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 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net sales | $ | 2,229.2 | $ | 2,216.3 | $ | 5,973.0 | $ | 6,294.4 | |||||||||||||||
| Cost of products sold (A) | 1,406.1 | 1,460.5 | 3,770.9 | 4,285.0 | |||||||||||||||||||
| Gross Profit | 823.1 | 755.8 | 2,202.1 | 2,009.4 | |||||||||||||||||||
| Selling, distribution, and administrative expenses | 374.2 | 380.9 | 1,021.3 | 1,079.0 | |||||||||||||||||||
| Amortization | 55.7 | 55.6 | 135.1 | 166.8 | |||||||||||||||||||
| Other special project costs (A) | 98.9 | 0.6 | 105.7 | 2.7 | |||||||||||||||||||
| Other operating expense (income) – net | (3.1) | 0.8 | 40.2 | (30.1) | |||||||||||||||||||
| Operating Income | 297.4 | 317.9 | 899.8 | 791.0 | |||||||||||||||||||
| Interest expense – net | (99.8) | (37.9) | (167.0) | (116.7) | |||||||||||||||||||
| Other debt costs (A) | — | — | (19.5) | — | |||||||||||||||||||
| Other income (expense) – net (A) | (2.1) | (4.6) | (30.0) | (4.9) | |||||||||||||||||||
| Income Before Income Taxes | 195.5 | 275.4 | 683.3 | 669.4 | |||||||||||||||||||
| Income tax expense | 75.1 | 66.9 | 184.4 | 160.0 | |||||||||||||||||||
| Net Income | $ | 120.4 | $ | 208.5 | $ | 498.9 | $ | 509.4 | |||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Net Income | $ | 1.14 | $ | 1.96 | $ | 4.82 | $ | 4.78 | |||||||||||||||
| Net Income – Assuming Dilution | $ | 1.13 | $ | 1.95 | $ | 4.81 | $ | 4.77 |
(A)Includes certain divestiture, acquisition, integration, and restructuring costs (“special project costs”). For more information, see Note 5: Special Project Costs, Note 6: Reportable Segments, and Note 9: Debt and Financing Arrangements.
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 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income | $ | 120.4 | $ | 208.5 | $ | 498.9 | $ | 509.4 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | 9.0 | 6.5 | 2.4 | (8.5) | |||||||||||||||||||
| Cash flow hedging derivative activity, net of tax | 3.0 | 2.7 | 8.2 | 7.8 | |||||||||||||||||||
| Pension and other postretirement benefit plans activity, net of tax | 0.5 | 0.6 | 1.0 | 1.5 | |||||||||||||||||||
| Available-for-sale securities activity, net of tax | 0.6 | 0.3 | 0.2 | (0.6) | |||||||||||||||||||
| Total Other Comprehensive Income (Loss) | 13.1 | 10.1 | 11.8 | 0.2 | |||||||||||||||||||
| Comprehensive Income | $ | 133.5 | $ | 218.6 | $ | 510.7 | $ | 509.6 |
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| Dollars in millions | January 31, 2024 | April 30, 2023 | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 35.9 | $ | 655.8 | |||||||
| Trade receivables – net | 789.6 | 597.6 | |||||||||
| Inventories: | |||||||||||
| Finished products | 601.3 | 657.6 | |||||||||
| Raw materials | 386.3 | 352.2 | |||||||||
| Total Inventory | 987.6 | 1,009.8 | |||||||||
| Investment in equity securities | — | 487.8 | |||||||||
| Other current assets | 110.9 | 107.7 | |||||||||
| Total Current Assets | 1,924.0 | 2,858.7 | |||||||||
| Property, Plant, and Equipment | |||||||||||
| Land and land improvements | 151.2 | 131.0 | |||||||||
| Buildings and fixtures | 1,139.8 | 956.1 | |||||||||
| Machinery and equipment | 2,879.6 | 2,443.5 | |||||||||
| Construction in progress | 874.4 | 629.4 | |||||||||
| Gross Property, Plant, and Equipment | 5,045.0 | 4,160.0 | |||||||||
| Accumulated depreciation | (2,040.1) | (1,920.5) | |||||||||
| Total Property, Plant, and Equipment | 3,004.9 | 2,239.5 | |||||||||
| Other Noncurrent Assets | |||||||||||
| Operating lease right-of-use assets | 182.3 | 103.0 | |||||||||
| Goodwill | 7,667.8 | 5,216.9 | |||||||||
| Other intangible assets – net | 7,310.3 | 4,429.3 | |||||||||
| Other noncurrent assets | 157.9 | 144.0 | |||||||||
| Total Other Noncurrent Assets | 15,318.3 | 9,893.2 | |||||||||
| Total Assets | $ | 20,247.2 | $ | 14,991.4 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 1,252.7 | $ | 1,392.6 | |||||||
| Accrued trade marketing and merchandising | 239.9 | 187.7 | |||||||||
| Short-term borrowings | 418.0 | — | |||||||||
| Current operating lease liabilities | 40.6 | 33.2 | |||||||||
| Other current liabilities | 516.2 | 373.2 | |||||||||
| Total Current Liabilities | 2,467.4 | 1,986.7 | |||||||||
| Noncurrent Liabilities | |||||||||||
| Long-term debt | 8,121.1 | 4,314.2 | |||||||||
| Deferred income taxes | 1,769.3 | 1,138.9 | |||||||||
| Noncurrent operating lease liabilities | 151.4 | 77.2 | |||||||||
| Other noncurrent liabilities | 177.9 | 183.6 | |||||||||
| Total Noncurrent Liabilities | 10,219.7 | 5,713.9 | |||||||||
| Total Liabilities | 12,687.1 | 7,700.6 | |||||||||
| Shareholders’ Equity | |||||||||||
| Common shares | 26.5 | 26.1 | |||||||||
| Additional capital | 5,706.0 | 5,371.8 | |||||||||
| Retained income | 2,055.0 | 2,132.1 | |||||||||
| Accumulated other comprehensive income (loss) | (227.4) | (239.2) | |||||||||
| Total Shareholders’ Equity | 7,560.1 | 7,290.8 | |||||||||
| Total Liabilities and Shareholders’ Equity | $ | 20,247.2 | $ | 14,991.4 |
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 | 2024 | 2023 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | 498.9 | $ | 509.4 | |||||||
| Adjustments to reconcile net income to net cash provided by (used for) operations: | |||||||||||
| Depreciation | 170.7 | 172.0 | |||||||||
| Amortization | 135.1 | 166.8 | |||||||||
| Realized loss on investment in equity securities – net | 21.5 | — | |||||||||
| Share-based compensation expense | 15.9 | 11.3 | |||||||||
| Loss (gain) on divestitures – net | 12.9 | (1.6) | |||||||||
| Deferred income tax expense (benefit) | (22.1) | — | |||||||||
| Other noncash adjustments – net | 25.5 | 29.3 | |||||||||
| Settlement of interest rate contracts | 42.5 | — | |||||||||
| Defined benefit pension contributions | (2.8) | (72.8) | |||||||||
| Changes in assets and liabilities, net of effect from acquisition and divestitures: | |||||||||||
| Trade receivables | (10.8) | (10.7) | |||||||||
| Inventories | 55.3 | (154.6) | |||||||||
| Other current assets | 13.2 | 69.4 | |||||||||
| Accounts payable | (147.9) | 46.3 | |||||||||
| Accrued liabilities | 61.8 | 26.2 | |||||||||
| Income and other taxes | (43.5) | (39.9) | |||||||||
| Other – net | (24.9) | (0.5) | |||||||||
| Net Cash Provided by (Used for) Operating Activities | 801.3 | 750.6 | |||||||||
| Investing Activities | |||||||||||
| Business acquired, net of cash acquired | (3,920.6) | — | |||||||||
| Proceeds from sale of equity securities | 466.3 | — | |||||||||
| Additions to property, plant, and equipment | (455.9) | (332.3) | |||||||||
| Proceeds from divestitures – net | 50.5 | 1.6 | |||||||||
| Other – net | (1.5) | 23.9 | |||||||||
| Net Cash Provided by (Used for) Investing Activities | (3,861.2) | (306.8) | |||||||||
| Financing Activities | |||||||||||
| Short-term borrowings (repayments) – net | 413.2 | (185.2) | |||||||||
| Proceeds from long-term debt | 4,285.0 | — | |||||||||
| Repayments of long-term debt | (1,441.0) | — | |||||||||
| Capitalized debt issuance costs | (32.1) | — | |||||||||
| Quarterly dividends paid | (325.5) | (321.8) | |||||||||
| Purchase of treasury shares | (372.5) | (8.0) | |||||||||
| Payment of assumed tax receivable agreement obligation | (86.4) | — | |||||||||
| Other – net | (1.2) | 5.6 | |||||||||
| Net Cash Provided by (Used for) Financing Activities | 2,439.5 | (509.4) | |||||||||
| Effect of exchange rate changes on cash | 0.5 | (0.1) | |||||||||
| Net increase (decrease) in cash and cash equivalents | (619.9) | (65.7) | |||||||||
| Cash and cash equivalents at beginning of period | 655.8 | 169.9 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 35.9 | $ | 104.2 |
( ) 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, 2024 | |||||||||||||||||||||||||||||||||||
| Dollars in millions | Common Shares Outstanding | Common Shares | Additional Capital | Retained Income | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||
| Balance at May 1, 2023 | 104,398,618 | $ | 26.1 | $ | 5,371.8 | $ | 2,132.1 | $ | (239.2) | $ | 7,290.8 | ||||||||||||||||||||||||
| Net income | 183.6 | 183.6 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 10.2 | 10.2 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 193.8 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (2,410,863) | (0.6) | (132.1) | (242.9) | (375.6) | ||||||||||||||||||||||||||||||
| Stock plans | 144,918 | — | 2.4 | (1.1) | 1.3 | ||||||||||||||||||||||||||||||
| Cash dividends declared, $1.06 per common share | (106.9) | (106.9) | |||||||||||||||||||||||||||||||||
| Balance at July 31, 2023 | 102,132,673 | $ | 25.5 | $ | 5,242.1 | $ | 1,964.8 | $ | (229.0) | $ | 7,003.4 | ||||||||||||||||||||||||
