What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-23 compared with 2022-03-01 · 117 added, 200 removed, 197 unchanged (62% of the section changed)

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(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, 2022 and 2021.

This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three months ended July 31, 2022 and 2021.

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

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Retail Consumer Foods segment.

Net proceeds from the divestiture were $97.3, which were inclusive of a preliminary working capital adjustment and cash transaction costs, and will be finalized during the fourth quarter of 2022.

Upon completion of this transaction, we recognized a pre-tax gain of $26.7 during the third quarter of 2022, which was included in other operating expense (income) – net within the Condensed Statement of Consolidated Income.

Final net proceeds from the divestiture were $98.7, which were inclusive of a working capital adjustment and cash transaction costs.

We recognized a pre-tax gain of $28.3 related to the natural beverage and grains businesses, including $1.6 during the three months ended July 31, 2022, within other operating expense (income) – net in the Condensed Statement of Consolidated Income, upon finalization of the working capital adjustment.

The remaining pre-tax gain was recognized during the second half of 2022.

On December 1, 2021, we sold the private label dry pet food business to Diamond Pet Foods.

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Final net proceeds from the divestiture were $32.9, which were net of cash transaction costs.

Upon completion of this transaction, we recognized a pre-tax loss of $17.1 during the third quarter of 2022, which was 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 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.

Final net proceeds from the divestiture were $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, of which $87.7 was recognized during the third quarter of 2021 and was included in other operating expense (income) – net within the Condensed Statement of Consolidated Income.

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.

Final net proceeds from the divestiture were $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, of which $114.9 was recognized during the third quarter of 2021 and was included in other operating expense (income) – net within the Condensed Statement of Consolidated Income.

Upon completion of this transaction during the third quarter of 2022, we recognized a pre-tax loss of $17.1.

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

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

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 requirements.

However, there was a significant number of U.S.

cases in late calendar year 2021 and early calendar year 2022, and as a result, consumers stayed at home more frequently as a precaution, causing the demand related to at-home food consumption to remain elevated, though the impact is of a lesser extent as compared to the prior year.

While we continue to benefit from elevated consumption, the supply chain

network remains challenged due to the increased demand and supply pressures, as well as COVID-19 cases and increasing labor shortages, which continue to negatively impact our business and overall industry.

We anticipate this consumer behavior and at-home food consumption will continue, to some extent, through 2022, dependent on government guidance regarding risk mitigation measures, vaccination rates and effectiveness, and the impact of additional COVID-19 variants.

In September 2021, the U.S.

President issued an executive order applicable to federal contractors and employers with 100 or more employees.

As a result, we announced a vaccination mandate that required all employees to be vaccinated or have received an approved medical or religious exemption as early as December 2021, and no later than March 2022, dependent upon location.

We fully implemented the mandate for salaried employees in December 2021, prior to the U.S.

Supreme Court’s ruling in January 2022 to block the federal mandate.

However, we lifted the mandate that required hourly employees to be vaccinated by March 2022 to support business continuity across our operations.

Furthermore, we are continuing a phased approach to reopen our corporate headquarters in Orrville, Ohio, with increased safety protocols, and as a result, occupancy levels are beginning to increase.

During the remainder of the year, we anticipate occupancy levels will gradually increase as our office-based employees transition to a hybrid work schedule.

We continue to monitor the latest public health and government guidance related to COVID-19 and will adjust our approach and safety protocols, as needed.

We have crisis management teams at all our facilities, which continue to monitor their respective locations and implement additional risk mitigation actions, as necessary.

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

During the first nine months of 2022, we 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.

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, inclusive of attrition related to the implementation of vaccination requirements.

Trends Affecting our Business

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

During 2022, we experienced significant input cost inflation and a dynamic macroeconomic environment, which we anticipate will persist through 2023.

In addition, the higher costs required us to implement material price increases across all of our businesses in 2022, and we anticipate the price elasticity of demand will continue to increase during 2023 as consumers respond to broader inflation pressures.

During the first three months of 2023, we continued to experience disruption in our supply chain network, including labor shortages and the supply of certain ingredients, packaging, and other sourced materials, which has resulted in the continued elevation of transportation and other supply chain costs.

It is possible that more significant disruptions could occur if the COVID-19 pandemic and certain geopolitical events continue to impact markets around the world, including the impact of e-commerce pressures on freight charges and potential shipping delays due to supply and demand imbalances, as well as labor shortages.

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

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However, to the extent that high demand levels or the current supply chain environment continues to disrupt order fulfillment, we may experience volume loss and elevated penalties.

