What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-25 compared with 2020-02-27 · 110 added, 178 removed, 145 unchanged (67% of the section changed)

1 unchanged sentence

(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 and nine months ended January 31, 2020 and 2019.

This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three months ended July 31, 2020 and 2019.

All comparisons presented are to the corresponding period of the prior year, unless otherwise noted.

On May 14, 2018, we acquired the equity of Ainsworth in an all-cash transaction, which was funded by debt and valued at $1.9 billion.

Ainsworth was a leading producer, distributor, and marketer of premium pet food and pet snacks, predominantly within the U.S.

We expected to achieve annual cost synergies related to this acquisition of approximately $55.0 by the end of 2020, which was fully realized as of January 31, 2020.

On August 31, 2018, we sold our U.S.

baking business to Brynwood Partners VII L.P.

and Brynwood Partners VIII L.P., subsidiaries of Brynwood Partners, an unrelated party.

The transaction included products that were primarily sold in U.S.

retail channels under the Pillsbury , Martha White , Hungry Jack , White Lily , and Jim Dandy brands, along with all relevant trademarks and licensing agreements, and our manufacturing facility in Toledo, Ohio.

This business generated net sales of approximately $370.0 in 2018, primarily in the U.S.

Retail Consumer Foods segment.

The transaction did not include our baking business in Canada.

We received proceeds from the divestiture of $369.5, which were net of cash transaction costs and included a working capital adjustment.

During 2019, we recognized a pre-tax gain of $27.7 related to this transaction, of which $1.0 was recognized during the third quarter associated with the working capital adjustment that was finalized during the fourth quarter.

The gain was included in other operating expense (income) – net within the Condensed Statement of Consolidated Income.

We are the owner of all trademarks referenced herein, except for the following, which are used under license:

Dunkin’ TM and Dunkin’ Donuts are trademarks of DD IP Holder LLC, and Rachael Ray is a trademark of Ray Marks II LLC.

The Dunkin’ and Dunkin’ Donuts brands are licensed to us for packaged coffee products, including K-Cup ® pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores.

All references to Dunkin’ in this Quarterly Report on Form 10-Q are deemed to include the Dunkin’ and Dunkin’ Donuts trademarks.

Information in this document does not pertain to products for sale in Dunkin’ restaurants.

K-Cup ® is a trademark of Keurig Green Mountain, Inc., used with permission.

The continued spread of COVID-19 throughout the United States and the international community has had, and will continue to have, an impact on financial markets, economic conditions, and portions of our business and industry.

During the first quarter of 2021, many state governments began a phased reopening of their economies.

These phased approaches include limited foodservice offerings, outdoor dining, travel, and the reopening of certain retail establishments, among others, while adhering to new guidelines and enhanced safety measures, such as physical distancing and face mask protocols.

However, certain states have delayed or reversed plans to reopen their economies as new cases of COVID-19 and related illnesses continue to rise.

In general, consumers continue to stay at home as a precaution due to the sustained increase in new cases, and as a result, at-home food consumption and consumer demand remains high.

In June, we commenced a phased approach to reopen our corporate headquarters in Orrville, Ohio, with increased safety protocols.

However, occupancy levels remain low as the majority of our office-based employees continue to work remotely where possible, and we continue to monitor the latest public health and government guidance related to COVID-19.

We have crisis management teams in place at all of our facilities, which are monitoring the continually evolving situation and implementing risk mitigation actions as necessary.

To date, there has been minimal disruption in our supply chain network, including the supply of our ingredients, packaging, or other sourced materials, although it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world.

We also continue to work closely with our customers and external business partners, taking additional actions to ensure safety and business continuity and maximize product availability.

We have increased production at all of our facilities and expanded the availability of appointments at distribution centers.

All of our production operations remain open and none have experienced significant disruptions or labor reductions related to COVID-19.

Furthermore, we have implemented measures to allocate order volumes to ensure a consistent supply across our retail partners during this period of high demand.

We continued to experience an increase in orders during the first quarter of 2021, primarily across our U.S.

Retail Coffee and U.S.

Retail Consumer Foods segments, in response to the increased consumer demand for our products related to the elevated at-home consumption.

The continued increase in consumer demand may slow in the coming months as consumer purchasing behavior may change as a result of t he length and severity of the pandemic, duration of physical distancing requirements, stay-at-home orders, and macroeconomic implications.

However, during the first quarter of 2021, consumer demand and customer orders for the U.S.

Retail Coffee and U.S Retail Consumer Foods segments remain elevated compared to historical comparison periods.

