Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.54M
2: EX-3.1 Articles of Incorporation/Organization or Bylaws HTML 67K
3: EX-10.1 Material Contract HTML 81K
4: EX-10.2 Material Contract HTML 75K
5: EX-10.3 Material Contract HTML 103K
6: EX-10.4 Material Contract HTML 81K
7: EX-10.5 Material Contract HTML 76K
8: EX-10.6 Material Contract HTML 75K
9: EX-31.1 Certification -- §302 - SOA'02 HTML 26K
10: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
11: EX-32 Certification -- §906 - SOA'02 HTML 23K
17: R1 Document and Entity Information HTML 73K
18: R2 Condensed Statements of Consolidated Income HTML 90K
(Unaudited)
19: R3 Condensed Statements of Consolidated Comprehensive HTML 53K
Income (Unaudited)
20: R4 Condensed Consolidated Balance Sheets (Unaudited) HTML 159K
21: R5 Condensed Statements of Consolidated Cash Flows HTML 106K
(Unaudited)
22: R6 Condensed Statements of Consolidated Shareholders' HTML 68K
Equity (Unaudited)
23: R7 Condensed Statements of Consolidated Shareholders' HTML 23K
Equity (Unaudited) (Parentheticals)
24: R8 Basis of Presentation HTML 24K
25: R9 Recently Issued Accounting Standards HTML 33K
26: R10 Integration and Restructuring Costs HTML 37K
27: R11 Divestitures HTML 27K
28: R12 Reportable Segments HTML 97K
29: R13 Earnings per Share HTML 43K
30: R14 Debt and Financing Arrangements HTML 52K
31: R15 Pensions and Other Postretirement Benefits HTML 45K
32: R16 Derivative Financial Instruments HTML 83K
33: R17 Other Financial Instruments and Fair Value HTML 75K
Measurements
34: R18 Leases HTML 81K
35: R19 Income Taxes HTML 26K
36: R20 Accumulated Other Comprehensive Income (Loss) HTML 61K
37: R21 Contingencies HTML 30K
38: R22 Common Shares HTML 27K
39: R23 Recently Issued Accounting Standards (Policies) HTML 24K
40: R24 Integration and Restructuring Costs (Tables) HTML 32K
41: R25 Reportable Segments (Tables) HTML 90K
42: R26 Earnings per Share (Tables) HTML 61K
43: R27 Debt and Financing Arrangements (Tables) HTML 48K
44: R28 Pensions and Other Postretirement Benefits HTML 41K
(Tables)
45: R29 Derivative Financial Instruments (Tables) HTML 83K
46: R30 Other Financial Instruments and Fair Value HTML 76K
Measurements (Tables)
47: R31 Leases (Tables) HTML 101K
48: R32 Accumulated Other Comprehensive Income (Loss) HTML 60K
(Tables)
49: R33 Common Shares (Tables) HTML 26K
50: R34 Integration and Restructuring Costs (Details) HTML 43K
51: R35 Divestitures (Details Textual) HTML 44K
52: R36 Reportable Segments (Details) HTML 67K
53: R37 Reportable Segments (Details 1) HTML 34K
54: R38 Reportable Segments (Details 2) HTML 65K
55: R39 Reportable Segments (Details Textual) HTML 24K
56: R40 Earnings per Share (Details) HTML 65K
57: R41 Earnings Per Share (Details 1) HTML 53K
58: R42 Debt and Financing Arrangements (Details) HTML 57K
59: R43 Debt and Financing Arrangements (Details Textual) HTML 42K
60: R44 Pensions and Other Postretirement Benefits HTML 55K
(Details)
61: R45 Derivative Financial Instruments (Details) HTML 26K
62: R46 Derivative Financial Instruments (Details 1) HTML 48K
63: R47 Derivative Financial Instruments (Details 2) HTML 28K
64: R48 Derivative Financial Instruments (Details 3) HTML 27K
65: R49 Derivative Financial Instruments (Details 4) HTML 37K
66: R50 Derivative Financial Instruments (Details Textual) HTML 61K
67: R51 Other Financial Instruments and Fair Value HTML 35K
Measurements (Details)
68: R52 Other Financial Instruments and Fair Value HTML 71K
Measurements (Details 1)
69: R53 Other Financial Instruments and Fair Value HTML 31K
Measurements (Details Textual)
70: R54 Leases (Details) HTML 50K
71: R55 Leases (Details 1) HTML 38K
72: R56 Leases (Details 2) HTML 32K
73: R57 Leases (Details 3) HTML 61K
74: R58 Leases (Details 4) HTML 30K
75: R59 Income Taxes (Details Textual) HTML 32K
76: R60 Accumulated Other Comprehensive Income (Loss) HTML 54K
(Details)
77: R61 Contingencies (Details Textual) HTML 26K
78: R62 Common Shares (Details) HTML 36K
81: XML IDEA XML File -- Filing Summary XML 140K
79: XML XBRL Instance -- sjm-20220731_htm XML 2.16M
80: EXCEL IDEA Workbook of Financial Reports XLSX 122K
13: EX-101.CAL XBRL Calculations -- sjm-20220731_cal XML 194K
14: EX-101.DEF XBRL Definitions -- sjm-20220731_def XML 472K
15: EX-101.LAB XBRL Labels -- sjm-20220731_lab XML 1.49M
16: EX-101.PRE XBRL Presentations -- sjm-20220731_pre XML 825K
12: EX-101.SCH XBRL Schema -- sjm-20220731 XSD 145K
82: JSON XBRL Instance as JSON Data -- MetaLinks 405± 589K
83: ZIP XBRL Zipped Folder -- 0000091419-22-000096-xbrl Zip 471K
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No o
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
ý
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ý
Selling,
distribution, and administrative expenses
i343.8
i324.0
Amortization
i55.6
i55.4
Other
special project costs (A)
i1.4
i1.8
Other
operating expense (income) – net
(i28.0)
(i1.2)
Operating
Income
i179.7
i259.4
Interest
expense – net
(i39.1)
(i43.1)
Other
income (expense) – net
i0.5
(i11.1)
Income
Before Income Taxes
i141.1
i205.2
Income
tax expense
i31.3
i51.3
Net
Income
$
i109.8
$
i153.9
Earnings
per common share:
Net Income
$
i1.03
$
i1.42
Net
Income – Assuming Dilution
$
i1.03
$
i1.42
(A) Special
project costs include certain divestiture, acquisition, integration, and restructuring costs, which are recognized in cost of products sold and other special project costs. For more information, see Note 3: Integration and Restructuring Costs and Note 5: Reportable Segments.
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three
Months Ended July 31,
Dollars in millions
2022
2021
Net income
$
i109.8
$
i153.9
Other
comprehensive income (loss):
Foreign currency translation adjustments
i1.4
(i4.0)
Cash
flow hedging derivative activity, net of tax
i2.5
i2.3
Pension
and other postretirement benefit plans activity, net of tax
i0.4
(i2.6)
Available-for-sale
securities activity, net of tax
(i0.3)
i0.1
Total
Other Comprehensive Income (Loss)
i4.0
(i4.2)
Comprehensive
Income
$
i113.8
$
i149.7
See
notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, unless otherwise noted, except per share data)
Note 1: Basis of Presentation
i
The
unaudited interim condensed consolidated financial statements of The J. M. Smucker Company (“Company,”“we,”“us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included.
