Item 2. Management’s Discussion and Analysis
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 and six months ended October 31, 2020 and 2019. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted.
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.
COVID-19
The 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 half of 2021, state governments have reopened their economies, while adhering to new guidelines and enhanced safety measures, such as physical distancing and face mask protocols. However, as many states continue to experience a sustained increase in new cases, state governments are beginning to impose additional safety measures and restrictions. In general, consumers are staying at home more frequently as a precaution, and as a result, at-home food consumption and consumer demand remains high, which we anticipate will continue in the months to come as cases continue to rise.
We also 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 at all of our facilities, which are monitoring the 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, including the impact of e-commerce pressures on freight charges and potential shipping delays due to supply and demand imbalances. 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
18
Table of Contents
COVID-19. Furthermore, we have implemented measures to manage order volumes to ensure a consistent supply across our retail partners during this period of high demand.
During the first half of 2021, we continued to experience an increase in orders, 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. It is unknown if the increase in consumer demand will slow during the second half of 2021, as consumer purchasing behavior will continue to evolve depending on the length and severity of the pandemic, duration of physical distancing requirements, stay-at-home orders, and macroeconomic implications. During the first six months of 2021, consumer demand and customer orders for the U.S. Retail Coffee and U.S Retail Consumer Foods segments remained elevated compared to historical comparison periods. We have also experienced a decline in products sold in 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 will continue to adversely affect our net sales while government mandated safety measures are in place. However, as states have reopened their economies during the first half of 2021, our net sales for the away from home channels improved compared to the initial months of the pandemic and relative to our initial expectations. This trend could reverse during the second half of 2021 if cases continue to rise and governments impose additional safety measures that impact away from home consumption. Overall, the impact of COVID-19 remains uncertain and ultimately depends on the length and severity of the pandemic; the federal, state, and local government actions taken in response; vaccine availability and effectiveness; and the macroeconomic environment. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, supply chain, consolidated results of operations, financial condition, and liquidity.
Results of Operations
Three Months Ended October 31, Six Months Ended October 31,
2020 2019 % Increase (Decrease) 2020 2019 % Increase (Decrease)
Net sales $ 2,034.0 $ 1,957.8 4 % $ 4,005.8 $ 3,736.7 7 %
Gross profit $ 818.2 $ 754.0 9 $ 1,593.6 $ 1,453.6 10
% of net sales 40.2 % 38.5 % 39.8 % 38.9 %
Operating income $ 380.8 $ 329.8 15 $ 741.9 $ 587.4 26
% of net sales 18.7 % 16.8 % 18.5 % 15.7 %
Net income:
Net income $ 230.8 $ 211.2 9 $ 467.8 $ 365.8 28
Net income per common share – assuming dilution $ 2.02 $ 1.85 9 $ 4.10 $ 3.21 28
Adjusted gross profit (A)
$ 786.7 $ 753.1 4 $ 1,545.9 $ 1,423.7 9
% of net sales 38.7 % 38.5 % 38.6 % 38.1 %
Adjusted operating income (A)
$ 408.8 $ 391.0 5 $ 813.3 $ 681.7 19
% of net sales 20.1 % 20.0 % 20.3 % 18.2 %
Adjusted income: (A)
Income $ 273.2 $ 257.5 6 $ 543.2 $ 437.2 24
Earnings per share – assuming dilution $ 2.39 $ 2.26 6 $ 4.76 $ 3.84 24
(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
Net sales in the second quarter of 2021 increased $76.2, or 4 percent, primarily due to favorable volume/mix for the U.S. Retail Coffee and U.S. Retail Consumer Foods segments, reflecting elevated at-home consumption, partially offset by unfavorable volume/mix for the Away From Home operating segment.
Net sales in the first six months of 2021 increased $269.1, or 7 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.
19
Table of Contents
Operating Income
The following table presents the components of operating income as a percentage of net sales.
