J M SMUCKER Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Dollars and shares in millions, unless otherwise noted, except per share data) This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three months ended July 31, 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. Under our ownership, the business generated net sales of $198.9 in 2021, primarily included in the U.S. Retail Consumer Foods segment. We received net proceeds from the divestiture of $530.2, which were net of cash transaction costs and a working capital adjustment. Upon completion of this transaction, we recognized a pre-tax gain of $114.8 during the second half of 2021. On January 29, 2021, we sold the Natural Balance premium pet food business to Nexus. The transaction included pet food products sold under the Natural Balance brand, certain trademarks and licensing agreements, and select employees who supported the Natural Balance business. Under our ownership, the business generated net sales of $156.7 in 2021, included in the U.S. Retail Pet Foods segment. We received net proceeds from the divestiture of $33.8, which were net of cash transaction costs and a working capital adjustment. Upon completion of this transaction, we recognized a pre-tax loss of $89.5 during the second half of 2021. 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 novel coronavirus (“COVID-19”) throughout the United States and the international community has had, and will continue to have, an impact on financial markets, economic conditions, and portions of our business and industry. During calendar year 2021, state governments reopened their economies, while adhering to new guidelines and enhanced safety measures, such as social distancing, face mask protocols, and vaccination recommendations. However, in recent months, there has been a general uptick in U.S. cases, and as a result, consumers continue to stay at home more frequently as a precaution, leading to the demand of at-home food consumption remaining elevated, though the impact is of a lesser extent as compared to the prior year. As a result of elevated consumption, the supply chain network continues to be challenged due to rising COVID-19 cases and increasing labor shortages, negatively impacting our business and the overall industry. We anticipate this consumer behavior and at-home food consumption will continue through 2022, with the extent to which it remains elevated dependent on vaccination rates and effectiveness, as well as the impact of additional COVID-19 variants. We are continuing the 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. All of our production operations remain open, and none have experienced significant disruptions or labor reductions related to COVID-19. During the first quarter of 2022, we have experienced increased disruption in our supply chain network, including the supply of certain ingredients, packaging, and other sourced materials, which has resulted in higher than expected inflation, including escalating transportation and other supply chain costs, as well as unfavorable volume/mix, as we transition from the unprecedented demand for our products in the prior year period. 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, as well as labor shortages. We also continue to work closely with our customers and external business partners, taking additional actions to ensure safety and business continuity and maximize product availability. We have maintained production at all of our facilities and availability of 19 Table of Contents appointments at distribution centers. Furthermore, we have implemented measures to manage order volumes to ensure a consistent supply across our retail partners during this period of high demand. During the first three months of 2022, order levels continued to be elevated, primarily across our U.S. Retail Consumer Foods and U.S. Retail Coffee segments, in response to the increased consumer demand for our products related to the elevated at-home consumption. It is anticipated that the increase in consumer demand will continue, to a lesser extent compared to the prior year, through the remainder of 2022. 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 calendar year 2021, our net sales for the away from home channels have continued to improve compared to the initial months of the pandemic, as experienced during the first quarter of 2022. This trend could moderate during 2022 if cases continue to rise and governments impose additional safety measures that further impact away from home consumption, which is partially dependent upon vaccination rates and effectiveness, as well as the impact of additional COVID-19 variants. 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; vaccination rates 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, including labor availability, consolidated results of operations, financial condition, and liquidity. Results of Operations Three Months Ended July 31, 2021 2020 % Increase (Decrease) Net sales $ 1,858.0 $ 1,971.8 (6) % Gross profit $ 639.4 $ 775.4 (18) % of net sales 34.4 % 39.3 % Operating income $ 259.4 $ 361.1 (28) % of net sales 14.0 % 18.3 % Net income: Net income $ 153.9 $ 237.0 (35) Net income per common share – assuming dilution $ 1.42 $ 2.08 (32) Adjusted gross profit (A) $ 646.2 $ 759.2 (15) % of net sales 34.8 % 38.5 % Adjusted operating income (A) $ 323.4 $ 404.5 (20) % of net sales 17.4 % 20.5 % Adjusted income: (A) Income $ 205.8 $ 270.0 (24) Earnings per share – assuming dilution $ 1.90 $ 2.37 (20) (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 July 31, 2021 2020 Increase (Decrease) % Net sales $ 1,858.0 $ 1,971.8 $ (113.8) (6) % Crisco divestiture — (79.5) 79.5 4 Natural Balance divestiture — (56.0) 56.0 3 Foreign currency exchange (10.4) — (10.4) (1) Net sales excluding divestitures and foreign currency exchange (A) $ 1,847.6 $ 1,836.3 $ 11.3 1 % 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. 20 Table of Contents Net sales in the first three months of 2022 decreased $113.8, or 6 percent, which includes $135.5 of noncomparable net sales in the prior year related to the Crisco and Natural Balance divestitures. Net sales excluding divestitures and foreign currency exchange increased $11.3, or 1 percent. Favorable volume/mix for the Away From Home operating segment and U.S. Retail Pet Foods segment was partially offset by unfavorable volume/mix for the International operating segment and U.S. Retail Coffee segment. A slight benefit from net price realization primarily reflected higher net pricing in the U.S. Retail Consumer Foods segment, mostly offset by lower net pricing in the U.S. Retail Coffee segment. Operating Income The following table presents the components of operating income as a percentage of net sales. Three Months Ended July 31, 2021 2020 Gross profit 34.4 % 39.3 % Selling, distribution, and administrative expenses: Marketing 5.3 % 6.2 % Selling 3.3 3.3 Distribution 3.7 3.5 General and administrative 5.1 5.1 Total selling, distribution, and administrative expenses 17.4 % 18.1 % Amortization 3.0 3.0 Other special project costs 0.1 — Other operating expense (income) – net (0.1) (0.1) Operating income 14.0 % 18.3 % Amounts may not add due to rounding. Gross profit decreased $136.0, or 18 percent, in the first quarter of 2022, reflecting higher costs, primarily driven by increased commodity and transportation costs, the noncomparable impact related to the Crisco and Natural Balance divestitures, and unfavorable volume/mix. Operating income decreased $101.7, or 28 percent, primarily reflecting the decrease in gross profit, partially offset by a $33.5 decrease in selling, distribution, and administrative (“SD&A”) expenses, primarily attributable to decreased marketing expense. Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets; special project costs; gains and losses related to the sale of a business; the change in net cumulative unallocated derivative gains and losses; and other one-time items that do not directly reflect ongoing operating results. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information. Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) decreased $113.0, or 15 percent, in the first quarter of 2022, primarily reflecting the exclusion of the change in net cumulative unallocated derivative gains and losses, as compared to GAAP gross profit. Operating income excluding non-GAAP adjustments (“adjusted operating income”) decreased $81.1, or 20 percent, as compared to the prior year. Interest Expense Net interest expense decreased $3.0, or 7 percent, in the first quarter of 2022, primarily as a result of reduced debt outstanding as compared to the prior year. For additional information, see “Capital Resources” in this discussion and analysis. Income Taxes Income taxes decreased $25.3, or 33 percent, in the first quarter of 2022, primarily due to the decrease in income before income taxes, partially offset by a higher effective income tax rate of 25.0 percent, as compared to 24.4 percent for the first quarter of 2021. During both the current and prior years, the effective income 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 income tax rate for 2022 of approximately 24.5 percent. For further information, refer to Note 12: Income Taxes. 