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 nine months ended January 31, 2021 and 2020. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted.
On December 1, 2020, we sold the Crisco oils and shortening business to B&G Foods. The transaction included oils and shortening products sold under the Crisco brand, primarily in the U.S. and Canada, certain trademarks and licensing agreements, dedicated manufacturing and warehouse facilities located in Cincinnati, Ohio, and approximately 160 employees who supported the Crisco business. The business generated net sales of approximately $270.0 in 2020, included primarily in the U.S. Retail Consumer Foods segment. Net proceeds from the divestiture were $533.4, inclusive of a preliminary working capital adjustment and transaction costs paid to date, which will be finalized during the fourth quarter of 2021. Upon completion of the transaction, we recognized a pre-tax gain of $114.9 during the third quarter of 2021, which is included in other operating expense (income) – net within the Condensed Statement of Consolidated Income.
On January 29, 2021, we sold the Natural Balance premium pet food business to Nexus. The transaction encompassed pet food products sold under the Natural Balance brand, certain trademarks and licensing agreements, and select employees who supported the Natural Balance business. The business generated net sales of approximately $220.0 in 2020, included in the U.S. Retail Pet Foods segment. Net proceeds from the divestiture were $35.9, inclusive of a preliminary working capital adjustment and transaction costs paid to date, which will be finalized during the fourth quarter of 2021. Upon completion of the transaction, we recognized a pre-tax loss of $87.7 during the third quarter of 2021, which is 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’ 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 2021, state governments have reopened their economies, while adhering to new guidelines and enhanced safety measures, such as physical distancing and face mask protocols, which have continued to be a requirement as many states continue to experience significant new cases. 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 through the end of 2021 as cases continue to be elevated, dependent upon vaccine availability and effectiveness, as well as the impact of additional strains of the virus.
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, including vaccine availability to our employees. 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 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 nine months 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
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elevated at-home consumption. It is anticipated that the increase in consumer demand will continue through the remainder of 2021, consistent with consumer purchasing behaviors experienced to date. A decline in products sold in away from home channels has also been experienced 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 and consumers continue to stay at home as a precaution. However, as states have reopened their economies during 2021, our net sales for the away from home channels improved compared to the initial months of the pandemic. This trend could reverse during the remainder of 2021 if cases rise and governments impose additional safety measures that further impact away from home consumption, which is partially dependent upon vaccine availability and effectiveness. Overall, the impact of COVID-19 remains uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; 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 January 31, Nine Months Ended January 31,
2021 2020 % Increase (Decrease) 2021 2020 % Increase (Decrease)
Net sales $ 2,076.7 $ 1,972.3 5 % $ 6,082.5 $ 5,709.0 7 %
Gross profit $ 809.4 $ 760.0 7 $ 2,403.0 $ 2,213.6 9
% of net sales 39.0 % 38.5 % 39.5 % 38.8 %
Operating income $ 406.2 $ 289.0 41 $ 1,148.1 $ 876.4 31
% of net sales 19.6 % 14.7 % 18.9 % 15.4 %
Net income:
Net income $ 261.5 $ 187.4 40 $ 729.3 $ 553.2 32
Net income per common share – assuming dilution $ 2.32 $ 1.64 41 $ 6.42 $ 4.85 32
Adjusted gross profit (A)
$ 775.6 $ 752.3 3 $ 2,321.5 $ 2,176.0 7
% of net sales 37.3 % 38.1 % 38.2 % 38.1 %
Adjusted operating income (A)
$ 403.9 $ 395.8 2 $ 1,217.2 $ 1,077.5 13
% of net sales 19.4 % 20.1 % 20.0 % 18.9 %
Adjusted income: (A)
Income $ 276.3 $ 268.5 3 $ 819.5 $ 705.7 16
Earnings per share – assuming dilution $ 2.45 $ 2.35 4 $ 7.21 $ 6.19 16
(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
Three months ended January 31, Nine Months Ended January 31,
2021 2020 Increase
(Decrease) % 2021 2020 Increase
(Decrease) %
Net sales $ 2,076.7 $ 1,972.3 $ 104.4 5 % $ 6,082.5 $ 5,709.0 $ 373.5 7 %
Crisco divestiture
— (40.7) 40.7 2 — (40.7) 40.7 1
Natural Balance divestiture
— (1.4) 1.4 — — (1.4) 1.4 —
Foreign currency exchange (2.4) — (2.4) — 0.6 — 0.6 —
Net sales excluding divestitures and foreign currency exchange (A)
$ 2,074.3 $ 1,930.2 $ 144.1 7 % $ 6,083.1 $ 5,666.9 $ 416.2 7 %
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.