Three Months Ended October 31, Six Months Ended October 31,
2020 2019 2020 2019
Gross profit 40.2 % 38.5 % 39.8 % 38.9 %
Selling, distribution, and administrative expenses:
Marketing 6.2 % 6.3 % 6.2 % 6.9 %
Selling 2.9 3.2 3.1 3.5
Distribution 3.5 3.6 3.5 3.6
General and administrative 6.3 5.4 5.7 5.9
Total selling, distribution, and administrative expenses 18.8 % 18.5 % 18.5 % 19.9 %
Amortization 2.9 3.0 3.0 3.1
Other special project costs — 0.2 — 0.2
Other operating expense (income) – net (0.2) — (0.2) —
Operating income 18.7 % 16.8 % 18.5 % 15.7 %
Amounts may not add due to rounding.
Gross profit increased $64.2, or 9 percent, in the second quarter of 2021, primarily due to a favorable change in derivative gains and losses as compared to the prior year and the increased contribution from volume/mix. Operating income increased $51.0, or 15 percent, primarily reflecting the increase in gross profit, partially offset by a $21.3 increase in selling, distribution, and administrative (“SD&A”). The increase in SD&A was partially driven by higher incentive compensation and the reinstatement of salary increases, inclusive of executive officers, which were previously frozen.
Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets; divestiture, acquisition, integration, and restructuring costs; gains and losses related to the sale of a business; unallocated gains and losses on commodity and foreign currency exchange derivatives; 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”) increased $33.6, or 4 percent, in the second 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 $17.8, or 5 percent, as compared to the prior year.
Gross profit increased $140.0, or 10 percent, in the first six months of 2021, driven by increased contribution from volume/mix and a net benefit from price and costs, including a favorable change in derivative gains and losses as compared to the prior year. Operating income increased $154.5, or 26 percent, primarily reflecting the increase in gross profit.
Adjusted gross profit increased $122.2, or 9 percent, in the first six months of 2021, reflecting the exclusion of unallocated derivative gains and losses, as compared to GAAP gross profit. Adjusted operating income increased $131.6, or 19 percent, as compared to the prior year.
Interest Expense
Net interest expense decreased $4.0, or 8 percent, in the second quarter of 2021, and decreased $7.3, or 7 percent, in the first six months 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.
Other Income (Expense) – Net
Net other expense increased $30.6 and $30.5 in the second quarter and first six months of 2021, respectively, primarily reflecting pension settlement charges of $30.6, which includes the $27.9 pre-tax settlement charge recognized during the second quarter of 2021 related to the purchase of a group annuity contract to transfer the obligations of our Canadian defined benefit pension plan to an insurance company. For further information, refer to Note 8: Pensions and Other Postretirement Benefits.
20
Table of Contents
Income Taxes
Income taxes increased $4.8, or 7 percent, in the second quarter of 2021, and increased $29.3, or 24 percent, in the first six months of 2021, primarily due to the increase in income before income taxes, partially offset by a lower effective tax rate of 24.0 and 24.2 percent for the second quarter and first six months of 2021, respectively. The 2020 effective tax rates were 24.3 percent for the second quarter and 24.7 percent for the first six months.
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. We anticipate a full-year effective tax rate for 2021 of approximately 24.0 percent, which does not include an estimate of the impact of the Crisco divestiture on our overall consolidated effective tax rate. For further information, refer to Note 12: Income Taxes.
Divestiture
On October 26, 2020, we announced a definitive agreement to sell our Crisco oils and shortening business to B&G Foods, and expect to close the transaction during the third quarter of 2021, subject to customary closing conditions. The transaction includes oils and shortening products sold under the Crisco brand, certain trademarks and licensing agreements, dedicated manufacturing and warehouse facilities located in Cincinnati, Ohio, and approximately 160 employees who support the Crisco business. The business generated net sales of approximately $270.0 in 2020, primarily in the U.S. Retail Consumer Foods segment. The transaction also includes our oils and shortening business outside the U.S., which is primarily in Canada.
We expect to receive approximately $550.0 in proceeds from the divestiture, which is subject to a final working capital adjustment, and anticipate recognizing a gain upon completion of the transaction. The pre-tax gain is estimated to be approximately $115.0 based on the expected proceeds, including the assumed working capital and the carrying value of the net assets, less estimated costs to sell, at the closing date. For further information, refer to Note 4: Divestiture.