We have also experienced a decline in products sold in the away from home channels as a result of COVID-19, which has negatively impacted our net sales in our Away From Home operating segment, and we expect COVID-19 to continue to adversely affect our net sales while government restrictions and physical distancing measures are in place.

However, as certain states have begun to reopen their economies, our net sales for the away from home channels has improved compared to the initial months of the pandemic and relative to our initial expectations.

The impact of COVID-19 remains uncertain and ultimately will be dictated by the length and severity of the pandemic;

the federal, state, and local government actions taken in response;

and the macroeconomic environment.

We will continue to evaluate the nature and extent to which COVID-19 will impact our business, consolidated results of operations, financial condition, and liquidity.

Results of Operations

Three Months Ended January 31, Nine Months Ended January 31,

2020 2019 % Increase (Decrease) 2020 2019 % Increase (Decrease)

Three Months Ended July 31,

2020 2019 % Increase (Decrease)

Net sales $ 1,971.8 $ 1,778.9 11 %

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Net income $ 237.0 $ 154.6 53

Net income per common share –

assuming dilution $ 1.64 $ 1.07 53 $ 4.85 $ 3.89 25

Net income per common share – assuming dilution $ 2.08 $ 1.36 53

Adjusted gross profit (A)

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Refer to “Non-GAAP Financial Measures” in this discussion and analysis for a reconciliation to the comparable GAAP financial measure.

Three Months Ended January 31, Nine Months Ended January 31,

2020 2019 Increase

(Decrease) % 2020 2019 Increase

Net sales $ 1,972.3 $ 2,011.9 $ (39.6) (2) % $ 5,709.0 $ 5,935.9 $ (226.9) (4) %

Ainsworth acquisition — — — — (25.4) — (25.4) —

Baking divestiture — — — — — (105.9) 105.9 2

Foreign currency exchange (1.3) — (1.3) — 2.3 — 2.3 —

Net sales excluding acquisition, divestiture, and foreign currency exchange (A)

$ 1,971.0 $ 2,011.9 $ (40.9) (2) % $ 5,685.9 $ 5,830.0 $ (144.1) (2) %

Amounts may not add due to rounding.

(A) Net sales excluding acquisition, divestiture, and foreign currency exchange is a non-GAAP financial measure used to evaluate performance internally.

This measure provides useful information because it enables comparison of results on a year-over-year basis.

Net sales in the third quarter of 2020 decreased $39.6, or 2 percent, reflecting unfavorable volume/mix in the U.S.

Retail Pet Foods segment, primarily driven by dog food.

Lower net price realization for the remaining segments was primarily driven by lower net pricing for coffee and peanut butter, which was mostly offset by favorable volume/mix for coffee and Smucker’s Uncrustables ® .

Net sales in the first nine months of 2020 decreased $226.9, or 4 percent, reflecting $105.9 of noncomparable net sales in the prior year related to the U.S.

baking business, partially offset by incremental net sales in the current year of $25.4 related to the Ainsworth acquisition.

Net sales excluding acquisition, divestiture, and foreign currency exchange decreased $144.1, or 2 percent.

Lower net price realization impacted net sales by 2 percentage points, primarily due to lower net pricing for coffee and peanut butter, partially offset by higher pricing for pet food and pet snacks.

Unfavorable volume/mix impacted net sales by 1 percentage point, primarily driven by declines for private label dog food, as well as the Natural Balance brand, partially offset by gains for the Smucker’s and Dunkin’ Donuts brands.

Net sales in the first three months of 2021 increased $192.9, or 11 percent, driven by favorable volume/mix across all of our retail businesses, supported by increased at-home consumption for the U.S.

Retail Coffee and U.S.

Retail Consumer Foods segments.

The retail business growth was partially offset by unfavorable volume/mix for the Away From Home operating segment.

Operating Income

The following table presents the components of operating income as a percentage of net sales.

Three Months Ended January 31, Nine Months Ended January 31,

2020 2019 2020 2019

Three Months Ended July 31,

Gross profit 39.3 % 39.3 %

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Amortization 3.0 3.3

Other intangible assets impairment charges 2.7 5.3 0.9 1.8

Other special project costs — 0.2

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Amounts may not add due to rounding.

Gross profit decreased $13.8, or 2 percent, in the third quarter of 2020, primarily driven by unfavorable volume/mix and an unfavorable net impact of lower prices and lower costs.

Operating income increased $71.4, or 33 percent, primarily reflecting a $54.8 decrease in intangible asset impairment charges, a $15.5 decrease in special project costs, and a $14.2 decrease in selling, distribution, and administrative (“SD&A”) expenses, partially offset by the decline in gross profit.