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Net sales in the third quarter of 2021 increased $104.4, or 5 percent, which includes $42.1 of noncomparable net sales in the prior year related to the Crisco and Natural Balance divestitures. Net sales excluding divestitures and foreign currency increased $144.1, or 7 percent, driven by favorable volume/mix across all of our retail businesses, which was partially offset by unfavorable volume/mix for the Away From Home operating segment.
Net sales in the first nine months of 2021 increased $373.5, or 7 percent, which includes the noncomparable impact of net sales in the prior year related to the Crisco and Natural Balance divestitures. Net sales excluding divestitures and foreign currency increased $416.2, 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,
2021 2020 2021 2020
Gross profit 39.0 % 38.5 % 39.5 % 38.8 %
Selling, distribution, and administrative expenses:
Marketing 6.2 % 6.1 % 6.2 % 6.6 %
Selling 2.9 2.9 3.0 3.3
Distribution 3.2 3.7 3.4 3.6
General and administrative 5.6 5.5 5.7 5.8
Total selling, distribution, and administrative expenses 17.9 % 18.2 % 18.3 % 19.3 %
Amortization 2.7 3.0 2.9 3.1
Other intangible assets impairment charge — 2.7 — 0.9
Other special project costs 0.1 0.2 — 0.2
Other operating expense (income) – net (1.3) (0.1) (0.6) —
Operating income 19.6 % 14.7 % 18.9 % 15.4 %
Amounts may not add due to rounding.
Gross profit increased $49.4, or 7 percent, in the third quarter of 2021, primarily due to the increased contribution from volume/mix and a favorable change in derivative gains and losses as compared to the prior year, partially offset by higher costs and the noncomparable impact related to the Crisco and Natural Balance divestitures. Operating income increased $117.2, or 41 percent, primarily attributable to a $52.4 intangible asset impairment charge recognized in the third quarter of 2020, the increase in gross profit, and a $27.2 net pre-tax gain related to the divestitures of the Crisco and Natural Balance businesses, partially offset by a $12.8 increase in selling, distribution, and administrative (“SD&A”) expenses.
Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets; divestiture, acquisition, integration, and restructuring costs (“special project costs”); gains and losses related to the sale of a business; 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”) increased $23.3, or 3 percent, in the third 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 $8.1, or 2 percent, as compared to the prior year, further reflecting exclusion of the impairment charge and the net pre-tax gain on the divestitures.
Gross profit increased $189.4, or 9 percent, in the first nine 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, partially offset by the noncomparable impact related to the Crisco and Natural Balance divestitures. Operating income increased $271.7, or 31 percent, primarily reflecting the increase in gross profit, the $52.4 intangible asset impairment charge in the prior year, and the $27.2 net pre-tax gain related to the divestitures of the Crisco and Natural Balance businesses.
Adjusted gross profit increased $145.5, or 7 percent, in the first nine months of 2021, reflecting the exclusion of unallocated derivative gains and losses, as compared to GAAP gross profit. Adjusted operating income increased $139.7, or 13 percent, as
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compared to the prior year, further reflecting exclusion of the impairment charge, the net pre-tax gain on the divestitures, and special project costs.
Interest Expense
Net interest expense decreased $1.6, or 4 percent, in the third quarter of 2021, and decreased $8.9, or 6 percent, in the first nine months of 2021, primarily as a result of reduced debt outstanding and a decrease in interest rates, 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 decreased $0.2 and increased $30.3 in the third quarter and first nine months of 2021, respectively, primarily reflecting pension settlement charges of $30.8, 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 our Canadian defined benefit pension plan obligations to an insurance company. For further information, refer to Note 9: Pensions and Other Postretirement Benefits.
Income Taxes
Income taxes increased $44.9, or 81 percent, in the third quarter of 2021, and increased $74.2, or 42 percent, in the first nine months of 2021, primarily due to a higher effective tax rate of 27.7 and 25.5 percent for the third quarter and first nine months of 2021, respectively, and the increase in income before income taxes. The 2020 effective tax rates were 22.7 percent for the third quarter and 24.0 percent for the first nine months.
During the third quarter and first nine months of 2021 and 2020, the effective tax rates varied from the U.S. statutory tax rate of 21.0 percent due to the impact of state income taxes. The effective tax rates for the current year were also unfavorably impacted by additional net income tax expense related to the divestitures of the Crisco and Natural Balance businesses during the third quarter of 2021. We anticipate a full-year effective tax rate for 2021 of approximately 25.5 percent. For further information, refer to Note 13: Income Taxes.