Operating results for the three months ended July 31, 2022, are not necessarily indicative of the results that may be expected for the year ending April 30, 2023. For further information, reference is made to the consolidated
financial statements and notes included in our Annual Report on Form 10-K for the year ended April 30, 2022.
Note 2: Recently Issued Accounting Standards
iiIn
March 2022, the U.S. Securities and Exchange Commission (the “SEC”) issued the proposed rule under SEC Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, to enhance and standardize the climate-related disclosures provided by public companies. This update will require the disclosure of greenhouse gas emissions, including Scope 1 and Scope 2 emissions, which will be subject to third-party assurance, as well as climate-related targets and goals, and how the Board of Directors (the “Board”) and management oversee climate-related risks. As of July 31, 2022, these amendments were not adopted by the SEC; however, we anticipate that the adoption of these amendments will have a material impact on our financial statements and disclosures./
Note
3: Integration and Restructuring Costs
i
Integration and restructuring costs primarily consist of employee-related costs and other transition and termination costs related to certain divestiture, acquisition, integration, or restructuring activities. Employee-related costs include severance, retention bonuses, and relocation costs. Severance costs and retention bonuses are recognized over the estimated future service period of the impacted employees, and relocation costs are expensed as incurred. Other
transition and termination costs include fixed asset-related charges, contract and lease termination costs, professional fees, and other miscellaneous expenditures associated with the integration or restructuring activities. With the exception of accelerated depreciation, these costs are expensed as incurred. These integration and restructuring costs are reported in cost of products sold and other special project costs in the Condensed Statements of Consolidated Income and are not allocated to segment profit. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.
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. This is inclusive of certain restructuring costs associated with the divestitures of the Crisco®, Natural Balance®, private label dry pet food, and natural beverage and grains businesses. For additional information, see Note 4: Divestitures.
During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close our Suffolk, Virginia, facility as a result of a new strategic partnership for the production of our liquid coffee products. During 2022, we completed the transition of production to JDE Peet’s N.V., as anticipated. Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the recent divestitures
of the private label dry pet food and natural beverage and grains businesses, as well as the closure of our Ripon, Wisconsin, production facility by the end of calendar year 2022 to further optimize operations for our U.S. Retail Consumer Foods business. We expect to incur costs of approximately $i70.0 associated with the restructuring activities planned to date. More than half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation, while the remainder represents
employee-related costs. We anticipate the planned activities associated with this restructuring program will be completed by the end of 2023.
The
obligation related to severance costs and retention bonuses was $i2.7 and $i2.4 at July 31, 2022 and April 30, 2022, respectively. As of July 31,
2022, cumulative noncash charges incurred to date were $i27.8, including $i4.8 and $i3.3
incurred during the three months ended July 31, 2022 and 2021, respectively, and primarily consisted of accelerated depreciation.
Note 4: Divestitures
i
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, dedicatedmanufacturing and distribution facilities in Chico, California, and Havre de Grace, Maryland, and approximately i150
employees who supported the natural beverage and grains businesses. The transaction did not include Santa Cruz Organic nut butters, fruit spreads, syrups, or applesauce. Under our ownership, the businesses generated net sales of $i106.7 in 2022, primarily included in the U.S. Retail Consumer Foods segment. Final net proceeds from the divestiture were $i98.7,
which were inclusive of a working capital adjustment and cash transaction costs. We recognized a pre-tax gain of $i28.3 related to the natural beverage and grains businesses, including $i1.6
during the three months ended July 31, 2022, within other operating expense (income) – net in the Condensed Statement of Consolidated Income, upon finalization of the working capital adjustment. The remaining pre-tax gain was recognized during the second half of 2022.
On December 1, 2021, we sold the private label dry pet food business to Diamond Pet Foods, Inc. (“Diamond Pet Foods”). The transaction included dry pet food products sold under private label brands, a dedicated manufacturing facility located in Frontenac, Kansas, and approximately i220
employees who supported the private label dry pet food business. The transaction did not include any branded products or our private label wet pet food business. Under our ownership, the business generated net sales of $i62.3 in 2022, included in the U.S. Retail Pet Foods segment. Final net proceeds from the divestiture were $i32.9,
which were net of cash transaction costs. Upon completion of this transaction during the third quarter of 2022, we recognized a pre-tax loss of $i17.1.
/
Note 5: Reportable Segments
i
We
operate in ione industry: the manufacturing and marketing of food and beverage products. We have ithree reportable segments:
U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods. The presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable.
The U.S. Retail Pet Foods segment primarily includes the domestic sales of Rachael Ray® Nutrish®, Meow Mix®, Milk-Bone®, 9Lives®, Kibbles ’n Bits®, Pup-Peroni®,and Nature’s Recipe®
branded products; the U.S. Retail Coffee segment primarily includes the domestic sales of Folgers®, Dunkin’®,and Café Bustelo® branded coffee; and the U.S. Retail Consumer Foods segment primarily includes the domestic sales of Smucker’s® and Jif® branded products. International and Away From Home includes the sale of products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores).
Segment profit represents net sales, less direct and allocable operating expenses, and is consistent with the way in which we manage our segments. However, we do not represent that the segments, if operated independently, would report operating profit equal to the segment profit set forth below, as segment profit excludes certain expenses such as amortization expense and impairment charges related to intangible assets, gains and losses on divestitures, the net change in cumulative unallocated gains and losses on commodity and foreign currency exchange derivative activities (“change in net cumulative unallocated derivative gains and losses”), certain divestiture, acquisition, integration, and restructuring costs (“special project costs”), as well as corporate administrative expenses.
Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility. We would expect that any gain or loss in the estimated fair value of the derivatives would generally be offset by a change in the estimated fair value of the underlying exposures.
i
The
following table reconciles segment profit to income before income taxes.
Change
in net cumulative unallocated derivative gains and losses
(i33.8)
(i2.2)
Cost
of products sold – special project costs (A)
(i1.1)
(i4.6)
Other
special project costs (A)
(i1.4)
(i1.8)
Corporate
administrative expenses
(i67.6)
(i59.4)
Other
income (expense) – net
i0.5
(i11.1)
Income
before income taxes
$
i141.1
$
i205.2
(A)Special
project costs include certain divestiture, acquisition, integration, and restructuring costs, which are recognized in cost of products sold and other special project costs in the Condensed Statements of Consolidated Income. For more information, see Note 3: Integration and Restructuring Costs.
/i
The following table presents certain geographical information.
(A)The
primary reportable segment generally represents at least i75 percent of total net sales for each respective product category.
(B)Represents the International and Away From Home operating segments, which are combined for segment reporting purposes.
(C)During the three months ended July 31, 2021, the net sales within this category
were primarily related to the divested natural beverage business included in the U.S. Retail Consumer Foods segment. For more information, see Note 4: Divestitures.
/
Note 6: Earnings per Share
i
We
computed net income per common share (“basic earnings per share”) under the two-class method for the three months ended July 31, 2022 and 2021, due to certain unvested common shares that contained non-forfeitable rights to dividends (i.e., participating securities) during these periods. For the three months ended July 31, 2022, 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. Diluted earnings per share for the three months ended July 31, 2021 was computed under the two-class method.
iiThe following table sets forth the computation of basic earnings per share and diluted earnings per share under the two-class method.