During the third quarter of 2020, we recognized a noncash impairment charge of $52.4 associated with the Natural Balance brand within the U.S.

Retail Pet Foods segment.

For further information on this charge, refer to “Critical Accounting Estimates and Policies” in this discussion and analysis.

Gross profit increased $75.8, or 11 percent, in the first quarter of 2021, primarily driven by favorable volume/mix and lower costs, partially offset by an unfavorable change in derivative gains and losses as compared to the prior year.

Operating income increased $103.5, or 40 percent, primarily reflecting the increase in gross profit and a $23.0 decrease in selling, distribution, and administrative (“SD&A”) expenses.

Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, integration and restructuring costs, and unallocated gains and losses on commodity and foreign currency exchange derivatives.

Refer to “Non-GAAP Financial Measures” in this discussion and analysis for further information.

Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) decreased $24.4, or 3 percent, in the third quarter of 2020, as compared to prior year, further reflecting a $10.6 unfavorable change related to the exclusion of unallocated derivative gains and losses, as compared to GAAP gross profit.

Operating income excluding non-GAAP adjustments (“adjusted operating income”) decreased $10.4, or 3 percent, as compared to prior year, further reflecting the change related to the exclusion of impairment charges and special project costs, as compared to GAAP operating income.

Gross profit decreased $9.7 in the first nine months of 2020, primarily driven by the noncomparable impact related to the U.S.

baking business divestiture and unfavorable volume/mix, mostly offset by a favorable net impact of lower prices and lower costs and the noncomparable benefit of Ainsworth.

The favorable net impact of price and cost was mostly driven by a favorable change in the impact of derivative gains and losses.

Operating income increased $101.4, or 13 percent, primarily due to the $54.8 decrease in intangible asset impairment charges, a $42.0 decrease in special project costs, and a $37.9 decrease in SD&A expenses, partially offset by the impact of the $27.6 pre-tax gain related to the sale of the U.S.

baking business in the prior year and the decline in gross profit.

Adjusted gross profit decreased $72.3, or 3 percent, in the first nine months of 2020, as compared to the prior year, further reflecting a $62.6 unfavorable change related to the exclusion of unallocated derivative gains and losses, as compared to GAAP gross profit.

Adjusted operating income decreased $61.5, or 5 percent, as compared to the prior year, further reflecting the change related to the exclusion of impairment charges and special project costs, as compared to GAAP operating income.

Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information.

Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) increased $88.6, or 13 percent, in the first quarter of 2021, reflecting the exclusion of unallocated derivative gains and losses, as compared to GAAP gross profit.

Operating income excluding non-GAAP adjustments (“adjusted operating income”) increased $113.8, or 39 percent, as compared to the prior year.

Interest Expense

Net interest expense decreased $6.5, or 13 percent, in the third quarter of 2020, and decreased $15.2, or 10 percent, in the first nine months of 2020, primarily as a result of reduced debt, as compared to the prior year, driven by repayments made during the last twelve months.

Income taxes increased $19.3, or 54 percent, in the third quarter of 2020, and increased $18.3, or 12 percent, in the first nine months of 2020.

The 2020 effective tax rates were 22.7 percent for the third quarter and 24.0 percent for the first nine months.

The 2019 effective tax rates were 22.8 percent for the third quarter and 26.1 percent for the first nine months.

During the current year and the prior year, the effective tax rates varied from the U.S.

Net interest expense decreased $3.3, or 7 percent, in the first quarter of 2021, primarily as a result of a decrease in interest rates and reduced debt outstanding, as compared to the prior year, partially offset by interest expense related to interest rate contracts terminated in the fourth quarter of 2020.

Income taxes increased $24.5, or 47 percent, in the first quarter of 2021, due to the increase in income before income taxes and partially offset by a lower effective tax rate of 24.4 percent, compared to 25.2 percent for the first quarter of 2020.

During both the current and prior years, the effective tax rates varied from the U.S.

statutory tax rate of 21.0 percent, primarily due to the impact of state income taxes.

The effective tax rate for the first nine months of the prior year was also unfavorably impacted by the income tax expense associated with the sale of the U.S.

baking business.

We anticipate a full-year effective tax rate for 2020 to be approximately 24.0 percent.

We anticipate a full-year effective tax rate for 2021 of approximately 24.0 percent.

For further information, refer to Note 11:

Income Taxes.

Integration Activities

We expect to incur approximately $50.0 in total integration costs related to the Ainsworth acquisition, the majority of which are expected to be cash charges.