Restructuring Activities
A restructuring program was approved by the Board during the third quarter of 2021. Under this program, we have identified opportunities to reduce our overall cost structure and optimize our organizational design, inclusive of stranded overhead associated with recent divestitures of the Crisco and Natural Balance businesses. While the entire scope of the program cannot be quantified at this time, we expect to incur approximately $60.0 in costs associated with the restructuring activities approved to date. Over half of these costs are expected to be employee-related costs, while the remainder represent other transition and termination costs associated with our cost reduction and margin management initiatives. We anticipate the activities and costs associated with this restructuring program will be completed by the end of 2023, with the majority of the costs expected to be incurred in 2022. We have incurred total cumulative restructuring costs of $1.7, which were all incurred during the third quarter of 2021. We expect to achieve approximately $60.0 of annual cost reductions by 2023, upon completion of the restructuring activities approved to date. 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. 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 , 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).
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Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 % Increase
(Decrease) 2021 2020 % Increase
(Decrease)
Net sales:
U.S. Retail Pet Foods $ 768.6 $ 721.9 6 % $ 2,169.9 $ 2,101.7 3 %
U.S. Retail Coffee 625.9 558.8 12 1,791.5 1,567.9 14
U.S. Retail Consumer Foods 447.6 422.9 6 1,415.9 1,251.2 13
International and Away From Home 234.6 268.7 (13) 705.2 788.2 (11)
Segment profit:
U.S. Retail Pet Foods $ 135.1 $ 146.0 (7) % $ 385.3 $ 403.1 (4) %
U.S. Retail Coffee 210.7 189.5 11 595.4 500.9 19
U.S. Retail Consumer Foods 110.9 84.2 32 377.7 256.6 47
International and Away From Home 24.5 49.0 (50) 94.9 131.7 (28)
Segment profit margin:
U.S. Retail Pet Foods 17.6 % 20.2 % 17.8 % 19.2 %
U.S. Retail Coffee 33.7 33.9 33.2 31.9
U.S. Retail Consumer Foods 24.8 19.9 26.7 20.5
International and Away From Home 10.4 18.2 13.5 16.7
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales increased $46.7 in the third quarter of 2021, reflecting favorable volume/mix, partially offset by lower net price realization and the $1.4 noncomparable impact on net sales in the prior year related to the divested Natural Balance business. The favorable volume/mix contributed 8 percentage points to net sales, primarily reflecting growth for dog snacks and cat food, driven by Milk-Bone and Pup-Peroni dog snacks, as well as Meow Mix and 9Lives cat food. Volume/mix for dog food was neutral, as growth for the Rachael Ray Nutrish brand was mostly offset by declines for private label offerings and the Natural Balance brand. Lower net price realization reduced net sales by 2 percentage points, primarily reflecting increased trade spend. Segment profit decreased $10.9, primarily reflecting the impact of an $8.1 recovery received during the third quarter of 2020 from a legal settlement related to a supplier issue. Excluding the impact of the noncomparable prior year settlement, segment profit decreased $2.8, primarily due to the impact of lower net pricing and higher costs, partially offset by favorable volume/mix.
The U.S. Retail Pet Foods segment net sales increased $68.2 in the first nine months of 2021, reflecting favorable volume/mix, partially offset by lower net price realization and the $1.4 noncomparable impact on net sales in the prior year related to the divested Natural Balance business. The favorable volume/mix contributed 5 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 $17.8, driven by lower pricing and the recovery received in the prior year from a legal settlement, partially offset by the favorable volume/mix and lower manufacturing costs.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased $67.1 in the third quarter of 2021, reflecting favorable volume/mix, which contributed 13 percentage points to net sales, related to growth for the Dunkin’, Folgers , and Café Bustelo brands. The favorable volume/mix reflects elevated at-home coffee consumption. Net price realization reduced net sales by 1 percentage point. Segment profit increased $21.2, primarily due to the favorable volume/mix, partially offset by the lower net pricing and increased marketing expense.
The U.S. Retail Coffee segment net sales increased $223.6 in the first nine months of 2021, reflecting favorable volume/mix, which contributed 15 percentage points to net sales, related to growth for the Dunkin’, Folgers , and Café Bustelo brands. The favorable volume/mix primarily reflects elevated at-home coffee consumption. Net price realization reduced net sales by 1 percentage point. Segment profit increased $94.5, primarily due to the favorable volume/mix.