| Net income | 194.9 | 194.9 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (11.5) | (11.5) | |||||||||||||||||||||||||||||||||
| Comprehensive income | 183.4 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (3,139) | — | (0.4) | — | (0.4) | ||||||||||||||||||||||||||||||
| Stock plans | 25,067 | — | 11.1 | 11.1 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $1.06 per common share | (108.6) | (108.6) | |||||||||||||||||||||||||||||||||
| Balance at October 31, 2023 | 102,154,601 | $ | 25.5 | $ | 5,252.8 | $ | 2,051.1 | $ | (240.5) | $ | 7,088.9 | ||||||||||||||||||||||||
| Net income | 120.4 | 120.4 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 13.1 | 13.1 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 133.5 | ||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (1,101) | — | (0.1) | — | (0.1) | ||||||||||||||||||||||||||||||
| Issuance of shares for acquisition | 3,989,915 | 1.0 | 449.2 | 450.2 | |||||||||||||||||||||||||||||||
| Stock plans | 33,904 | — | 4.1 | 4.1 | |||||||||||||||||||||||||||||||
| Cash dividends declared, $1.06 per common share | (116.5) | (116.5) | |||||||||||||||||||||||||||||||||
| Balance at January 31, 2024 | 106,177,319 | $ | 26.5 | $ | 5,706.0 | $ | 2,055.0 | $ | (227.4) | $ | 7,560.1 |
| 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 |
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 United States (“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, 2024, are not necessarily indicative of the results that may be expected for the year ending April 30, 2024. 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, 2023.
Note 2: Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures. ASU 2023-09 will improve the transparency and decision usefulness of income tax disclosures to better assess how operations and related tax risks affect tax rates and future cash flows on an interim and annual basis. It will be effective for us on May 1, 2025, with the option to early adopt at any time prior to the effective date and will require adoption on a retrospective basis. We are currently evaluating the impacts of the standard on our financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures. ASU 2023-07 will improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis. It will be effective for our annual period beginning May 1, 2024, and interim periods beginning May 1, 2025, with the option to early adopt at any time prior to the effective date and will require adoption on a retrospective basis. We are currently evaluating the impacts of the standard on our financial statements and disclosures.
In July 2023, the U.S. Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring current reporting about material cybersecurity incidents and annual disclosures on management’s processes for assessing, identifying, and managing material cybersecurity risks, the material impacts of cybersecurity threats and previous cybersecurity incidents, the Board of Directors’ (the “Board”) oversight of cybersecurity risks, and management’s role and expertise in assessing and managing material cybersecurity risks. SEC Release No. 33-11216 was effective for us on November 1, 2023, and did not have a material impact on our financial statements and disclosures.
In December 2022, the SEC adopted the final rule under SEC Release No. 33-11138, Insider Trading Arrangements and Related Disclosures, which requires new disclosures regarding insider trading policies and procedures, the use of Rule 10b5-1 plans by directors and officers, and stock option grants issued in close proximity to the release of material nonpublic information. SEC Release No. 33-11138 was effective for us on May 1, 2023, and did not have a material impact on our financial statements and disclosures.
In March 2022, 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. As proposed, 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 information related to how the Board and management oversee climate-related risks. As of January 31, 2024, these amendments were not adopted by the SEC; however, we anticipate that the adoption of these amendments would have a material impact on our financial statements and disclosures.
Note 3: Acquisition
On November 7, 2023, we completed a cash and stock transaction to acquire Hostess Brands, Inc. (“Hostess Brands”). The total purchase consideration in connection with the acquisition was $5.4 billion, which reflects an exchange offer of all outstanding shares of Hostess Brands common stock at a price of $34.25 per share, consisting of $30.00 in cash and 0.03002 shares of our common shares, based on the closing stock price on September 8, 2023, that were exchanged for each share of Hostess Brands common stock as of the transaction date.
The purchase price included the issuance of approximately 4.0 million of our common shares to Hostess Brands’ shareholders, valued at $450.2, as discussed in Note 17: Common Shares. In addition, we paid $3.9 billion in cash, net of cash acquired, and assumed $991.0 of debt from Hostess Brands and $67.8 of an other debt-like item, reflecting consideration transferred for the cash payment of Hostess Brands’ employee equity awards. New debt of $5.0 billion was borrowed, consisting of $3.5 billion in Senior Notes, a $800.0 senior unsecured delayed-draw Term Loan Credit Agreement (“Term Loan”), and $700.0 of short-term borrowings under our commercial paper program to partially fund the transaction and pay off the debt assumed as part of the acquisition. For additional information on the financing associated with this transaction, refer to Note 9: Debt and Financing Arrangements.
Hostess Brands is a manufacturer and marketer of sweet baked goods brands including Hostess*®* Donettes®, Twinkies®, CupCakes, DingDongs®, Zingers®, CoffeeCakes, HoHos®, Mini Muffins, and Fruit Pies, and the Voortman*®* cookie brand. In addition to its headquarters in Lenexa, Kansas, the transaction included six manufacturing facilities located in Emporia, Kansas; Burlington, Ontario; Chicago, Illinois; Columbus, Georgia; Indianapolis, Indiana; and Arkadelphia, Arkansas, a distribution facility in Edgerton, Kansas, and a commercial center of excellence in Chicago, Illinois. Approximately 3,000 employees transitioned with the business at the close of the transaction.
The transaction was accounted for under the acquisition method of accounting, and accordingly, the results of Hostess Brands operations, including $300.3 in net sales and $34.7 in operating income, are included within the Sweet Baked Snacks segment for the three months ended January 31, 2024. The operating income for the three months ended January 31, 2024, includes the recognition of an unfavorable fair value purchase accounting adjustment of $8.1, attributable to the acquired inventory, and excludes special project costs recognized within the segment.
The purchase price was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition on a provisional basis. We determined the estimated fair values based on independent appraisals, discounted cash flow analyses, quoted market prices, and estimates made by management. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired and, as such, the excess was allocated to goodwill.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.
| Assets acquired: | |||||
| Cash and cash equivalents | $ | 135.0 | |||
| Trade receivables – net | 181.1 | ||||
| Inventories | 65.9 | ||||
| Other current assets | 7.1 | ||||
| Property, plant, and equipment – net | 542.2 | ||||
| Operating lease right-of-use assets | 17.2 | ||||
| Goodwill | 2,461.1 | ||||
| Other intangible assets | 3,036.8 | ||||
| Other noncurrent assets | 43.5 | ||||
| Total assets acquired | $ | 6,489.9 | |||
| Liabilities assumed: | |||||
| Accounts payable | $ | 67.3 | |||
| Current operating lease liabilities | 4.7 | ||||
| Current liabilities | 250.2 | ||||
| Deferred income taxes | 655.0 | ||||
| Noncurrent operating lease liabilities | 14.5 | ||||
| Other noncurrent liabilities | 1.4 | ||||
| Total liabilities assumed | 993.1 | ||||
| Net assets acquired | $ | 5,496.8 |
Certain estimated fair values for the acquisition, including goodwill, intangible assets, property, plant, and equipment, and income taxes, are not yet finalized. The purchase price was preliminarily allocated based on information available at the acquisition date and is subject to change as we complete our analysis of the fair values at the date of the acquisition during the measurement period not to exceed one year, as permitted under FASB ASC 805, Business Combinations.