Segment Results
We have three reportable segments: U.S. Retail Pet Foods, U.S. 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 leadership changes, these operating segments are 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.
The U.S. 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; 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, Jif , and Crisco 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).
21
Table of Contents
Three Months Ended October 31, Six Months Ended October 31,
2020 2019 % Increase
(Decrease) 2020 2019 % Increase
(Decrease)
Net sales:
U.S. Retail Pet Foods $ 708.7 $ 709.9 — % $ 1,401.3 $ 1,379.8 2 %
U.S. Retail Coffee 594.7 543.4 9 1,165.6 1,009.1 16
U.S. Retail Consumer Foods 479.1 426.1 12 968.3 828.3 17
International and Away From Home 251.5 278.4 (10) 470.6 519.5 (9)
Segment profit:
U.S. Retail Pet Foods $ 124.9 $ 137.0 (9) % $ 250.2 $ 257.1 (3) %
U.S. Retail Coffee 202.1 182.5 11 384.7 311.4 24
U.S. Retail Consumer Foods 135.3 91.4 48 266.8 172.4 55
International and Away From Home 39.5 50.4 (22) 70.4 82.7 (15)
Segment profit margin:
U.S. Retail Pet Foods 17.6 % 19.3 % 17.9 % 18.6 %
U.S. Retail Coffee 34.0 33.6 33.0 30.9
U.S. Retail Consumer Foods 28.2 21.5 27.6 20.8
International and Away From Home 15.7 18.1 15.0 15.9
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales decreased $1.2 in the second quarter of 2021, reflecting a 1 percentage point impact from lower net pricing, mostly offset by a 1 percentage point improvement due to volume/mix. The contribution from volume/mix primarily reflects growth for cat food and dog snacks, driven by Meow Mix and private label cat food, as well as Pup-Peroni and Milk-Bone dog snacks. These gains were partially offset by declines for dog food, mostly driven by private label and the Natural Balance brand . Segment profit decreased $12.1, primarily due to the impact of lower net pricing and higher marketing expense.
The U.S. Retail Pet Foods segment net sales increased $21.5 in the first six months of 2021, reflecting favorable volume/mix, partially offset by lower net price realization. The favorable volume/mix contributed 3 percentage points to net sales, driven by growth for Meow Mix, 9Lives , and private label cat food, as well as Milk-Bone and Pup-Peroni dog snacks, partially offset by declines for private label, Natural Balance, and Nature’s Recipe dog food. Lower net price realization reduced net sales by 2 percentage points, primarily reflecting increased trade spend. Segment profit decreased $6.9, driven by lower pricing, partially offset by lower manufacturing costs, and the favorable volume/mix.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased $51.3 in the second quarter of 2021, reflecting favorable volume/mix, which contributed 10 percentage points to net sales, related to growth for the Dunkin’, Café Bustelo , and Folgers brands. The favorable volume/mix reflects elevated at-home coffee consumption. Net price realization reduced net sales by 1 percentage point. Segment profit increased $19.6, primarily due to the favorable volume/mix and decreased SD&A expenses, partially offset by the impact of net pricing and costs.
The U.S. Retail Coffee segment net sales increased $156.5 in the first six months of 2021, reflecting favorable volume/mix, which contributed 16 percentage points to net sales, related to growth for the Dunkin’, Folgers , and Café Bustelo brands. The favorable volume/mix reflects elevated at-home consumption and re-stocking of retailer inventory following the surge in consumer demand during the fourth quarter of 2020. Net price realization reduced net sales by 1 percentage point. Segment profit increased $73.3, primarily due to the favorable volume/mix.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales increased $53.0 in the second quarter of 2021, reflecting a 7 percentage point increase from volume/mix, primarily driven by elevated at-home consumption for Smucker’s Uncrustables ® frozen sandwiches, Crisco oils and shortening, and Jif peanut butter. Higher net pricing increased net sales by 5 percentage points, reflecting the impact of a peanut butter list price increase taken during the second quarter of 2021 and reduced promotional
22
Table of Contents
activity for the Jif brand. S egment profit increased $43.9, reflecting the favorable impact of net pricing and costs, the increased contribution from volume/mix, and lower SD&A expenses.