(A) Represents
the carrying amount included in the Condensed Consolidated Balance Sheets, which includes the impact of capitalized debt issuance costs, offering discounts, and terminated interest rate contracts.
/
We have available a $i2.0 billion unsecured revolving credit facility
with a group of i11 banks that matures in August 2026. Borrowings under the revolving credit facility bear interest on the prevailing U.S. Prime Rate, London Interbank Offered Rate, Euro Interbank Offered Rate, or Canadian Dealer Offered Rate, based on our election. Interest is payable either on a quarterly basis or at the end of the borrowing term. We do iino/t
have a balance outstanding under the revolving credit facility at July 31, 2022, or April 30, 2022.
We participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $i2.0 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 July 31, 2022, and April 30, 2022, we had $i388.0 and $i180.0
of short-term borrowings outstanding, respectively, which were issued under our commercial paper program at a weighted-average interest rate of i2.60 percent and i0.65
percent, respectively.
Interest paid totaled $i9.4 and $i12.8 for the three months ended July 31, 2022 and 2021,
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 certain covenant restrictions, including an interest coverage ratio. As of July 31, 2022, we are in compliance with all covenants.
Note 8: Pensions and Other Postretirement Benefits
ii
The components of our net
periodic benefit cost for defined benefit pension and other postretirement benefit plans are shown below.
Three Months Ended July 31,
Defined Benefit Pension Plans
Other Postretirement Benefits
2022
2021
2022
2021
Service
cost
$
i0.3
$
i0.4
$
i0.2
$
i0.3
Interest
cost
i4.4
i3.2
i0.6
i0.4
Expected
return on plan assets
(i4.0)
(i4.1)
i—
i—
Amortization
of net actuarial loss (gain)
i1.0
i1.7
(i0.3)
(i0.1)
Amortization
of prior service cost (credit)
i0.1
i0.2
(i0.1)
(i0.2)
Settlement
loss (gain)
i—
i3.7
i—
i—
Net
periodic benefit cost
$
i1.8
$
i5.1
$
i0.4
$
i0.4
//
During
the first quarter of 2023, we made contributions of $i70.0 to increase funding for our U.S. qualified defined benefit pension plans and direct benefit payments of $i0.7.
Note
9: Derivative Financial Instruments
i
We are exposed to market risks, such as changes in commodity prices, foreign currency exchange rates, and interest rates. To manage the volatility related to these exposures, we enter into various derivative transactions. We have policies in place that define acceptable instrument types we may enter into and establish controls to limit our market risk exposure.
Commodity Derivatives:
We enter into commodity derivatives to manage price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, soybean meal, corn, edible oils, and wheat. We also enter into commodity derivatives to manage price risk for energy input costs, including diesel fuel and natural gas. Our derivative instruments generally have maturities of less than ione year.
We do not qualify commodity derivatives for hedge accounting treatment, and as a result, the derivative gains and losses are immediately recognized
in earnings. Although we do not perform the assessments required to achieve hedge accounting for derivative positions, we believe all our commodity derivatives are economic hedges of our risk exposure.
The commodities hedged have a high inverse correlation to price changes of the derivative instrument. Thus, we would expect that over time any gain or loss in the estimated fair value of the derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
Foreign Currency Exchange Derivatives: We utilize foreign currency derivatives to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials and finished goods. The contracts generally
have maturities of less than ione year. We do not qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment.
Interest Rate Derivatives: We utilize derivative instruments to manage interest rate risk associated with anticipated debt transactions, as well as to manage changes in the fair value of our long-term debt. At the inception of an interest rate contract, the instrument is evaluated and documented for qualifying hedge accounting
treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the contract are deferred and included as a component of accumulated other comprehensive income (loss) and generally reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the contract is recognized at fair value on the balance sheet and changes in the fair value are recognized in interest expense. Generally, changes in the fair value of the contract
are equal to changes in the fair value of the underlying debt and have no net impact on earnings.
iThe following table presents the gross notional value of outstanding derivative contracts.
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 $i42.4 and $i54.6
at July 31, 2022, and April 30, 2022, respectively, and are included in other current assets in the Condensed Consolidated Balance Sheets. The change in the cash margin account balances 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 our open positions with individual counterparties, all our derivative liabilities would be fully offset by either our derivative asset positions or margin accounts based on the net asset or liability position with our individual counterparties. Cash flows associated with the settlement of derivative instruments are classified in the same line item as the cash flows of the related hedged item, which is within operating activities in the Condensed Statements of Consolidated Cash Flows.
Economic
Hedges
iThe following table presents the net gains and losses recognized in cost of products sold on derivatives not designated as hedging instruments.
Derivative
gains (losses) on foreign currency exchange contracts
(i0.2)
i1.5
Total
derivative gains (losses) recognized in cost of products sold
$
(i9.1)
$
i17.3
/
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. iThe
following table presents the net change in cumulative unallocated derivative gains and losses.
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 $i239.8, 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.
i
The
following table presents information on the pre-tax gains and losses recognized on all terminated interest rate contracts which were previously designated as cash flow hedges.
Gains
(losses) recognized in other comprehensive income (loss)
$
i—
$
i—
Less:
Gains (losses) reclassified from accumulated other comprehensive income (loss)
to interest expense – net (A)
(i3.3)
(i3.5)
Less:
Gains (losses) reclassified from accumulated other comprehensive income (loss)
to other income (expense) – net (B)
i—
i0.6
Change
in accumulated other comprehensive income (loss)
$
i3.3
$
i2.9
(A)Interest
expense – net, as presented in the Condensed Statements of Consolidated Income was $i39.1 and $i43.1 for the three months ended July 31,
2022 and 2021, respectively.
(B)Other income (expense) – net, as presented in the Condensed Statements of Consolidated Income was income of $i0.5 and expense of $i11.1
for the three months ended July 31, 2022 and 2021, respectively. The reclassification during the first quarter of 2022 is related to the debt extinguishment of the $400.0 Senior Notes due March 15, 2022.
/
Included as a component of accumulated other comprehensive income (loss) at July 31, 2022, and April 30, 2022, were deferred net pre-tax losses of $i210.9
and $i214.2, respectively, related to the terminated interest rate contracts. The related net tax benefit recognized in accumulated other comprehensive income (loss) at July 31, 2022, and April 30, 2022, was $i49.5
and $i50.3, respectively. Approximately $i13.5 of the net
pre-tax loss will be recognized over the next 12 months related to the terminated interest rate contracts.
Fair Value Hedges
In 2015, we terminated the interest rate swap on the Senior Notes due October 15, 2021, which was designated as a fair value hedge and used to hedge against the changes in the fair value of the debt. As a result of the early termination, we received $i58.1
in cash, which included $i4.6 of accrued and prepaid interest. The gain on termination was recorded as an increase in the long-term debt balance and was recognized over the life of the debt as a reduction of interest expense. As of the second quarter of 2022, we had fully recognized the gain of $i53.5,
of which $i2.1 was recognized during three months ended July 31, 2021.
Note 10: Other Financial Instruments and Fair Value Measurements
i
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.
i
The following table provides information on the carrying amounts and fair values of our financial instruments.