Of the total anticipated integration costs, we expect approximately one-third to be employee-related costs.

We have incurred total cumulative integration costs of $42.0, of which $3.3 and $9.9 were incurred in the third quarter and first nine months of 2020, respectively.

All remaining integration costs are expected to be incurred by the end of 2020.

For further information, refer to Note 4:

Integration and Restructuring Costs.

Segment Results

We have four reportable segments:

We have three reportable segments:

Retail Pet Foods, U.S.

Retail Coffee, U.S.

Retail Consumer Foods, and International and Away From Home.

Retail Pet Foods segment primarily includes the domestic sales of Rachael Ray Nutrish, Meow Mix , Milk-Bone , Natural Balance , Kibbles ’n Bits , 9Lives , Nature’s Recipe , and Pup-Peroni branded products;

Retail Coffee segment primarily includes the domestic sales of Folgers, Dunkin’ Donuts, and Café Bustelo branded coffee;

Retail Coffee, and U.S.

Retail Consumer Foods.

Effective during the first quarter of 2021, the presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable.

As a result of recent leadership changes, these operating segments are now being managed and reported separately, and no longer represent a reportable segment for segment reporting purposes.

Prior year segment results have not been modified, as the combination of these operating segments represents the previously reported International and Away From Home reportable segment.

Retail Pet Foods segment primarily includes the domestic sales of Rachael Ray Nutrish, Meow Mix , Milk-Bone , 9Lives , Kibbles ’n Bits , Natural Balance, Pup-Peroni , and Nature’s Recipe branded products;

Retail Coffee segment primarily includes the domestic sales of Folgers, Dunkin’, and Café Bustelo branded coffee;

Retail Consumer Foods segment primarily includes the domestic sales of Smucker’s, Jif , and Crisco branded products.

The International and Away From Home segment comprises products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., restaurants, lodging, schools and universities, health care operators).

Three Months Ended January 31, Nine Months Ended January 31,

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).

Three Months Ended July 31,

2020 2019 % Increase

(Decrease) 2020 2019 % Increase

Retail Pet Foods $ 692.6 $ 669.9 3 %

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Retail Pet Foods

Retail Pet Foods segment net sales in the third quarter of 2020 decreased $37.1, reflecting unfavorable volume/mix, which reduced net sales by 5 percentage points and was primarily driven by the Natural Balance brand and private label dog food.

Net price realization was neutral, as list price increases implemented during the second half of the prior year were mostly offset by increased trade spend.

Segment profit decreased $1.9, as unfavorable volume/mix was mostly offset by an $8.1 recovery from a legal settlement related to a prior year supplier issue, synergy realization, and reduced marketing expense.

Retail Pet Foods segment net sales in the first nine months of 2020 decreased $56.6, including the impact of two weeks of incremental Ainsworth sales in the current year.

Excluding the incremental Ainsworth business, net sales decreased $82.0, reflecting a $59.6 decline related to private label products.

Volume/mix reduced net sales by 5 percentage points, primarily driven by private label dog food and the Natural Balance brand.

Net price realization contributed 1 percentage point, primarily related to the Meow Mix , 9Lives , and Kibbles ’n Bits brands, reflecting the list price increases implemented during the second half of the prior year, partially offset by increased trade spend.

Segment profit increased $30.9, reflecting a $10.9 unfavorable fair value purchase accounting adjustment in the prior year and the benefit from the incremental Ainsworth sales.

Profit improvement was also driven by synergy realization, higher net pricing, reduced marketing expense, and the recovery from a legal settlement related to a prior year supplier issue, partially offset by unfavorable volume/mix and higher input costs.

Retail Pet Foods segment net sales increased $22.7 in the first quarter of 2021, primarily reflecting favorable volume/mix, which contributed 5 percentage points to net sales.

The favorable volume/mix was driven by growth for 9Lives and Meow Mix cat food and Milk-Bone dog snacks, partially offset by declines for Natural Balance, Nature’s Recipe, and private label dog food.

Lower net price realization reduced net sales by 2 percentage points, primarily reflecting increased trade spend for dog food and cat food.

Segment profit increased $5.2, driven by lower manufacturing costs, the favorable volume/mix, and lower SD&A expenses, partially offset by lower pricing.

Retail Coffee

Retail Coffee segment net sales decreased $2.8 in the third quarter of 2020, reflecting lower net price realization, mostly offset by favorable volume/mix.

Lower net pricing on the Folgers and Dunkin’ Donuts brands reduced net sales by 5 percentage points, which reflected increased promotional activity across both brands, primarily supported by lower green coffee costs.