21 Table of Contents Restructuring Activities A restructuring program was approved by the Board during 2021, associated with opportunities identified 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. For additional information related to these divestitures, see Note 4: Divestitures. During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close our Suffolk, Virginia, production facility by the end of 2022, as a result of a new strategic partnership for the production of our Away From Home liquid coffee products. We expect to incur costs of approximately $85.0 associated with the restructuring activities approved to date. Approximately half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation, while the remainder represents employee-related costs. We anticipate the activities associated with this restructuring program will be completed by the end of 2023, with the majority of the costs expected to be incurred by the end of 2022. We have incurred total cumulative restructuring costs of $30.5, of which $6.4 were incurred during the first quarter of 2022. For further information, refer to Note 3: Integration and Restructuring Costs. Segment Results We have three reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods. The presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable. The U.S. Retail Pet Foods segment primarily includes the domestic sales of Rachael Ray Nutrish, Meow Mix , Milk-Bone , 9Lives , Kibbles ’n Bits , Pup-Peroni , and Nature’s Recipe branded products; the U.S. Retail Coffee segment primarily includes the domestic sales of Folgers, Dunkin’, and Café 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). Three Months Ended July 31, 2021 2020 % Increase (Decrease) Net sales: U.S. Retail Pet Foods $ 648.0 $ 692.6 (6) % U.S. Retail Coffee 543.2 570.9 (5) U.S. Retail Consumer Foods 435.6 489.2 (11) International and Away From Home 231.2 219.1 6 Segment profit: U.S. Retail Pet Foods $ 79.9 $ 125.3 (36) % U.S. Retail Coffee 151.3 182.6 (17) U.S. Retail Consumer Foods 118.7 131.5 (10) International and Away From Home 32.9 30.9 6 Segment profit margin: U.S. Retail Pet Foods 12.3 % 18.1 % U.S. Retail Coffee 27.9 32.0 U.S. Retail Consumer Foods 27.2 26.9 International and Away From Home 14.2 14.1 U.S. Retail Pet Foods The U.S. Retail Pet Foods segment net sales decreased $44.6 in the first quarter of 2022, inclusive of the impact of $56.0 of noncomparable net sales in the prior year related to the divested Natural Balance business. Excluding the noncomparable impact of the divested business, net sales increased $11.4, or 2 percent, primarily due to favorable volume/mix, which contributed 2 percentage points to net sales, primarily driven by growth for the Meow Mix, Milk-Bone , and Pup-Peroni brands, as well as private label pet food, partially offset by declines for the Rachael Ray Nutrish and Kibbles ’n Bits brands. Net price realization was neutral. Segment profit decreased $45.4, primarily reflecting higher commodity and transportation costs. 22 Table of Contents U.S. Retail Coffee The U.S. Retail Coffee segment net sales decreased $27.7 in the first quarter of 2022, driven by lower net price realization and unfavorable volume/mix. Net price realization reduced net sales by 3 percentage points, reflecting increased trade spend related to the lapping of suspended promotions in the prior year. Volume/mix reduced net sales by 2 percentage points, reflecting the lapping of retailer inventory re-stocking in the prior year, driven by declines for the Folgers brand, partially offset by growth for the Dunkin’ and Café Bustelo brands. Segment profit decreased $31.3, reflecting lower net pricing, higher commodity costs, and unfavorable volume/mix, partially offset by lower marketing expense. U.S. Retail Consumer Foods The U.S. Retail Consumer Foods segment net sales decreased $53.6 in the first quarter of 2022, inclusive of the impact of $71.7 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 $18.1, or 4 percent. Higher net price realization contributed 4 percentage points to net sales, primarily driven by peanut butter and Smucker’s Uncrustables ® frozen sandwiches. Volume/mix was neutral, as growth for Smucker’s Uncrustables frozen sandwiches and Jif peanut butter was mostly offset by a decline for Smucker’s fruit spreads. Segment profit decreased $12.8, reflecting the noncomparable segment profit in the prior year related to the divested Crisco business and higher transportation, commodity, and packaging costs, partially offset by the higher net pricing and lower marketing expense. International and Away From Home International and Away From Home net sales increased $12.1 in the first quarter of 2022, including the noncomparable impact of $7.8 of net sales in the prior year related to the divested Crisco business and $10.4 of favorable foreign currency exchange. Excluding the noncomparable impact of the divested business and foreign currency exchange, net sales increased $9.5, or 4 percent, primarily reflecting a 27 percent increase for the Away From Home operating segment, partially offset by a net sales decline of 12 percent for the International operating segment. Favorable volume/mix for the combined businesses contributed 3 percentage points to net sales, primarily driven by growth for portion control, coffee, and frozen handheld products in the