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.
i
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)
Total
financial instruments measured at fair value
$
(i3,947.4)
$
i21.1
$
i—
$
(i3,926.3)
(A)Marketable
securities and other investments consists of funds maintained for the payment of benefits associated with nonqualified retirement plans. The funds include equity securities listed in active markets, municipal obligations valued by a third party using valuation techniques that utilize inputs that are derived principally from or corroborated by observable market data, and money market funds with maturities of three months or less. Based on the short-term nature of these money market funds, carrying value approximates fair value. As of July 31, 2022, our municipal obligations are scheduled to mature as follows: $i0.2
in 2023, $i1.7 in 2024, $i1.8 in 2025, $i0.8
in 2026, $i4.4 in 2027, and the remaining $i9.6 in 2028 and beyond.
(B)Level 1 commodity
and foreign currency exchange derivatives are valued using quoted market prices for identical instruments in active markets. Level 2 commodity and foreign currency exchange derivatives are valued using quoted prices for similar assets or liabilities in active markets. For additional information, see Note 9: Derivative Financial Instruments.
(C)Long-term debt is composed of public Senior Notes, which are traded in an active secondary market and valued using quoted prices. For additional information, see Note 7: Debt and Financing Arrangements.
/
Note 11:
Leases
i
We lease certain warehouses, manufacturing facilities, office space, equipment, and vehicles, primarily through operating lease agreements. We have elected to not recognize leases with a term of 12 months or less on the balance sheet. Instead, we recognize the related lease expense on a straight-line basis over the lease term.
Although the majority of our right-of-use asset and lease liability balances consist of leases with renewal options, these optional periods do not typically impact the lease term as we are not reasonably
certain to exercise them. Certain leases also include termination provisions or options to purchase the leased property. Since we are not reasonably certain to exercise these types of options, minimum lease payments do not include any amounts related to these termination or purchase options. Our lease agreements generally do not contain residual value guarantees or restrictive covenants that are material.
We determine if an agreement is or contains a lease at inception by evaluating whether an identified asset exists that we control over the term of the arrangement. A lease commences when the lessor makes the
identified asset available for our use. We generally account for lease and non-lease components as a single lease component. Minimum lease payments do not include variable lease payments other than those that depend on an index or rate.
Because the interest rate implicit in the lease cannot be readily determined for the majority of our leases, we utilize our incremental borrowing rate in determining the present value of lease payments using information available at the lease commencement date. We consider our credit rating and the current economic environment in determining this collateralized rate.
iThe
following table sets forth the right-of-use assets and lease liabilities recognized in the Condensed Consolidated Balance Sheets.
The effective income tax rates for the three months ended July 31, 2022 and 2021, were i22.2
and i25.0 percent, respectively. During the three months ended July 31, 2022 and 2021, the effective income tax rates varied from the U.S. statutory income tax rate of ii21.0/
percent primarily due to the impact of state income taxes. The effective income tax rate for the three months ended July 31, 2022, reflects the favorable deferred tax benefit of a state income tax rate reduction enacted during the quarter.
Within the next i12 months, it is reasonably possible that we could decrease our unrecognized tax benefits by an estimated $i1.2,
primarily as a result of the expiration of statute of limitation periods.
/
On August 16, 2022, President Biden signed into law The Inflation Reduction Act of 2022, H.R. 5376 (the “Act”). Under the Act, share repurchases after December 31, 2022, will be subject to a 1% excise tax, which would not be material. Further, the remaining corporate tax changes included in the Act are not expected to have a material impact on our financial statements.
Note 13: Accumulated Other Comprehensive
Income (Loss)
ii
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
(A)The
reclassification is composed of deferred gains (losses) related to terminated interest rate contracts. During both 2023 and 2022, the reclassification was primarily from accumulated other comprehensive income (loss) to interest expense. In addition, during the first quarter of 2022, a portion of the reclassification was to other income (expense) – net, which was driven by the prepayment of the Senior Notes due March 15, 2022. For additional information, see Note 9: 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 8: Pensions and Other Postretirement
Benefits.
Note 14: Contingencies
i
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business
previously owned by, but divested prior to our acquisition of, Big Heart Pet Brands, the significant majority of which were settled and paid during 2019 and 2020. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at July 31, 2022. Based on the information known to date, with the exception of the matters discussed below, we do not believe the final outcome of these proceedings would have a material adverse effect on our financial position, results of operations, or cash flows.
In addition to the legal proceedings discussed above, we are currently a defendant in Council for Education and Research on Toxics (“CERT”) v. Brad Barry LLC, et al., which alleges that
we, in addition to nearly eighty other defendants (collectively the “Defendants”) who manufacture, package, distribute, or sell packaged coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code Section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (better known as “Proposition 65”). CERT sought equitable relief, including warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65. In addition, CERT asserted that every consumed cup of coffee, absent a compliant warning, was equivalent to a violation under Proposition 65. In June 2019, the state agency responsible for administering the Proposition 65 program, the California Office of Environmental Health Hazard Assessment (“OEHHA”), approved a regulation clarifying that cancer warnings are not required
for coffee under Proposition 65, and in August 2020, the trial court granted the Defendants’ motion for summary judgment based on the regulation. CERT appealed the ruling in November 2020 to the California Court of Appeals for the Second Appellate District, which is currently pending.
We are also defendants in a series of putative class action lawsuits that were originally filed in federal courts in California, Florida, Illinois, Missouri, New York, Texas, Washington, and Washington D.C., but have been transferred to the United States District Court for the Western District of Missouri for coordinated pre-trial proceedings. The plaintiffs assert claims arising under various state laws for false advertising, consumer protection, deceptive and unfair trade practices, and similar statutes. Their claims are premised on allegations that we have misrepresented the number of servings that can be made from various canisters of Folgers
coffee on the packaging for those products.
We are a defendant in five putative class action lawsuits as a result of our voluntary recall of select Jif peanut butter products. The plaintiffs assert causes of action for negligence, breach of warranties, fraudulent concealment, unjust enrichment, and, in some of the lawsuits, violations of state consumer protection and deceptive trade practices laws. Their claims are premised on allegations that we engaged in business practices designed to mislead the public regarding the safety of Jif peanut butter for human consumption due to the alleged presence of salmonella.
The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as of July 31,
2022, and the likelihood of loss is not considered probable or estimable.
However, if we are required to pay significant damages, our business and financial results could be adversely impacted, and sales of those products could suffer not only in these locations but elsewhere.
Product Recall: In May 2022, we initiated a voluntary recall of select Jif peanut butter products produced at our Lexington, Kentucky, facility and sold primarily in the U.S., due to potential salmonella contamination.
At that time, we also suspended the manufacturing of these products at our Lexington facility and temporarily paused shipments from our Memphis, Tennessee, facility. No other products produced at our other facilities were affected by this recall. In June 2022, we resumed manufacturing and shipping at our Lexington facility, as well as shipping from our Memphis facility. We continue to partner with retailers to restock Jif peanut butter products as quickly as possible and anticipate a return to normal levels by the end of 2023. In addition to the impact of manufacturing downtime, we expect to incur total direct costs of approximately $i90.0
by the end of 2023, net of the remaining anticipated insurance recoveries, related to customer returns, fees, unsaleable inventory, and other product recall-related costs, primarily within our U.S. Retail Consumer Foods segment. Approximately $i65.0 of direct costs were recognized, net of the remaining anticipated insurance recoveries, during the three months ended July 31, 2022. We expect the majority of the remaining costs will be incurred through the third quarter of 2023.