As a result of the acquisition, we recognized a total of $2.5 billion of goodwill within the Sweet Baked Snacks segment, of which $196.6 is expected to be deductible for tax purposes, which will be refined during the measurement period. Goodwill represents the value we expect to achieve through the implementation of operational synergies and growth opportunities as we integrate Hostess Brands into our Company. We are evaluating the impact of these anticipated operational synergies and growth opportunities across our reporting units and, as a result, have not allocated goodwill to our other reporting units as of January 31, 2024; however, we will complete our evaluation and allocate goodwill, as appropriate, by the end of the measurement period. The goodwill and indefinite-lived trademarks resulting from the acquisition are susceptible to future impairment charges. Any significant change in our near or long-term projections or macroeconomic conditions may result in future impairment charges as the carrying values of goodwill and indefinite-lived trademarks approximate estimated fair values.
The preliminary purchase price was allocated to the identifiable intangible assets acquired as follows:
| Intangible assets with finite lives: | |||||
| Customer and contractual relationships (25-year useful life) | $ | 1,237.8 | |||
| Non-competition agreements (varying useful lives) | 36.9 | ||||
| Trademarks (5-year useful life) | 9.9 | ||||
| Intangible assets with indefinite lives: | |||||
| Trademarks | 1,752.2 | ||||
| Total intangible assets | $ | 3,036.8 |
The estimated annual amortization expense for the finite-lived intangible assets based on the preliminary purchase price allocation is $71.6.
Hostess Brands’ results of operations are included in our consolidated financial statements from the date of the transaction within our Sweet Baked Snacks segment. If the transaction had occurred on May 1, 2022, unaudited pro forma consolidated results for the three and nine months ended January 31, 2024 and 2023, would have been as follows:
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ | 2,253.2 | $ | 2,544.0 | $ | 6,707.1 | $ | 7,311.5 | |||||||||||||||
| Net income | 162.5 | 186.7 | 453.0 | 461.3 | |||||||||||||||||||
| Net income per common share – assuming dilution | 1.53 | 1.68 | 4.25 | 4.16 | |||||||||||||||||||
The unaudited pro forma consolidated results are based on our historical financial statements and those of Hostess Brands, and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period presented. The most significant pro forma adjustments relate to the elimination of nonrecurring acquisition-related costs incurred prior to the close of the transaction, amortization of acquired intangible assets, depreciation of acquired property, plant, and equipment, and interest expense associated with acquisition-related financing. The unaudited pro forma consolidated results do not give effect to the synergies of the acquisition and are not indicative of the results of operations in future periods.
Note 4: Divestitures
On January 2, 2024, we sold our Canada condiment business to TreeHouse Foods, Inc. (“TreeHouse Foods”). The transaction included Bick’s*®* pickles, Habitant*®* pickled beets, Woodman’s*®* horseradish, and McLarens*®* pickled onions brands, inclusive of certain trademarks. Under our ownership, these brands generated net sales of approximately $60.0 in 2023, which were included in the International operating segment. Net proceeds from the divestiture were $25.3, net of cash transaction costs and includes a receivable related to a preliminary working capital adjustment. During the second quarter of 2024, the disposal group was classified as held for sale, and as a result, an estimated pre-tax loss of $5.2 was recognized within other operating expense (income) – net in the Condensed Statement of Consolidated Income. Upon close of the transaction during the third quarter of 2024, the pre-tax loss was adjusted to $5.7, reflecting the fair value of the disposal group as of the transaction date.
On November 1, 2023, we sold our Sahale Snacks*®* business to Second Nature Brands (“Second Nature”). The transaction included products sold under our Sahale Snacks brand, inclusive of certain trademarks and licensing agreements; a leased manufacturing facility in Seattle, Washington; and approximately 100 employees who supported the brand. Under our ownership, the Sahale Snacks brand generated net sales of approximately $48.0 in 2023, primarily included in the U.S. Retail Frozen Handheld and Spreads segment. Final net proceeds from the divestiture were $31.6, net of a working capital adjustment and cash transaction costs. During the second quarter of 2024, the disposal group was classified as held for sale, and as a result, an estimated pre-tax loss of $6.8 was recognized within other operating expense (income) – net in the Condensed Statement of Consolidated Income. Upon close of the transaction during the third quarter of 2024, the pre-tax loss was adjusted to $6.7, reflecting the fair value of the disposal group as of the transaction date.
The following table summarizes the net assets and liabilities disposed, which were measured at the lower of carrying amount or fair value less costs to sell.
| January 31, 2024 | |||||||||||
| Condiment | Sahale Snacks | ||||||||||
| Assets disposed: | |||||||||||
| Inventories | $ | 23.9 | $ | 9.9 | |||||||
| Property, plant, and equipment – net | — | 6.0 | |||||||||
| Operating lease right-of-use assets | — | 1.8 | |||||||||
| Goodwill | — | 11.5 | |||||||||
| Other intangible assets – net | 7.1 | 14.7 | |||||||||
| Other noncurrent assets | — | 0.3 | |||||||||
| Total assets disposed | $ | 31.0 | $ | 44.2 | |||||||
| Liabilities disposed: | |||||||||||
| Other current liabilities | $ | — | $ | 0.8 | |||||||
| Deferred income taxes | — | 4.1 | |||||||||
| Other noncurrent liabilities | — | 1.0 | |||||||||
| Total liabilities disposed | — | 5.9 | |||||||||
| Net assets disposed | $ | 31.0 | $ | 38.3 |
On April 28, 2023, we sold certain pet food brands to Post Holdings, Inc. (“Post”). The transaction included 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 supported these pet food brands. Under our ownership, these brands generated net sales of $1.5 billion in 2023, primarily included in the U.S. Retail Pet Foods segment. Final net proceeds from the divestiture were $1.2 billion, consisting of $683.9 in cash, net of a working capital adjustment and cash transaction costs, and approximately 5.4 million shares of Post common stock, valued at $491.6 at the close of the transaction. We recognized a pre-tax loss of $1.0 billion upon completion of this transaction during the fourth quarter of 2023, within other operating expense (income) – net in the Statement of Consolidated Income, net of a working capital adjustment and transaction costs. During 2024, we finalized the working capital adjustment and transaction costs, which resulted in an immaterial adjustment to the pre-tax loss. Furthermore, during the first quarter of 2024, we began entering into equity forward derivative transactions under an agreement with an unrelated third party to facilitate the forward sale of the Post common stock. All 5.4 million shares of Post common stock were settled for $466.3 on November 15, 2023. For additional information, see Note 11: Derivative Financial Instruments.
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. Final net proceeds from the divestiture were $98.7, net of a working capital adjustment and cash transaction costs. We recognized a pre-tax gain of $28.3 related to the natural beverage and grains businesses, of which $1.6 was recognized during the first quarter of 2023, within other operating expense (income) – net in the Condensed Statement of Consolidated Income, upon finalization of the working capital adjustment.
Note 5: Special Project Costs
Special project costs consist primarily of employee-related costs and other transition and termination costs related to certain divestiture, acquisition, integration, and restructuring activities. Employee-related costs include severance, retention bonuses, and relocation costs. Severance costs are generally recognized when deemed probable and estimable, 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 divestiture, acquisition, integration, and restructuring activities. With the exception of accelerated depreciation, these costs are expensed as incurred. These special project costs are reported in cost of products sold, other special project costs, other debt costs, and other income (expense) – net 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.
Divestiture Costs: Total divestiture costs related to the divested Sahale Snacks and Canada condiment businesses are anticipated to be approximately $6.0 and consist primarily of employee-related costs and lease termination costs, all of which are expected to be cash charges and recognized in 2024. We incurred $2.3 and $2.8 of employee-related costs during the three and nine months ended January 31, 2024, respectively, related to these divestitures. We also incurred $1.6 of other transition and termination costs during the third quarter of 2024, primarily related to lease termination costs. The obligation related to severance and retention bonuses was $1.5 at January 31, 2024. For additional information, see Note 4: Divestitures.
Integration Costs: Total integration costs related to the acquisition of Hostess Brands are anticipated to be approximately $210.0 and include transaction costs, employee-related costs, and other transition and termination charges. Of the total anticipated integration costs, approximately half reflect transaction costs, with the remainder split between employee-related costs and other transition and termination charges. The majority of the integration costs are expected to be cash charges incurred by the end of 2026, with over half of the costs expected to be recognized in 2024.