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U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales increased $24.7 in the third quarter of 2021, inclusive of the impact of $36.2 of noncomparable net sales in the prior year related to the divested Crisco business. Excluding the noncomparable impact of the divested business, net sales increased $60.9, or 16 percent, primarily due to favorable volume/mix, which contributed 10 percentage points to net sales, driven by elevated at-home consumption for Smucker’s Uncrustables ® frozen sandwiches, Jif peanut butter, and Smucker’s fruit spreads. Higher net pricing increased net sales by 5 percentage points, primarily reflecting the impact of a peanut butter list price increase taken during the second quarter of 2021. Segment profit increased $26.7, reflecting the increased contribution from volume/mix, a favorable net impact of higher pricing and increased input costs, and a $7.5 write-off of equipment related to the discontinuation of Jif Power Ups ® during the third quarter of 2020. These increases were partially offset by the noncomparable segment profit in the prior year related to the divested Crisco business and increased marketing expense.
The U.S. Retail Consumer Foods segment net sales increased $164.7 in the first nine months of 2021, inclusive of the impact of $36.2 of noncomparable net sales in the prior year related to the divested Crisco business. Excluding the noncomparable impact of the divested business, net sales increased $200.9, or 17 percent, primarily due to favorable volume/mix, which contributed 12 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 primarily reflects elevated at-home consumption. Higher net pricing increased net sales by 4 percentage points, primarily driven by the impact of the peanut butter list price increase and reduced promotional activity for the Jif brand. S egment profit increased $121.1, reflecting the increased contribution from volume/mix, the favorable impact of higher net pricing, and the lapping of the write-off of equipment related to the discontinuation of Jif Power Ups during the third quarter of 2020, partially offset by the noncomparable segment profit in the prior year related to the divested Crisco business.
International and Away From Home
International and Away From Home net sales decreased $34.1 in the third quarter of 2021, inclusive of the impact of $4.5 of noncomparable net sales in the prior year related to the divested Crisco business. Excluding this noncomparable impact of the divested business, net sales decreased $29.6, primarily reflecting a 27 percent decline for the Away From Home operating segment, partially offset by net sales growth of 9 percent for the International operating segment. Unfavorable volume/mix for the combined businesses reduced net sales by 11 percentage points, primarily driven by declines for coffee and portion control products in away from home channels. Net price realization reduced net sales by 1 percentage point, and foreign currency exchange contributed a 1 percentage point increase to net sales. Segment profit decreased $24.5, reflecting the net impact of higher costs and lower pricing and the unfavorable volume/mix.
International and Away From Home net sales decreased $83.0 in the first nine months of 2021, inclusive of the impact of $4.5 of noncomparable net sales in the prior year related to the divested Crisco business. Excluding this noncomparable impact of the divested business, net sales decreased $78.5, primarily reflecting a 28 percent decline for the Away From Home operating segment, partially offset by net sales growth of 12 percent for the International operating segment, most notably for flour and baking ingredients. Unfavorable volume/mix for the combined businesses reduced net sales by 10 percentage points, primarily driven by coffee, portion control, and sweetener products in away from home channels, partially offset by flour and baking ingredients in the International operating segment. Segment profit decreased $36.8, 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 January 31, 2021, total cash and cash equivalents was $501.5, compared to $391.1 at April 30, 2020.
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The following table presents selected cash flow information.
Nine Months Ended January 31,
2021 2020
Net cash provided by (used for) operating activities $ 1,274.0 $ 967.1
Net cash provided by (used for) investing activities 419.1 (177.6)
Net cash provided by (used for) financing activities (1,590.6) (816.1)
Net cash provided by (used for) operating activities $ 1,274.0 $ 967.1
Additions to property, plant, and equipment (198.7) (192.9)
Free cash flow (A)
$ 1,075.3 $ 774.2
(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 $306.9 increase in cash provided by operating activities in the first nine 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 and timing of payments related to income taxes, partially offset by an increase in trade receivables due to the timing of sales and payments.
Cash provided by investing activities in the first nine months of 2021 consisted of net proceeds from the divestitures of the Crisco and Natural Balance businesses of $569.3 and a decrease of $48.8 in our derivative cash margin account balances, partially offset by $198.7 in capital expenditures. 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 financing activities in the first nine months of 2021 consisted primarily of long-term debt repayments of $700.0, purchase of treasury shares of $504.1, dividend payments of $304.8, and a net decrease in short-term borrowings of $82.4. 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.