The U.S. Retail Consumer Foods segment net sales increased $140.0 in the first six months of 2021, as favorable volume/mix contributed 13 percentage points to net sales, reflecting growth for the Smucker’s , inclusive of Uncrustables ® frozen sandwiches and fruit spreads, Crisco, and Jif brands. The favorable volume/mix reflects 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 4 percentage points, driven by reduced promotional activity for the Jif brand and the impact of the peanut butter list price increase. S egment profit increased $94.4, reflecting the increased contribution from volume/mix, the favorable impact of net pricing and costs, and lower SD&A expenses.
International and Away From Home
International and Away From Home net sales decreased $26.9 in the second quarter of 2021, primarily reflecting a 24 percent decline for the Away From Home operating segment, partially offset by net sales growth of 7 percent for the International operating segment. Unfavorable volume/mix for the combined businesses reduced net sales by 11 percentage points, primarily driven by coffee and portion control products. Net price realization contributed a 1 percentage point increase to net sales. Segment profit decreased $10.9, reflecting the unfavorable volume/mix and the impact of higher net pricing and costs, partially offset by lower SD&A expenses.
International and Away From Home net sales decreased $48.9 in the first six months of 2021, primarily reflecting a 28 percent decline for the Away From Home operating segment, partially offset by net sales growth of 13 percent for the International operating segment, most notably for flour and baking ingredients. Unfavorable volume/mix for the combined businesses reduced net sales by 9 percentage points, primarily driven by coffee and portion control products, and foreign currency decreased net sales by 1 percentage point. Net price realization contributed a 1 percentage point increase to net sales. Segment profit decreased $12.3, primarily reflecting the unfavorable volume/mix and higher input costs, partially offset by lower SD&A expenses.
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 October 31, 2020, total cash and cash equivalents was $405.6, compared to $391.1 at April 30, 2020.
The following table presents selected cash flow information.
Six Months Ended October 31,
2020 2019
Net cash provided by (used for) operating activities $ 787.7 $ 445.5
Net cash provided by (used for) investing activities (100.9) (104.2)
Net cash provided by (used for) financing activities (675.8) (395.2)
Net cash provided by (used for) operating activities $ 787.7 $ 445.5
Additions to property, plant, and equipment (129.0) (136.4)
Free cash flow (A)
$ 658.7 $ 309.1
(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 $342.2 increase in cash provided by operating activities in the first six months 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.
Cash used for investing activities in the first six months of 2021 consisted of $129.0 in capital expenditures, partially offset by a $27.9 decrease in our derivative cash margin account balances. Cash used for investing activities in the first six months
23
Table of Contents
of 2020 consisted of $136.4 in capital expenditures, partially offset by a $32.1 decrease in our derivative cash margin account balances.
Cash used for financing activities in the first six months of 2021 consisted primarily of long-term debt repayments of $500.0 and dividend payments of $202.4, partially offset by a net increase in short-term borrowings of $31.7. Cash used for financing activities in the first six months of 2020 consisted primarily of dividend payments of $196.6, a net decrease of short-term borrowings of $102.9, and a long-term debt repayment of $100.0.
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, 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 October 31, 2020, $185.6 of our outstanding payment obligations were elected and sold to a financial institution by participating suppliers. During the first six months of 2021, we paid $171.0 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 October 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 will have a material adverse effect on our financial position, results of operations, or cash flows.
In addition to the legal proceedings discussed above, we are currently a defendant in CERT v. Brad Barry LLC, et al., which alleges that we, in addition to nearly eighty other defendants who manufacture, package, distribute, or sell coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. The Plaintiff 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. The Plaintiff 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 Court granted the Defendants’ motion for summary judgment based on the regulation. The Plaintiff submitted its formal notice to appeal on November 20, 2020. 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 October 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.
24
Table of Contents
Capital Resources
The following table presents our capital structure.
October 31, 2020 April 30, 2020
Current portion of long-term debt $ 957.3 $ —
Short-term borrowings 280.0 248.0
Long-term debt, less current portion 3,914.5 5,373.3
Total debt $ 5,151.8 $ 5,621.3
Shareholders’ equity 8,515.0 8,190.9
Total capital $ 13,666.8 $ 13,812.2
In April 2018, we entered into a Term Loan with a syndicate of banks and an available commitment amount of $1.5 billion. The full amount of the Term Loan was drawn on May 14, 2018, to partially finance the Ainsworth acquisition. 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. 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 October 31, 2020, we have prepaid $1.3 billion on the Term Loan to date, including $500.0 during the first half of 2021, of which $200.0 was paid during the second quarter. The interest rate on the Term Loan at October 31, 2020, was 0.95 percent.
We have available a $1.8 billion unsecured revolving credit facility with a group of 11 banks that matures in September 2022. Additionally, we participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $1.8 billion at any time. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper will be used as a continuing source of short-term financing for general corporate purposes. As of October 31, 2020, we had $280.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 0.17 percent.
We are in compliance with all of our debt covenants. For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 7: Debt and Financing Arrangements.
During the second quarter of 2021, we did not repurchase any common shares under a repurchase plan authorized by the Board. On October 22, 2020, the Board authorized the repurchase of up to 5.0 million common shares, in addition to the 3.6 million common shares that remain available for repurchase pursuant to prior authorizations of the Board. Therefore, at October 31, 2020, approximately 8.6 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 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 October 31, 2020, total cash and cash equivalents of $100.8 was held by our foreign subsidiaries, primarily in Canada. The undistributed earnings of our foreign subsidiaries remain permanently reinvested.
Non-GAAP Financial Measures
We use non-GAAP financial measures, including: 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;
25
Table of Contents
divestiture, acquisition, integration, and restructuring costs (“special project costs”); gains and losses related to the sale of a business; unallocated gains and losses on commodity and foreign currency exchange derivatives (“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.
Three Months Ended October 31, Six Months Ended October 31,
2020 2019 2020 2019
Gross profit reconciliation:
Gross profit $ 818.2 $ 754.0 $ 1,593.6 $ 1,453.6
Unallocated derivative losses (gains) (31.5) (0.9) (47.7) (29.9)
Adjusted gross profit $ 786.7 $ 753.1 $ 1,545.9 $ 1,423.7
Operating income reconciliation:
Operating income $ 380.8 $ 329.8 $ 741.9 $ 587.4
Amortization 59.5 58.8 119.1 117.6
Unallocated derivative losses (gains) (31.5) (0.9) (47.7) (29.9)
Other special project costs — 3.3 — 6.6
Adjusted operating income $ 408.8 $ 391.0 $ 813.3 $ 681.7
Net income reconciliation:
Net income $ 230.8 $ 211.2 $ 467.8 $ 365.8
Income tax expense 72.7 67.9 149.3 120.0
Amortization 59.5 58.8 119.1 117.6
Unallocated derivative losses (gains) (31.5) (0.9) (47.7) (29.9)
Other special project costs — 3.3 — 6.6
Other one-time items:
Pension plan termination settlement charge (A)
27.9 — 27.9 —
Adjusted income before income taxes $ 359.4 $ 340.3 $ 716.4 $ 580.1
Income taxes, as adjusted 86.2 82.8 173.2 142.9
Adjusted income $ 273.2 $ 257.5 $ 543.2 $ 437.2
Weighted-average shares – assuming dilution 114.2 114.1 114.1 114.0
Adjusted earnings per share – assuming dilution $ 2.39 $ 2.26 $ 4.76 $ 3.84
(A) Represents the nonrecurring pre-tax settlement charge of $27.9 related to the purchase of a group annuity contract to transfer the obligations of our Canadian defined benefit pension plan to an insurance company. For additional information, see Note 8: Pensions and Other Postretirement Benefits .
Off-Balance Sheet Arrangements and Contractual Obligations
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 October 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.
26
Table of Contents
Critical Accounting Estimates and Policies
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.