The following table summarizes our integration costs incurred related to the acquisition of Hostess Brands.
| Three Months Ended January 31, 2024 | Nine Months Ended January 31, 2024 | ||||||||||||||||||||||||||||
| Transaction costs | $ | 72.7 | $ | 98.9 | |||||||||||||||||||||||||
| Employee-related costs | 16.3 | 16.3 | |||||||||||||||||||||||||||
| Other transition and termination costs | 5.9 | 5.9 | |||||||||||||||||||||||||||
| Total integration costs | $ | 94.9 | $ | 121.1 |
Noncash charges of $0.1 were included in employee-related costs incurred during both the three and nine months ended January 31, 2024. Transaction costs primarily reflect equity compensation pay-outs, legal fees, and a 364-day senior unsecured Bridge Term Loan Credit Facility (“Bridge Loan”) that provided committed financing for the acquisition of Hostess Brands. Other transition and termination costs primarily consist of consulting fees. The obligation related to severance and retention bonuses was $14.8 at January 31, 2024. For additional information, see Note 3: Acquisition.
Restructuring Costs: 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, and was further expanded in 2022 to include the costs associated with the divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the closure of certain production facilities. The restructuring activities were considered complete as of April 30, 2023. The costs incurred associated with these restructuring activities included other transition and termination costs related to our cost reduction and margin management initiatives, inclusive of accelerated depreciation, as well as employee-related costs.
The following table summarizes our restructuring costs incurred related to the restructuring program.
| Three Months Ended January 31, 2023 | Nine Months Ended January 31, 2023 | Total Costs Incurred to Date at April 30, 2023 | |||||||||||||||||||||||||||
| Employee-related costs | $ | 0.3 | $ | 2.1 | $ | 27.1 | |||||||||||||||||||||||
| Other transition and termination costs | 1.3 | 5.5 | 36.6 | ||||||||||||||||||||||||||
| Total restructuring costs | $ | 1.6 | $ | 7.6 | $ | 63.7 |
The obligation related to severance costs and retention bonuses was $1.6 at April 30, 2023, and was fully satisfied during the first quarter of 2024. Cumulative noncash charges incurred through April 30, 2023, were $33.2, and included $3.2 and $10.2 incurred during the three and nine months ended January 31, 2023, respectively, which primarily consisted of accelerated depreciation.
Note 6: Reportable Segments
We operate in one industry: the manufacturing and marketing of food and beverage products. We have four reportable segments: U.S. Retail Coffee, U.S. Retail Frozen Handheld and Spreads, U.S. Retail Pet Foods, and Sweet Baked Snacks. The presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable.
As disclosed in Note 3: Acquisition, we acquired Hostess Brands in a cash and stock transaction on November 7, 2023. The transaction resulted in a new reportable segment for 2024, Sweet Baked Snacks. Further, the historical U.S. Retail Consumer Foods reportable segment has been renamed to U.S. Retail Frozen Handheld and Spreads; however, there is no change to the manner in which the segment was previously presented. We do not anticipate any impact to our other historical reportable segments, as we do not anticipate any changes to the internal manner in which we will manage and report these reportable segments.
The U.S. Retail Coffee segment primarily includes the domestic sales of Folgers®, Dunkin’®, and Café Bustelo® branded coffee; the U.S. Retail Frozen Handheld and Spreads segment primarily includes the domestic sales of Smucker’s® and Jif® branded products; the U.S. Retail Pet Foods segment primarily includes the domestic sales of Meow Mix®, Milk-Bone®, Pup-Peroni®, and Canine Carry Outs® branded products; and the Sweet Baked Snacks segment primarily includes all domestic and foreign sales of Hostess and Voortman branded products in all channels. With the exception of Sweet Baked Snacks products, International and Away From Home includes the sale of all products that are distributed in foreign countries through retail channels, as well as domestically and in foreign countries through 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”), 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, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| U.S. Retail Coffee | $ | 727.5 | $ | 735.1 | $ | 2,038.3 | $ | 2,042.8 | |||||||||||||||
| U.S. Retail Frozen Handheld and Spreads | 436.8 | 434.2 | 1,365.1 | 1,177.5 | |||||||||||||||||||
| U.S. Retail Pet Foods (A) | 465.2 | 758.6 | 1,370.2 | 2,252.8 | |||||||||||||||||||
| Sweet Baked Snacks | 300.3 | — | 300.3 | — | |||||||||||||||||||
| International and Away From Home | 299.4 | 288.4 | 899.1 | 821.3 | |||||||||||||||||||
| Total net sales | $ | 2,229.2 | $ | 2,216.3 | $ | 5,973.0 | $ | 6,294.4 | |||||||||||||||
| Segment profit: | |||||||||||||||||||||||
| U.S. Retail Coffee | $ | 207.8 | $ | 204.0 | $ | 548.9 | $ | 537.6 | |||||||||||||||
| U.S. Retail Frozen Handheld and Spreads | 104.1 | 94.1 | 338.3 | 249.2 | |||||||||||||||||||
| U.S. Retail Pet Foods (A) | 109.5 | 109.0 | 288.0 | 349.4 | |||||||||||||||||||
| Sweet Baked Snacks | 68.0 | — | 68.0 | — | |||||||||||||||||||
| International and Away From Home | 50.4 | 37.6 | 147.0 | 95.7 | |||||||||||||||||||
| Total segment profit | $ | 539.8 | $ | 444.7 | $ | 1,390.2 | $ | 1,231.9 | |||||||||||||||
| Amortization | (55.7) | (55.6) | (135.1) | (166.8) | |||||||||||||||||||
| Gain (loss) on divestitures – net | (0.3) | — | (12.9) | 1.6 | |||||||||||||||||||
| Interest expense – net | (99.8) | (37.9) | (167.0) | (116.7) | |||||||||||||||||||
| Change in net cumulative unallocated derivative gains and losses | (5.2) | 17.5 | (21.1) | (43.4) | |||||||||||||||||||
| Cost of products sold – special project costs (B) | — | (1.0) | — | (4.9) | |||||||||||||||||||
| Other special project costs (B) | (98.9) | (0.6) | (105.7) | (2.7) | |||||||||||||||||||
| Other debt costs (B) | — | — | (19.5) | — | |||||||||||||||||||
| Corporate administrative expenses | (82.3) | (87.1) | (215.6) | (224.7) | |||||||||||||||||||
| Other income (expense) – net (B) | (2.1) | (4.6) | (30.0) | (4.9) | |||||||||||||||||||
| Income before income taxes | $ | 195.5 | $ | 275.4 | $ | 683.3 | $ | 669.4 |
(A)On April 28, 2023, we sold certain pet food brands to Post, and the divested net sales were primarily included in the U.S. Retail Pet Foods segment. For more information, see Note 4: Divestitures.
(B)Includes certain divestiture, acquisition, integration, and restructuring costs. For more information, see Note 5: Special Project Costs and Note 9: Debt and Financing Arrangements.
The following table presents certain geographical information.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| United States | $ | 2,094.7 | $ | 2,080.8 | $ | 5,567.4 | $ | 5,902.8 | |||||||||||||||
| International: | |||||||||||||||||||||||
| Canada | $ | 111.8 | $ | 110.0 | $ | 333.0 | $ | 323.0 | |||||||||||||||
| All other international | 22.7 | 25.5 | 72.6 | 68.6 | |||||||||||||||||||
| Total international | $ | 134.5 | $ | 135.5 | $ | 405.6 | $ | 391.6 | |||||||||||||||
| Total net sales | $ | 2,229.2 | $ | 2,216.3 | $ | 5,973.0 | $ | 6,294.4 |
The following table presents product category information.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Primary Reportable Segment (A) | |||||||||||||||||||||||||
| Coffee | $ | 817.6 | $ | 827.7 | $ | 2,305.1 | $ | 2,307.2 | U.S. Retail Coffee | ||||||||||||||||||||
| Pet snacks | 261.0 | 269.0 | 760.3 | 773.4 | U.S. Retail Pet Foods (B) | ||||||||||||||||||||||||
| Peanut butter | 204.5 | 184.6 | 617.1 | 438.1 | U.S. Retail Frozen Handheld and Spreads | ||||||||||||||||||||||||
| Cat food | 203.4 | 271.3 | 599.1 | 821.4 | U.S. Retail Pet Foods (B) | ||||||||||||||||||||||||
| Frozen handheld | 182.6 | 172.6 | 573.8 | 501.4 | U.S. Retail Frozen Handheld and Spreads | ||||||||||||||||||||||||
| Fruit spreads | 108.2 | 110.2 | 321.7 | 314.0 | U.S. Retail Frozen Handheld and Spreads | ||||||||||||||||||||||||
| Sweet baked goods | 270.2 | — | 270.2 | — | Sweet Baked Snacks | ||||||||||||||||||||||||
| Portion control | 51.5 | 42.9 | 153.1 | 114.2 | Other (D) | ||||||||||||||||||||||||
| Baking mixes and ingredients | 23.1 | 25.7 | 68.0 | 70.8 | Other (D) | ||||||||||||||||||||||||
| Toppings and syrups | 21.0 | 21.1 | 67.7 | 67.2 | U.S. Retail Frozen Handheld and Spreads | ||||||||||||||||||||||||
| Dog food | 17.4 | 241.8 | 64.5 | 729.8 | U.S. Retail Pet Foods (B) (C) | ||||||||||||||||||||||||
| Cookies | 30.1 | — | 30.1 | — | Sweet Baked Snacks | ||||||||||||||||||||||||
| Other | 38.6 | 49.4 | 142.3 | 156.9 | Other (D) | ||||||||||||||||||||||||
| Total net sales | $ | 2,229.2 | $ | 2,216.3 | $ | 5,973.0 | $ | 6,294.4 |
(A)The primary reportable segment generally represents at least 75 percent of total net sales for each respective product category.