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 January 31, 2021, $260.2 of our outstanding payment obligations were elected and sold to a financial institution by participating suppliers. During the first nine months of 2021, we paid $465.0 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 January 31, 2021. Based on the information known to date, with the exception of the matters discussed below, we do not believe the final outcome of these proceedings will have a material adverse effect on our financial position, results of operations, or cash flows.
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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 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 submitted its formal notice to appeal on November 20, 2020.
We are also defendants in nine pending putative class action lawsuits filed in federal courts in California, Florida, Illinois, Missouri, Texas, Washington, and Washington D.C. The plaintiffs in those actions 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. Similar claims have been asserted against certain retailers of our Folgers coffee products, and indemnity claims have been asserted by such retailers against us. Various other potential plaintiffs have threatened to assert similar claims against us.
The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as of January 31, 2021, 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.
Capital Resources
The following table presents our capital structure.
January 31, 2021 April 30, 2020
Current portion of long-term debt $ 755.4 $ —
Short-term borrowings 166.0 248.0
Long-term debt, less current portion 3,915.3 5,373.3
Total debt $ 4,836.7 $ 5,621.3
Shareholders’ equity 8,211.6 8,190.9
Total capital $ 13,048.3 $ 13,812.2
During the third quarter of 2021, we prepaid, in full, the remaining outstanding balance of the $1.5 billion Term Loan that was entered into in April 2018 to partially finance the Ainsworth acquisition. During the three and nine months ended January 31, 2021, we prepaid $200.0 and $700.0 on the Term Loan, respectively.
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 January 31, 2021, we had $166.0 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 8: Debt and Financing Arrangements.
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 remained available for repurchase pursuant to prior authorizations of the Board, for a total of 8.6 million common shares available for repurchase. Under our repurchase program, 4.5 million common shares were repurchased for $521.9 between December 2, 2020, and January 29, 2021, of which 0.2 million common shares will be settled during the fourth quarter of 2021. Included in the total repurchases during the third quarter of 2021 were 2.0 million common shares repurchased under a 10b5-1 plan entered into on December 30, 2020. These repurchases were transacted by a broker based upon the guidelines and parameters of the 10b5-1 plan. At January 31, 2021, approximately 4.1 million common shares remain available
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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 January 31, 2021, total cash and cash equivalents of $121.5 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: 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 related to the sale of a business; 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, such as the permanent tax impacts associated with the Crisco and Natural Balance divestitures, 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.
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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,
2021 2020 2021 2020
Gross profit reconciliation:
Gross profit $ 809.4 $ 760.0 $ 2,403.0 $ 2,213.6
Unallocated derivative losses (gains) (33.8) (7.7) (81.5) (37.6)
Adjusted gross profit $ 775.6 $ 752.3 $ 2,321.5 $ 2,176.0
Operating income reconciliation:
Operating income $ 406.2 $ 289.0 $ 1,148.1 $ 876.4
Amortization 57.0 58.8 176.1 176.4
Other intangible assets impairment charge — 52.4 — 52.4
Gain on divestitures – net (27.2) — (27.2) —
Unallocated derivative losses (gains) (33.8) (7.7) (81.5) (37.6)
Other special project costs 1.7 3.3 1.7 9.9
Adjusted operating income $ 403.9 $ 395.8 $ 1,217.2 $ 1,077.5
Net income reconciliation:
Net income $ 261.5 $ 187.4 $ 729.3 $ 553.2
Income tax expense 100.0 55.1 249.3 175.1
Amortization 57.0 58.8 176.1 176.4
Other intangible assets impairment charge — 52.4 — 52.4
Gain on divestitures – net (27.2) — (27.2) —
Unallocated derivative losses (gains) (33.8) (7.7) (81.5) (37.6)
Other special project costs 1.7 3.3 1.7 9.9
Other one-time items:
Pension plan termination settlement charge (A)
— — 27.9 —
Adjusted income before income taxes $ 359.2 $ 349.3 $ 1,075.6 $ 929.4
Income taxes, as adjusted 82.9 80.8 256.1 223.7
Adjusted income $ 276.3 $ 268.5 $ 819.5 $ 705.7
Weighted-average shares – assuming dilution 112.6 114.0 113.6 114.0
Adjusted earnings per share – assuming dilution $ 2.45 $ 2.35 $ 7.21 $ 6.19
(A) Represents the nonrecurring pre-tax settlement charge of $27.9 related to the purchase of a group annuity contract to transfer our Canadian defined benefit pension plan obligations to an insurance company. For additional information, see Note 9: 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 January 31, 2021, 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.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.