During the first nine months of 2022, customer order levels remain 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 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, 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 nine months of 2022.

This trend could moderate during the remainder of 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;

Although we do not have any operations in Russia or Ukraine, we continue to monitor the environment for any significant escalation or expansion of economic or supply chain disruptions, as well as broader inflationary costs.

During the first three months of 2023, the conflict between Russia and Ukraine primarily impacted the price of grains, oils, and fat-based products, which may continue to have an adverse impact on our results of operations during 2023.

Overall, the impact of COVID-19 and the conflict between Russia and Ukraine, including broad-based supply chain disruptions and rising levels of inflation, remain uncertain and ultimately depend on the length and severity of the conflict and the pandemic, inclusive of the introduction of new strains of the virus;

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

vaccination rates and effectiveness;

the impact of vaccination requirements;

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 and attrition, consolidated results of operations, financial condition, and liquidity.

We will continue to evaluate the nature and extent to which COVID-19 and the conflict between Russia and Ukraine will impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity.

Results of Operations

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

2022 2021 % Increase (Decrease) 2022 2021 % Increase (Decrease)

Three Months Ended July 31,

2022 2021 % Increase (Decrease)

Net sales $ 1,873.0 $ 1,858.0 1 %

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

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

Three Months Ended July 31,

2022 2021 Increase

(Decrease) % 2022 2021 Increase

Net sales $ 1,873.0 $ 1,858.0 $ 15.0 1 %

Crisco divestiture

— (34.5) 34.5 2 — (198.9) 198.9 3

Natural Balance divestiture

— (49.9) 49.9 2 — (156.7) 156.7 3

Private label dry pet food divestiture — (25.1) 25.1 1

Natural beverage and grains divestiture — (33.4) 33.4 2

Foreign currency exchange 4.4 — 4.4 —

Net sales excluding divestitures

and foreign currency exchange (A)

Net sales excluding divestitures and foreign currency exchange (A)

$ 1,877.4 $ 1,799.5 $ 77.9 4 %

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

Net sales in the third quarter of 2022 decreased $19.6, or 1 percent, which includes $100.7 of noncomparable net sales in the prior year related to divestitures.

Net sales excluding divestitures and foreign currency exchange increased $79.3, or 4 percent, which was due to higher net price realization for each of our U.S.

Retail segments and for International and Away From Home, partially offset by unfavorable volume/mix.

Net sales in the first nine months of 2022 decreased $117.4, or 2 percent, which includes $371.9 of noncomparable net sales in the prior year related to divestitures.

Net sales excluding divestitures and foreign currency exchange increased $236.7, or 4 percent, which was due to higher net price realization and favorable volume/mix across all businesses, with the exception of unfavorable volume/mix for the U.S.

Retail Pet Foods segment.

Net sales in the first three months of 2023 increased $15.0, or 1 percent, which includes $58.5 of noncomparable net sales in the prior year related to divestitures.

Net sales excluding divestitures and foreign currency exchange increased $77.9, or 4 percent.

Higher net price realization contributed 14 percentage points to net sales, primarily reflecting list price increases for the U.S.

Retail Coffee, U.S Retail Pet Foods, and International and Away From Home businesses, partially offset by the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall.

The favorable net price realization was partially offset by a 9 percentage point decrease from volume/mix, primarily due to manufacturing downtime related to the recall, as well as declines for mainstream roast and ground coffee.

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,

2022 2021 2022 2021

Three Months Ended July 31,

Gross profit 29.5 % 34.4 %

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Amortization 3.0 3.0

Other intangible assets impairment charge 7.3 — 2.5 —

Other special project costs 0.1 0.1

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Amounts may not add due to rounding.

Gross profit decreased $126.3, or 16 percent, in the third quarter of 2022, reflecting higher costs, primarily driven by increased commodity, ingredient, manufacturing, and packaging costs, unfavorable volume/mix, and the noncomparable impact related to divestitures, partially offset by increased pricing.

Operating income decreased $255.6, or 63 percent, primarily reflecting a $150.4 intangible asset impairment charge and the decrease in gross profit, partially offset by a $35.7 decrease in selling, distribution, and administrative (“SD&A”) expenses.

Gross profit decreased $86.9, or 14 percent, in the first quarter of 2023, including the unfavorable impact of customer returns, fees, manufacturing downtime, and unsaleable inventory related to the Jif peanut butter product recall.