Note
15: Common Shares
iiThe following table sets forth common share information.
Repurchase
Program: During the three months ended July 31, 2022 and 2021, we did iino/t
repurchase any common shares under a repurchase plan authorized by the Board. The shares repurchased during the three months ended July 31, 2022 and 2021, consisted of shares repurchased from stock plan recipients in lieu of cash payments. At July 31, 2022, approximately i5.8 million common shares remain available for repurchase
pursuant to the Board’s authorizations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollars and shares in millions, unless otherwise noted, except per share data)
This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three months ended July 31,
2022 and 2021. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted.
On January 31, 2022, we sold the natural beverage and grains businesses to 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, dedicatedmanufacturing and distribution facilities in Chico, California, and Havre de Grace, Maryland, and approximately 150 employees who supported the natural beverage and grains businesses. The transaction did not include Santa Cruz Organic
nut butters, fruit spreads, syrups, or applesauce. Under our ownership, the businesses generated net sales of $106.7 in 2022, primarily included in the U.S. Retail Consumer Foods segment. Final net proceeds from the divestiture were $98.7, which were inclusive of a working capital adjustment and cash transaction costs. We recognized a pre-tax gain of $28.3 related to the natural beverage and grains businesses, including $1.6 during the three months ended July 31, 2022, within other operating expense (income) – net in the Condensed Statement of Consolidated Income, upon finalization of the working capital adjustment. The remaining pre-tax gain was recognized during the second half of 2022.
On December 1, 2021, we sold the private label dry pet food business to Diamond Pet Foods. The transaction included dry pet food products
sold under private label brands, a dedicated manufacturing facility located in Frontenac, Kansas, and approximately 220 employees who supported the private label dry pet food business. The transaction did not include any branded products or our private label wet pet food business. Under our ownership, the business generated net sales of $62.3 in 2022, included in the U.S. Retail Pet Foods segment. Final net proceeds from the divestiture were $32.9, which were net of cash transaction costs. Upon completion of this transaction during the third quarter of 2022, we recognized a pre-tax loss of $17.1.
We are the owner of all trademarks referenced herein, except for the following, which are used under license: Dunkin’ is a trademark of DD IP Holder LLC, and Rachael Ray is a trademark of Ray Marks II LLC. The Dunkin’
brand is licensed to us for packaged coffee products, including K-Cup® pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, e-commerce, and drug stores. Information in this document does not pertain to products for sale in Dunkin’ restaurants. K-Cup® is a trademark of Keurig Green Mountain, Inc., used with permission.
Trends Affecting our Business
The spread of the novel coronavirus (“COVID-19”) throughout the United States and the international community has had, and will continue to have, an impact on financial markets, economic conditions, and portions of our business and industry. During 2022, we experienced significant input cost inflation and a dynamic macroeconomic environment,
which we anticipate will persist through 2023. In addition, the higher costs required us to implement material price increases across all of our businesses in 2022, and we anticipate the price elasticity of demand will continue to increase during 2023 as consumers respond to broader inflation pressures.
During the first three months of 2023, we continued to experience disruption in our supply chain network, including labor shortages and the supply of certain ingredients, packaging, and other sourced materials, which has resulted in the continued elevation of transportation and other supply chain costs. It is possible that more significant disruptions could occur if the COVID-19 pandemic and certain geopolitical events continue to impact markets around the world, including the impact of e-commerce pressures on freight charges and potential shipping delays due to supply and demand imbalances, as well as labor shortages. We also
continue to work closely with our customers and external business partners, taking additional actions to ensure safety and business continuity, and maximize product availability. We have maintained production at all our facilities and availability of appointments at distribution centers. Furthermore, we have implemented measures to manage order volumes to ensure a consistent supply across our retail partners during this period of high demand. However, to the extent that high demand levels or the current supply chain environment continues to disrupt order fulfillment, we may experience volume loss and elevated penalties.
Although we do not have any operations in Russia or Ukraine, we continue to monitor the environment for any significant escalation or expansion of economic or supply chain disruptions, as well as broader inflationary costs. During the first three months of 2023, the conflict between Russia and Ukraine primarily
impacted the price of grains, oils, and fat-based products, which may continue to have an adverse impact on our results of operations during 2023.
Overall, the impact of COVID-19 and the conflict between Russia and Ukraine, including broad-based supply chain disruptions and rising levels of inflation, remain uncertain and ultimately depend on the length and severity of the conflict and the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response to the pandemic; vaccination rates and effectiveness; and the macroeconomic environment. We will
continue to evaluate the nature and extent to which COVID-19 and the conflict between Russia and Ukraine will impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity.
(A)We use non-GAAP financial measures to evaluate our performance. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for a reconciliation to the comparable GAAP financial measure.
Net sales excluding divestitures and foreign currency exchange (A)
$
1,877.4
$
1,799.5
$
77.9
4
%
Amounts
may not add due to rounding.
(A) Net sales excluding divestitures and foreign currency exchange is a non-GAAP financial measure used to evaluate performance internally. This measure provides useful information to investors because it enables comparison of results on a year-over-year basis.
Net sales in the first three months of 2023 increased $15.0, or 1 percent, which includes $58.5 of noncomparable net sales in the prior year related to divestitures. Net sales excluding divestitures and foreign currency exchange increased $77.9, or 4 percent. Higher net price realization contributed 14 percentage points to net sales, primarily reflecting list price increases for the U.S. Retail Coffee, U.S Retail Pet Foods, and International and Away From Home businesses, partially offset by the unfavorable impact of customer returns and fees related to the Jif
peanut butter product recall. The favorable net price realization was partially offset by a 9 percentage point decrease from volume/mix, primarily due to manufacturing downtime related to the recall, as well as declines for mainstream roast and ground coffee.
Selling, distribution, and administrative expenses:
Marketing
5.1
%
5.3
%
Selling
3.7
3.3
Distribution
3.9
3.7
General
and administrative
5.6
5.1
Total selling, distribution, and administrative expenses
18.4
%
17.4
%
Amortization
3.0
3.0
Other
special project costs
0.1
0.1
Other operating expense (income) – net
(1.5)
(0.1)
Operating income
9.6
%
14.0
%
Amounts
may not add due to rounding.
Gross profit decreased $86.9, or 14 percent, in the first quarter of 2023, including the unfavorable impact of customer returns, fees, manufacturing downtime, and unsaleable inventory related to the Jif peanut butter product recall. The decrease also reflects higher costs, primarily driven by increased commodity and ingredient, manufacturing, and packaging costs, unfavorable volume/mix, and the noncomparable impact related to divestitures, partially offset by increased pricing.
Operating income decreased $79.7, or 31 percent, primarily reflecting the decrease in gross profit and a $19.8 increase in selling, distribution, and administrative (“SD&A”) expenses, partially offset by a $26.8 increase in net other operating income, primarily reflecting an anticipated insurance recovery related to the
Jif peanut butter product recall, as discussed in Note 14: Contingencies.
Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, special project costs, gains and losses on divestitures, the change in net cumulative unallocated derivative gains and losses, and other one-time items that do not directly reflect ongoing operating results. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information. Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) decreased $58.8, or 9 percent, in the first quarter of 2023, primarily reflecting the exclusion of the change in net cumulative unallocated derivative gains and losses, as compared to GAAP gross profit. Operating income excluding non-GAAP adjustments (“adjusted operating income”) decreased $53.4, or 17 percent,
as compared to the prior year.