The favorable volume/mix increased net sales by 5 percentage points, due to growth of the Dunkin’ Donuts, Café Bustelo and Folgers brands.

Segment profit increased $5.8, primarily due to favorable volume/mix and reduced marketing expense, partially offset by the unfavorable net impact of lower net pricing and lower input costs.

Retail Coffee segment net sales decreased $28.1 in the first nine months of 2020, reflecting lower net price realization, partially offset by favorable volume/mix.

Lower net pricing, which reduced net sales by 4 percentage points, reflected promotional activity across all brands, primarily supported by lower green coffee costs.

The favorable volume/mix, which increased net sales by 3 percentage points, was primarily driven by the Dunkin’ Donuts and Café Bustelo brands.

S egment profit decreased $4.9, primarily due to the net unfavorable impact of lower net pricing and lower green coffee costs, partially offset by decreased marketing expense and favorable volume/mix.

Retail Coffee segment net sales increased $105.2 in the first quarter of 2021, reflecting favorable volume/mix, which contributed 23 percentage points to net sales, primarily related to growth for the Dunkin’ Donuts, Folgers , and Café Bustelo brands.

The favorable volume/mix is reflective of elevated at-home consumption and re-stocking of retailer inventory following the surge in consumer demand during the fourth quarter of 2020.

Segment profit increased $53.7, primarily due to the favorable volume/mix.

Retail Consumer Foods

Retail Consumer Foods segment net sales in the third quarter of 2020 was comparable to the prior year, as favorable volume/mix was offset by lower net price realization.

Favorable volume/mix contributed 4 percentage points to net sales, primarily related to growth for Smucker’s Uncrustables and the Jif brand.

Lower net pricing reduced net sales by 4 percentage points, primarily driven by a list price decrease on the Jif brand in the fourth quarter of the prior year, partially offset by decreased trade spend.

S egment profit decreased $11.7, which included a $7.5 write-off of equipment related to the discontinuation of Jif Power Ups ® .

Excluding this impact, segment profit decreased $4.2, primarily reflecting an unfavorable net impact of lower pricing and lower input costs, partially offset by favorable volume/mix.

Retail Consumer Foods segment net sales decreased $116.7 in the first nine months of 2020, driven by a $102.2 noncomparable impact of the U.S.

baking business.

Excluding the noncomparable impact of the divested business, net sales decreased 1 percent.

Lower net price realization reduced net sales by 3 percentage points, primarily driven by the list price decrease on the Jif brand, partially offset by decreased trade spend.

Favorable volume/mix contributed 2 percentage points to net sales, primarily related to growth for Smucker’s Uncrustables and the Jif brand, partially offset by a decline for the Crisco brand.

Segment profit decreased $70.9, primarily reflecting $44.3 of segment profit in the prior year related to the divested business, of which $27.6 represented the pre-tax gain related to the sale.

Excluding the impact of the divestiture, segment profit decreased 9 percent, driven primarily by the unfavorable net impact of lower pricing and lower input costs and the write-off of equipment related to the discontinuation of Jif Power Ups , partially offset by the favorable volume/mix and decreased marketing expense.

Retail Consumer Foods segment net sales increased $87.0 in the first quarter of 2021, as favorable volume/mix contributed 19 percentage points to net sales, reflecting growth for the Smucker’s brand, inclusive of Uncrustables ® frozen sandwiches and fruit spreads, Crisco oils and shortening, and Jif peanut butter.

The favorable volume/mix is reflective of elevated at-home consumption and retailer inventory re-stocking following the surge in consumer demand during the fourth quarter of 2020.

Higher net pricing increased net sales by 3 percentage points, primarily attributable to reduced promotional activity for Jif peanut butter and Smucker’s fruit spreads.

S egment profit increased $50.5, primarily reflecting the favorable volume/mix, higher net pricing, and lower SD&A expenses.

International and Away From Home

The International and Away From Home segment net sales in the third quarter of 2020 was comparable to the prior year, as a favorable foreign currency impact on net sales was offset by unfavorable net price realization and unfavorable volume/mix.

Segment profit decreased $3.5, primarily reflecting the unfavorable volume/mix.

The International and Away From Home segment net sales decreased $25.5 in the first nine months of 2020, including a noncomparable impact of $3.7 of net sales in the prior year related to the divested U.S.

baking business.

Unfavorable volume/mix reduced net sales by 2 percentage points, primarily driven by increased shipments in the prior year related to the closing of facilities in Mexico and transition to a distributor export model, in addition to declines for the Folgers and Jif brands.