The decrease also reflects higher costs, primarily driven by increased commodity and ingredient, manufacturing, and packaging costs, unfavorable volume/mix, and the noncomparable impact related to divestitures, partially offset by increased pricing.

Operating income decreased $79.7, or 31 percent, primarily reflecting the decrease in gross profit and a $19.8 increase in selling, distribution, and administrative (“SD&A”) expenses, partially offset by a $26.8 increase in net other operating income, primarily reflecting an anticipated insurance recovery related to the Jif peanut butter product recall, as discussed in Note 14:

Contingencies.

Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, special project costs, gains and losses on divestitures, the change in net cumulative unallocated derivative gains and losses, and other one-time items that do not directly reflect ongoing operating results.

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

Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) decreased $63.3, or 8 percent, in the third 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 $26.0, or 6 percent, as compared to the prior year, further reflecting the exclusion of the impairment charge and the net pre-tax gain on divestitures.

Gross profit decreased $369.0, or 15 percent, in the first nine months of 2022, reflecting higher costs, primarily driven by increased commodity, transportation, packaging, and ingredient costs, the noncomparable impact related to divestitures, and unfavorable volume/mix, partially offset by increased pricing.

Operating income decreased $426.3, or 37 percent, primarily reflecting the decrease in gross profit and the $150.4 intangible asset impairment charge, partially offset by a $104.3 decrease in SD&A expenses.

Adjusted gross profit decreased $232.1, or 10 percent, in the first nine months of 2022, primarily reflecting the exclusion of the change in net cumulative unallocated derivative gains and losses, as compared to GAAP gross profit.

Adjusted operating income decreased $128.0, or 11 percent, as compared to the prior year, further reflecting the exclusion of the impairment charge and the net pre-tax gain on divestitures.

Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) decreased $58.8, or 9 percent, in the first quarter of 2023, primarily reflecting the exclusion of the change in net cumulative unallocated derivative gains and losses, as compared to GAAP gross profit.

Operating income excluding non-GAAP adjustments (“adjusted operating income”) decreased $53.4, or 17 percent, as compared to the prior year.

Interest Expense

Net interest expense decreased $4.0 and $11.8 in the third quarter and first nine months of 2022, respectively, primarily as a result of reduced debt outstanding as compared to the prior year.

Net interest expense decreased $4.0 in the first three months of 2023, primarily driven by prepaying the $400.0 Senior Notes due March 15, 2022, during the first quarter of 2022, partially offset by increased debt outstanding as compared to the prior year.

For additional information, see “Capital Resources” in this discussion and analysis.

Income taxes decreased $60.1, or 60 percent, in the third quarter of 2022, and decreased $95.3, or 38 percent, in the first nine months of 2022, primarily due to the decrease in income before income taxes, partially offset by a higher effective income tax rate of 36.4 and 26.4 percent for the third quarter and first nine months of 2022, respectively.

The 2021 effective income tax rates were 27.7 percent for the third quarter and 25.5 percent for the first nine months.

During the third quarter and first nine months of 2022, the effective income tax rates varied from the U.S.

statutory income tax rate of 21.0 percent, primarily due to state income taxes, including the unfavorable one-time deferred tax impact of an internal legal entity simplification to support multiple work locations for office-based employees and our continued strategic activities.

The effective income tax rates for the three and nine months ended January 31, 2021, varied from the U.S.

statutory tax rate due to the impact of state income taxes, and were also unfavorably impacted by additional net income tax expense related to the Crisco and Natural Balance divestitures during the third quarter of 2021.

Income taxes decreased $20.0, or 39 percent, in the first three months of 2023, primarily due to the decrease in income before income taxes and a lower effective income tax rate of 22.2 percent, as compared to 25.0 percent for the first quarter of 2022.

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

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

The effective income tax rate for the three months ended July 31, 2022, reflects the favorable deferred tax benefit of a state income tax rate reduction enacted during the quarter.

We anticipate a full-year effective income tax rate for 2023 of approximately 24.2 percent.

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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 the divestitures of the Crisco and Natural Balance businesses.

During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close our Suffolk, Virginia, facility as a result of a new strategic partnership for the production of our Away From Home liquid coffee products.

During the third quarter of 2022, we completed the transition of production to JDE Peet's, as anticipated.

Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the recently announced plans to close our Ripon, Wisconsin, production facility by the end of calendar year 2022 to further optimize operations for our Consumer Foods business.

A restructuring program was approved by the Board during 2021, associated with opportunities identified to reduce our overall cost structure, optimize our organizational design, and support our portfolio reshape.

This is inclusive of certain restructuring costs associated with the divestitures of the Crisco, Natural Balance , private label dry pet food, and natural beverage and grains businesses.

For additional information related to the divestitures, see Note 4:

Divestitures.

We expect to incur costs of approximately $110.0 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 calendar year 2022.

We have incurred total cumulative restructuring costs of $46.7, of which $8.8 and $22.6 were incurred during the third quarter and first nine months of 2022, respectively.

During 2022, we completed the transition of production to JDE Peet’s N.V., as anticipated.

Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the recent divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the closure of our Ripon, Wisconsin, production facility by the end of calendar year 2022 to further optimize operations for our U.S.

Retail Consumer Foods business.

We expect to incur costs of approximately $70.0 associated with the restructuring activities planned to date.

More than half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation, while the remainder represents employee-related costs.

We anticipate the planned activities associated with this restructuring program will be completed by the end of 2023.

We have incurred total cumulative restructuring costs of $55.1, of which $2.5 and $6.4 were incurred during the three months ended July 31, 2022 and 2021, respectively.

For further information, refer to Note 3:

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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 January 31, Nine Months Ended January 31,

Three Months Ended July 31,

2022 2021 % Increase

(Decrease) 2022 2021 % Increase

Retail Pet Foods $ 729.0 $ 648.0 13 %

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Retail Pet Foods

Retail Pet Foods segment net sales decreased $72.0 in the third quarter of 2022, inclusive of the impact of $66.2 of noncomparable net sales in the prior year related to the divested Natural Balance and private label dry pet food businesses.

Excluding the noncomparable impact of the divested businesses, net sales decreased $5.8, or 1 percent.

Unfavorable volume/mix decreased net sales by 7 percentage points, primarily driven by declines for dog food, which was partially offset by 6 percentage points of higher net price realization across the portfolio.

Segment profit decreased $39.4, primarily reflecting higher commodity, manufacturing, and transportation costs and the unfavorable volume/mix, partially offset by the higher net pricing.

Retail Pet Foods segment net sales decreased $123.7 in the first nine months of 2022, inclusive of the impact of $173.0 of noncomparable net sales in the prior year related to the divested Natural Balance and private label dry pet food businesses.

Excluding the noncomparable impact of the divested businesses, net sales increased $49.3, or 2 percent.

Higher net price realization across the portfolio increased net sales by 4 percentage points.

Unfavorable volume/mix decreased net sales by 1 percentage point, primarily driven by declines for dog food, partially offset by growth for the Milk-Bone and Meow Mix brands.

Segment profit decreased $110.1, primarily reflecting higher commodity, transportation, and manufacturing costs and the unfavorable volume/mix, partially offset by the higher net pricing.

Retail Pet Foods segment net sales increased $81.0 in the first three months of 2023, inclusive of the impact of $25.1 of noncomparable net sales in the prior year related to the divested private label dry pet food business.

Excluding the noncomparable impact of the divested business, net sales increased $106.1, or 17 percent.

Higher net price realization increased net sales by 20 percentage points, primarily reflecting list price increases across the portfolio, partially offset by a decreased contribution from volume/mix of 3 percentage points.

Segment profit increased $40.4, primarily reflecting the favorable net impact of higher net price realization and increased commodity and ingredient, packaging, and manufacturing costs, as well as lower marketing spend, partially offset by the unfavorable volume/mix.

Retail Coffee

Retail Coffee segment net sales increased $35.9 in the third quarter of 2022, driven by higher net price realization, partially offset by unfavorable volume/mix.

Net price realization increased net sales by 7 percentage points, primarily reflecting list price increases across the portfolio and trade spend reductions for roast and ground products.

Volume/mix decreased net sales by 1 percentage point, driven by declines for the Folgers brand, partially offset by growth for the Café Bustelo brand.

Segment profit increased $2.7, primarily reflecting higher net pricing, partially offset by higher commodity costs and the

unfavorable volume/mix.

Retail Coffee segment net sales increased $58.6 in the first nine months of 2022.

Net price realization contributed 3 percentage points to net sales, primarily reflecting list price increases across the portfolio and trade spend reductions for roast and ground products, partially offset by increased trade spend related to the lapping of suspended promotions in the prior year.

Favorable volume/mix contributed 1 percentage point to net sales, driven by the Dunkin’ and Café Bustelo brands, partially offset by a decline for the Folgers brand.

Segment profit decreased $22.9, reflecting higher commodity costs, partially offset by higher net pricing and lower marketing expense.

Retail Coffee segment net sales increased $54.7 in the first three months of 2023.

Net price realization contributed 24 percentage points to net sales, primarily reflecting list price increases across the portfolio.

Unfavorable volume/mix decreased net sales by 14 percentage points, primarily driven by the Folgers and Dunkin’ brands.

Segment profit decreased $5.4, primarily reflecting the unfavorable volume/mix and increased marketing investment, partially offset by a favorable net impact of higher net price realization and increased commodity costs.

Retail Consumer Foods

Retail Consumer Foods segment net sales decreased $14.5 in the third quarter of 2022, inclusive of the impact of $31.7 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 $17.2, or 4 percent.

Higher net price realization contributed 7 percentage points of growth to net sales, primarily driven by Smucker’s Uncrustables ® frozen sandwiches and Smucker’s fruit spreads.

Volume/mix decreased net sales by 2 percentage points, driven by Jif peanut butter and Smucker’s fruit spreads, partially offset by an increase for Smucker’s Uncrustables frozen sandwiches.

Segment profit decreased $11.4, reflecting the noncomparable segment profit in the prior year related to the divested Crisco business.

Comparable segment profit growth from the higher net pricing and lower marketing spend was mostly offset by higher ingredient, manufacturing, commodity, and packaging costs.

Retail Consumer Foods segment net sales decreased $106.0 in the first nine months of 2022, inclusive of the impact of $178.5 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 $72.5, or 6 percent.

Higher net price realization contributed 5 percentage points to net sales, primarily driven by Smucker’s Uncrustables frozen sandwiches, Smucker’s fruit spreads, and Jif peanut butter.

Volume/mix increased net sales by 1 percentage point, driven by Smucker’s Uncrustables frozen sandwiches, partially offset by a decline for Smucker’s fruit spreads.

Segment profit decreased $48.5, reflecting the noncomparable segment profit in the prior year related to the divested Crisco business.

Comparable segment profit growth from the higher net pricing, lower marketing spend, and favorable volume/mix was partially offset by higher ingredient, manufacturing, transportation, and packaging costs.

Retail Consumer Foods segment net sales decreased $124.5 in the first three months of 2023, inclusive of the impact of $31.4 of noncomparable net sales in the prior year related to the divested natural beverage and grains businesses.

Excluding the noncomparable impact of the divested businesses, net sales decreased $93.1, or 23 percent.

Volume/mix decreased net sales by 20 percentage points, primarily driven by manufacturing downtime for Jif peanut butter, partially offset by an increase for Smucker’s Uncrustables ® frozen sandwiches.

Furthermore, lower net price realization decreased net sales by 3 percentage points, primarily driven by Jif peanut butter, inclusive of the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall, partially offset by list price increases across the remainder of the portfolio.

Segment profit decreased $63.9, primarily reflecting the impact of the recall and the noncomparable segment profit in the prior year related to the divested natural beverage and grains businesses.

Excluding the estimated unfavorable impact of the recall and divested businesses, segment profit increased primarily due to a net favorable impact of higher net price realization and higher commodity and ingredient, manufacturing, and packaging costs, as well as favorable volume/mix.

International and Away From Home

International and Away From Home net sales increased $31.0 in the third quarter of 2022, including the noncomparable impact of $2.8 of net sales in the prior year related to the divested Crisco business and $1.8 of favorable foreign currency exchange.

Excluding the noncomparable impact of the divested business and foreign currency exchange, net sales increased $32.0, or 14 percent, primarily reflecting increases for the Away From Home and International operating segments of 29 percent and 1 percent, respectively.

Favorable volume/mix for the combined businesses contributed 10 percentage points to net sales, primarily driven by increases for portion control and coffee products in the away from home channels.

Net price realization contributed a 4 percentage point increase to net sales for the combined businesses.

Segment profit increased $9.7, primarily reflecting higher net pricing.

International and Away From Home net sales increased $53.7 in the first nine months of 2022, including the noncomparable impact of $20.4 of net sales in the prior year related to the divested Crisco business and $17.8 of favorable foreign currency exchange.

Excluding the noncomparable impact of the divested business and foreign currency exchange, net sales increased $56.3, or 8 percent, primarily reflecting a 27 percent increase for the Away From Home operating segment, partially offset by a 7 percent decrease for the International operating segment.

Favorable volume/mix for the combined businesses contributed 6 percentage points to net sales, primarily driven by increases for portion control and coffee products in the away from home channels, partially offset by a decrease for baking mixes and ingredients in the International operating segment.

Net price realization contributed a 2 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products in the away from home channels and fruit spread products in the International operating segment.

Segment profit increased $12.6, primarily reflecting higher net pricing and the favorable foreign currency exchange impact, partially offset by the noncomparable segment profit in the prior year related to the divested Crisco business and increased commodity costs.

International and Away From Home net sales increased $3.8 in the first three months of 2023, including the noncomparable impact of $2.0 of net sales in the prior year related to the divested natural beverage and grains businesses and $4.4 of unfavorable foreign currency exchange.

Excluding the noncomparable impact of the divested businesses and foreign currency exchange, net sales increased $10.2, or 4 percent, reflecting a 15 percent increase for the Away From Home operating segment, partially offset by a 6 percent decrease for the International operating segment.

Net price realization contributed a 4 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products and baking mixes and ingredients, partially offset by the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall.

Segment profit decreased $16.3, primarily reflecting the impact of the recall and higher commodity costs, partially offset by higher net pricing.

Financial Condition – Liquidity and Capital Resources

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, 2022, total cash and cash equivalents was $284.3, compared to $334.3 at April 30, 2021.

At July 31, 2022, total cash and cash equivalents was $151.6, compared to $169.9 at April 30, 2022.

The following table presents selected cash flow information.

Nine Months Ended January 31,

Three Months Ended July 31,

Net cash provided by (used for) operating activities $ (39.0) $ 137.8

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(A) Free cash flow is a non-GAAP financial measure used by management to evaluate the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share repurchases, and other corporate purposes.

The $531.4 decrease in cash provided by operating activities in the first nine 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 in cash required to fund working capital, as compared to the prior year, was primarily attributable to timing of payments for accounts payable, an increase in inventory levels compared to the prior year, and changes in marketing and accrued incentive compensation.

Cash used for investing activities in the first nine months of 2022 consisted primarily of $244.5 in capital expenditures and an increase of $15.4 in our derivative cash margin account balances, partially offset by net proceeds from the divested private label dry pet food and the natural beverage and grains businesses of $130.2.

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 financing activities in the first nine months of 2022 consisted primarily of long-term debt repayments of $1,157.0 and dividend payments of $311.1, partially offset by $797.6 in long-term debt proceeds.

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.

The $176.8 decrease in cash provided by operating activities in the first three months of 2023 was primarily driven by the $70.0 contribution to our U.S.

qualified defined benefit pension plans during the first quarter of 2023, lower net income adjusted for noncash items in the current year, and greater working capital requirements in 2023.

The increase in cash required to fund working capital, as compared to the prior year, reflected an increase in inventory levels compared to the prior year, primarily driven by the recent input cost inflation, as well as timing of payments for trade receivables and accounts payable and a decrease in accrued incentive compensation.

Cash used for investing activities in the first three months of 2023 consisted primarily of $88.3 in capital expenditures, primarily driven by investments in the new manufacturing and distribution facilities in McCalla, Alabama, and capacity expansions in Longmont, Colorado, to support growth for the Smucker’s Uncrustables brand, as well as plant maintenance across our facilities.

Partially offsetting the use of cash in 2023 was a decrease of $12.2 in our derivative cash margin account balances.

Cash provided by investing activities in the first three months of 2022 consisted primarily of $68.0 in capital expenditures, which reflected capacity expansion at our Longmont facility, as well as plant maintenance across our facilities.

An increase of $11.4 in our derivative cash margin account balances also contributed to the use of cash in 2022.

Cash provided by financing activities in the first three months of 2023 consisted primarily of a net increase in short-term borrowings of $207.0, partially offset by dividend payments of $105.1.

Cash used for financing activities in the first three months of 2022 consisted primarily of long-term debt repayments of $407.0 and dividend payments of $97.2, partially offset by a net increase in short-term borrowings of $284.0.

Supplier Financing Program

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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.

We have an agreement with a third-party administrator to provide an accounts payable tracking system and facilitate a supplier financing program which allows participating suppliers the ability to monitor and voluntarily elect to sell our payment obligations to a designated third-party financial institution.

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

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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, 2022 and April 30, 2021, $259.9 and $304.2 of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers.

During the first nine months of 2022 and 2021, we paid $774.8 and $465.0, respectively, to a financial institution for payment obligations that were settled through the supplier financing program.

As of July 31, 2022 and April 30, 2022, $353.2 and $314.3 of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers.

During the first three months of 2023 and 2022, we paid $338.8 and $267.7, respectively, to a financial institution for payment obligations that were settled through the supplier financing program.

