filings.toolsItem 1. Financial Statements.
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Item 1. Financial Statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| Dollars in millions, except per share data | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net sales | $ | 2,216.3 | $ | 2,057.1 | $ | 6,294.4 | $ | 5,965.1 | |||||||||||||||
| Cost of products sold (A) | 1,460.5 | 1,374.0 | 4,285.0 | 3,931.1 | |||||||||||||||||||
| Gross Profit | 755.8 | 683.1 | 2,009.4 | 2,034.0 | |||||||||||||||||||
| Selling, distribution, and administrative expenses | 380.9 | 336.0 | 1,079.0 | 1,007.7 | |||||||||||||||||||
| Amortization | 55.6 | 55.3 | 166.8 | 166.1 | |||||||||||||||||||
| Other intangible assets impairment charge | — | 150.4 | — | 150.4 | |||||||||||||||||||
| Other special project costs (A) | 0.6 | 2.0 | 2.7 | 5.1 | |||||||||||||||||||
| Other operating expense (income) – net | 0.8 | (11.2) | (30.1) | (17.1) | |||||||||||||||||||
| Operating Income | 317.9 | 150.6 | 791.0 | 721.8 | |||||||||||||||||||
| Interest expense – net | (37.9) | (39.5) | (116.7) | (122.9) | |||||||||||||||||||
| Other income (expense) – net | (4.6) | (1.5) | (4.9) | (15.3) | |||||||||||||||||||
| Income Before Income Taxes | 275.4 | 109.6 | 669.4 | 583.6 | |||||||||||||||||||
| Income tax expense | 66.9 | 39.9 | 160.0 | 154.0 | |||||||||||||||||||
| Net Income | $ | 208.5 | $ | 69.7 | $ | 509.4 | $ | 429.6 | |||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Net Income | $ | 1.96 | $ | 0.64 | $ | 4.78 | $ | 3.96 | |||||||||||||||
| Net Income – Assuming Dilution | $ | 1.95 | $ | 0.64 | $ | 4.77 | $ | 3.96 |
(A) Special project costs include certain restructuring costs, which are recognized in cost of products sold and other special project costs. For more information, see Note 3: Restructuring Costs and Note 5: Reportable Segments.
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| Dollars in millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income | $ | 208.5 | $ | 69.7 | $ | 509.4 | $ | 429.6 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | 6.5 | (7.0) | (8.5) | (9.0) | |||||||||||||||||||
| Cash flow hedging derivative activity, net of tax | 2.7 | 3.4 | 7.8 | 8.4 | |||||||||||||||||||
| Pension and other postretirement benefit plans activity, net of tax | 0.6 | 4.7 | 1.5 | 8.6 | |||||||||||||||||||
| Available-for-sale securities activity, net of tax | 0.3 | 0.1 | (0.6) | 0.1 | |||||||||||||||||||
| Total Other Comprehensive Income (Loss) | 10.1 | 1.2 | 0.2 | 8.1 | |||||||||||||||||||
| Comprehensive Income | $ | 218.6 | $ | 70.9 | $ | 509.6 | $ | 437.7 |
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| Dollars in millions | January 31, 2023 | April 30, 2022 | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 104.2 | $ | 169.9 | |||||||
| Trade receivables – net | 533.9 | 524.7 | |||||||||
| Inventories: | |||||||||||
| Finished products | 786.1 | 704.4 | |||||||||
| Raw materials | 455.4 | 384.9 | |||||||||
| Total Inventory | 1,241.5 | 1,089.3 | |||||||||
| Other current assets | 148.2 | 226.2 | |||||||||
| Total Current Assets | 2,027.8 | 2,010.1 | |||||||||
| Property, Plant, and Equipment | |||||||||||
| Land and land improvements | 131.4 | 120.4 | |||||||||
| Buildings and fixtures | 1,026.4 | 959.7 | |||||||||
| Machinery and equipment | 2,654.3 | 2,503.3 | |||||||||
| Construction in progress | 489.6 | 527.8 | |||||||||
| Gross Property, Plant, and Equipment | 4,301.7 | 4,111.2 | |||||||||
| Accumulated depreciation | (2,027.4) | (1,979.5) | |||||||||
| Total Property, Plant, and Equipment | 2,274.3 | 2,131.7 | |||||||||
| Other Noncurrent Assets | |||||||||||
| Operating lease right-of-use assets | 82.9 | 106.5 | |||||||||
| Goodwill | 6,010.1 | 6,015.8 | |||||||||
| Other intangible assets – net | 5,484.4 | 5,652.2 | |||||||||
| Other noncurrent assets | 138.0 | 138.7 | |||||||||
| Total Other Noncurrent Assets | 11,715.4 | 11,913.2 | |||||||||
| Total Assets | $ | 16,017.5 | $ | 16,055.0 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 1,231.0 | $ | 1,193.3 | |||||||
| Accrued trade marketing and merchandising | 215.1 | 193.8 | |||||||||
| Short-term borrowings | — | 180.0 | |||||||||
| Current operating lease liabilities | 34.4 | 40.1 | |||||||||
| Other current liabilities | 260.2 | 345.6 | |||||||||
| Total Current Liabilities | 1,740.7 | 1,952.8 | |||||||||
| Noncurrent Liabilities | |||||||||||
| Long-term debt | 4,313.3 | 4,310.6 | |||||||||
| Deferred income taxes | 1,323.6 | 1,325.8 | |||||||||
| Noncurrent operating lease liabilities | 56.3 | 76.2 | |||||||||
| Other noncurrent liabilities | 248.6 | 249.5 | |||||||||
| Total Noncurrent Liabilities | 5,941.8 | 5,962.1 | |||||||||
| Total Liabilities | 7,682.5 | 7,914.9 | |||||||||
| Shareholders’ Equity | |||||||||||
| Common shares | 26.6 | 26.6 | |||||||||
| Additional capital | 5,469.4 | 5,457.9 | |||||||||
| Retained income | 3,076.2 | 2,893.0 | |||||||||
| Accumulated other comprehensive income (loss) | (237.2) | (237.4) | |||||||||
| Total Shareholders’ Equity | 8,335.0 | 8,140.1 | |||||||||
| Total Liabilities and Shareholders’ Equity | $ | 16,017.5 | $ | 16,055.0 |
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
| Nine Months Ended January 31, | |||||||||||
| Dollars in millions | 2023 | 2022 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | 509.4 | $ | 429.6 | |||||||
| Adjustments to reconcile net income to net cash provided by (used for) operations: | |||||||||||
| Depreciation | 172.0 | 178.9 | |||||||||
| Amortization | 166.8 | 166.1 | |||||||||
| Other intangible assets impairment charge | — | 150.4 | |||||||||
| Share-based compensation expense | 11.3 | 15.2 | |||||||||
| Gain on divestitures – net | (1.6) | (9.6) | |||||||||
| Other noncash adjustments – net | 26.2 | 12.3 | |||||||||
| Make-whole payments included in financing activities | — | 7.0 | |||||||||
| Defined benefit pension contributions | (72.8) | (3.9) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Trade receivables | (10.7) | (30.7) | |||||||||
| Inventories | (154.6) | (131.0) | |||||||||
| Other current assets | 69.4 | 22.5 | |||||||||
| Accounts payable | 46.3 | (15.2) | |||||||||
| Accrued liabilities | 26.2 | (35.8) | |||||||||