These declines were partially offset by gains for the Smucker’s brand.

Lower net price realization reduced net sales by 1 percentage point, primarily related to the Folgers and Jif brands.

Foreign currency exchange had a $2.3 unfavorable impact on net sales.

Segment profit decreased $20.9, primarily reflecting the unfavorable volume/mix and lower net pricing.

International and Away From Home net sales decreased $22.0 in the first quarter of 2021, primarily reflecting a 33 percent decline for the Away From Home operating segment, partially offset by net sales growth of 21 percent for the International operating segment, most notably for flour and baking ingredients.

Unfavorable volume/mix for the combined businesses reduced net sales by 8 percentage points and foreign currency decreased net sales by 1 percentage point.

Segment profit decreased $1.4, primarily reflecting higher input costs and the unfavorable volume/mix, partially offset by lower SD&A expenses.

Financial Condition – Liquidity and Capital Resources

Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility.

At January 31, 2020, total cash and cash equivalents was $74.4, compared to $101.3 at April 30, 2019.

At July 31, 2020, total cash and cash equivalents was $396.6, compared to $391.1 at April 30, 2020.

The following table presents selected cash flow information.

Nine Months Ended January 31,

Three Months Ended July 31,

Net cash provided by (used for) operating activities $ 409.0 $ 221.5

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(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 $100.1 increase in cash provided by operating activities for the first nine months of 2020 was primarily driven by higher net income adjusted for noncash items in the current year.

The cash required to fund working capital decreased compared to the prior year, excluding the impact of the realization of a $30.0 income tax refund received in 2019.

The decrease in working capital requirements was primarily driven by a reduction in trade receivables due to lower sales, in addition to lower payments for accounts payable items driven by working capital initiatives.

These decreases were partially offset by an increase in inventory levels compared to the prior year.

Cash used for investing activities in the first nine months of 2020 consisted of $192.9 in capital expenditures, partially offset by a $15.0 decrease in our derivative cash margin account balances.

Cash used for investing activities in the first nine months of 2019 consisted of $1.9 billion related to the Ainsworth acquisition, $267.2 in capital expenditures, and a $22.8 increase in our derivative cash margin account balances, partially offset by net proceeds from the divestiture of the U.S.

baking business of $371.4.

Cash used for financing activities in the first nine months of 2020 consisted primarily of long-term debt repayments of $400.0, dividend payments of $296.7, and a net decrease in short-term borrowings of $122.6.

Cash provided by financing activities in the first nine months of 2019 consisted primarily of $1.5 billion in long-term debt proceeds and a $360.0 net increase in short-term borrowings, partially offset by long-term debt repayments of $600.0 and dividend payments of $281.4.

The $187.5 increase in cash provided by operating activities in the first quarter of 2021 was primarily driven by lower working capital requirements in 2021, as well as higher net income adjusted for noncash items in the current year.

The decrease in cash required to fund working capital, as compared to the prior year, was primarily attributable to lower payments for accounts payable driven by working capital initiatives, inclusive of a supplier financing program entered into during the second half of 2020, as well as a reduction in trade receivables this quarter, due to the timing of sales and payments.

Cash used for investing activities in the first three months of 2021 consisted of $76.6 in capital expenditures, partially offset by a $27.6 decrease in our derivative cash margin account balances.

Cash used for investing activities in the first three months of 2020 consisted of $73.0 in capital expenditures, partially offset by a $20.9 decrease in our derivative cash margin account balances.

Cash used for financing activities in the first three months of 2021 consisted primarily of long-term debt repayments of $300.0 and dividend payments of $100.1, partially offset by a net increase in short-term borrowings of $47.8.

Cash used for financing activities in the first three months of 2020 consisted primarily of a $130.0 net decrease in short-term borrowings and dividend payments of $96.5.

Supplier Financing Program

As part of ongoing efforts to maximize working capital, we work with our suppliers to optimize our terms and conditions, which includes the extension of payment terms.

Payment terms with our suppliers, which we deem to be commercially reasonable, generally range from 0 to 180 days.

During the second half of 2020, we entered into an agreement with a third-party administrator to provide an accounts payable tracking system and facilitate a supplier financing program which allows participating suppliers the ability to monitor and voluntarily elect to sell our payment obligations to a designated third-party financial institution.

Participating suppliers can sell one or more of our payment obligations at their sole discretion, and our rights and obligations to our suppliers are not impacted.

We have no economic interest in a supplier’s decision to enter into these agreements.

Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers’ decisions to sell amounts under these arrangements.