Interest Expense
Net interest expense decreased $4.0 in the first three months of 2023, primarily driven by prepaying the $400.0 Senior Notes due March 15, 2022, during the first quarter of 2022, partially offset by increased debt outstanding as compared to the prior year. For additional information, see “Capital Resources” in this discussion and analysis.
Income Taxes
Income taxes decreased $20.0, or 39 percent, in the first three months of 2023, primarily due to the decrease in income before income taxes and a lower effective income tax rate of 22.2 percent, as compared
to 25.0 percent for the first quarter of 2022. During both the current and prior years, the effective income tax rates varied from the U.S. statutory income tax rate of 21.0 percent, primarily due to the impact of state income taxes. The effective income tax rate for the three months ended July 31, 2022, reflects the favorable deferred tax benefit of a state income tax rate reduction enacted during the quarter. We anticipate a full-year effective income tax rate for 2023 of approximately 24.2 percent. For further information, refer to Note 12: Income Taxes.
A restructuring program was approved by the Board during 2021, associated with opportunities identified to reduce our overall cost structure, optimize our organizational design, and support our portfolio reshape. This is inclusive of certain restructuring costs associated with the divestitures of the Crisco,Natural Balance, private label dry pet food, and natural beverage and grains businesses. For additional information related to the divestitures, see Note 4: Divestitures.
During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close our Suffolk, Virginia, facility as a result of a new strategic partnership for the production of our liquid coffee products. During 2022, we completed the transition of production
to JDE Peet’s N.V., as anticipated. Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the recent divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the closure of our Ripon, Wisconsin, production facility by the end of calendar year 2022 to further optimize operations for our U.S. Retail Consumer Foods business. We expect to incur costs of approximately $70.0 associated with the restructuring activities planned to date. More than half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation, while the remainder represents employee-related costs. We anticipate the planned activities associated with this restructuring program will be completed by the end of 2023. We have incurred total cumulative restructuring costs of $55.1,
of which $2.5 and $6.4 were incurred during the three months ended July 31, 2022 and 2021, respectively. For further information, refer to Note 3: Integration and Restructuring Costs.
Segment Results
We have three reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods. The presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable.
The U.S. Retail Pet Foods segment primarily includes the domestic sales of Rachael Ray Nutrish,Meow
Mix, Milk-Bone, 9Lives, Kibbles ’n Bits, Pup-Peroni, and Nature’s Recipe branded products; the U.S. Retail Coffee segment primarily includes the domestic sales of Folgers,Dunkin’, and Café Bustelobranded coffee; and the U.S. Retail Consumer Foods segment primarily includes the domestic sales of Smucker’s and Jif branded products. International and Away From Home includes the sale of products distributed domestically and in foreign countries through retail channels
and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores).
The U.S. Retail Pet Foods segment net sales increased $81.0 in the first
three months of 2023, inclusive of the impact of $25.1 of noncomparable net sales in the prior year related to the divested private label dry pet foodbusiness. Excluding the noncomparable impact of the divested business, net sales increased $106.1, or 17 percent. Higher net price realization increased net sales by 20 percentage points, primarily reflecting list price increases across the portfolio, partially offset by a decreased contribution from volume/mix of 3 percentage points. Segment profit increased $40.4, primarily reflecting the favorable net impact of higher net price realization and increased commodity and ingredient, packaging, and manufacturing costs, as well as lower marketing spend, partially offset by the unfavorable volume/mix.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased
$54.7 in the first three months of 2023. Net price realization contributed 24 percentage points to net sales, primarily reflecting list price increases across the portfolio. Unfavorable volume/mix decreased net sales by 14 percentage points, primarily driven by the Folgers and Dunkin’ brands. Segment profit decreased $5.4, primarily reflecting the unfavorable volume/mix and increased marketing investment, partially offset by a favorable net impact of higher net price realization and increased commodity costs.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales decreased $124.5 in the first three months of 2023, inclusive of the impact of $31.4 of noncomparable net sales in the prior year related to the divested natural beverage and grains
businesses. Excluding the noncomparable impact of the divested businesses, net sales decreased $93.1, or 23 percent. Volume/mix decreased net sales by 20 percentage points, primarily driven by manufacturing downtime for Jif peanut butter, partially offset by an increase for Smucker’s Uncrustables®frozen sandwiches. Furthermore, lower net price realization decreased net sales by 3 percentage points, primarily driven by Jif peanut butter, inclusive of the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall, partially offset by list price increases across the remainder of the portfolio. Segment profit decreased $63.9, primarily reflecting the impact of the recall and the noncomparable segment profit
in the prior year related to the divested natural beverage and grains businesses. Excluding the estimated unfavorable impact of the recall and divested businesses, segment profit increased primarily due to a net favorable impact of higher net price realization and higher commodity and ingredient, manufacturing, and packaging costs, as well as favorable volume/mix.
International and Away From Home
International and Away From Home net sales increased $3.8 in the first three months of 2023, including the noncomparable impact of $2.0 of net sales in the prior year related to the divested natural beverage and grains businesses and $4.4 of unfavorable foreign currency exchange. Excluding the noncomparable impact of the divested businesses and foreign currency exchange, net sales increased $10.2, or 4 percent, reflecting a 15 percent increase for the Away From
Home operating segment, partially offset by a 6 percent decrease for the International operating segment. Net price realization contributed a 4 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products and baking mixes and ingredients, partially offset by the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall. Segment profit decreased $16.3, primarily reflecting the impact of the recall and higher commodity costs, partially offset by higher net pricing.
Financial Condition – Liquidity and Capital Resources
Liquidity
Our principal source of funds is cash generated from
operations, supplemented by borrowings against our commercial paper program and revolving credit facility. At July 31, 2022, total cash and cash equivalents was $151.6, compared to $169.9 at April 30, 2022.
Net cash provided by (used for) operating activities
$
(39.0)
$
137.8
Net cash provided by (used for) investing activities
(71.5)
(80.0)
Net
cash provided by (used for) financing activities
91.9
(223.3)
Net cash provided by (used for) operating activities
$
(39.0)
$
137.8
Additions to property, plant, and equipment
(88.3)
(68.0)
Free
cash flow (A)
$
(127.3)
$
69.8
(A)Free cash flow is a non-GAAP financial measure used by management to evaluate the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share repurchases, and other corporate purposes.
The $176.8 decrease in cash provided by operating activities in the first three months of 2023 was primarily driven by the $70.0 contribution to our U.S. qualified defined benefit pension plans during the first quarter of 2023, lower net income adjusted for noncash items in the current year, and greater working capital
requirements in 2023. The increase in cash required to fund working capital, as compared to the prior year, reflected an increase in inventory levels compared to the prior year, primarily driven by the recent input cost inflation, as well as timing of payments for trade receivables and accounts payable and a decrease in accrued incentive compensation.