| Income and other taxes | (39.9) | (14.9) | |||||||||
| Other – net | 2.6 | 1.7 | |||||||||
| Net Cash Provided by (Used for) Operating Activities | 750.6 | 742.6 | |||||||||
| Investing Activities | |||||||||||
| Additions to property, plant, and equipment | (332.3) | (244.5) | |||||||||
| Proceeds from divestitures – net | 1.6 | 130.2 | |||||||||
| Other – net | 23.9 | (17.6) | |||||||||
| Net Cash Provided by (Used for) Investing Activities | (306.8) | (131.9) | |||||||||
| Financing Activities | |||||||||||
| Short-term borrowings (repayments) – net | (185.2) | 11.7 | |||||||||
| Proceeds from long-term debt | — | 797.6 | |||||||||
| Repayments of long-term debt, including make-whole payments | — | (1,157.0) | |||||||||
| Capitalized debt issuance costs | — | (10.4) | |||||||||
| Quarterly dividends paid | (321.8) | (311.1) | |||||||||
| Purchase of treasury shares | (8.0) | (7.7) | |||||||||
| Proceeds from stock option exercises | 7.8 | 16.2 | |||||||||
| Other – net | (2.2) | 0.3 | |||||||||
| Net Cash Provided by (Used for) Financing Activities | (509.4) | (660.4) | |||||||||
| Effect of exchange rate changes on cash | (0.1) | (0.3) | |||||||||
| Net increase (decrease) in cash and cash equivalents | (65.7) | (50.0) | |||||||||
| Cash and cash equivalents at beginning of period | 169.9 | 334.3 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 104.2 | $ | 284.3 |
( ) Denotes use of cash
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(Unaudited)
| Nine Months Ended January 31, 2023 | |||||||||||||||||||||||||||||||||||
| Dollars in millions | Common Shares Outstanding | Common Shares | Additional Capital | Retained Income | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||
| Balance at May 1, 2022 | 106,458,317 | $ | 26.6 | $ | 5,457.9 | $ | 2,893.0 | $ | (237.4) | $ | 8,140.1 | ||||||||||||||||||||||||
| Net income | 109.8 | 109.8 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 4.0 | 4.0 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 113.8 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (61,693) | — | (6.7) | (1.1) | (7.8) | ||||||||||||||||||||||||||||||
| Stock plans | 162,735 | — | 6.5 | — | 6.5 | ||||||||||||||||||||||||||||||
| Cash dividends declared, $1.02 per common share | (108.3) | (108.3) | |||||||||||||||||||||||||||||||||
| Balance at July 31, 2022 | 106,559,359 | $ | 26.6 | $ | 5,457.7 | $ | 2,893.4 | $ | (233.4) | $ | 8,144.3 | ||||||||||||||||||||||||
| Net income | 191.1 | 191.1 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (13.9) | (13.9) | |||||||||||||||||||||||||||||||||
| Comprehensive income | 177.2 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (580) | — | (0.1) | — | (0.1) | ||||||||||||||||||||||||||||||
| Stock plans | 67,757 | — | 4.4 | 4.4 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $1.02 per common share | (108.5) | (108.5) | |||||||||||||||||||||||||||||||||
| Balance at October 31, 2022 | 106,626,536 | $ | 26.6 | $ | 5,462.0 | $ | 2,976.0 | $ | (247.3) | $ | 8,217.3 | ||||||||||||||||||||||||
| Net income | 208.5 | 208.5 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 10.1 | 10.1 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 218.6 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (746) | — | (0.1) | — | (0.1) | ||||||||||||||||||||||||||||||
| Stock plans | 8,499 | — | 7.5 | 7.5 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $1.02 per common share | (108.3) | (108.3) | |||||||||||||||||||||||||||||||||
| Balance at January 31, 2023 | 106,634,289 | $ | 26.6 | $ | 5,469.4 | $ | 3,076.2 | $ | (237.2) | $ | 8,335.0 |
| Nine Months Ended January 31, 2022 | |||||||||||||||||||||||||||||||||||
| Dollars in millions | Common Shares Outstanding | Common Shares | Additional Capital | Retained Income | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||
| Balance at May 1, 2021 | 108,339,057 | $ | 27.1 | $ | 5,527.6 | $ | 2,847.5 | $ | (277.4) | $ | 8,124.8 | ||||||||||||||||||||||||
| Net income | 153.9 | 153.9 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (4.2) | (4.2) | |||||||||||||||||||||||||||||||||
| Comprehensive income | 149.7 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (50,203) | — | (6.1) | (0.7) | (6.8) | ||||||||||||||||||||||||||||||
| Stock plans | 71,140 | — | 9.5 | 9.5 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $0.99 per common share | (106.9) | (106.9) | |||||||||||||||||||||||||||||||||
| Balance at July 31, 2021 | 108,359,994 | $ | 27.1 | $ | 5,531.0 | $ | 2,893.8 | $ | (281.6) | $ | 8,170.3 | ||||||||||||||||||||||||
| Net income | 206.0 | 206.0 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 11.1 | 11.1 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 217.1 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (5,676) | — | (0.6) | (0.1) | (0.7) | ||||||||||||||||||||||||||||||
| Stock plans | 8,521 | — | 6.6 | 6.6 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $0.99 per common share | (106.9) | (106.9) | |||||||||||||||||||||||||||||||||
| Balance at October 31, 2021 | 108,362,839 | $ | 27.1 | $ | 5,537.0 | $ | 2,992.8 | $ | (270.5) | $ | 8,286.4 | ||||||||||||||||||||||||
| Net income | 69.7 | 69.7 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 1.2 | 1.2 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 70.9 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (1,505) | — | (0.2) | — | (0.2) | ||||||||||||||||||||||||||||||
| Stock plans | 100,996 | — | 16.8 | 16.8 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $0.99 per common share | (107.0) | (107.0) | |||||||||||||||||||||||||||||||||
| Balance at January 31, 2022 | 108,462,330 | $ | 27.1 | $ | 5,553.6 | $ | 2,955.5 | $ | (269.3) | $ | 8,266.9 |
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, unless otherwise noted, except per share data)
Note 1: Basis of Presentation
The unaudited interim condensed consolidated financial statements of The J. M. Smucker Company (“Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included.
Operating results for the nine months ended January 31, 2023, are not necessarily indicative of the results that may be expected for the year ending April 30, 2023. For further information, reference is made to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended April 30, 2022.