As of July 31, 2020, $192.3 of our outstanding payment obligations were elected and sold to a financial institution by participating suppliers.

During the first quarter of 2021, we paid $122.1 to a financial institution for payment obligations that were settled through the supplier financing program.

Contingencies

We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business.

We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart Pet Brands, the significant majority of which were settled and paid during the second half of 2019.

While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at January 31, 2020.

Based on the information known to date, with the exception of the matter discussed below, we do not believe the final outcome of these proceedings would have a material adverse effect on our financial position, results of operations, or cash flows.

during the second half of 2019.

Based on the information known to date, with the exception of the matter discussed below, we do not believe the final outcome of these proceedings will have a material adverse effect on our financial position, results of operations, or cash flows.

In addition to the legal proceedings discussed above, we are currently a defendant in CERT v.

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The outcome and the financial impact of the case, if any, cannot be predicted at this time.

Accordingly, no loss contingency has been recorded for this matter as of January 31, 2020, as the likelihood of loss is not considered probable or estimable.

Accordingly, no loss contingency has been recorded for this matter as of July 31, 2020, as the likelihood of loss is not considered probable or estimable.

However, if we are required to pay significant statutory penalties or to add warning labels to any of our products or place warnings in certain locations where our products are sold as a result of Proposition 65, our business and financial results could be adversely impacted, and sales of those products could suffer not only in those locations but elsewhere.

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The following table presents our capital structure.

January 31, 2020 April 30, 2019

July 31, 2020 April 30, 2020

Current portion of long-term debt $ 399.8 $ —

$ 499.8 $ 798.5

Short-term borrowings 296.0 248.0

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Borrowings under the Term Loan bear interest on the prevailing U.S.

Prime Rate or LIBOR, based on our election, and are payable either on a quarterly basis or at the end of the borrowing term.

Prime Rate or LIBOR, based on our election, and is payable either on a quarterly basis or at the end of the borrowing term.

The Term Loan matures on May 14, 2021, and does not require scheduled amortization payments.

Voluntary prepayments are permitted without premium or penalty.

As of January 31, 2020, we have prepaid $800.0 on the Term Loan to date, including $100.0 in 2020.

The interest rate on the Term Loan at January 31, 2020, was 2.45 percent.

In November 2019, we entered into an amendment to the Term Loan that decreased the applicable margins on LIBOR, based on our long-term unsecured debt rating.

This amendment did not have a material impact on our condensed consolidated financial statements.

As of July 31, 2020, we have prepaid $1.1 billion on the Term Loan to date, including $300.0 in the first quarter of 2021.

The interest rate on the Term Loan at July 31, 2020, was 0.97 percent.

We have available a $1.8 billion unsecured revolving credit facility with a group of 11 banks that matures in September 2022.

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Commercial paper will be used as a continuing source of short-term financing for general corporate purposes.

As of January 31, 2020, we had $310.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 1.79 percent.

As of July 31, 2020, we had $296.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 0.25 percent.

We are in compliance with all of our debt covenants.

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Debt and Financing Arrangements.

During the third quarter of 2020, we did not repurchase any common shares under a repurchase plan authorized by the Board.

At January 31, 2020, approximately 3.6 million common shares remain available for repurchase pursuant to the Board’s authorizations.

During the first quarter of 2021, we did not repurchase any common shares under a repurchase plan authorized by the Board.

At July 31, 2020, approximately 3.6 million common shares remain available for repurchase pursuant to the Board’s authorizations.

There is no guarantee as to the exact number of shares that may be repurchased or when such purchases may occur.

Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations, borrowings available under our commercial paper program and revolving credit facility, and access to capital markets, will be sufficient to meet our cash requirements for the next 12 months, including capital expenditures, the payment of quarterly dividends, principal and interest payments on debt outstanding, and share repurchases.

During the first nine months of 2020, we returned $39.7 of international cash to the U.S., primarily driven by a reduction in our capital investment in certain foreign subsidiaries in conjunction with a restructuring of our international holding and operating entities.

No foreign withholding taxes were applicable, and state income taxes were not significant.

As of January 31, 2020, total cash and cash equivalents of $64.5 was held by our foreign subsidiaries, primarily in Canada.

Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations, borrowings available under our commercial paper program and revolving credit facility, and access to capital markets, will be sufficient to meet our cash requirements for the next 12 months, including the payment of quarterly dividends, principal and interest payments on debt outstanding, and capital expenditures.

However, as a result of COVID-19, we may

experience an increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future, which could affect our financial condition or our ability to fund operations or future investment opportunities.