away from home channels, partially offset by declines for baking mixes and ingredients in the International operating segment. Net price realization contributed a 1 percentage point increase to net sales. Segment profit increased $2.0, primarily reflecting the favorable foreign currency exchange impact, lower marketing expense, and a favorable impact of net pricing and costs, partially offset by the noncomparable segment profit in the prior year related to the divested Crisco business and unfavorable volume/mix. Financial Condition – Liquidity and Capital Resources Liquidity Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility. At July 31, 2021, total cash and cash equivalents was $168.8, compared to $334.3 at April 30, 2021. The following table presents selected cash flow information. Three Months Ended July 31, 2021 2020 Net cash provided by (used for) operating activities $ 137.8 $ 409.0 Net cash provided by (used for) investing activities (80.0) (49.2) Net cash provided by (used for) financing activities (223.3) (357.3) Net cash provided by (used for) operating activities $ 137.8 $ 409.0 Additions to property, plant, and equipment (68.0) (76.6) Free cash flow (A) $ 69.8 $ 332.4 (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 $271.2 decrease in cash provided by operating activities in the first three months of 2022 was primarily driven by greater working capital requirements in 2022, as well as lower net income adjusted for noncash items in the current year. The increase 23 Table of Contents in cash required to fund working capital, as compared to the prior year, was primarily attributable to an increase in trade receivables due to the timing of payments and an increase in inventory levels. Cash used for investing activities in the first three months of 2022 consisted primarily of $68.0 in capital expenditures and an increase of $11.4 in our derivative cash margin account balances. 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 financing activities in the first three months of 2022 consisted primarily of long-term debt repayments of $407.0 and dividend payments of $97.2, partially offset by a net increase in short-term borrowings of $284.0. 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. Supplier Financing Program As part of ongoing efforts to maximize working capital, we work with our suppliers to optimize our terms and conditions, which includes the extension of payment terms. Payment terms with our suppliers, which we deem to be commercially reasonable, range from 0 to 180 days. During 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, 2021 and April 30, 2021, $278.2 and $304.2 of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers. During the first three months of 2022 and 2021, we paid $267.7 and $122.1, respectively, 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 2019 and 2020. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at July 31, 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 would have a material adverse effect on our financial position, results of operations, or cash flows. In addition to the legal proceedings discussed above, we are currently a defendant in CERT v. Brad Barry LLC, et al., which alleges that we, in addition to the Defendants who manufacture, package, distribute, or sell packaged coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. CERT sought equitable relief, including warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65. In addition, CERT asserted that every consumed cup of coffee, absent a compliant warning, was equivalent to a violation under Proposition 65. In June 2019, the state agency responsible for administering the Proposition 65 program, OEHHA, approved a regulation clarifying that cancer warnings are not required for coffee under Proposition 65, and in August 2020, the trial court granted the Defendants’ motion for summary judgment based on the regulation. CERT appealed the ruling in November 2020 to the California Court of Appeals for the Second Appellate District, which is currently pending. We are also defendants in 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. Five of the lawsuits have been transferred to the United States District Court for the Western District of Missouri for coordinated pre-trial proceedings. 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. 