Cash used for investing activities in the first three months of 2023 consisted primarily of $88.3 in capital expenditures, primarily driven by investments in the new manufacturing and distribution facilities in McCalla, Alabama, and capacity expansions in Longmont, Colorado, to support growth for the Smucker’s Uncrustables brand, as well as plant maintenance across our facilities. Partially offsetting the use of cash in 2023 was a decrease of $12.2 in our derivative cash margin account balances. Cash provided by investing activities
in the first three months of 2022 consisted primarily of $68.0 in capital expenditures, which reflected capacity expansion at our Longmont facility, as well as plant maintenance across our facilities. An increase of $11.4 in our derivative cash margin account balances also contributed to the use of cash in 2022.
Cash provided by financing activities in the first three months of 2023 consisted primarily of a net increase in short-term borrowings of $207.0, partially offset by dividend payments of $105.1. Cash used for financing activities in the first three months of 2022 consisted primarily of long-term debt repayments of $407.0 and dividend payments of $97.2, partially offset by a net increase in short-term borrowings of $284.0.
Supplier Financing Program
As part of ongoing efforts to maximize working capital, we work with our suppliers
to optimize our terms and conditions, which includes the extension of payment terms. Payment terms with our suppliers, which we deem to be commercially reasonable, range from 0 to 180 days. We have an agreement with a third-party administrator to provide an accounts payable tracking system and facilitate a supplier financing program which allows participating suppliers the ability to monitor and voluntarily elect to sell our payment obligations to a designated third-party financial institution. Participating suppliers can sell one or more of our payment obligations at their sole discretion, and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers’ decisions to sell amounts under these arrangements. As of July 31,
2022 and April 30, 2022, $353.2 and $314.3 of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers. During the first three months of 2023 and 2022, we paid $338.8 and $267.7, respectively, to a financial institution for payment obligations that were settled through the supplier financing program.
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising
in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart Pet Brands, the significant majority of which were settled and paid during 2019 and 2020. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at July 31, 2022. Based on the information known to date, with the exception of the matters discussed below, we do not believe the final outcome of these proceedings would have a material adverse effect on our financial position, results of operations, or cash flows.
In
addition to the legal proceedings discussed above, we are currently a defendant in CERT v. Brad Barry LLC, et al., which alleges that we, in addition to the Defendants who manufacture, package, distribute, or sell packaged coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. CERT sought equitable relief, including warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65. In addition, CERT asserted that every consumed cup of coffee, absent a compliant warning, was equivalent to a violation under Proposition 65. In June 2019, the state agency responsible for administering the Proposition 65 program, OEHHA, approved a regulation clarifying that cancer warnings are not required for coffee under Proposition 65, and in August 2020, the trial court granted the Defendants’ motion for summary judgment based on the regulation.
CERT appealed the ruling in November 2020 to the California Court of Appeals for the Second Appellate District, which is currently pending.
We are also defendants in a series of putative class action lawsuits that were originally filed in federal courts in California, Florida, Illinois, Missouri, New York, Texas, Washington, and Washington D.C., but have been transferred to the United States District Court for the Western District of Missouri for coordinated pre-trial proceedings. The plaintiffs assert claims arising under various state laws for false advertising, consumer protection, deceptive and unfair trade practices, and similar statutes. Their claims are premised on allegations that we have misrepresented the number of servings that can be made from various canisters of Folgers coffee on the packaging for those products.
We are
a defendant in five putative class action lawsuits as a result of our voluntary recall of select Jif peanut butter products. The plaintiffs assert causes of action for negligence, breach of warranties, fraudulent concealment, unjust enrichment, and, in some of the lawsuits, violations of state consumer protection and deceptive trade practices laws. Their claims are premised on allegations that we engaged in business practices designed to mislead the public regarding the safety of Jif peanut butter for human consumption due to the alleged presence of salmonella.
The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as of July 31, 2022, and the likelihood of loss is not considered
probable or estimable. However, if we are required to pay significant damages, our business and financial results could be adversely impacted, and sales of those products could suffer not only in these locations but elsewhere.
Product Recall
In May 2022, we initiated a voluntary recall of select Jif peanut butter products produced at our Lexington, Kentucky, facility and sold primarily in the U.S., due to potential salmonella contamination. At that time, we also suspended the manufacturing of these products at our Lexington facility and temporarily paused shipments from our Memphis, Tennessee, facility. No other products produced at our other facilities were affected by this recall. In June 2022, we resumed manufacturing and shipping at our Lexington facility, as well as shipping from our
Memphis facility. We continue to partner with retailers to restock Jif peanut butter products as quickly as possible and anticipate a return to normal levels by the end of 2023. In addition to the impact of manufacturing downtime, we expect to incur total direct costs of approximately $90.0 by the end of 2023, net of the remaining anticipated insurance recoveries, related to customer returns, fees, unsaleable inventory, and other product recall-related costs, primarily within our U.S. Retail Consumer Foods segment. Approximately $65.0 of direct costs were recognized, net of the remaining anticipated insurance recoveries, during the three months ended July 31, 2022. We expect the majority of the remaining costs will be incurred through the third quarter of 2023.
We
have available a $2.0 billion unsecured revolving credit facility with a group of 11 banks that matures in August 2026. Additionally, 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 July 31, 2022, we had $388.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 2.60 percent.
We are in compliance with all our debt covenants as of July 31, 2022, and expect
to be for the next 12 months. For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 7: Debt and Financing Arrangements.
During the first three months of 2023 and 2022, we did not repurchase any common shares under a repurchase plan authorized by the Board. At July 31, 2022, approximately 5.8 million common shares remain available for repurchase pursuant to the Board’s authorizations. There is no guarantee as to the exact number of shares that may be repurchased or when such purchases may occur.
In November 2021, we announced plans to invest $1.1 billion to build a new manufacturing facility and distribution center in McCalla, Alabama, dedicated to production of Smucker’s Uncrustables frozen sandwiches. Construction of this facility began
in the third quarter of 2022, with production expected to begin in calendar year 2025. The project demonstrates our commitment to meet increasing demand for this highly successful product and deliver on our strategy to focus on brands with the most significant growth opportunities. Construction of the facility and production will occur in three phases over multiple years and will result in the creation of up to 750 jobs. Financial investments and job creation will align with each of the three phases.
Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations, borrowings available under our revolving credit facility and commercial paper program, and access to capital markets, will be sufficient to meet our cash requirements for the next 12 months, including the payment of quarterly dividends, principal and interest payments on debt outstanding, and
capital expenditures. However, as a result of the current macroeconomic environment, including the ongoing impacts of COVID-19 and the conflict between Russia and Ukraine, we may experience an increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future. We continue to evaluate these risks, which could affect our financial condition or our ability to fund operations or future investment opportunities.
As of July 31, 2022, total cash and cash equivalents of $29.2 was held by our foreign subsidiaries, primarily in Canada. We have not repatriated foreign cash to the U.S. during the first three months of 2023.
Material
Cash Requirements
We do not have material off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities. Transactions with related parties are in the ordinary course of business and are not material to our results of operations, financial condition, or cash flows.
As of July 31, 2022, there were no material changes to our material cash requirements as previously reported in our Annual Report on Form 10-K for the year ended April 30, 2022.
We use non-GAAP financial measures, including: net sales excluding divestitures and foreign currency exchange, adjusted gross profit, adjusted operating income, adjusted income, adjusted earnings per share, and free cash flow, as key measures for purposes of evaluating performance internally. We believe that investors’ understanding of our performance is enhanced by disclosing these performance measures. Furthermore, these non-GAAP financial measures are used by management in preparation of the annual budget and for the monthly analyses of our operating results. The Board also utilizes certain non-GAAP financial measures as components for measuring performance for incentive compensation purposes.