As of July 31, 2020, total cash and cash equivalents of $85.1 was held by our foreign subsidiaries, primarily in Canada.

The undistributed earnings of our foreign subsidiaries remain permanently reinvested.

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We use non-GAAP financial measures, including:

net sales excluding acquisition, divestiture, and foreign currency exchange;

adjusted gross profit;

adjusted operating income;

adjusted income;

adjusted earnings per share;

and free cash flow, as key measures for purposes of evaluating performance internally.

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.

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The Board also utilizes certain non-GAAP financial measures as components for measuring performance for incentive compensation purposes.

Non-GAAP measures exclude certain items affecting comparability that can significantly affect the year-over-year assessment of operating results, which include amortization expense and impairment charges related to intangible assets, integration and restructuring costs (“special project costs”), and unallocated gains and losses on commodity and foreign currency exchange derivatives (“unallocated derivative gains and losses”), as well as the related tax impact of these exclusions.

Non-GAAP financial measures exclude certain items affecting comparability that can significantly affect the year-over-year assessment of operating results, which include amortization expense and impairment charges related to intangible assets, integration and restructuring costs (“special project costs”), and unallocated gains and losses on commodity and foreign currency exchange derivatives (“unallocated derivative gains and losses”), as well as the related tax impacts of these exclusions.

The special project costs in the following table relate to specific integration and restructuring projects, and the unallocated derivative gains and losses reflect the changes in fair value of our commodity and foreign currency exchange contracts.

Additionally, income taxes, as adjusted is calculated using an adjusted effective income tax rate that is applied to adjusted income before income taxes.

While this adjusted effective income tax rate does not generally differ materially from our GAAP effective income tax rate, certain items can significantly impact our adjusted effective income tax rate.

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.

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The following table reconciles certain non-GAAP measures to the comparable GAAP financial measure.

See page 23 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure.

Three Months Ended January 31, Nine Months Ended January 31,

2020 2019 2020 2019

Three Months Ended July 31,

Gross profit reconciliation:

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Amortization 59.6 58.8

Other intangible assets impairment charges 52.4 107.2 52.4 107.2

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

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Amortization 59.6 58.8

Other intangible assets impairment charges 52.4 107.2 52.4 107.2

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

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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 not material to our results of operations, financial condition, or cash flows.

As of January 31, 2020, there were no material changes to our future contractual obligations as previously reported in our

Transactions with related parties are in the ordinary course of business and are not material to our results of operations, financial condition, or cash flows.

As of July 31, 2020, there were no material changes to our future contractual obligations as previously reported in our

Annual Report on Form 10-K for the year ended April 30, 2020.

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A discussion of our critical accounting estimates and policies can be found in the “Management’s Discussion and Analysis” section of our Annual Report on Form 10-K for the year ended April 30, 2020.

There were no material changes to the information previously disclosed, with the exception of the item discussed below.

During the third quarter of 2020, we began our annual planning cycle, which was not complete as of January 31, 2020;

however, certain brand-level decisions were made during the quarter that we evaluated to determine whether the carrying value of certain indefinite-lived intangible assets more likely than not exceeded fair value.

As a result, we recognized an impairment charge of $52.4 related to the Natural Balance brand within the U.S.

Retail Pet Foods segment due to a decline in current year and long-term net sales expectations and the royalty rate used in the interim analysis, primarily driven by the market environment and re-positioning of this brand within the Pet Foods brand portfolio.

This charge was included as a noncash charge in our Condensed Statement of Consolidated Income.

Additionally, we reassessed the long-term strategic expectations for the Natural Balance brand and will reclassify this brand as a finite-lived intangible asset as of February 1, 2020, resulting in annual amortization expense of $4.5.

As of January 31, 2020, there were no other indicators of impairment, and as a result, we do not believe that our reporting units or any of our remaining indefinite-lived intangible assets are more likely than not impaired.

However, the goodwill and indefinite-lived trademarks within the U.S.

Retail Pet Foods segment, inclusive of the recently acquired Ainsworth business, remain susceptible to future impairment charges due to the narrow differences between fair value and carrying value.

Any significant adverse change in our near or long-term projections or macroeconomic conditions could result in future impairment charges.

The carrying values of the goodwill and indefinite-lived intangible assets within the U.S.

Retail Pet Foods segment were $2.4 billion and $1.4 billion, respectively, as of January 31, 2020.

During the third quarter of 2019, we recognized a noncash impairment charge of $107.2 related to certain indefinite-lived intangible assets within the U.S.

Retail Pet Foods segment.

There were no material changes to the information previously disclosed.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis