | (0.3) | (0.5) | |||||||||||||||||||||||||||||||
| Actual return on plan assets | 9.2 | 6.1 | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation | (3.6) | (3.9) | — | — | |||||||||||||||||||||||||||||||
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The following table sets forth additional information related to our defined benefit pension plans.
| April 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Accumulated benefit obligation for all pension plans | $ | 642.8 | $ | 605.6 | |||||||||||||
| Plans with an accumulated benefit obligation in excess of plan assets: | |||||||||||||||||
| Accumulated benefit obligation | $ | 563.4 | $ | 521.5 | |||||||||||||
| Fair value of plan assets | 380.6 | 388.2 | |||||||||||||||
| Plans with a projected benefit obligation in excess of plan assets: | |||||||||||||||||
| Projected benefit obligation | $ | 572.9 | $ | 531.4 | |||||||||||||
| Fair value of plan assets | 380.6 | 388.2 | |||||||||||||||
We employ a total return on investment approach for the defined benefit pension plans’ assets. A mix of equity, fixed-income, and alternative investments is used to maximize the long-term rate of return on assets for the level of risk. In determining the expected long-term rate of return on the defined benefit pension plans’ assets, we consider the historical rates of return, the nature of investments, the asset allocation, and expectations of future investment strategies. The actual rate of return was 7.8 percent and 3.8 percent for the years ended April 30, 2020 and 2019, respectively, which excludes administrative and investment expenses.
Our current investment policy is to invest approximately 65 percent of assets in fixed-income securities, with the remaining invested primarily in equity securities.
The following tables summarize the major asset classes for the U.S. and Canadian defined benefit pension plans and the levels within the fair value hierarchy for those assets measured at fair value.
|
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Plan Assets at April 30, 2020 | ||||||||||||||||||||
|
Cash and cash equivalents (A)
|
$ | 2.1 | $ | — | $ | — | $ | 2.1 | |||||||||||||||
| Equity securities: | |||||||||||||||||||||||
|
U.S. (B)
|
51.2 | — | — | 51.2 | |||||||||||||||||||
|
International (C)
|
65.9 | — | — | 65.9 | |||||||||||||||||||
| Fixed-income securities: | |||||||||||||||||||||||
|
Bonds (D)
|
212.1 | — | — | 212.1 | |||||||||||||||||||
|
Fixed income (E)
|
93.4 | — | — | 93.4 | |||||||||||||||||||
|
Other types of investments (F)
|
— | 41.8 | — | 41.8 | |||||||||||||||||||
| Total financial assets measured at fair value | $ | 424.7 | $ | 41.8 | $ | — | $ | 466.5 | |||||||||||||||
|
Total financial assets measured at net asset value (G)
|
5.1 | ||||||||||||||||||||||
| Total plan assets | $ | 471.6 | |||||||||||||||||||||
63
|
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Plan Assets at April 30, 2019 | ||||||||||||||||||||
|
Cash and cash equivalents (A)
|
$ | 0.5 | $ | — | $ | — | $ | 0.5 | |||||||||||||||
| Equity securities: | |||||||||||||||||||||||
|
U.S. (B)
|
65.7 | 1.8 | — | 67.5 | |||||||||||||||||||
|
International (C)
|
74.3 | 9.2 | — | 83.5 | |||||||||||||||||||
| Fixed-income securities: | |||||||||||||||||||||||
|
Bonds (D)
|
220.6 | — | — | 220.6 | |||||||||||||||||||
|
Fixed income (E)
|
51.8 | — | — | 51.8 | |||||||||||||||||||
|
Other types of investments (F)
|
— | 46.3 | — | 46.3 | |||||||||||||||||||
| Total financial assets measured at fair value | $ | 412.9 | $ | 57.3 | $ | — | $ | 470.2 | |||||||||||||||
|
Total financial assets measured at net asset value (G)
|
10.1 | ||||||||||||||||||||||
| Total plan assets | $ | 480.3 | |||||||||||||||||||||
(A) This category includes money market holdings with maturities of three months or less and are classified as Level 1 assets. Based on the short-term nature of these assets, carrying value approximates fair value.
(B) This category is invested in a diversified portfolio of common stocks and index funds that primarily invest in U.S. stocks with broad market capitalization ranges similar to those found in the S&P 500 Index and/or the various Russell Indices and are traded on active exchanges. The Level 1 assets are valued using quoted market prices for identical securities in active markets. The Level 2 asset in 2019 was comprised of a pooled fund that consists of equity securities traded on active exchanges.
(C) This category is invested primarily in common stocks and other equity securities traded on active exchanges of foreign issuers located outside the U.S. The fund invests primarily in developed countries, but may also invest in emerging markets. The Level 1 assets are valued using quoted market prices for identical securities in active markets. The Level 2 asset in 2019 was comprised of a pooled fund that consists of equity securities traded on active exchanges.
(D) This category is primarily comprised of bond funds, which seek to duplicate the return characteristics of high-quality U.S. and foreign corporate bonds with a duration range of 10 to 13 years, as well as various U.S. Treasury Separate Trading of Registered Interest and Principal holdings, with wide-ranging maturity dates. These assets are valued using quoted market prices for identical securities in active markets and are classified as Level 1 assets.
(E) This category is comprised of fixed-income funds that invest primarily in government-related bonds of non-U.S. issuers and include investments in the Canadian, as well as emerging markets. These assets are valued using quoted market prices for identical securities in active markets and are classified as Level 1 assets.
(F) This category is comprised of a real estate fund whereby the underlying investments are contained in the Canadian market, and a common collective trust fund investing in direct commercial property funds. The real estate fund and the collective trust fund investing in direct commercial property are classified as Level 2 assets, whereby the underlying securities are valued utilizing quoted market prices for identical securities in active markets and based on the quoted market prices of the underlying investments in the common collective trust, respectively.
(G) This category is comprised of a private equity fund that consists primarily of limited partnership interests in corporate finance and venture capital funds, as well as a private limited investment partnership. The fair value estimates of the private equity fund and private limited investment partnership are based on the underlying funds’ net asset values. Furthermore, as a practical expedient equivalent to our defined benefit plan’s ownership interest in the partners’ capital, a proportionate share of the net assets is attributed and further corroborated by our review. The private equity fund and private limited investment partnership are non-redeemable, and the return of principal is based on the liquidation of the underlying assets. In accordance with ASU 2015-07, the private equity fund and private limited investment partnership are removed from the total financial assets measured at fair value and disclosed separately.
In 2021, we expect to make contributions of approximately $1.0, while making direct benefit payments of approximately $13.5, primarily related to our defined benefit pension plans. Further, we expect the following payments to be made from the defined benefit pension and other postretirement benefit plans: $43.7 in 2021, $45.9 in 2022, $45.6 in 2023, $45.2 in 2024, $45.4 in 2025, and $213.3 in 2026 through 2030.
Multi-Employer Pension Plan: We participate in one multi-employer pension plan, the Bakery and Confectionery Union and Industry International Pension Fund (“Bakery and Confectionery Union Fund”) (52-6118572), which provides defined benefits to certain union employees. During 2020 and 2019, a total of $2.2 and $2.3 was contributed to the plan, respectively, and we anticipate contributions of $2.5 in 2021.
64
The risks of participating in multi-employer pension plans are different from the risks of participating in single-employer pension plans. For instance, the assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, and if a participating employer stops contributing to the plan, the unfunded obligations of the plan allocable to the withdrawing employer may be the responsibility of the remaining participating employers. Additionally, if we stop participating in the multi-employer pension plan, we may be required to pay the plan an amount based on our allocable share of the underfunded status of the plan, referred to as a withdrawal liability.
The Pension Protection Act of 2006 ranks the funded status of multi-employer pension plans depending upon a plan’s current and projected funding. A plan is in the Red Zone (Critical) if it has a current funded percentage less than 65 percent. A plan is in the Yellow Zone (Endangered) if it has a current funded percentage of less than 80 percent or projects a credit balance deficit within seven years. A plan is in the Green Zone (Healthy) if it has a current funded percentage greater than 80 percent and does not have a projected credit balance deficit within seven years. The zone status is based on the plan’s year-end, not our fiscal year-end. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. During calendar year 2019, the Bakery and Confectionery Union Fund was in Red Zone status, as the current funding status was 50.4 percent. A funding improvement plan, or rehabilitation plan, has been implemented.
Note 10: Derivative Financial Instruments
We are exposed to market risks, such as changes in commodity prices, foreign currency exchange rates, and interest rates. To manage the volatility related to these exposures, we enter into various derivative transactions. We have policies in place that define acceptable instrument types we may enter into and establish controls to limit our market risk exposure.
Commodity Price Management: We enter into commodity derivatives to manage the price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, corn, edible oils, soybean meal, and wheat. We also enter into commodity derivatives to manage price risk for energy input costs, including diesel fuel and natural gas. Our derivative instruments generally have maturities of less than one year.
We do not qualify commodity derivatives for hedge accounting treatment, and as a result, the derivative gains and losses are immediately recognized in earnings. Although we do not perform the assessments required to achieve hedge accounting for derivative positions, we believe all of our commodity derivatives are economic hedges of our risk exposure.
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 the derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
Foreign Currency Exchange Rate Hedging: 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.
Interest Rate Hedging: 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.
We entered into interest rate contracts in November 2018 and June 2018, with notional values of $300.0 and $500.0, respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These interest rate contracts were designated as cash flow hedges. In March 2020, we terminated the interest rate contracts concurrent with the pricing of the Senior Notes due March 15, 2030, and March 15, 2050, which resulted in a pre-tax loss of $239.8. The loss was deferred and included as a component of accumulated other comprehensive income (loss) and is being amortized as interest expense over the life of the debt.
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In 2018, we terminated a treasury lock concurrent with the pricing of the Senior Notes due December 15, 2027, which was designated as a cash flow hedge and used to manage our exposure to interest rate volatility. The termination resulted in a pre-tax gain of $2.7, which was deferred and included as a component of accumulated other comprehensive income (loss) and is being amortized as a reduction to 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. The gain on termination was recorded as an increase in the long-term debt balance and is being recognized over the remaining life of the underlying debt as a reduction of interest expense. To date, we have recognized $41.1 of the gain, of which $8.1, $8.0, and $7.8 were recognized in 2020, 2019, and 2018, respectively. The remaining gain will be recognized as follows: $8.4 in 2021 and $4.0 in 2022.
The following tables set forth the gross fair value amounts of derivative instruments recognized in the Consolidated Balance Sheets.
| April 30, 2020 | |||||||||||||||||||||||||||||||||||||||||
|
Other
Current Assets |
Other
Current Liabilities |
Other
Noncurrent Assets |
Other
Noncurrent Liabilities |
||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||||||||
| Commodity contracts | $ | 14.7 | $ | 33.2 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Foreign currency exchange contracts | 2.4 | 0.1 | — | — | |||||||||||||||||||||||||||||||||||||
| Total derivative instruments | $ | 17.1 | $ | 33.3 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| April 30, 2019 | |||||||||||||||||||||||||||||||||||||||||
|
Other
Current Assets |
Other
Current Liabilities |
Other
Noncurrent Assets |
Other
Noncurrent Liabilities |
||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | 49.1 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | — | $ | 49.1 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||||||||
| Commodity contracts | $ | 4.8 | $ | 25.8 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Foreign currency exchange contracts | 1.4 | 0.2 | — | — | |||||||||||||||||||||||||||||||||||||
| Total derivative not designated as hedging instruments | $ | 6.2 | $ | 26.0 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Total derivative instruments | $ | 6.2 | $ | 75.1 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
We have elected to not offset fair value amounts recognized for our exchange-traded derivative instruments and our cash margin accounts executed with the same counterparty that are generally subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of our open positions. At April 30, 2020 and 2019, we maintained cash margin account balances of $43.2 and $40.7, respectively, included in other current assets in the Consolidated Balance Sheets. The change in the cash margin account balances is included in other – net, investing activities in the Statements of Consolidated Cash Flows. In the event of default and immediate net settlement of all of our open positions with individual counterparties, all of our derivative liabilities would be fully offset by either our derivative asset positions or margin accounts based on the net asset or liability position with our individual counterparties.
Interest expense – net, as presented in the Statements of Consolidated Income, was $189.2, $207.9, and $174.1 in 2020, 2019, and 2018, respectively. The following table presents information on the pre-tax gains and losses recognized on interest rate contracts designated as cash flow hedges.
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Gains (losses) recognized in other comprehensive income (loss) | $ | (190.7) | $ | (49.1) | $ | 2.7 | |||||||||||||||||||||||
|
Less: Gains (losses) reclassified from accumulated other comprehensive
income (loss) to interest expense |
(2.1) | (0.4) | (0.5) | ||||||||||||||||||||||||||
| Change in accumulated other comprehensive income (loss) | $ | (188.6) | $ | (48.7) | $ | 3.2 | |||||||||||||||||||||||
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Included as a component of accumulated other comprehensive income (loss) at April 30, 2020 and 2019, were deferred net pre-tax losses of $241.1 and $52.5, respectively, related to the terminated interest rate contracts. The related net tax benefit recognized in accumulated other comprehensive income (loss) was $55.5 and $12.1 at April 30, 2020 and 2019, respectively. Approximately $13.9 of the net pre-tax loss will be recognized over the next 12 months related to the terminated interest rate contracts.
The following table presents the net gains and losses recognized in cost of products sold on derivatives not designated as hedging instruments.
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Gains (losses) on commodity contracts | $ | (31.4) | $ | (98.6) | $ | 6.5 | |||||||||||||||||||||||
| Gains (losses) on foreign currency exchange contracts | 2.3 | 3.0 | (5.9) | ||||||||||||||||||||||||||
| Total gains (losses) recognized in costs of products sold | $ | (29.1) | $ | (95.6) | $ | 0.6 | |||||||||||||||||||||||
Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility. The following table presents the activity in unallocated derivative gains and losses.
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Net gains (losses) on mark-to-market valuation of unallocated derivative positions | $ | (29.1) | $ | (95.6) | $ | 0.6 | |||||||||||||||||||||||
| Less: Net gains (losses) on derivative positions reclassified to segment operating profit | (48.7) | (41.4) | (36.7) | ||||||||||||||||||||||||||
| Unallocated derivative gains (losses) | $ | 19.6 | $ | (54.2) | $ | 37.3 | |||||||||||||||||||||||
The net cumulative unallocated derivative gains and losses at April 30, 2020 and 2019, were losses of $32.9 and $52.5, respectively.
The following table presents the gross notional value of outstanding derivative contracts.
| Year Ended April 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Commodity contracts | $ | 890.1 | $ | 544.8 | |||||||||||||
| Foreign currency exchange contracts | 65.6 | 144.9 | |||||||||||||||
| Interest rate contracts | — | 800.0 | |||||||||||||||
Note 11: Other Financial Instruments and Fair Value Measurements
Financial instruments, other than derivatives, that potentially subject us to significant concentrations of credit risk consist principally of cash investments, short-term borrowings, and trade receivables. The carrying value of these financial instruments approximates fair value. Our remaining financial instruments, with the exception of long-term debt, are recognized at estimated fair value in the Consolidated Balance Sheets.
The following table provides information on the carrying amounts and fair values of our financial instruments.
| April 30, 2020 | April 30, 2019 | ||||||||||||||||||||||||||||||||||
|
Carrying
Amount |
Fair Value |
Carrying
Amount |
Fair Value |
||||||||||||||||||||||||||||||||
| Marketable securities and other investments | $ | 38.6 | $ | 38.6 | $ | 40.9 | $ | 40.9 | |||||||||||||||||||||||||||
| Derivative financial instruments – net | (16.2) | (16.2) | (68.9) | (68.9) | |||||||||||||||||||||||||||||||
| Total long-term debt | (5,373.3) | (5,740.6) | (5,484.8) | (5,504.0) | |||||||||||||||||||||||||||||||
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques are based on observable and unobservable inputs.
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Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions.
The following tables summarize the fair values and the levels within the fair value hierarchy in which the fair value measurements fall for our financial instruments.
|
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Fair Value at
April 30, 2020
|
||||||||||||||||||||
|
Marketable securities and other investments: (A)
|
|||||||||||||||||||||||
| Equity mutual funds | $ | 8.7 | $ | — | $ | — | $ | 8.7 | |||||||||||||||
| Municipal obligations | — | 24.2 | — | 24.2 | |||||||||||||||||||
| Money market funds | 5.7 | — | — | 5.7 | |||||||||||||||||||
|
Derivative financial instruments: (B)
|
|||||||||||||||||||||||
| Commodity contracts – net | (18.3) | (0.2) | — | (18.5) | |||||||||||||||||||
| Foreign currency exchange contracts – net | 0.2 | 2.1 | — | 2.3 | |||||||||||||||||||
|
Total long-term debt (C)
|
(5,032.0) | (708.6) | — | (5,740.6) | |||||||||||||||||||
| Total financial instruments measured at fair value | $ | (5,035.7) | $ | (682.5) | $ | — | $ | (5,718.2) | |||||||||||||||
|
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Fair Value at April 30, 2019
|
||||||||||||||||||||
|
Marketable securities and other investments: (A)
|
|||||||||||||||||||||||
| Equity mutual funds | $ | 8.7 | $ | — | $ | — | $ | 8.7 | |||||||||||||||
| Municipal obligations | — | 31.7 | — | 31.7 | |||||||||||||||||||
| Money market funds | 0.5 | — | — | 0.5 | |||||||||||||||||||
|
Derivative financial instruments: (B)
|
|||||||||||||||||||||||
| Commodity contracts – net | (20.7) | (0.3) | — | (21.0) | |||||||||||||||||||
| Foreign currency exchange contracts – net | (0.1) | 1.3 | — | 1.2 | |||||||||||||||||||
| Interest rate contracts | — | (49.1) | — | (49.1) | |||||||||||||||||||
|
Total long-term debt (C)
|
(4,646.6) | (857.4) | — | (5,504.0) | |||||||||||||||||||
| Total financial instruments measured at fair value | $ | (4,658.2) | $ | (873.8) | $ | — | $ | (5,532.0) | |||||||||||||||
(A)Marketable securities and other investments consist of funds maintained for the payment of benefits associated with nonqualified retirement plans. The funds include equity securities listed in active markets, municipal obligations valued by a third-party using valuation techniques that utilize inputs that are derived principally from or corroborated by observable market data, and money market funds with maturities of three months or less. Based on the short-term nature of these money market funds, carrying value approximates fair value. As of April 30, 2020, our municipal obligations are scheduled to mature as follows: $1.0 in 2021, $1.5 in 2022, $3.5 in 2024, and the remaining $18.2 in 2025 and beyond. We do not have any municipal obligations scheduled to mature in 2023. For additional information, see Marketable Securities and Other Investments in Note 1: Accounting Policies.
(B)Level 1 commodity and foreign currency exchange derivatives are valued using quoted market prices for identical instruments in active markets. Level 2 commodity and foreign currency exchange derivatives are valued using quoted prices for similar assets or liabilities in active markets. The Level 2 interest rate contracts were valued using standard valuation techniques, the income approach, and observable Level 2 market expectations at the measurement date to convert future amounts to a single discounted present value. Level 2 inputs for the valuation of the interest rate contracts are limited to prices that are observable for the asset or liability. For additional information, see Note 10: Derivative Financial Instruments.
(C)Long-term debt is composed of public Senior Notes classified as Level 1 and the Term Loan classified as Level 2. The public Senior Notes are traded in an active secondary market and valued using quoted prices. The fair value of the Term Loan is based on the net present value of each interest and principal payment calculated utilizing an interest rate derived from an estimated yield curve obtained from independent pricing sources for similar types of term loan borrowing arrangements. For additional information, see Note 8: Debt and Financing Arrangements.
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We recognized impairment charges of $52.4 during 2020, related to the Natural Balance brand in the U.S. Retail Pet Foods segment. During 2019, we recognized impairment charges of $205.1, of which $97.9 and $107.2 related to the goodwill of the Natural Foods reporting unit within the U.S. Retail Consumer Foods segment and certain indefinite-lived trademarks in the U.S. Retail Pet Foods segment, respectively. These adjustments were included as noncash charges in our Statements of Consolidated Income. We utilized Level 3 inputs based on management’s best estimates and assumptions to estimate the fair value of the reporting unit and indefinite-lived trademarks. For additional information, see Goodwill and Other Intangible Assets in Note 1: Accounting Policies and Note 7: Goodwill and Other Intangible Assets.
Note 12: Leases
We lease certain warehouses, manufacturing facilities, office space, equipment, and vehicles, primarily through operating lease agreements. We have elected to not recognize leases with a term of 12 months or less on the balance sheet. Instead, we recognize the related lease expense on a straight-line basis over the lease term.
Although the majority of our right-of-use asset and lease liability balances consist of leases with renewal options, we generally are not reasonably certain to exercise them, and therefore, the optional periods do not typically impact the lease term. Certain leases also include termination provisions or options to purchase the leased property. Since we are not reasonably certain to exercise these types of options, minimum lease payments do not include any amounts related to these termination or purchase options. Our lease agreements generally do not contain residual value guarantees or restrictive covenants that are material.
We determine if an agreement is or contains a lease at inception by evaluating whether an identified asset exists that we control over the term of the arrangement. A lease commences when the lessor makes the identified asset available for our use. We generally account for lease and non-lease components as a single lease component. Minimum lease payments do not include variable lease payments other than those that depend on an index or rate.
For the majority of our leases, the interest rate implicit in the lease cannot be readily determined, so we utilize our incremental borrowing rate to present value lease payments using information available at the lease commencement date. We consider our credit rating and the current economic environment in determining this collateralized rate. For the initial implementation of the lease standard, the incremental borrowing rate at May 1, 2019, was used to calculate all operating lease liabilities.
The following table sets forth the right-of-use assets and lease liabilities recognized in the Consolidated Balance Sheet.
| April 30, 2020 | |||||
| Operating lease right-of-use assets | $ | 148.4 | |||
| Operating lease liabilities: | |||||
| Current operating lease liabilities | $ | 36.5 | |||
|
Noncurrent operating lease liabilities
|
120.0 | ||||
| Total operating lease liabilities | $ | 156.5 | |||
| Finance lease right-of-use assets: | |||||
|
Machinery and equipment
|
$ | 11.6 | |||
|
Accumulated depreciation
|
(5.9) | ||||
| Total property, plant, and equipment | $ | 5.7 | |||
| Finance lease liabilities: | |||||
|
Other current liabilities
|
$ | 2.2 | |||
|
Other noncurrent liabilities
|
3.5 | ||||
| Total finance lease liabilities | $ | 5.7 | |||
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The following table summarizes the components of lease expense.
| April 30, 2020 | ||||||||
| Operating lease cost | $ | 51.7 | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | 2.8 | |||||||
|
Interest on lease liabilities
|
0.2 | |||||||
| Variable lease cost | 22.9 | |||||||
| Short-term lease cost | 35.2 | |||||||
| Sublease income | (4.3) | |||||||
| Net lease cost | $ | 108.5 | ||||||
The following table sets forth cash flow and noncash information related to leases.
| April 30, 2020 | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
|
Operating cash flows from operating leases
|
$ | 50.8 | |||||||||
| Operating cash flows from finance leases | 0.2 | ||||||||||
|
Financing cash flows from finance leases
|
2.8 | ||||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | |||||||||||
| Operating leases | 57.0 | ||||||||||
|
Finance leases
|
2.6 | ||||||||||
The following table summarizes the maturity of our lease liabilities by fiscal year.
| April 30, 2020 | |||||||||||||||||
| Operating Leases | Finance Leases | ||||||||||||||||
| 2021 | $ | 40.3 | $ | 2.3 | |||||||||||||
| 2022 | 36.8 | 1.7 | |||||||||||||||
| 2023 | 34.2 | 1.0 | |||||||||||||||
| 2024 | 22.7 | 0.7 | |||||||||||||||
| 2025 | 14.7 | 0.3 | |||||||||||||||
| 2026 and beyond | 19.8 | — | |||||||||||||||
| Total undiscounted minimum lease payments | $ | 168.5 | $ | 6.0 | |||||||||||||
| Less: Imputed interest | 12.0 | 0.3 | |||||||||||||||
| Lease liabilities | $ | 156.5 | $ | 5.7 | |||||||||||||
As of April 30, 2019, our minimum operating lease obligations were as follows: $43.0 in 2020, $36.7 in 2021, $30.5 in 2022, $24.8 in 2023, and $12.3 in 2024.
The following table sets forth the weighted average remaining lease term and discount rate.
| April 30, 2020 | |||||
| Weighted average remaining lease term (in years): | |||||
|
Operating leases
|
4.7 | ||||
| Finance leases | 3.4 | ||||
| Weighted average discount rate: | |||||
| Operating leases | 3.1 | % | |||
|
Finance leases
|
2.9 | % | |||
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Note 13: Share-Based Payments
We provide for equity-based incentives to be awarded to key employees and non-employee directors. Currently, these incentives consist of restricted shares, restricted stock units (which may also be referred to as deferred stock units), performance units, and stock options. These awards are administered primarily through the 2010 Equity and Incentive Compensation Plan initially approved by our shareholders in August 2010 and re-approved in August 2015. Awards under this plan may be in the form of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units, incentive awards, and other share-based awards. Awards under this plan may be granted to our non-employee directors, consultants, officers, and other employees. Deferred stock units granted to non-employee directors vest immediately and, along with dividends credited on those deferred stock units, are paid out in the form of common shares upon termination of service as a non-employee director. At April 30, 2020, there were 4,781,736 shares available for future issuance under this plan.
Under the 2010 Equity and Incentive Compensation Plan, we have the option to settle share-based awards by issuing common shares from treasury, issuing new Company common shares, or issuing a combination of common shares from treasury and new Company common shares.
Stock Options: Under the 2010 Equity and Incentive Compensation Plan, we granted 193,831 options during 2020 and granted no stock options during 2019 and 2018. Stock options granted in 2020 vest ratably over a period of three years. The exercise price of all stock options granted was equal to the market value of the shares on the date of grant, and all stock options granted and outstanding have a contractual term of 10 years.
The fair value of each stock option is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions for stock options granted in 2020:
| 2020 | |||||||||||
| Expected volatility (%) | 20.1 | % | |||||||||
| Dividend yield (%) | 2.8 | % | |||||||||
| Risk-free interest rate (%) | 1.9 | % | |||||||||
| Expected life of stock options (years) | 6.0 | ||||||||||
Expected volatility was calculated in accordance with the provisions of FASB ASC 718, Compensation – Stock Compensation, based on consideration of both historical and implied volatilities. The expected life of a stock option represents the period from the grant date through the expected exercise date of the option. This was calculated using a simplified method whereby the midpoint between the vesting date and the end of the contractual term is utilized to compute the expected term.
The following table is a summary of our stock option activity.
|
Number of
Stock Options |
Weighted-Average
Exercise Price |
||||||||||
| Outstanding at May 1, 2019 | 400,000 | $ | 113.24 | ||||||||
| Granted | 193,831 | 121.93 | |||||||||
| Exercised | (62,750) | 111.66 | |||||||||
| Cancelled | (42,026) | 120.67 | |||||||||
| Outstanding at April 30, 2020 | 489,055 | $ | 116.25 | ||||||||
| Exercisable at April 30, 2020 | 314,750 | $ | 113.21 | ||||||||
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the stock option. The total intrinsic value for stock options outstanding and exercisable was $1.0 and $0.8 at
April 30, 2020, respectively, with an average remaining contractual term of 6.5 years and 5.0 years, respectively. The total intrinsic value of stock options exercised during 2020 and 2018 was $0.2 and $0.6, respectively, and there were no stock options exercised in 2019. The closing market price of our common stock on the last trading day of 2020 was $114.91 per share. The stock options granted during 2020 have a weighted-average grant date fair value of $17.82 per option.
Compensation cost related to stock options is recognized ratably over the service period from the grant date through the end of the requisite service period. During 2020, we recognized compensation cost of $1.3, and during 2019, we did not recognize
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any compensation cost, as the requisite service period for the previous options granted ended on April 30, 2018. The compensation expense for stock option awards totaled $0.4 for the year ended April 30, 2018, which was included in other special project costs in the Statement of Consolidated Income. The tax benefit related to the stock option expense was $0.3 and $0.1 for 2020 and 2018, respectively. As of April 30, 2020, we had unrecognized compensation cost of $1.8 related to the stock options that were granted in 2020.
Cash received from stock option exercises was $7.1 and $3.9 for the years ended April 30, 2020 and 2018, respectively.
There were no stock options exercised in 2019.
Other Equity Awards: The following table is a summary of our restricted shares, deferred stock units, and performance units.
|
Restricted
Shares and Deferred Stock Units |
Weighted-
Average Grant Date Fair Value |
Performance
Units |
Weighted-
Average Conversion Date Fair Value |
||||||||||||||||||||
| Outstanding at May 1, 2019 | 583,576 | $ | 118.44 | 85,154 | $ | 123.68 | |||||||||||||||||
| Granted | 245,945 | 121.19 | 168,212 | 123.68 | |||||||||||||||||||
| Converted | 85,154 | 123.68 | (85,154) | 123.68 | |||||||||||||||||||
| Vested | (123,714) | 119.13 | — | — | |||||||||||||||||||
| Forfeited | (54,277) | 117.30 | (14,995) | 123.68 | |||||||||||||||||||
| Outstanding at April 30, 2020 | 736,684 | $ | 119.93 | 153,217 | $ | 123.68 | |||||||||||||||||
The weighted-average grant date fair value of equity awards other than stock options that vested in 2020, 2019, and 2018 was $14.7, $17.0, and $17.1, respectively. The vesting date fair value of equity awards other than stock options that vested in 2020, 2019, and 2018 was $14.5, $17.0, and $20.7, respectively. The weighted-average grant date fair value of restricted shares, deferred stock units, and performance units is the average of the high and the low share price on the date of grant. The following table summarizes the weighted-average fair values of the equity awards granted.
| Year Ended April 30, |
Restricted
Shares and Deferred Stock Units |
Weighted-
Average Grant Date Fair Value |
Performance
Units |
Weighted-
Average Conversion Date Fair Value |
|||||||||||||||||||
| 2020 | 245,945 | $ | 121.19 | 168,212 | $ | 123.68 | |||||||||||||||||
| 2019 | 194,932 | 104.33 | 85,154 | 123.68 | |||||||||||||||||||
| 2018 | 136,127 | 126.80 | 84,051 | 103.86 | |||||||||||||||||||
The restricted shares and deferred stock units granted in 2020 under our new long-term incentive compensation program vest ratably over a three-year period from date of grant. The remaining restricted shares and deferred stock units generally vest over four years from the date of grant or upon the attainment of a defined age and years of service, subject to certain retention requirements. The performance units granted in 2020 vest over three years from the date of grant and are converted to restricted shares upon vest based on the performance achieved during the service period. During 2019 and 2018, the performance units granted represented the number of restricted shares received by certain executive officers, subsequent to year-end, upon conversion of the performance units earned during the one year period.
Note 14: Income Taxes
Income before income taxes is as follows:
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Domestic | $ | 986.7 | $ | 659.2 | $ | 828.6 | |||||||||||||||||||||||
| Foreign | 40.0 | 42.4 | 32.4 | ||||||||||||||||||||||||||
| Income before income taxes | $ | 1,026.7 | $ | 701.6 | $ | 861.0 | |||||||||||||||||||||||
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The components of the provision for income taxes are as follows:
| Year Ended April 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Current: | |||||||||||||||||||||||||||||
| Federal | $ | 188.7 | $ | 227.9 | $ | 277.9 | |||||||||||||||||||||||
| Foreign | 8.5 | 16.0 | 7.9 | ||||||||||||||||||||||||||
| State and local | 42.4 | 36.8 | 40.0 | ||||||||||||||||||||||||||
| Deferred: | |||||||||||||||||||||||||||||
| Federal | 7.1 | (73.6) | (802.3) | ||||||||||||||||||||||||||
| Foreign | 0.6 | (0.1) | 0.5 | ||||||||||||||||||||||||||
| State and local | (0.1) | (19.8) | (1.6) | ||||||||||||||||||||||||||
| Total income tax expense (benefit) | $ | 247.2 | $ | 187.2 | $ | (477.6) | |||||||||||||||||||||||
A reconciliation of the statutory federal income tax rate and the effective income tax rate is as follows:
| Year Ended April 30, | |||||||||||||||||||||||||||||
| (Percent of Pre-tax Income) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 30.4 | % | |||||||||||||||||||||||
| Tax reform – net impact on U.S. deferred tax assets and liabilities | — | — | (92.0) | ||||||||||||||||||||||||||
| Tax reform – transition tax | — | (0.5) | 3.0 | ||||||||||||||||||||||||||
| Goodwill impairment charges | — | 2.9 | 5.5 | ||||||||||||||||||||||||||
| Sale of the U.S. baking business | — | 2.4 | — | ||||||||||||||||||||||||||
| State and local income taxes | 3.3 | 2.7 | 1.9 | ||||||||||||||||||||||||||
| Domestic manufacturing deduction | — | — | (3.0) | ||||||||||||||||||||||||||
| Deferred tax benefit from integration | — | (2.4) | — | ||||||||||||||||||||||||||
| Other items – net | (0.2) | 0.6 | (1.3) | ||||||||||||||||||||||||||
| Effective income tax rate | 24.1 | % | 26.7 | % | (55.5) | % | |||||||||||||||||||||||
| Income taxes paid | $ | 227.1 | $ | 250.9 | $ | 336.8 | |||||||||||||||||||||||
The income tax expense of $187.2 for 2019 included the permanent tax impacts associated with the sale of the U.S. baking business and a goodwill impairment charge, partially offset by a noncash deferred tax benefit related to the integration of Ainsworth into the Company.
U.S. Tax Reform: On December 22, 2017, the U.S. government enacted the Tax Act, legislating comprehensive tax reform that reduced the U.S. federal statutory corporate tax rate from 35.0 percent to 21.0 percent effective January 1, 2018, broadened the U.S. federal income tax base, required companies to pay a one-time transition tax, and created new taxes on certain foreign-sourced earnings as part of a new territorial tax regime.
During 2019, we finalized our accounting for the income tax effects of enactment of the Tax Act, as required by
ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which resulted in an immaterial adjustment to the net provisional benefit of $765.8 previously recorded during 2018. The net benefit included the revaluation of net deferred tax liabilities at the reduced federal income tax rate, offset in part by the estimated impact of the one-time transition tax.
Despite the completion of our accounting for the Tax Act, the amounts recorded may change as a result of future guidance and interpretation from the Internal Revenue Service (“IRS”) and various other taxing jurisdictions, all of which are continuing to analyze the complexities and interdependencies of the provisions within the Tax Act. Any future legislative and interpretive actions could result in additional income tax impacts which could be material in the period any such changes are enacted. During 2020, the Coronavirus Aid, Relief, and Economic Security Act was enacted, which included rollbacks of certain provisions of the Tax Act. While these specific rollbacks did not impact us, future legislative actions in response to COVID-19 could further modify provisions of the Tax Act, and such changes will need to be analyzed for their respective impacts on our income taxes at that time.
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We are a voluntary participant in the Compliance Assurance Process (“CAP”) program offered by the IRS and are currently under a CAP examination for the tax years ended April 30, 2020 and 2019. Through the contemporaneous exchange of information with the IRS, this program is designed to identify and resolve tax positions with the IRS prior to the filing of a tax return, which allows us to remain current with our IRS examinations. The IRS has completed the CAP examinations for the tax years ended April 30, 2018 and 2017. The tax years prior to 2017 are no longer subject to U.S. federal tax examination. With limited exceptions, we are no longer subject to examination for state and local jurisdictions for the tax years prior to 2016 and for the tax years prior to 2013 for foreign jurisdictions.
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of our deferred tax assets and liabilities are as follows:
| April 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Deferred tax liabilities: | |||||||||||||||||
| Intangible assets | $ | 1,399.7 | $ | 1,428.3 | |||||||||||||
| Property, plant, and equipment | 151.3 | 120.5 | |||||||||||||||
| Leases | 30.3 | — | |||||||||||||||
| Other | 15.1 | 13.4 | |||||||||||||||
| Total deferred tax liabilities | $ | 1,596.4 | $ | 1,562.2 | |||||||||||||
| Deferred tax assets: | |||||||||||||||||
| Post-employment and other employee benefits | $ | 100.3 | $ | 84.9 | |||||||||||||
| Tax credit and loss carryforwards | 28.1 | 10.0 | |||||||||||||||
| Intangible assets | 16.9 | 17.2 | |||||||||||||||
| Hedging transactions | 59.5 | 15.6 | |||||||||||||||
| Leases | 31.9 | — | |||||||||||||||
| Other | 37.8 | 39.4 | |||||||||||||||
| Total deferred tax assets | $ | 274.5 | $ | 167.1 | |||||||||||||
| Valuation allowance | (29.7) | (3.5) | |||||||||||||||
| Total deferred tax assets, less allowance | $ | 244.8 | $ | 163.6 | |||||||||||||
| Net deferred tax liability | $ | 1,351.6 | $ | 1,398.6 | |||||||||||||
We evaluate the realizability of deferred tax assets for each of the jurisdictions in which we operate. The total valuation allowance increased by a net amount of $26.2 during the year, primarily related to the foreign tax credit deferred tax assets that were determined to not be realizable.
During 2020, we returned $39.7 of international cash to the U.S., primarily driven by a reduction in our capital investment in certain foreign subsidiaries in conjunction with a restructuring of our international holding and operating entities. No foreign withholding taxes were applicable. The state income taxes were not significant and have been included in income tax expense. Deferred income taxes have not been provided on approximately $29.7 of remaining temporary differences related to our investments in foreign subsidiaries since these amounts remain permanently reinvested. It is not practical to estimate the amount of additional taxes that might be payable on these basis differences because of the numerous methods by which these differences could reverse.
Our unrecognized tax benefits were $13.1, $15.0, and $32.3, of which $10.5, $12.0, and $21.5 would affect the effective tax rate, if recognized, as of April 30, 2020, 2019, and 2018, respectively. Our accrual for tax-related net interest and penalties totaled $1.9, $3.3, and $4.0 as of April 30, 2020, 2019, and 2018, respectively. The amount of tax related to net interest and penalties credited to earnings totaled $0.1 and $0.8 for 2020 and 2019, respectively, and charged to earnings totaled $0.1 during 2018.
Within the next 12 months, it is reasonably possible that we could decrease our unrecognized tax benefits by an estimated $2.6, primarily as a result of the expiration of statute of limitation periods.
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A reconciliation of our unrecognized tax benefits is as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Balance at May 1, | $ | 15.0 | $ | 32.3 | $ | 40.4 | |||||||||||
| Increases: | |||||||||||||||||
| Current year tax positions | 1.4 | 0.9 | 1.1 | ||||||||||||||
| Prior year tax positions | 0.2 | 0.3 | 0.5 | ||||||||||||||
| Decreases: | |||||||||||||||||
| Settlement with tax authorities | — | 9.0 | 3.0 | ||||||||||||||
| Expiration of statute of limitations periods | 3.5 | 9.5 | 6.7 | ||||||||||||||
| Balance at April 30, | $ | 13.1 | $ | 15.0 | $ | 32.3 | |||||||||||
Note 15: Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), including the reclassification adjustments for items that are reclassified from accumulated other comprehensive income (loss) to net income, are shown below.
|
Foreign
Currency Translation Adjustment |
Net Gains (Losses)
on Cash Flow
Hedging
Derivatives (A)
|
Pension
and Other
Postretirement
Liabilities (B)
|
Unrealized
Gain (Loss) on Available-for-Sale Securities |
Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||
| Balance at May 1, 2017 | $ | (43.0) | $ | (4.4) | $ | (100.0) | $ | 4.0 | $ | (143.4) | |||||||||||||||||||
| Reclassification adjustments | — | 0.5 | 10.7 | — | 11.2 | ||||||||||||||||||||||||
| Current period credit (charge) | 26.6 | 2.7 | 9.2 | (1.7) | 36.8 | ||||||||||||||||||||||||
| Income tax benefit (expense) | — | (1.2) | (5.6) | 0.5 | (6.3) | ||||||||||||||||||||||||
|
Reclassification of stranded tax effects (C)
|
— | (0.5) | (15.3) | 0.8 | (15.0) | ||||||||||||||||||||||||
| Balance at April 30, 2018 | $ | (16.4) | $ | (2.9) | $ | (101.0) | $ | 3.6 | $ | (116.7) | |||||||||||||||||||
| Reclassification adjustments | — | 0.4 | 7.3 | — | 7.7 | ||||||||||||||||||||||||
| Current period credit (charge) | (19.1) | (49.1) | (19.1) | 0.7 | (86.6) | ||||||||||||||||||||||||
| Income tax benefit (expense) | — | 11.2 | 2.8 | (0.2) | 13.8 | ||||||||||||||||||||||||
| Balance at April 30, 2019 | $ | (35.5) | $ | (40.4) | $ | (110.0) | $ | 4.1 | $ | (181.8) | |||||||||||||||||||
| Reclassification adjustments | — | 2.1 | 7.4 | — | 9.5 | ||||||||||||||||||||||||
| Current period credit (charge) | (15.0) | (190.7) | (54.8) | (0.4) | (260.9) | ||||||||||||||||||||||||
| Income tax benefit (expense) | — | 43.4 | 10.7 | 0.1 | 54.2 | ||||||||||||||||||||||||
| Balance at April 30, 2020 | $ | (50.5) | $ | (185.6) | $ | (146.7) | $ | 3.8 | $ | (379.0) | |||||||||||||||||||
(A)The reclassification from accumulated other comprehensive income (loss) to interest expense was related to terminated interest rate contracts. The current period charge in 2020 and 2019 relates to losses on the interest rate contracts entered into in November 2018 and June 2018 that were terminated in 2020. The current period credit in 2018 relates to the gain on the interest rate contract terminated in 2018. For additional information, see Note 10: Derivative Financial Instruments.
(B)Amortization of net losses and prior service costs was reclassified from accumulated other comprehensive income (loss) to other income (expense) – net.
(C)During 2018, we adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allowed us to reclassify the stranded income tax effects resulting from the Tax Act from accumulated other comprehensive income (loss) to retained earnings.
Note 16: Contingencies
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart, the significant majority of which we settled and paid during the second half of 2019. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at April 30, 2020. Based on the information known to date, with the exception of the
75
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.
On May 9, 2011, CERT filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against us and additional defendants who manufacture, package, distribute, or sell packaged coffee. The lawsuit is CERT v. Brad Barry LLC, et al., and was a tag along to a 2010 lawsuit against companies selling “ready-to-drink” coffee based on the same claims. Both cases have since been consolidated and now include nearly eighty defendants, which constitute the great majority of the coffee industry in California. The Plaintiff alleges that we and the other defendants failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. The Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of $2,500.00 per day per violation of Proposition 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.
As part of a joint defense group organized to defend against the lawsuit, we dispute the claims of the Plaintiff. 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. We have asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On
September 1, 2015, the trial court issued a final ruling adverse to the defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of calendar year 2017. On March 28, 2018, the trial court issued a proposed ruling adverse to the defendants on the Phase 2 defense, our last remaining defense to liability. The trial court finalized and affirmed its Phase 2 ruling on May 7, 2018, and therefore, the trial on the third phase regarding remedies issues was scheduled to commence on October 15, 2018. The trial did not proceed on the scheduled date as further described below.
On June 15, 2018, the state agency responsible for administering the Proposition 65 program, the California Office of Environmental Health Hazard Assessment (“OEHHA”), issued a proposed regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The California Court of Appeals granted defendants’ requests to stay the trial on remedies until a final determination was made on OEHHA’s proposed regulation. During the interim period, the California Office of Administrative Law approved the proposed regulation on June 3, 2019, and the regulation went into effect on October 1, 2019. In response to CERT’s objection, the defendants amended their answer to raise the regulation as a complete defense to the claims. CERT unsuccessfully challenged the defendants’ right to assert the regulation as an affirmative defense but continues to challenge the validity of the regulation. During the third quarter of 2020, CERT filed several motions seeking judgment in its favor as a matter of law, and the defendants also filed their own motion. The hearing on the motions has been pushed back until at least July 22, 2020, due to COVID-19. This past quarter, CERT issued discovery requests seeking information regarding acrylamide in coffee flavorings, thereby introducing a new theory into the lawsuit, over the objection of the defendants.
At this stage of the proceedings, prior to and without knowing whether the regulation will stand as a defense or the trial on remedies issues will move forward in light of the challenge, we are unable to predict or reasonably estimate the potential loss or effect on our operations. Accordingly, no loss contingency has been recorded for this matter as of April 30, 2020, as the likelihood of loss is not considered probable or estimable. The trial court has discretion to impose zero penalties against us or to impose significant statutory penalties if the case proceeds. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase our costs and adversely affect sales of our coffee products, as well as involve substantial expense and operational disruption, which could have a material adverse impact on our financial position, results of operations, or cash flows. Furthermore, a future appellate court decision could reverse the earlier trial court rulings should the regulation be held invalid. The outcome and the financial impact of settlement, the trial, or the appellate court rulings of the case, if any, cannot be predicted at this time.
Note 17: Common Shares
Voting: The Amended Articles of Incorporation (“Articles”) provide that each holder of a common share outstanding is entitled to one vote on each matter submitted to a vote of the shareholders, except for the following specific matters:
•any matter that relates to or would result in the dissolution or liquidation of the Company;
•the adoption of any amendment to the Articles or Amended Regulations, or the adoption of amended Articles, other than the adoption of any amendment or amended Articles that increases the number of votes to which holders of our common shares are entitled or expands the matters to which time-phased voting applies;
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•any proposal or other action to be taken by our shareholders relating to any successor plan to the Rights Agreement, dated as of May 20, 2009, between the Company and Computershare Trust Company, N.A, which expired on
June 25, 2018;
•any matter relating to any stock option plan, stock purchase plan, executive compensation plan, executive benefit plan, or other similar plan, arrangement, or agreement;
•the adoption of any agreement or plan of or for the merger, consolidation, or majority share acquisition of us or any of our subsidiaries with or into any other person, whether domestic or foreign, corporate or noncorporate, or the authorization of the lease, sale, exchange, transfer, or other disposition of all, or substantially all, of our assets;
•any matter submitted to our shareholders pursuant to Article Fifth (which relates to procedures applicable to certain business combinations) or Article Seventh (which relates to procedures applicable to certain proposed acquisitions of specified percentages of our outstanding common shares) of the Articles, as they may be further amended, or any issuance of our common shares for which shareholder approval is required by applicable stock exchange rules; and
•any matter relating to the issuance of our common shares or the repurchase of our common shares that the Board determines is required or appropriate to be submitted to our shareholders under the Ohio Revised Code or applicable stock exchange rules.