24 Table of Contents The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as of July 31, 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. July 31, 2021 April 30, 2021 Current portion of long-term debt $ 751.6 $ 1,152.9 Short-term borrowings 366.0 82.0 Long-term debt, less current portion 3,517.5 3,516.8 Total debt $ 4,635.1 $ 4,751.7 Shareholders’ equity 8,170.3 8,124.8 Total capital $ 12,805.4 $ 12,876.5 During the first quarter of 2022, we prepaid $400.0 in principal of the Senior Notes due March 15, 2022, and as a result, we recognized a net loss on extinguishment of $6.9, which primarily consisted of a make-whole payment and was included in other income (expense) – net in the Condensed Statement of Consolidated Income. As of July 31, 2021, we had available a $1.8 billion unsecured revolving credit facility with a group of 11 banks that was scheduled to mature 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 is used as a continuing source of short-term financing for general corporate purposes. As of July 31, 2021, we had $366.0 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. Subsequent to the first quarter of 2022, we entered into an unsecured revolving credit facility with a group of 11 banks, which provides for a revolving credit line of $2.0 billion and matures in August 2026. As a result of entering into the new facility in August 2021, we terminated the $1.8 billion revolving credit facility. Furthermore, in conjunction with entering into the new unsecured revolving credit facility, we also increased our commercial paper program to $2.0 billion. We are in compliance with all of our debt covenants as of July 31, 2021. For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 7: Debt and Financing Arrangements. During the first quarter of 2022, we did not repurchase any common shares under a repurchase plan authorized by the Board. At July 31, 2021, approximately 2.8 million common shares remain available for repurchase pursuant to the Board’s authorizations. There is no guarantee as to the exact number of shares that may be repurchased or when such purchases may occur. Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations, borrowings available under our revolving credit facility and commercial paper program, and access to capital markets, will be sufficient to meet our cash requirements for the next 12 months, including the payment of quarterly dividends, principal and interest payments on debt outstanding, and capital expenditures. However, as a result of 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. We continue to evaluate these risks, which could affect our financial condition or our ability to fund operations or future investment opportunities. As of July 31, 2021, total cash and cash equivalents of $17.3 was held by our foreign subsidiaries, primarily in Canada. 25 Table of Contents 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; the change in net cumulative unallocated derivative gains and losses; and other one-time items that do not directly reflect ongoing operating results. Income taxes, as adjusted is calculated using an adjusted effective income tax rate that is applied to adjusted income before income taxes and reflects the exclusion of the previously discussed items, as well as any adjustments for one-time tax-related activities, when they occur. While this adjusted effective income tax rate does not generally differ materially from our GAAP effective income tax rate, certain exclusions from non-GAAP results can significantly impact our adjusted effective income tax rate. These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with U.S. GAAP. Rather, the presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our businesses and facilitate the comparison of past and present operations and liquidity. These non-GAAP financial measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments. The following table reconciles certain non-GAAP measures to the comparable GAAP financial measure. See page 20 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure. Three Months Ended July 31, 2021 2020 Gross profit reconciliation: Gross profit $ 639.4 $ 775.4 Change in net cumulative unallocated derivative gains and losses 2.2 (16.2) Cost of products sold – special project costs 4.6 — Adjusted gross profit $ 646.2 $ 759.2 Operating income reconciliation: Operating income $ 259.4 $ 361.1 Amortization 55.4 59.6 Change in net cumulative unallocated derivative gains and losses 2.2 (16.2) Cost of products sold – special project costs 4.6 — Other special project costs 1.8 — Adjusted operating income $ 323.4 $ 404.5 Net income reconciliation: Net income $ 153.9 $ 237.0 Income tax expense 51.3 76.6 Amortization 55.4 59.6 Change in net cumulative unallocated derivative gains and losses 2.2 (16.2) Cost of products sold – special project costs 4.6 — Other special project costs 1.8 — Adjusted income before income taxes $ 269.2 $ 357.0 Income taxes, as adjusted 63.4 87.0 Adjusted income $ 205.8 $ 270.0 Weighted-average shares – assuming dilution 108.4 114.1 Adjusted earnings per share – assuming dilution $ 1.90 $ 2.37 26 Table of Contents 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 July 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, 2021. 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, 2021. There were no material changes to the information previously disclosed.