(B)During the three and nine months ended January 31, 2024, a portion of the net sales within this product category relates to sales associated with a contract manufacturing agreement resulting from the divestiture of certain pet food brands, primarily included in the U.S. Retail Pet Foods segment. This agreement will continue through the remainder of 2024 and into 2025.
(C)During the three and nine months ended January 31, 2023, the net sales within this product category were primarily related to the divested pet food brands, primarily included in the U.S. Retail Pet Foods segment. For more information, see Note 4: Divestitures.
(D)Primarily represents the International and Away From Home operating segments, which are combined for segment reporting purposes.
Note 7: 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, 2024 and 2023, 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, 2024 and 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 FASB ASC 260, Earnings Per Share.
The following table sets forth the computation of basic and diluted earnings per share under the two-class method.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ | 120.4 | $ | 208.5 | $ | 498.9 | $ | 509.4 | |||||||||||||||
| Less: Net income allocated to participating securities | — | 0.2 | 0.2 | 0.7 | |||||||||||||||||||
| Net income allocated to common stockholders | $ | 120.4 | $ | 208.3 | $ | 498.7 | $ | 508.7 | |||||||||||||||
| Weighted-average common shares outstanding | 105.9 | 106.5 | 103.5 | 106.4 | |||||||||||||||||||
| Add: Dilutive effect of stock options | — | 0.1 | — | 0.1 | |||||||||||||||||||
| Weighted-average common shares outstanding – assuming dilution | 105.9 | 106.6 | 103.5 | 106.5 | |||||||||||||||||||
| Net income per common share | $ | 1.14 | $ | 1.96 | $ | 4.82 | $ | 4.78 | |||||||||||||||
| Net income per common share – assuming dilution | $ | 1.14 | $ | 1.95 | $ | 4.82 | $ | 4.78 |
The following table sets forth the computation of diluted earnings per share under the treasury stock method.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ | 120.4 | $ | 208.5 | $ | 498.9 | $ | 509.4 | |||||||||||||||
| Weighted-average common shares outstanding – assuming dilution: | |||||||||||||||||||||||
| Weighted-average common shares outstanding | 105.9 | 106.5 | 103.5 | 106.4 | |||||||||||||||||||
| Add: Dilutive effect of stock options | — | 0.1 | — | 0.1 | |||||||||||||||||||
| Add: Dilutive effect of restricted shares, restricted stock units, and performance units | 0.2 | 0.4 | 0.3 | 0.4 | |||||||||||||||||||
| Weighted-average common shares outstanding – assuming dilution | 106.1 | 107.0 | 103.8 | 106.9 | |||||||||||||||||||
| Net income per common share – assuming dilution | $ | 1.13 | $ | 1.95 | $ | 4.81 | $ | 4.77 |
Note 8: Goodwill and Other Intangible Assets
The following table summarizes the changes in our goodwill.
| U.S. Retail Coffee | U.S. Retail Frozen Handheld and Spreads | U.S. Retail Pet Foods | Sweet Baked Snacks | International and Away From Home | Total | ||||||||||||||||||||||||||||||
| Balance at April 30, 2023 | $ | 2,090.9 | $ | 1,147.5 | $ | 1,580.2 | $ | — | $ | 398.3 | $ | 5,216.9 | |||||||||||||||||||||||
| Acquisition | — | — | — | 2,461.1 | — | 2,461.1 | |||||||||||||||||||||||||||||
| Divestiture | — | (7.6) | — | — | (3.9) | (11.5) | |||||||||||||||||||||||||||||
| Other (A) | — | — | — | — | 1.3 | 1.3 | |||||||||||||||||||||||||||||
| Balance at January 31, 2024 (B) | $ | 2,090.9 | $ | 1,139.9 | $ | 1,580.2 | $ | 2,461.1 | $ | 395.7 | $ | 7,667.8 |
(A)The amounts classified as other represent foreign currency translation adjustments.
(B)Included in goodwill as of April 30, 2023, are accumulated goodwill impairment charges of $242.9.
The following table summarizes our other intangible assets and related accumulated amortization and impairment charges including foreign currency exchange adjustments.
| January 31, 2024 | April 30, 2023 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 4,764.9 | $ | 1,840.4 | $ | 2,924.5 | $ | 3,499.0 | $ | 1,719.8 | $ | 1,779.2 | |||||||||||||||||||||||
| Patents and technology | 163.0 | 160.7 | 2.3 | 167.6 | 161.6 | 6.0 | |||||||||||||||||||||||||||||
| Trademarks | 143.1 | 109.1 | 34.0 | 151.4 | 111.6 | 39.8 | |||||||||||||||||||||||||||||
| Total intangible assets subject to amortization | $ | 5,071.0 | $ | 2,110.2 | $ | 2,960.8 | $ | 3,818.0 | $ | 1,993.0 | $ | 1,825.0 | |||||||||||||||||||||||
| Indefinite-lived intangible assets not subject to amortization: | |||||||||||||||||||||||||||||||||||
| Trademarks | $ | 4,572.7 | $ | 223.2 | $ | 4,349.5 | $ | 2,830.7 | $ | 226.4 | $ | 2,604.3 | |||||||||||||||||||||||
| Total other intangible assets | $ | 9,643.7 | $ | 2,333.4 | $ | 7,310.3 | $ | 6,648.7 | $ | 2,219.4 | $ | 4,429.3 |
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, 2024, 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. In addition, the goodwill and indefinite-lived trademarks within the Sweet Baked Snacks segment remain susceptible to future impairment charges, as the carrying values approximate estimated fair values due to the
recent acquisition of Hostess Brands. Any significant adverse change in our near or long-term projections or macroeconomic conditions could result in future impairment charges for these segments.
Note 9: Debt and Financing Arrangements
The following table summarizes the components of our long-term debt.
| January 31, 2024 | April 30, 2023 | ||||||||||||||||||||||
| Principal Outstanding | Carrying Amount (A) | Principal Outstanding | Carrying Amount (A) | ||||||||||||||||||||
| 3.50% Senior Notes due March 15, 2025 | $ | 1,000.0 | $ | 999.1 | $ | 1,000.0 | $ | 998.4 | |||||||||||||||
| 3.38% Senior Notes due December 15, 2027 | 500.0 | 498.3 | 500.0 | 498.0 | |||||||||||||||||||
| 5.90% Senior Notes due November 15, 2028 | 750.0 | 744.2 | — | — | |||||||||||||||||||
| 2.38% Senior Notes due March 15, 2030 | 500.0 | 497.1 | 500.0 | 496.7 | |||||||||||||||||||
| 2.13% Senior Notes due March 15, 2032 | 500.0 | 494.8 | 500.0 | 494.4 | |||||||||||||||||||
| 6.20% Senior Notes due November 15, 2033 | 1,000.0 | 991.3 | — | — | |||||||||||||||||||
| 4.25% Senior Notes due March 15, 2035 | 650.0 | 645.4 | 650.0 | 645.1 | |||||||||||||||||||
| 2.75% Senior Notes due September 15, 2041 | 300.0 | 297.4 | 300.0 | 297.3 | |||||||||||||||||||
| 6.50% Senior Notes due November 15, 2043 | 750.0 | 736.3 | — | — | |||||||||||||||||||
| 4.38% Senior Notes due March 15, 2045 | 600.0 | 588.6 | 600.0 | 588.2 | |||||||||||||||||||
| 3.55% Senior Notes due March 15, 2050 | 300.0 | 296.2 | 300.0 | 296.1 | |||||||||||||||||||
| 6.50% Senior Notes due November 15, 2053 | 1,000.0 | 982.5 | — | — | |||||||||||||||||||
| Term Loan Credit Agreement due November 7, 2026 | 350.0 | 349.9 | — | — | |||||||||||||||||||
| Total long-term debt | $ | 8,200.0 | $ | 8,121.1 | $ | 4,350.0 | $ | 4,314.2 | |||||||||||||||
(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.
In September 2023, we entered into a Term Loan with a group of banks for an unsecured $800.0 term facility. Borrowings under the Term Loan bear interest on the prevailing Secured Overnight Financing Rate (“SOFR”) and are payable at the end of the borrowing term. The Term Loan matures on November 7, 2026, and does not require scheduled amortization payments. Voluntary prepayments are permitted without premium or penalty. In November 2023, the full amount was drawn on the Term Loan to partially finance the acquisition of Hostess Brands and pay off the debt assumed as part of the acquisition, as discussed in Note 3: Acquisition. Capitalized debt issuance costs associated with the Term Loan will be amortized to interest expense – net in the Condensed Statements of Consolidated Income over the time period for which the debt is outstanding. As of January 31, 2024, we prepaid $450.0 on the Term Loan. The interest rate on the Term Loan at January 31, 2024, was 6.69 percent. Subsequent to January 31, 2024, we prepaid an additional $100.0 on the Term Loan.
In September 2023, we entered into a commitment letter for a $5.2 billion Bridge Loan that provided committed financing for the acquisition of Hostess Brands, as disclosed in Note 3: Acquisition. No balances were drawn against this facility, as the commitment letter was terminated after completion of the Senior Notes offering and drawing on the Term Loan. Included in other debt costs in the Condensed Statement of Consolidated Income during the nine months ended January 31, 2024, was $19.5 related to financing fees associated with the Bridge Loan.
In October 2023, we completed an offering of $3.5 billion in Senior Notes due November 15, 2028, November 15, 2033, November 15, 2043, and November 15, 2053. The Senior Notes included $31.8 of capitalized debt issuance costs and $15.0 of offering discounts to be amortized to interest expense – net in the Condensed Statements of Consolidated Income over the time period for which the debt is outstanding. The net proceeds from the offering were used to partially finance the acquisition of Hostess Brands and pay off the debt assumed as part of the acquisition.
All of our Senior Notes outstanding at January 31, 2024, 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.
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, SOFR, 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, 2024, or April 30, 2023.
We participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $2.0 billion at any time. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper is used as a continuing source of short-term financing for general corporate purposes. As of January 31, 2024, we had $418.0 of short-term borrowings outstanding, which were issued under our commercial paper program at weighted-average interest rate of 5.45 percent. As of April 30, 2023, we did not have a balance outstanding.
Interest paid totaled $20.6 and $9.9 for the three months ended January 31, 2024 and 2023, respectively, and $94.2 and $87.2 for the nine months ended January 31, 2024 and 2023, 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, 2024, we are in compliance with all covenants.
Note 10: 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 | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Service cost | $ | 0.2 | $ | 0.3 | $ | 0.2 | $ | 0.2 | |||||||||||||||
| Interest cost | 4.5 | 4.6 | 0.7 | 0.6 | |||||||||||||||||||
| Expected return on plan assets | (4.0) | (3.6) | — | — | |||||||||||||||||||
| Amortization of net actuarial loss (gain) | 1.0 | 1.0 | (0.4) | (0.3) | |||||||||||||||||||
| Amortization of prior service cost (credit) | — | 0.1 | (0.1) | (0.1) | |||||||||||||||||||
| Settlement loss (gain) | — | 1.4 | — | — | |||||||||||||||||||
| Net periodic benefit cost | $ | 1.7 | $ | 3.8 | $ | 0.4 | $ | 0.4 |
| Nine Months Ended January 31, | |||||||||||||||||||||||
| Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Service cost | $ | 0.7 | $ | 0.9 | $ | 0.6 | $ | 0.7 | |||||||||||||||
| Interest cost | 13.8 | 13.4 | 2.0 | 1.8 | |||||||||||||||||||
| Expected return on plan assets | (12.2) | (11.7) | — | — | |||||||||||||||||||
| Amortization of net actuarial loss (gain) | 2.7 | 3.0 | (1.2) | (0.9) | |||||||||||||||||||
| Amortization of prior service cost (credit) | 0.1 | 0.5 | (0.4) | (0.5) | |||||||||||||||||||
| Settlement loss (gain) | 3.2 | 3.1 | — | — | |||||||||||||||||||
| Net periodic benefit cost | $ | 8.3 | $ | 9.2 | $ | 1.0 | $ | 1.1 |
In 2021, we transferred obligations related to our Canadian defined benefit pension plan to an insurance company through the purchase of an irrevocable group annuity contract (the “Canadian Buy-Out Contract”). The group annuity contract was purchased using assets from the pension trust. During the first quarter of 2024, we received corporate approval to proceed with distribution of the surplus that remains within the Canadian defined benefit pension plan. As a result, we recognized a noncash pre-tax settlement charge of $3.2 related to the acceleration of prior service cost for the portion of the plan surplus to be allocated to plan members, which is subject to regulatory approval before a payout can be made. The settlement charge was included within other income (expense) – net in the Condensed Statement of Consolidated Income. We did not recognize any charges related to the Canadian Buy-Out Contract during the nine months ended January 31, 2023.
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. Additionally, we made direct benefit payments of $2.8 in both the nine months ended January 31, 2024 and 2023.
Note 11: 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 the 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, wheat, and edible oils. 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 its 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: From time to time, 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.
Equity Forward Derivative: During the first quarter of 2024, we began entering into equity forward derivative transactions under an agreement with an unrelated third party to facilitate the forward sale of the Post common stock. We did not qualify the forward sale derivative contract for hedge accounting treatment, and as a result, derivative gains and losses associated with the economic hedge were immediately recognized in earnings within other income (expense) – net in the Condensed Statement of Consolidated Income, netting with the change in fair value of the underlying shares. All 5.4 million shares of Post common stock were hedged as of October 31, 2023. On November 15, 2023, we settled the equity forward contract for $466.3 and recognized a realized pre-tax loss of $28.2 and gain of $5.4 during the three and nine months ended January 31, 2024, respectively. For additional information, see Note 4: Divestitures.
The following table presents the gross notional value of outstanding derivative contracts.
| January 31, 2024 | April 30, 2023 | ||||||||||
| Commodity contracts | $ | 312.3 | $ | 448.1 | |||||||
| Foreign currency exchange contracts | 106.5 | 98.1 | |||||||||
The following tables set forth the gross fair value amounts of derivative instruments recognized in the Condensed Consolidated Balance Sheets.
| January 31, 2024 | |||||||||||||||||||||||
| Other Current Assets | Other Current Liabilities | Other Noncurrent Assets | Other Noncurrent Liabilities | ||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts | $ | 2.9 | $ | 7.7 | $ | — | $ | — | |||||||||||||||
| Foreign currency exchange contracts | 0.5 | 1.0 | — | — | |||||||||||||||||||
| Total derivative instruments | $ | 3.4 | $ | 8.7 | $ | — | $ | — |
| April 30, 2023 | |||||||||||||||||||||||
| Other Current Assets | Other Current Liabilities | Other Noncurrent Assets | Other Noncurrent Liabilities | ||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts | $ | 18.1 | $ | 14.7 | $ | — | $ | — | |||||||||||||||
| Foreign currency exchange contracts | 1.4 | 0.1 | — | — | |||||||||||||||||||
| Total derivative instruments | $ | 19.5 | $ | 14.8 | $ | — | $ | — |
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 $19.1 and $17.0 at January 31, 2024, and April 30, 2023, respectively, and are included in other current assets in the Condensed Consolidated Balance Sheets. The change in the cash margin accounts is 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 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. 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 in the Condensed Statements of Consolidated Income on derivatives not designated as hedging instruments.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Derivative gains (losses) on commodity contracts | $ | (6.1) | $ | 17.3 | $ | (3.3) | $ | (10.9) | |||||||||||||||
| Derivative gains (losses) on foreign currency exchange contracts | (3.3) | (1.9) | (0.7) | 2.7 | |||||||||||||||||||
| Total derivative gains (losses) recognized in cost of products sold | $ | (9.4) | $ | 15.4 | $ | (4.0) | $ | (8.2) |
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, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net derivative gains (losses) recognized and classified as unallocated | $ | (9.4) | $ | 15.4 | $ | (4.0) | $ | (8.2) | |||||||||||||||
| Less: Net derivative gains (losses) reclassified to segment operating profit | (4.2) | (2.1) | 17.1 | 35.2 | |||||||||||||||||||
| Change in net cumulative unallocated derivative gains and losses | $ | (5.2) | $ | 17.5 | $ | (21.1) | $ | (43.4) |
Net cumulative unallocated derivative losses were $5.2 at January 31, 2024, and net cumulative unallocated derivative gains were $15.9 at April 30, 2023.
Cash Flow Hedges
In November 2023, we terminated interest rate contracts for $42.5 concurrent with the payment of the debt assumed with the acquisition of Hostess Brands. The interest rate contracts were designated as cash flow hedges and were used to manage exposure to changes in cash flows associated with variable rate debt.
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 contracts previously designated as cash flow hedges.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Gains (losses) recognized in other comprehensive income (loss) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Less: Gains (losses) reclassified from accumulated other comprehensive income (loss) to interest expense – net (A) | (3.3) | (3.4) | (10.1) | (10.2) | |||||||||||||||||||
| Change in accumulated other comprehensive income (loss) | $ | 3.3 | $ | 3.4 | $ | 10.1 | $ | 10.2 |
(A)Interest expense – net, as presented in the Condensed Statements of Consolidated Income was $99.8 and $37.9 for the three months ended January 31, 2024 and 2023, respectively, and $167.0 and $116.7 for the nine months ended January 31, 2024 and 2023, respectively. The reclassification includes terminated contracts which were designated as cash flow hedges.
Included as a component of accumulated other comprehensive income (loss) at January 31, 2024, and April 30, 2023, were deferred net pre-tax losses of $190.6 and $200.7, respectively, related to the terminated interest rate contracts. The related net tax benefit recognized in accumulated other comprehensive income (loss) at January 31, 2024, and April 30, 2023, was $45.2 and $47.1, respectively. Approximately $13.6 of the net pre-tax loss will be recognized over the next 12 months related to the terminated interest rate contracts.
Note 12: 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, 2024 | April 30, 2023 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Marketable securities and other investments | $ | 23.1 | $ | 23.1 | $ | 24.0 | $ | 24.0 | |||||||||||||||
| Derivative financial instruments – net | (5.3) | (5.3) | 4.7 | 4.7 | |||||||||||||||||||
| Investment in equity securities | — | — | 487.8 | 487.8 | |||||||||||||||||||
| Total long-term debt | (8,121.1) | (8,077.6) | (4,314.2) | (3,879.1) |
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, 2024 | ||||||||||||||||||||
| Marketable securities and other investments: (A) | |||||||||||||||||||||||
| Equity mutual funds | $ | 5.5 | $ | — | $ | — | $ | 5.5 | |||||||||||||||
| Municipal obligations | — | 17.3 | — | 17.3 | |||||||||||||||||||
| Money market funds | 0.3 | — | — | 0.3 | |||||||||||||||||||
| Derivative financial instruments: (B) | |||||||||||||||||||||||
| Commodity contracts – net | (4.9) | 0.1 | — | (4.8) | |||||||||||||||||||
| Foreign currency exchange contracts – net | 0.2 | (0.7) | — | (0.5) | |||||||||||||||||||
| Total long-term debt (D) | (7,677.4) | (400.2) | — | (8,077.6) | |||||||||||||||||||
| Total financial instruments measured at fair value | $ | (7,676.3) | $ | (383.5) | $ | — | $ | (8,059.8) |
| 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, 2023 | ||||||||||||||||||||
| Marketable securities and other investments: (A) | |||||||||||||||||||||||
| Equity mutual funds | $ | 5.0 | $ | — | $ | — | $ | 5.0 | |||||||||||||||
| Municipal obligations | — | 18.6 | — | 18.6 | |||||||||||||||||||
| Money market funds | 0.4 | — | — | 0.4 | |||||||||||||||||||
| Derivative financial instruments: (B) | |||||||||||||||||||||||
| Commodity contracts – net | 2.7 | 0.7 | — | 3.4 | |||||||||||||||||||
| Foreign currency exchange contracts – net | 0.2 | 1.1 | — | 1.3 | |||||||||||||||||||
| Investment in equity securities (C) | 487.8 | — | — | 487.8 | |||||||||||||||||||
| Total long-term debt (D) | (3,879.1) | — | — | (3,879.1) | |||||||||||||||||||
| Total financial instruments measured at fair value | $ | (3,383.0) | $ | 20.4 | $ | — | $ | (3,362.6) |
(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, 2024, our municipal obligations are scheduled to mature as follows: $0.2 in 2024, $1.3 in 2025, $0.8 in 2026, $4.5 in 2027, $0.4 in 2028, and the remaining $10.1 in 2029 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.
(C)The market approach is utilized to measure the fair value of equity securities. The investment in equity securities represented our equity interest in Post of approximately 8 percent as of April 30, 2023, which was valued using the trading value of Post common stock. On November 15, 2023, we settled the equity forward contract that hedged all 5.4 million shares of Post common stock for $466.3. The investment in equity securities was valued at $460.9 on the settlement date. As a result, we recognized a realized pre-tax loss of $30.7 on the investment, of which a gain of $28.2 and loss of $26.9 was recognized during the three and nine months ended January 31, 2024, respectively, which was included in other income (expense) – net in the Condensed Statement of Consolidated Income. For additional information, see Note 4: Divestitures.
(D)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 principle 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 9: Debt and Financing Arrangements.
During the second quarter of 2024, the disposal groups for the Sahale Snacks and Canada condiment businesses were classified as held for sale, and as a result, an estimated pre-tax loss of $6.8 and $5.2 were recognized within other expense (income) – net in the Condensed Statement of Consolidated Income, respectively. Upon close of the transactions during the third quarter of 2024, the pre-tax losses were adjusted to $6.7 and $5.7, respectively, reflecting the fair values of the disposal groups as of the transaction dates. We utilized Level 3 inputs based on management’s best estimates and assumptions to estimate the fair value of the disposal groups. Furthermore, the pre-tax loss for the divested Sahale Snacks business included the impact of an
allocation of $11.5 of goodwill, primarily in the U.S. Retail Frozen Handheld and Spreads segment, which was determined based on a relative fair value analysis. For additional information, see Note 4: Divestitures and Note 8: Goodwill and Other Intangible Assets.
Furthermore, we acquired Hostess Brands on November 7, 2023, and as a result, the underlying assets acquired and liabilities assumed were adjusted to their estimated fair values at the date of acquisition, which was determined based on independent appraisals, discounted cash flow analyses, quoted market prices, and estimates made by management. For additional information, see Note 3: Acquisition.
Note 13: 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 in the Condensed Consolidated Balance Sheets. 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 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.
The following table sets forth the right-of-use assets and lease liabilities recognized in the Condensed Consolidated Balance Sheets.
| January 31, 2024 | April 30, 2023 | ||||||||||
| Operating lease right-of-use assets | $ | 182.3 | $ | 103.0 | |||||||
| Operating lease liabilities: | |||||||||||
| Current operating lease liabilities | $ | 40.6 | $ | 33.2 | |||||||
| Noncurrent operating lease liabilities | 151.4 | 77.2 | |||||||||
| Total operating lease liabilities | $ | 192.0 | $ | 110.4 | |||||||
| Finance lease right-of-use assets: | |||||||||||
| Machinery and equipment | $ | 16.3 | $ | 7.7 | |||||||
| Accumulated depreciation | (7.5) | (4.4) | |||||||||
| Total property, plant, and equipment | $ | 8.8 | $ | 3.3 | |||||||
| Finance lease liabilities: | |||||||||||
| Other current liabilities | $ | 2.4 | $ | 1.2 | |||||||
| Other noncurrent liabilities | 6.7 | 2.2 | |||||||||
| Total finance lease liabilities | $ | 9.1 | $ | 3.4 |
The following table summarizes the components of lease expense.
| Three Months Ended January 31, | Nine Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Operating lease cost | $ | 13.1 | $ | 10.3 | $ | 37.0 | $ | 31.1 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | 0.7 | 0.4 | 2.7 | 1.2 | |||||||||||||||||||
| Interest on lease liabilities | 0.1 | 0.1 | 0.4 | 0.1 | |||||||||||||||||||
| Variable lease cost | 6.4 | 7.2 | 17.6 | 18.9 | |||||||||||||||||||
| Short-term lease cost | 11.8 | 11.0 | 32.4 | 33.6 | |||||||||||||||||||
| Total lease cost (A) | $ | 32.1 | $ | 29.0 | $ | 90.1 | $ | 84.9 |
(A)Total lease cost does not include sublease income which is immaterial for all years presented.