On the matters listed above, common shares are entitled to 10 votes per share if they meet the requirements set forth in the Articles. Common shares which would be entitled to 10 votes per share must meet one of the following criteria:
•common shares for which there has not been a change in beneficial ownership in the past four years; or
•common shares received through our various equity plans that have not been sold or otherwise transferred.
In the event of a change in beneficial ownership, the new owner of that common share will be entitled to only one vote with respect to that share on all matters until four years pass without a further change in beneficial ownership of the share.
Repurchase Programs: We did not repurchase any common shares under a repurchase plan authorized by the Board during 2020 and 2019. At April 30, 2020, approximately 3.6 million common shares remain available for repurchase pursuant to the Board’s authorizations.
Note 18: Quarterly Results of Operations (Unaudited)
The following tables summarize the unaudited quarterly results of operations for the years ended April 30, 2020 and 2019.
| 2020 | |||||||||||||||||||||||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,778.9 | $ | 1,957.8 | $ | 1,972.3 | $ | 2,092.0 | |||||||||||||||||||||||||||||||||
| Gross profit | 699.6 | 754.0 | 760.0 | 788.4 | |||||||||||||||||||||||||||||||||||||
| Net income | 154.6 | 211.2 | 187.4 | 226.3 | |||||||||||||||||||||||||||||||||||||
|
Earnings per common share (A):
|
|||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 1.36 | $ | 1.85 | $ | 1.64 | $ | 1.98 | |||||||||||||||||||||||||||||||||
| Net income – assuming dilution | 1.36 | 1.85 | 1.64 | 1.98 | |||||||||||||||||||||||||||||||||||||
| Dividends declared per common share | 0.88 | 0.88 | 0.88 | 0.88 | |||||||||||||||||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,902.5 | $ | 2,021.5 | $ | 2,011.9 | $ | 1,902.1 | |||||||||||||||||||||||||||||||||
| Gross profit | 678.2 | 771.3 | 773.8 | 692.4 | |||||||||||||||||||||||||||||||||||||
| Net income | 133.0 | 188.5 | 121.4 | 71.5 | |||||||||||||||||||||||||||||||||||||
|
Earnings per common share (A):
|
|||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 1.17 | $ | 1.66 | $ | 1.07 | $ | 0.63 | |||||||||||||||||||||||||||||||||
| Net income – assuming dilution | 1.17 | 1.66 | 1.07 | 0.63 | |||||||||||||||||||||||||||||||||||||
| Dividends declared per common share | 0.85 | 0.85 | 0.85 | 0.85 | |||||||||||||||||||||||||||||||||||||
(A) Annual net income per common share may not equal the sum of the individual quarters due to differences in the average number of shares outstanding during the respective periods, primarily due to share repurchases.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 Exchange Act), as of April 30, 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.
Changes in Internal Controls: There were no changes in internal control over financial reporting that occurred during the fourth quarter ended April 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item as to the directors of the Company, the Audit Committee, the Audit Committee financial expert, and compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the information set forth under the captions “Election of Directors,” “Corporate Governance,” “Board and Committee Meetings,” and “Ownership of Common Shares” in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 19, 2020. The information required by this Item as to the executive officers of the Company is incorporated herein by reference to Part I, Item 1 in this Annual Report on Form 10-K.
The Board of Directors has adopted a Code of Business Conduct and Ethics, last revised January 2018, which applies to our directors, principal executive officer, and principal financial and accounting officer. The Board of Directors has adopted charters for each of the Audit, Executive Compensation, and Nominating, Governance, and Corporate Responsibility committees and has also adopted Corporate Governance Guidelines. Copies of these documents are available on our website (investors.jmsmucker.com/governance-documents).
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the information set forth under the captions “Executive Compensation,” “Board and Committee Meetings,” and “Compensation Committee Interlocks and Insider Participation” in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 19, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to the information set forth under the captions “Ownership of Common Shares” and “Equity Compensation Plan Information” in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 19, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference to the information set forth under the captions “Corporate Governance” and “Related Party Transactions” in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 19, 2020.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to the information set forth under the captions “Service Fees Paid to the Independent Registered Public Accounting Firm” and “Audit Committee Pre-Approval Policies and Procedures” in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 19, 2020.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
| (a)(1) | Financial Statements: | |||||||
| See the Index to Financial Statements on page 36 of this Annual Report on Form 10-K. | ||||||||
| (a)(2) | Financial Statement Schedules: | |||||||
| Financial statement schedules are omitted because they are not applicable or because the information required is set forth in the Consolidated Financial Statements or notes thereto. | ||||||||
| (a)(3) | Exhibits: | |||||||
| The following exhibits are either attached or incorporated herein by reference to another filing with the U.S. Securities and Exchange Commission. | ||||||||
| Exhibit Number | Exhibit Description | ||||
80
| Exhibit Number | Exhibit Description | ||||
81
| Exhibit Number | Exhibit Description | ||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 104 | The cover page of this Annual Report on Form 10-K for the year ended April 30, 2020, formatted in Inline XBRL | ||||
* Identifies exhibits that consist of a management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Date: June 19, 2020
|
The J. M. Smucker Company | ||||||||||
| /s/ Tucker H. Marshall | |||||||||||
| By: | Tucker H. Marshall | ||||||||||
| Chief Financial Officer | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| * | ||||||||||||||
| Mark T. Smucker |
President and Chief Executive Officer and Director
(Principal Executive Officer) |
June 19, 2020
|
||||||||||||
| /s/ Tucker H. Marshall | ||||||||||||||
| Tucker H. Marshall | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Timothy P. Smucker | Chairman Emeritus | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Richard K. Smucker | Executive Chairman | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Kathryn W. Dindo | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Paul J. Dolan | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Jay L. Henderson | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Gary A. Oatey | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Kirk L. Perry | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Sandra Pianalto | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Nancy Lopez Russell | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Alex Shumate | Director | June 19, 2020 | ||||||||||||
| * | ||||||||||||||
| Dawn C. Willoughby | Director | June 19, 2020 | ||||||||||||
| * | The undersigned, by signing her name hereto, does sign and execute this report pursuant to the powers of attorney executed by the above-named officers and directors of the registrant, which are being filed herewith with the Securities and Exchange Commission on behalf of such officers and directors. | ||||
|
Date: June 19, 2020
|
/s/ Jeannette L. Knudsen | |||||||||||||
| By: | Jeannette L. Knudsen Attorney-in-Fact | |||||||||||||
83
Exhibit 10.27