Non-GAAP financial measures exclude certain items affecting comparability that can significantly
affect the year-over-year assessment of operating results, which include amortization expense and impairment charges related to intangible assets, special project costs, gains and losses on divestitures, the change in net cumulative unallocated derivative gains and losses, and other one-time items that do not directly reflect ongoing operating results. Income taxes, as adjusted is calculated using an adjusted effective income tax rate that is applied to adjusted income before income taxes and reflects the exclusion of the previously discussed items, as well as any adjustments for one-time tax-related activities, when they occur. While this adjusted effective income tax rate does not generally differ materially from our GAAP effective income tax rate, certain exclusions from non-GAAP results can significantly impact our adjusted effective income tax rate.
These non-GAAP financial measures are not intended to replace the presentation
of financial results in accordance with U.S. GAAP. Rather, the presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our businesses and facilitate the comparison of past and present operations and liquidity. These non-GAAP financial measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments.
The following table reconciles certain non-GAAP measures to the comparable GAAP financial measure. See page 20 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure.
A discussion of our critical accounting estimates and policies can be found in the “Management’s Discussion and Analysis” section of our Annual Report on Form 10-K for the year ended April 30, 2022. There were no material changes to the information previously disclosed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
(Dollars in millions, unless otherwise noted)
The following discussions about our market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the forward-looking statements. We are exposed to market risk related to changes
in interest rates, commodity prices, and foreign currency exchange rates.
Interest Rate Risk: The fair value of our cash and cash equivalents at July 31, 2022, approximates carrying value. We are exposed to interest rate risk with regard to existing debt consisting of fixed- and variable-rate maturities. Our interest rate exposure primarily includes U.S. Treasury rates and commercial paper rates in the U.S.
We utilize derivative instruments to manage interest rate risk associated with anticipated debt transactions, as well as to manage changes in the fair value of our long-term debt. At the inception of an interest rate contract, the instrument is evaluated and documented for qualifying hedge accounting treatment. If the
contract is designated as a cash flow hedge, the mark-to-market gains or losses on the contract are deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the contract is recognized at fair value on the balance sheet, and changes in the fair value are recognized in interest expense. Generally, changes in the fair value of the contract are equal
to changes in the fair value of the underlying debt and have no net impact on earnings.
In 2020, we terminated 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.
In measuring interest rate risk by the amount
of net change in the fair value of our financial liabilities, a hypothetical 100 basis-point decrease in interest rates at July 31, 2022, would increase the fair value of our long-term debt by $342.5.
Commodity Price Risk: We use certain raw materials and other commodities that are subject to price volatility caused by supply and demand conditions, political and economic variables, weather, investor speculation, and other unpredictable factors. To manage the volatility related to anticipated commodity purchases, we use derivatives with maturities of generally less than one year. We do not qualify commodity derivatives for hedge accounting treatment. As a result, the gains and losses on all commodity derivatives are immediately recognized in cost of products sold.
The following sensitivity analysis presents our
potential loss of fair value resulting from a hypothetical 10 percent change in market prices related to commodities.
The
estimated fair value was determined using quoted market prices and was based on our net derivative position by commodity for the previous four quarters. The calculations are not intended to represent actual losses in fair value that we expect to incur. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. The commodities hedged have a high inverse correlation to price changes of the derivative instrument. Thus, we would expect that over time any gain or loss in the estimated fair value of its derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
Foreign Currency Exchange Risk: We have operations outside the U.S. with foreign currency denominated assets and liabilities, primarily denominated in Canadian currency. Because we have foreign currency denominated assets and liabilities,
financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. The foreign currency balance sheet exposures as of July 31, 2022, are not expected to result in a significant impact on future earnings or cash flows.
We utilize foreign currency derivatives to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials and finished goods. The contracts generally have maturities of less than one year. We do not qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment. Therefore, the change in value of these instruments is immediately recognized in cost of products
sold. Based on our hedged foreign currency positions as of July 31, 2022, a hypothetical 10 percent change in exchange rates would not materially impact the fair value.
Revenues from customers outside the U.S., subject to foreign currency exchange, represented 5 percent of net sales during the three months ended July 31, 2022. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an impact on operating results.
Certain Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of federal securities laws. The forward-looking statements may include statements
concerning our current expectations, estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expect,”“anticipate,”“believe,”“intend,”“will,”“plan,” and similar phrases.
Federal securities laws provide a safe harbor for forward-looking statements to encourage companies to provide prospective information. We are providing this cautionary statement in connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on any forward-looking statements, as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of our control and could cause actual results to differ materially from such statements
and from our historical results and experience. These risks and uncertainties include, but are not limited to, the following:
•the impact of the COVID-19 pandemic on our business, industry, suppliers, customers, consumers, employees, and communities;
•disruptions or inefficiencies in our operations or supply chain, including any impact caused by product recalls (including the recent Jif peanut butter recall), political instability, terrorism, armed hostilities (including the ongoing conflict between Russia and Ukraine), extreme weather conditions, natural disasters, pandemics (including the COVID-19 pandemic), or other calamities;
•risks related to the availability, and cost inflation in, supply chain inputs, including
labor, raw materials, commodities, packaging, and transportation;
•the impact of food security concerns involving either our products or our competitors’ products, including product recalls;
•risks associated with derivative and purchasing strategies we employ to manage commodity pricing and interest rate risks;
•the availability of reliable transportation on acceptable terms, including any impact of the COVID-19 pandemic;
•our ability to achieve cost savings related to our restructuring and cost management programs in the amounts and within the time frames currently anticipated;
•our ability to generate sufficient cash flow to continue
operating under our capital deployment model, including capital expenditures, debt repayment, dividend payments, and share repurchases;
•our ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period;
•the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses, including product innovation;
•general competitive activity in the market, including competitors’ pricing practices and promotional spending levels;
•our ability to attract and retain key talent;
•the concentration of
certain of our businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and our ability to manage and maintain key relationships;
•impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in the useful lives of other intangible assets or other long-lived assets;
•the impact of new or changes to existing governmental laws and regulations and their application;
•the
outcome of tax examinations, changes in tax laws, and other tax matters;
•a disruption, failure, or security breach of our or our suppliers’ information technology systems, including ransomware attacks;
•foreign currency exchange rate and interest rate fluctuations; and
•risks related to other factors described under “Risk Factors” in other reports and statements we have filed with the SEC.
Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. We do not undertake any obligation to update or revise these forward-looking statements to reflect new events or circumstances subsequent
to the filing of this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Management, including the principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of July 31, 2022 (the “Evaluation Date”). Based on that evaluation, the principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring
that information required to be disclosed in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting during the three months ended July 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information required for Part II, Item 1 is incorporated by reference to the discussion in Note 14: Contingencies in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors.
Our business, operations, and financial condition are subject to various risks and uncertainties.
The risk factors described in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended April 30, 2022, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse impact on our business, financial condition, and results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers: The following table presents the total number of shares of common stock purchased during the first quarter of 2023, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase program, if any, and the approximate dollar value of the maximum number of shares that may yet be purchased under the share repurchase program:
Period
(a)
(b)
(c)
(d)
Total Number of Shares Purchased
Average
Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