The following table sets forth cash flow and noncash information related to leases.
| Nine Months Ended January 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 36.9 | $ | 33.2 | |||||||
| Operating cash flows from finance leases | 0.4 | 0.1 | |||||||||
| Financing cash flows from finance leases | 2.6 | 1.3 | |||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | |||||||||||
| Operating leases | $ | 91.9 | $ | 7.2 | |||||||
| Finance leases | 8.0 | 1.5 |
The following table summarizes the maturity of our lease liabilities by fiscal year.
| January 31, 2024 | |||||||||||
| Operating Leases | Finance Leases | ||||||||||
| 2024 (remainder of the year) | $ | 12.5 | $ | 0.7 | |||||||
| 2025 | 46.5 | 2.7 | |||||||||
| 2026 | 43.0 | 2.3 | |||||||||
| 2027 | 24.7 | 2.0 | |||||||||
| 2028 | 17.7 | 1.7 | |||||||||
| 2029 and beyond | 77.5 | 0.6 | |||||||||
| Total undiscounted minimum lease payments | $ | 221.9 | $ | 10.0 | |||||||
| Less: Imputed interest | 29.9 | 0.9 | |||||||||
| Lease liabilities | $ | 192.0 | $ | 9.1 |
The following table sets forth the weighted average remaining lease term and discount rate.
| January 31, 2024 | April 30, 2023 | ||||||||||
| Weighted average remaining lease term (in years): | |||||||||||
| Operating leases | 6.3 | 4.8 | |||||||||
| Finance leases | 4.0 | 3.1 | |||||||||
| Weighted average discount rate: | |||||||||||
| Operating leases | 4.3 | % | 3.3 | % | |||||||
| Finance leases | 4.8 | % | 2.4 | % |
Note 14: Income Taxes
The effective income tax rates for the three months ended January 31, 2024 and 2023, were 38.4 and 24.3 percent, respectively, and for the nine months ended January 31, 2024 and 2023, were 27.0 and 23.9 percent, respectively. During the three and nine months ended January 31, 2024, the effective income tax rates varied from the U.S. statutory income tax rate of 21.0 percent primarily due to state income taxes and unfavorable tax impacts associated with the acquisition of Hostess Brands. The effective income tax rate for the nine months ended January 31, 2024, also included a favorable tax impact of the divested Sahale Snacks business. During the three and nine months ended January 31, 2023, the effective income tax rate varied from the U.S. statutory income tax rate of 21.0 percent primarily due to state income taxes.
We are a voluntary participant in the Compliance Assurance Process (“CAP”) program offered by the Internal Revenue Service (“IRS”) and are currently under a CAP examination for the tax years ended April 30, 2023, and April 30, 2024. During the three months ended January 31, 2024, the IRS concluded the CAP examinations for the 2019 through 2022 tax years.
Within the next 12 months, it is reasonably possible that we could decrease our unrecognized tax benefits by an estimated $2.5, primarily as a result of the expiration of statute of limitation periods.
As part of the acquisition of Hostess Brands, we assumed a tax receivable agreement payable to C. Dean Metropoulos and entities under his control. Subsequent to the acquisition, we terminated all future payments under the tax receivable agreement in exchange for a cash payment of $86.4, which was recognized as a financing outflow in the Condensed Statement of Consolidated Cash Flows for the nine months ended January 31, 2024.
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, 2023 | $ | (34.3) | $ | (153.6) | $ | (52.7) | $ | 1.4 | $ | (239.2) | |||||||||||||||||||
| Reclassification adjustments | — | 10.1 | 4.4 | — | 14.5 | ||||||||||||||||||||||||
| Current period credit (charge) | 2.4 | — | (3.2) | 0.3 | (0.5) | ||||||||||||||||||||||||
| Income tax benefit (expense) | — | (1.9) | (0.2) | (0.1) | (2.2) | ||||||||||||||||||||||||
| Balance at January 31, 2024 | $ | (31.9) | $ | (145.4) | $ | (51.7) | $ | 1.6 | $ | (227.4) |
| 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) |
(A)The reclassification from accumulated other comprehensive income (loss) is composed of deferred gains (losses) related to terminated interest rate contracts which were reclassified to interest expense – net. For additional information, see Note 11: 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 10: Pensions and Other Postretirement Benefits.
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, and 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, 2024. 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 will have a material adverse effect on our financial position, results of operations, or cash flows.
We are defendants in a series of putative class action lawsuits that were transferred to the U.S. 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, 2024, and the likelihood of loss is not considered probable or reasonably 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 Jif peanut butter products at the Lexington facility. We partnered with retailers to restock Jif peanut butter products during the first quarter of 2023 and returned to normal levels at the end of 2023. We recognized total direct costs associated with the recall of approximately $120.0, net of insurance recoveries, related to customer returns, fees, unsaleable inventory, and other product recall-related costs, primarily within our U.S. Retail Frozen Handheld and Spreads segment. Approximately $20.0 and $110.0 of direct costs were recognized during the three and nine months ended January 31, 2023, respectively, and no significant direct costs were recognized during 2024.
Further, 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 in connection with the Jif voluntary recall, 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. In addition, we have worked diligently to further strengthen our already stringent quality processes, including doubling our finished product testing and tripling our environmental testing to verify the efficacy of our actions. 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 based on such an agency conclusion 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 ongoing consumer litigation associated with the voluntary recall of Jif peanut butter products. The outcome and financial impact of the ongoing consumer litigation or any 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, 2024, and the likelihood of loss is not considered probable or reasonably estimable.
Voortman Contingency: In December 2020, Hostess Brands asserted claims for indemnification against the sellers (the “Sellers”) under the terms of a Share Purchase Agreement (the “Purchase Agreement”) pursuant to which Hostess Brands acquired Voortman Cookies Limited (“Voortman”). The claims were for damages arising out of alleged breaches by the Sellers of certain representations, warranties and covenants contained in the Purchase Agreement relating to periods prior to the closing of the acquisition. Hostess Brands also submitted claims relating to these alleged breaches under the representation and warranty insurance policy (“RWI”) that was purchased in connection with the acquisition. In the third quarter of calendar 2022, the RWI insurers paid Hostess Brands $42.5 CAD (the RWI coverage limit) (the “Proceeds”) related to these breaches. Per agreement with the RWI insurers, under no circumstances would we be required to return the Proceeds.
On November 3, 2022, pursuant to the agreement with the RWI insurers, Voortman brought claims in the Ontario (Canada) Superior Court of Justice (the “Claim”), related to the breaches against certain of the Sellers. The Claim alleges the seller defendants made certain non-disclosures and misrepresentations to induce Hostess Brands to overpay for Voortman. We are seeking damages of $109.0 CAD representing the amount of the aggregate liability of the Sellers for indemnification under the Purchase Agreement, $5.0 CAD in punitive or aggravated damages, interest, proceedings fees, and any other relief the presiding
court deems appropriate. A portion of any recovery will be shared with the RWI insurers. Although we believe that the Claim is meritorious, no assurance can be given as to whether we will recover all, or any part, of the amounts being pursued.
Note 17: Common Shares
The following table sets forth common share information.
| January 31, 2024 | April 30, 2023 | ||||||||||
| Common shares authorized | 300.0 | 300.0 | |||||||||
| Common shares outstanding | 106.2 | 104.4 | |||||||||
| Treasury shares | 44.3 | 42.1 |
Repurchase Program: On March 2, 2023, we entered into a share repurchase plan (the “10b5-1 Plan”) established in accordance with Rule 10b5-1 of the Exchange Act in connection with the remaining common shares authorized for repurchase by the Board, which was approximately 3.5 million common shares as of April 30, 2023. In accordance with the 10b5-1 Plan, our designated broker had the authority to repurchase approximately 2.4 million common shares, which commenced upon the sale of certain pet food brands on April 28, 2023, and expired 45 calendar days after the closure of the transaction. During the nine months ended January 31, 2024, we repurchased approximately 2.4 million common shares for $362.8 under the 10b5-1 Plan, and approximately 1.1 million common shares remain available for repurchase. In accordance with The Inflation Reduction Act of 2022, H.R. 5376 (the “Inflation Reduction Act”), a one percent excise tax was applied to share repurchases after December 31, 2022. As a result, an excise tax of $3.6 was accrued on the repurchased shares during the first quarter of 2024, and included within additional capital in our Condensed Consolidated Balance Sheet.
During the nine months ended January 31, 2023, we did not repurchase any common shares under a repurchase plan authorized by the Board. All other share repurchases during the nine months ended January 31, 2024 and 2023, consisted of shares repurchased from stock plan recipients in lieu of cash payments.
Shares Issued: On November 7, 2023, we acquired Hostess Brands, and as a result, we issued approximately 4.0 million common shares valued at $450.2 in exchange for the outstanding shares of Hostess Brands common stock to partially fund the acquisition of Hostess Brands. The shares issued were based on each outstanding share of Hostess Brands common stock receiving $30.00 per share in cash and 0.03002 shares of our common shares, which represented a value of $4.25 based on the closing stock price of our common shares on September 8, 2023, the last trading day preceding September 11, 2023, the date on which the execution of the Hostess Brands merger agreement was publicly announced. For additional information on the acquisition of Hostess Brands, see Note 3: Acquisition.
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