Contingencies

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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 January 31, 2022.

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

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Their claims are premised on allegations that we have misrepresented the number of servings that can be made from various canisters of Folgers coffee on the packaging for those products.

We are a defendant in five putative class action lawsuits as a result of our voluntary recall of select Jif peanut butter products.

The plaintiffs assert causes of action for negligence, breach of warranties, fraudulent concealment, unjust enrichment, and, in some of the lawsuits, violations of state consumer protection and deceptive trade practices laws.

Their claims are premised on allegations that we engaged in business practices designed to mislead the public regarding the safety of Jif peanut butter for human consumption due to the alleged presence of salmonella.

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

Accordingly, no loss contingency has been recorded for these matters as of January 31, 2022, and the likelihood of loss is not considered probable or estimable.

Accordingly, no loss contingency has been recorded for these matters as of July 31, 2022, and the likelihood of loss is not considered probable or estimable.

However, if we are required to pay significant damages, our business and financial results could be adversely impacted, and sales of those products could suffer not only in these locations but elsewhere.

Product Recall

In May 2022, we initiated a voluntary recall of select Jif peanut butter products produced at our Lexington, Kentucky, facility and sold primarily in the U.S., due to potential salmonella contamination.

At that time, we also suspended the manufacturing of these products at our Lexington facility and temporarily paused shipments from our Memphis, Tennessee, facility.

No other products produced at our other facilities were affected by this recall.

In June 2022, we resumed manufacturing and shipping at our Lexington facility, as well as shipping from our Memphis facility.

We continue to partner with retailers to restock Jif peanut butter products as quickly as possible and anticipate a return to normal levels by the end of 2023.

In addition to the impact of manufacturing downtime, we expect to incur total direct costs of approximately $90.0 by the end of 2023, net of the remaining anticipated insurance recoveries, related to customer returns, fees, unsaleable inventory, and other product recall-related costs, primarily within our U.S.

Retail Consumer Foods segment.

Approximately $65.0 of direct costs were recognized, net of the remaining anticipated insurance recoveries, during the three months ended July 31, 2022.

We expect the majority of the remaining costs will be incurred through the third quarter of 2023.

Capital Resources

The following table presents our capital structure.

January 31, 2022 April 30, 2021

Current portion of long-term debt $ — $ 1,152.9

July 31, 2022 April 30, 2022

Short-term borrowings $ 388.0 $ 180.0

Long-term debt, less current portion 4,309.7 3,516.8

Long-term debt 4,311.5 4,310.6

Total debt $ 4,699.5 $ 4,490.6

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Total capital $ 12,843.8 $ 12,630.7

During the second quarter of 2022, we completed an offering of $800.0 in Senior Notes due March 15, 2032, and September 15, 2041.

The Senior Notes include $7.2 of capitalized debt issuance costs and $2.4 of offering discounts to be amortized to interest expense over the time for which the debt is outstanding.

The net proceeds from the offering were primarily used to repay $750.0 in principal of the Senior Notes due October 15, 2021.

Furthermore, 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.

We have available a $2.0 billion unsecured revolving credit facility with a group of 11 banks that matures in August 2026.

Additionally, we participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $2.0 billion at any time.

The commercial paper program is backed by our revolving credit facility and reduces

what we can borrow under the revolving credit facility by the amount of commercial paper outstanding.

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 January 31, 2022, we had $94.0 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 our debt covenants as of January 31, 2022, and expect to be for the next 12 months.

As of July 31, 2022, we had $388.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 2.60 percent.

We are in compliance with all our debt covenants as of July 31, 2022, and expect to be for the next 12 months.

For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 7:

Debt and Financing Arrangements.

During the first nine months of 2022, we did not repurchase any common shares under a repurchase plan authorized by the Board.

At January 31, 2022, approximately 7.8 million common shares remain available for repurchase pursuant to the Board’s authorizations.

During the first three months of 2023 and 2022, we did not repurchase any common shares under a repurchase plan authorized by the Board.

At July 31, 2022, approximately 5.8 million common shares remain available for repurchase pursuant to the Board’s authorizations.

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

In November 2021, we announced plans to invest $1.1 billion to build a new manufacturing facility and distribution center in McCalla, Alabama, dedicated to production of Smucker’s Uncrustables frozen sandwiches.

Construction of this third dedicated manufacturing facility began in the third quarter of 2022, with production expected to begin in calendar year 2025.