Note 2: Recently Issued Accounting Standards
In March 2022, the U.S. Securities and Exchange Commission (the “SEC”) issued the proposed rule under SEC Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, to enhance and standardize the climate-related disclosures provided by public companies. This update will require the disclosure of greenhouse gas emissions, including Scope 1 and Scope 2 emissions, which will be subject to third-party assurance, as well as climate-related targets and goals, and how the Board of Directors (the “Board”) and management oversee climate-related risks. As of January 31, 2023, these amendments were not adopted by the SEC; however, we anticipate that the adoption of these amendments will have a material impact on our financial statements and disclosures.
Note 3: Restructuring Costs
Restructuring costs primarily consist of employee-related costs and other transition and termination costs related to approved 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 impacted 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 restructuring activities. With the exception of accelerated depreciation, these costs are expensed as incurred. These restructuring costs are reported in cost of products sold and other special project costs in the Condensed Statements of Consolidated Income and are not allocated to segment profit. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.
A restructuring program was approved by the Board during 2021 associated with opportunities identified to reduce our overall cost structure, optimize our organizational design, and support our portfolio reshape. This is inclusive of certain restructuring costs associated with the divestitures of the Crisco*®, Natural Balance®*, private label dry pet food, and natural beverage and grains businesses. For additional information related to the divestitures, see Note 4: Divestitures.
During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close our Suffolk, Virginia, facility as a result of a new strategic partnership for the production of our liquid coffee products. During 2022, we completed the transition of production to JDE Peet’s N.V. Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the closure of our Ripon, Wisconsin, production facility to further optimize operations for our U.S. Retail Consumer Foods business. We completed the closure of the Ripon facility during the third quarter of 2023, as planned, and anticipate the remaining restructuring activities will be completed by the end of 2023. We expect to incur total costs of approximately $65.0 associated with the restructuring activities, of which more than half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation. The remaining costs represent employee-related costs.
The following table summarizes our restructuring costs incurred related to the restructuring program.
| Three Months Ended January 31, | Nine Months Ended January 31, | Total Costs Incurred to Date at January 31, 2023 | |||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||
| Employee-related costs | $ | 0.3 | $ | 1.4 | $ | 2.1 | $ | 3.8 | $ | 25.7 | |||||||||||||||||||
| Other transition and termination costs | 1.3 | 7.4 | 5.5 | 18.8 | 34.5 | ||||||||||||||||||||||||
| Total restructuring costs | $ | 1.6 | $ | 8.8 | $ | 7.6 | $ | 22.6 | $ | 60.2 |
The obligation related to severance costs and retention bonuses was $0.5 and $2.4 at January 31, 2023, and April 30, 2022, respectively. Noncash charges of $3.2 and $6.7 were included in the restructuring costs during the three months ended January 31, 2023 and 2022, respectively, and $10.2 and $15.9 during the nine months ended January 31, 2023 and 2022, respectively. As of January 31, 2023, cumulative noncash charges incurred to date were $33.2 and primarily consisted of accelerated depreciation.
Note 4: Divestitures
Subsequent to January 31, 2023, we entered into a definitive agreement to sell several of our pet food brands to Post Holdings, Inc. (“Post”). We expect the transaction to close during the fourth quarter of 2023, subject to closing conditions, including the receipt of required regulatory approvals. The transaction includes the Rachael Ray® Nutrish®, 9Lives®, Kibbles ’n Bits®, Nature’s Recipe®, and Gravy Train® brands, as well as our private label pet food business, inclusive of certain trademarks and licensing agreements, manufacturing and distribution facilities in Bloomsburg, Pennsylvania, manufacturing facilities in Meadville, Pennsylvania, and Lawrence, Kansas, and approximately 1,100 employees who support these pet food brands. Under our ownership, these brands are expected to generate net sales of approximately $1.5 billion in 2023, primarily included in the U.S. Retail Pet Foods segment. The transaction is valued at approximately $1.2 billion, consisting of $700.0 in cash, subject to a working capital adjustment, and approximately 5.39 million shares of Post common stock. Based on the expected proceeds, less estimated costs to sell, we anticipate recognizing a pre-tax loss of approximately $815.0 in the fourth quarter of 2023, inclusive of the estimated carrying value of the net assets to be disposed, primarily consisting of goodwill and other intangible assets.
On January 31, 2022, we sold the natural beverage and grains businesses to Nexus Capital Management LP (“Nexus”). The transaction included products sold under the R.W. Knudsen*®* and TruRoots*®* brands, inclusive of certain trademarks, a licensing agreement for Santa Cruz Organic*®* beverages, dedicated manufacturing and distribution facilities in Chico, California, and Havre de Grace, Maryland, and approximately 150 employees who supported the natural beverage and grains businesses. The transaction did not include Santa Cruz Organic nut butters, fruit spreads, syrups, or applesauce. Under our ownership, the businesses generated net sales of $106.7 in 2022, primarily included in the U.S. Retail Consumer Foods segment. Final net proceeds from the divestiture were $98.7, which were inclusive of a working capital adjustment and net of cash transaction costs. We recognized a pre-tax gain of $28.3 related to the natural beverage and grains businesses within other operating expense (income) – net in the Condensed Statements of Consolidated Income, of which $26.7 was recognized during the second half of 2022, and the remaining $1.6 was recognized upon finalization of the working capital adjustment during the first quarter of 2023.
On December 1, 2021, we sold the private label dry pet food business to Diamond Pet Foods, Inc. (“Diamond Pet Foods”). The transaction included dry pet food products sold under private label brands, a dedicated manufacturing facility located in Frontenac, Kansas, and approximately 220 employees who supported the private label dry pet food business. The transaction did not include any branded products or our private label wet pet food business. Under our ownership, the business generated net sales of $62.3 in 2022, included in the U.S. Retail Pet Foods segment. Final net proceeds from the divestiture were $32.9, which were net of cash transaction costs. Upon completion of this transaction during the third quarter of 2022, we recognized a pre-tax loss of $17.1, within other operating expense (income) – net in the Condensed Statement of Consolidated Income.
Note 5: Reportable Segments
We operate in one industry: the manufacturing and marketing of food and beverage products. We have three reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods. The presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable.
The U.S. Retail Pet Foods segment primarily includes the domestic sales of Rachael Ray Nutrish, Meow Mix®, Milk-Bone®, 9Lives, Kibbles ’n Bits, Pup-Peroni®, and Nature’s Recipe branded products; the U.S. Retail Coffee segment primarily includes
the domestic sales of Folgers®, Dunkin’®, and Café Bustelo® branded coffee; and the U.S. Retail Consumer Foods segment primarily includes the domestic sales of Smucker’s® and Jif® branded products. International and Away From Home includes the sale of products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores).
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 amortization expense and impairment charges related to intangible assets, gains and losses on divestitures, the net change in cumulative unallocated gains and losses on commodity and foreign currency exchange derivative activities (“change in net cumulative unallocated derivative gains and losses”), certain divestiture, acquisition, integration, and restructuring costs (“special project costs”), as well as corporate administrative expenses.
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.
The following table reconciles segment profit to income before income taxes.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 758.6 | $ | 696.6 | $ | 2,252.8 | $ | 2,046.2 | |||||||||||||||
| U.S. Retail Coffee | 735.1 | 661.8 | 2,042.8 | 1,850.1 | |||||||||||||||||||
| U.S. Retail Consumer Foods | 434.2 | 433.1 | 1,177.5 | 1,309.9 | |||||||||||||||||||
| International and Away From Home | 288.4 | 265.6 | 821.3 | 758.9 | |||||||||||||||||||
| Total net sales | $ | 2,216.3 | $ | 2,057.1 | $ | 6,294.4 | $ | 5,965.1 | |||||||||||||||
| Segment profit: | |||||||||||||||||||||||
| U.S. Retail Pet Foods | $ | 109.0 | $ | 95.7 | $ | 349.4 | $ | 275.2 | |||||||||||||||
| U.S. Retail Coffee | 204.0 | 213.4 | 537.6 | 572.5 | |||||||||||||||||||
| U.S. Retail Consumer Foods | 94.1 | 99.5 | 249.2 | 329.2 | |||||||||||||||||||
| International and Away From Home | 37.6 | 34.2 | 95.7 | 107.5 | |||||||||||||||||||
| Total segment profit | $ | 444.7 | $ | 442.8 | $ | 1,231.9 | $ | 1,284.4 | |||||||||||||||
| Amortization | (55.6) | (55.3) | (166.8) | (166.1) | |||||||||||||||||||
| Other intangible assets impairment charge | — | (150.4) | — | (150.4) | |||||||||||||||||||
| Gain on divestitures – net | — | 9.6 | 1.6 | 9.6 | |||||||||||||||||||
| Interest expense – net | (37.9) | (39.5) | (116.7) | (122.9) | |||||||||||||||||||
| Change in net cumulative unallocated derivative gains and losses | 17.5 | (22.4) | (43.4) | (37.9) | |||||||||||||||||||
| Cost of products sold – special project costs (A) | (1.0) | (6.8) | (4.9) | (17.5) | |||||||||||||||||||
| Other special project costs (A) | (0.6) | (2.0) | (2.7) | (5.1) | |||||||||||||||||||
| Corporate administrative expenses | (87.1) | (64.9) | (224.7) | (195.2) | |||||||||||||||||||
| Other income (expense) – net | (4.6) | (1.5) | (4.9) | (15.3) | |||||||||||||||||||
| Income before income taxes | $ | 275.4 | $ | 109.6 | $ | 669.4 | $ | 583.6 |
(A)Special project costs include certain restructuring costs, which are recognized in cost of products sold and other special project costs in the Condensed Statements of Consolidated Income. For more information, see Note 3: Restructuring Costs.
The following table presents certain geographical information.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| United States | $ | 2,080.8 | $ | 1,921.8 | $ | 5,902.8 | $ | 5,574.2 | |||||||||||||||
| International: | |||||||||||||||||||||||
| Canada | $ | 110.0 | $ | 111.9 | $ | 323.0 | $ | 326.5 | |||||||||||||||
| All other international | 25.5 | 23.4 | 68.6 | 64.4 | |||||||||||||||||||
| Total international | $ | 135.5 | $ | 135.3 | $ | 391.6 | $ | 390.9 | |||||||||||||||
| Total net sales | $ | 2,216.3 | $ | 2,057.1 | $ | 6,294.4 | $ | 5,965.1 |
The following table presents product category information.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Primary Reportable Segment (A) | |||||||||||||||||||||||||
| Coffee | $ | 827.7 | $ | 746.2 | $ | 2,307.2 | $ | 2,077.8 | U.S. Retail Coffee | ||||||||||||||||||||
| Cat food | 271.3 | 243.7 | 821.4 | 707.5 | U.S. Retail Pet Foods | ||||||||||||||||||||||||
| Pet snacks | 269.0 | 251.5 | 773.4 | 697.1 | U.S. Retail Pet Foods | ||||||||||||||||||||||||
| Dog food | 241.8 | 219.9 | 729.8 | 696.7 | U.S. Retail Pet Foods | ||||||||||||||||||||||||
| Frozen handheld | 172.6 | 120.2 | 501.4 | 380.9 | U.S. Retail Consumer Foods | ||||||||||||||||||||||||
| Peanut butter | 184.6 | 194.6 | 438.1 | 606.7 | U.S. Retail Consumer Foods | ||||||||||||||||||||||||
| Fruit spreads | 110.2 | 101.6 | 314.0 | 282.3 | U.S. Retail Consumer Foods | ||||||||||||||||||||||||
| Portion control | 42.9 | 42.4 | 114.2 | 117.6 | Other (B) | ||||||||||||||||||||||||
| Baking mixes and ingredients | 25.7 | 23.4 | 70.8 | 61.3 | Other (B) | ||||||||||||||||||||||||
| Juices and beverages | 0.8 | 36.0 | 2.4 | 105.7 | Other (B)(C) | ||||||||||||||||||||||||
| Other | 69.7 | 77.6 | 221.7 | 231.5 | Other (B) | ||||||||||||||||||||||||
| Total net sales | $ | 2,216.3 | $ | 2,057.1 | $ | 6,294.4 | $ | 5,965.1 |
(A)The primary reportable segment generally represents at least 75 percent of total net sales for each respective product category.
(B)Represents the International and Away From Home operating segments, which are combined for segment reporting purposes.
(C)During the three and nine months ended January 31, 2022, the net sales within this category were primarily related to the divested natural beverage business included in the U.S. Retail Consumer Foods segment. For more information, see Note 4: Divestitures.
Note 6: Earnings per Share
We computed net income per common share (“basic earnings per share”) under the two-class method for the three and nine months ended January 31, 2023 and 2022, due to certain unvested common shares that contained non-forfeitable rights to dividends (i.e., participating securities) during these periods. For the three and nine months ended January 31, 2023, the computation of net income per common share – assuming dilution (“diluted earnings per share”) was more dilutive under the treasury stock method, as compared to the two-class method; therefore, the treasury stock method was used in accordance with Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share. Diluted earnings per share for the three and nine months ended January 31, 2022, was computed under the two-class method.
The following table sets forth the computation of basic earnings per share and diluted earnings per share under the two-class method.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 208.5 | $ | 69.7 | $ | 509.4 | $ | 429.6 | |||||||||||||||
| Less: Net income allocated to participating securities | 0.2 | 0.1 | 0.7 | 1.2 | |||||||||||||||||||
| Net income allocated to common stockholders | $ | 208.3 | $ | 69.6 | $ | 508.7 | $ | 428.4 | |||||||||||||||
| Weighted-average common shares outstanding | 106.5 | 108.1 | 106.4 | 108.1 | |||||||||||||||||||
| Add: Dilutive effect of stock options | 0.1 | 0.1 | 0.1 | — | |||||||||||||||||||
| Weighted-average common shares outstanding – assuming dilution | 106.6 | 108.2 | 106.5 | 108.1 | |||||||||||||||||||
| Net income per common share | $ | 1.96 | $ | 0.64 | $ | 4.78 | $ | 3.96 | |||||||||||||||
| Net income per common share – assuming dilution | $ | 1.95 | $ | 0.64 | $ | 4.78 | $ | 3.96 |
The following table sets forth the computation of diluted earnings per share under the treasury stock method.
| Three Months Ended January 31, 2023 | Nine Months Ended January 31, 2023 | ||||||||||
| Net income | $ | 208.5 | $ | 509.4 | |||||||
| Weighted-average common shares outstanding – assuming dilution: | |||||||||||
| Weighted-average common shares outstanding | 106.5 | 106.4 | |||||||||
| Add: Dilutive effect of stock options | 0.1 | 0.1 | |||||||||
| Add: Dilutive effect of restricted shares, restricted stock units, and performance units | 0.4 | 0.4 | |||||||||
| Weighted-average common shares outstanding – assuming dilution | 107.0 | 106.9 | |||||||||
| Net income per common share – assuming dilution | $ | 1.95 | $ | 4.77 |
Note 7: Goodwill and Other Intangible Assets
We review goodwill and other indefinite-lived intangible assets for impairment at least annually on February 1, and more often if indicators of impairment exist. As of January 31, 2023, there were no indicators of impairment, and as a result, we do not believe that any of our reporting units or material indefinite-lived intangible assets are more likely than not impaired. The goodwill within the U.S. Retail Pet Foods segment remains susceptible to future impairment charges due to 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. The carrying value of the goodwill within the U.S. Retail Pet Foods segment was $2.4 billion as of January 31, 2023.
During the third quarter of 2022, we recognized an impairment charge of $150.4 related to the Rachael Ray Nutrish brand within the U.S. Retail Pet Foods segment, primarily driven by the re-positioning of this brand within the Pet Foods brand portfolio, which led to a decline in the current and long-term net sales expectations and the royalty rate used in the valuation analysis. This charge was included as a noncash charge in our Condensed Statement of Consolidated Income. Additionally, we reassessed the long-term strategic expectations for the Rachael Ray Nutrish brand and reclassified this brand as a finite-lived intangible asset as of January 31, 2022.
Note 8: Debt and Financing Arrangements
The following table summarizes the components of our long-term debt.
| January 31, 2023 | April 30, 2022 | ||||||||||||||||||||||
| Principal Outstanding | Carrying Amount (A) | Principal Outstanding | Carrying Amount (A) | ||||||||||||||||||||
| 3.50% Senior Notes due March 15, 2025 | 1,000.0 | 998.2 | 1,000.0 | 997.6 | |||||||||||||||||||
| 3.38% Senior Notes due December 15, 2027 | 500.0 | 497.9 | 500.0 | 497.6 | |||||||||||||||||||
| 2.38% Senior Notes due March 15, 2030 | 500.0 | 496.6 | 500.0 | 496.2 | |||||||||||||||||||
| 2.13% Senior Notes due March 15, 2032 | 500.0 | 494.3 | 500.0 | 493.8 | |||||||||||||||||||
| 4.25% Senior Notes due March 15, 2035 | 650.0 | 645.0 | 650.0 | 644.7 | |||||||||||||||||||
| 2.75% Senior Notes due September 15, 2041 | 300.0 | 297.2 | 300.0 | 297.1 | |||||||||||||||||||
| 4.38% Senior Notes due March 15, 2045 | 600.0 | 588.0 | 600.0 | 587.6 | |||||||||||||||||||
| 3.55% Senior Notes due March 15, 2050 | 300.0 | 296.1 | 300.0 | 296.0 | |||||||||||||||||||
| Total long-term debt | $ | 4,350.0 | $ | 4,313.3 | $ | 4,350.0 | $ | 4,310.6 | |||||||||||||||
(A) Represents the carrying amount included in the Condensed Consolidated Balance Sheets, which includes the impact of capitalized debt issuance costs, offering discounts, and terminated interest rate contracts.
We have available a $2.0 billion unsecured revolving credit facility with a group of 11 banks that matures in August 2026. Borrowings under the revolving credit facility bear interest on the prevailing U.S. Prime Rate, London Interbank Offered Rate, Euro Interbank Offered Rate, 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 January 31, 2023, or April 30, 2022.
We participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $2.0 billion at any time. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper is used as a continuing source of short-term financing for general corporate purposes. At April 30, 2022, we had $180.0 of short-term borrowings outstanding, which were issued under our commercial paper program at a weighted-average interest rate of 0.65 percent. As of January 31, 2023, we did not have a balance outstanding under the commercial paper program.
Interest paid totaled $9.9 and $8.6 for the three months ended January 31, 2023 and 2022, respectively, and $87.2 and $90.4 for the nine months ended January 31, 2023 and 2022, respectively. This differs from interest expense due to the timing of interest payments, capitalized interest, the effect of interest rate contracts, amortization of debt issuance costs and discounts, and the payment of other debt fees.
Our debt instruments contain covenant restrictions, including an interest coverage ratio. As of January 31, 2023, we are in compliance with all covenants.
Note 9: Pensions and Other Postretirement Benefits
The components of our net periodic benefit cost for defined benefit pension and other postretirement benefit plans are shown below.
| Three Months Ended January 31, | |||||||||||||||||||||||
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Service cost | $ | 0.3 | $ | 0.4 | $ | 0.2 | $ | 0.3 | |||||||||||||||
| Interest cost | 4.6 | 3.1 | 0.6 | 0.3 | |||||||||||||||||||
| Expected return on plan assets | (3.6) | (3.9) | — | — | |||||||||||||||||||
| Amortization of net actuarial loss (gain) | 1.0 | 1.7 | (0.3) | (0.1) | |||||||||||||||||||
| Amortization of prior service cost (credit) | 0.1 | 0.3 | (0.1) | (0.2) | |||||||||||||||||||
| Settlement loss (gain) | 1.4 | 1.3 | — | — | |||||||||||||||||||
| Net periodic benefit cost | $ | 3.8 | $ | 2.9 | $ | 0.4 | $ | 0.3 |
| Nine Months Ended January 31, | |||||||||||||||||||||||
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Service cost | $ | 0.9 | $ | 1.3 | $ | 0.7 | $ | 0.9 | |||||||||||||||
| Interest cost | 13.4 | 9.3 | 1.8 | 1.0 | |||||||||||||||||||
| Expected return on plan assets | (11.7) | (12.1) | — | — | |||||||||||||||||||
| Amortization of net actuarial loss (gain) | 3.0 | 5.2 | (0.9) | (0.3) | |||||||||||||||||||
| Amortization of prior service cost (credit) | 0.5 | 0.7 | (0.5) | (0.5) | |||||||||||||||||||
| Settlement loss (gain) | 3.1 | 7.5 | — | — | |||||||||||||||||||
| Net periodic benefit cost | $ | 9.2 | $ | 11.9 | $ | 1.1 | $ | 1.1 |
During the first nine months of 2023, we made contributions of $70.0 to increase funding for our U.S. qualified defined benefit pension plans and direct benefit payments of $2.8.
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 Derivatives: We enter into commodity derivatives to manage price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, soybean meal, corn, edible oils, 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 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 Derivatives: 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 Derivatives: 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 generally 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.
The following table presents the gross notional value of outstanding derivative contracts.
| January 31, 2023 | April 30, 2022 | ||||||||||
| Commodity contracts | $ | 876.6 | $ | 2,086.2 | |||||||
| Foreign currency exchange contracts | 102.5 | 91.3 | |||||||||
The following tables set forth the gross fair value amounts of derivative instruments recognized in the Condensed Consolidated Balance Sheets.
| January 31, 2023 | |||||||||||||||||||||||
| Other Current Assets | Other Current Liabilities | Other Noncurrent Assets | Other Noncurrent Liabilities | ||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts | $ | 31.3 | $ | 11.7 | $ | 0.2 | $ | 0.2 | |||||||||||||||
| Foreign currency exchange contracts | 1.4 | 0.9 | — | — | |||||||||||||||||||
| Total derivative instruments | $ | 32.7 | $ | 12.6 | $ | 0.2 | $ | 0.2 |
| April 30, 2022 | |||||||||||||||||||||||
| Other Current Assets | Other Current Liabilities | Other Noncurrent Assets | Other Noncurrent Liabilities | ||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts | $ | 45.4 | $ | 22.3 | $ | — | $ | — | |||||||||||||||
| Foreign currency exchange contracts | 1.7 | — | — | — | |||||||||||||||||||
| Total derivative instruments | $ | 47.1 | $ | 22.3 | $ | — | $ | — |
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. Our cash margin accounts represented collateral pledged of $33.4 and $54.6 at January 31, 2023, and April 30, 2022, respectively, and are included in other current assets in the Condensed Consolidated Balance Sheets. The change in the cash margin accounts are included in other – net, investing activities in the Condensed Statements of Consolidated Cash Flows. In the event of default and immediate net settlement of all our open positions with individual counterparties, all 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. Cash flows associated with the settlement of derivative instruments are classified in the same line item as the cash flows of the related hedged item, which is within operating activities in the Condensed Statements of Consolidated Cash Flows.
Economic Hedges
The following table presents the net gains and losses recognized in cost of products sold on derivatives not designated as hedging instruments.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Derivative gains (losses) on commodity contracts | $ | 17.3 | $ | 12.4 | $ | (10.9) | $ | 39.1 | |||||||||||||||
| Derivative gains (losses) on foreign currency exchange contracts | (1.9) | 2.1 | 2.7 | 3.4 | |||||||||||||||||||
| Total derivative gains (losses) recognized in cost of products sold | $ | 15.4 | $ | 14.5 | $ | (8.2) | $ | 42.5 |
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 net change in cumulative unallocated derivative gains and losses.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net derivative gains (losses) recognized and classified as unallocated | $ | 15.4 | $ | 14.5 | $ | (8.2) | $ | 42.5 | |||||||||||||||
| Less: Net derivative gains (losses) reclassified to segment operating profit | (2.1) | 36.9 | 35.2 | 80.4 | |||||||||||||||||||
| Change in net cumulative unallocated derivative gains and losses | $ | 17.5 | $ | (22.4) | $ | (43.4) | $ | (37.9) |
The net cumulative unallocated derivative losses were $6.1 at January 31, 2023, and net cumulative unallocated derivative gains were $37.3 at April 30, 2022.
Cash Flow Hedges
In 2020, we terminated all outstanding interest rate contracts concurrent with the pricing of the Senior Notes due March 15, 2030, and March 15, 2050. The contracts were designated as cash flow hedges and were used to manage our exposure to interest rate volatility associated with the anticipated debt financing. The termination resulted in a pre-tax loss of $239.8, which was deferred and included as a component of accumulated other comprehensive income (loss) and is being amortized as interest expense over the life of the debt.
The following table presents information on the pre-tax gains and losses recognized on all terminated interest rate contracts which were previously designated as cash flow hedges.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Gains (losses) recognized in other comprehensive income (loss) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Less: Gains (losses) reclassified from accumulated other comprehensive income (loss) to interest expense – net (A) | (3.4) | (3.4) | (10.2) | (10.4) | |||||||||||||||||||
| Less: Gains (losses) reclassified from accumulated other comprehensive income (loss) to other income (expense) – net (B) | — | — | — | 0.6 | |||||||||||||||||||
| Change in accumulated other comprehensive income (loss) | $ | 3.4 | $ | 3.4 | $ | 10.2 | $ | 9.8 |
(A)Interest expense – net, as presented in the Condensed Statements of Consolidated Income was $37.9 and $39.5 for the three months ended January 31, 2023 and 2022, respectively, and $116.7 and $122.9 for the nine months ended January 31, 2023 and 2022, respectively.
(B)Other income (expense) – net, as presented in the Condensed Statements of Consolidated Income was expense of $4.6 and $1.5 for the three months ended January 31, 2023 and 2022, respectively, and expense of $4.9 and $15.3 for the nine months ended January 31, 2023 and 2022, respectively. The reclassification during the nine months ended January 31, 2022, is related to the debt extinguishment of the $400.0 Senior Notes due March 15, 2022.
Included as a component of accumulated other comprehensive income (loss) at January 31, 2023, and April 30, 2022, were deferred net pre-tax losses of $204.0 and $214.2, respectively, related to the terminated interest rate contracts. The related net tax benefit recognized in accumulated other comprehensive income (loss) at January 31, 2023, and April 30, 2022, was $47.9 and $50.3, respectively. Approximately $13.5 of the net pre-tax loss will be recognized over the next 12 months related to the terminated interest rate contracts.
Fair Value Hedges
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 was recognized over the life of the debt as a reduction of interest expense. As of the second quarter of 2022, we had fully recognized the gain of $53.5, of which $4.0 was recognized during the nine months ended January 31, 2022.
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 Condensed Consolidated Balance Sheets.
The following table provides information on the carrying amounts and fair values of our financial instruments.
| January 31, 2023 | April 30, 2022 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Marketable securities and other investments | $ | 24.3 | $ | 24.3 | $ | 26.6 | $ | 26.6 | |||||||||||||||
| Derivative financial instruments – net | 20.1 | 20.1 | 24.8 | 24.8 | |||||||||||||||||||
| Total long-term debt | (4,313.3) | (3,824.3) | (4,310.6) | (3,977.7) |
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. 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 January 31, 2023 | ||||||||||||||||||||
| Marketable securities and other investments: (A) | |||||||||||||||||||||||
| Equity mutual funds | $ | 5.3 | $ | — | $ | — | $ | 5.3 | |||||||||||||||
| Municipal obligations | — | 18.5 | — | 18.5 | |||||||||||||||||||
| Money market funds | 0.5 | — | — | 0.5 | |||||||||||||||||||
| Derivative financial instruments: (B) | |||||||||||||||||||||||
| Commodity contracts – net | 20.1 | (0.5) | — | 19.6 | |||||||||||||||||||
| Foreign currency exchange contracts – net | 0.2 | 0.3 | — | 0.5 | |||||||||||||||||||
| Total long-term debt (C) | (3,824.3) | — | — | (3,824.3) | |||||||||||||||||||
| Total financial instruments measured at fair value | $ | (3,798.2) | $ | 18.3 | $ | — | $ | (3,779.9) |
| 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, 2022 | ||||||||||||||||||||
| Marketable securities and other investments: (A) | |||||||||||||||||||||||
| Equity mutual funds | $ | 5.7 | $ | — | $ | — | $ | 5.7 | |||||||||||||||
| Municipal obligations | — | 19.9 | — | 19.9 | |||||||||||||||||||
| Money market funds | 1.0 | — | — | 1.0 | |||||||||||||||||||
| Derivative financial instruments: (B) | |||||||||||||||||||||||
| Commodity contracts – net | 23.4 | (0.3) | — | 23.1 | |||||||||||||||||||
| Foreign currency exchange contracts – net | 0.2 | 1.5 | — | 1.7 | |||||||||||||||||||
| Total long-term debt (C) | (3,977.7) | — | — | (3,977.7) | |||||||||||||||||||
| Total financial instruments measured at fair value | $ | (3,947.4) | $ | 21.1 | $ | — | $ | (3,926.3) |
(A)Marketable securities and other investments consists 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 January 31, 2023, our municipal obligations are scheduled to mature as follows: $0.2 in 2023, $1.5 in 2024, $1.3 in 2025, $0.8 in 2026, $5.0 in 2027, and the remaining $9.7 in 2028 and beyond.
(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. For additional information, see Note 10: Derivative Financial Instruments.
(C)Long-term debt is composed of public Senior Notes, which are traded in an active secondary market and valued using quoted prices. For additional information, see Note 8: Debt and Financing Arrangements.
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, these optional periods do not typically impact the lease term as we are not reasonably certain to exercise them. 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.
Because the interest rate implicit in the lease cannot be readily determined for the majority of our leases, we utilize our incremental borrowing rate in determining the present value of 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. As of January 31, 2023, we have entered into lease commitments related to two distribution centers for which the leases have not yet commenced as of that date. The leases will begin during the fourth quarter of 2023 and the first quarter of 2024, and upon commencement, we expect to recognize a right-of-use asset and lease liability of approximately $28.8 and $72.8, respectively, in the Condensed Consolidated Balance Sheets.
The following table sets forth the right-of-use assets and lease liabilities recognized in the Condensed Consolidated Balance Sheets.
| January 31, 2023 | April 30, 2022 | ||||||||||
| Operating lease right-of-use assets | $ | 82.9 | $ | 106.5 | |||||||
| Operating lease liabilities: | |||||||||||
| Current operating lease liabilities | $ | 34.4 | $ | 40.1 | |||||||
| Noncurrent operating lease liabilities | 56.3 | 76.2 | |||||||||
| Total operating lease liabilities | $ | 90.7 | $ | 116.3 | |||||||
| Finance lease right-of-use assets: | |||||||||||
| Machinery and equipment | $ | 8.6 | $ | 8.1 | |||||||
| Accumulated depreciation | (4.8) | (4.3) | |||||||||
| Total property, plant, and equipment | $ | 3.8 | $ | 3.8 | |||||||
| Finance lease liabilities: | |||||||||||
| Other current liabilities | $ | 1.4 | $ | 1.4 | |||||||
| Other noncurrent liabilities | 2.5 | 2.5 | |||||||||
| Total finance lease liabilities | $ | 3.9 | $ | 3.9 |
The following table summarizes the components of lease expense.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating lease cost | $ | 10.3 | $ | 10.8 | $ | 31.1 | $ | 32.2 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | 0.4 | 0.5 | 1.2 | 1.6 | |||||||||||||||||||
| Interest on lease liabilities | 0.1 | — | 0.1 | 0.1 | |||||||||||||||||||
| Variable lease cost | 7.2 | 5.9 | 18.9 | 16.9 | |||||||||||||||||||
| Short-term lease cost | 11.0 | 10.2 | 33.6 | 30.3 | |||||||||||||||||||
| Sublease income | (0.3) | (0.3) | (0.9) | (0.9) | |||||||||||||||||||
| Net lease cost | $ | 28.7 | $ | 27.1 | $ | 84.0 | $ | 80.2 |
The following table sets forth cash flow and noncash information related to leases.
| Nine Months Ended January 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 33.2 | $ | 33.7 | |||||||
| Operating cash flows from finance leases | 0.1 | 0.1 | |||||||||
| Financing cash flows from finance leases | 1.3 | 1.7 | |||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | |||||||||||
| Operating leases | 7.2 | 2.9 | |||||||||
| Finance leases | 1.5 | 1.2 |
The following table summarizes the maturity of our lease liabilities by fiscal year.
| January 31, 2023 | |||||||||||
| Operating Leases | Finance Leases | ||||||||||
| 2023 (remainder of the year) | $ | 10.3 | $ | 0.4 | |||||||
| 2024 | 32.5 | 1.5 | |||||||||
| 2025 | 23.1 | 1.0 | |||||||||
| 2026 | 19.9 | 0.7 | |||||||||
| 2027 | 6.0 | 0.4 | |||||||||
| 2028 and beyond | 2.6 | 0.1 | |||||||||
| Total undiscounted minimum lease payments | $ | 94.4 | $ | 4.1 | |||||||
| Less: Imputed interest | 3.7 | 0.2 | |||||||||
| Lease liabilities | $ | 90.7 | $ | 3.9 |
The following table sets forth the weighted average remaining lease term and discount rate.
| January 31, 2023 | April 30, 2022 | ||||||||||
| Weighted average remaining lease term (in years): | |||||||||||
| Operating leases | 3.2 | 3.6 | |||||||||
| Finance leases | 3.2 | 3.3 | |||||||||
| Weighted average discount rate: | |||||||||||
| Operating leases | 2.6 | % | 2.5 | % | |||||||
| Finance leases | 2.4 | % | 2.1 | % |
Note 13: Income Taxes
The effective income tax rates for the three months ended January 31, 2023 and 2022, were 24.3 and 36.4 percent, respectively, and for the nine months ended January 31, 2023 and 2022, were 23.9 and 26.4 percent, respectively. During the three and nine months ended January 31, 2023, the effective income tax rates varied from the U.S. statutory income tax rate of 21.0 percent primarily due to the impact of state income taxes. The effective income tax rates for the three and nine months ended January 31, 2022, varied from the U.S. statutory income tax rate due to the impact of state income taxes, including an unfavorable one-time deferred tax impact of an internal legal entity simplification.
Within the next 12 months, it is reasonably possible that we could decrease our unrecognized tax benefits by an estimated $1.1, primarily as a result of the expiration of statute of limitation periods.
Note 14: 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, 2022 | $ | (21.1) | $ | (163.9) | $ | (54.2) | $ | 1.8 | $ | (237.4) | |||||||||||||||||||
| Reclassification adjustments | — | 10.2 | 5.2 | — | 15.4 | ||||||||||||||||||||||||
| Current period credit (charge) | (8.5) | — | (3.1) | (0.8) | (12.4) | ||||||||||||||||||||||||
| Income tax benefit (expense) | — | (2.4) | (0.6) | 0.2 | (2.8) | ||||||||||||||||||||||||
| Balance at January 31, 2023 | $ | (29.6) | $ | (156.1) | $ | (52.7) | $ | 1.2 | $ | (237.2) |
| 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, 2021 | $ | (9.0) | $ | (174.8) | $ | (97.3) | $ | 3.7 | $ | (277.4) | |||||||||||||||||||
| Reclassification adjustments | — | 9.8 | 12.6 | — | 22.4 | ||||||||||||||||||||||||
| Current period credit (charge) | (9.0) | — | (2.0) | 0.2 | (10.8) | ||||||||||||||||||||||||
| Income tax benefit (expense) | — | (1.4) | (2.0) | (0.1) | (3.5) | ||||||||||||||||||||||||
| Balance at January 31, 2022 | $ | (18.0) | $ | (166.4) | $ | (88.7) | $ | 3.8 | $ | (269.3) |
(A)The reclassification from accumulated other comprehensive income (loss) is primarily composed of deferred gains (losses) related to terminated interest rate contracts which were reclassified to interest expense. For additional information, see Note 10: Derivative Financial Instruments.
(B)The reclassification from accumulated other comprehensive income (loss) to other income (expense) – net is composed of settlement charges and amortization of net losses and prior service costs. For additional information, see Note 9: Pensions and Other Postretirement Benefits.
Note 15: Contingencies
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart Pet Brands, the significant majority of which were settled and paid during 2019 and 2020. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at January 31, 2023. Based on the information known to date, with the exception of the matters discussed below, we do not believe the final outcome of these proceedings would have a material adverse effect on our financial position, results of operations, or cash flows.
In addition to the legal proceedings discussed above, in May 2011, we were named a defendant in Council for Education and Research on Toxics (“CERT”) v. Brad Barry LLC, et al., which alleged that we, in addition to nearly eighty other defendants (collectively the “Defendants”) who manufacture, package, distribute, or sell packaged coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code Section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (better known as “Proposition 65”). In August 2020, the trial court granted the Defendants’ motion for summary judgment based on a 2019 regulation clarifying that cancer warnings are not required for coffee under Proposition 65. CERT appealed the ruling in November 2020 to the California Court of Appeals for the Second Appellate District, which affirmed the trial court's decision. CERT then petitioned for further appeal to the California Supreme Court, which was denied on February 15, 2023. The California Supreme Court will send the case back to the trial court to affirm judgement in favor of the Defendants thereby effectively concluding this litigation.
We are also defendants in a series of putative class action lawsuits that were originally filed in federal courts in California, Florida, Illinois, Missouri, New York, Texas, and Washington D.C., but have been transferred to the United States District Court for the Western District of Missouri for coordinated pre-trial proceedings. The plaintiffs assert claims arising under
various state laws for false advertising, consumer protection, deceptive and unfair trade practices, and similar statutes. Their claims are premised on allegations that we have misrepresented the number of servings that can be made from various canisters of Folgers coffee on the packaging for those products.
The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as of January 31, 2023, and the likelihood of loss is not considered probable or estimable. However, if we are required to pay significant damages, our business and financial results could be adversely impacted, and sales of those products could suffer not only in these locations but elsewhere.
Product Recall: In May 2022, we initiated a voluntary recall of select Jif peanut butter products produced at our Lexington, Kentucky, facility and sold primarily in the U.S., due to potential salmonella contamination. At that time, we also suspended the manufacturing of these products at our Lexington facility and temporarily paused shipments from our Memphis, Tennessee, facility. No other products produced at our other facilities were affected by this recall. In June 2022, we resumed manufacturing and shipping at our Lexington facility, as well as shipping from our Memphis facility. We partnered with retailers to restock Jif peanut butter products during the first quarter of 2023 and anticipate a return to normal levels by the end of 2023. During the three and nine months ended January 31, 2023, approximately $20.0 and $110.0 of direct costs were recognized, respectively, net of insurance recoveries, related to customer returns, fees, unsaleable inventory, and other product recall-related costs, primarily within our U.S. Retail Consumer Foods segment. The majority of the direct costs were incurred through the third quarter of 2023, and additional direct costs are expected to be minimal during the remainder of 2023.
Further, we are a defendant in five putative class action lawsuits as a result of our voluntary recall of select Jif peanut butter products. The plaintiffs assert causes of action for negligence, breach of warranties, fraudulent concealment, unjust enrichment, and, in some of the lawsuits, violations of state consumer protection and deceptive trade practices laws. Their claims are premised on allegations that we engaged in business practices designed to mislead the public regarding the safety of Jif peanut butter for human consumption due to the alleged presence of salmonella. The cases are pending and consolidated in the United States District Court for the Northern District of Ohio. Additionally, the U.S. Food and Drug Administration (the “FDA”) issued a warning letter on January 24, 2023, following an inspection of our Lexington facility completed in June 2022, identifying concerns regarding certain practices and controls at the facility. We have responded to the warning letter with a detailed explanation of our food safety plan and extensive verification activities to prevent contamination in Jif peanut butter products but the FDA or other agencies may nonetheless conclude that certain practices or controls were not in compliance with the Federal Food, Drug, and Cosmetic Act or other laws. Any potential regulatory action could result in the imposition of injunctive terms and monetary payments that could have a material adverse effect on our business, reputation, brand, results of operations, and financial performance, as well as affect pending consumer litigation associated with the voluntary recall of Jif peanut butter products. The outcome and financial impact, if any, of the ongoing consumer litigation or potential regulatory action associated with the Jif voluntary recall cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as of January 31, 2023, and the likelihood of loss is not considered probable or estimable.
Note 16: Common Shares
The following table sets forth common share information.
| January 31, 2023 | April 30, 2022 | ||||||||||
| Common shares authorized | 300.0 | 300.0 | |||||||||
| Common shares outstanding | 106.6 | 106.5 | |||||||||
| Treasury shares | 39.9 | 40.0 |
Repurchase Program: During the nine months ended January 31, 2023 and 2022, we did not repurchase any common shares under a repurchase plan authorized by the Board. The shares repurchased during the nine months ended January 31, 2023 and 2022, consisted of shares repurchased from stock plan recipients in lieu of cash payments. At January 31, 2023, approximately 5.8 million common shares remain available for repurchase pursuant to the Board’s authorizations.
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