Construction of this facility began in the third quarter of 2022, with production expected to begin in calendar year 2025.

The project demonstrates our commitment to meet increasing demand for this highly successful product and deliver on our strategy to focus on brands with the most significant growth opportunities.

Construction of the facility and production will occur in three phases over multiple years and will result in the creation of up to 750 jobs.

Financial investments and job creation will align with each of the three phases and are contingent upon the closing of the transaction to purchase the property where the facility will be located.

We anticipate our capital expenditures to be approximately $400.0 for 2022.

Financial investments and job creation will align with each of the three phases.

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

However, as a result of 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.

However, as a result of the current macroeconomic environment, including the ongoing impacts of COVID-19 and the conflict between Russia and Ukraine, we may experience an increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future.

We continue to evaluate these risks, which could affect our financial condition or our ability to fund operations or future investment opportunities.

As of January 31, 2022, total cash and cash equivalents of $36.3 was held by our foreign subsidiaries, primarily in Canada.

As of July 31, 2022, total cash and cash equivalents of $29.2 was held by our foreign subsidiaries, primarily in Canada.

We have not repatriated foreign cash to the U.S.

during the first nine months of 2022.

during the first three months of 2023.

Material Cash Requirements

We do not have material off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities.

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

As of July 31, 2022, there were no material changes to our material cash requirements as previously reported in our Annual Report on Form 10-K for the year ended April 30, 2022.

Non-GAAP Financial Measures

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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 one-time deferred state tax impact of the internal legal entity simplification during the third quarter of 2022, can significantly impact our adjusted effective income tax rate.

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

These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with U.S.

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See page 20 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,

2022 2021 2022 2021

Three Months Ended July 31,

Gross profit reconciliation:

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Amortization 55.6 55.4

Other intangible assets impairment charge 150.4 — 150.4 —

Gain on divestitures – net (9.6) (27.2) (9.6) (27.2)

Gain on divestiture (1.6) —

Change in net cumulative unallocated derivative gains and losses 33.8 2.2

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Amortization 55.6 55.4

Other intangible assets impairment charge 150.4 — 150.4 —

Gain on divestitures – net (9.6) (27.2) (9.6) (27.2)

Gain on divestiture (1.6) —

Change in net cumulative unallocated derivative gains and losses 33.8 2.2

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Other special project costs 1.4 1.8

Other one-time items:

Pension plan termination settlement charge (A)

Adjusted income before income taxes $ 231.4 $ 269.2

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Adjusted earnings per share – assuming dilution $ 1.67 $ 1.90

(A) Represents the nonrecurring pre-tax settlement charge of $27.9 recognized during the second quarter of 2021 related to the Canadian buy-out contract.

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.

During the second quarter of 2022, we completed an offering of $800.0 in Senior Notes due March 15, 2032, and September 15, 2041.

For additional information, see Note 8:

Debt and Financing Arrangements.

As of January 31, 2022, there were no other 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, 2022.

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

During the third quarter of 2022, we began our annual planning cycle, inclusive of a strategy review within our strategic business areas.

We made certain strategic decisions related to our U.S.

Retail Pet Foods segment in support of our continued focus on prioritizing and accelerating growth in dog snacks, driving momentum in cat food, and improving dog food performance, which will require further allocation of resources to support more strategic, faster growth opportunities.

As a result, we completed an interim review to determine the impact these strategic decisions had on the fair value of the goodwill and certain indefinite-lived intangible assets within the U.S.

Retail Pet Foods segment.

We recognized an impairment charge of $150.4 related to the Rachael Ray Nutrish brand within the U.S.

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

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

Additionally, we reassessed the long-term strategic expectations for the Rachael Ray Nutrish brand and reclassified this brand as a finite-lived intangible asset as of January 31, 2022, which will result in annual amortization expense of $10.5.

Furthermore, as a result of the divestitures of the private label dry pet food business and natural beverage and grains businesses during the third quarter of 2022, we reviewed all impacted reporting units and concluded that the estimated fair values were in excess of the carrying values as of the date of the divestitures.

However, the goodwill within the U.S.

Retail Pet Foods segment remains susceptible to future impairment charges due to the narrow difference between fair value and carrying value.

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

The carrying value of the goodwill within the U.S.

Retail Pet Foods segment was $2.4 billion as of January 31, 2022.

There were no other indicators of impairment, and as a result, we do not believe that any of our remaining reporting units or material indefinite-lived intangible assets are more likely than not impaired as of January 31, 2022.

There were no material changes to the information previously disclosed.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis